Madras High Court
Commissioner Of Income Tax vs M/S.Adityaram Properties (P) Ltd on 18 August, 2021
T.C.A.No.579 of 2014
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 18.08.2021
CORAM :
THE HON'BLE MR. JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE MR. JUSTICE SATHI KUMAR SUKUMARA KURUP
T.C.A. No.579 of 2014
Commissioner of Income Tax,
Central Circle,
Chennai. ... Appellant
Vs.
M/s.Adityaram Properties (P) Ltd.,
No.14, Ambadi Road,
Kotturpuram,
Chennai – 600 085. ... Respondent
Tax Case Appeal preferred under Section 260A of the Income Tax
Act, 1961, against the order, dated 20.01.2011, passed by the Income Tax
Appellate Tribunal, Chennai "D" Bench, in I.T.A.No.744/Mds/2010, for the
Assessment Year 2007-08.
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For Appellant : Mr.T.R.Senthil Kumar
Senior Standing Counsel
and Mrs.K.G.Usha Rani
Standing Counsel
For Respondent : Mr.R.Venkata Narayanan
for M/s.Subbaraya Aiyar Padmanabhan
JUDGMENT
(Judgment was delivered by T.S. SIVAGNANAM, J.)
This Tax Case Appeal filed by the Revenue under Section 260-A of
the Income Tax Act, 1961 ("the Act" for brevity), is directed against the
order, dated 20.01.2011, passed by the Income Tax Appellate Tribunal,
Chennai "D" Bench, in I.T.A.No.744/Mds/2010, for the Assessment Year
2007-08.
2.The appeal was admitted on 02.09.2014 on the following substantial
questions of law :
“1.Whether on the facts and circumstances of the
case, the Tribunal was right in law in holding that the price
for the land purchased and paid to the Director was not
excessive while comparing with the fair market value of the
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T.C.A.No.579 of 2014
land which was Rs.1.36 Lakhs per cent?
2.Whether on the facts and circumstances of the case,
the Tribunal was right in law in holding that long term
capital gain is not leviable on the lands sold and the
provisions of Section 40A(2)(b) are not applicable?
3.Whether on the facts and circumstances of the case,
the Tribunal was right in upholding the order of CIT(A) by
allowing the expenditure on purchase of land at Rs.2.75
Lakhs per cent was proper?”
3.The respondent/assessee is a company engaged in Real Estate
Development and they filed return of income for the Assessment Year under
consideration, i.e., AY 2007-08, on 14.11.2007, declaring 'NIL' income. The
return was initially processed under Section 143(1) of the Act and
subsequently, the case was selected for scrutiny and notice under Section
143(2) was issued. The Assessing Officer found that the assessee had
purchased land to the cost of Rs.19.51 Crores and the total cost of the land
sold during the year and debited to profit and loss account was
Rs.8,01,61,275/-. The assessee was directed to furnish details of the land
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T.C.A.No.579 of 2014
purchased by them. On details being furnished, the Assessing Officer came
to know that the assessee company had purchased larger extent of land from
its two Directors/shareholders at the rate of Rs.3 Lakhs per cent. Ultimately,
these lands, which were purchased, were sold to third party buyers as many
as 41 of them. The Assessing Officer found that the lands have been sold by
the assessee in the year under consideration at the rate of Rs.1.36 Lakhs per
cent, which is far less than the Guideline Value which was 1.75 Lakhs per
cent at the relevant point of time, which is far far less than the selling price
paid to the Directors, which was Rs.3 Lakhs per cent. Therefore, the
Assessing Officer held that the assessee company has incurred expenditure
in respect of the payment which has been made to the Directors and the
expenditure is excessive and unreasonable and therefore, invoked the
provisions of Section 40A(2)(b) of the Act and completed the assessment
vide order dated 30.10.2009.
4.Aggrieved by the same, the assessee preferred an appeal before the
Commissioner of Income Tax (Appeals)-III, Chennai (“CIT(A)” for brevity).
So far as the correctness of the order passed by the Assessing Officer
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T.C.A.No.579 of 2014
invoking Section 40A(2)(b) of the Act is concerned, the CIT(A) granted the
relief to the assessee, however, the CIT(A) directed the Assessing Officer to
allow the expenditure on purchase of land @ Rs.2,75,000/- per cent and to
disallow @ Rs.25,000/- per cent, which was paid to the Directors.
5.Aggrieved by the said order, the Revenue as well as the assessee
filed appeals before the Tribunal. The appeal filed by the Revenue was
numbered as I.T.A.No.744/Mds/2010 and the appeal filed by the assessee
was numbered as I.T.A.No.812/Mds/2010. The Tribunal, by the impugned
common order, dismissed the appeal filed by the Revenue and allowed the
appeal filed by the assessee.
6.The Revenue, aggrieved by the dismissal of their appeal by the
Tribunal which was numbered as I.T.A.No.744/Mds/2010, has preferred the
above Tax Case Appeal.
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T.C.A.No.579 of 2014
7.We have elaborately heard Mr.T.R.Senthil Kumar, learned Senior
Standing Counsel for the appellant/Revenue and Mr.R.Venkata Narayanan,
learned counsel appearing for M/s.Subbaraya Aiyar Padmanabhan, counsel
for the respondent/assessee.
