AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (11) TMI 719
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....f the Income-tax Act, 1961 ('the Act') erred on the following grounds: 1. In upholding that initiation of reassessments proceedings under section 147 of the Act on the basis that income chargeable to tax had escaped assessment is valid and proper in law. 2. In upholding that the amount payable by the Appellant to M/S Metals Ltd ('OM') and Wellwisher Construction and Finance Pvt Ltd ('WW') amounting to Rs. 100.80 crores reflected in its books of accounts under the head 'Inventories', is a non-business expenditure. 3. In upholding the disallowance of interest expense attributable to the monies borrowed for financing the payments to OM and WW and reducing such interest from the value of 'Inventories'." 3. The facts in brief are that the assessee is a company incorporated with the objectives of undertaking construction and development of residential and commercial projects. The assessee is presently developing an IT SEZ at Airoli, Navi Mumbai. The assessee filed the return of income on 23.11.2006 declaring a total income of Rs. 2,95,820/-.The assessment was framed u/s 143(3) of the Act vide order dated 22.12.2008 by ....
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....hat the assessee company has "Increase in Stock" in its Profit & Loss Account at Rs. 152,79,93,507j- and has carried forward the same as "Inventories" in its Balance Sheet. During the course of assessment proceeding vide letter dated 31.05.2010, the assessee company has given details of S.Creditors showing "Payable to Om Metals" at Rs. 46,87,50,000/- and "Payable to Wellwisher Construction & Finance Pvt. Ltd." at Rs. 46,87,50,000/-. Subsequently, certain information was called for from the assessee company vide letter dated 19.05.2010, in reply to which, the assessee company vide letter dated 18.10.2008 the assessee submitted the ledger account of Om Metals and Wellwisher Construction and Finance Pvt Ltd which is reproduced as under : Well Wisher Construction & Finance Pvt Ltd Ledger Account 01.04.2005 to 31.03.2006 Debit Credit 19-09-2005 To Vijaya Bank Payment 3,00,00,000 12-12-2005 To SCB Payment 40,00,000 02-01-2006 To SCB Payment 12,50,000 31-03-2006 To payable to Well Wisher Construction and Finance Ltd Journal &nbs....
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....C vide letter dated 14.11.2005 has offered 50 acres of land. v. An unregistered agreement was entered between B. Raheja Builders Pvt. Ltd. Wellwisher Construction & Finance Pvt. Ltd., and OM. on OB.12.2005 which mentions relinquishment of rights of Wellwisher Construction & Finance Pvt. Ltd., and OM. in this Airoli plot in favour of B. Raheja Builders Pvt. Ltd upon certain terms and conditions. vi. The entire payment of Rs. 50,5B,62,500/- to MIDC for lease of this plot of land has been made by B. Raheja builders Pvt. Ltd. In light of the above discussed facts, it clearly emerges that only B. Raheja Builders Pvt Lid is the only entity interested in developing the IT Park at Airoli. The other two entities viz. Wellwisher Construction & Finance Pvt. Ltd., and Om Metals. Ltd., did not contributed for the above transaction and the entire arrangement made appears sham in light of the following facts: i. A payment of Rs. 3,00,00,000 has been made to Wellwisher Construction & Finance Pvt. Ltd. on 19.08.2005 just after entering into the Joint Venture agreement, much earlier to allotment of land at Airoli by MIDC. ii. The assessee company did not ....
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....ssee filed objections to the re-opening of assessment which were also dismissed. 4.2. The ld PCIT upheld the re-opening of assessment after considering and rejecting the submissions of the assessee as has been incorporated in para no 8 of the appellate order by observing and holding as under:- 8. I have considered the facts of the case, submissions made by the learned AR in this regard. As stated above, the assessee company entered into a joint venture agreement with OM and Wellwisheer Construction and Finance Pvt Ltd on 16.8.2005, allegedly for developing an IT Park at Navi Mumbai. They accordingly applied to MIDC for allotment of a plot of land on 18/8/2005. However, the very next day, on 19/8/2005, this agreement fell apart and the assessee company, OM. and Wellwisher Construction & Finance Pvt. Ltd. decided to part ways and the assessee company proposed to go ahead with the project independently. On the same date, i.e. on 19/8/2005, the assessee also paid an upfront amount of Rs. 3 Crores to Wellwisher Construction & Finance Pvt. Ltd., in lieu of their parting ways. It is important to mention over here that by 19/8/2005, even a plot of land was not allotted to the a....
