TaxTMI 
TaxTMI 
2014 (6) TMI 932
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.... action u/s.132 of the Income Tax Act was conducted in case of the assessee and others on 22-08-2008. In response to notice u/s.153A the assessee filed his return of income on 30-03-2009 disclosing total income of Rs. 12,10,26,580/-. During the course of assessment proceedings the AO noted that the assessee has paid brokerage to M/s. Regenesis Project Management Company Pvt. Ltd. (Regenesis PMCPL) which is a related party of the assessee. This brokerage has been paid by the assessee to the above party for the sale of Jambhe land. The land has been sold to M/s.Kolte Patil Developers Ltd. (KPDL in short) which is the flagship concern of the group. The AO, therefore, asked the assessee to explain as to why the brokerage paid to M/s. Regenesis PMCPL amounting to Rs. 25,96,400/- for the impugned assessment year (Rs.5,17,549/- for A.Y. 2007-08 and Rs. 4,20,455/- for A.Y. 2008-09) should not be disallowed. 3.1 It was explained by the assessee that KPDL wanted to undertake a massive project on the lands owned by the Directors and their relatives at Hinjewadi. Since KPDL did not have necessary experience and contacts, it decided to set up the subsidiary, namely Regenesis PMCPL to underta....
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.... held that the strategy/ modus operandi which was adopted by the assessee and other individuals of KPDL group was devised to reduce the tax liability through what was apparently a colourable device/arrangement. He held that the assessee had not only worked out lesser short term capital gains by claiming the brokerage expenses but also the entire transaction had been so arranged so as to result in negligible or Nil income/losses in the hands of the related concern namely Regenesis PMCPL. He, therefore, proceeded to disallow brokerage amounts claimed to have been paid from the computation of short term capital gains in the hands of the assessee. 5. Before the CIT(A) it was submitted that the AO was not justified in disallowing the brokerage paid by the assessee on the ground that the same has been paid to avoid tax. It was submitted that the brokerage has been paid as per MOU dated 03-10-2005 between the assessee and Regenesis PMCPL which specifies the reasons for payment of brokerage and the duties and services to be provided by Regenesis PMCPL. The observation of the AO that the land in question have been sold to KPDL was challenged. It was submitted that the lands have not been....
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....nt of brokerage by the appellant to reduce tax liability is not justified in law 2. The appellant has given detailed submission during the course of assessment proceedings before the A.O. copy of which is enclosed (refer page no. 1 to 9). 3. It is submitted before Your Honour that while disallowing the brokerage paid by the appellant, the learned A.O. has stated that the Regenesis PMCPL is a subsidiary of the KPDL and Rajesh Patil & Milind Kolte are the Directors of the company with 50% each beneficial ownership/ of the equity shares is factually incorrect, it is submitted before Your Honour that Regenesis PMCPL is a subsidiary of KPDL but Rajesh Patil & Milind Kolte are not having 50% each beneficial ownership of the company. In support of this the share holding pattern of the Regenesis is enclosed (refer page no. 10s). 4. The learned A. O. has not appreciated the facts of the case properly and therefore, we bring the correct facts relating to the transaction, the reason of payment of brokerage by the appellant to Regenesis PMCPL as under. a) The appellant and the family members acquired some lands in Jambhe, Pune. Kolte Patil Group had also acq....
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....e assessee necessitating the payment of brokerage are that the assessee and family members had acquired some lands in Jambhe, Pune along with KPDL during A.Ys. 2006-07to 2009-10 (and between 2006-07 and 2007-08 in the case of Smt. Ankita Rajesh Patil) . It was realized that this land would fetch higher profits if a township is constructed thereon, rather than development in bits and pieces. Since KPDL did not have the financial strength to develop such a large project of 300 to 400 acres, it was interested in finding a partner to invest funds and develop the project along with KPDL. Since the Kolte Patil Group did not have necessary experience and contacts, a subsidiary called Regenesis PMCPL was formed and assigned to the task of finding a suitable JV partner. Through professional expertise available to Regenesis PMCPL, the assessee was able to successfully negotiate with ICICI Ventures and get a good price for the impugned lands to be transferred to the JV. This was possible only due to the marathon efforts of the Regenesis PMCPL. The services of Regenesis PMCPL was necessary and instrumental in successfully transferring the land of the assessee at a better price and therefore, t....
