ORBIS REAL ESTATE FUND I,HYDERABAD (AUTH. REP.) vs. ADIT (INTERNATIONAL TAXATION)-2 - 2, HYDERABAD

2.2 We have carefully considered the rival contentions and perused the condonation application along with the supporting documents, including the timeline of events and the affidavit. It is evident that the assessee initially pursued the rectification route and subsequently filed an appeal against the section 154 order before the Ld. CIT(A). Given the prolonged resolution process before the Ld. CIT(A), the assessee subsequently filed the present appeal before this Tribunal on 22.12.2023 with a request for condonation of delay. The appeal was initially returned by the Registry due to technical defects, including lack of liquidator’s signature. The defect was only noticed when the assessee attempted to file a stay petition on the ITAT portal on 13.08.2024 in response to a recovery notice issued by the Revenue. Immediately upon learning of the defect, the assessee took corrective steps and resubmitted the appeal on 19.08.2024. We have also noted from the record that the assessee has provided screenshots and e- mail logs indicating that no defect communication was received against the first appeal filed on 22.12.2023, although such communications were received for the second appeal filed in August 2024. This clearly supports the assessee’s contention that it was unaware of the defects until the notice from the Revenue prompted further action. In our considered view, the delay in filing the appeal is attributable to a bona fide belief of resolution through rectification, absence of communication of defects, and the subsequent swift action taken by the assessee upon discovery. We find that the Hon’ble Supreme Court in the case of Vidya Shankar Jaiswal vs. The Income Tax Officer, Ward-2, Ambikapur in Special Leave Petition (Civil) Nos. 26310-26311/2024, dated 31.01.2025, has held that a justice- oriented and liberal approach should be adopted while dealing with matters relating to condonation of delay, particularly when substantial justice is pitted against technicalities. Therefore, considering the circumstances and facts of the present case, in the interest of justice, we are of the view that the delay in filing of this appeal deserves to be condoned. Accordingly, the delay of 356 days in filing the appeal is condoned, and the appeal is admitted for adjudication on merits.

3. The grounds of appeal of the assessee are as under :

“ (1) The Ld. AO erred in not considering the residential status of the Appellant and he/she has erred in disputing the TRC issued by the government authorities of Mauritius. (2) The Ld. AO failed to recognize genuineness of substance of full time functioning advisory firm in Mauritius and board of directors meeting wholly held in Mauritius and he/she has erred in applying the applicable provisions of the India-Mauritius Double tax avoidance agreement (“DTAA”). (3) The Ld. AO erred in recharacterizing the nature of transaction from sale of shares to sale of immovable property and he/she has erred in proposing to disallow the expenditure under section 40(a)(i) in the show-cause notice and passing the draft order disallowing under a different section. In this regard, the Ld. AO erred in not providing an opportunity of being heard for the disallowance proposed in the final draft assessment order. (4) Without prejudice to the above ground, the Ld. AO erred in applying the provisions of section 40(a)(i) which are applicable to income chargeable under the head “profits and gains of business or profession” whereas the Appellant has had only capital gains income during the year under consideration. (5) Without prejudice to the above grounds, Ld. AO further erred in proposing the penalty proceedings u/s 270A. The Ld. AO erred in taking into consideration that in order to levy penalty under section 270A of the Act, the primary condition is to prove ‘mens rea’, i.e., guilty mind or an act of conscious concealment or furnishing of inaccurate particulars on part of Assessee, whereas the Appellant has disclosed all the information requested for during the assessment proceedings as well as at the time of filing the Income tax return. (6) Without prejudice to the above, Ld. AO has passed an order (143(3)/144C(13)) which is erroneous both in fact and in law. (7) Without prejudice to the above grounds, Ld. AO has failed to appreciate the directions of Ld. DRP while passing the final order u/s 143 of the Act. (8) Without prejudice to the above grounds, Ld. AO has erred in computing the tax payable under the head Income from Capital Gains. (9) Without prejudice to the above grounds, Ld. AO has erred in not giving the indexation benefits provided for sale of immoveable property u/s 48 of the Income tax Act, 1961. (10) Without prejudice to the above grounds, Ld. AO has charged interest under section 234B and 234C despite the TDS Amount being sufficient to cover the entire tax liability computed as per contested grounds. (11) Without prejudice to the above, the Assessee has filed a rectification petition under section 154 for rectifying the mistakes apparent from record on account of tax liability computation which was not agreed upon and the Assessee has proceeded to file a appeal against the 154 order before the Honorable commissioner of income tax (Appeals). In this regard, the process of filing the appeal before the Honorable ITAT has been delayed and we request you to condone the delay of filing of the appeal before the Honorable ITAT.”