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....r :- Particulars Amount (in Rs.) Deferred Tax Assets 1,19,87 Current Assets, Loans & Advances Inventories Cash & Bank Balance Loans and Advances 1,52,79,93,507 5,54,822 96,95,011 Less: Current Liabilities (93 79,60,521) Net Current Assets 60,02,82,81 From the above, it is clear that the assessee company did not follow appropriate accounting standards (AS-2) while mentioning various facts in its Balance Sheet, and if the methodology adopted by the assessee was at variance, then it should have mentioned those facts in the notes to the accounts. Though the assessee has claimed that its duty was only to disclose primary facts alone and other facts have to be unearthed by the AO from the accounts enclosed by the assessee with the return. However from the basic accounts enclosed by the assessee, the facts relating to payment of Rs. 100.80 Crores to OM. and Wellwisher Construction & Finance Pvt. Ltd. are just not clear and the AO, by a cursory look at the Balance Sheet, could not have made out whether any payment has been made to such parties. Since the figure of closing work-in-progress is being carried forward from A.Y. 2006-07 to A.Y. 2007-08, the....
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....ssessment year is not valid unless the escapement of income has taken place because of non disclosure of materials facts by the assessee in the assessment proceedings concluded u/s 143(3) of the Act. The ld AR submitted that the assessment in the case of the assessee was completed on 22.12. 2008 which was re-opened on the basis of assessment order of M/S OM dated 30.12.2010 which was passed approximately two years after the assessment in the case of the assessee. The assessment order of M/S Om Metal Ltd was not available with the assessee nor with the AO during original assessment and it was not possible to disclose something which was not in the knowledge of the assessee. The ld AR submitted that a fact which came into being after the assessment can not be a materials fact that ought to have been disclosed by the assessee and he cited a series of decisions in support namely (i) P.R. Mukerjee Vs CIT 30 ITR 555 Cal, (ii) RAi Singh Dev Singh Bist and Others Vs UOI and Others77 ITR 802 Delhi, (iii) ITO Vs Calcutta Chromotype Pvt Ltd 97 ITR 55 (Cal), (iv) CIT Vs Akbarali Jummabhai 198 ITR 69 Guj, (v) CIT Vs Satya Narayan Lohia 204 ITR 894(Cal). The ld AR contended that the assessment c....
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....d any satisfaction in granting permission for re-opening a concluded assessment in terms of provisions of section 151(1) of the Act. The satisfaction should not be mechanical but should be recorded after due application of mind. The ld AR submitted that the AO recorded the reasons on 22.5.2012 as filed at page no 115 & 116 of paper book. On 23.5.2012 the AO forwarded the same to the Addl. CIT who sanctioned the same on 25.5.2012 and forwarded the same to CIT(Central) Mumbai on the same day i.e 25.5.2012 who on the same day accorded approval in a mechanical manner by noting " I have gone through the reason and agree with the reasons given by the AO.I consider it a fit case for invoking proceedings u/s 147." The ld CIT granted approval within 24 hours by just mentioning his satisfaction in one line. The ld AR submitted that due diligence is a pre-requisite for re-opening and mechanical approval is not valid. The ld AR relied on a number of decisions in support of his arguments namely (i) Arjun Singh and Other VS Assistant Director of Income Tax (Investigation) & others 246 ITR 363(MP), (ii)CIT Vs S. Goyanka Lime & Chemical Ltd 56Taxman.com390(MP), (iii) CIT Vs S. Goyanka Lime & Chemi....
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....2010 but the assessee supplied details only in respect of payments to the two companies who surrendered their interest in the land. The ld DR while taking us through the relevant pages of the paper book submitted that when the interest in the land was surrendered vide deed of assignment dated 6.8.2007 relevant to AY 2008-09 how the assessee could foresee and created provisions as on 31.3.2006 relevant to AY 2006-07. Thus assessee has not furnished any basis for doing so. The said assignment deed did not refer to any agreement or understanding which preceded the deed of assignment. The ld DR also pointed out that initially the amount payable to these two JV partners were Rs. 50.40 Cr each but in the assignment deed only Rs. 43.52 Cr was stated. According to the ld DR there was no clarity as to the settlement of payment to the JV partners. All these proves beyond doubt that the assessee did not want to divulge the details to the tax authorities. On the recording of reasons, the ld DR submitted that before re-opening the case the reasons were recorded after eliciting information from the assessee and also with reference to the copy of assessment order of OM with annexures which formed....
