NEVILLE ERACH MEHTA, MUMBAI v. ITO 12(3)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY(A.M) ITA NO.998/MUM/2010(A.Y. 2006-07) NEVILLE ERACH MEHTA 20 COMMON WEALTH BUILDING MADAM CAMA ROAD NARIMAN POINT MUMBAI 21 PAN:AISPM 5442J (APPELLANT) VS. THE INCOME TAX OFFICER WARD 12(3)(2) MUMBAI. (RESPONDENT) APPELLANT BY : SHRI DEEPAK TRALSHAWALA RESPONDENT BY : SHRI HARI GOVIND SINGH ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE O RDER DATED 2/12/2009 OF CIT(A)-23 MUMBAI RELATING TO AY 06-07. 2. GROUND NO.1 TO 3 RAISED BY THE ASSESSEE READS AS FOLLOWS: 1. THE LEARNED ASSESSING OFFICER HAS ERRED IN DISA LLOWING JOINT VENTURE EXPENSES OF RS. 3583728/-. 2. THE LEARNED ASSESSING OFFICER HAS ERRED IN MAKIN G HIS OWN ASSUMPTION IN RESPECT OF JOINT VENTURE. 3. THE LEARNED ASSESSING OFFICER HAS ERRED IN CONCL UDING THAT JOINT VENTURE EXPENSES OF RS.3583728 ARE NOT FOR THE PURPOSE OF B USINESS. 3. THE ASSESSEE IS AN INDIVIDUAL. HE IS ENGAGED IN THE BUSINESS OF PROPERTY DEVELOPMENT/CONSTRUCTION. HIS SOURCE OF INCOME IS FROM THE SAID BUSINESS BESIDES INCOME UNDER THE HEAD INCOME FORM OTHER SOURCES. FOR A.Y.06-07 HE FILED A RETURN OF INCOME DECLARING TOTAL INCOME OF RS.2 37 600/-. IN THE COMPUTATION OF TOTAL ITA NO.998/MUM/2010(A.Y. 2006-07) 2 INCOME UNDER THE HEAD INCOME FROM BUSINESS THE AS SESSEE SHOWN AN INCOME OF RS.3 16 443. THE PROFIT AND LOSS A/C. OF THE ASSES SEE SHOWED THAT THE AFORESAID PROFIT FROM BUSINESS OF CONSTRUCTION. ON PERUSAL O F THE PROFIT AND LOSS ACCOUNT THE AO NOTICED THAT THE ASSESSEE HAD DEBITED A SUM OF R S.35 83 278 UNDER THE HEAD JOINT VENTURE SHARE IN JOINT DEVELOPMENT. THE AO CALLED UPON THE ASSESSEE TO EXPLAIN THE NATURE OF THE AFORESAID EXPENDITURE. T HE ASSESSEE EXPLAINED THAT HE HAD DEVELOPED PROPERTY BEARING SUB-PLOT NO.208/3A VIL LAGE NAUPADA TALUKA AND DISTRICT THANE MEASURING ABOUT 615 SQ.MTRS.(HEREINA FTER REFERRED TO AS THE PROPERTY). THE PROPERTY FORMED PART OF A LARGER E XTENT OF LAND MEASURING 27 649 SQ.YRDS WHICH WAS OWNED BY ONE MR.SATINDER KUMAR M ANGALDAS VERMA WHO DIED ON 15.7.1987. DURING HIS LIFE TIME HE HAD EXECUTED HIS LAST WILL AND TESTAMENT DATED 17.7.1985 BY WHICH THE LARGER EXTENT OF THE PROPERT Y WAS BEQUEATHED TO HIS DAUGHTER MRS.ANJALI NEVILLE MEHTA @ ANJALI MEENA VERMA WHO IS NONE OTHER THAN THE WIFE OF THE ASSESSEE. MRS.ANJALAI NEVILLE MEHTA ENTERED INT O AN AGREEMENT DATED 2/11/1995 TO SELL THE PROPERTY TO THE ASSESSEE. THE ASSESSEE ENTERED INTO THE SAID AGREEMENT IN HIS CAPACITY OF PROMOTER OF A PVT.LTD. COMPANY T O BE FORMED UNDER THE NAME AND STYLE OF M/S.ANJAVILLE HOLDINGS