ACIT, Circle-7(1), Hyderabad, Hyderabad v. Kamineni Builders, Hyderabad, Hyderabad

ITA 1486/HYD/2016 | 2009-2010
Pronouncement Date: 30-11-2017 | Result: Allowed

Appeal Details

RSA Number 148622514 RSA 2016
Assessee PAN AAHFK9996L
Bench Hyderabad
Appeal Number ITA 1486/HYD/2016
Duration Of Justice 1 year(s) 25 day(s)
Appellant ACIT, Circle-7(1), Hyderabad, Hyderabad
Respondent Kamineni Builders, Hyderabad, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-11-2017
Appeal Filed By Department
Tags No record found
Order Result Allowed
Bench Allotted B
Tribunal Order Date 30-11-2017
Date Of Final Hearing 26-04-2017
Next Hearing Date 26-04-2017
First Hearing Date 26-04-2017
Assessment Year 2009-2010
Appeal Filed On 04-11-2016
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B HYDERABAD BEFORE SMT. P. MADHAVI DEVI JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. ASST. YEAR APPELLANT RESPONDENT 149/HYD/15 2010-11 INCOME TAX OFFICER WARD-7(1) HYDERABAD M/S. KAMINENI BUILDERS HYDERABAD [PAN: AAHFK9996L] 1486/HYD/16 2009-10 THE ASST. COMMISSIONER OF INCOME TAX CIRCLE-7(1) HYDERABAD FOR REVENUE : SHRI L. RAMJI RAO DR FOR ASSESSEE : SHRI K.C. DEVDAS AR DATE OF HEARING : 24-10-2017 DATE OF PRONOUNCEMENT : 30-11-2017 O R D E R PER B. RAMAKOTAIAH A.M. : BOTH ARE REVENUES APPEALS FOR THE A.Y 2010-11 AND 2 009- 10 RESPECTIVELY. SINCE COMMON ISSUE IS INVOLVED THES E ARE HEARD TOGETHER AND DISPOSED-OF BY THIS COMMON ORDER. ITA NO. 149/HYD/15 AY. 2010-11: 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE WHICH IS ENGAGED IN THE BUSINESS OF REAL ESTATE FILED ITS RETU RN OF INCOME M/S. KAMINENI BUILDERS :- 2 - : FOR THE AY. 2010-11 ORIGINALLY ON 21-03-2011 ADMITTIN G TAXABLE INCOME OF RS. 49 84 618/-. SUBSEQUENTLY THE ASSESSEE FILED A REVISED RETURN OF INCOME ON 18-05-2011 DECLARING TAXA BLE INCOME OF RS.49 50 990/-. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS TO VERIFY THE INCOME ARISING TO THE ASSESSEE ON SALE O F A PROPERTY. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE A CT THE AO OBSERVED THAT THE ASSESSEE FIRM IS CARRYING ON BUSINES S IN REAL ESTATE BY PURCHASE OF LAND AND SALE THEREOF AFTER DIV ISION AND DEVELOPMENT OF PLOTS AND DURING THE COURSE OF SUCH BUS INESS HAS ADMITTED RECEIPTS FROM THE DEVELOPMENT OF LAND AT RS. 3 90 64 918/- RECEIPTS FROM SALE OF LAND AT RS. 1 89 14 882/- APART FROM CLOSING STOCK OF RS. 4 15 50 289/- BUT TH AT THE ASSESSEE HAD ADMITTED A NET PROFIT OF RS. 47 96 566/- O NLY THOUGH THE NET PROFIT DERIVED BY IT WAS RS. 4 08 42 873/- AND THAT THE BALANCE PROFIT OF RS. 3 60 46 308/- WAS NOT OFFERED F OR TAXATION. THE ASSESSEE WAS THEREFORE ASKED TO EXPLAIN AS TO WH Y THE REMAINING PROFIT OF RS. 3 60 46 308/- WAS NOT OFFERED TO TAX IN THE HANDS OF THE ASSESSEE FIRM. THE ASSESSEE FILED A LETT ER DATED 27- 02-2013 STATING THAT THE ASSESSEE ENTERED INTO AN MOU ON 22-03- 2007 WITH M/S. SINDYA INFRASTRUCTURE DEVELOPMENT COMP ANY PRIVATE LIMITED (HEREIN AFTER REFERRED AS SIDCPL OR C OMPANY) CHENNAI AS PER WHICH THE SAID COMPANY HAS A CHARGE ON THE GROSS RECEIPTS OF THE ASSESSEE I.E. 87.12% OF THE GRO SS RECEIPTS AFTER DEDUCTING COST OF LAND DEVELOPMENT CHARGES AND B ROKERAGE FOR PURCHASE OF LAND AND HENCE SIDCPL HAS AN OVERR IDING TITLE OVER THE SAID INCOME AND CANNOT BE TREATED AS INCOME OF THE ASSESSEE. M/S. KAMINENI BUILDERS :- 3 - : 3. THE AO WAS HOWEVER NOT CONVINCED WITH THE SAID CONTENTION OF THE ASSESSEE AND HELD THAT THE PARTING OF SH ARE OF THE PROFIT IN FAVOUR OF SIDCPL IS ONLY AN APPLICATIO N OF INCOME AND NOT DIVERSION OF INCOME BY OVERRIDING TITLE. THE AO THEREFORE BROUGHT THE ENTIRE AMOUNT OF PROFIT TO TAX IN THE HANDS OF THE ASSESSEE. ITA NO. 1486/HYD/16 AY. 2009-10: 4. IN THIS ASSESSMENT YEAR ASSESSEE-FIRM FILED ITS R ETURN OF INCOME ON 01-10-2010 ADMITTING TAXABLE INCOME OF RS.19 06 910/-. RETURN WAS ONLY ACCEPTED U/S 143(1). SUBSEQUENT TO THAT THE AO ISSUED NOTICE U/S. 148 OF THE A CT ON 26-04-2013. BASED ON THE INFORMATION AND DOCUMENTS FU RNISHED THE AO HAS PASSED THE ORDER U/S. 143(3) R.W.S. 147 OF THE ACT ON 20-03-2015 AFTER DISALLOWING A SUM OF RS. 1 57 01 80 9/- BEING THE SHARE OF PROFIT PAID TO M/S. SIDCPL. 