Case Law Details
ACIT Vs Sandeep U Mehta (ITAT Mumbai)
Conclusion:
Assessee was entitled to exemption under section 54 on long term capital gain on sale of properties as the holding period of the asset should be considered from the date of acquisition of asset in the light of agreement to sale, but not from the date of possession of the property.
Held:
Assessee had computed long term capital gain from sale of two properties by adopting indexed cost of acquisition and claimed exemption u/s 54 for purchase of another residential house property. AO had recomputed long term capital gain derived from sale of one residential property for the reason that the holding period of the asset was less than 3 years if the date of possession of the property had been considered. It was held various Courts had consistently held that the holding period of the asset should be considered from the date of acquisition of asset in the light of agreement to sale, but not from the date of possession of the property. In this case, if the date of acquisition of the property had been taken from the date of agreement to sale, then the holding period of the asset was more than 36 months and consequent gain arising from sale of property was assessable under the head ‘long term capital gain’. Assessee had filed various details including copy of document evidencing purchase of another residential house property within one year before the date of sale of immovable property under consideration and hence, the long term capital gain was exempt u/s 54.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the revenue is directed against the order of the CIT(A)-44, Mumbai dated 05-05-2016 and it pertains to AY 23013. The revenue has raised the following grounds of appeal:-
“1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.1,95,82,899/- ignoring the fact that the corresponding income has not been offered to tax during the year and has not been established that whether income was offered for tax in any other year.”
2. ” On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,95,82,899/- despite the fact that the assessee is following mercantile system of accounting and has also claimed credit for IDS during the year as such the Ld. CIT(A) has failed to appreciate the accounting principles and matching concept of income recognition and expenditure claimed.”
3. “On the facts and in the circumstances of the case and in law, the Ld-CIT(A) has erred in deleting the additions of Rs.88,66,633//- ignoring the fact that the assessee has understated the receipts in the books of accounts and there was difference as per AIR information and receipt shown in the books of accounts.”
4. “On the facts and in the circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs.17,90,500/- on account of Short Term Capital Gain ignoring the fact that the possession of flat was given to the assessee only after March 2009 and the asset in question was held by the assessee for less than 36 months as such the gain arising out of sale of flat was rightly assessed as short Term Capital Gain.”
5. “On the facts and in the circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.15,66,1987/- on account of Long Term Capital Gain ignoring the fact that assessee did not provide any evidence regarding purchase of new property.”
6. “On the facts and in the circumstance of the case and in law, the Id. CIT(A) has erred in admitting the addition regarding purchase of new property in violation to the provisions of the Ruel 4GA of the Income Tax Rules, 1962 and consequently directing the Assessing officer to grant deduction u/s 54 of the Act.”
7. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.2,40,166/- made on account of unsecured loans and interest as the assessee has failed to prove the identity ,creditworthiness and genuineness of the said loan. Also the party from whom the alleged loan was received by the assessee was listed as hawala entry provider who indulged in providing accommodation entry of unsecured loans and related to Pravin Kumar Jain and his Group.”
2. The brief facts of the case are that the assessee is a civil contractor, filed his return of income for AY 2012-13 on 27-09-2012 declaring total income of Rs.3,55,68,680. The case was selected for scrutiny and accordingly notices u/s 143(2) and 142(1) of the Act, alongwith questionnaire were issued. In response to notices, authorized representative of the assessee appeared from time to time and filed various details, as called for. The assessment has been completed u/s 143(3) determining total income at Rs.6,99,03,800. The assessee carried the matter in appeal before the first appellate authority. The assessee has filed elaborate written submissions on various additions made by the AO. The Ld.CIT(A), for the detailed discussions in his appellate order dated 05-05-2016, partly allowed appeal filed by the assessee, wherein he has deleted addition made by the AO towards unreconciled turnover from contract of Rs.1,95,82,899 alongwith under stated contract receipts of Rs.88,66,633, recomputation of long term capital gain from sale of properties by rejecting exemption claimed u/s 54, assessment of long term capital gain declared by the assessee under the head ‘short term capital gains’ and addition towards unexplained cash credits being unsecured loan taken from M/s Kailash Enterprises. Aggrieved by the order of CIT(A), revenue is in appeal before us.