PVT.LTD. THE ASSES SEE WANTED TO DEVELOP THE PROPERTY BY PUTTING UP CONSTRUCTIONS IN THE FORM OF FLATS OVER THE PROPERTY FOR SALE. ACCORDING TO THE ASSESSEE THE PROPERTY WAS IN OCCU PATION OF (1) SMT.S.PRADHAN& MISS ASHWINI S.PRADHAN (2) SMT. INES ASHOK GUPTA; (3) SHRI JAYPRAKASH MAURYA WHO WERE PUTTING FORTH TENANCY RIGHTS. IN ORDER TO ENABLE THE ASSESSEE TO SMOOTHLY CARRY ON THE DEVELOPMENT OF THE PROPERTY THE ASSES SEE ENTERED INTO AN AGREEMENT DATED 4/11/1995. THIS AGREEMENT DESCRIBES THE ASSE SSEE AS ACTING IN HIS CAPACITY OF PROMOTER OF THE COMPANY M/S.ANJAVILLE HOLDINGS PVT. LTD. AND THE PARTY OF THE FIRST PART AND THE PERSONS IN OCCUPATION OF THE PROPERTY AS PARTY OF THE SECOND PART. PREAMBLE (C ) OF THIS AGREEMENT READS AS FOLLOWS: C) THE PARTY OF THE FIRST PART IS DESIROUS OF DE VELOPING THE BALANCE PORTION OF THE SAID PROPERTY MORE PARTICULARLY DESCRIBED IN THE FOURTH SCHEDULE HEREUNDER WRITTEN(HEREINAFTER REFERRED TO AS THE SA ID PORTION OF LAND). HOWEVER THE PARTY OF THE FIRST PART IS UNABLE TO D O SO DUE TO LACK OF KNOWLEDGE AND ITS PREOCCUPATION IN OTHER BUSINESS AND HENCE THE FIRST PART HAS DECIDED TO DEVELOP THE SAID PORTION OF LAND WITH THE HELP O F REPUTED PERSONS/BUILDERS. ITA NO.998/MUM/2010(A.Y. 2006-07) 3 THE PARTY OF THE SECOND PART BEING INTERESTED TO D EVELOP THE SAID PORTION OF LAND APPROACHED THE PARTY OF THE FIRST PART AND EX PRESSED THEIR DESIRE TO DEVELOP THE SAID PORTION OF LAND MORE PARTICULARLY DESCRIBED IN THE FOURTH SCHEDULE HEREUNDER WRITTEN IN JOINT VENTURE. D) AFTER DUE NEGOTIATIONS THE PARTIES HERETO HAVE COME TO CONCLUSION THAT THE SAID PORTION OF LAND MORE PARTICULARLY DESCRIBED IN THE FOURTH SCHEDULE HEREUNDER WRITTEN TO BE DEVELOPED IN JOINT VENTURE ON THE FOLLOWING TERMS AND CONDITIONS WHICH ARE APPEARING HEREINAFTER. 4. IN CLAUSE-4 OF THE SAID AGREEMENT IT IS PROVIDED AS FOLLOWS: 4. IT IS AGREED THAT THE PARTIES HERETO SHALL HOL D THE SHARE HOLDINGS IN THE PROPOSED COMPANY AND SHALL ALSO SHARE THE PROFITS O R LOSSES AFTER MEETING THE NECESSARY EXPENSES COSTS CHARGES & TAXES IN THE F OLLOWING MANNER:- A) M/S. ANJAVILLE HOLDINGS PVT. LTD (PROP) - 45% B) SMT. INES ASHOK GUPTA - 7.5% C)SMT. PRATIBHA S. PRADHAN & MISS. ASHWINI S. PRADHAN - 37.5% D)SHRI JAYAPRAKASH MAURYA - 10% 5. IT HAS TO BE EMPHASIZED HERE THAT THIS AGREEMENT DOES NOT SAY ANYTHING ABOUT THE PARTY OF THE SECOND PART BEING IN OCCUPATION OF THE PROPERTY AND PUTTING FORTH TENANCY RIGHTS. THE CLAIM OF THE ASSESSEE BEFORE T HE AO WAS THAT THE SUM OF RS.35 83 278 DEBITED IN THE PROFIT AND LOSS ACCOUN T UNDER THE HEAD JOINT VENTURE