5. AGGRIEVED BY THE ORDERS OF THE AO ASSESSEE PREFE RRED APPEALS BEFORE THE CIT(A). BEFORE THE LD.CIT(A) ASS ESSEE EMPHASIZED THAT THE SAID AMOUNTS CANNOT BE TREATED AS TH E INCOME AS PER THE PRINCIPLE OF DOCTRINE OF OVERRIDIN G TITLE AS THE SAID AMOUNT IS A CHARGE ON THE PROFIT OF ASSESSEE. FU RTHER CLAIMED THAT THOUGH THE AMOUNT WAS RECEIVED BY HIM IT WAS NOT PART OF THEIR INCOME AND IT WAS RECEIVED ON BEHALF OF THE COM PANY TO WHOM IT WAS PAYABLE. IT WAS FURTHER STATED THAT: ASSESSEE HAD BORROWED THE ENTIRE CONSIDERATION AND AGREED TO REPAY THE SAME. THEREFORE IT IS A CASE OF DIVERSI ON OF INCOME BY OVERRIDING TITLE AND NOT THE CASE OF APPLICATION OF INCOME. THE TRUE TEST FOR M/S. KAMINENI BUILDERS :- 4 - : THE APPLICATION OF THE RULE OF DIVERSION OF INCOME BY AN OVERRIDING CHARGE IS WHETHER THE AMOUNT SOUGHT TO BE DEDUCTED IN TRU TH NEVER REACHED HIM AS HIS INCOME. THAT THE PAYMENT MADE BY ASSESSEE FI RM WAS TAXED IN THE HANDS OF THE COMPANY THEREFORE THERE IS NO REVENUE LEAKAGE. 6. LD. CIT (A) GRANTED RELIEF TO THE ASSESSEE BY ACCE PTING THE PRINCIPLE OF DIVERSION OF INCOME BY OVERRIDING TITLE AND AFTER OBSERVING THAT SIMILAR PAYMENT IN THE AYS. 2007-08 TO 2 010-11 HAS BEEN ALLOWED BY THE AO AND THEREFORE THE RULE OF CONSISTENCY AND UNIFORMITY HAS TO BE FOLLOWED. THE ORDER FOR A Y 2009-10 IS EXTRACTED FOR THE SAKE OF BREVITY. AS PER THE MOU BETWEEN THE APPELLANT AND SINDYA IN FRASTRUCTURE DEVELOPMENT CO. PVT. LTD. DATED 22-3-2007 THE APPE LLANT COMPANY RECEIVED RS.8 CRORES FROM SINDYA INFRASTRUCTURE DEV ELOPMENT COMPANY PVT. LTD. AS UNDER: 29-06-2006 - 2 CRORE 31-6-2006 - 6 CRORE AFTER RECEIVING THE MONEY FROM SINDYA INFRASTRUCTUR E DEVELOPMENT COMPANY PVT. LTD. THE APPELLANT ENTERED MOU WITH HD FC FOR DEVELOPMENT OF LAND ON 22-3-2007. IT IS PERTINENT TO MENTION THAT THE AMOUNT PAID BY FIRM OF RS 1 57 01 809 PAID TO THE COMPANY WAS SHOWN AS INCOME OF THE COMP ANY. HOWEVER THE COMPANY DID NOT PAY ANY TAXES IN VIEW OF BROUGHT FO RWARD LOSSES. IT IS PERTINENT TO MENTION THAT THE SAME ISSUE WAS DECIDED IN FAVOUR OF THE APPELLANT BY THE CIT(APPEALS) FOR A.Y. 2010-11 IN A PPEAL NO. 0095/13- 14/ CIT(A)-VI DTD12-11-2014 WHERE IN THE CIT(A) OBS ERVED THAT : THIS PRACTICE/ METHOD OF ACCOUNTING HAS BEEN FALLOW ED BY THE APPELLANT FIRM FROM 2007-08 ONWARDS WHICH WERE ACCEPTED BY THE DEP ARTMENT AND THE AMOUNT OF RS. 3 60 46 408/- CLAIMED AND DEBITED TO PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER REFERENCE IS AN SIMILAR LINES AND AS PER THE MOU. THERE IS NO CHANGE IN FACTS AND LAW FOR A.Y. 2007-08 TO 2010-11 AND UNDER THE CIRCUMSTANCES THE ARGUMENT OF THE APPELLANT APPEAR S REASONABLE AND THERE IS NO REASON TO DISTURB THE CLAIM. THE DECISION OF SUP REME COURT IN THE CASE OF RADHA SOAMI SATSANG VS. CIT (193 ITR 321) SUPPORT T HE CAUSE OF THE APPELLANT THUS ON THE LINES OF THE ARGUMENT BASED ON FACTS A ND THE JUDICIAL 'DECISIONS THERE IS NO GROUND FOR THE ASSESSING OFFICER TO TRE AT THE CLAIM OF EXPENSES BEING M/S. KAMINENI BUILDERS :- 5 - : THE DIVERSION OF PROFITS ON DIFFERENT FOOTING FROM THE OTHER YEARS AND FOR DISALLOWING THE SAME. ACCORDINGLY THE ADDITION HE LD TO BE UNSUSTAINABLE. THUS BASED BOTH ON FACTS AND THE JUDICIAL DECISION THE ADDITION OF RS. 3 60 46 408/- IS ORDERED TO BE DELETED BEING UNSUSTAINABLE. THIS GR OUND OF APPEAL IS TREATED AS ALLOWED. 