Itta/448/2015 Of Late Smt. Hoorjahan Begum v. Tghe Income Tax Officer

7THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN AND THE HON’BLE SRI JUSTICE S.RAVI KUMAR I.T.T.A.Nos.433, 448 & 466 of 2015 COMMON ORDER: (per Hon’ble Sri Justice Ramesh Ranganathan) Heard Sri A.V.Krishna Kaundinya, learned Senior Counsel appearing on behalfof the appellants, and Sri B.Narasimha Sarma, learned Special StandingCounsel for the Income Tax Department and, after hearing both the learnedcounsel, these appeals are being disposed of at the stage of admission. These three appeals are preferred by the assesses under Section 260-A of theIncome Tax Act, 1961 (for short “the Act”) against the order of the Income TaxAppellate Tribunal, Hyderabad in I.T.A.Nos.1386, 1387 and 1388 of 2014 dated14.01.2015. The assessees, in these three appeals, are two brothers and their mother. Theywere assessed as individuals deriving income from salary, share income fromM/s.Hansa Overseas Enterprises (a partnership firm) and income from othersources. Returns of income were filed by the assessees declaring certainincome. While the returns were initially processed under Section 143(1) of theAct, subsequently, on the basis of the information available on record and asthe Assessing Officer had reason to believe that the assessees’ income hadescaped assessment, the assessment was reopened and notices underSection 148 of the Act were issued. During the re-assessment proceedings, theAssessing Officer noted that, in the relevant previous year, the assessees hadsold a property situated at Road No.12, Banjara Hills, Hyderabad by way ofregistered sale deed No.2540/05 dated 23.06.2005 for a consideration ofRs.1,09,50,000/- each received by their two brothers, and Rs.1,20,48,000/-,received by their mother, totalling to Rs.3,39,48,000/-. The assessees,however, did not offer the said sale transaction to tax under the head “capitalgains”. The case of the assessees, before the Assessing Authority, was thatthe entire sale proceeds, received on the sale of the subject property, werepaid to State Bank of India, and was appropriated towards the debt due to theBank from M/s.Hoe Leather Garments Private Limited, in which both thebrothers were Directors. Likewise in M/s. Hansa Overseas Enterprises (apartnership firm), wherein both the brothers were the partners. On verifying the material on record, the Assessing Officer noticed that, thoughthe assessees had claimed that the entire sale consideration was appropriatedby the Bank towards the dues outstanding in the name of M/s.Hoe LeatherGarments Private Limited, in which the assessees (brothers) were directors, aperusal of the bank account maintained by them, with the State Bank of Hyderabad, showed that, after receipt of the sale consideration, the amountreceived was kept in short term Fixed Deposits, and the interest earnedthereon was also offered as income in the assessment years underconsideration. In his order, the Assessing Authority held that the claim of the assessees thatthey did not receive the sale consideration, and the Bank had appropriated theentire sale consideration against the dues of the company, was not tenable; onbeing confronted with these facts, the assessees had stated that they hadmade short term deposits with the State Bank of Hyderabad from out of thesale proceeds, thereafter, they had made payment to the bank towards thedues of the company, and since the sale proceeds were utilised for clearing thedebts of the company, no capital gains arose. The Assessing Officer subjectedthe transaction to tax as capital gains holding that, as per the statutoryprovisions, loan repayment is not one of the modes which would entitle theassessees to claim deduction from chargeability to tax on capital gains. In the appeals, filed before the Commissioner (Appeals), the assesseescontended that both M/s.Hansa Overseas Enterprises (a partnership firm) andM/s.Hoe Leather Garments Private Limited had availed loans from the StateBank of India as security for which, their residential house, held jointly in thenames of the assessees (both the brothers and their mother), were mortgaged;due to recession in the market from 2002 onwards, the loan had become a NonPerforming Asset; proceedings for recovery were initiated both against thepartnership firm and the company; subsequently the proposal, for a One TimeSettlement (OTS), was accepted by the Bank settling the amount payable atRs.3.5 crores i.e., Rs.2.85 crores for M/s.Hoe Leather Garments PrivateLimited, and Rs.75 lacs for M/s.Hansa Overseas Enterprises, which was alsoaccepted by these concerns; in terms of the OTS, the assessees madepayment, through their individual accounts, which were reflected in the books ofM/s. Hoe Leather Garments Limited and M/s. Hansa Overseas Enterprises;these two concerns had also offered the amount, waived by the Bank on theOTS, as income from other sources; in the case of M/s.Hoe Leather