8.The sole reason for which the Assessing Officer invoked Section
40A(2)(b) of the Act is for the reason that the Directors of the company were
paid Rs.3 Lakhs per cent for the purchase of the land, whereas, the lands
have been sold by the assessee to about 41 purchasers with an average
selling price at Rs.1.36 Lakhs per cent of land, and therefore, the expenditure
incurred by the assessee company for payment of the sale price to the
Directors is exorbitant and accordingly, Section 40A(2)(b) of the Act would
stand attracted. The CIT(A), while considering the correctness of the said
finding, has examined the entire facts in a very elaborate manner and found
that the assessee had paid a sum of Rs.3 Lakhs per cent for the land
purchased from its Directors, which was sold to third parties during the year
under consideration at the rate of Rs.1.36 Lakhs per cent, however, in the
subsequent years, it was sold @ Rs.2.72 Lakhs per cent and thereafter, at
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T.C.A.No.579 of 2014
Rs.6.36 Lakhs per cent. Thus, taking into consideration the totality of the
circumstances and that the decision taken by the assessee was a business
decision and taking note of the latest sale price, the assessee had a
substantial gain of Rs.19 Crores, the CIT(A) granted relief to the assessee.
However, the CIT(A) directed the Assessing Officer to allow the expenditure
@ Rs.2,75,000/- per cent and disallow @ Rs.25,000/- per cent.
9.We find from the order of the CIT(A) that there is no reason given
by the CIT(A) for disallowing Rs.25,000/- per cent. This finding would run
contrary to the finding recorded by the CIT(A) in Para No.6.4 of the order
dated 30.03.2010, wherein, the assessee was granted relief and on facts it
was held that the decision for purchase of land from the Directors at Rs.3
Lakhs per cent was a business decision and it was shown before the CIT(A)
that the assessee company benefited out of the said decision and substantial
profits were earned by the assessee company. Thus, the Tribunal was right
in setting aside the portion of the order passed by the CIT(A) disallowing the
sum of Rs.25,000/- per cent.
10.The learned Senior Standing Counsel for the appellant/Revenue
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T.C.A.No.579 of 2014
placed reliance on the decision of the Hon'ble Division Bench of this Court
in the case of V.S.T. Motors Ltd. v. Commissioner of Income Tax reported
in (2004) 135 Taxman 91 (Mds). In the said case, the assessee company
carried on business as agents of certain truck manufacturers and maintained
a stock-yard and had engaged a transport firm for the purpose of transporting
trucks from the stock-yard to the showroom and delivering to customers.
The Assessing Officer as well as the Appellate Authority disallowed a part
of the transportation charges paid to the said firm as excessive under Section
40A(2) of the Act on finding that the owners of the firm were the Directors
of the assessee company and close relative of the other Directors. On facts,
the Hon'ble Division Bench found that the provisions of Section 40A(2) of
the Act would stand attracted. In the instant case, the assessee has been able
to show that the decision for purchase of land @ Rs.3 Lakhs per cent was a
prudent business decision, as the assessee was able to earn substantial profit
on account of the sale of the land to various third parties at much higher
price @ Rs.6.36 Lakhs per cent. Therefore, we find that the decision is
distinguishable on facts.
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11.Reliance has been placed on the decision of the Division Bench of
this Court in the case of Vaduganathan Talkies vs. Income Tax Officer,
Non-Corporate Ward 20(5), Chennai-34 reported in [2020] 120
taxmann.com 25 (Madras). In the said case, the assessee company had
made cash payment for the purpose of acquiring rights to screen movies in
theatres, which ran to several lakhs of rupees, though payees were
identifiable, and since inspite of availability of Banking facility, the assessee
had been regularly effecting cash payments, the said payments were
disallowed in terms of Section 40A(3) of the Act r/w. Rule 6DD of the
Income Tax Rules, 1962. The case on hand is couched entirely on different
factual settings and the decision in Vaduganathan Talkies (supra) cannot be
applied to the facts of the case on hand.
12.The learned counsel placed reliance on the decision of the Hon'ble
Division Bench of this Court in Patterson & Co. (P.) Ltd. vs. Deputy
Commissioner of Income-tax, Company Circle V(1), Chennai reported in
[2019] 105 taxmann.com 150 (Madras). In the said case, the genuineness
of the transactions was in question, but so far as the case on hand is
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T.C.A.No.579 of 2014
concerned, genuineness of transaction has not been questioned, but the only
reason invoking Section 40A(2)(b) of the Act is of the ground that the lands
which were purchased from the Directors at Rs.3 Lakhs per cent have been
sold at Rs.1.36 Lakhs per cent. The assessee has given more than one
explanation for such a decision. Firstly, because, the assessee company
owns the land behind the lands owned by the Directors and if the lands
owned by the Directors are purchased, then it would give better access to the
land owned by the company and it will be a good decision of the company to
improve its financial well being. These decisions are all commercial
decisions, which have to be taken by the assessee, and it is not for the
Assessing Officer to sit in the arm-chair of the assessee and suggest the ways
and means to run their business as long as there is no unlawful activity,
which has been alleged to have been done by the assessee. Thus, we are of
the considered view that the Tribunal was right in affirming the order passed
by the CIT(A) holding that the decision to purchase the lands @ Rs.3 Lakhs
per cent from the Directors was a prudent commercial decision taken by the
assessee company.
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T.C.A.No.579 of 2014
13.Thus, for the above reasons, we find no ground to interfere with the
order passed by the Tribunal. In the result, this Tax Case Appeal filed by the
Revenue is dismissed and the substantial questions of law are answered
against the Revenue. No costs.
(T.S.S., J.) (S.S.K., J.)
18.08.2021
mkn
Internet : Yes
Index : Yes / No
Speaking order / Nonspeaking order
To
1.The Income Tax Appellate Tribunal,
Chennai, “D” Bench.
2.The Commissioner of Income Tax,
Central Circle,
Chennai.
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T.C.A.No.579 of 2014
T.S. SIVAGNANAM, J.
and
SATHI KUMAR SUKUMARA KURUP, J.
mkn
T.C.A. No.579 of 2014
18.08.2021
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