8. IN VIEW OF THE APPELLANTS AGREEMENT WITH THE CO MPANY THE COMPANY IS ENTITLED TO 87.12% OF THE PROFITS AND ACCORDINGL Y THE APPELLANT IS ELIGIBLE TO CLAIM RS. 1 57 01 809/-. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT (A) THE REVE NUE IS IN APPEAL BEFORE US FOR AY 2009-10 AND AY. 2010-11. 7. THE LEARNED DR WHILE SUPPORTING THE ORDER OF THE AO HAS DRAWN OUR ATTENTION TO THE VARIOUS CLAUSES OF THE M OU TO DEMONSTRATE THAT THE ASSESSEE WAS ONLY PARTING WITH THE P ROFITS OF THE COMPANY AND WAS RETAINING ITS SHARE OF 12.88% OF THE RECEIPTS. HE SUBMITTED THAT THE WORD RETAIN ITSELF DEMONSTRATES THAT TH E ENTIRE PROFIT WAS OF THE ASSESSEE AND IT WAS APPLYING I TS PROFIT BY PARTING WITH 87% OF THE GROSS RECEIPTS AFTER MEETING THE EXPENDITURE IN FAVOUR OF M/S. SIDCPL AND THEREFORE IT IS CLEARLY APPLICATION OF INCOME. IN SUPPORT OF THE CONTENTION THAT THE PRINCIPLES OF DIVERSION OF INCOME BY OVERRIDING TITL E DO NOT APPLY TO THE FACTS OF THE CASE BEFORE US HE PLACED RELIANCE UP ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SITALDAS TIRATHDAS REPORTED IN (1961) [41 ITR 367]. 8. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND SUBMITTED THAT IT WAS WITH THE ADVANCES RECEIVED FR OM M/S. SIDCPL THAT THE ASSESSEE HAD PURCHASED THE LAND FROM HDFC LTD AND THEREFORE THE SAID COMPANY HAD THE CHARGE OVER TH E PROPERTY. HE SUBMITTED THAT THE INTENTION OF BOTH THE PARTIES IS EVIDE NT FROM M/S. KAMINENI BUILDERS :- 6 - : THE MOU WHEREIN IT IS CLEARLY STATED THAT THE PROPERTY HA S BEEN PURCHASED WITH THE ADVANCE GIVEN BY M/S. SIDCPL AND FURTHER THAT THE ASSESSEE HAS NOT BEEN ABLE TO REPAY THE AMOUNT AN D HENCE 87% OF THE PROFITS WAS TO BE SHARED BY M/S. SI DCPL. HE SUBMITTED THAT THE REVENUE HAS LOST SIGHT OF THE FACT THAT T HE ASSESSEE COULD NOT HAVE PURCHASED THE LAND LEAVE A LONE EARNING ANY PROFIT BUT FOR THE ADVANCES OF RS.8.00 CRORES FR OM M/S. SIDCPL. HE ALSO SUBMITTED THAT THE ASSESSEE HAD BEEN ABL E TO REPAY ONLY A PART OF THE ADVANCES DURING THE RELEVANT PREVIOUS YEAR. IN SUPPORT OF HIS CONTENTION THAT THE CHARGE OF M /S. SIDCPL OVER THE GROSS RECEIPTS IS NOTHING BUT DIVERSION OF IN COME BY OVERRIDING TITLE THE LEARNED COUNSEL FOR THE ASSESSE E PLACED RELIANCE UPON THE FOLLOWING DECISIONS: (A) I.T.A.T ORDER IN THE CASE OF C. NARENDRANATH IN ITA NO.48/HYD/2013 DATED: 26/11/2014 (B) JAMSHEDPUR MOTOR ACCESSORIES STORES VS. C.I.T (P ATNA) 95 ITR 664 (C) C.I.T VS. C.V. SOUNDARARAJAN AND ANOTHER 8 & 9 (MADRAS) 150 ITR 80 (D) C.I.T VS. M.D. MANOHAR RAO (A.P HIGH COURT) 155 ITR 696 (E) CIT VS. EXCEL INDUSTRIES LTD (SUPREME COURT) 358 ITR 295 (F) CIT VS. GOPAL PUROHIT (BOMBAY) 336 ITR 287 (G) C.I.T VS. A.R.J. SECURITY PRINTERS (DELHI) 264 I TR 276. (H) CIT VS. SITALDAS TIRATHDAS (SUPREME COURT) 41 ITR 367 M/S. KAMINENI BUILDERS :- 7 - : (I) HON'BLE A.P. HIGH COURT IN THE CASE OF SPECTRA SH ARES AND SCRIPS P LTD VS. CIT REPORTED IN 36 TAXMANN.COM 348 (J) OFFICIAL TRUSTEE OF WEST BENGAL VS. C.I.T WEST BE NGAL- II CALCUTTA 116 ITR 219 (K) CIT BOMBAY CITY -I VS. CRAWFORD BAYLEY & CO 22 106 ITR 884 (L) CIT BOMBAY CITY -II VS. NARIMAN B. BHARUCHA & SONS 130 ITR 863 9. LD. COUNSEL ALSO PLACED ON RECORD PAPER BOOK EXPLAINING THE TRANSACTIONS OF ASSESSEE WITH THAT OF TH E COMPANY TO SUPPORT THAT ASSESSEE COULD NOT REPAY THE AMOUNTS AND THE INCOMES WERE OFFERED BY THE OTHER COMPANY. ON A QUER Y WHETHER INCOMES WERE DIVIDED BETWEEN THE TWO PARTIES