4.1 Aggrieved with the draft assessment order of the Ld. AO, the assessee filed objections before the Ld. DRP. The Ld. DRP issued directions u/s.144C(5) of the Act on 30.05.2023. The Ld. AO passed the final assessment order u/s.143(3) r.w.s. 144C(13) of the Act on 30.06.2023 by making addition of Rs.80,00,13,814/- on account of income from capital gain and addition of Rs.83,62,670/- on account of disallowance of expenditure u/s. 40(a)(i) of the Act.

4.2 Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before us. The Ld. AR submitted that, the assessee is pressing the following issues only out of their grounds of appeal : a) First Issue : Denying the exemption claimed under Article no. 13(4) of the Double Taxation Avoidance Agreement between India and Mauritius (“DTAA”) on account of capital gain on sale of shares . b) Second Issue : Addition of Rs.83,62,670/- u/s.40(a)(i) of the Act.

5.1 Subsequently, the assessee sold its shares in WEPL to M/s Raja Pushpa Properties Pvt. Ltd. and reported capital gains on sale of shares. The assessee claimed that such capital gains were exempt under Article 13(4) of the DTAA . However, the Ld. AO rejected the exemption, stating that the share transfer was only a façade and that the actual transaction was a transfer of immovable property situated in India. The Revenue invoked the doctrine of lifting the corporate veil, recharacterized the transaction, and taxed it under Article 6 of the DTAA.

5.2 The Ld. AR further submitted that, the assessee is a Mauritius resident and has produced a valid TRC. Therefore, under Article 13(4) of the India–Mauritius DTAA, the gains on sale of shares of an Indian company by the assessee are taxable only in Mauritius. He also submitted that, the share transfer was a genuine commercial transaction, following resolution of a long-standing land dispute. The assessee was compelled to liquidate the Fund, and hence, the shares were sold. The Ld. AR further submitted that, the Revenue cannot lift the corporate veil and recharacterize the transaction as a land sale without cogent evidence of tax avoidance. Accordingly, the Ld. AR finally submitted that the capital gain of the assessee is covered under Article 13(4) of the DTAA and hence not taxable in India.

5.3 In their alternate argument, the Ld. AR submitted that, the Ld. AO also denied the indexed cost of acquisition u/s. 48 of the Act holding that the land was not directly held by the assessee. He further submitted that, even if the transaction is treated as a transfer of land, the land was a capital asset held through WEPL from FY 2006–07. Therefore, the assessee should be granted indexed cost of acquisition u/s. 48 of the Act, treating the date of investment as the date of acquisition.

6.1 The Ld. DR relied on the retrospective amendment by the Finance Act, 2012 introducing Explanation 5 to Section 9(1)(i), which provides that capital gains arising from the transfer of a foreign company’s shares are deemed to accrue in India if such shares derive substantial value from Indian assets.

6.2 The Ld. DR further submitted that, Mr. Subash Kolluru, a U.S.-based representative, was effectively controlling both entities. This demonstrated that the real control did not lie with Mauritius. Accordingly, the Revenue lifted the corporate veil to bring out the substance of the transaction, which was a transfer of land. Therefore, the gain was taxed in India by the Ld. AO under Article 6 of the DTAA.