GarmentsPrivate Limited, Rs.2,85,00,000/- was added to the income of the companytreating the amounts, introduced in the names of the two directors throughjournal entries, as unexplained cash credits; and when cheques were given bythe assessees from their individual accounts, to discharge the debts of thecompany and the partnership firm, and when the bank had also confirmed thisin the course of investigation made by the Assessing Officer, they could not besubjected to tax under the head “capital gains”. The assessees also contendedthat the assessment made in the hands of the company, treating the amountspaid by the directors towards OTS as an unsecured loan and, at the same time,charging the sale consideration again in the hands of the assessees as capitalgains, would amount to assessing the same income twice over; the saleconsideration had been utilised for the purpose of discharging the debts of thecompany, that too, on a property mortgaged to the bank; and the same isallowable under Section 48(1) of the Act. In his order, the Commissioner of Income Tax (Appeals) observed that therewas no connection between repayment of the loan, mortgage of the property,and the sale transaction relating to the property; the property was sold prior tothe OTS; the entire sale consideration, received by the bank, was credited toassessees’ bank accounts, and was being used for repayment of the loan asper the OTS, through the books of accounts of the company; the amount wasinvested in fixed deposits in the name of the assessees, on which interest wasalso earned; there was no indication that the sale consideration was either paidto the bank directly, or appropriated by the bank directly, so as to make thesale consideration eligible for deduction under Section 48 of the Act; the saleconsideration was not paid directly to the mortgagee bank; the property wasdirectly sold by the assessee, regardless of the OTS and the mortgage in force;and, hence, the assessees claim, that the sale consideration received by themshould be allowed as deduction under Section 48(1) of the Act, could not beaccepted. The Commissioner further observed that the amount, claimed to have beenrepaid as a loan, was not the liability of the assessees but the liability of thecompany and the firm in which two of them were directors/partners; the amountused for repayment of the loan was credited, in the books of accounts of thecompany, as a loan from the directors who were shown as creditors to thecompany; the amount paid to the bank, through the books of accounts of theseconcerns credited in the name of the directors, could not be treated asexpenses incurred by the assessees in connection with the transfer ofproperty; the assessees were independent entities different from the concernswhich had availed the loans; the properties were also sold independently bytheir owners, irrespective of the fact that there was a mortgage or an OTS; asthe sale consideration had no connection with repayment of the loan, theconsideration received, from such transactions, were chargeable to tax ascapital gains in the hands of the assessees; and treating the unsecured loans,as unexplained cash credits in the hands of those two concerns, had absolutelyno effect on the chargeability of capital gains in the hands of individuals. In the order under appeal, the Tribunal held that, during the relevant previousyear, the assessees had sold a house property in Banjara Hills for a saleconsideration of Rs.3,39,48,000/-; the property sold was a capital asset asdefined under Section 2(14) of the Act; the gain derived from sale of suchproperty would normally be assessable to tax under the head “capital gains”;the sale consideration, received by the assesses, was deposited into theirpersonal bank accounts, and was kept in the form of short term fixed deposits;the interest earned on these short term fixed deposits was also offered to tax inthe returns of income filed by the assessees; the property was sold much priorto the sanction of OTS by the bank, which advanced the loans to M/s.HoeLeather Garments Private Limited and M/s. Hansa Overseas Enterprises,wherein the assessees (the two brothers) were directors and partners; the saleconsideration was not directly paid to the bank towards discharge of the debtas per the OTS claimed by the assessees; the amount claimed to have been paid, by the company and the firm towards OTS, originated from the unsecuredloan claimed to have been availed through the personal accounts of thedirectors/partners; the contention of the assessees, that the bank hadappropriated the sale consideration towards discharge of the debt as per theOTS, was not acceptable; there was no direct nexus between the receipt of thesale consideration, and the payment made to the bank towards discharge of thedebt; the unsecured loan, of the amount claimed to have been received fromthe directors, was disbelieved by the Department while completing assessmentin