AS PER T HE MOU IT WAS FAIRLY ADMITTED THAT IN THE FIRST YEAR ASSESSEE HAS NOT PARTED WITH THE INCOME AND THE ENTIRE INCOME WAS OFFERED IN TH E FIRMS HANDS. ONLY IN LATER YEAR I..E AY. 2009-10 THE INC OME WAS DISTRIBUTED WHICH WAS OFFERED BY THE COMPANY AS WELL. THERE IS NO EVIDENCE ON RECORD THAT INCOMES WERE DISTRIBUTED IN LATE R YEARS. IT WAS THE CONTENTION OF LD. COUNSEL THAT IN A PROJECT OF T HIS NATURE WHERE DEVELOPMENT IS INVOLVED ASSESSEE HAS OFFERED ABOUT 12.88% WHICH IS MORE THAN 8% BEING DETERMINED BY THE ITAT IN VARIOUS OTHER CASES. 10. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERU SED THE DOCUMENTS PLACED ON RECORD IN THE FORM OF PAPER B OOK. BEFORE ADVERTING TO THE RIVAL CONTENTIONS AND ADJUDICATION OF THE ISSUE IT IS NECESSARY TO CONSIDER THE FOLLOWING FACTS: M/S. KAMINENI BUILDERS :- 8 - : A. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT THE SAID M/S. SINDYA INFRASTRUCTURE DEVELOPMENT COMPANY (P) LT D. (SIDCPL) HAS ADVANCED FUNDS TO ASSESSEE-FIRM ON 28- 06-2006 TO AN EXTENT OF RS. 2 CRORES AND ON 31-07-2006 TO AN EX TENT OF RS. 6 CRORES. ASSESSEE HAS ENTERED INTO MOU ON 22-03-2007 WHEREIN IT WAS AGREED THAT THE APPELLANT COULD CARRY OUT THE DEVELOP MENT OF LAND INTO PLOTS AND SELL THE SAME AND DISTRIBUTE THE PROF IT (AFTER EXPENDITURE) IN THE RATIO OF 87.12% TO THE SAID SIDCPL BALANCE 12.88% TO BE RETAINED BY THE ASSESSEE-FIRM. AS SEEN FROM THE FINANCIALS FOR THE PERIOD 01-04-2006 TO 31-03-2007 ASSESSEES GROSS RECEIPTS ON DEVELOPMENT OF LAND AND SALE OF LAN D WERE TO THE TUNE OF RS. 1 05 36 668/- HAVING CLOSING BALANCE OF RS. 8 39 94 008/-. THE NET PROFIT EARNED IN THAT YEAR WAS RS. 19 69 838/-. FOR THAT ASSESSMENT YEAR AY 2007-08 AS SESSEE HAS FILED RETURN OF INCOME ON 31-05-2010 ( BELATEDLY) AD MITTING INCOME OF RS. 25 47 842/-. THIS INCOME INCLUDES PRO FIT OF RS. 19 69 838/- AND DISALLOWANCE OF AMOUNT U/S. 40(A)(IA ). THIS INDICATES THAT FOR THE ASSESSMENT YEAR ENDING 31-03-2007 THE PROFITS EARNED WERE NOT SHARED BETWEEN THE TWO EVEN TH OUGH MOU WAS STATED TO HAVE BEEN ENTERED ON 22-03-2007. AS ON 31-03- 2007 ASSESSEE HAS REPAID MORE THAN RS. 2 CRORES OF LOAN AND THE OUTSTANDING AMOUNT WAS ONLY RS. 5.95 CRORES AGAINST SID CPL. AS SEEN FROM THE LEDGER ACCOUNT ALSO ASSESSEE WAS ABLE TO REPAY AN AMOUNT OF RS. 2 05 00 000/- TO THE SAID COMPANY. HO WEVER AS SEEN FROM THE FINANCIALS PLACED ON RECORD IN THE PAPE R BOOK FROM PG. 120 ONWARDS INCLUDING ASSESSMENT ORDER IN THE CAS E OF SIDCPL DT. 24-12-2009 M/S. KAMINENI BUILDERS WAS NO T SHOWN IN THE BALANCE SHEET UNDER ANY OF THE HEAD. WHILE DI SALLOWING THE INTEREST ON THE INTEREST FREE ADVANCES MADE THE AO OF TH E SAID M/S. KAMINENI BUILDERS :- 9 - : COMPANY HAD DETERMINED THE INTEREST FREE ADVANCES MADE TO M/S. KALPATHARU INFRASTRUCTURE DEVELOPMENT PVT. LTD. AND D ISALLOWED THE AMOUNT PAID TO M/S. KALPATHARU ENTERPRISES PVT. LTD. WHEREAS THE INTEREST FREE DEPOSIT GIVEN TO M/S. KAMINEN I BUILDERS WAS NOT SHOWN OR REFLECTED ANYWHERE SO AS TO VERIFY TH E SAME. THUS THERE IS NO EVIDENCE OF ASSESSEE FIRM BEING SH OWN AS DEBTOR OR THE PROFIT WAS SHARED AS DECIDED IN THE MOU RELIED ON. B. COMING TO AY. 2008-09 I.E. FOR THE YEAR ENDING 3 1-03-2008 ASSESSEE HAS SHOWN A PROFIT OF RS. 47 06 063/- ON RE CEIPT OF RS. 6 28 95 338/-. FOR THIS YEAR HOWEVER ASSESSEE HAS SHOWN THE SHARE OF GROSS PROFIT AT RS. 3 43 59 901/- STATED TO HAV E BEEN PAID TO SIDCPL AND OFFERED ONLY NET INCOME OF RS. 47 06 0 73/- EVEN THOUGH THE PROFITS FROM THE TRANSACTIONS WERE SHOWN AT R S. 3 49 39 739/-. THE AMOUNT WAS SHOWN AS PROFIT ON SA LE OF LAND IN THE CASE OF SIDCPL (IN SCHEDULE 8 OF THAT ACCOUNTS) . AS