M/S Maheswari Plaza Resorts Limited,, ... vs Department Of Income Tax

This is an appeal filed by the Revenue against the order of the CIT (A)-V Hyderabad dated 14.02.2013 relating to A.Y 2006-

07.

2. Brief facts of the case are that the assessee is a limited company, engaged in construction and running of hotels. For A.Y 2006-07, assessee filed its return of income on 20.04.2007 admitting total income of Rs.2,61,18,812/-. Assessment u/s 143(3) was completed determining total income at Rs.6,10,49,592/- by making certain additions.

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3. The assessee preferred appeal before the CIT (A). The CIT (A) allowed the appeal partly. In the said appeal order, the additions of Rs.2.00 lakhs was decided in favour of the assessee. The additions of Rs.45,01,777, Rs.1,22,54,000 and Rs.1,26,00,000 were decided in favour of Revenue. On the issue of addition of Rs.2,10,60,000 towards difference in profit on sale of shop in ground floor, the CIT (A) remanded the issue to the file of the AO with the following observations:

"Keeping in view all the above legal pronouncements and facts of the case, I hold that there is no doubt that based on evidence and human probability the area in question was sold to the brother of the Director Mr. Ashok Kumar Malpani is at the rate at least Rs.2000/- per sq.foot on the minimum sale rate of adjoining areas. It was not difficult for the appellant to obtain the unaccounted for consideration in cash as the purchaser Mr. Ashok Kumar Malpani was a brother of a Director and also a close business associate in the project. Therefore, the AO is correct in holding that the actual sale rate was much higher than what was shown by the appellant. However, instead of sale rate of rs.2,250/- sq.foot the AO is directed to apply a sale rate 2,000. As already discussed the AO is also directed to verify whether there is any duplicate addition with respect to ground Nos. 4, 5, 6 & 7 of the appeal".

4. Against the decision of the ld CIT (A), both the Department and the assessee preferred appeal before the ITAT. During appellate proceedings before the Tribunal, the assessee preferred an additional ground pleading that the transactions of sale made during the year by the company relevant to the subject A.Y are part of family agreement and no capital gains arose out of the sales made. The Tribunal after going through the same, vide order in ITA No.571/Hyd/2010 remanded the matter back to the file of the AO with the following observations:

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"5. We have considered the rival submissions on either side and also perused the materials available on record. The assessee now claims before this Tribunal that the transfer was made due to family arrangement in order to settle the family disputes. The learned counsel for the assessee also placed his reliance on various judgments of the Apex Court. As rightly submitted by the learned counsel for the assessee and the Learned Departmental Representative, the lower authorities had no occasion to consider this issue. Both the counsels, for the assessee and the Department, have no objection to remit back the matter to the file of the Assessing Officer. In our considered opinion, since the lower authorities had no occasion to consider this issue, the matter needs to be considered by the assessee at the first instance. Since the issue of family arrangement goes to the root of the matter, the other issues raised by the assessee in the appeal have also to be reconsidered by the Assessing Officer.

6. Accordingly, we set aside the order of the lower authorities and remit back the entire issue to the file of the Assessing Officer. The Assessing Officer shall consider the issue on the basis of the materials that may be filed by the assessee and thereafter decide the issue in accordance with law after giving a reasonable opportunity to the assessee. We make it clear that we are not expressing any opinion on the merit of the appeal. The Assessing Officer has to reconsider the entire issue in accordance with law without being influenced by any of the observations made by this Tribunal in this order or of the CIT(A) in the impugned order".

5. Consequent to the directions of the Tribunal, the AO initiated assessment proceedings and passed an order dated 30.12.2011 by making the following additions:

i) Disallowance of 40(a)(ia) of Rs.2,71,729

ii) Disallowance of interest of Rs.45,01,777

iii) Expenditure incurred in relation to exempt income of Rs.2.00 lakhs.

iv) Business profit of shops sold of Rs.1,22,54,000

v) Difference in profit on sale of shop in ground floor of MMP Mall of Rs.2,10,60,000

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vi) Difference in profit on sale of shops in 2nd, 3rd & 4th floors in MPM Mall of Rs.1,26,00,000.

6. Aggrieved by the assessment order dated 30.12.2011 the assessee preferred appeal before the CIT (A). The assessee raised Ground No.3 before the CIT (A) which is as follows:

"3. The ld AO grossly erred in disallowing interest paid on borrowed capital for an aggregate sum of Rs.45,01,777 as expenses incurred exempted income in total disregard of the provisions of section 14A r.w. Rule 8D and also of the decision of the Hon'ble ITAT in the case of this appellant in its order dated

31 October, 2011 in ITA No.1705/Hyd/2008 for the A.Y 2005-06. He ought to have allowed the interest claimed in terms of section 36(I)(iii)".

