Loke City Plaza,, Srinagar vs Department Of Income Tax

This appeal of the Revenue arises from the order of the CIT, Jammu,

dated 27.12.2013 for the assessment year 2005-06. The Revenue has raised

the following grounds of appeal:

"1. The Ld. CIT(A) has erred in deleting the addition of Rs.20,39,894/- on account of profit of sale of commercial space.

2. The Ld. CIT(A) has erred in deleting the addition ofRs.12,50,000/- on protective basis on account of unexplained deposits."

2. The brief facts of the case are as per AO's order at pages 9 to 12, are

reproduced for the sake of convenience, as under:

2 ITA No. 166(Asr)/2014

"The assessee during the year has sold a portion of commercial complex to the estate department J & K Bank Ltd. for a consideration of Rs.2,00,28,200/- on 25.02.2005 but the assessee has claimed income under the "Short Term Capital Gain" instead of taking it under the head "business and profession". From the partnership deed enclosed with the return of income it is given at para 2 of the partnership deed that the business of the partnership shall be that of construction of shopping /commercial at Karan Nagar, Srinagar. However, the partnership deed is silent about how the shopping/commercial complex will be put to use after construction. Yet, by the common logic only two uses of the said commercial complex can be thought of . One is the sale of the shop/offices and the second is to put the premises on rent. The assessee has sold a portion of commercial complex during the year to Estate department, J & K Bank Ltd., instead of taking it under the head profit & gain from business and profession, which should have been the case considering the partnership deed of the assessee. The relevant para of the partnership deed is as under:

"2. That the partnership business shall be that of construction of a Shopping/Commercial Complex at Karan Nagar, Srionagar ( Near Cassettee School.)"

10. During the original assessment proceedings the assessee has furnished a valuation report from a Valuer dated 15.02.2005, on 11.09.2007. Vide this valuation report the value of the construction portion of the building during the year has been valued at Rs.1,99,79,365/- as per the following calculation:

"a. Area of the building : The building is constructed on land measuring 11200 Sft. The plinth area of the building is 8400 Sft. And the total floor area available at present is 18121 Sft.

The distribution of floor area in the building is as below:

1. Basement 7910 Sft.

2. G/Floor 4340 Sft.

3. F/Floor 5871 Sft.

b. Area under occupation

1. Basement 1550 Sft.

2. G/Floor 40 Sft.

3. F/Floor 4721Sft.

6261 Sft.

c. Cost of construction 1. Land 11200 Sft. @ 1836 Sft. Rs.2,05,63,200/- 2. Building 8400 Sft. @ 4436 Sft. Rs.3,72,62,400/- Total: Rs.5,78,25,600/-

Which is 5782600 = Rs.3191 carpet area Sft. Carpet area including land. 3 ITA No. 166(Asr)/2014

18121 Therefore, cost of construction of area under occupation : 6261 Sft. @ 3191/- Sft. Say = Rs.1,99,79,365/-

The perusal of the above calculations reveals that while arriving at the figure of Rs.1,99,79,365/- the value of land measuring 11200 Sft. Has also been taken in to the cost of construction ( as per "c" above) which is Rs.2,05,63,200/- @ Rs.1836/- Sft. However, from the balance sheet enclosed with the return of income the value of land has been reflected at Rs.1 only. Therefore, it is not correct to take the value of land at Rs.2,05,63,200/- in order to ascertain the rate of per Sft. Carpet area. Instead of this, only the value of cost of construction the building comprising of 18121 Sft. Of floor area build upon 8400 Sft. of plinth area should be considered. By doing so the value of the cost of construction of the area under occupation comes to be as under:

3,72,62,400 X 6261 = 1,28,74,559/- 18121

In view of the above, the assessee was requested to show cause as to why the value of cost of construction of the area under occupation of the building which was sold during the year may not be taken at Rs.1,28,74,559/- instead of Rs.1,99,79,365/- as taken by the assessee and the profit may not be determined accordingly.

11. The assessee has replied vide letter dated 12.02.2009 which is as under:

"The clause of the partnership deed regarding partnership business is incomplete. It should have read " the business of the partnership shall be that of construction of shopping/ commercial complex at Karan Nagar, Srinagar for being let out on rent. The underlined works have not been written in the deed but that does not imply that the business of the partnership shall be construction and sale of shopping/commercial complexes because in hat case instead of complex, there should have been word 'complexes' and the words ' at Karan Nagar', Srinagar 9 near Cassette Schools)" should not have been there if the intention was to engage in the business of construction and sale of shopping/commercial complexes. Further, the word "sale" must have been here in the clause because the construction alone cannot constitute business unless it is suffixed with the word sale. That stands to reason why the commercial complex has been treated as a capital asset and the surplus treated as capital gain.