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....sment proceedings qua the inventories and sundry creditors which were supplied to the AO. It is only thereafter the AO after being satisfied accepted the said transaction and the assessment was framed accordingly u/s 143(3) of the Act vide order dated 22.12.2008. The AO raised a specific query to the assessee qua the inventories and sundry creditors which the assessee complied with by filing the details of inventories and sundry creditors, however the copies of the agreements with M/S OM and WW were not filed before the AO and as a result the AO could not examine the transaction among the trio. Looking the facts in totality, we are of the view that there was failure on the part of assessee to disclose fully and truly all material facts for completion of assessment during the assessment proceedings. The case laws relied upon by the assessee are not applicable to the facts of the case as the necessary agreements qua joint venture, relinquishing the interest in the said land were not furnished before the AO in the course of assessment proceedings and there is a failure on the part of the assessee to disclose the material facts during the course of assessment and hence in our opinion t....
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....he said amount of Rs. 100.80 Cr from inventories ( land) and completed the assessment. 5.2. The ld PCIT also dismissed the ground raised by the assessee after taking into consideration the contentions and submissions of the assessee as has been incorporated in para 13 of the appellate order by observing and holding as under:- "14. I have considered the facts of the case, submissions and contentions of the appellant, as also the order of the AO. It is gathered that the assessee paid a sum of Rs. 1 OO.8O crores to OM. and Wellwisher Construction & Finance Pvt. Ltd., who happened to be joint venture partners for acquisition of land from M/DC at Navi Mumbai, but later the joint venture was terminated. The AO, while completing the assessment, observed that it was wholly unnecessary and superfluous on the part of the assessee to pay a sum of Rs. 100. 80 crores to the alleged joint venture partners, viz. OM. and Wellwisher Construction & Finance Pvt. Ltd., and that such parties remained in existence, as far as the joint venture is concerned, for a period of only three days and walked away with a whopping sum of Rs. 100.80 crores, without any contribution to the capital or taki....
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....of Rs. 25.29 crores was paid by, the assessee company. 10/12/2005 Rs. 40 lacs each was paid to Wellwisher & Om Metals 02/01/2006 Rs.3.12 crores was paid to Om Metals 02/01/2006 Rs.12.50 lacs was paid to Wellwisher. 24/02/2006 MIDC allotted land vide letter dated 24/2/2006 25/03/2006 All the three companies made a request to MIDC to execute the lease deed in favour of the assessee company 31/03/2006 The assessee company made provision in the books of accounts towards balance compensation payable of Rs. 46.87 crores to each of the companies and the same was added to capital WIP towards cost of plot by the assessee company 03/08/2007 Lease Deed was executed by all three companies with MIDC 06/08/2007 Well Wisher and Om Metals signed Deed of Assignment assigning their rights in plot in favour of the assessee 21/08/2007 A request was made to MIDC for granting permission for assignment of rights in favour of the assessee company, which was followed by another request letter dated 21.8.2007 29.10.2007 MIDC finally granted permission for assignment of rights in plot of land in favour of the assessee company, on payment of permissi....
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....ied to claim in their accounts as capital receipt, so that they' were not required to pay any tax on this amount, and, at the same time; the assessee chose to claim this amount as part of project work-in-progress/ cost of the project, which amounts to revenue expenditure. Therefore, on one hand, the assessee was trying to claim this amount as revenue expenditure and on the other hand, the recipients were trying to claim this amount as capital receipt. Further it is relevant to mention over here that even before any land was allotted to the - so-called joint venture or permanently to the assessee company, a sum of Rs. 3 crores had been paid to Wellwisher Construction & Finance Put. Ltd. one of the companies of the joint venture, without any basis or justification. It is also interesting to note that the other two companies have not brought in any capital or expertise to the project and even the entire amount for the plot, payable to MIDC, had been paid by the assessee company, but still they were paid a whopping amount of Rs. 1 00.80 crores. Further, as stated above, one of the partners of the joint venture was paid a sum of Rs. 3 crores just after two days of formation: of the ....
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.... need for detailing the joint venture terms did not arise. These clauses of the joint venture agreement and the admission of the learned AR that no agreement in this regard was executed on account of termination. of the joint venture agreement make it amply clear that no contribution had been made by these companies towards the project, as no contribution would have been made by them in the absence of any agreement in that regard. 17. The learned AR has also contended that the credentials and, credibility that these companies brought to the venture was significant for ensuring that the land is allotted to the joint venture by MlDC. If the payment in question had been made on account of the goodwill that these companies are claimed to have brought to the venture, such fact would have been clearly mentioned in the joint venture agreement and the agreements relinquishing their rights. Surprisingly, the agreements dated 10/12/2005 do not mention any reason for termination of the joint venture and as to how the compensation is computed. In any case, it has not been explained as to how the compensation for the so called goodwill could be valued at an amount more than two times o....