POINTED OUT BY THE CIT(A) THE SAME WAS ADJUSTED IN THE NET LOSS ES. HOWEVER THERE IS NO DISCUSSION ON THIS ISSUE IN THE HANDS OF THE COMPANY IN THEIR ASSESSMENT. THE ACCOUNT COPIES FUR NISHED PARTICULARLY OF ASSESSEES ACCOUNT IN SIDCPL DO INDIC ATE THAT OUTSTANDING BALANCE AS ON 22-02-2007 WAS RS. 5 95 00 000/-. HOWEVER THE JOURNAL ENTRY PASSED ON 01-04-2007 HAS T HE FOLLOWING EXPLANATION: BEING ADVANCED FOR LAND ENTRY PASSED IN THE EARLIE R YEAR NOW RECTIFIED AND TRANSFERRED TO THE RESPECTIVE ACCOUNT S TO TALLY THE INTER ACCOUNT BALANCES. M/S. KAMINENI BUILDERS :- 10 -: THUS THE DEBIT ENTRY AS ON 31-03-2007 WAS NULLIFIED O N 01-04- 2007. THEREAFTER THAT COMPANY WENT ON TO PAY MORE THA N RS. 5 CRORES OF AMOUNT TO ASSESSEE TOWARDS ACCOUNT UPTO 02 -11-2007. SUBSEQUENTLY ALSO ASSESSEE PAID AN AMOUNT ON 21-05-2 008 TO AN EXTENT OF RS. 7 20 00 000/- AND THE YEAR ENDING BALAN CE WAS A CREDIT BALANCE WHICH MEANS ASSESSEE HAS OVER PAID TO AN EXTENT OF RS. 2.83 CRORES. THUS THE ARGUMENT THAT ASSESSEE H AS TO DISCHARGE THE LOAN BY WAY OF AGREEMENT TO SHARE PROFITS HAS NO VALIDITY AT ALL. C. FOR THE YEAR ENDING 31-03-2009 ASSESSEE HAS SHOW N RECEIPTS OF RS. 2.20 CRORES AND EARNED A GROSS PROFI T OF RS. 1 73 86 209/- AND THE SHARE OF PROFIT TO THAT COMPANY WAS DETERMINED AT RS. 1 57 01 809/-. IN THE COMPANYS A CCOUNTS HOWEVER THIS AMOUNT WAS NOT SHOWN AS INCOME AT ALL EV EN THOUGH FOR 31-03-2008 AMOUNT OF RS. 3 43 59 901/- A S CLAIMED BY ASSESSEE WAS SHOWN. IN THE ORDER FOR AY. 2009-10 ALSO THERE IS NO DISCUSSION ABOUT THIS AMOUNT SUPPOSED TO HAVE B EEN RECEIVED FROM ASSESSEE-FIRM NOR WAS OFFERED AS INCO ME IN THAT YEAR. THE ACCOUNT COPY OF SIDCPL INDICATE THAT AN AMOUN T OF RS. 5 CRORES WAS ADJUSTED ON 01-04-2009 TOWARDS SMT. SUNI THA REDDY WITH THE ENTRY BEING ADVANCE PENDING ALLOTMENT OF SHARES RECEIVED FROM SR WRONGLY CLASSIFIED UNDER KAMINENI BUILDERS NOW RECTIFIED. THESE TRANSACTIONS INDICATE THAT ASSESSEE AND M/S. SIDCPL HAD SOME OTHER TRANSACTIONS WHICH HAS NO BEARI NG ON THE CLAIM OF PROFIT BEING SHARED. D. FOR YEAR ENDING 31-03-2010 THE FINANCIALS OF SID CPL INDICATE THAT PROFIT FROM M/S. KAMINENI BUILDERS M/S. KAMINENI BUILDERS :- 11 -: RS. 3 60 46 308/- WAS OFFERED AS INCOME. THE SAME A MOUNT WAS ALSO CLAIMED BY ASSESSEE IN ITS FINANCIALS FOR 31-0 3-2010 AND NET PROFIT OF RS. 47 96 565/- WAS ONLY OFFERED. E. FOR THE YEAR ENDING 31-03-2011 ASSESSEE HAD NO SALES AND ONLY CLOSING STOCK WAS SHOWN BEING THE OPENING STOCK BUT THE OPERATIONS RESULTED IN A LOSS OF RS. 38 765/-. THIS LOSS ALONG WITH OTHER EXPENDITURE WAS CLAIMED AT RS. 3 97 928/- BUT TH E NET LOSS WAS NOT DIVIDED BETWEEN THE TWO COMPANIES AS PER THE AGREEMENT. F. HOWEVER IN THE SUBSEQUENT YEAR ENDING ON 31-03-20 12 ASSESSEE HAS SHOWN GROSS PROFIT OF RS. 3 05 57 192/ - AND THIS PROFIT WAS AGAIN SHARED WITH SIDCPL AT RS. 2 65 87 139 /-. THE FINANCIALS OF SIDCPL FOR THESE YEARS HOWEVER WERE NOT PLACED ON RECORD SO AS TO EXAMINE WHETHER THE SAID COMPANY OF FERED THE INCOME OR NOT. 11. AS SEEN FROM THE ABOVE THERE IS NO CONSISTENCY I N CLAIMS EITHER BY ASSESSEE OR BY THE SAID COMPANY SID CPL. AS FAR AS YEAR ENDING 31-03-2007 WAS CONCERNED FOR WHICH R ETURN WAS FILED IN MAY 2010 THE ENTIRE PROFIT WAS OFFERED EVEN THOUGH THE SO CALLED AGREEMENT WAS DATED 22-03-2007 AND WAS OPERATIV E IN 2007 ITSELF. AS ALREADY POINTED OUT THAT COMPANY HAS O FFERED INCOMES ONLY IN TWO YEARS AS SEEN FROM THE INFORMATI ON PLACED ON RECORD AND UPTO 31-03-2008 OR EVEN SUBSEQUENTLY M/S . KAMINENI BUILDERS WAS NOT EVEN SHOWN AS A DEBTOR IN ITS SCHEDU LES. THEREFORE THE VERY BASIS OF DISTRIBUTION IS GIVING A DOUBT ABOUT THE REAL