7. With respect to ground No.3 on disallowance of interest of Rs.45,01,777/- paid on borrowed capital u/s 14A r.w.s. Rule 8D, AO observed that the assessee, out of interest bearing funds, had invested Rs.4.00 crores towards share application money in its sister concern M/s Maheshwari Mega Ventures Ltd and also had given loans/advances of about 60% to the family members and relatives of the Directors of the assessee company out of the total advances of Rs.10.11 crores without charging any interest, AO disallowed interest of Rs.45,01,777/-. In doing so the AO relied on the observations of the predecessor CIT(A) in the appellate order for the A.Y 2005-06 wherein the disallowance so made for A.Y 2005-06 was confimed in the appellate order. As there was no change in the facts of the case for the present year, the AO disallowed interest of Rs.45,01,777/-.

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8. In this connection, the ld CIT (A) held as follows at para 7.1 "7.1.... It is pertinent to mention here that against the confirmation of disallowance of interest by the CIT (A) for the A.Y 2005-06, the Tribunal adjudicatged this issue in ITA No.1705/Hyd/2008 and held as under:

"75. We heard both parties and perused the material on record. We find that the assessee is in the business of running a star hotel, namely, Quality Inn Residency at Hyderabad for the last several years, whereas Maheshwari Mega Venture, which is the sister concern is in the process of setting up a five star hotel at Ameerpet, Hyderabad. Out of Rs.8.37 cores which was worked out by the assessing officer as interest free advances, Rs.4 crores was advanced to M/s. Maheswari Builders merged with Ashish Builders to form a new entity, namely, Maheshwari Mega Venture, so as to enable the said concern to mobilize funds to purchase land and balance Rs.4 crores was advanced towards share application money. In CIT V/s. Hero Cycles Ltd. (323 ITR 518), Hon'ble Punjab and Haryana High Court has held as follows-

"Held, dismissing the appeal, that the expenditure on interest was set off against the income from interest and the investment in the shares and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section1 4A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, was a question of fact. The contention of the Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was not permissible."

The same view has been taken by the Tribunal in the case of ACIT V/s. Sun Investment (8 ITR (Trib) 33). Relying on the ratio laid down in the above cases, this issue is set aside to the file of the assessing officer, to verify whether any exempted income has been earned by the assessee during the previous year relevant to assessment year under consideration on the investment towards share application money and decide the issue in accordance with law, after giving an opportunity to the assessee to present its case.

76. As for the balance amount of interest free advance of Rs.4.37 crores advanced by the assessee, we find that the assessee

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company, which is having experience and expertise in running a star hotel is interested in the new venture in as much as it was felt that the assessee would be benefitted maximum by being a part of a hotel chain. The running of a chain of hotels belonging to a group is quite in vogue and the advance has been prompted on the principles of business prudence and commercial expediency. Hence, in the light of the decision of the Apex Court in the case of SA Builders (supra), interest is deductible as the amount is advanced to a subsidiary company/sister concern, as a measure of commercial expediency. In Atherton V/s. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. Same view was also expressed by the Apex Court in Eastern Investments Ltd. V/s. CIT(20 ITR 1); and CIT V/s. Chandulal Keshavlala and Co. (38 ITR 601).

77. In view of the above discussion, while we set aside this issue to the file of the assessing officer insofar as it related to investment in share application money of Rs.4 crores, we delete the disallowance relatable to balance amount of interest free advances of Rs.4.37 crores".

7.2 Going by the above decision of the Hon'ble Tribunal, the issue of investment of Rs.4.00 crores pertaining to the previous A.Y 2005-06 was set aside and the balance interest relatable to interest free advances to relatives and family members was directed to be deleted. Accordingly, as the amount of Rs.4.00 crores advanced to sister concern pertain to earlier A.Y, following the above decision of the Tribunal, the interest disallowed at Rs.45,01,777/- for the subject A.Y on the loans advanced to relatives/family members is directed to be allowed. Thus, this ground of appeal is allowed".

9. Against the order of the CIT (A), the Department has preferred appeal and Ground No.2 of the Departmental appeal read as follows:

"2. The CIT (A) ought to have appreciated the disallowance of the expenditure of Rs.45,01,777 claimed by the assessee as finance charges/interest debited to the P&L a/c".

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10. We find no infirmity in the order of the CIT (A) as he has only followed the order of the ITAT in ITA No.1705/Hyd/2008 for the AY 2005-06 in the assessee's own case. Hence this ground raised by the Revenue is dismissed.