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....sputes and disagreements arose in two days after forming the joint venture. The agreements for termination of the joint venture also do not say anything to this effect. On the contrary, as per these agreements, the assessee company had requested the two companies to release and assign their rights in the land in favour of the assessee company and the companies had agreed to do the same for a consideration. Thus, the agreements for termination of joint venture do not mention any reason for termination. Even before the AO during assessment proceedings or before me, the appellant has not explained the exact reasons for termination of the joint venture. 20. The learned AR also contended before me that the assessee had incurred various expenses in connection with the transaction and that such expenses would not have been incurred if the transaction was a sham transaction. However, I do not agree with such contention of the learned AR. Merely because certain expenses are incurred by the assessee in connection *.with a transaction, such transaction cannot be held to be a genuine one. The assessee may deliberately incur certain expenses to show that a non-genuine transaction is a ....
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....aluation report, the fair market value of the plot of land in question as on 28/2/2007 was Rs. 125, 72,94,500/-, and not as on 19/8/2005, when the joint venture partners decided to part ways, or 15/9/2005, when the allotment of land was made. So, firstly, the figure of Rs. 125.72 crores as on 28/2/2007 may not be relevant for computation of compensation as on 19/8/2005. Secondly, even considering this market value of the land, payment of Rs. 100.80 Crores (which is much more than 2/3rd of the market value of the land as on 28/2/2007) to the above parties cannot be treated as justified, in view of the fact that the said two companies had not contributed any capital or technical expertise towards the project and that they had merely lent their names as co-applicants for allotment of the land. Moreover, the decision to terminate the so-called joint venture agreement was taken by the parties and the assessee company had also started making payments to OM. and Wellwisher Construction & Finance Put. Ltd., in this regard, on 19/8/2005 itself. Therefore, it is not understood as to how the market value as on 28/2/2007 could be considered as the basis for making the payment of Rs. 100.80 Cro....
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.... Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skilful, advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, "Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization." But, surely, it is high time for tho judiciary in India too to part its ways from the principle of Westminister and the alluring logic of tax avoidance. We now live In a welfare state whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as beh....
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....re of Rs.l,03,26,288j - and consequent reduction of the said amount from the closing work-in-progress as on 31.3.2007, is upheld and the ground taken by the assessee is rejected" 5.3. The ld AR submitted that the order of first appellate authority was incorrect and contrary to the facts on records particularly when both the joint venture partners receiving the payment of Rs. 100.80 Cr in equal proportion in lieu of surrender of interest in 50 acres of land in question were duly assessed by the revenue authorities without doubting or treating the transaction as sham in their hands. The ld AR submitted that both companies M/S OM and WW were involved right from the JV agreement dated 16.08.2005 till final sanction by MIDC of assignment of interest in the land in favour of the assessee by these two companies. Therefore the conclusion of the AO that the two companies did not have any role in the acquisition of land and they were just name lenders is wrong and devoid of any basis. The ld AR submitted that the transaction as entered into between the joint venture partners was not a sham as the Sham transaction involves concealing true nature and reality of transactions and is a subterf....
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....accepted by the OM and OM paid taxes thereon with some dispute as to claim of expenses was allowed by PCIT and revenue's appeal before ITAT was also dismissed. In other words the assessments of OM and WW were made and travelled upto ITAT and in both the cases the amount paid to these parties were assessed to tax. The ld AR contended that when the multiple tax authorities have examined the transactions and accepted the same, then the same transaction cannot become non genuine in the hands of assessee. On the reasonability of payment of 100.80 Cr, the ld AR argued that the AO has stepped into the shoes of businessman to decide whether a particular payment if reasonable or not and submitted that it is not the job of the AO to check the commercial expediency of a transaction by relying on the following decisions namely (i) The Newton Studio Ltd Vs CIT 28 ITR 378 (Mad), (ii) Raman and Raman Ltd Vs CIT 46 ITR 400(Mad), (iii) CIT Vs Walchand & Co Pvt Ltd 65 ITR381 SC, (iv) JK Woollen Manufacture Vs CIT 72 ITR 612 SC, (v) CIT Vs Dhanrajgiri Raja Narasingirji 91 ITR 544 SC, (vi) Sasoon J.David and Co Pvt Ltd Vs CIT 118 ITR 261 SC, (vii) CIT Vs National Rayon Commercial Co Ltd 193 ITR 744 Bo....