ARRANGEMENT BETWEEN THE PARTIES. M/S. KAMINENI BUILDERS :- 12 -: 12. COMING TO THE LEGAL PROPOSITIONS WE FIND THAT THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SITALDAS TIRATHDAS (SUPREME COURT) [41 ITR 367] HAS BROUGHT OUT THE DIFFE RENCE BETWEEN THE APPLICATION OF INCOME AND DIVERSION OF IN COME BY OVERRIDING TITLE. IT HAS BEEN HELD THAT THE TRUE TEST FOR THE APPLICATION OF THE RULE OF DIVERSION OF INCOME BY OV ERRIDING CHARGE IS THE NATURE OF THE OBLIGATION I.E. WHETHER THE AMOUNT S OUGHT TO BE DEDUCTED REACHED THE ASSESSEE AS HIS INCOME WHICH THE PERSON IS OBLIGED TO APPLY OR WHETHER AN AMOUNT BY THE NATURE OF THE OBLIGATION CANNOT BE SAID TO BE A PART OF THE INCOME OF THE ASSESSEE. IT HAS BEEN HELD THAT WHERE BY THE OBLIGATION THE INCOME IS DIVERTED BEFORE IT REACHES THE ASSESSEE IT IS DEDUCTIBLE BUT WHERE THE INCOME IS REQUIRED TO BE APPLIED TO DISCH ARGE AN OBLIGATION AFTER SUCH INCOME REACHES THE ASSESSEE THE N IT IS APPLICATION OF INCOME. 13. IN THE CASE BEFORE US THE ASSESSEE HAD RECEIVED AN ADVANCE OF RS.8 CRORES ON 28-06-2006 AND 31-07-2006 FROM SIDCPL AND HAS UTILIZED THE SAID ADVANCE FOR PURCHASE OF LAND AT CHENGALPET CHENNAI FROM HDFC CHENNAI BY ENTERING IN TO AN AGREEMENT DATED 28-06-2006. AT THAT POINT OF TIME THERE IS NO OBLIGATION ON THE PART OF THE ASSESSEE TO PART WITH ANY OF THE RECEIPTS OR EVEN PROFIT FROM THE SALE OF SUCH LAND. IT IS ONLY A RECEIPT OF ADVANCE WHICH WAS STATED TO BE RETURNED WITHI N THE PERIOD AGREED TO BY AND BETWEEN THE PARTIES ON OR BEFO RE 31-03- 2007. THEREAFTER IT WAS STATED THAT WHEN THE ASSESSEE C OULD NOT REPAY THE ADVANCE TO SIDCPL AS AGREED TO AND THE ASSES SEE ENTERED INTO AN MOU DATED 22-03-2007 TO ASSIGN/NOMINA TE 87.12% OF THE SHARE IN THE PROFITS WHICH IS DEFINED IN THE MOU TO M/S. KAMINENI BUILDERS :- 13 -: MEAN SURPLUS REMAINING AFTER DEDUCTION FROM OUT OF TO TAL SALE RECEIPTS OF LAND COST OF ACQUISITION OF LAND DEVELO PMENT CHARGES BROKERAGE CHARGES ON PURCHASE OF LANDS AND OTHER IN CIDENTAL EXPENSES. THEREFORE IT IS CLEAR THAT THE SO CALLED O BLIGATION OF THE ASSESSEE ARISES ONLY BY VIRTUE OF THE MOU DATED 22-0 3-2007 THAT TOO BY WAY OF AGREEMENT BETWEEN PARTIES NOT CONNECTED WITH PROPERTY AS SUCH. 14. SINCE THE AMOUNT OF RS. 2.05 CRORES WAS ALREADY PAID BY THE TIME THE MOU ENTERED THE DISTRIBUTION OF PROFIT A T 87.12% ALSO GIVES RISE TO A DOUBT ABOUT THE RATIO THAT WAS DET ERMINED. THE PROJECT WAS TO BE UNDERTAKEN BY THE FIRM AND ONLY THE PROFITS ARE TO BE SHARED NOT THE LOSSES AFTER SET OFF OF ALL EXPENDITURES. IF THERE IS AN OBLIGATION AT THE SOURCE THEN THE LOSSES AR ISING ALSO GETS SHARED. AS SEEN FROM THE TERMS OF AGREEMENT THI S CAN ONLY BE CONSIDERED AS APPROPRIATION OF THE PROFITS BUT NOT A DI VERSION BY OVERRIDING TITLE. THE PRINCIPLES ARE VERY CLEAR THAT THE OBLIGATION HAS TO BE TO THE SOURCE. IN THIS CASE THIS OBLIGATION IS CREATED BY THE PARTIES BY WAY OF SUBSEQUENT AGREEMENT MUCH LATER TO THE ADVANCING OF MONEY TO ASSESSEE-COMPANY (WITH OR WITH OUT INTEREST) AND PART OF THE PAYMENT WAS ALREADY REPAID OUT OF THE TOTAL AMOUNT BORROWED. THE WAY INCOMES WERE OFFERED IN ASSESSEES HANDS IN THE FIRST YEAR EVEN THOUGH AGREEM ENT WAS ENTERED AS EARLY AS 22-03-2007 AND THE RETURN WAS FIL ED MUCH LATER ON IN MAY 2010 AND THAT COMPANY WAS OFFERING INCOMES ONLY IN TWO YEARS AND NOT OFFERING IN SOME YEARS EVEN THO UGH IT HAS RECEIVED SUBSTANTIAL AMOUNTS IN THREE YEARS (AS PER DE TAILS PLACED ON RECORD) DO INDICATE THAT THERE IS NO CONSISTENCY IN CLAIMS AND M/S. KAMINENI BUILDERS :- 14 -: THE REASONS FOR OFFERING IN SOME YEARS AND NOT OFFERI NG IN OTHER YEARS IS NOT EXPLAINABLE/VERIFIABLE ON THE RECORD. 