Case Law Details

Case Name : ACIT Vs K.B. Developers (ITAT Kolkata)
Appeal Number : I.T.A. No. 26/KOL/2021
Date of Judgement/Order : 22/04/2021
Related Assessment Year : 2013-2014

ACIT Vs K.B. Developers (ITAT Kolkata)

Sole ground on which the disallowance is made is that the assessee had entered into these agreements, without making solid provisions to raise funds by due dates and hence it does not make any sense for a firm engaged in commercial venture to enter into these agreements. He drew attention to the Bench to the order of the ld. CIT(Appeals) and supported the same. He vehemently contended that the Assessing Officer has not doubted the genuineness of the agreement of sales nor he has been made any enquiry or investigation with the sellers of the land or with the arbitrators who had given the arbitration award, and only based on the Assessing Officer’s perception, that the loss was disallowed. He vehemently contended that the Assessing Officer does not have any iota of evidence to controvert the documentary evidences filed by the assessee in support of its claim. He submitted that the fact of payment of earnest money to the parties, who are nowhere connected with the assessee-firm and the fact that the amount is forfeited by such parties, is not disputed by the ld. Assessing Officer. He prayed that the order of the ld. CIT (Appeals) be upheld.

The AO has disallowed the claim of the forfeiture of the amount of Rs.9,92,00,000/- only on the ground that the assessee should not have entered into the agreement of purchase of land without making arrangement for the balance amount payable by 18.2.2013. Since according to him it does not make any sense for a firm to be engaged in commercial venture. It may be submitted that the assessee had in its balance sheet assets over 81 crores and there was every chance to realize the same and pay for the balance. But the same could not be collected. However, the factum of tile forfeiture and the award is not disputed. The AO has also verified the said agreement by making necessary enquiries and there is no dispute about the same

We find that the Assessing Officer in this case has not made any enquiry or investigation, based on which he has come to the abovestated conclusions-

Nobody was examined. No questions were asked to third parties. No information was called for from third parties. There is no evidence collected against the claim of the assessee.

In our view, there is no contradiction between the versions of agreements for sale and the submissions made by the assessee-firm to the arbitrator that the assessee-firm was desirous to develop the plots of land for earning profit and that there were fall in prices of properties. No adverse inference can be drawn.

This observation cannot lead into a conclusion that the agreements are bogus. The fact that agreements were entered into, amounts were paid and the facdt that these advances or earnest money was forfeited by the seller is not controverted with evidence by the Assessing Officer.

The ld. CIT(Appeals) at para 5.3.7 of his order narrated the facts and thereafter at para 5.3.10 referred to the judgment of the Hon’ble Supreme Court in the case of Satish Batra –vs.- Sudhir Rawal dated 18.10.2012 in Civil Appeal No. 7588 of 2012. The Hon’ble Supreme Court in the case of Satish Batra came to the conclusion that the seller in this case was justified in forfeiting the amount of Rs.7,00,000/- as per the relevant clause, since the earnest money was primarily a security for the due performance of the agreement and the seller is entitled for forfeit the entire deposit. The undisputed fact is that the assessee is engaged in the business of real estate and that these payments were made in the course of business and that the earnest money was forfeited resulting into business loss of the assessee.

Such loss is allowable as a deduction as held in the following cases:-

(i) Jawala Prosad Radha Kishan [79 ITR 580 (Allh.);

(ii) Inden Bislers [91 ITR 427 (Madras)];

(iii) Kishangunge Madira Sangh [167 ITR 393].

FULL TEXT OF THE ITAT JUDGEMENT

This appeal I.T.A. No. 26/KOL/2021 is filed by the Revenue directed against the order of ld. Commissioner of Income Tax (Appeals)-13, Kolkata dated 08.06.2020, passed under section 250 of the Income Tax Act, 1961 (‘the Act’).

2. There is a delay of 52 days on the part of the Revenue in filing this appeal before the Tribunal. Shri Mintu Roy, ACIT vide letter dated 03.03.2021 submits that there is no delay in filing this appeal on the ground that filing of any appeal extended or relaxation upto the 31.03.2021 which any time limit falls during the period from 20th March, 2020 to 31st December, 2020 vide Notification and Bill no. 116 of 2020 and published by Gazette of India Order no. 63 dated 29.09.2020 of the taxation and other laws (Relaxation and Management of Certain Provisions) Act, 2020 of Order No. 38 of 2020 at chapter II and prayed that the delay be condoned. Moreover he also submitted that due to the prevailing Covid-19 Pandemic situation, the offices of the assessee as well as the Government were not functioning, which was the cause of delay. The ld. Counsel did not raise any objection. Therefore, we condone the delay and dispose of the appeal on merit.