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....s that the sale deed has been executed for an amount of Rs. 60,59,74,700 which is at par with the market value as demonstrated in the Index II furnished before me. Therefore, it cannot be said from the sale deed that the sale price received by the appellant is a better price since the sale consideration is prima facie as per the market value. The market value is known to be an indicator of reasonable rate that the property would fetch in the market and not per se an indicator of the best rate that the appellant could have received, especially in the context that the agreement in question is not related to outright sale but is a development agreement. It has been argued that the brokerage is justified on account of the future profits that would accrue if the township were to be constructed rather than the land being developed in small pieces. This argument does not hold good in the appellant's case since in the hands of the appellant as an individual it is only the capital gains that attracts taxation and not profits that would accrue in future. The appellant individual and other individuals of the group namely Shri Naresh A. Patil, Shri Milind D. Kolte and Smt. Ankita R. Patil ....
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....is has assured KPDL that in the negotiations with the investors, they will keep in mind that the development will be made only in a Joint Venture of the investor and KPDL. 5.3. The terms of payment of commission/brokerage were also verified. The payment of commission as agreed by Clause (4) of the MOU would be paid by each of the entities at the rate of 1.5% for the first tranche of minimum 100 acres and for additional area @ 0.5% of the transaction value, subject to not simply the sale/transfer of land but the higher objective of securing a partner for joint investment and development of a township. Clause (4) reads as under: 4. KPDL, RAP (the appellant), MDK, NAP and ARP have agreed to pay individually for the first tranche of minimum 100 Acres @ 1.5% and subsequently for the additional area @ 0.5% of the transaction value of their respective lands to Regenesis as its fee in the event Regenesis is successful in securing investment by real estate funds etc. into Jambhe lands along with KPDL as developer. 5.4. The lands sold/ assigned by the appellant to the joint venture are at par with the market value of the lands and no higher or better price as has b....
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.... whichever is higher. Regenesis PMCPL would get 10% post distribution to the joint venturers and the surplus cash flow after distribution as per above would be distributed in the ratio of 35% : 35% : 30% between ICICI JV, Kolte Patil Group and Regenesis PMCPL. Thus, a reading of this agreement would further show the payment of brokerage and commission has not only reduced the liability in the hands of the appellant but also by making Regenesis PMCPL a partner in the Joint Venture, shared the profits ultimately earned on the joint venture with Regenesis PMCPL which is a group company of Kolte Patil Developers and a related concern to the appellant. The appellant has not benefited by the payment of brokerage in the profit sharing to be earned on the later date by the joint venture. 5.6. The Delhi High Court in the case of Smt Sita Nanda vs CIT reported in 251 ITR 575 has held that the expression "expenditure incurred wholly and exclusively in connection with such transfer" as used in Section 48(i) means expenditure incurred which is necessary to effect the transfer. Even if an expenditure has some nexus with the transfer, it does not qualify for such deduction unless it is i....
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....entitled to any of the residual profits to be earned by Regenesis PMCPL post-distribution of the regular profits nor the surplus cash flow distribution arising at the end of the joint venture. Benefit, if at all any, received by the appellant out of the payment of the brokerage is only remote and there is no direct nexus between the brokerage paid and the subsequent transfer of the land, which is anyways a fait accompli. 5.8. During the course of appellate proceedings, on 16.11.2012 and further on 27.11.2012 along with other details, the Ld. ARs were requested to produce evidences and correspondences and / or any other documentary evidences regarding the services rendered by Regenesis PMCPL in accordance with and for prosecution of the MOU dated 3.10,2005 between the appellants and Regenesis PMCPL. However, other than the list of Senior Executives employed by Regenesis PMCPL, their qualifications and the amount of salary/ professional fees paid during the financial years 2005-06 to 2008-09, no such evidences has been filed. The argument advanced by the AR is that since the key personnel have left the company for other assignments along with their laptops etc. it is not pos....
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....To summarize therefore, it is held that the Assessing Officer was correct in law as well as facts to deny the appellant the benefit of deduction of the brokerage payments u/s 48(i) as expenditure "wholly and exclusively incurred in connection with the transfer of the land" by the appellant in view of the following reasons : a) The brokerage payment to Regenesis is prima facie not linked to the transfer of land but to the identification of suitable investment partner to develop the lands into a special township. The transfer of lands is only incidental to the entire arrangement. b) The appellant has received the prevalent market price of the land and nothing more than the same, although he has entered into a development agreement and not simply a sale agreement. c) The real beneficiaries in the whole process are not only the appellants who want to claim the brokerage and reduce their capital gainstaxes but also Regenesis PMCPL who offered Nil to nominal incomes and also get entitled to a share of the residual profits of the joint venture, if any. d) The act of payment of brokerage to an interested party by the appellant who is the CEO of the broke....
