P. Kunhiraman Nair vs Commissioner of Income Tax

K.M. Joseph, J.—The following substantial questions of law were raised in the appeal memorandum:

(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in confirming the addition of Rs. 5 lakhs to the income from business/profession? Is not the above addition illegal and perverse in the facts and circumstances of the case?

(ii) Whether, on the facts of the case, the Appellate Tribunal is justified in confirming the addition of Rs. 16 lakhs as net long-term capital gains without allowing any deduction for cost and indexed cost of acquisition, in respect of the amount paid or obtaining the lease of the residential flat in 1961 and subsequent amounts spent on repairs ?

(iii) Is the Appellate Tribunal justified in not following the decision of the co-ordinate Bench in the case of the P.V. Radhakrishnan v. ITO in I.T.A. No. 167/Coch/2006, dated January 11, 2008, which was rendered more or less on similar facts? Is not the decision of the Appellate Tribunal in disagreeing to follow the precedents illegal and unsustainable?

(iv) Is the order of the Appellate Tribunal in relation to the additions made in the assessment legal, valid and sustainable in law?

A search was conducted in the residential premises of the assessee on June 14, 2007, which revealed deposits in three bank accounts with Allahabad Bank, Bandra Branch, Mumbai. A total of Rs. 8 lakhs was deposited in cash on November 16, 2004. Two deposits, i.e., Rs. 3 lakhs and Rs. 2 lakhs aggregating to Rs. 5 lakhs were deposited in the joint names of the assessee and his wife. The third bearing a sum of Rs. 3 lakhs was deposited in the name of the appellant''s daughter, Pramila Gopi, and her husband. The appellant was examined on oath u/s 131 of the income tax Act. The appellant gave the following reply:

Question No. 2: On examination of the materials seized during the time of search, the following payment slips were found out from your house.

(1) Bank account No. 100054--Turner Road Branch of Allahabad Bank--Rs. 3 lakhs cash dated December 16, 2004.

(2) Account No. 108295 of the same branch Rs. 2 lakhs dated November 16, 2004--Deposit.

(3) Account No. 108455 of the same branch Rs. 3 lakhs dated November 16, 2004--Deposit.

Please explain the above transaction?

Answer No. 2: These amounts were deposited by me out of my receipts from various companies/firms where I worked after my retirement. The remuneration was paid in cash. I have not paid any income tax on these receipts. The amount was received by me for the consultancy work I rendered during the period 2000-02. These firms were not in a position to pay me regularly and I got these amounts during 2004 November only. These same portion of this amount may be maturity amount of fixed deposits. I will verify my records and if any tax is due to pay I will pay the tax accordingly.

The assessee offered Rs. 3 lakhs as consultation charges received. On being asked to explain, the appellant, vide letter dated October 24, 2009, explained that the amount of Rs. 3 lakhs in account No. 108455-and-in account No. 108297 are not his income and he is not liable to tax. He had further explained that account No. 108455 belonged to his daughter, Pramila, who was employed in Corporation Bank and she was abroad with her husband. Her transactions were quite independent it was contended. The Assessing Officer, however, did not accept the later version. Instead the Assessing Officer pointed out that appellant admitted during the course of search that cash deposits were made by him in all the three accounts out of the receipts from consultation. None of these deposits was maturity amount of any fixed deposits and, accordingly, the entire deposit amounting to Rs. 8 lakhs was treated as professional income.

Still further, in the sworn statement taken at the time of search, the assessee stated that the assessee had received Rs. 20 lakhs by cheque by surrender of the tenancy right of the flat at Mumbai.

Question No. 1: On your statement recorded by the income tax authorities on June 14, 2007, you have stated that you have received Rs. 20 lakhs (20,00,000) for transferring your tenancy right of the flat in Bombay. Please tell the utilization of that amount and also state whether you have paid tax on the capital gains ?

Answer No. 1: I received Rs. 20,00,000 as cheque which was deposited in my bank account of HSBC, Mumbai, in November 2004. From this amount, I paid Rs. 8 lakhs, to my eldest daughter through cheque. Another Rs. 6 lakhs (six lakhs) was deposited in Senior Citizens Savings Scheme in SBI, Taliparamba. Another Rs. 4 lakhs was utilized for purchasing Nabard Capital Gains Scheme. Another 2 lakhs rupees was utilized to repair my house at Thaliparamba. I have not paid any capital gains on the above amount. I have acquired the tenancy right in 1969 by giving 3 months advance rent of Rs. 390, No brokerage was paid during the transfer of tenancy right.