11. With respect to Ground Nos. 3 & 4, relating to long term capital gains of Rs.1,00,07,133/- treated as business income at Rs.1,22,54,400/-, it was observed that the assessee had sold its let out shops and offered it under long term capital gains. The AO treated the sale of assets as its business income and brought to tax an amount of Rs.1,22,54,400/-. On this, during the course of scrutiny proceedings, it was submitted by the assessee, as under:

"Company has initially capitalized the building as investment in the year 2001-02 with an intention to hold the same as an asset for long run and receive rentals in the nature of regular income on the same. The same property was leased out to M/s Pantaloon Retail India Ltd and M/s Bennet Coloman & Co. Ltd with the said intention of earning rentals. The intention the company is further witnesses in the balance sheet as the same was presented as an investment in building, as capital asset since that year. Hence the income generated on the sale of the same should be treated as capital gain and not as a business income. An amount of Rs.1,34,83,600/- is shown under the head investments capitalized.

12. On this the AO observed "just because an entry is made in its books of accounts to show the property as investment in building, it cannot impress that it is a capital asset". He further observed that the assessee is in the business of construction and held the transaction as business transaction and brought the

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sale consideration to tax as business income. Assessee reiterated during the appellate proceedings that the shops so let out by the company were shown as investments in their books and since the investment was sold, the same was offered as capital gains. Assessee brought out the position of shops reflected in their books of accounts from the very beginning and claimed that long term gains are correctly admitted. Assessee further relied on the case of Radho Swamy Satsang 193 ITR 321 (SC) wherein it was held that consistency is a virtue to be followed both by the assessee and the Revenue.

13. The ld CIT (A) in this connection held as under:

"9.2 I have gone through the assessment order and submissions of the appellant. I find merit in the submissions of the appellant. Once an asset is treated as investment and reflected as such in the books of accounts over a period of time, this treatment cannot be changed by the AO without valid basis. Though the appellant is in the business of construction, there is no bar in treating an asset build by it as investment. Keeping the marketability of the portion of building, the appellant is free to treat a portion of the building as investment and do business with the rest of the building, by selling it. As submitted by the appellant, when this treatment, as appearing in the balance sheet filed year after year, is accepted by the Department till last year, there is no point in changing the treatment for the subject assessment year with the only reason that it was sold. Accordingly I direct the AO to delete this addition".

14. On further appeal before us, we heard both the parties and we find that the shops let out by the company were shown as investment in the books and when the investment were sold the

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same were offered as capital gains. An amount of Rs.1,34,83,600 was shown under the head "investment capitalized". Relying on the decision of Radhaswamy Satsang (193 ITR 321) wherein it was held that consistency is a virtue to be followed both by the assessee and the Revenue and applying the ratio of the decision in 193 ITR 321 and taking into consideration that the shops have been reflected in the books of accounts from the very beginning, we are of the opinion that the income generated on the sale of the same should be treated as capital gain and not as business income. We confirm the order of the CIT (A) in deleting the addition. Ground Nos. 3 & 4 of appeal of the Revenue are dismissed.

15. Ground No.5 relates to the additions made towards profit on sale of ground floor - Rs.2,10,06,000/- and profit on sale of shops in 2nd, 3rd and 4th floors - Rs.1,26,00,000/-. In this regard assessee submitted before the CIT (A) that the transactions made i.e. sale on ground floor and 2nd, 3rd and 4th floors of MPM Mall should be viewed from a family settlement angle. According to the assessee, members of Malpani family had come to an understanding of settling their properties and it is in pursuance of this settlement of assets between members of family and they had some transactions/exchange of properties and those arrangements should be viewed from this angle and not as a general transaction. Hence, during the appellate proceedings, the assessee along with an aide memoire, filed a copy of "deed of family arrangement" evidencing the arrangement entered into by the family members of Malpani. According to this agreement, Directors of the assessee company exchanged some properties and in the process, the ground floor is to be given to Sri Ashok

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Kumar Malpani, 2nd, 3rd and 4th floors were to be handed over to Sri Girish Malpani, Manish Malpany and Ashish Malpani. It was the contention of the assessee that the AO had overlooked this arrangement and wrongly relied on the case of Mumbai Bench in the case of Rupee Finance and Management (P) Ltd vs. ACIT rendered by ITAT (120 ITD 539). Contradicting the above, the assessee placed reliance on the Hon'ble Madras High Court in the case of CIT vs. KAY ARR Enterprises and Others (299 ITR

348) wherein it was held as follows:

"It is settled law that when parties enter into a family arrangement, the validity of the family arrangement is not to be judged with reference to whether the parties who raised disputes or rights or claimed rights in certain properties had in law any such right or not".