SHARE IN JOINT DEVELOPMENT IS NOTHING BUT THE VALU E OF 37.5% SHARE OF PROFITS AND LOSSES WHICH THE ASSESSEE WAS TO GIVE MRS. S.PRADHA N AND MISS ASHWINI S.PRADHAN UNDER THE AGREEMENT DATED 4/11/1995 AND WAS A PAYME NT TO GET THEM VACATED TO ENABLE ASSESSEE TO CARRY ON CONSTRUCTION. ACCORDIN G TO THE ASSESSEE THE SAID EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINES S OF THE ASSESSEE WITH A VIEW TO ENABLE SMOOTH COMPLETION OF THE PROJECT TO BE CONST RUCTED OVER THE PROPERTY AND WAS THEREFORE TO BE ALLOWED AS A DEDUCTION. 6. THE AO HOWEVER REFERRED TO THE PREAMBLE (C ) TO THE AGREEMENT DATED 4/11/1995 AND THE STAND OF THE ASSESSEE BEFORE THE AO THAT THE PAYMENT IN QUESTION ITA NO.998/MUM/2010(A.Y. 2006-07) 4 WAS TO GET VACANT POSSESSION FROM OCCUPANTS OF THE PROPERTY. ACCORDING TO THE AO THE AGREEMENT DID NOT MENTION ANYTHING ABOUT THE PO SSESSION AND OCCUPATION OF THE PRADHANS BUT REFERS TO THE INTEREST OF THE PRADHANS TO DEVELOP THE PROPERTY. THE ASSESSEES CLAIM IN THE ASSESSMENT PROCEEDINGS WAS THEREFORE CONTRADICTORY TO THE AGREEMENT DATED 4/11/1995. THE AO HELD THAT THE AS SESSEE DID NOT PRODUCE ANY EVIDENCE TO SHOW THAT THE PRADHANS WERE IN OCCUPATI ON OF THE PROPERTY AND THAT EFFORTS WERE MADE BY THE ASSESSEE TO EVICT THEM. I N THAT VIEW OF THE MATTER THE AO DISALLOWED THE CLAIM OF THE ASSESSEE HOLDING THAT T HE EXPENDITURE HAS NOT BEEN PROVED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUS INESS OF THE ASSESSEE. THE CIT(A) CONFIRMED THE ACTION OF THE AO GIVING RAISE TO THE AFORESAID GROUNDS OF APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE REASO N ASSIGNED BY THE REVENUE AUTHORITIES FOR REJECTING THE CLAIM OF THE ASSESSEE WAS THAT THE ASSESSEE DID NOT PRODUCE ANY EVIDENCE TO SHOW THAT THE PRADHANS WERE IN OCCUPATION OF THE PROPERTY AND THAT EFFORTS WERE MADE BY THE ASSESSEE TO EVICT THEM. IN COMING TO THIS CONCLUSION THE FOLLOWING CIRCUMSTANCES IN OUR VIE W HAVE BEEN IGNORED BY THE REVENUE AUTHORITIES. WE HAVE ALREADY SEEN THAT MRS .ANJA NEVILLE MEHTA THE WIFE OF THE ASSESSEE WAS THE OWNER OF THE PROPERTY. WE HAV E ALSO SEEN THAT AS EARLY AS 2/11/1995 SHE HAD AGREED TO SELL THE PROPERTY TO T HE ASSESSEE. WE HAVE ALSO SEEN THAT ON 4/11/1995 THE ASSESSEE IN HIS CAPACITY AS PROMOTER OF A COMPANY TO BE FORMED VIZ. M/S.ANJA VILLE HOLDINGS PVT.LTD. AS P ARTY OF THE FIRST PART AND (1) SMT.S.PRADHAN& MISS ASHWINI S.PRADHAN (2) SMT. INE S ASHOK GUPTA; (3) SHRI JAYPRAKASH MAURYA WHO WERE PUTTING FORTH TENANCY R IGHTS AS PARTIES OF THE SECOND PART ENTERED INTO AN MOU BY WHICH THE PRADHANS WERE TO GET 37.5% OF