3. The first issue that came up for our consideration from revenue’s appeal is addition towards unexplained unreconciled contract receipts of Rs.1,95,82,899. The AO made additions towards unreconciled contract receipts on the basis of turnover reported by the assessee in its books of account and turnover reported in Form 26AS by various contractees, who deducted TDS of payments made to the assessee and payment difference of Rs.1,95,82,899. According to the AO, although assessee has filed reconciliation statement explaining difference between turnover reported in his books of account and amount appeared in Form 26AS, while reconciling difference, the assessee has deducted amounts shown in work in progress of Rs.1,41,27,864 even though it is not part of either turnover of the assessee in its books of account or part of receipts appearing in Form 26AS. Therefore, he opined that the assessee failed to reconcile the difference and accordingly made addition. It is the contention of the assessee that it has filed reconciliation statement explaining the difference between turnover as per books of account and turnover reported in Form 26AS and such difference has been explained to the AO with reasons. According to the assessee, in respect of contract receipts received from MCGM, a sum of Rs.1,95,82,899 was booked as sales / contract receipts for the financial year 2010-11 relevant to AY 2011-12, whereas MCGM has deducted TDS in respect of such contract receipts in the financial year relevant to AY 2012-13 but the assessee has considered only TDS amount for AY 2012-13 for the reason that the turnover has been already entered in the books of account for earlier years and shown as debtors. The AO, without understanding this reconciliation filed by the assessee, made addition only on the basis of amount appeared in Form 26AS ignoring evidences filed by the assessee. Similarly, the assessee has filed reconciliation statement explaining difference of Rs.88,66,633 with corresponding TDS amount of Rs.1,77,333.
4. We have heard both the parties and perused the material available on record. The AO has made addition towards unreconciled contract receipts on the basis of turnover reported in books of account and turnover appeared in Form 26AS. According to the AO, assessee has failed to file any reconciliation to the satisfaction of the AO with necessary evidences, although the assessee has filed reconciliation. It is the contention of the assessee that difference in turnover is on account of payments made by MCGM towards works contract bills which has been considered by the assessee in the financial year relevant to AY 2011-12 whereas MCGM has deducted TDS in the financial year relevant to AY 2012-13. The assessee further contended that it has filed necessary evidences including ledger extracts of MCGM to prove that the said income have been accounted for in the previous financial year and shown as receivable in the books of account against which the assessee has received payments in the current financial year. The assessee further claims that in this financial year he has considered only TDS amounts pertaining to said contract receipts and this fact has been explained before the AO.
5. Having heard both the sides, we find that although the assessee has filed reconciliation statement explaining difference between turnover reported in his books of account and turnover as per Form 26AS, on perusal of reconciliation statement filed by the assessee it appears that the assessee has considered an amount of Rs.1,41,27,864 shown under the head ‘work-in-progress’ to reconcile the difference between the turnover. This aspect has not been considered by the Ld.CIT(A). In the case of civil construction business it is quite possible that the assessee submit bills in one financial year and the principals will certify and make payment in another financial year and deduct TDS on such payments when the payments have been actually made. The assessees account turnover in their books of account as and when bill is submitted by following mercantile system of accounting. Therefore, there will always be difference between turnover considered by the assessee in its books of account and turnover appeared in Form 26AS. But, in such situation it is for the assessee to explain such difference by filing reconciliation statement to the satisfaction of the AO with evidence. In this case, although assessee claims to have accounted related turnover in the previous financial year, on perusal of the orders of authorities below, the facts are not emanating from the orders. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of claim of the assessee that the said turnover has been accounted in the previous financial year and shown as receivable in books of account. If, the assessee proves his claim with necessary evidence, then the AO is directed to delete addition towards unreconciled contract receipts.
6. The next issue that came up for our consideration is addition towards capital gain from sale of properties. The facts relating to the impugned dispute are that during the financial year relevant to AY 2012-13 assessee has sold immovable property for a consideration of Rs.71 lakhs vide sale agreement dated 29-10-2011. The assessee has computed long term capital gain from sale of two properties by adopting indexed cost of acquisition and claimed exemption u/s 54 of the I.T. Act for purchase of another residential house property. The AO has recomputed long term capital gain derived from sale of one residential property for the reason that the holding period of the asset is less than 3 years if the date of possession of the property has been considered. According to the AO, although assessee has purchased flat vide agreement dated 7-12-2008, the possession of such flat has been handed over by the builder in the month of March, 2009. Therefore, he opined that the holding period of the asset is less than 3 years and hence, the assessee is not eligible for exemption u/s 54 of the Income-tax Act, 1961. In respect of another flat, although the AO has accepted the fact that the holding period of the asset is more than 3 years, denied he benefit of exemption for the reason that the assessee has failed to file any documentary evidence for purchasing another residential house property to claim the benefit of exemption u/s 54 of the Act. It is the contention of the assessee that it has purchased flat on 7-5-2008 by way of a registered agreement to sell and hence, the holding period of the asset shall be determined by the date of agreement even though the possession of the property has been handed over subsequently. If the holding period of the asset has been considered from the date of agreement, then the asset is held for more than 36 months and accordingly gain derived from sale of such asset is assessable under the head ‘long term capital gain’ and the benefit of exemption u/s 54 is allowable. As regards another property, it is the contention of the assessee that the AO has ignored the evidence filed by the assessee in the form of copies of sale deeds to prove purchase of another house property for a consideration of Rs.2,03,54,000 vide sale deed dated 16-12-2010. The assessee further contended that during the year under consideration, he had made payment of Rs.29,11,123 in respect of the said flat and accordingly eligible to claim exemption u/s 54 of the Income-tax Act, 1961.
