TaxTMI 
TaxTMI 
TaxTMI 
2020 (2) TMI 81
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....l shopping complex-cum-hotel complex at Jaipur. It filed its return of income on 15th October, 2010 declaring nil income. During the course of assessment proceedings, the AO noted that the assessee has constructed and transferred the hotel project at Jaipur named as "Hotel Fortune Select Metropolitan", Jaipur to one of their associated company M/s Multitude Infrastructure Pvt. Ltd., for Rs. 95 crores. Out of this sale consideration, the company has paid Rs. 57 crores (60% of Rs. 95 crores) to another associated company, M/s. MGF Development Ltd. as per the 'Collaboration Agreement' entered with it allegedly in the F.Y. 2004-05 relevant to A.Y. 2005-06 for providing & securing of fund requirements, bank guarantee and technical expertise in successful completion of the project. The AO noted that this fact has been mentioned only as a notes to the accounts by the Auditors as a qualification to the Audit Report, for the F.Y. 2009-10, which is reproduced as under: "NOTES FORMING PART OF THE ACCOUNTS 4. The Project undertaken at Jaipur consists of Commercial Mall and Integrated Hotel Project, Direct & Indirect expenditure incurred or Integrated hotel Project was being shown as capita....
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....deration. The AO issued summons to M/s MGF Development Ltd. requiring them to prove the genuineness of the collaboration agreement with the assessee by filing various details as per page 6 of the assessment order. In response to the said summons, it was submitted that the company has received an amount of Rs. 57 crores in pursuance of the collaboration agreement between MGF Development Ltd. and Vishnu Apartments Pvt. Ltd., being its share from Vishnu Apartments Pvt. Ltd., and the amounts received have been duly recognized by the company in its audited financial statements for the year ending 31st March, 2010. M/s MGF Development Ltd. also submitted the break-up of sale booked by MGF Development Ltd. in F.Y. 2009-10 showing total sale at Rs. 97,85,23,909/- which inter alia include the sale receipt of Metropolitan Hotel Jaipur at Rs. 57 crores. So far as the query relating to the details of work done and financial support provided to the assessee company by incurring direct cost or indirect cost incurred/contributed towards the cost of construction, no information or details were filed. 5. The AO issued notice to the assessee company asking them to specifically give complete detail....
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....lly be summarized as under i) Reliance upon agreement dated 06.09.2004 is an afterthought. This document never existed and surfaced for the first time during present assessment proceedings. Further, in spite of repeated request, the original Collaboration Agreement was never produced. ii) Summon u/s. 131 of the I.T. Act issued on 01.03.2013 to Sh. Sharvan Gupta, the Authorized Signatory of the alleged 'Collaboration Agreement', also remained partly uncomplied as he did not attended personally for personal deposition to ascertain the veracity of the 'Collaboration Agreement' but nor produced the agreement in original due to which the genuineness of 'Collaboration Agreement' remained unverifiable, hence cannot be relied upon. iii) Contents of agreement mentioned in Clause 1, as to the estimated cost of construction at Rs. 75-80 crores is contradictory to the project report submitted before ICICI Bank in the F.Y. 2005-06, estimating that the total cost of the project at Rs. 44.58 crores. iv) The associated company also holds 40% shares in the company, therefore, providing bank guarantee and non-charging of interest will indirectly increase the protability of the company and th....
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....rand image of MGF Development Ltd. in its project at Jaipur, the AO allowed an amount of Rs. 9,92,62,857/- out of the amount of Rs. 57 crores and made an addition of Rs. 47,07,37,143/- by observing as under:- "5.18 However, taking a holistic view under which M/s. MGF Development Ltd. has provided finance though not ascribed towards the cost of construction has had incurred some opportunity cost in terms of loss of interest income on the amount advanced to the assessee company. This opportunity cost lost by M/s. MGF Development Ltd. may be considered as the contribution made by M/s .MGF Development towards the cost of construction/development of Integrated Project at Jaipur. An effort has been made to compute the interest, which could have been earned by the assessee if the fund advanced to bank by taking the interest rate @ 12% from F.Y. 2004-05 to F.Y. 2007-08 on the net balance advanced on day-to-day basis. The computation shows that the average advance given by M/s. MGF Development Ltd. to the assessee company were in the range of Rs. 2-10 crores and the interest computed @12% on day-to-day basis advanced basis comes to Rs. 5,87,72,012/- for the period F.Y. 2004-05 to F.Y. 200....
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.... reply to each objection made by the AO was brought before the notice of the CIT(A). It was submitted that in the joint venture project in the urban cities in India, the share of land owner is usually 35% to 50% whereas the assessee, in the instant case, has share of only 42% of the gross project revenue. 9.1 Based on the arguments advanced by the assessee, the ld. CIT(A) deleted the addition by observing as under:- "4.3 I have considered the assessment order and the submissions made. Facts are that the appellant constructed a hotel-cum-mall known as Metropolitan Mall at Jaipur comprising of a mall section and a hotel section. The super structure for whole complex was completed during the year 2007- 08 and sale of mall space commenced. However, construction of the hotel portion continued till FY 2009- 10 wherein it was sold off. For the said project, the appellant entered into an agreement with M/s MGF Development Ltd. (MGFD), an associate concern, in a revenue sharing arrangement whereby MGFD was to contribute by way of capital (as equity and loans / advances), expertise & logistics, brand value, marketing, etc. The land was contributed by the appellant. The revenue from sa....