THE SHARE OF PROFIT OF THE COMPANY TO BE FORMED. IN THIS MOU IT IS TRUE THAT THERE IS NO REFERENCE TO THE PRADHANS HAVING POSSESSORY RIGHTS OVER THE PROP ERTY BUT THERE IS ONLY A REFERENCE TO THE FACT THAT THE FIRST PARTY LACKS KNOWLEDGE AN D IS PREOCCUPIED WITH OTHER BUSINESS AND THEREFORE REQUESTED THE PARTIES OF THE SECOND P ART TO DEVELOP THE PROPERTY. THE CONSTRUCTION OF THE PROJECT WAS COMPLETED ON 5.1.20 04 AS CLAIMED BY THE ASSESSEE IN THE STATEMENT OF FACTS FILED BEFORE CIT(A). AS EAR LY AS 30-12-2002 THE ASSESSEE ITA NO.998/MUM/2010(A.Y. 2006-07) 5 OBTAINED A CONVEYANCE FROM MRS.ANJALI NEVILLE MEHTA OF THE PROPERTY. THIS CONVEYANCE DEED WAS DULY REGISTERED WITH THE REGIST RAR OF ASSURANCES. THIS CONVEYANCE DEED CLEARLY REFERS TO THE FACT THAT THE PROPERTY WAS AGREED TO BE SOLD TO ASSESSEE IN HIS PERSONAL CAPACITY AS WELL AS DIRECT OR OF M/S.ANJA VILLE HOLDINGS PVT.LTD. BUT THE PROPERTY IS ULTIMATELY CONVEYED T O THE ASSESSEE. IN THE RECITALS TO THIS AGREEMENT (AT POINT (L) IT IS MADE VERY CLEAR THAT MR.SATISH PRADHAN AND HIS FAMILY MEMBERS AND RELATIVES AND OTHERS WERE CLAIMING TENA NCY AND POSSESSION OF THE PORTIONS OF THE PROPERTY AND THAT MRS.ANJALAI NEVIL LE MEHTA HAS SETTLED WITH THE PRADHANS FOR CONSIDERATION AND HAS SECURED DOCUMENT S WITH MR. AND MRS. SATISH PRADHAN AND HIS FAMILY MEMBERS AND RELATIVES AND OT HERS. THIS IS THE FIRST CIRCUMSTANCE TO SHOW THAT THE PRADHANS WERE IN POSS ESSION OF THE PROPERTY AND THEIR CO-OPERATION WAS REQUIRED TO COMPLETE THE PROJECT. SECONDLY ON 21 ST JULY 2005 AFTER THE PROJECT WAS COMPLETED SMT.PRATHIBHA S.PR ADHAN AND MR.KAMLESH S.PRADHAN WERE GIVEN A CONSTRUCTED FLAT BEING FLAT NO.301 AND 302 IN THIRD FLOOR TOGETHER WITH GARAGE IN THE BUILDING DEVELOPED BY T HE ASSESSEE WHICH BY THEN WAS NAMED AS ABHIMAN ONE HAVING CARPET AREA OF 1476 SQ.FT. IN THIS AGREEMENT THERE IS A REFERENCE TO THE MOU DATED 4/11/1995 AND THE FACT THAT THE FLAT WAS BEING CONVEYED TO THE PURCHASERS IN SETTLEMENT OF THEIR 3 7.5% SHARE OF PROFITS IN THE PROJECT. THE COST OF THE FLAT EXCEEDED SUCH SHARE BY RS.5 LACS AND THE PRADHANS PAID THE SAME TO THE ASSESSEE. THESE RECITALS IN T HE REGISTERED CONVEYANCE DEED CANNOT BE IGNORED. THE SCRUTINY ASSESSMENT PROCEED INGS IN THE CASE OF THE ASSESSEE FOR AY 06-07 COMMENCED BY ISSUE OF NOTICE U/S.142(1) AFTER 24/10/2007. IT COULD NOT BE SAID THAT AS EARLY AS 21 ST JULY 2005 WHEN THE FLAT WAS CONVEYED TO THE PRADHANS BY THE ASSESSEE THEY WOULD HAVE HAD ANY M OTIVE TO INTRODUCE A CLAUSE IN THE CONVEYANCE DEED TO PUT FORTH A FALSE CASE BEFOR E THE AO. EVEN IN THE ASSESSMENT