TaxTMI 
TaxTMI 
2020 (2) TMI 81
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.... business of real estate development as it has developed a commercial 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 & I....
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....f loan and advances as per section 269SS/269TT of the IT Act prior to the assessment year under consideration. 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 f....
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....s under: "5.17 The reasons for disallowance of the amount of Rs. 57,00,00,000/- claimed to be part of revenue sharing agreement, may finally 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....
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....ards the cost of construction and had incurred some opportunity cost in terms of loss of interest income on the amount advanced to the assessee company and further observing that the assessee company to some extent has enjoyed the brand 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 avera....
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....d entities. Penalty u/s 271(1)(C) is being issued for submitting inaccurate particulars of income. {Addition Rs. 47,07,37,143/-}" 9. Before the CIT(A) the assessee filed detailed submissions. The various clauses of the collaboration agreement along with the 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 agreemen....
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....o words then the validity of the agreement has expired on 05.09.2008, as it was valid only for four years from the date of agreement i.e., 06.09.2004, whereas, the hotel has been sold on 01.05.2009. This implies that the sharing of revenue on account of sale of hotel on the strength of alleged 'Collaboration Agreement' 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. ....
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....eral case laws on the subject in favour of the revenue where it has been held that such payments made to related parties are hit by provisions of section 40A(2)(b) and are therefore not allowable. Finding For the provision u/s 40A(2) to be attracted, there must be expenditure and that too excessive expenditure. This is not a case of expenditure but revenue shared. Further, on account of excessive 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 woul....
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....on agreement was never produced before the AO or the CIT(A) in spite of the assessee being asked to produced the same. Further, there is no mention of such agreement or any liability on account of such agreement in any of the balance sheets filed for previous years. In the project report submitted before the ICICI Bank in F.Y. 2005-06, relevant to A.Y. 2006-07, the total cost of the project was shown at Rs. 44.58 crores. However, in the so-called collaboration agreement dated 6th September, 2004, 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....
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....90,845/- crores, both totaling to Rs. 9.91 crores, the order of the ld.CIT(A) be reversed and that the order of the AO be restored. 13. The ld. counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). He submitted that the existence of collaboration agreement as well as the contribution of MGF Development Ltd., towards the project has been recognized by the AO himself. He submitted that the AO has not discarded the contribution of MGF Development Ltd., towards the completion 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 Hig....
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....king the payment of Rs. 57 crore. According to the AO, a holistic view has to be taken for the investment made by M/s MGFD by providing funds to the assessee, the payment of Rs. 5,87,72,012/- was required to be allowed in respect of F.Ys 2004-05 to 2007-08. Similarly, the AO held that a sum of Rs. 4,04,90,845/- is to be allowed as brand fee @3% of the sale of units sold. Thus, the AO allowed a sum of Rs. 9,92,62,857/- and disallowed the balance amount of Rs. 47,07,37,143/- out of the total payment made of Rs. 47 crores. 16.1 We find 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 cal....
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....aised by the revenue is not one relating to the expenditure being not for the purposes of the business. It is the question of an appropriate amount which would have been paid as commission. In fact, the Assessing Officer himself has allowed to the extent of Rs. 4,35,854 holding, inter alia, ",the payment of Rs. 1.75 per M. T. to Cement Distributors Ltd. is very much on the excessive side". This in our view was impermissible within the framework of section 37. The jurisdiction of the revenue is confined to deciding reality of the expenditure, namely, 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 ....
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....dvanced by the Revenue. When expenditure of this nature is treated 'business expenditure' per se by the Department itself, there cannot be any question of raising the issue of want of business expediency. The learned counsel for the respondent is right in his submission that the Department could not sit on the armchair of the assessee and decide as to whether it was appropriate on business expediency for the assessee to incur such an expenditure or not. If the transaction is otherwise valid in law and is a part of tax planning, merely because it has resulted in reduction of tax, 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....