The assessee has not paid any capital gains tax on the transaction. In the return filed by the appellant, he claimed the entire capital gains as exempt u/s 54EC as he had invested the long-term capital gains in Nabard Capital Gains Bonds on May 8, 2005 (within six months from the date of transfer). The Assessing Officer noticed that the appellant had reduced from the sale consideration an indexed cost of Rs. 16,80,000 on a market value of Rs. 3,50,000 as on April 1, 1981. The Assessing Officer noticed that the cost of tenancy right being self-generated, it has to be taken at nil as per the provisions of section 55 of the Act. The appellant offered the following explanation:

In my case, the tenancy right is not a self-generated asset. I have paid Rs. 20,000 for the flat in 1961. In Bombay, the practice of paying ''pugree (on money) is widely prevalent and in fact one will not get a premises on rent unless the pugree is paid. The pugree practice is not a recent development and it was well there in 1961. Hence, I have taken the market value of tenancy right, at Rs. 3,50,000 as on April 1, 1981 and have deposited Rs. 4,00,000 to cover the resulting capital gains tax on the transfer of tenancy right.

The Assessing Officer did not choose to accept the explanation, it is noted that the appellant did not produce any proof of payment; of pugree for Rs. 20,000 and, accordingly, proceeded to assess the appellant.

In appeal, in respect of both the complaints, that is, regarding non-exigibility to tax in respect of Rs. 5 lakhs being account maintained in the joint names of the appellant and his wife, daughter and son-in-law, and the issue regarding capital gains were rejected. The view of the Assessing Officer was approved. The following is the finding of the first appellate authority:

I have carefully considered the relevant facts and the provisions of law with regard to the issue involved. I find that the amount was received by the appellant on account of surrender of tenancy right. This fact is duly admitted by the appellant. The cost of acquisition in respect of receipt of surrender of tenancy right is to be taken as nil as is duly provided in section 55(2)(a)(ii). I thus find that the action of the Assessing Officer was strictly in accordance with the relevant provisions of law. The claim of the appellant that he incurred a cost of Rs. 20,000 as pugree for taking the flat in 1961 was, therefore, not relevant in the matter. Further to the above, this claim of the appellant is contradicted by himself when he claims in the same written submissions that Rs. 20,000 was spent for repairing the flat which in any case was a recurring expenditure and does not constitute cost of acquisition. Notwithstanding the same it is further seen that there is no supporting evidence for the claim of the appellant that he paid Rs. 20,000 in 1961 to acquire the tenancy right. There is no acknowledgment of the recipient on record. The corresponding source of funds have also not been explained by the appellant. From the submissions of the appellant itself it is apparent that the appellant paid to the owner only a refundable deposit of Rs. 335 and took the house on rent at Rs. 112 per month. The letter of Smt. Sunitha Yewle, daughter of the owner of the house, is of no relevance in the matter because she does not confirm the receipt of amount. She was also not the recipient of the amount. Further to the above, the letter being a new evidence, was also not admissible at this stage as per rule 46A of the income tax Rules. In view of the above and the provisions of law as referred to above, I hold that the Assessing Officer was justified in making the addition. The additions of Rs. 16 lakhs made by the Assessing Officer as capital gains is accordingly confirmed. This ground of appeal is, therefore, rejected.

The Tribunal has confirmed the findings.

We heard learned senior counsel, Sri T.M. Sreedharan, and learned standing counsel for the Department.

Learned counsel for the appellant would contend that as far as the tax effect for an amount of Rs. 5 lakhs on the basis of the statement given by the appellant at the time of search was concerned, the Tribunal should have noted that a clear case has been built up on the basis that the daughter of the appellant being employed in a bank, it is submitted that an opportunity should have been granted by issuing notice to the daughter and her version should have been obtained. Not having done so, the finding is insupportable.