7. We have heard both the parties and perused the material available on record. Admittedly, the assessee has purchased one flat on 7-05-2008 by way of an agreement to sale. The AO has considered the date of acquisition of the asset from the date of handing over of the possession by the builder and accordingly considered the date of acquisition from March, 2009 to determine period of holding of the asset. The issue whether, right or interest in the property to be considered from the date of possession or from the date of agreement to sale is settled by decisions of various high courts. Various Courts have consistently held that the holding period of the asset should be considered from the date of acquisition of asset in the light of agreement to sale, but not from the date of possession of the property. In this case, if the date of acquisition of the property has been taken from the date of agreement to sale, then the holding period of the asset is more than 36 months and consequent gain arising from sale of property is assessable under the head ‘long term capital gain’. Insofar as second property, there is no dispute with regard to the holding period and related computation of long term capital gain. The AO has denied benefit of exemption claimed u/s 54 only on the ground that the assessee has not filed any evidence to prove investment in purchase of another residential house property. The Ld.CIT(A) has recorded categorical finding that the assessee has filed various details including copy of document evidencing purchase of another residential house property for a consideration of Rs.2,03,54,000. The Ld.CIT(A) further recorded that the assessee has purchased new residential house property within one year before the date of sale of immovable property under consideration and hence, the long term capital gain is exempt u/s 54 of the Income-tax Act, 1961. The relevant portion of the order of the CIT(A) is extracted below:-
“5.3 I have carefully gone through the assessment order as well as the written submission of the AR. From the facts of the case, it is clear that there is no dispute as far as the computation of capital gain is concerned. The AO has only stated that the capital gain shown by the appellant cannot be of the nature of long term capital gain. The main reason for the conclusion reached by the AO is that as per the AO the assessee has not acquired any rights over the property in the financial year 2008-9 as claimed by the appellant in case of first property. Regarding the second property it is a contention of the AO that the details of investment which would entitle the assessee for deduction u/s 54 was not submitted by the appellant. With respect to this property the AO has not doubted that there is no long term capital gain. In case of the first property the agreement for purchase of property was registered on 7.05.2008 while the same property was sold by an agreement registered on 29.10.2011. The AO was of the opinion that the possession of the flat was given only after March, 2009 and hence the agreement date of 07.05.2008 cannot be treated as date of purchase.
5.4 In modern times most of the purchases of residential houses are by way of purchase of flats. In bigger cities like Mumbai & Delhi an overwhelming proportion of residential houses constitute of flats which are units in a residential block developed by some builder. As per market norms and practice the purchase is treated as complete if the agreement is registered irrespective of the fact that possession has not been given. Thus in case of the first property the date of purchase will be 07.05.2008. Since this property has been sold by an agreement dated 29.10.2011 the profit of Rs 4,05,842/- arising out of this transfer of asset will have to be treated as long term capital gain. In this situation the benefit of sec. 54 will have to be allowed if the long term capital gain is invested for purchase of new residential property within the stipulated period.
5.5 It has been held by the Hon’ble Supreme Court of India in the case of CIT vs T N Arvind Reddy (1979) 120 ITR 46 (SC) that the purchase in the context of sec. 54 should be understood in a liberal sense without any undue restriction limiting the meaning to “lexical legalese. It has been held in the case_of_CIT vs Sambandan Uday Kumar (2012) 19 Taxmann.com (KAR) that sec. 54 is a beneficial provision for promoting construction of residential house and therefore it has to be construed liberally for achieving purpose for which it was incorporated in the statute. It has also been held by the Karnataka High Court in this case that once it is demonstrated that consideration received on transfer of capital asset has been invested either in purchase or in construction of the residential house, even though these transactions are not complete in all respects as required under law, same would not disentitle assessee from benefit of exemption under sec. 54.