3. The assessee is a partnership firm which is engaged in the business of real estate. The original partnership firm consisted of 18 partners, out of which 10 partners retired on 27.05.2012. The assessee-firm filed its e-return of income for the assessment year 2013-14 on 30.07.2013 declaring its taxable income of Rs.12,21,75,410/-. The case was selected for scrutiny assessment. The Assessing Officer completed the assessment under section 143(3) of the Act on 31.03.2016 determining the total income of the assessee at Rs.22,30,85,410/-, inter alia, making an addition of Rs.9,92,00,000/- on the ground that it was a bogus loss and also disallowing a commission of Rs.17,10,000/- connected to this issue of bogus loss. The assessee had declared long-term capital gains of Rs.22,28,28,000/- under section 45(4) of the Act. The Assessing Officer brought it to tax as business income under the head “income from business” and charged income tax at the normal rates. Being aggrieved, the assessee carried the matter in appeal. The first appellate authority allowed the business loss claimed by the assessee of Rs.9,92,00,000/- and also allowed the claim of commission expenditure of Rs.17,10,000/-. On the issue as to under which ‘head of account’ is the amount of Rs.22,28,28,000/- chargeable to tax, the ld. CIT(Appeals) held that this amount is chargeable to tax under the head of ‘long-term capital gains’ and directed the Assessing Officer to apply the tax rate applicable to long-term capital gain, to this income. Aggrieved, the Revenue is in appeal before the Tribunal on the following grounds:-

(1) On the facts and in the circumstances of the case and in law the ld. CIT(Appeals)-13, Kolkata erred in allowing relief to the assessee to the tune of Rs.9,92,00,000/- being loss on purchase of land or earnest money paid.

(2) On the facts and in the circumstances of the case, the ld. CIT(A) erred in law as well as on facts of the case by deleting the additions of Rs.17,10,000/- ,made by the AO being brokerage paid by the assessee which rely upon judgment of Hon’ble Calcutta High Court in the case of Alpha Hydronics Pvt. Limited in ITA No. 549 of 2004 dated 10.11.2014.

(3) On the fact and in the circumstances of the case, the ld. CIT(A) erred in law as well as on the facts by not considering the amount of Rs.22,28,28,000/- to be taxed as normal rate instead of taxed at special rate as LTCG.

4. The assessee filed the Cross Objection on the following grounds:-

“(1) For that the ld. CIT(Appeals) should have held that the capital gain declared u/s 45(4) was not at all taxable since the partners who contributed the land in the partnership at the time of jointing the firm took it back at the time of retirement at the same value.

(2) For that the ld. CIT(A) was fully justified in deleting the addition on account of loss in business and the commission payment following the findings in the remand report and on the facts of the case”.

5. The CIT (D.R.) Mr. John Vincent explained the facts of the case as brought out by the Assessing Officer, as well as the CIT(Appeals) and submitted that the assessee’s claim that it had entered into different agreements for purchases of plots of land, during the year under consideration, with six different persons and had given them earnest money as advance for such purchase of land in accordance with the agreements and due to non-payment of balance consideration by the assessee within time, in all the cases and non-fulfilment of the terms and conditions of the contracts for purchases of land, the earnest money paid was forfeited by the sellers. As per the ld. CIT,DR, the agreement clause, that in the event of failure on the part of assessee to pay the balance amount of consideration by due date resulting into business loss is totally unbelievable. He referred to the assessment order and submitted that the Assessing Officer has rightly concluded that the deals entered into by the assessee were not a bonafide one or part of the business activity of the firm. He pointed out that the agreement for sale was entered into on 04.01.2013 and whereas it is alleged that the value of the property declined between the period 04.01.2013 to 18.02.2013 when the final payment was scheduled to be made, even though no extraordinary events such as war, civil unrest, famine, earthquake, deluge or sudden collapse in money market happened in the intervening period justifying the claim of the assessee that there was declined the value of the land. He referred to the submissions made by the assessee that, as per the agreements to sale dated 04.01.2013, the assessee firm expressed its desire for development of those plots of land for profit and entered agreements with the so called sellers, and whereas as per the written submission before the arbitrator, copy of which furnished at the time of assessment proceedings, it was submitted that the assessee entered into the agreement with the hope they will be able to arrange a partner who will finance the purchase of land. It was stated by the arbitrator as per his award dated 28.02.2013 that, it was alleged the prospective buyer were not forthcoming in view of the decline in the price of the land during the intervening period. He submitted that the assessee without making solid provisions to raise funds by due dates, had agreed to pay the balance value of the land by 18.02.2013 in two instalments which is not believable. He submitted that it does not make any commercial sense and hence the Assessing Officer has rightly disallowed the claim of loss. Referring to the order, he submitted that the ld. CIT(Appeals) was wrong in believing that the transactions are bonafide in allowing the claim of the assessee. He prayed that the order of the ld. CIT(Appeals) be reversed and the order of the Assessing Officer be restored.

