THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 2(1), , GUNTUR vs. POLISETTY SOMASUNDARAM PRIVATE LIMITED, GUNTUR

आदेश /O R D E R

Per Shri D.S.Sunder Singh, Accountant Member :

2. All the grounds of appeal are related to the disallowance of expenditure of Rs.5,86,00,000/- incurred in connection with the termination of Memorandum of Understanding (MoU) entered by the assessee with M/s LEPL Projects Ltd (LEPL) claimed under capital gains. The assessee is in the business of trading and export of tobacco. For the A.Y.2015-16, the assessee has filed the return of income admitting total income of Rs.24,01,89,770/- and the case was selected for scrutiny. During the course of scrutiny, the Assessing Officer (AO) found that the assessee has made the payment of Rs.5,86,00,000/- to LEPL for termination of MoU entered with them in connection with two plots of land sold by the assessee. The AO called for explanation of the assessee as to why the expenditure should not be disallowed, since the expenditure was not prima

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur facie appeared to be incurred for the purpose of development of the property. The assessee explained that it had entered into MoU with LEPL to develop a shopping mall on the lands of the assessee for which the assessee was to receive 40% of revenue realized. The MoU was entered into by the assessee on 10.04.2008. The assessee further explained that on termination of the agreement, the company compensated LEPL on account of expenses incurred by LEPL towards preparing the lay outs, drawings, blue prints, consultation, architectural engineering, professional fee, legal expenses, soil tests, survey staff etc., and incidental expenses including the expenses in liasoning with the Government authorities for the purpose of the proposed project of developing the shopping mall. The assessee was asked to produce the proof for incurring the expenses by LEPL, since the assessee failed to submit any proof regarding the expenses incurred, the AO searched from the Google Earth and found no intangible changes were made to the land. The sale agreement also did not make any reference to the MoU or any of the drawings, lay out or permission from government which would have led to increase in the value of land and the land was exactly the same as prior to condition of MoU. Therefore, the AO viewed that there was no improvements in the land, hence, no cost of improvement required to be allowed. At this juncture, the assessee made alternate plea

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur requesting to allow the expenditure as wholly and exclusively incurred for transfer of the land. The alternate plea also did not find favour before the AO. The AO viewed that termination of MOU and the sale of land were two independent transactions, but not inter related to each other. He further viewed that since, the Joint Development Agreement (MoU) failed to materialize the assessee has entered into the sale transaction and on sale deed there was no reference in respect of JDA, hence, the AO contended that the assessee’s request to consider the expenditure as wholly and exclusively incurred in connection with the transfer of land was also not tenable. Assessee furnished the PAN number and the address of LEPL but the LEPL did not respond to the notice issued by the AO. Therefore, the AO disallowed the entire payment made to LEPL and made the addition of Rs.5,86,00,000/- in the hands of the assessee. The reason for addition in a nut shell is explained by the AO in para No.2.3.16 which reads as under :

“2.3.16. Thus in conclusion the amount spent as payment to LEPL could not be allowed as:- 1. It was not a cost of improvement to the land a. No physical changes to the land. b. Land appreciated on its, own and not due to efforts of the company or the effects of the MOU. c. No proof was offered of any clearances/permissions or intangible addition made to the land. d. The sale deed does not talk of any improvement and the schedule of the property is exactly the same as it was prior to the MOU.

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur for his comments. It is seen from the remand report extracted by the Ld.CIT(A) that the AO reiterated the observations made in the assessment order without examining the merits and the additional evidences submitted by the assessee and justified the assessment order placing relying on the decisions in the case of Paramanand Bhai Patel and Jyotsna Devi Patel Vs. CIT (1984) 149 ITR 80 (MP) and M/s Industrial Credit & Development Syndicate Ltd. Vs. CIT (2001) 251 ITR 720 / 118 taxman 705 (Kar.). The Ld.CIT(A) considered the submissions of the assessee, additional evidences, remand report and allowed the appeal of the assessee holding that the payment was made in connection with transfer of sale of property. The Ld.CIT(A) given a finding that the transfer of property and the payment made to LEPL is inter linked. Without the payment to LEPL the property cannot be transferred. Therefore, held that the payment made to LEPL is inter linked and interrelated, hence, held that the expenditure incurred in connection with the sale of property was wholly incurred for the purpose of transfer of property and accordingly allowed the appeal of the assessee.

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur and as per the agreement, the assessee was to be entitled for share of 40% of gross revenue generated out of the project. The said agreement was terminated on 15.05.2014, since, the project could not take place. As per the understanding between the parties, the assessee has to reimburse LEPL, a sum of Rs.5.86 crores incurred or expended by the LEPL on account of preparing layouts, drawings, layouts, liaison expenses etc. However, during the course of assessment proceedings, the assessee did not submit any evidence. The Ld.DR argued that the Termination Agreement was entered on 15.05.2014 and the land was sold on 24.07.2014, both the transactions are independent transactions and not inter linked. Therefore, argued that the payment made to LEPL cannot be treated as incurred wholly and exclusively in connection with the transfer of land. The Ld.DR further submitted that the assessee has created a charge by entering into MoU, which is a self created charge, neither related to development nor transfer of the land. Expenditure incurred on such encumbrances created by the assessee are not allowable deductions u/s 48 of the Act. The Ld.DR relied on the decision of Hon’ble High Court of Madras in the case of CIT Vs. N.Vajrapani Naidu, 107 taxmann 277 (Madras) and the decision of Hon’ble Supreme Court in the case of CIT Vs. Attili N.Rao, 119 taxman 1030 (SC) and argued that the assessee is not entitled for claiming deduction.

