M/S Minitechs Aerotools Pvt. Ltd.,, vs Department Of Income Tax

The Deputy Commissioner of Vs. M/s. Minitechs Aerotools Income Tax, Pvt. Ltd., Circle 12(1), Rathna Complex, IV Floor, Bangalore. No.143, Rathna Avenue, Richmond Road, Bangalore - 560 025. PAN : AABCM 1317J APPELLANT RESPONDENT

Appellant by : Shri P. Dhivahar, Jt. CIT (DR) Respondent by : Shri S. Venkatesan, CA

Date of hearing : 12.05.2015 Date of Pronouncement : 26.05.2015

ORDER

Per N.V. Vasudevan, Judicial Member

This appeal by the Revenue is against the order dated 31.5.2013 of

the CIT(Appeals)-III, Bangalore relating to assessment year 2007-08. ITA No.1225/Bang/2013 Page 2 of 12

2. In this appeal, the Revenue has challenged the order of the

CIT(Appeals) whereby the CIT(A) cancelled the order of the AO imposing

penalty on the assessee u/s. 271(1)(c) of the Income Tax Act, 1961 (Act).

3. The facts and circumstances under which penalty was imposed on

the assessee by the AO are as follows. The assessee is a company

engaged in manufacture of machine components. It owned a property viz.,

land bearing Plot No.1 & 2, Khata No.2 of CMC Krishnarajapuram situated

at HAL Industrial Estate, Bangalore - 37, measuring 21,862 sq.ft.

[hereinafter referred to as "the property"]. The assessee entered into a joint

development agreement in respect of the property with Ms/. Value Build

Designs Pvt. Ltd. ["VBDPL"] dated 23.2.2004. As per the joint development

agreement, the developer agreed to put up construction over the property

and hand over to the assessee 10,931 sq.ft. of built up area, in exchange

for the assessee conveying to the builder 50% undivided share of the land

of the property. The joint development agreement was given effect to by

parties. The assessee accordingly received built up area of 10,931 sq.ft.

The share of property which the assessee received from the builder was let

out by the assessee and income from such letting was offered to tax by the

assessee under the head 'income from house property'. The return of

income was filed by the assessee for A.Y. 2007-08 on 24.10.07 declaring

total income of Rs.36,04,060 comprising of Rs.36,04,060 comprising of

income from property of Rs.33,88,276 and income from business of

Rs.2,15,779. The return was processed u/s. 143(1) of the Act on ITA No.1225/Bang/2013 Page 3 of 12

31.10.2008. The assessee received built up area of the flats during the

previous year relevant to A.Y. 2007-08 i.e., on 1.11.2006.

4. There was a survey u/s. 133A of the Act conducted in the case of

M/s. VBDPL. In the course of such survey, the Revenue came to know

about the joint development agreement between the assessee and VBDPL

and the fact that capital gain on transfer of the property by the assessee

had not been offered to tax in the return of income filed by the assessee for

A.Y. 2007-08. It appears that on coming to know about the survey, the

assessee filed a working of long term capital gain arising from transfer of

the property. The assessee filed only a computation of long term capital

gain computing the same at Rs.2,14,42,340, but did not file a revised return

of income because the time limit for filing revised return of income had also

expired by that time.

5. The Assessing Officer initiated proceedings u/s. 148 to tax the

capital gain of Rs,2,14,42,340 declared by the assessee in the revised

computation of capital gain. Ultimately by an order dated 30.12.2011

passed u/s.147 r.w.s. 143(3) of the At, the AO brought to tax long term

capital gain of Rs.2,27,31,386 + Rs.1,26,696 as disallowance in calculation

of long term capital gain + Rs.17,59,087 out of labour charges claimed as

expenses in computing business income. In all, a sum of Rs.2,46,17,169

was brought to tax.

ITA No.1225/Bang/2013 Page 4 of 12

6. In respect of long term capital gain brought to tax in the

reassessment proceedings and addition to business income by

disallowance of labour charges, the AO initiated penalty proceedings u/s.

271(1)(c) of the Act against the assessee. In the penalty proceedings, the

AO held that but for the survey in the case of VBDPL, the capital gain

would not have been offered to tax by the assessee. He therefore

concluded that assessee had concealed particulars of income and

accordingly imposed penalty u/s. 271(1)(c).

7. Before the CIT(Appeals), the assessee submitted that assessee had

no intention of concealing the particulars of income. The assessee pointed

out the circumstances under which the built up area was received by the

assessee under the joint development agreement and income therefrom

had been duly disclosed by the assessee in the original return of income.

The assessee pointed out that it was owing to a wrong advise that in a joint

development agreement, there was only a barter and hence there was no

incidence of capital gain that capital gain had not been declared in the

original return of income. The assessee also pointed out that after the

survey, when the assessee was apprised of the real position in law, it

voluntarily declared revised computation of income, cooperated with the

department and paid taxes. The assessee also pointed out that it could

have legally taken a stand that capital gain is liable to tax only in the year in

which the joint development agreement was entered into viz., 2004-05 and

such a stand would have been in tune with the decision of the Hon'ble High ITA No.1225/Bang/2013 Page 5 of 12

Court of Karnataka rendered in the case of CIT v. T.K. Dayalu in ITA No.