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....hough the application was made jointly by WW and assessee Page no.511 is a letter dt.16.08.2005 by Shri Vijay Raheja, Director of assessee B.R to Shri Chandrakant M.Bhansali, Director of WW in reference to his meeting dt.15.08.2005 for sending Rs. 6000/- in advance in cash for the purpose of making application jointly in the name of assessee and WW This application dt.18.08.2005 is after the unregistered JV dt. 16.8.2005 but does not bear the name of OM explain the nature of such transaction and paperwork. The only resolution of the board was submitted by OM dt.15.11.2005 despite the fact that all the three corporate entities were bound by such resolution not only for joint venture but also for subsequent settlement about payment and relinquishment of right but none of them has given any such resolution. It can be concluded that not only the impugned transaction is based on make belief papers but also gave birth to several irregularities under the Companies Act also. These transactions are therefore, sham transaction. 5.6. The AO vide letter dt.25.02.2013 called for various details u/s. 131 of the Act from MIDC. Such details were supplied by MIDC vide letter dt.7.05.2013.The AO ....
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....or. The offer letter was for 50 acre of land @ Rs. 2500 per sq.mt. The assessee vide letter 23.09.2005 submitted the compliance report for offer letter dt. 15.09.2005. A MOU of JV of all the three parties and a copy of Board Resolution for purchase of land were filed. It was requested that a demand note may kindly be issued for an amount as offer was accepted. The joint venture agreement as submitted by the assessee alongwith WW and OM to MIDC is available at pg.187 to 200. This is "A joint venture and share subscription agreement dt.10.12.2005". The assessee has (when asked by the AO before reopening) not submitted this agreement. OM in their assessment for A.Y 2008-09 submitted a copy of JV agreement dt.16.8.2005 at point 3 (PB pg.189) mentioned about the JV agreement dt.16.8.2005. At point 4 it is mentioned that "The Raheja Group are the promoters and pvt. Ltd. ("JVC or Company). The parties have now agreed that M/s. WW and M/s.OM shall each subscribe for and acquire 125 equity shares of Rs. 100 / - each in JVC so that WW, OM and Raheja Group shall hold the paid up equity share capital of JVC in the ratio 10: 10:80 with the intention of making assessee a joint venture company an....
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....d viz.(a) The expenditure in question is not of the nature described u/s 30 to 36,(b) The expenditure is not of the nature of capital expenditure,(c) It is not a personal expenditure and (d) The expenditure has been laid out or expanded wholly or exclusively for the purpose of business or profession. All conditions simultaneously should be satisfied. To support these contentions following legal authorities were relied on by the ld DR : a. Laxminarayan Madan Lal V/s. CIT - (1972) 86 ITR 0439 b. Killick Nixon Ltd. V /s. DCIT - (2012) 81 CCH 0066 Mum HC c. Vodafone International Holdings B.V V/s.Union of India & Anr. Bombay High Court Writ Petition No. 1325 of 2010 dt. 8.9.10 d. Swadeshi Cotton Mills Co. Ltd. V/s CIT- (1967) 63 ITR 0057 e. CIT V Is. Navsari Cotton & Silk Mills - (1982) ITR 0546 Finally the ld DR prayed that in view of facts and legal submissions cited by him the transaction was just a make belief arrangement and was a sham transaction not entered into for the business of the assessee wholly and exclusively and therefore was rightly rejected by the lower authorities. 5.7. In the rebuttal, the ld AR submitted that the f....
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.....05.2012 after four years from the end of the relevant assessment year. In the first para of the reasons recorded by the AO, he admitted that the assessee vide letter dated 18.10.2008 supplied the details of sundry creditors. Thereafter, the AO while framing order u/s 143(3) r.w.s. 148 of the Act reduced the inventories of the assessee by Rs. 100.80 Cr on the ground that the transaction was a sham and non genuine despite the fact the same transaction was treated as genuine in the hands of OM and WW the two JV partners to whom the assessee paid Rs. 50.40 Cr each for acquiring the interest in the land. In the case of OM, the receipt from the assessee was treated as capital receipt but the same was treated as revenue receipts by the AO in the assessment framed u/s 143(3) of the Act which was accepted by OM and paid due taxes thereon. In the case of the WW the money received from the assessee was treated as capital receipt and MAT was paid thereon. The AO accepted the same in the assessment framed u/s 143(3) of the Act however the CIT invoked revisionary jurisdiction u/s 263 of the Act which stood quashed by the ITAT. In other words the amounts paid by the assessee to OM and WW were ta....