6.3 The Ld. DR also submitted that although the Ld. AO has rightly lifted the corporate viel and treated the capital gain on transfer of share as capital gain on account of transfer of immovable property, but inadvertently have taxed the income under Article number as 6 instead of DTAA. She further submitted that, mere mention of a wrong Article number will not ipso facto affect the order, provided the Ld. AO had the jurisdiction, the substantive reasoning is valid and based on facts. In support of their submission, the Ld. DR relied on the decision of the Hon’ble Supreme Court in the case of P.K.Palanisamy v/s N. Arumugham & Anr dated 23.07.2009, wherein, at para no. 13 of the order, the Hon’ble Supreme Court has held that “Only because a wrong provision was mentioned by the appellant, the same, in our opinion, by itself would not be a ground to hold that the application was not maintainable or the order passed thereon would be a nullity”. Finally, the Ld. DR prayed before the bench to upheld the addition made by the Ld. AO.

6.4 As far as the alternate argument of the assessee is concerned, the Ld. DR submitted that, the assessee is not the registered owner of the land, and at best can be treated as a deemed owner only if the veil is lifted. Therefore, the indexation benefit under Section 48 of the Act is not allowable as the land was not held by the assessee in its own right. It was further pointed out that possession of the land was transferred to WEPL only during the same financial year in which the shares were transferred, and hence, even if the assessee were deemed to own the land, it cannot be treated as a long-term capital asset. As a result, indexation is not available under the second proviso to Section 48 of the Act, which applies only to long-term capital assets.

ORBIS REAL ESTATE FUND I MINUTES OF MEET THE DIRECTORS OF THE COMPANY, HELD AT THE REGISTERED OFFICE ON 19 JULY 2006 AT 17:15 HRS (MAURITIUS TIME) PRESENT: Mr HeerdayeJugbandhan Mr PovazhaganSoobramanien as alternate to Mrs ChirstianeYeung Chin Shing Mr Peter Alan Vorbrich (By telephone – from USA) IN ATTENDACE: Mr Subash Kolluru (By telephone – USA ) Representing ORBIS Real Estate Advisors (the “investment Manager ) Intertnational Management (Mauritius) Ltd (“IBM” or “the Administrator” or the “Secretary”) (Represented by Ms YannickRoussety) 1. OPERNING Upon a proposal from Mr Soobramanien, it was agreed that Mr Jubandhan would chair the meeting. The Chairman welcomed the members to the board meeting and there being a quorum present the Chairman declared the meeting competent to transact the business of the day.

The Chairman invited Mr Kolluru, the Investment Manager, to brief the Board on the proposed investment. Mr Kolluru reported that the Hyderabad Urban Development Authority (“HUDA”) has on 4 July 2006 presented a Brochure & Application (“B&A”) for investors/developers interested in pursuing the bidding process to acquire any and all of the twenty lots spread over three distinctive sites at a cost of Rs 10,000. He explained that in accordance with the B&A, all qualified bidders would have to submit an Earnest Money Deposit (“EMD”) of Rs. 20, 000,000 in order to participate in the bid. He also highlighted that the EMD is due two hours before the auction. The Investment Manager stated that the highest bidder would be required to pay the Initial deposit (“ID”) comprising of the first instalment of one-third of the highest bid after deducting of the EMD by 26 July 2006 at latest. The second and third instalments representing one-third of the highest bid each, would be due by latest on 9 August 2006 and 24 August 2006 respectively. The Investment Manager explained that it had, with the assistance of a land planner, subjected all of the twenty lots in the HUDA auction to a feasibility analysis as set out in the Investment Plan. He added that out these, a subset of seven lots had been subjected to an underwriting analysis under three investment scenarios as set out in the Investment Plan. Mr Kolluru also referred the Board to the Equity Return Sensitivity Analysis table of each of the seven lots at different maximum bid price per acre under the three investment scenarios.