The observation made by your goodself are well taken. However, where the Income Tax Act, 1961 read with I.T.Rules, 1962 lays down a procedure for determining the cost of acquisition in various circumstances, the calculations made by an engineer or a valuer on the basis of engineering assumption, norms or formulae are irrelevant. The 4 ITA No. 166(Asr)/2014

said piece of land has to be accounted for in the books of account on actual cost basis . Since the land was received by the firm as a gift there was no cost to be accounted for. So the cost was taken to be Rs.1 for accounting purpose. But that does not mean that the land does not have a value. It definitely has and such a value has to be ascertained under the provisions of law.

Section 49(i)(i) provides that where the capital asset (land in this case) became the property of the assessee under a gift or a will, the cost of acquisition of the asset shall be deemed to be the cost of the previous owner.

The const. to the previous owner in this case is Rs.3,650/- and the year of purchase is 1935 through auction as per the Auction Money Collection records of Srinagar Municipality (enclosed)

However, such a cost can not be taken to be the cost sine the time lag between year of purchase i.e. 1935 and the year of sale i.e. 2004 is too huge (69 years) that the same can not be taken care of even by the indexation of the cost under the proviso to section 48 of the Act. It, therefore, becomes imperative to determine the cost as the market value of the said land either all the time of sale i.e. 2004 or in the year 1981-82, the base year and thereafter resort to indexation.

Further, the sale of land embedded in the total sale shall attract tax at a lower rate of 20% because of being a long term capital asset.

12. The reply of the assessee cannot be accepted in view of the discussion in the para 9 above. Since the assessee has engaged in the business activity if the construction of shopping complex and the income out of its sale should be taken under the head profit and loss from business and profession. In view of this the income from the sale of the building is calculated as under:

Total sale consideration Rs.2,00,28,200/- Cost of construction as per para 10 above. Rs.1,28,74,59/-

Gross Profit Rs.71,53,641/- Less Interest on Term Loan Rs.4,00,661/- (After disallowance as per Para 7 & 8 above)

Net Income Rs.67,52,981/-

Therefore, the assessee has earned an income of Rs.67,52,981/- which is added to the total income of the assessee subject to penalty proceedings u/s 271(1)(c) of the Act for furnishing inaccurate particulars of income." 5 ITA No. 166(Asr)/2014

3. The Ld. CIT(A) treated the said income as chargeable under the head "Capital

Gains" since the assessee has been assessed under the head "Income from house

property" for the assessment years 2009-10 to 2010-11. As regards the computation of

capital gains, the assessee submitted the additional evidences under Rule 46A in the form

of Gift Deed of land and certificate of the Revenue Authority regarding the valuation

of the land as on 01.04.1981, since the land was gifted before 01.04.1981. The same

were forwarded to the AO for remand report, who submitted a fresh certificate of

Revenue Authority dated 20.11.2013 showing the market value of land at Rs. 6 lakhs per

kanal. The total area of land being 2 kanal 1 marla according to the AO the market

value was Rs.12.30 lacs as on 01.04.1981.The Ld. CIT(A) accepted the remand report of

the AO and worked out the capital gains at Rs.47,13,087/- instead of business income of

Rs.67,52,981/- worked out by the AO. Accordingly, the appeal of the assessee was partly

allowed by the ld. CIT(A).

4. The Ld. DR relied upon the order of the Assessing Officer.

5. The Ld. Counsel for the assessee, Mr. Joginder Singh, CA, on the other hand,

relied upon the submissions made before the AO and the Ld. CIT(A) and the decision of

the Ld. CIT(A) in para 4.3 at pages 11 & 12 of his order.

4. We have heard the rival contentions and perused the facts of the case. As per

explanation dated 12.02.2009 given by the assessee before the AO, the partnership deed

provides the business of partnership as the construction of shopping/commercial complex

for being let out for rent which does not mean that the business of the partnership shall

be construction and sale of shopping or commercial complexes. There is no mention of

the word 'sale' in any of the clause of the partnership deed and therefore, the said 6 ITA No. 166(Asr)/2014

complexes have been treated as capital assets and accordingly, surplus has to be treated

as capital gain. Moreover, the assessee has assessed the rental income under the head

"Income from house property" from the said complex for the assessment years 2009-10

& 2010-11. Therefore, under the circumstances, the AO is not justified in treating the

said income as business income and accordingly, we find no infirmity in the order of the

ld. CIT(A) in treating the said income as income under the head 'capital gains'.