the case of M/s. Hoe Leather Garments Private Limited, and additions weremade under Section 68 of the Act which also stood confirmed; the claim ofunsecured loans from the directors, of the amount utilised towards discharge ofthe debt, had also not been accepted; and, therefore, the assessees claim that,since the sale consideration was utilised towards discharge of the debt, thesame could not be chargeable to capital gains, could not be accepted. The Tribunal further held that, even if the property was mortgaged as securitytowards the debt availed by the company/firm, the same could not be chargedto capital gains; the Supreme Court, in R.M.Arunachalam vs. Commissionerof Income Tax and VSNR Jagdish Chandran vs. Commissioner of IncomeTax, hadheld that the amount paid, out of the sale proceeds, to clear themortgage debt could not be treated as the cost of acquisition or the cost ofimprovement, so as to reduce the same from the sale consideration, whilecomputing capital gains under Section 48 of the Act; and there was no infirmityin the order passed by the Commissioner of Income Tax (Appeals). The Tribunal further held that, even if the property was mortgaged as securitytowards the debt availed by the company/firm, the same could not be chargedto capital gains; the Supreme Court, in R.M.Arunachalam vs. Commissionerof Income Tax and VSNR Jagdish Chandran vs. Commissioner of IncomeTax, hadheld that the amount paid, out of the sale proceeds, to clear themortgage debt could not be treated as the cost of acquisition or the cost ofimprovement, so as to reduce the same from the sale consideration, whilecomputing capital gains under Section 48 of the Act; and there was no infirmityin the order passed by the Commissioner of Income Tax (Appeals). Before us, Sri A.V.Krishna Kaundinya, learned Senior Counsel appearing onbehalf of the appellants, would contend that the sale transaction could not besubjected to tax twice; the amounts received as sale consideration, which waskept in the form of short term fixed deposits, were in turn advanced asunsecured loans to the company/firm; the unsecured loans, given by theassessees, were used for repayment of the debt due to the bank under theOTS; the amounts lent by the assessees, in the form of unsecured loans, weretreated as unexplained cash credits in the books of accounts of thecompany/firm; and, as these transactions had already been subjected to tax inthe hands of the company and the firm, the same could not be subjected to taxin the hands of the individual assessees also. Learned counsel would furthersubmit that the very fact that the Tribunal had subsequently waived the penalty,imposed by the Assessing Authority, itself proved that the Tribunal alsobelieved that the same transactions had been subjected to tax twice. As noted both by the Adjudicating Authority and the Appellate Authority, thesubject property was sold even before the bank had offered OTS; the propertywas sold despite an existing mortgage in favour of the bank; the sale proceedswere not utilised directly for repayment of the loan, but were kept in the form ofshort term fixed deposits in the names of the assessees; and the interestearned thereon was also declared as income by the individual assessees. As has been rightly observed by the Commissioner of Income Tax (Appeals),and the Tribunal, no deduction can be claimed under Section 48 of the Act,even if the said amount had been utilised for repayment of the loan extended bythe bank to the company and the firm. The assessment orders passed in thecase of the company and the firm, and certain transactions of the company andthe firm being treated as unexplained cash credits, are not in issue in thepresent appeals. The circumstances under which additions were made to theincome of the company and the firm, treating certain amounts received by themas unexplained cash credits, are also not known. The mere fact that thecompany and the firm were subjected to tax, on additions made for unexplainedcash credits, would not absolve the appellants herein of their liability to pay taxon capital gains on the consideration received on the sale of the subjectproperty. The fact that the Tribunal took a lenient view subsequently, by itsorder dated 09.10.2015, would not justify setting aside the earlier order of theTribunal dated 14.01.2015 upholding the assessment order. Viewed from anyangle, we see no error in the order of the Tribunal, much less a substantialquestion of law, necessitating interference in these appeals. All the three appeals fail and are, accordingly, dismissed. The miscellaneouspetitions pending, if any, shall also stand dismissed. There shall be no order asto costs. ________________________ RAMESH RANGANATHAN, J Date: 07.12.2015 JSU ______________ S.RAVI KUMAR, J THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN AND THE HON’BLE SRI JUSTICE S.RAVI KUMAR JSU I.T.T.A.Nos.433, 448 & 466 of 2015 Date: 07.12.2015