15. ONE OF THE ARGUMENTS RAISED BY LD. COUNSEL IS TH AT ASSESSEE OFFERED MORE THAN 8% PROFIT ON THE DEVELOPME NT ACCORDINGLY THOSE CLAIMS ARE ALLOWABLE. WE DO NOT A GREE WITH THIS ARGUMENT. AS SEEN FROM THE P&L A/C OF THE FIRM THE PR OFITS ITSELF ARE VERY HIGH. AS PER THE MOU ALSO ONLY THE PROFITS A RE BEING SHARED AT THAT RATIO. THEREFORE AFTER EARNING PROFITS PORTION OF THE AMOUNT IS APPORTIONED WHICH CANNOT BE CONSIDERED AS EXPENDITURE IN THE HANDS OF FIRM WHO HAS UNDERTAKEN THE DEVELOPMENT OF THE PROPERTY. WHAT COULD BE THE SOURCE OF THE FUNDS FOR INVESTING PROPERTY IS A SEPARATE CONSIDERA TION WHILE THE SO CALLED MOU ENTERED SUBSEQUENT TO THE PROPERTY BEIN G PURCHASED AND DEVELOPED CANNOT BE CONSIDERED AS AN OBLIGATION CREATED AT SOURCE SO AS TO CLAIM DIVERSION OF INCOM E. SINCE IT IS ONLY AN APPROPRIATION OF THE PROFITS BY WAY OF A SEPA RATE ARRANGEMENT BY THE SO CALLED AGREEMENT WE ARE OF THE O PINION THAT THE AO IS CORRECT IN TREATING IT AS APPLICATION OF I NCOME BUT NOT DIVERSION AT SOURCE. 16. LD.CIT(A) EVEN THOUGH HAS STATED SOME OF THE FACTS WE ARE OF THE OPINION THAT HE HAS APPLIED THE PRINCIPLES I NCORRECTLY AND THEREFORE HIS ORDER CANNOT BE SUSTAINED. THE OTHER ASPECT WHICH CIT(A) HAS CONSIDERED IS CONSISTENCY IN ACCOUN TS EVEN THOUGH THIS CONCEPT ALSO WAS NOT APPLIED PROPERLY. AS ALREADY STATED ASSESSEE HAS NOT DISTRIBUTED THE PROFITS FOR THE YE AR ENDING 31-03-2007 (ALREADY NOTED THE RETURN WAS FILED IN MAY 2010) AND THE ENTIRE PROFITS WERE OFFERED EVEN THOUGH IT WAS CLAI MED THAT M/S. KAMINENI BUILDERS :- 15 -: THERE WAS AN AGREEMENT DT. 22-03-2007. AS VERIFIED FRO M THE DOCUMENTS PLACED ON RECORD THE SAID COMPANY ALSO DID NOT OFFER THE INCOMES EVEN THOUGH IT HAS RECEIVED IN SOME YEARS . BASICALLY M/S. KAMINENI BUILDERS IS EVEN NOT SHOWN AS DEBTOR O R AS AN INVESTMENT IN ANY OF THE SCHEDULES WHEREAS ANOTHER S ISTER CONCERN IS BEING SHOWN AS PARTY TO WHOM THE FUNDS AR E ADVANCED INTEREST FREE. THAT AOS DISALLOWANCE OF INTEREST FREE ON TWO SISTER CONCERNS IN THE HANDS OF COMPANY IS INDICATION THAT M /S. KAMINENI BUILDERS IS NOT SHOWN IN THE BOOKS OF THE SA ID COMPANY (AS VERIFIED BY US FROM THE DOCUMENTS PLACED ON RECOR D). IN VIEW OF THESE FACTS AVAILABLE ON RECORD WE ARE OF THE OPIN ION THAT ASSESSEE DID INDEED EARN VERY HIGH MARGIN OF PROFITS AND FOR UNEXPLAINED REASONS THE SAME WAS DISTRIBUTED/APPLIED TO DISCHARGE ITS OBLIGATION OF REPAYING THE LOAN. ACCOR DINGLY WE ARE OF THE OPINION THAT THIS OBLIGATION CANNOT BE CONSIDERED AS AN EXPENDITURE OR AS DIVERSION OF INCOME. WE HAVE NO HE SITATION IN SETTING ASIDE THE ORDER OF THE CIT(A) AND RESTORING THE ORDER OF AO FOR THE IMPUGNED ASSESSMENT YEARS. 17. ASSESSEES COUNSEL HAS RELIED ON VARIOUS CASES LAW AS STATED ABOVE. WE ARE OF THE OPINION THAT THE PRINCIPLE E STABLISHED IN VARIOUS CASE LAW IS BASED ON THE JUDGMENT OF HON'B LE SUPREME COURT IN THE CASE OF CIT VS. SITALDAS TIRATHDAS (SUPRA ) BUT THE FACTS OF CASE ARE ENTIRELY DIFFERENT SO AS TO MAKE APPL ICABLE TO ASSESSEES CASE. 18. IN THE CASE OF ACIT VS. MR. C. NARENDRANATH IN ITA NO. 48/HYD/2013 (AY. 2008-09) DT. 26-11-2014 THE ISSUE I S WITH REFERENCE TO ADOPTING SALE CONSIDERATION. THERE THE F ACTS INDICATE M/S. KAMINENI BUILDERS :- 16 -: THAT THE LAND OWNER HAS TO PAY CORPUS FUND INFRASTRUCT URE FUND AND DIFFERENCE ON ACCOUNT OF TEAKWOOD FALLING TO HIS S HARE TO THE BUILDER BY AN AGREEMENT. THE BUILDER INSTEAD OF COL LECTING THE SAME FROM THE FLAT OWNERS PASSED ON THE RESPONSIBILIT Y TO THE LAND OWNER. THUS BY VIRTUE OF CLAUSE IN THE AGREEMENT THE RE IS AN OBLIGATION CREATED UNDER THE AGREEMENT AND WHILE CALC ULATING THE SALE CONSIDERATION FOR THE PURPOSE OF CAPITAL GAINS T HE AMOUNTS PAID TOWARDS INFRASTRUCTURE EXPENDITURE AND CORPUS FU ND ETC. WERE ALLOWED TO BE DEDUCTED. IN THAT CONTEXT WHILE DETERMINI NG THE FULL VALUE OF CONSIDERATION IT WAS HELD THAT IT WAS AN OBLI GATION TO PAY BY VIRTUE OF THE AGREEMENT. THE FACTS IN THAT CASE ARE E NTIRELY DIFFERENT. 