5.6 Regarding the second property there was no dispute that long term capital gain of Rs 15,66,1977- has arisen from transfer of this property. The only reason why the benefit of sec. 54 was denied by the AO was the fact that the appellant had not submitted the detail of investment in new residential house. However, it is the contention of the appellant that this detail was submitted but was not considered by the AO. From the details submitted by the appellant it is clear that the \ appellant had made an investment of Rs 29,11,123/- as per ledger extract of AY 2012-13. Both the properties have been sold in October, 2011, The investment in new property has been made within one year before the sale of the properties under consideration. The capital gain arising out of sale of both the properties have been invested in one single property wherein investment of Rs 29,11,123/-was made as per ledger extract for AY 2012-13. Further, this investment was made for purchase of a new residential property. Since the appellant has shown long term capital gain of Rs 19,72/039/-_from transfer of both properties and has invested Rs 29,11,123/- towards purchase of new residential property he will be entitled for deduction u/s 54.
5.7 After considering the totality of facts and the legal position as discussed above, I have come to a conclusion that the appellant is entitled to benefit of deduction u/s 54. The AO is accordingly directed to compute long term capital gain after fallowing deduction u/s 54. Grounds of appeal nos. 3&4 are accordingly allowed.”
8. Facts remain unchanged. The revenue fails to bring on record any contrary evidence to counter the findings of fact recorded by the Ld.CIT(A). The Ld.CIT(A) has recorded categorical finding that capital gain computed by the assessee from sale of two properties is a long term capital gain and the assessee is eligible for exemption u/s 54 of the Act. Hence, we are in agreement with the findings of the Ld.CIT(A) and reject ground raised by the revenue.
9. The next issue that came up for our consideration is addition made towards unsecured loan u/s 68 of the Income-tax Act,1961. During the course of assessment proceedings the AO noticed that the assessee has taken unsecured loan of Rs.2,18,333 from M/s Kailash Enterprises which an entity related to Pravinkumar Jain group of companies in which evidences of providing accommodation entries have been found as a result of search. The AO, therefore, disallowed the total claim of unsecured loan including interest paid thereon and added the same to the total income of the assessee. It is the contention of the assessee that it has taken unsecured loan from M/s Kailash Enterprises and paid interest to the said party amounting to Rs.2,18,333 after deducting TDS of Rs.21,833. The AO has made disallowance of interest amount alongwith TDS merely for the reason that the said party is related to Pravinkumar Jain, but fact remains that the said party is not related to Pravinkumar Jain and also has filed various details to prove identity, genuineness and creditworthiness of the loan creditor. The assessee further contended that the had paid interest on such amount after deducting necessary TDS, therefore, the AO was completely erred in treating loan received from creditor as unexplained credit.
10. We have heard both the parties and perused the materials available on record. According to the AO, the assessee has not filed any evidence to prove loan taken from M/s Kailash Enterprises in the backdrop of finding of the Investigation Wing that the said entity is related to Pravinkumar Jain group of companies, who was involved in providing accommodation entries. The Ld.CIT(A) deleted addition made by the AO on technical ground without examining the findings of the AO. The Ld.CIT(A) deleted addition made by the AO by holding that the AO has not conducted necessary enquiry before making additions. The Ld.CIT(A) further observed that the AO has ignored the fact that interest payment was made to the said party after deducting necessary TDS.
11. Having heard both the sides, we find that payment of interest and deduction of TDS from such interest is not sacrosanct. What is relevant is whether assessee has filed necessary evidence to prove identity, genuineness of transactions and creditworthiness of the parties. In this case, on perusal of orders of lower authorities, there is divergent facts emerge from the orders of AO and the Ld.CIT(A) on the issue of genuineness of transactions and creditworthiness of the creditors. The AO stated that the assessee did not file any evidence, whereas the Ld.CIT(A) stated that the assessee has filed confirmation from the party. Therefore, we are of the considered view that the issue needs to be re- examined by the AO in the light of the divergent facts emerging from the orders of lower authorities and hence, we set aside the issue to the file of the AO and direct him to cause necessary enquiries to ascertain the claim of the assessee that the said payment is interest paid on loan. 12. In the result, appeal filed by the revenue is partly allowed, for statistical purpose.
Order pronounced in the open court on 20th July, 2018.