4. RECOMMENDATIONS OF THE COMPANY Based on the above, the Investment Manager recommended the following to the Company: (i) to delegate authority to Watermark Estates Private Limited to bit on the Company’s behalf on 20 July 2006 at the HUDA Golden Mile Auction Process on all the six parcels identified as Site #1, i.e. Plots 2,3,7,8,9,10 as per the Investment Plan subject to a maximum bid price of Rs120,000,000/Acre; (ii) to delegate authority to Watermark Estates Private Limited to bid on the Company’s behalf on 20 July 2006 at the HUDA Golden Mile Auction process on all of the one parcel identified as Site# 1, i.e. Plot 4 as per the investment plan subject to a maximum bid price of Rs.80,000,000/Acre; (iii) to request Cargill Incorporate and / or its affiliates in India (‘Cargill”) to facilitate the issuance of an EMD for Rs20,000,000 by posting adequate cash collateral with a reputable financial institution in India: and (iv) to approve the reimbursement to Cargill for the full amount of the Earnest Money Deposit (“EMD”) plus transaction and reasonable carrying costs irrespective of the outcome at the auction since Cargill was instrumental in facilitating the issuance of EMD for Rs 20,000,000. The Board noted that the above recommendation would require an immediate investment by the Company of approximately $7,000,000 to all of the Members of the Company immediately upon a favourable outcome of the auction to comply with the first instalment payment due date of 26 July 2006.

5. INVESTMENT APPROVAL After due consideration the Board RESOLVED that authority be delegated to Watermarke Estates Private Limited to bid on the Company’s behalf on 20 July 2006 at the HUDA Golden Mile Auction process on: (a) all of the six parcels identified as Site#1, i.e. Plots 2,3,7,8,9,10 subject to a maximum bid price of Rs120,000,000/Acre; (b) all of the one parcel identified as Site # 1, i.e. Plot 4 subject to maximum bid price of Rs 80,000,000/Acre; It was also RESOLVED that Cargill Incorporate and /or its affiliates in India (“Cargill”) be requested to facilitate the issuance of an EMD for Rs 20,000,000 by posting adequate cash collateral with a reputable financial institution in India and that Cargill be reimbursed for the full amount of the Earnest Money Deposit (“EMD”) plus transaction and reasonable carrying costs irrespective of the outcome at the auction. The Board further RESOLVED that the issuance of Capital Call, in accordance with the Constitution, in an amount not to exceed $7,000,000 to all of the Members of the Company, be made immediately upon a favorable outcome of the auction to comply with the first installment payment due date of 26 July 2006.

6. TERMINATION OF MEETING There being no further business, the Meeting was declared closed.”

7.1 on perusal of above we found that, the primary agenda of the Board meeting was to explore the possibility of purchasing a parcel of land in Kokapet, Hyderabad, for future development. However, the assessee being a foreign company, was not eligible to bid directly in the auction. Accordingly, the assessee resolved to acquire the land in the name of WEPL, and to fund the transaction fully through equity and FCCPs. We have gone through 4th para of page no.4 of the final registered sale deed dated 13.03.2019, which is reproduced as under:

“In pursuance of the above orders, M/s Watermarke Estates Private Limited are hereby directed to submit the draft sale deed documents along with related papers for registration of land. As the M/s Watermarke Estates Private Limited have paid an amount of Rs. 40,09,60,670/- (including EMD) as against the total amount of Rs.60,14,41,000/-. As per the Hon'ble Supreme Court order the proportionate extent of land to an extent of Ac 4.07 Cents in Sy.No: 109 situated at Kokapet village, Gandipet Mandal, RR district was allotted to M/s Watermarke Estates Private Limited.”

