M.D. Properties Pvt. Ltd.,, Kolhapur vs Department Of Income Tax

ACIT, Central Circle, Kolhapur .. Appellant

Vs.

M/s. M.D. Properties Pvt. Ltd., Ist Floor, Embassy Point, 150, Infantary Road, Bangalore - 560 001 .. Respondent PAN No.AACCM 6628B

Assessee by : Shri Bharat Shah Department by : Shri B.C. Malakar Date of Hearing : 29-04-2015 Date of Pronouncement : 30-04-2015

ORDER

PER R.K. PANDA, AM :

The above 3 appeals filed by the Revenue are directed against

the common order dated 03-07-2012 of the CIT(A) Kolhapur relating

to Assessment Years 2007-08 to 2009-10 respectively. Since

identical grounds have been taken by the Revenue in all the 3

appeals, therefore, these were heard together and are being disposed

of by this common order.

2. First we take up ITA No.1896/PN/2012 for A.Y. 2007-08 as

the lead case. Facts, in brief, are that the assessee is a company

and derives income from house property. It filed its original return

of income for the impugned assessment year on 29-10-2007

declaring total income of Rs.2,27,64,910/-. The assessee company

belongs to Shri Sanjay Ghodawat group. In the group cases, a

search action u/s.132/133A of the I.T. Act was carried out on 04-

02-2009. However, no search was carried out in this particular 2

case. The AO issued notice u/s.153C of the I.T. Act on 06-09-2010,

in response to which the assessee vide letter dated 13-10-2010

requested the AO to consider the regular return filed for all the 3

assessment years as return filed in response to notice u/s.153C.

2.1 During the course of assessment proceedings the AO noted

that a search operation was carried out on 04.02.2009 at the

business premises of M/s Ghodawat Industries (India) Pvt Ltd,

Corporate office at 438-Chipri, Dist Kolhapur. A group of

Ghodawat Industries is owned and controlled by Shri Sanjay

Ghodawat of Jaysingpur. During the course of search operation at

the above premises loose paper were seized as per panchanama

dated 06.02.2009. Vide Loose paper bundle No. 2, paper serial no.

94 to 101 a copy of valuation report in respect of property owned by

M.D.Properties Pvt. Ltd viz Golflink Software Business Park - Tower

A, situated at Bangalore was seized. The said papers are valuation

report of commercial property namely Golflink Software Business

Park - Tower A, owned by the assessee M.D.Properties Pvt Ltd.,

Banglore prepared by Deshmukh & Associates, 20 Sheelakant,

Mahalaxmi Society, Laxminagar, Kupwad Road, Sangli-416416. As

per the said valuation report the value of the property as on

19.04.2008 is at Rs. 250,00,00,000/- (Rs. Two Hundred Fifty Crores

only).

3. The AO noted that the property namely Golflink -Software

Business Park - Tower A, at Survey No. 6, Challaghatta, Banglore

was originally constructed by M/s. Golflink Software Park Pvt. Ltd.

Belonging to Virwani Group. Occupation certificate was received on

16.04.2004. At the stage of construction itself M/s. GSPPL had

entered into a lease agreement with M/s. Fidelity Information

Systems (I) Co. P Ltd , (FISCPL) for a monthly rent of Rs. 72.5 lacs 3

for a period of five years. Hence proceedings were initiated u/s.

153C of the I.T. Act, 1961.

4. The AO further noted that during course of search

action at the residential premises of Shri Sanjay D. Ghodawat

books of account & documents as per Annexure "A" (Sr No 1) to

Panchanama dated 05/02/2009 (Party No. KR-2) has been

seized. Page No. 1 & 2 - is a calculation sheet prepared by

Sanjay Ghodawat, which Shows the working of interest

calculation and amount payable to and receivable from

Embassy Group of Banglore as on 31-01-2009. As per this

paper the net amount receivable by Ghodawat group from

Embassy Group as on 31/01/2009 is Rs. 13,86,46,673/-. The

details on this loose papers as reproduced by the AO in the

body of the assessment order is as under :

Paper No. 1 :

Date Amount received Interest calculation Interest @8% 04-Jan-06 100,000,000.00 8,000,000.00 31-Dec-07 8,000,000.00 31-Dec-08 8,000,000.00 31-Jan-09 666,667.00

Total Interest Payable 24,666,667.00

Add - Previous payable 791,884.00 ------------------- Total amount payable 125,458,551.00 --------------------

Months Amount Months Interest @8% Total receivable Nov-06 7250000 27 1305000 8555000 Dec-06 7250000 26 1256667 8506667 Jan-07 7250000 25 1208333 8458333 Feb-07 7250000 24 1160000 8410000 Mar-07 7250000 23 1111667 8361667 Apr-07 7250000 22 1063333 8313333 May-07 7250000 21 1015000 8265000 Jun-07 7250000 20 966667 8216667 Jul-07 7250000 19 918333 8168333 4