PROCEEDINGS THE EXPLANATION GIVEN BY THE ASSESSEE WAS THE SAME AS PER THE RECITALS IN THE CONVEYANCE DEED DATED 21 ST JULY 2005. IT IS ALSO TO BE NOTICED THAT SMT. INES ASHOK GUPTA AND SHRI JAYPRAKASH MAU RYA WHO WERE PARTIES TO THE MOU DATED 4/11/1995 ALSO SIGNED THE CONVEYANCE DEED AS CONFIRMING PARTIES. IN OUR OPINION THE AUTHENTICITY OF THE EVIDENCE IN TH E FORM OF REGISTERED DOCUMENTS WHICH TRANSPIRED MUCH EARLIER IN POINT OF TIME TO T HE ASSESSMENT PROCEEDINGS BEFORE ITA NO.998/MUM/2010(A.Y. 2006-07) 6 THE AO FOR AY 06-07 CANNOT BE IGNORED. THE ABSENC E OF REFERENCE TO THE PRADHANS HAVING POSSESSORY RIGHTS OVER THE PROPERTY IN THE M OU DATED 4/11/1995 AND THE FACT THAT THERE IS ONLY A REFERENCE TO THE FACT THAT THE ASSESSEE LACKS KNOWLEDGE AND IS PREOCCUPIED WITH OTHER BUSINESS AND THEREFORE REQUE STED THE PRADHANS TO DEVELOP THE PROPERTY IN OUR OPINION CANNOT BE SO FATAL TO IGNORE THE OTHER EVIDENCE BROUGHT ON RECORD. THE VALUE OF THE FLAT SOLD TO PRADHANS HAS BEEN SHOWN AS SALES IN THE PROFIT AND LOSS ACCOUNT BY THE ASSESSEE. THE AMOUN T PAYABLE TO PRADHANS VIZ. THE VALUE OF THE COST OF CONSTRUCTION OF THE FLAT HAS B EEN CLAIMED AS DEDUCTION. THE DEDUCTION CLAIMED IS THEREFORE TO BE ALLOWED AS EXP ENDITURE INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. THE DEDUCTION CLA IMED IS THEREFORE TO BE ALLOWED AS DEDUCTION WHILE COMPUTING THE PROFITS. 8. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMIT TED BEFORE US THAT EVEN ASSUMING THE PLEA OF THE ASSESSEE TO BE NOT ACCEPTA BLE THE PAYMENT OF THE DISPUTED SUM AS CONSIDERATION OF USE OF EXPERTISE OF THE PRA DHANS WILL BE SUFFICIENT TO ALLOW THE CLAIM OF THE ASSESSEE AS AN EXPENDITURE INCURRE D FOR THE PURPOSE OF HIS BUSINESS. SINCE WE HAVE AGREED WITH THE MAIN PLEA OF THE ASS ESSEE THIS ALTERNATIVE SUBMISSION THOUGH WORTH EXAMINING IS NOT BEING CO NSIDERED. FOR THE REASONS STATED ABOVE WE DIRECT THE AO TO ALLOW THE CLAIM O F THE ASSESSEE FOR DEDUCTION OF A SUM OF RS.35 83 728/-. GROUND NO.1 TO 3 ARE ALLOWE D. 9. THE OTHER GROUNDS OF APPEAL WERE NOT PRESSED AND THEY ARE THEREFORE DISMISSED AS NOT PRESSED. 10. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 25 TH DAY OF FEBRUARY 2011. SD/- SD/- (J.SUDHAKAR REDDY) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 25 TH FEB.2011 ITA NO.998/MUM/2010(A.Y. 2006-07) 7 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.998/MUM/2010(A.Y. 2006-07) 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 21/2/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 21/2/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER