admin November 15, 2019

On 3 February, 2017  ITAT, HYDERABAD BENCH in the case of Dy. CIT v. M/s. Maheswari Mega Ventures Ltd. decide on following three issues:-

Assessing officer failed to appreciate that company is an independent entity and distinct person. The action of the company will not have any bearing on the shareholders. Assessing officer has no jurisdiction to charge anything in the case of assessee over the dealings of any other person. It is brought on record that on money was paid in the dealings by M/s OMDPL towards the purchase of land, if at all any addition can be made, it can be in the hands of M/s OMDPL and not in the hands of the assessee. It is misconceived idea to charge payment of ‘on money’ to the shareholders of the company, in which company entered in the transaction.

Further held that the assessing officer had not brought on record how the contents of page 32 were connected with the assessee, except stating that this was found during survey. No statement or confirmation was obtained from the assessee / its Directors about the veracity of the expenses written. Further, he observed that without proving that the assessee had actually incurred such expenses, based on some rough papers it cannot be said that the assessee had incurred expenditure on provisions, milk, water, vegetables, etc., to the tune of Rs. 29,90,050.

Further held that without proving the nexus between the loans obtained and the investments made, the provisions of section 14A cannot be invoked for making disallowance of interest

Full Judgement is as under:-

IN THE ITAT, HYDERABAD BENCH

1. MADHAVI DEVI, J.M. & S. RIFAUR RAHMAN, A.M.

Dy. CIT v. M/s. Maheswari Mega Ventures Ltd.

ITA No. 367/Hyd/2013

3 February, 2017

Revenue by : U. Mini Chandran

Assessee by : K.C. Devdas

ORDER

1. Rifaur Rahman, A.M.

This appeal filed by the Revenue is directed against the order of Commissioner (Appeals)-V, Hyderabad, dated 24-12-2012 for assessment year 2009-10

2. Briefly the facts of the case are that the assessee company is engaged in the business of construction and real estate. For the assessment year 2009-10, the assessee company filed its return of income on 30-9-2009 admitting a total income of Rs. 2,38,14,880. Assessment under section 143(3) of the Act was completed determining the total income at Rs. 14,86,33,805 by making the following disallowances :–

(i)	Payment of on-money for purchase of land	Rs. 12,14,50,000
(ii)	Unexplained expenditure	Rs. 29,90,050
(iii)	Disallowance under section 14A	Rs. 3,78,875

3. When the assessee carried the matter in appeal before the Commissioner (Appeals), the Commissioner (Appeals) deleted all the said disallowances and aggrieved with the order of the Commissioner (Appeals), the revenue is in appeal before us.
4. As regards the disallowance of payment of on-money for purchase of land amounting to Rs. 12,14,50,000, it is observed that during survey in the business premises of the assessee on 20-10-2008, an agreement of sale dated 7-8-2006 was found. As per this agreement, land of 20 acres at Hafeezpet was supposed to be purchased at Rs. 5 crore per acre by M/s Om Metal Developers Pvt Ltd., Mumbai from 11 vendors. Out of the 11 vendors, 8 individual vendors were represented by 9th person, Mrs Indrani Prasad, who is also a Director of M/s Gold Stone Exports Pvt Ltd (10th vendor). The 10th and 11th vendors, being companies, were represented by Dr. P.S. Prasad and Sri R. Subramanyam. Smt Indrani Prasad is wife of Dr. P.S. Prasad. The vendee as per this agreement is M/s Om Metal Developers Pvt. Ltd., represented by Sri Raj Kumar Malpani. Sri Malpani was also the Managing Director of the assessee-company and M/s Maheswari Mega Ventures Ltd. It is here based on the multifaceted positions of the vendors and vendees their representatives, the assessing officer had drawn a conclusion that in essence the above agreement is between M/s Gold Stone Exports Ltd and M/s OM Metal Developers Pvt. Ltd. It is in M/s Om Metal Developers Pvt. Ltd., the assessee-company holds 35% share holding and the balance by M/s Metro Management Services Pvt Ltd., New Delhi.

4.1 Though the agreement was for 20 acres of land @ Rs. 5 crore per acre, as per registered sale deed dt.18.04.2008, only 10 acres of land was transferred @ Rs. 1.8 crores per acre, aggregating to Rs. 18.00 crores.

4.2 During the course of search and seizure proceedings conducted by DDIT, New Delhi on 6-1-2011 at the premises of Shiwani group of companies, having interests in M/s Metro Management Services Pvt. Ltd., a similar agreement of sale was found for the land at Hafeezpet, Hyderabad between the 11 vendors as above and M/s Om Metal Developers Pvt. Ltd (OMDPL). As per the DDIT (Inv.), New Delhi, the amount for purchase of 10 acres of land was shown at Rs. 20.30 crores in the books of M/s OMDPL and a further amount of Rs. 21.6 crores was shown as ‘advances against land’ in the Balance Sheet. As per the agreement found at New Delhi, Rs. 30.00 crores has been paid by M/s OMDPL to the vendors on the date of agreement. The sale mentions that a further amount of Rs. 18.00 crores has been paid to the vendors, taking the aggregate consideration for 10 acres of land to Rs. 48.00 crores. In a statement recorded from the representatives of Shiwani group, which holds Metro Management Services Pvt. Ltd (a company having 65% share holding in M/s OMDPL along with the assessee-company), it was confirmed that 10 acres of land at Hyderabad was purchased for a consideration of Rs. 55 crores (including expenses).

4.3 From the above factual background, the assessing officer concluded that the component of cash, out of the above amount of Rs. 55 crores, was Rs. 34.70 crores. As the assessee-company holds 35% of share in M/s Om Metal Developers Pvt Ltd., the unaccounted/ undisclosed investments made by the assessee company in M/s OMDPL was taken at 35% of the cash component of Rs. 34.70 crores, which worked out to Rs. 12,14,50,000. In support of the above, the assessing officer further brought in the contents of OS filed by M/s OMDPL agitating over the lands at Hafeezpet, Hyderabad filed before 1st Addl. District Judge, R.R. District. In the said OS, there was mention of paying Rs. 30 crores as advance (partly in cash and partly in cheques) on signing the agreement for sale. Finally, it was concluded that the assessee-company made undisclosed investment in M/s OMDPL in the form of capital to the tune of Rs. 12,14,50,000 and brought this amount to tax.

5. Aggrieved by the order of the assessing officer, the assessee preferred an appeal before the Commissioner (Appeals).
6. During appeal proceedings, the assessee submitted that they had not purchased any property in Hafeezpet and that the alleged unrecorded payment of on-money in purchasing the above land should not be considered in its hands. The assessee further contended that there is no material to indicate that they had paid part of money for purchase of land by M/s Om Metal Developers Private Limited and that the same was treated as their share holding. The scribbling relied by the assessing officer in the assessment, in no way pertain to them and the assessing officer also without explaining the source of the said scribbling had simply concluded that they had made unexplained investment in the share capital of M/s OMDPL. It was also contended that the assessing officer failed to demonstrate the circumstances under which the alleged addition is made in their hands. The assessee further pointed out some inconsistencies in the version of the assessing officer in concluding that the assessee had paid unrecorded sale consideration for purchase of land in the name of M/s OMDPL, the gist of which is as under:

(a) In para 3.2, the assessing officer while bringing the relation between the purchaser of land, M/s OMDPL and the assessee company, stated that in essence the agreement for sale of land was between M/s Gold Stone Exports ltd and M/s OMDPL, since there were common Directors/ interested parties in both the companies. By stating so, the assessing officer had not considered the corporate status of these two parties and the share holders/Directors were equated with the companies. The assessee further brought out that the legal framework pertaining to a company’s operations and obligations acknowledges separate legal existence as a key feature of the company structure and lifting the veil of corporate personality means that the company is longer viewed as a distinct entity.

(b) In para 3.1 the assessing officer refers to an agreement of sale dated 7-8-2006 for transfer of 20 acres of land for a consideration of Rs. 100 crores. There is no mention of any consideration being parted by the purchaser to the seller in this agreement. However, in para 3.5, the assessing officer refers to pages 135 to 146 of Annexure A-5 found in the premises of Shivvani group of companies, as the same agreement of sale dt. 7-8-2006. It was further brought out in para 3.6 that this agreement of sale mentions that Rs. 30 crores was paid by M/s OMDPL to the vendors on the date of agreement. If the agreement found at Delhi mentions payment of Rs. 30 crores, how the same agreement found in the premises of the assessee during survey fails to make a mention of the consideration parted on the date of agreement is not brought out by the assessing officer.

(c) Another apparent inconsistency is that in para 3.3 while referring to sale deed executed on 12-2-2008 and registered on 18-4-2008 for transfer of 10 acres of land, the total sale consideration was mentioned at Rs. 18 crores, i.e., Rs. 1.8 crore per acre. However, in para 3.6, the assessing officer referring to the same sale deed found in Delhi brings out the sale consideration to a ‘further’ amount of Rs. 18 crores, i.e., Rs. 30 crores already paid on the date of execution of sale agreement and another amount of Rs. 18 crores on the date of registration, totaling to Rs. 48 crores. The assessee contends that even considering that the registered document indicate that M/s OMDPL had parted Rs. 48 crores for purchase of land, the same should be clarified from M/s OMDPL and not from the assessee, who is only a share holder with 35% stake holding in M/s OMDPL. Without any verification from the actual purchaser or from the sellers, the assessing officer concluded that the assessee had paid consideration outside books and added Rs. 1214.50 lakhs. The applicant finally concluded that what all the material referred to by the assessing officer for making the above addition is agreement of sale and registered sale deeds, indicating that M/s OMDPL had paid some consideration for purchase of land, then it is open for the Department to question the purchaser and the assessee cannot be said to have paid any on-money.

7. After considering the submissions of the assessee as well as the assessment order, the Commissioner (Appeals) observed that ordinarily, any finding of the assessing officer shall be based on the material he possesses and conclusions could be drawn emanating from the material available. The available material should indicate the course of conclusion that can be drawn. He noted that from the assessment order, assessing officer had come to a conclusion first and then brought in the available material to fit into the already drawn conclusion – conclusion preceding the available material. Commissioner (Appeals) observed that whatever material was found in possession of the assessee about the land transaction was not considered as incriminating but the material found from the premises of M/s Shiwani group at New Delhi was found to be incriminating and the assessee was confronted with such material found at New Delhi. As contended by the assessee, this material has to be first clarified from the parties directly involved in the transaction, i.e., M/s OMDPL and the vendors. However, no effort appears to have been made in this direction. Any adverse conclusion from a transaction against outside parties, in whatever way these outside parties were connected with the main parties concerned to the transaction, should originate from an independent enquiry being carried out, which was missing in the case on hand. The assessing officer had simply concluded that the assessee had paid consideration outside books for purchase of land in the name of a company, in which they had 35% stake holding, on the basis of some scribbling made by other parties and linking their common interests/ share holding ratios in companies. He observed that no material evidence was brought out to hold that the assessee had actually invested money in the share holding of M/s OMDPL outside books or actually paid consideration to the vendors of land on behalf of M/s OMDPL. In view of the above observations made, the Commissioner (Appeals) held that the addition of Rs. 12,14,50,000 made cannot be sustained and the assessing officer was directed to delete the addition so made.
8. Learned Departmental Representative submitted that assessing officer had established that on money was paid in this transaction and he had rightly charged in the hands of assessee, as the assessee being one among the sharing parties and having substantial interest in the transaction. All the stake holders are closely involved. He supported the findings of the assessing officer.
9. Learned authorised representative submitted that as per the document seized during the search proceedings in the case of M/s Shiwani group, there is no mention of the assessee’s name anywhere in the handwritten note (refer page 55 of paper book). In absence of any such link, it is wrong to bring the assessee’s involvement in those transactions. It is contended that the assessee’s name was involved in those transactions merely because assessee is holding 35% share holding in M/s OMDPL. Otherwise, there is no other evidence to show that assessee had actually involved in those transactions. He relied on the decision in the case of CIT v. Salora International Ltd. (2016) 386 ITR 58 (Del).
10. Considered the rival submissions and perused the material facts on record. As understood from the facts, during the survey an agreement of sale was found in the business premises of the assessee, as per which, M/s OMDPL proposed to buy land from 11 vendors. In the above company, the assessee is holding 35% of shares. In a separate search proceedings in Delhi, similar agreement of sale was found in the premises of M/s Shiwani group, which is having interest in M/s Metro Management Services Pvt. Ltd. (MMSPL). M/s MMSPL is holding 65% shares in M/s OMDPL. The assessing officer brought to tax the on money payment which was made by M/s OMDPL to the land owners based on the shareholders in M/s OMDPL. Assessing officer failed to appreciate that company is an independent entity and distinct person. The action of the company will not have any bearing on the shareholders. Assessing officer has no jurisdiction to charge anything in the case of assessee over the dealings of any other person. It is brought on record that on money was paid in the dealings by M/s OMDPL towards the purchase of land, if at all any addition can be made, it can be in the hands of M/s OMDPL and not in the hands of the assessee. It is misconceived idea to charge payment of ‘on money’ to the shareholders of the company, in which company entered in the transaction. We cannot accept and appreciate the action of the assessing officer. Accordingly, we uphold the findings of the Commissioner (Appeals) in this regard and dismiss the ground raised by the revenue.
11. As regards the disallowance of expenditure amounting to Rs. 29,90,050 under section 69C of the Act, the assessing officer referred to impounded material Annexure-3, page 32, wherein certain payments to various vendors/provisions like milk, water, vegetables were noted. The total of such payments was Rs. 29,90,050. The assessing officer held that as these expenses were not recorded in the books, hence, the same were treated as unexplained expenditure under section 69C of the Act.
12. On appeal before the Commissioner (Appeals), the assessee submitted that the notings in the impounded paper do not belong to their business and therefore the addition cannot be made in their hands.
13. The Commissioner (Appeals) observed that the assessing officer had not brought on record how the contents of page 32 were connected with the assessee, except stating that this was found during survey. No statement or confirmation was obtained from the assessee / its Directors about the veracity of the expenses written. Further, he observed that without proving that the assessee had actually incurred such expenses, based on some rough papers it cannot be said that the assessee had incurred expenditure on provisions, milk, water, vegetables, etc., to the tune of Rs. 29,90,050. The Commissioner (Appeals) observed that in the assessment order also, no reason whatsoever was adduced for linking the said expenditure to the business of the assessee or for that matter that the assessee had actually incurred such expenditure on these items. Therefore, the Commissioner (Appeals) directed the assessing officer to delete the addition of Rs. 29,90,0501 treated as unexplained expenditure.
14. Learned Departmental Representative relied on the findings of assessing officer.
15. Learned authorised representative submitted that there is no evidence to show that assessee had actually incurred the above expenditure and these are not in the nature of expenditure in which the assessee is normally dealing with.
16. Considered the rival submissions and perused the material facts on record. Assessing officer has not brought any cogent material to prove that assessee has actually incurred these expenses except finding loose sheet in the premises in which such details were recorded. We are inclined to accept the findings of learned Commissioner (Appeals). Accordingly ground raised by the revenue is dismissed.
17. As regards the disallowance of Rs. 3,78,875 under section 14A read with Rule 8D, the assessing officer observed that the assessee invested huge amounts as share capital in different companies out of borrowed funds and interest of Rs. 69,07,096 was debited as interest on these loans. Accordingly, the assessing officer had worked out the disallowance under section l4A read with Rule 8D and disallowed an amount of Rs. 3,78,878.
18. Before the Commissioner (Appeals), the assessee submitted that (i) the said investments were not made during the year under consideration and were accumulated over a period of time, (ii) in the absence of any exempted Income, the provisions of 14A cannot be invoked, (iii) they have reserves of around 603.48 crores as against the investments of Rs. 7.27 crores made and therefore, without proving the nexus between the loans obtained and the investments made, the provisions of section 14A cannot be invoked for making disallowance of interest. The assessee also relied on a number of case laws on this issue.
19. The Commissioner (Appeals) observed that the submissions of the assessee were agreeable and n nexus between the funds borrowed and the funds invested by the assessee was brought out by the assessing officer. Therefore, he directed the assessing officer to delete the addition made.
20. Learned Departmental Representative relied on the findings of assessing officer.
21. Learned authorised representative submitted that assessee had not earned any exempt income and in the absence of any exempt income, provisions of section 14A cannot be applied. Moreover, the assessee had incurred financial charges on the working capital loan and no portion of working capital loan was diverted.
22. Considered the rival submissions and perused the material facts on record. As per the P&L account and balance sheet submitted before us, the assessee had not earned any exempt income. The provisions of section 14A will be applied to find the expenditure relating to exempt income. In the absence of such exempt income, no expenditure can be disallowed in relation to exempt income. Accordingly, we uphold the decision of Commissioner (Appeals) and dismiss the ground raised by the revenue.
23. In the result, appeal of the revenue is dismissed.