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....e. c. The assessee was the CEO of M/s. Regenesis PMCPL and hence, the said brokerage expenditure paid to the above related party was only a colourable device to avoid taxes and therefore, the said expenditure was not allowable as a deduction u/s 48 of the Act. d. The assessee was not able to prove with the help of any documentary evidence that M/s. Regenesis PMCPL had actually rendered any services for the purpose of the finding the buyer for the land sold by the assessee and brokerage paid by the assessee could not be allowed as a deduction u/s 48 against the capital gains earned against sale of the said land. 3] The learned CIT(A) failed to appreciate that - a. The assessee had paid the said brokerage to M/s. Regenesis PMCPL towards the services rendered by it to find a buyer for the land of the assessee and hence, the same was incurred wholly and exclusively for the purposes of transfer of land and therefore, the same was allowable to the assessee as a deduction u/s 48 of the Act. b. M/s. Regenesis PMCPL had helped the assessee to sale the land at a substantially profits and hence, the amount of brokerage paid by the assessee in accor....
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.... agreed to explore potential investors, institutional investors, real estate funds etc. who may co-invest with KPDL to develop a big township project on the lands acquired by the various members of Kolte Patil Group and KPDL at village Jambhe, Marunji & Nere situated in Pune District. As per the said MOU, it was further agreed that the various members of the Kolte Patil Group would individually pay Regenesis a fee of 1.50% of the transaction value for the first tranche of 100 acres and a fee of 0.50% of the transaction value for the additional area sold over and above 100 acres in consideration of the services rendered by Regenesis for finding the potential investor. 10.1 He submitted that for the purpose of finding the potential investors, Regenesis employed various persons with high educational qualifications and vast experience in the field of Realty market. Referring to page 249 of the paper book, he drew the attention of the Bench to the details of the educational qualifications and past experience of the key employees of Regenesis and submitted that the various persons employed were highly qualified and specialized in the field of realty market. He submitted that some of t....
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....o the Third Party i.e. ICICI Venture had agreed to pay a part of the profits of the JV to Regenesis in consideration of the services rendered by the said company in bringing about the deal. He accordingly submitted that Regenesis was an independent entity which played a substantial role in materializing the deal between Kolte Patil Group and ICICI Venture and hence, the brokerage paid to the said company by the assessee was justified on facts of the case. He submitted that the fact that Regenesis was made a party to the shareholders agreement itself indicates that Regenesis was the main person who had brokered the deal. He submitted that during the course of assessment proceedings it was pointed out that only because Regenesis was instrumental in finalizing the deal, ICICI had allowed to make Regenesis a party to the said shareholders' agreement and also share some profits. If Regenesis had no role to play in the finalization of the deal, there was no reason to make it a party to the said agreement. This fact itself indicates that because of the efforts put in by Regenesis, ICICI Venture had agreed to be a partner to develop the land along with Kolte Patil. 10.4 As regards t....
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....r authorities were not justified in disallowing the same. He submitted that the various reasons stated by the learned CIT(A) for disallowing the said brokerage payment made to Regenesis are factually incorrect. Firstly, the brokerage paid to Regenesis was in relation to finding an investor to develop the assessee's land and hence, the said brokerage payment was certainly incurred in connection with the transfer of land and therefore, the same is allowable as a deduction while computing the capital gains on transfer of the land. He submitted that only if a good investor was found, he would have been able to sell the lands at substantial amounts and earn capital gain. Thus, finding of the investor had a direct nexus with the sale of lands and this fact is also evident since the sale consideration of the lands is mentioned in the shareholders agreement. 10.7 He submitted that Regenesis had earned substantial profits of Rs. 6,53,864/- in A.Y.2006 - 07 (page 39 of Paper Book), Rs. 11,63,183/- in A.Y.2007 - 08 (page 65) and Rs. 25,42,095/- in A.Y.2008 - 09 (Refer page 98 of Paper Book). Therefore, the learned CIT(A) is not justified in holding that Regenesis had declared Nil or no....