6. On the issue of payment of commission, the ld. CIT D.R. relied upon the order of the Assessing Officer and submitted that the commission was paid for facilitating arbitration in connection with the so-called forfeiture of advance paid for the so-called agreement of purchase of plots of land. He referred to the arguments made, on the issue of loss on purchase of land or earnest money paid amounting to Rs.9,92,00,000/- and argued consequential brokerage and commission being bogus has to be disallowed.

7. Ld. Counsel for the assessee, on the other hand, relied on the order of the ld. CIT(Appeals) and submitted that the grounds of disallowance are brought out by the Assessing Officer in the remand report, copy of which is extracted by the ld. CIT(Appeals) in his order and that the basis of disallowance was factually and legally incorrect. He submitted that the sole ground on which the disallowance is made is that the assessee had entered into these agreements, without making solid provisions to raise funds by due dates and hence it does not make any sense for a firm engaged in commercial venture to enter into these agreements. He drew attention to the Bench to the order of the ld. CIT(Appeals) and supported the same. He vehemently contended that the Assessing Officer has not doubted the genuineness of the agreement of sales nor he has been made any enquiry or investigation with the sellers of the land or with the arbitrators who had given the arbitration award, and only based on the Assessing Officer’s perception, that the loss was disallowed. He vehemently contended that the Assessing Officer does not have any iota of evidence to controvert the documentary evidences filed by the assessee in support of its claim. He submitted that the fact of payment of earnest money to the parties, who are nowhere connected with the assessee-firm and the fact that the amount is forfeited by such parties, is not disputed by the ld. Assessing Officer. He prayed that the order of the ld. CIT(Appeals) be upheld.

8. On the issue of allowability of brokerage, he submitted that the commission was required to be paid for obtaining and conducting of arbitration proceedings and connected services and that nexus was established with the business. He referred to the remand report given by the Assessing Officer to the ld. CIT(Appeals) and submitted that no adverse comment has been made by the Assessing Officer on this payment nor anyone was examined or there was a iota of evidence against the assessee. He relied on the order of the ld. CIT(Appeals) and prayed that the same be upheld.

9. Rival contentions heard. On a careful consideration of all the facts, papers on record, orders of the authorities below and case laws cited, we hold as follow:-

Disallowance of Rs.9,92,00,000/-:

The facts of the case are brought out by the ld. CIT(Appeals) at pages 12 & 13 of his order as follows:-

“The assessee during the year decided to purchase a property at Village-Sikaria, near Brindaban, Dist. Mathura, U.P. so that he can also enter into the business of development of the properties. The details of the said land are as under:-

Name of seller Land area Total consideration Earnest money paid
Sri Harish C. Agarwal 17.96 acres 9,87,80,000 1,97,00,000
Rajat Agarwal 8.12 acres 90,00,000 90,00,000
Suresh C.
Agarwal
17.27 acres 1,90,00,000- 1,90,00,000
Triple K. Distributors Co. Pvt. Ltd. 17.28 acres 1,90,00,000- 1,90,00,000
Dhanprakash Gupta 17.28 acres 1,90,00,000- 1,90,00,000
Dolphin Business Consultants Pvt. Ltd. 12.24 acres 1,35,00,000- 1,35,00,00
Total   49,58,25,000 9,92,00,000

The said land was agreed to be purchased for a consideration of Rs.49,58,25,000/- and accordingly agreement to sale dated 4.1.2013 was entered into with the sellers and the assessee in all paid earnest money of Rs.9,92,00,000/·. The assessee also agreed to pay the remaining consideration by 18th Feb. 2013. The assessee thereafter having not been able to arrange the money and requested the seller for extension of time. The first instalment of the balance amount was payable by 31st Jan. 2013. Since the time was not extended the parties appointed Arbitrator to decide the issue. The last instalment is also payable by 18.2.2013. The said instalment also could not be paid. Finally, the Arbitrator beard for the parties and an award was given in favour of the seller that the earnest money shall stand forfeited by the seller. The said award was accepted by the assessee since there was no chance of arrangement of the money, not only that by that time the properly market also started coming down and the assessee rightly felt that it was hot the time to entered into construction business. The copy of the agreement, the reference to the Arbitrator and tile Arbitration award is enclosed herewith for ready reference.

The AO has disallowed the claim of the forfeiture of the amount of Rs.9,92,00,000/- only on the ground that the assessee should not have entered into the agreement of purchase of land without making arrangement for the balance amount payable by 18.2.2013. Since according to him it does not make any sense for a firm to be engaged in commercial venture. It may be submitted that the assessee had in its balance sheet assets over 81 crores and there was every chance to realize the same and pay for the balance. But the same could not be collected. However, the factum of tile forfeiture and the award is not disputed. The AO has also verified the said agreement by making necessary enquiries and there is no dispute about the same”.

10. The Assessing Officer disallowed this claim of the assessee for the following reasons:-

(i) The entire events do not suggest that the deals entered by the assessee were a bona fide one and as a part of the business activities of the firm;

(ii) The statement that the prices/ values of these properties, which are supposed to be purchased declined between the period 04.01.2013 to 18.02.2013 cannot be believed, as there is no extra­ordinary events such as war, civil unrest, famine, earthquake, deluge or sudden collapse in money market etc.

(iii) As per the agreements to sale dated 04.01.2013, the assesese firm expressed its desire for development all these plots of land for profit and whereas it was stated by the arbitrator in his award dated 28.03.2013, that it was alleged the prospective buyers are not forthcoming in view of the decline in the price of the land during the intervening period. That the subsequent forfeiture of so-called advance money suggests malafide motives before the staged deal.

(iv) It is most surprising that without making solid provisions to raise funds by due dates, the assessee-firm agreed to pay balance value of the land i.e. Rs.39,66,25,000/- by 18.02.2013 in two instalments.

10.2. We find that the Assessing Officer in this case has not made any enquiry or investigation, based on which he has come to the abovestated conclusions-

Nobody was examined. No questions were asked to third parties. No information was called for from third parties. There is no evidence collected against the claim of the assessee.

In our view, there is no contradiction between the versions of agreements for sale and the submissions made by the assessee-firm to the arbitrator that the assessee-firm was desirous to develop the plots of land for earning profit and that there were fall in prices of properties. No adverse inference can be drawn.

11. Before arbitrator, ld. Counsel stated that the assessee entered into the agreement with the hope they will be able to arrange a partner who will finance and that they tried to arrange finances for this deal. There is no evidence to controvert this submission. The arbitrator has given a finding of fact that the value of the property declined between the period 04.01.2013 to 18.02.2013. The Assessing Officer has not found any evidence to controvert these findings of the arbitrator. Genuineness of this agreement to sale cannot be disputed by the Assessing Officer unless he examined the sellers of the land and unless he collects evidence to show that these are manipulated agreements which are arranged in connivance with other parties, for financial gain of the assessee and others involve in the events.

The Assessing Officer observed in his remand report as follows:-

“It is crystal clear that without making solid provision to raise fund to due date the assessee firm agreed to pay balance value of land i.e. Rs.49,66,25,000/- by 18.02.2013. It does not make any sense for a firm engaged in commercial venture. So, the amount of loss claimed by the assessee is not allowed and added to the total income of the assessee”.

This observation cannot lead into a conclusion that the agreements are bogus. The fact that agreements were entered into, amounts were paid and the facdt that these advances or earnest money was forfeited by the seller is not controverted with evidence by the Assessing Officer.

12. The ld. CIT(Appeals) at para 5.3.7 of his order narrated the facts and thereafter at para 5.3.10 referred to the judgment of the Hon’ble Supreme Court in the case of Satish Batra –vs.- Sudhir Rawal dated 18.10.2012 in Civil Appeal No. 7588 of 2012. The Hon’ble Supreme Court in the case of Satish Batra came to the conclusion that the seller in this case was justified in forfeiting the amount of Rs.7,00,000/- as per the relevant clause, since the earnest money was primarily a security for the due performance of the agreement and the seller is entitled for forfeit the entire deposit. The undisputed fact is that the assessee is engaged in the business of real estate and that these payments were made in the course of business and that the earnest money was forfeited resulting into business loss of the assessee.

13. Such loss is allowable as a deduction as held in the following cases:-

(i) Jawala Prosad Radha Kishan [79 ITR 580 (Allh.);

(ii) Inden Bislers [91 ITR 427 (Madras)];

(iii) Kishangunge Madira Sangh [167 ITR 393].

Applying the proposition of law laid down in the case law to the facts of this case, we uphold the order of the ld. CIT(Appeals) on this issue and dismiss this disallowance of commission of Rs.17,10,000/-.

14. The assessee has disputed the disallowance of Rs.17,10,000/- being brokerage paid for which the evidences were filed. The assessee claims that it was proved that this disallowance was made based on the conclusion drawn by the Assessing Officer on the first time of disallowance of loans, forfeits the earnest money deposit. There is evidence of payment and services. No enquiries were made by the Assessing Officer. No adverse evidence is collected. Inference was drawn without any basis. The said payment was made for the purpose of business. In view of the above discussion and consistent with the view taken by us in the previous disallwoance, we uphold the order of the ld. CIT(Appeals) and dismiss this ground of Revenue.

15. The ld. CIT(Appeals) at page 29 of his order states that (i) the persons who received the commission confirmed the same and submitted their income tax details, (ii) income-tax details demonstrated that these commission agents have disclosed the amount in question as their income by filing the return of income. Nothing is brought on record by the Assessing Officer to dislodge the claim of the assessee or to show that the money paid as commission has come back to the assessee. Thereafter the ld. CIT(Appeals) relied on the judgment of the Hon’ble Jurisdictional High Court in the case of Alpha Hydronics Pvt. Limited in ITA No. 549 of 2004 and allowed the claim of the assessee. We find no infirmity in the order of the ld. CIT(Appeals).

16. In the result, the appeal of the Revenue is dismissed.

17. Now we take up the Cross Objection being C.O. No. 8/KOL/2021 filed by the assessee on the following grounds:-

“(1) For that the ld. CIT(Appeals) should have held that the capital gain declared u/s 45(4) was not at all taxable since the partners who contributed the land in the partnership at the time of jointing the firm took it back at the time of retirement at the same value.

(2) For that the ld. CIT(A) was fully justified in deleting the addition on account of loss in business and the commission payment following the findings in the remand report and on the facts of the case”.

18. The facts relating to these grounds of Cross Objection are as follow:-

The assessee is a partnership firm. This partnership firm originally consisted of 18 partners. Out of these 18 partners, 10 partners retired on 27.05.2012. Some of the partners contributed their land at cost, to the partnership firm, when the partnership was formed in the assessment year 2008-09. After retirement on 27.05.2012, these partners are stated to have taken back this land so contributed and the partnership firm has returned the land so contributed by them, when the partnership firm was formed in the year 2008-09.

19. The assessee-firm computed capital gains as per section 45(4) of the Act on these transactions and offered to tax the same as per provisions of long-term capital gain and the rate of tax applicable thereon. The Assessing Officer was of the view that this amount is assessable as business income at normal rate. On appeal, the ld. CIT(Appeals) held that the amount in question is taxable at the rate applicable to long-term capital gain.

20. In this Cross Objection, the assessee has raised the fundamental issue as to whether the amount in question is taxable or not. The assessee relied on the judgment of the Hon’ble Madras High Court in the case of M/s. National Company –vs.- ACIT in Tax Case Appeal No. 365 of 2009 judgment dated 08.04.2019. Ld. Counsel argued that re-constituency of partnership firm cannot result in transfer of assets and urged that section 45(4) of the Act would not apply to the facts of the present case. He argued that on retirement of partners when there is transfer of assets, it would not attract the provisions of section 45(4) of the Act. The ld. D.R., on the other hand, submits that this is not the case of settlement of accounts on retirement and return of land share originally contributed by the partners to the firm, on retirement of the same. The ld. DR submitted that the judgment of the Hon’ble Madras High Court in the case of National Company (supra) does not apply.

21. After hearing rival submissions, we find that the assessee has suo motu offered to tax the amount of gain that arose on this transaction of retirement of partners under the head “long-term capital gains”. It is not a case where the assessee claims that the partners of the assessee-firm retired and consequent to settlement of accounts these retiring partners had withdrawn such land from the firm. The ld. Counsel for the assessee states that the land contributed to the assessee-firm by the partners at the time of formation of the firm had withdrawn by the partners at the time of retirement from the firm. This cannot be a case of settlement of accounts on retirement. It is not a case where retiring partners are merely releasing or relinquishing all their rights and interest in the firm on retirement and receiving the value of one’s interest in the firm. No such documentary evidence was produced before us or before the lower authorities. No relief can be granted to the assessee in the absence of any details. This issue requires investigation into fresh facts which are not on record. Hence this additional ground cannot be admitted. Under these circumstances, we dismiss this ground of Cross Objection.

22. In the result, the Revenue’s appeal as well as Cross Objection by the assessee both are dismissed.

Order pronounced in the open Court on April 22, 2021.

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