As far as tax on long-term capital gains is concerned, it is contended that the Tribunal has proceeded in a very technical manner and not keeping in mind the ground realities. It is submitted that in Mumbai, for a long time, the practice of paying pugree has prevailed. In this regard, support is sought to be drawn from the order passed in I.T.A. No. 167 of 2006, a copy of which is produced as annexure I. Therein our attention is drawn to paragraph 10, wherein, the Tribunal noticed that one should see the realities of life. That was a case where the assessee had acquired tenancy right in 1960. The tenancy right was transferred to one ISKCON after 28 years in 1998. Still further he would submit that other documents include the rent deposit receipt dated September 1, 1961. Of course, the case is built up on the following letter dated November 1, 2004, allegedly sent by the granddaughter of the landlord, it reads as follows:

Our tenant, Mr. P.K. Nair, who was residing in Saraswatisadan, Flat No. 13 at the time the flat was given to him on rent in 1961 had made certain payments to my grandmother, Gangubhai Yewle, owner (who is no more) to have the flat vacated by the previous tenant and to carry out certain essential repairs to have the place habitable.

On consideration of the materials and also keeping in view the ground realities, the Tribunal ought to have granted relief to the appellant, he contends. He would submit that this court may remand the matter back to the Tribunal.

Per contra, learned counsel for the Revenue would submit that interference in an appeal u/s 260A is permissible only if substantial question of law is made out. He would submit that the Tribunal has entered findings on fact which are not vulnerable to interference in appeal. They are not perverse, it is submitted.

We are of the view that there is no merit in the appeal. As far as the question arising apparently from an amount of Rs. 8 lakhs in bank deposits being brought to tax or rather an amount of Rs. 5 lakhs being brought to tax, we have already taken note of the statement given by the appellant at the time of search. The attempt which was made by the appellant, which he continues to do before this court is to make out that his daughter was employed and, therefore, the amount should be treated as her income. We must notice that the appellant, at the time of search had given a statement and he has no case that he had retracted from the statement on the basis that the statement was procured by means of any unlawful means. He had freely given the statement. The authority has acted on the same. Circumstances also appear to indicate that the findings of the Tribunal affirming the orders of the authorities are probable in this regard. He has given a statement that he has received the amount which are found in the slips. It shows that the amounts have been deposited in three bank deposits which he received from the previous employers, all in cash which were not subjected to any tax at all. In such circumstances, we do not think that appellant has been successful in persuading us to hold that there is any substantial question of law made out.

As far as the question relating to payment of Rs. 20,000 as pugree and consequently the need for calculating the cost of acquisition and thereby reducing the incidence of capital gains is concerned, we would think again it is essentially a finding of fact. The appellant, as already noted had given a statement. In this statement he has no case at all that he has paid pugree of Rs. 20,000. Instead he set up a case that for getting the tenancy in 1969 he had to pay three months advance rent of Rs. 390. It is specifically stated that no brokerage was paid during the transfer of tenancy right. As noted by the first appellate authority, there is no supporting evidence in this regard. The letter from the grand-daughter is of no relevance as she does not confirm the receipt of the amount. In fact, we notice that no particular amount is mentioned as having been received even though a sum of Rs. 20,000 is claimed by the appellant. We further notice that the corresponding source of fund for paying Rs. 20,000 in the year 1961 is not explained by the appellant. They are all findings of fact. The said decision has been confirmed by the Tribunal. Section 55 mandates that valuation to be taken as "nil" in the case of self-acquired asset which includes the amount paid on termination of tenancy. It is precisely that the authorities have done. The Tribunal further notes that the appellant has contradicted himself when he states that an amount of Rs. 20,000 has been given to the owner for repairs of the flat, so that the same did not admittedly constitute the cost of acquisition either of the flat or any right there of. The Tribunal also notes that when for Rs. 335 he maintains receipts, it is incomprehensible that he would qua an amount 60 times higher not keep receipts. It is further noted that there is no question of the appellant paying such a heavy amount approximating the cost of the flat itself as inferred from the fact of the same being 180 times (approximately) the monthly rental, without proper documents issued. In this connection, we may notice that a perusal of the order passed by the Tribunal, which is relied on that is I.T.A. No. 167 of 2006 reveals that it is not a case where a statement was given, as given by the appellant in this case. That was a case where the appellant, right from the beginning set up a case that he had paid Rs. 15,000. There was a certificate issued by the ISKCON. In the said case, the Tribunal took note of the practice (we are told by the learned senior counsel for the appellant that apparently the officer derived knowledge of such a practice on the basis of his stint as a member at Mumbai). At any rate, we do not think we should permit the appellant to draw support from the order as the facts are clearly distinguishable. In such circumstances, we feel that the appellant has not made out any case at all. The questions are answered against the appellant. The appeal is dismissed.