There was a transfer of shares between the assessee firm which consisted of its partners, who were family members. Certain new shares were acquired in exchange for old shares, as also some consideration in cash. The assessees contended that the transfer was consequent to a family arrangement. But the AO after analyzing the facts of the case and the legal aspects concluded that there was a transfer involved and thus subjected it to capital gains tax. On appeal by the assessee the Commissioner (Appeals) upheld the order of the AO. The Tribunal allowing the appeal by the assessee on the ground that the rearrangement of shareholding in the company to avoid possible litigation among family members was a prudent arrangement, which was necessary to control the company effectively by the major shareholders to produce better prospects and active supervision, accordingly held that such family arrangement could not be held to be a transfer which was exigible to capital gain tax. On appeal by the Revenue:

Held, dismissing the appeal that the Tribunal had rightly found that the transfer of shares by way of family arrangement would not attract capital gains tax, as the same was a prudent arrangement to avoid

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possible litigation among the family members and was made voluntarily and not induced by any fraud or coercion and therefore, could not be doubted. The Tribunal was justified in arriving at the conclusion that the family arrangement among the assessees did not amount to any transfer and hence was not exigible to capital gains tax"

16. The ld CIT (A) held as under:

" 10.1 I have gone through the assessment order and submissions of the appellant. Going by the facts involved, I see there is merit in the submissions of the appellant. When an arrangement is made between the family members of the Directors of the company, the rates so adopted for this purpose cannot be compared to prevailing market rates and unless it was proved that consideration in excess of what was mentioned in the sale deed has been parted by the purchaser, the difference in rates cannot be adopted for the purpose of capital gains. Therefore, the comparable rates of the adjacent shops sold by the appellant cannot be criteria to the sale transactions effected within the members of family of the Directors, as part of arrangement between themselves. Accordingly, I direct the AO to adopt the rates as admitted by the appellant in the computation and delete the additions so made".

17. We heard both the parties. We have perused the copy of the deed of family arrangement filed by the assessee evidencing the arrangement entered into by the family members of Malpani family. According to this agreement, Directors of the assessee company exchanged some properties and in the process the ground floor is to be given to Shri Ahok Kumar Malpani and 2nd, 3rd and 4th floors were to be handed over to Shri Girish Malpani, Shri Manish Malpani and Shri Ashish Malpani respectively. The CIT (A) has held that when an arrangement is made between the

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family members, being Directors of the company, the rate so adopted for this purpose cannot be compared to prevailing market rate and the difference in rate cannot be adopted for the purpose of capital gains. In fact, the CIT (A) relied on the decision of the Hon'ble Madras High Court in the case of CIT vs. KAY ARRT Enterprises (299 ITR 348), the wherein the High Court held that "the Tribunal had rightly found that the transfer of shares by way of family arrangement would not attract capital gains tax, as the same was a prudent arrangement to avoid possible litigation among the family members and was made voluntarily and not induced by any fraud or coercion and therefore, could not be doubted. The Tribunal was justified in arriving at the conclusion that the family arrangement among the assessees did not amount to any transfer and hence was not exigible to capital gains tax"

18. Further in the case of Shri Sachin P. Ambulkar vs. ITO in ITA No.7542/Mum/2007, where the Judicial Member was one of the Members passing the order, it has been held as follows:

"20. Therefore, in our opinion following the ratio of the decision of the Supreme Court in the case of Maturi Pullaiah & Another vs. Maturi Narasimham & Others, we hold that as there is no transfer of assets in a family arrangement and the amount received by the assessee is also part of the family arrangement and not towards transfer of any capital asset, there can be no levy of capital gain tax. In a family settlement there is only a readjustment of the pre-existing joint interest as separate interest and there is no transfer leading to liability to capital gains. IN the circumstances the order of the lower authorities assessing the amount received under a family arrangement as capital gains is erroneous and delete the addition and we allow the assessee's appeal".

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19. Hence we confirm the order of the CIT (A) wherein he has directed the AO to adopt the rates as admitted by the assessee in the computation and to delete the addition made in this regard. Hence, this ground of appeal of the Revenue is dismissed.

20. In the result the Revenue's appeal is dismissed.

Order pronounced in the Open Court on 25th February, 2015.

Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 25th February, 2015. Vnodan/sps Copy to:

1. The Dy. Commissioner of Income Tax, Circle 16(2) Room No.611, 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad

2. M/s. Maheshwari Plaza Resorts Ltd., Model House, Panjagutta, Hyderabad

3. The CIT(A)-V Hyderabad

4. The CIT -IV, Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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