(ITA No.3209 of 2005) dated 20.6.2011. In that case, the Hon'ble High Court

held that incidence of charge to tax of capital gain in a joint development

agreement is the previous year in which the joint development agreement

is entered into and possession is delivered to the developer. The assessee

also pointed out that its bonafides in the circumstances stated above

cannot be doubted.

8. The CIT(Appeals) on a consideration of the above circumstances

pointed out by the assessee, was of the view that it was not a fit case for

levy of penalty. It is also relevant to point out that while computing long

term capital gain, the computation of long term capital gain as filed by the

Assessee, was a sum of Rs.2,14,42,340. In arriving at this figure, the

assessee had reduced the cost of acquisition of Rs.2,53,392. Since the

assessee was retaining 50% of the undivided share of land of the property.

The AO was of the view that only 50% of the aforesaid sum can be claimed

as cost of acquisition. Similarly, a sum of Rs.17,59,087 was disallowed out

of labour expenses. The CIT(Appeals) was of the view that those additions

cannot also be the basis to impose penalty for the following reasons:-

"6.3 Similarly, with respect to labour charges, the addition made by the AO is fully accepted by the appellant and taxes paid on the same. In course of the appellate proceeding, the appellant has produced the details of the labour payments together with the receipts / vouchers and demonstrated the entries in the cash book and the ledger account extracts. The genuineness of these expenses is evident from the same. However, the AO found some ITA No.1225/Bang/2013 Page 6 of 12

discrepancies in the figures and accordingly made the additions. Finding that the appellant accepted the additions and chose not to contest the same, and having noted that all the payments were duly routed through the bank account, I am not convinced that the appellant intended to avoid tax through such payments by manipulating the same."

9. Aggrieved by the order of the CIT(Appeals), the Revenue has filed

the present appeal before the Tribunal.

10. We have heard the submissions of the ld. DR, who reiterated the

stand of Revenue that but for the survey, the assessee would not have

declared long term capital gain. The ld. counsel for the assessee relied on

the order of CIT(Appeals) and also brought to our notice certain judicial

pronouncements.

11. We have considered the rival submissions. We have given a very

careful consideration to the rival submissions. The assessee received built

up area of the flats of 10,931 sq.ft. during the previous year relevant to A.Y.

2007-08 i.e., on 1.11.2006. The share of property which the assessee

received from the builder was let out by the assessee and income from

such letting was offered to tax by the assessee under the head 'income

from house property'. The return of income was filed by the assessee for

A.Y. 2007-08 on 24.10.07 declaring total income of Rs.36,04,060

comprising of income from property of Rs.33,88,276 and income from

business of Rs.2,15,779. The return was processed u/s. 143(1) of the Act

on 31.10.2008. There was a survey u/s. 133A of the Act conducted in the ITA No.1225/Bang/2013 Page 7 of 12

case of M/s. VBDPL, the entity which developed the property. In the

course of such survey, the Revenue came to know about the joint

development agreement between the assessee and VBDPL and the fact

that capital gain on transfer of the property by the assessee had not been

offered to tax in the return of income filed by the assessee for A.Y. 2007-

08. Immediately the assessee filed a working of long term capital gain

arising from transfer of the property, even without any proceedings having

been initiated against the Assessee. The assessee filed only a

computation of long term capital gain computing the same at

Rs.2,14,42,340, but did not file a revised return of income because the time

limit for filing revised return of income had also expired by that time. The

above circumstances explained by the Assessee cannot be ignored and

was rightly treated by the CIT(A) to be circumstance which go to show the

bonafides of the Assessee.

12. The Assessee's explanation that owing to wrong professional advise

to the effect that in a Joint Development Agreement there was only a barter

and no capital gain arises is also a plausible explanation. Though no

material has been brought on record in this regard by the Assessee, it is

widely acknowledged that incidence of capital gain tax in a Joint

Development Agreement and the year of chargeability of capital gain tax in

a Joint Development Agreement is not free from doubt and is always

controversial.

ITA No.1225/Bang/2013 Page 8 of 12

13. The subsequent conduct of the Assessee in not raising any legal

issue with regard to the year of taxability of capital gain and validity of

initiation of reassessment proceedings was also rightly treated as a

circumstance showing the bonafides of the Assessee by the CIT(A). It was

open to the Assessee to have taken a stand that in view of the decision of

the Hon'ble Karnataka High Court case of Dr T K Dayalu (supra), capital

gain in the case of transfer of capital assets under Joint Development

agreement will be only the year in which the Joint Development Agreement

is entered into and possession given to the developer for developer.