18.1. IN THE CASE OF JAMSHEDPUR MOTOR ACCESSORIES STO RES VS. CIT [95 ITR 664] (PAT) THERE WAS AN AGREEMENT TO PAY PROFITS INSTEAD OF INTEREST WHILE BORROWING THE AMOUNT ITSELF. I N THAT CONTEXT THE CLAIM OF PROFIT WAS HELD TO BE THE BUSINES S EXPENDITURE WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS. THE FACTS IN THAT CASE ALSO INDICATE THAT THERE WAS A PRIOR A GREEMENT BEFORE BORROWING THE MONEY TO PAY THE INTEREST WHICH IS CHARGED ON THE PROFITS OF ASSESSEE. NO SUCH FACT EXISTS IN THIS CA SE. 18.2. IN THE CASE OF CIT VS. C.V. SOUNDARARAJAN AN D ANOTHER [150 ITR 80] (MAD) THE FACTS INDICATE THAT THERE WAS A FAMILY PARTITION IN WHICH ASSESSEES WERE ALLOTTED A PROPERTY IN WHICH THEIR MOTHER WAS GIVEN A RIGHT OF RESIDENCE CONSEQUENTLY THE AMOUNT PAID TO THE MOTHER WAS CONSIDERED TO BE ALLOWABLE AS TH ERE IS AN OBLIGATION TO PAY AS ASSESSEES DID NOT HAVE ANY ABSO LUTE RIGHT OVER THE PROPERTY. WE ARE AFRAID THAT THE PRINCIPLES LAID D OWN BY THE M/S. KAMINENI BUILDERS :- 17 -: HON'BLE MADRAS HIGH COURT IN THAT CASE DO NOT APPLY TO THE FACTS OF THE CASE AS THERE IS NO OBLIGATION TO THE PROPERTY A T ALL BUT THE OBLIGATION WAS CREATED BY ARRANGEMENT/AGREEMENT BETWE EN THE PARTIES SUBSEQUENTLY. 18.3. SIMILARLY THE FACTS IN THE CASE OF CIT AP V S. M.D. MANOHAR RAO IS THAT THERE IS DIVERSION BY OVERRIDING TITLE. IN THAT CASE THERE IS AN AGREEMENT FOR SALE OF LAND AND THE LAND WAS SUBSEQUENTLY ACQUIRED BY GOVERNMENT. THE EXCESS PRICE RECEIVED BELONGS TO THE PURCHASER AS PER THE AGREEMENT. THEREF ORE ON THE FACTS OF THE CASE IT WAS HELD THAT AMOUNT OF COMPENSATI ON IN EXCESS OF AGREED SALE PRICE WAS DIVERTED BY OVERRID ING TITLE FROM SELLER. THE FACTS OF THAT CASE AND THE PRINCIPLE LAID DOWN THEREIN DO NOT APPLY TO ASSESSEES CASE AT ALL. 18.4. THE REST OF THE CASES RELIED UPON BY ASSESSEES COUNSEL ARE ON THE PRINCIPLE OF CONSISTENCY. AS ALREADY DISC USSED ABOVE NEITHER PARTY IS FOLLOWING ANY CONSISTENT METHOD OF AC COUNTANCY OR CLAIMS. IN VIEW OF THAT EVEN THOUGH THERE IS NO DISP UTE WITH REFERENCE TO THE PRINCIPLE OF CONSISTENCY ON THE FAC TS OF THE CASE THOSE DECISIONS DO NOT APPLY TO ASSESSEES CASE. 19. IN VIEW OF THAT WE ARE OF THE OPINION THAT THERE I S ONLY AN APPLICATION OF INCOME BY VIRTUE OF SUBSEQUENT AGREE MENT BY ASSESSEE AND THERE IS NO OBLIGATION OR DIVERSION BY O VERRIDING TITLE ATTACHED TO THE PROPERTY PARTICULARLY IN VIEW OF THE FAC T THAT ASSESSEE HAS AGREED ONLY TO SHARE THE PROFITS BUT NOT THE LOSSES AND THIS AGREEMENT WAS SUBSEQUENTLY ENTERED WHICH CANN OT BE CONSIDERED AS AN OBLIGATION ON THE SOURCE ITSELF. IN VIEW OF THAT WE M/S. KAMINENI BUILDERS :- 18 -: SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE ORDER OF AO FOR BOTH THE ASSESSMENT YEARS. 20. IN THE RESULT BOTH THE APPEALS OF REVENUE ARE ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER 2017 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD DATED 30 TH NOVEMBER 2017 TNMM M/S. KAMINENI BUILDERS :- 19 -: COPY TO : 1. THE ASST. COMMISSIONER OF INCOME TAX CIRCLE-7(1 ) HYDERABAD. 2. THE INCOME TAX OFFICER WARD-7(1) HYDERABAD. 3. M/S. KAMINENI BUILDERS H.NO. 10-3-316/A MASAB TANK HYDERABAD. 4. CIT (APPEALS)-VI HYDERABAD. 5. CIT (APPEALS)-3 HYDERABAD. 6. CIT-VI HYDERABAD. 7. PR.CIT-3 HYDERABAD. 8. D.R. ITAT HYDERABAD. 9. GUARD FILE.