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....eement' dated 06.09.2004 is not valid. The agreement dated 06.09.2004, is a sham agreement in the nature of colorable devices executed with an intention of reducing the tax liability. Finding What is to be seen is commercial expediency and business exigency, both of which are present and not disputed as such. The agreement was a private agreement between related parties. The agreement could very well have been a verbal / internal agreement resolved by the two boards of directors. Fact remains that large part of funding, technical support, logistics and branding was done by MGFD for the appellant. Appellant was basically only the land- owner and practically the entire project was executed by MGFD. Thus, the existence or other-wise, or validity or otherwise, of the impugned written agreement will have no impact on commercial expediency of the transaction. Observation of Revenue (2) The associated company also holds 40% shares in the company, therefore, providing bank guarantee and non-charging of interest will indirectly increase the profitability of the company and the benefit will accrue to M/s MGF Development Ltd. also in the form of higher dividend. MGF Development Ltd., ....
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....essive expenditure separate disallowance has been made. Observation of Revenue (5) Contents of agreement mentioned in Clause 1, as to the estimated cost of construction at Rs. 75-80 crores is contradictory to the project report submitted before ICICI Bank in the F.Y. 2005-06, estimating that the total cost of the project at Rs. 44.58 crores. Finding The project took 6 years since inception in mid-2004 to completion in mid- 2010. Over such periods of time costs escalate due to inflation. Thus, different estimations at different points of time were quite natural. No adverse inference can be drawn based on such facts. Observation of Revenue (6) The quantum of sharing @ 60% of gross sales is inordinately high, which would result in transfer of the entire profit from the project to the assessee company. Finding It is incorrect to state that 60% of the revenue was shared by the appellant with MGFD. What was shared was 60% of the revenue generated from sale of hotel, and not the entire project. It is not disputed that the appellant was merely the landowner, and yet appellant received about 58% of the gross revenues in the project. MGFD, on the other hand, having provided....
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....4, the estimated cost of construction is mentioned as Rs. 75 to Rs. 80 crores. He submitted that it is incomprehensible as to how the estimated cost of construction can be higher by almost Rs. 30 crores in one year back in F.Y. 2004-05 as compared to estimated cost of construction submitted with ICICI Bank for F.Y. 2005-06. Further, it is also surprising that the final cost of construction was almost matching with the estimated cost of construction shown in the collaboration agreement dated 6th September, 2004. This, according to him, shows that the collaboration agreement was not signed on 6th September, 2004 and was actually signed later, most likely at the time of completion of the project. Referring to para 5.17 of the assessment order at page 22, the ld.CIT, DR submitted that Shri Sharvan Gupta, the authorized signatory of the collaboration agreement did not comply with the summons issued u/s 131 of the Act on 1st March, 2013 for personal deposition and verification of the collaboration agreement. Therefore, in absence of the verification of the genuineness of the socalled collaboration agreement, the claim of the assessee, which is solely based on the collaboration agreement....
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....pletion of the project which is for the financing, implementation, providing brand name and other technical assistance for completion of the project. He submitted that the agreement need not always be in writing and oral agreement is also sufficient for sharing the revenue. He submitted that when there is a commercial expediency in incurring the expenditure, the AO has no power to sit into the arm chair of the businessman and decide as to what would be reasonable expenditure which is required to be incurred. 14. Referring to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Dalmia Cement (Bharat) (P) Ltd. (2002) 254 ITR 377 (Del), he submitted that the Hon'ble High Court in the said decision has held that once it is established that there was a nexus between the expenditure and the purpose of business, the revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. 14.1 Referring to the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (2007) 288 ITR ....
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....ind the ld.CIT(A) deleted the addition made by the AO on the ground that the assessee was only the land owner and the entire project was actually executed by MGFD, therefore, in view of the market practice, the revenue share with MGFD was reasonable and it could be upto Rs. 81 crore as the gross revenue earned from the project was Rs. 135 crores. Since the revenue share by the assessee was about 42% of the gross project revenue and since the revenue received by MGFD was offered to tax and has been accepted in the hands of the MGFD as per the assessment order dated 25th May, 2012 passed u/s 143(3) of the Act, therefore, he held that no disallowance is called for. 16.2 It is the submission of the ld. DR that the assessee failed to establish the genuineness of the so-called collaboration agreement. It is also his submission that the ld.CIT(A) has given weightage to the fact that the total revenue of the project was Rs. 135 crores which is an irrelevant consideration as the agreement is only in respect of revenue sharing of hotel project. It is also his argument that the finding of the CIT(A) that the entire project was executed by MGFD is not correct. According to him, the findings ....
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....y, whether the amount claimed as deduction was factually expended or laid down and whether it was wholly and exclusively for the purpose of the business. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was a nexus between the expenditure and the purpose of business, the revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure havins resard to the circumstances of the case. We need not go into any hypothetical issue in this case in view of the accepted position that the factum of services rendered by CDL has not been refuted by the revenue. It needs no reiteration that the settled position in law is that no businessman can be compelled to maximise his profits. The obvious answer to the first question is in the affirmative, in favour of the assessee and against the revenue." 19. We find the Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT reported in [2007] 288 ITR 1 (SC) at para 34 of the order has observed as un....
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...., such expenditure cannot be ignored raising the issue of underlying motive of entering into this type of transaction. Various iudgements cited by the learned counsel for the respondents clearly get attracted to this Court." 21. We find the Hon'ble Delhi High Court in the case of Vodafone South Ltd. vs. CIT [2015] 378 ITR 410 (Delhi), has observed as under:- "20. The legal position as regards deduction under Section 57(iii) of the Act of expenditure laid out or expended wholly or exclusively for the purpose of making or earning 'income from other sources' may be summarised as under: (i) For the purpose of the deduction in terms of Section 57(iii) the test is not whether the transaction for which the expenditure was laid out was a prudent one which resulted in ultimate gain to the Assessee, but whether it was properly entered into as a part of the Assessee's legitimate commercial undertaking in order indirectly to facilitate the carrying on of its business. (ii) The expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. In other words, if it is such expe....