14. The Assessee paid taxes much before the issue of the notice u/s

148 and had also duly filed the revised computation of income. The AO's

view is that "when the rental income was already offered to tax, it was in

the knowledge of the assessee that the capital gains are also attracted on

taking possession of the built up area". As already stated, the issue was

debatable and the belief entertained by the Assessee in this regard cannot

be said to be unreasonable. The levy of penalty with regard to computation

of long term capital gain by disallowing part of cost of acquisition, in our

view, cannot lead to concealment and it, at best, could be an error in

computation. The primary facts with regard to the computation of capital

gain filed by the Assessee are true and there was no concealment or

furnishing of inaccurate particulars therein. Even with regard to

disallowance of labour charges of Rs.1759087/- against the business

receipts, the disallowance was made owing to mismatch between two ITA No.1225/Bang/2013 Page 9 of 12

submissions. The accountant had made a mistake by submitting a

provisional ledger extract at one point of time which resulted into certain

mismatches in the amounts. The mismatch in the submissions would not

result into total expenditure to be bogus. The labour component is major

expenditure of the Assessee. The CIT(A) has examined the labour

payments of Rs.17,59,087 made to various parties and the mode of

payment and has found that labour charges for Rs.1759087/- have been

discharged through bank barring a small expenditure of Rs.3224/- by cash.

It appears to us that the Assessee in order to avoid any litigation with the

department has accepted the addition and did not file any appeal on the

addition made though the entire expenditure is backed up with clear

documentary proof.

15. The Hon'ble Supreme Court in the case of MAK Data (P) Ltd v. CIT

(2013) 358 ITR 593 (SC) has discussed the approach to be adopted in

cases such as that of the Assessee. The assessee-company filed its return

of income for the assessment year 2004-05 on 27th October, 2004

declaring income of Rs 16.17 lakh along with tax audit report. The case

was selected for scrutiny. At the time of assessment, it came to light that a

survey under section 133A was conducted on the assessee on 16.12.2003.

During the course of survey, certain documents comprising share

application forms, bank statements, memorandum of association of certain

companies, affidavits, copies of income-tax return and blank share transfer

deeds were impounded. The Assessing Officer sought specific information ITA No.1225/Bang/2013 Page 10 of 12

pertaining to blank share transfer deeds by means of show cause notice.

The assessee-company surrendered a sum of Rs 40.74 lakhs as additional

income with a reply in the following manner: "The offer of surrender is by

way of voluntary disclosure of income without admitting any concealment

whatsoever or with any intention to conceal and subject to non-initiation of

penalty proceedings and prosecution". The Assessing Officer completed

the assessment by adding Rs 40.74 lakhs as income from other sources

and the assessment was completed on 29.12.2006. Further, the Assessing

Officer initiated proceedings for levy of penalty towards concealment of

income. The Hon'ble Delhi High Court applied clause (A) of Explanation 1

and held that the assessee has not offered any explanation and therefore

upheld the levy of penalty. On appeal by the Assessee, the Hon'ble

Supreme Court held that Explanation to section 271(1) raises a

presumption of concealment, when a difference is noticed by the Assessing

Officer between the returned income and assessed income. The burden

then is on the assessee to show otherwise, by giving cogent and reliable

evidence. When the initial onus is discharged by the assessee, the onus

shifts on the Revenue to show that the amount in question constituted the

income and not otherwise. The Apex Court held that surrender of income

with a view to avoid litigation, buy peace and to channelise the energy and

resources towards productive work and to make amicable settlement with

the Income-tax Department are not recognised type of defence under

Explanation 1 to section 271(1)(c) of the Act. It held that the law does not ITA No.1225/Bang/2013 Page 11 of 12

absolve the assessee from concealment penalty merely because a

voluntary disclosure of concealed income is made.

16. The Hon'ble Supreme Court held that the surrender of income in

this case is not voluntary and the surrender was in view of the detection

made by Assessing Officer. It is not surrender of income on voluntary

basis. The survey was conducted 10 months before the assessee filed its

return of income. Had it been the intention of the assessee to make full and

true disclosure, it could have filed the return declaring the amount which

was factually surrendered only during the course of assessment

proceedings and not in the return filed. It is a clear case of the assessee

not having intention to declare its true income.

17. In the present case, as we have already seen, the original return of

income was filed by the Assessee in which the income from the property

which the Assessee received under the Joint Development Agreement was

offered to tax. After survey in the case of the Property Developer, the

Assessee filed a revised computation of total income offering capital gain to

tax and also paid taxes due thereon. We have already found that the

explanation offered by the Assessee for not offering the capital gain in the

original return of income as bonafide explanation. In the circumstances, we

are of the view that the CIT(A) was fully justified in coming to the

conclusion that the case is not a fit case for imposing penalty u/s.271(1)(c) ITA No.1225/Bang/2013 Page 12 of 12

of the Act. We concur with the view of the CIT(A) and find no merit in this

appeal by the Revenue.

18. Accordingly, the appeal by the Revenue is dismissed.

19. In the result, the appeal by the Revenue is dismissed.

Pronounced in the open court on this 26th day of May, 2015.

Sd/- Sd/-

( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member

Bangalore, Dated, the 26th May, 2015.

/D S/

Copy to:

1. Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar / Senior Private Secretary ITAT, Bangalore.