4.1. As regards the computation of capital gains, the assessee has submitted a gift deed

of the land which was acquired before 01.04.19081 alongwith a certificate of the revenue

authority, which was forwarded to the AO for submitting the remand report. The same

was submitted and the AO submitted a fresh certificate from the revenue authority dated

20.11.2013 showing market value of land at Rs. 6 lacs per kanal and the assessee having

owned 2 kanal 1 marla, therefore, the value of the land as on 01.04.981 was reported at

Rs.12.30 lacs by the AO in the remand report and accordingly computed the capital gain

at Rs.47,13,087/- instead of business income at RS.67,52,981/-.. We find no infirmity in

the order of the ld. CIT(A) , which is a reasoned order in the facts and circumstances of

the case. Thus, ground No.1 of the Revenue is dismissed.

5. As regards ground 2, the brief facts of the case as per AO's order at page 12 &

13, are reproduced for the sake of convenience as under:

"13. During the year under consideration, the assessee has reflected deposits of Rs.35,99,100/- in the balance sheet. At the time of original assessment, the then AO had added all the deposits to the total income of the assessee, as, as per AO the assessee was not able to prove the genuineness of the deposits. The assessee during the revision proceeding has contended that it had given all the details of the persons from whom the deposits were received. He further contended that the AO on his part has not made any efforts to verify the genuineness of the deposits. The CIT, Jammu has set aside the addition on this issue. During the fresh assessment proceedings, the assessee was requested to either produce the parties from whom the deposits have been received or to furnish their complete postal 7 ITA No. 166(Asr)/2014

addresses. The assessee gave the postal addresses of the said parties. Letters u/s 133(6) of the Act were issued to all the parties on 09.10.09 for confirmation of the deposits. In all there are 12 parties. The notices issued to them were received back in case of the following parties:-

S.No. Name and address

1. Dr. Sameena Farhat, R/o Gole Market, Karan Nagar, Sgr.

2. Sh.Farooq Ahmad Shah, R/o Rawalpora, Sanant Nagar, Sgr.

3. Sh. Nazir Ahmad Sheikh R/o Bagi Mehtab, Near Water Tank, Sgr.

4. Sh. Jeelani Qadri R/o Shiraz Road, Sgar.

5. Sh. Afzal Buch, Kadipora, Anantnag

6. M/s. New Choice Car Bazar C/o Opposite Lake City Plaza Mear Gole Market, Karan Nagar. Sgr.

7. Sh. Mukhtiar Ahmad R/o Wazir Bagh, Near L.D.Hospital, Sgr.

Similarly, in case of the following five remaining parties no replies were received.

1. Sh. Ajaz Hussain Sahaf R/o Near Gole Market, Karan Nagar, Sgr.

2. Sh. Amir Malik Peer Bagh, Hyderpora, Near Mosque, Sgr.

3. M/s. Smile Market C/o Koker Bazar, Sgr.

4. Sh. Syed Athar Qadari R/o Gopalpora Kralpora, Sgr.

5. Sh.Syed Rufaid Qadri R/o Gopalpora Kralpora, Sgr.

In view of the above, the assessee was reqiuested vide letter dated 4.12.2009 to produce all the above persons so that the credit worthiness of the transaction as well as identity and capacity of parties from whom the security deposits have been received may be verified, as the onus to prove the same lies upon the assessee. It was being intimated that in case of further failure on part of the assessee to the same, the undersigned will be constrained to add the deposits allegedly received by the assessee from the above mentioned persons during the yea, to the total income as done by my predecessor during the original assessment. In response to the same the assessee expressed its inability to produce the said parties vide letter received in this office on 14.12.09 through its counsel Sh. Ab. Rashid Dulloo and further the assessee has produced the copies of rent agreements with three of the parties in order to prove the identity of the persons from whom deposits have been received. No details have been furnished with regard to remaining 9 parties. Even in respect of three parties in respect of which the rent deeds have been filed, the assessee has tried to prove the identity of the party but in no way it can be said that the assessee has proved the genuineness of the transaction and the capacity of the persons who have it deposits to the assessee. The courts vide various judgments have held that the assessee has proved the following three conditions to explain the deposits or loans received by it:

a) Identity of the donor b) Capacity of the donor 8 ITA No. 166(Asr)/2014

c) And creditworthiness of the transaction.

By no standards it can be said that the assessee has been able to prove the above three conditions regarding the deposits received from all the twelve persons. In view of this I left with no other option but to hold that the assessee has not able to explain the credits on account of deposits in the books of accounts. Therefore, an amount of Rs.36,99,100/- is added to the total income of assessee on protective basis as unexplained credits u/s 68 of the Act subject to penalty u/s 271(1)(c) of the Act for furnishing inaccurate particulars of income and substantive addition is proposed in the hands of donors."