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....s the investor for developing the township project with KPDL. He submitted that the task of finding potential investors was a highly complicated job which involved meeting a large number of potential investors, preparing presentations etc., convincing the investors about the financial feasibility and future prospects of the project and the said task required specialists with vast experience in this field and therefore, it was not possible for the assessee or the other members of the Kolte Patil Group to individually undertake the above activities. He accordingly submitted that Regenesis, which undertook the above activities by employing various experts, was a distinct entity from the assessee and the other members of the Kolte Patil Group and hence, there was no reason to hold that the formation of the said company was merely a colourable device to avoid payment of taxes. 10.9 Referring to paper book page 255 he submitted that the assessee has also paid service tax @ 12.24% on the brokerage paid to Regenesis. If the activity of finding potential investors would have been conducted individually by the Kolte Patil Group members, then they would not have required to incur the addit....
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.... He submitted that the argument of the Ld. Counsel for the assessee that the quantum of commission is very low as compared to the huge amount of capital gain earned by the assessee is immaterial since the question here is the allowability of brokerage/commission u/s.48(i) of the I.T. Act. He submitted that the assessee has adopted this method only to reduce his tax liability and therefore it is a colourable device. Referring to para 5.9 of the order of the CIT(A) he drew the attention of the Bench to the findings by the Ld.CIT(A) where the Ld.CIT(A) has mentioned that the real beneficiaries in the whole process are not only the assessees who want to claim the brokerage and reduce their capital gain taxes but also Regenesis PMCPL who offered NIL to nominal income and also get entitled to share of the residual profit of the joint venture. He submitted that either KPDL or the assessees could have employed the persons appointed by Regenesis to find potential investors. Therefore, at the most, some proportionate expenses towards salary of those persons may be allowed. But even that is also not necessary. He accordingly submitted that the order of the CIT(A) be upheld. 12. The Ld. Cou....
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....rage payment to Regenesis is prima-facie not linked to the transfer of the land but to the identification of suitable investment partner in order to develop the lands into a special township. The transfer of land is not incidental to the entire arrangement. The assessee has not received anything more than the prevailing market price and the transaction is nothing but a colourable device. According to her, the real beneficiaries in the whole process are not only the assessee and the other members who sold the land and claimed brokerage but also Regenesis PMCPL who offered NIL to nominal income are also get entitled to a share of the residual profit of the joint venture. 13.2 It is the submission of the Ld. Counsel for the assessee that the transaction is not at all a coulourable device since the company Regenesis PMCPL has paid tax on its income which is not marginal but substantial, the assessee has paid service tax for the brokerage so paid. It is also the submission of the Ld. Counsel for the assessee that as per the MOU Regenesis had agreed to explore potential investors, institutional investors and real estate funds etc. who may co-invest with KPDL to develop a big township ....
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....akhs in A.Y. 2007-08 (paper book page 65) and Rs. 25.42 lakhs in A.Y. 2008-09 (paper book page 98). Apart from the above, the assessee has also paid service tax on the brokerage paid and such service tax is @ 12.24% (paper book page 255). Therefore, if the action of the assessee is to reduce the tax liability by paying brokerage to Regenesis PMCPL then such company would not have paid tax on the huge income declared nor the assessee would have paid service tax to the Government Account. Therefore, the allegation of the revenue that Regenesis PMCPL has offered NIL to nominal income and the assessee claimed the brokerage to reduce the capital gain tax also does not find much force. 13.5 We further find merit in the argument of the ld. Counsel for the assessee that when the total capital gain earned by the assessee is Rs. 26.13 crores for the A.Y. 2006-07 to A.Y. 2008-09 and he has duly paid taxes thereon and the capital gain earned by the individual members of the group is Rs. 148.95 crores there was no justification on the part of the assessee to claim such a meagre commission for sale of the land which is hardly 0.5% to 1.5% as against the prevailing market rate of about 2% and ....
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.... of the assessee. 16. In appeal, the Ld.CIT(A) confirmed the addition made by the Assessing Officer by observing as under : "17.2 I have considered the submissions made. It is seen that the appellant has only made some general observations about the affluence of the family and the accumulation of jewellery over a period of time by way of gifts and purchases. No attempt has been made to substantiate the claim of the appellant with reference to the record. I find that the Assessing Officer has already been quite generous in allowing the claim of ownership of gold jewellery in the hands of not only the appellant but also all members of his family such as wife, children and parents. The order of the Assessing Officer, in my view, deserves to be upheld since it is extremely reasonable and also in accordance with the Board's Instruction on this subject. Accordingly, Grounds No. 1 to 3 for A.Y. 2009- 10 are treated as dismissed. 18. Ground No.4 : Under this ground, the appellant has only sought to reserve the right to amend, alter or add to the grounds of appeal. Since no such rights have been exercised during appellate proceedings, as such, at this stage, the gro....