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur Therefore, requested to set aside the order Of the Ld.CIT(A) and allow the appeal of the revenue.

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur including expenses in liaisoning with the Govt. Authorities to make the property freehold. Unless the property is made free from all encumbrances, the assessee can’t deal with it for transfer. The assessee had accepted for reimbursement of expenses and entered into sale agreement with M/s Jyothirmayee Properties Private Ltd., and from the advances given by R.Satyanarayana of M/s JPPL the assessee paid compensation to M/s LEPL Projects Ltd. and got terminated the MoU entered into with M/s LEPL Projects Ltd. Therefore, argued that termination of MoU is a precondition or prerequisite for the assessee to enter into sale agreement or dispose off the property. Without cancelling the MoU, the assessee is barred from making any transactions, such as sale, mortgage or development with any other party. Therefore, argued that the expenditure incurred for payment of compensation to M/s LEPL is incurred wholly and exclusively for transfer of property. Thus, argued that the expenditure is allowable expenditure, hence requested to allow the expenditure and uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. The Ld.AR further submitted that the Ld.DR argued that the assessee had created the encumbrance for his own benefit. In fact no liability was created by the assessee for his own purpose and it was only an MoU reached for development of the property in the business interest. The assessee neither

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur mortgaged the property nor created any charge against the property and taken personal loans. Therefore, argued that the case laws relied upon by the Ld.DR were related to the charges created by the assessee for which the expenses were incurred for removal of encumbrance, hence the case laws relied upon by the DR are distinguishable. Therefore, argued that the case laws relied upon by the Ld.DR are distinguishable, hence not applicable in the assessee’s case.

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur soil tests, survey staff etc. which are incurred for the services rendered but not for any physical development, naturally, Google Earth cannot show any development, thus, the AO could not find any development. The presumption of the AO with regard to physical development of the land or improvement of the land on the services rendered in connection with the drawings, blue prints, architectural engineering were not based on proper material. Further the expenses were incurred by the M/s LEPL in various assement years which could be verified from the assessment records of LEPL which is possible only to the department. The income tax assessment details were given by the AO to the assessee. The AO ought to have verified the expenses incurred by M/s LEPL in the respective assessment years as per the powers vested in the AO u/s 131, 133(6) or from the assessment records. Non responding to the notice issued by the AO is not the reason for making any addition when the AO is vested with the powers under Income Tax and to make the enquiries and to enforce the assessee or witness to submit the information. Further, the AO simply relied on information of Google Earth and landed in a conclusion that there was no development which is incorrect. Apart from furnishing income tax particulars and payment details, the assessee could not furnish any details before the AO since the assessee also could not collect the said information

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur at the time of assessment. Naturally, the assessee has no access to the records of LEPL and has no powers to call for the information and depend on the mercy of LEPL. During the appeal proceedings before the first appellate authority, the assessee has submitted additional evidence in the form of income tax returns of LEPL, MoUs, ledger account copy of R.Satyanarayana along with bank account on 06.06.2008. The Ld.CIT(A) admitted additional evidence. The AO without verifying any facts, relying on images of Google Earth, submitted the remand report which shows the casual attitude of the AO in dealing with remand issues. In the instant case, M/s LEPL Projects is stated to have incurred the expenses towards various services rendered by them to take up the projects as discussed above and the assessee has satisfied with the genuineness of the expenses paid the same from the advance received from Sri R.Satyanarayana, associate of M/s JPPL and made the payment for termination of agreement. Both the parties to MoU have no grievance. The property was in possession of LEPL by virtue of MoU and had rights over the property and it can bar the assessee to make any transfer, sale by virtue of MoU dated 10.04.2008. The LEPL can raise unnecessary litigation if the assessee intends to proceed to sale without clearing the issue / dispute with LEPL. Since the issue is mutually settled, LEPL did not file any suit for violating the terms of MoU by the CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur assessee, but only demanded the reimbursement of expenses incurred by LEPL. Hence, we agree with the finding of the Ld.CIT(A) that the termination of MoU and sale of land are inter dependent transactions. In view of the above the observation of the AO that the termination of MoU and the sale of land to M/s JPPL are not inter linked is incorrect and ill founded. Having held that the transaction of cancellation of MoU is a pre requisite to enter into any transfer arrangement or sale by the assessee, the expenses incurred for surrender of the rights of LEPL required to be considered as an expenses wholly and exclusively incurred in connection with the transfer of the land and allowable u/s 48 of the Act. The case laws relied upon by the Ld.DR are distinguishable on facts. All the case laws are related to the charges created by the assessee on the property such as mortgage, security etc. In the instant case, no such charge was created by the assessee for personal gain. Therefore, the case laws have no application in the assessee’s case. It is observed from the order of the Ld.CIT(A) that the other party i.e. LEPL had offered this amount of Rs.5.86 crores as income in their hands. Hence, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue.

CO No.99/Viz/2019, A.Y.2015-16 M/s Polisetty Somasundaram Pvt. Ltd., Guntur

Order pronounced in the open court on 30th January, 2020.