5.1. The Ld. CIT(A) deleted the said addition of Rs.35,99,110/- for the

reasons with regard to the addition of Rs.23,49,100/- which related to the

protective addition of eight persons. Assessment was reopened u/s 147 of the

Act and the parties have confirmed of having made the payments of security

deposits to the assessee. Accordingly, the ld. CIT(A) deleted the addition of

Rs.23,49,100/-. With regard to the security deposits of Rs.2.5 lacs from Mr.

Naziar Ahmed Sheikh, the assessee had submitted the identity of the persons

in the form of rent deed dated 26.11.2007 registered with the Sub Registrar,

Srinagar and the transaction having been passed through bank and purpose

of deposit is on record, the Ld. CIT(A) accordingly deleted the addition

made by the AO on protective basis.

6. As regards the deposits of Rs. 10 lacs which assessee, in fact, has not

received during the year, the AO. gave details of such depositors - namely,

Sh. Syed Athar Qadri, New Choice Car Bazar and Smile Marketing whose

assessments were not reopened since the time for initiation of proceedings 9 ITA No. 166(Asr)/2014

u/s 147 had elapsed. The Ld. CIT(A) deleted the addition since the assessee

had submitted identity, the purpose and source of payments and because of

the in-action of the AO to initiate reassessment proceedings the addition can

not be made and accordingly, the ld. CIT(A) deleted the addition of

Rs.35,99,100/- in toto.

6.1. The Ld. DR relied upon the order of the Assessing Officer.

6.2. The Ld. Counsel for the assessee, Sh.Joginder Singh, CA relied upon

the submissions made before the AO and the ld. CIT(A) and the decision of

the ld. CIT(A).

7. We have heard the rival contentions and perused the facts of the case. In the present case, the AO had made protective addition and probably substantive addition in the hands of the persons who had given the deposits with the assessee. The AO made additions with respect to the following 9 persons:

Sl.No. Name 1. Sh. Amir Malik 2. Dr. Sameena Farhat Hakal 3. Sh. Aijaz Hussain 4. Sh. Mukhtar Ahmed 5. Sh. Farooq Ahmed Shah 6. Sh.Syed Rufaida Qadri 7. Sg. Jeelani Qadri 8. Sh. Afzai Buch 9. Sh. Nazir Ahmad Sheikh

7.1. Out of the said 9 persons, 8 persons have confirmed of having made

deposits with the assessee. Accordingly, the said addition was rectified and 10 ITA No. 166(Asr)/2014

deleted by the AO u/s 154 of the Act. Since the addition has been deleted by

the AO u/s 154 of the Act, therefore, the revenue is not in appeal before us

with regard to the addition of Rs.23,49,100/-.

8. As regards the deposit by Sh. Nazir Ahmed Sheikh, the assessee has

submitted a copy of the rent deed and has proved that the transaction has

been made through bank and the purpose of deposit has also been proved.

Therefore, we find no infirmity in the order of the ld. CIT(A) who has

rightly deleted the addition on protective basis.

9. As regards the deposits of Rs. 4 lacs, Rs.4 lacs and Rs.2 lacs from

Syed Athar Qadari, New Choice Car Bazar and Smile Marketing

respectively totaling Rs.10 lacs, in fact, were not received during the year.

Therefore, at the outset, no addition u/s 68 of the Act, can be made during

the year. Though, the ld. CIT(A) has observed that the proceedings u/s 147

of the Act were not initiated against the said persons since the time for

initiation of proceedings u/s 147 had elapsed. Therefore, if proceedings u/s

147 of the Act, had not been initiated against the said persons, the addition

cannot be sustained, especially when the assessee had brought on record

identity, source and creditworthiness of the said persons and has proved that

the payments have been received through banking channel. In the facts and

circumstances of the case, we find no infirmity in the order of the ld. 11 ITA No. 166(Asr)/2014

CIT(A), who has rightly deleted the additions of Rs. 2,50,000/- and

Rs.10,00,000/- totaling Rs.12,50,000/- made on protective basis by the AO.

Thus, ground No.2 of the Revenue is dismissed.

10. In the result, the appeal filed by the Revenue in ITA

No.166(Asr)/2014 is dismissed.

Order pronounced in the open court on 19th February, 2015.

Sd/- Sd/- (A.D.JAIN) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 19th February, 2015 /SKR/ Copy of the order forwarded to:

1. The Assessee:M/s. Lake City Plaza, Karan Bazar, Sgr.

2. The ITO Ward 3(2), Sgr.

3. The CIT(A), Jammu.

4. The CIT, Jammu.

5. The SR DR, ITAT, Amritsar.

True copy By order

(Assistant Registrar) Income Tax Appellate Tribunal, Amritsar Bench: Amritsar.