Aug-07 7448790 18 893855 8342645 Sep-07 7612500 17 862750 8475250 Oct-07 7612500 16 812000 8424500 Nov-07 7612500 15 761250 8373750 Dec-07 7793750 14 727417 8521167 Jan-08 7793750 13 675458 8469208 Feb-08 7793750 12 623500 8417250 Mar-08 7793750 11 571542 8365292 Apr-08 7793750 10 519583 8313333 May-08 7793750 9 467625 8261375 Jun-08 7975000 8 425333 8400333 Jul-08 7975000 7 372167 8347167 Aug-08 7975000 6 319000 8294000 Sep-08 7975000 5 265833 8240833 Oct-08 7975000 4 212667 8187667 Nov-08 7975000 3 159500 8134500 Dec-08 7975000 2 106333 8081333 Jan-09 7975000 1 53167 8028167 2O609879 18833980 2249327

Receivable from Rent 224,932,770.00 Others 5,000,000.00 Total Payable 25,458,55.00 Net Receivable 104,474,219.00 Add-Loan as on 31/01/2009 250,291,822.00 Less-TDS upto 31 / 01 / 2009 63,417,610.00 Balance Receivable 291,348,431.00 Less-Received Embassy Brindavan 109,998,400.00 Less-Received DDPL 30,000,000.00

Less-Received Advance for Windmill 50,000,000.00 Less-Received from Udhyman 15,000,000.00 Investment Pvt. Ltd., 86,350,031.00 Add-Embassy Brindavan 2,500,000.00 Add-DDPL 12,500,000.00 Add-DM Estate Pvt. Ltd., 2,500,000.00 Add-DDPL-MD Properties 19,249,304.00 Add-Service Tax-Oct 07 to Jan 09 15,547,338.00 Net Receivable (as on 31-01-2009) 138,646,673.00

Paper NO.2 : Pending issues with Embassy Group

1. Topaz Investments Pvt. Ltd.,

There is a Credit Balance of the companies mentioned below for a long time and needs to be repaid in books.

a. Dynasty Developers Pvt. Ltd. 13,15,00,000/-

b. More Finanshare Investments Pvt. Ltd., 5,16,77,355/- c. Dynasty Developers Pvt. Ltd., (Star) 40,90,917/- d. Dynasty Developers Pvt. Ltd., (Estate) 10,72,500/-

Total 18,61,95,772/-

5 2. M.D. Properties Pvt. Ltd.,

Fidelity is paying monthly rentals including Service Tax, However, there is no other source in M.D. Properties from where we can pay the Service Tax. We require Service Tax Cheque separately. We are following up the matter with Mr. Gopinath and expecting the same in this month. We have not paid Service Tax for the month December 2008 and January 2009."

5. The AO on perusal of Paper No.5 and submission of the

assessee came to conclusion that the amount shown in tabular form

is nothing but the rent received by the M.D. Properties Pvt. Ltd., a

concern of the assessee group. The same is offered in the return of

income. The assessee during the course of assessment proceedings

has confirmed the same. The assessee also confessed that the paper

is prepared by employee of the group. However he observed that in

respect of the figures shown as interest receivable, the assessee did

not accept the interest calculation shown on the same paper as

receivable and stated that it is a mistake of the employee. The AO

therefore came to the conclusion that the partial acceptance of the

evidence seized itself shows that the working given on this page is

nothing but a true picture of the affairs of the assessee's activity and

therefore the interest receivable shown on this paper is the income

of the assessee. The AO accordingly made addition on the basis of

above paper for the following 3 assessment years, the details of

which are as under :

A.Y. 2O07-08 Rs. 60,41,667/- A.Y. 2008-09 Rs. 98,91,105/- A.Y. 2009-10 Rs. 28,01,208/-

6. In appeal the Ld.CIT(A) deleted the addition made by the AO

for all the 3 assessment years by observing as under :

"8. First of all even if we assume that the assessing officer has correctly concluded on the nature of content of the loose paper relied upon for making the addition, the addition should have been of the amounts of Rs.7,25,000.00 in A.Y. 2007-08, Rs.74,85,352.13 in A.Y. 2008-09 and Rs.1,88,33,979.80 in A.Y. 2009-10. This is for the reason that in the 6

loose paper, the computation of interest is on a particular day: 31st day of January, 2009. Therefore interest is computed for 27 months on annualised basis for the rent received for the month of November 2006. Similarly interest is computed for 24 months for the rent of February 2007, 15 months for the rent of November 2007, 1 month for the rent of January 2009, etc. If interest income on rent received during the previous year relevant to A.Y. 2007-08 is computed then the number of months for which interest would be annualised would have been 5,4,3,2 and 1 for the months of November 2006, December 2006, January 2007, February 2007 and March 2007 respectively. Similarly, for the assessment year 2008-09, interest after annualising would have to be computed for period of 17, 16, 15, 14 and 13 months for rentals of November 2006, December 2006, January 2007, February 2007 and March 2007 respectively, received during the previous year relevant to A.Y. 2007-08. Thus the assessing office has committed an elementary error even in computing the interest for assessment years 2007-08, 2008-09 and 2009-10.

9. The approach of the assessing officer in making the addition is based on the assumption that interest would have been received or would be receivable against the rental income received from 'Fidelity', but there is no basis for making this assumption and therefore the addition. It is not at all clear whether the amounts were actually given out on interest and if so then the identity of persons to whom the loan was given out is not discernible from the seized material. Similarly, the seized paper does not spell out and the assessing officer has not found out the identity of the person from whom the amount of Rs.10,00,00,000/- was received. It is noticeable that the paper indicates that some amount aggregating to Rs.2,46,66,667/- was calculated as interest on these loans. In such scenario, there is no reason as to why the amount of Rs.2,46,66,667/- shown as payable in the same calculation should not be adjusted against the interest of Rs.1,88,33,980/- shown as receivable. This would lead to a negative income or loss on account of interest payments! In my opinion, the contents of the paper appear to be a rough cash flow of the Ghodawat group on a particular day in January 2009. The cash flow has taken into account the notional outgoing and incoming in the form of interest. This type of working is made to find out the cash flows after adjusting for the cost of capital employed. It is used to find out if the capital is being productively employed or not. If the net return on capital employed is below the returns from financial institutions, corrective measures can be taken by the appellant or the person to modify the investment pattern and or to rectify exposure into a particular business or group.

10. The appellant has explained that the amount of Rs.10,00,00,000/-was a loan take from. Jitendra Virwani by Sanjay Ghodawat (Individual) which was appearing in the balance sheet of Sanjay Ghodawat (Individual) since A.Y. 2006-07. The outstanding balances were reduced in F.Y. 2009-10. No interest was paid to Jitendra Virwani. The appellant submitted that this fact is evident from the books of accounts of Sanjay Ghodawat (Individual). It was pointed out that rental income was received from Fidelity Information System (India) Ltd., a wholly owned subsidiary of Fidelity USA. The appellant has taken me through the accounts of M.D. Properties and I do not find any instance of laying out of the rental receipts towards earning of interest income. It was explained further that the money coming in as rental receipts in M.D. Properties was spent on repayment of loan taken from HDFC bank. M.D. Property financed the purchase of the asset 7

'Pinehurst' through two loans of Rs.26.41 crores and Rs.11.92 crores aggregating to Rs.38.33 crores from HDFC bank @ 8% interest. The seized material cannot attribute the calculation of interest to arise from any dealing with the Virwanis. The calculation of interest on loan (Rs.10,00,00,000/-) and on rental incomes therefore appears to be notional.

11. The decision of Udhavdas Kewalram v. CIT [1967] 66 ITR 462 (SC), relied on by the appellant lays down the law that in proceeding to disbelieve the assessee's contentions, one has to consider all the evidence which are either in favour of or against the assessee. It was held--

It is for the income-tax authorities to prove that a particular receipt is taxable. In deciding whether an item of receipt is taxable as income, the Tribunal may consider the evidence in the light of the statements made by the assessee, his conduct and the probabilities, but in arriving at its conclusion there must be a fair and reasonably full review of the evidence.

12. The decision of CIT v. Shoorji Vallabhdas [1962] 46 ITR 144 (SC) lays down the law that income tax is levied on income and if income does not result at all there cannot be any income. The decision --

Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. This was exactly what had happened in instant case. Here the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the instant case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a gift by the assessee firm to the managed companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated. [Emphasis Supplied]

13. These decisions are applicable in the case of the appellant. The seized material does not show in any manner that the income has materialised or that it has accrued and arisen to the appellant. A perusal of the evidences at hand and the discussion in the assessment order shows that the probability of the impugned amounts being income in the hands of the appellant is not only remote and improbable, but impossible. The inference that the impugned amounts represent interest income of the appellant cannot be drawn from seized material. 8

7. Aggrieved with such order of the CIT(A) the Revenue is in

appeal before us with the following ground :

"1. Whether on the facts & circumstance of the case & law, the CIT(A) is justified in deleting the addition made on account of interest received but not accounted in the books totaling to Rs.60,41,667/- for the AY. 2007-08."

8. Identical grounds have been taken by the Revenue for the

remaining 2 assessment years also.

9. The Ld. Departmental Representative heavily relied on the

order of the AO. He submitted that the assessee during the course

of assessment proceedings confirms that paper No.1 contains the

rent received by M.D. Properties Pvt. Ltd. It was also confessed that

the paper is prepared by an employee of the group. However, the

assessee in respect of the figures shown as interest receivable did

not accept the interest calculation shown on the same paper as

receivable and says it is a mistake of the employee. He submitted

that the seized documents have to be either accepted in toto or to be

rejected. However, a part of the same cannot be accepted as true

and the other part as incorrect. He submitted that the Ld.CIT(A)

without applying his mind properly has deleted the addition for all

the 3 assessment years for which the order of the CIT(A) should be

set aside and that of the AO be restored.

10. The Ld. Counsel for the assessee on the other hand heavily

relied on the order of the CIT(A). He submitted that the paper is a

mere jotting of figures by one of the employees which did not give

any name. The AO was not in a position to establish as to what are

the entries and to whom the money has been given and who has

paid the interest. There was no corroborative evidence. Even the

AO had never bothered to examine Shri Virwani and the embassy 9

group of Bangalore. He submitted that the decisions cited by the

assessee before the Ld.CIT(A) are squarely applicable to the facts of

the case which has been relied upon by the Ld.CIT(A). He

accordingly submitted that the order of the CIT(A) should be upheld

and the appeals filed by the Revenue should be dismissed.

11. We have considered the rival arguments made by both the

sides, perused the orders of the Assessing Officer and the CIT(A) and

the Paper Book filed on behalf of the assessee. We have also

considered the various decisions cited before us. We find in the

instant case the AO has not examined Shri Virwani of embassy

group to find out as to whether any money was advanced by the

assessee to the same group and whether any interest has been

received. There is no basis for making the addition on the ground

that the assessee has received or would have received the interest.

The identity of the person to whom the so called amount has been

given is not discernible from the seized paper. Further, the

submission of the assessee that the amount of Rs.10 crores was the

loan taken from Shri Jitendra Virwani by Shri Sanjay Ghodawat,

individual which was appearing in the balance sheet of Shri Sanjay

Ghodawat since the A.y. 2006-07 which has been reduced in F.Y.

2009-10 and no interest was received from Shri Jitendra Virwani

could not be controverted by the Ld. Departmental Representative.

11.1 The Hon'ble Supreme Court in the case of Udhavdas

Kewalram (Supra) has held that it is for the income-tax authorities

to prove that a particular receipt is taxable. In deciding whether an

item of receipt is taxable as income, the Tribunal may consider the

evidence in the light of the statements made by the assessee, his

conduct and the probabilities, but in arriving at its conclusion there

must be a fair and reasonably full review of the evidence. 10 11.2 Similarly, the Hon'ble Supreme Court in the case Shoorji

Vallabhdas (Supra) has observed that if income does not result at

all, there cannot be a tax, even though in book-keeping, an entry is

made about a hypothetical income, which does not materialise. It

has been held that where income has in fact been received and is

subsequently given up in such circumstances that it remains the

income of the recipient, even though given up, the tax may be

payable. However, where the income can be said not to have

resulted at all, there is obviously neither accrual nor receipt of

income, even though an entry to that effect might, in certain

circumstances, have been made in the books of account.

11.3 Therefore, when the seized document do not show clearly and

with reasonable certainty as to receipt of the interest, and when the

seized paper does not spell out as to whether amounts were actually

given out on interest and if so then to whom such loan was given,

then in that case the AO in our opinion was not justified in making

the addition. Since the Ld.CIT(A) while deleting the addition for all

the 3 assessment years has relied on various decisions of the

Hon'ble Supreme Court and the Ld. Departmental Representative

could not controvert the factual findings of the Ld.CIT(A), therefore,

under the facts and circumstances of the case, we find no infirmity

in the order of the CIT(A) deleting the addition made by the AO. We

accordingly uphold the order of the CIT(A) and the ground raised by

the Revenue is dismissed.

12. Identical grounds have been taken by the Revenue in ITA Nos.

1897 and 1898/PN/2012. Facts being similar, therefore, following

the reasonings given above, we uphold the order of the CIT(A) on

this issue and the grounds raised by the Revenue are dismissed. 11

13. In the result, all the 3 appeals filed by the Revenue are

dismissed.

Pronounced in the open court on 30-04-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 30th April, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A), Kolhapur 4. CIT, Kolhapur 5. The D.R, "B" Bench 6. Guard File

By order

// True Copy // Assistant Registrar ITAT, Pune Benches, Pune