7.2 On perusal of above, we find that the WEPL has paid total amount of Rs.40,09,60,670/- towards purchase of the land. Further, we have also gone through page no. 94 of the paper book, the relevant portion of which is reproduced as under:

7.3 On perusal of above, we find that the assessee has invested total amount of Rs. 42,99,28,000/- in WEPL through equity and FCCPs, which is more than the amount paid by WEPL towards purchase of the land. Hence, the funding of the land purchase was carried out entirely by the assessee. Further, the assessee facilitates the provision of an advance of Rs.2 crores by its affiliates in India to WEPL, as seen from the copy of the minutes of the assessee, reproduced above. Thus, on totality of facts, we are inclined to agree with the Ld. DR that WEPL was merely a conduit or pass-through entity, and the real and beneficial ownership of the land rested with the assessee. Accordingly, we find merit in the contention of the Ld. DR that the corporate veil must be lifted in the present case, as the structure was artificial and existed solely for the purpose of facilitating the sale of land while avoiding tax. Applying the doctrine of “substance over form”, we hold that the transaction is liable to be taxed in India.

7.4 Further, we also found that, the entire value of shares transferred by the assessee was derived from the land held in India. In our view, this falls squarely within the ambit of Explanation 5 to Section 9(1)(i) of the Act, which deems income to accrue or arise in India where the share derives its value substantially from assets located in India.

7.5 We also note that the Ld. AO had taxed the income under Article 6 of the DTAA, which pertains to income from immovable property. Though this may appear as a technical misstep, the Ld. DR rightly on the decision of the Hon’ble Supreme Court in the case of P.K.Palanisamy v/s N. Arumugham & Anr dated 23.07.2009, wherein, at para no. 13 of the order, the Hon’ble Supreme Court has held that “Only because a wrong provision was mentioned by the appellant, the same, in our opinion, by itself would not be a ground to hold that the application was not maintainable or the order passed thereon would be a nullity”, submitted that the substance of the transaction and not the label of the Article governs the taxability. Hence, we accept this contention of Ld. DR. 7.6 In view of the above discussion, we find no infirmity in the action of the Ld. AO in denying the benefit of Article 13(4) of the DTAA. Accordingly, the primary objection of the assessee with regards to the first issue is dismissed.

8.1 On perusal of above, we found that WEPL was only given provision allotment letter on 29-07-2006, subject to the other conditions to be fulfilled by WEPL as per the said provisional allotment letter. Hence, it is abundantly clear that the WEPL did not become the owner of the said land on 29-07-2006. Further, we have also gone through (a) last para of page no. 5 and (b) para no. 8 of page no.7 of the final registered sale deed dated 13.03.2019, which is to the following effect :

(a) last para of page no. 5 :

“HMDA has issued a Final allotment letter to the purchaser here in vide Lr. No:B4/7768/Site-I/P.2/2006, dt:04.02.2019 and handed over the physical vacant possession of the plot to the purchaser on 04.02.2019.”

(b) para no. 8 of page no.7:

“8) The Vendor hereby further declares that the scheduled property together with all privileges, easements and benefits attached there to shall stand absolutely vested in the vendee. on and from this date.”

8.2 on perusal of above, we find that the final allotment letter as well as the effective possession and control of the underlying land was obtained by M/s WEPL (and consequently attributable to the assessee) only on 04.02.2019 . Further, the land was registered in the name of the assessee on 13.03.2019 and the absolute rights of the land was vested with the assessee w.e.f. 13.03.2019. Therefore, even if the assessee is treated as deemed owner of the immovable property, the date of acquisition for the purposes of indexation would be 04.02.2019. Accordingly, the benefit of indexation, if any, under Section 48 of the Act shall be restricted from 04.02.2019 and not from any earlier date. Therefore, even without entering into the legal question as to whether indexation is allowable to the assessee under section 48 of the Act or not, the factual matrix itself renders such claim untenable. This is because indexation benefit under section 48 of the Act is available only in respect of long-term capital assets, and in the present case, the period of deemed holding of the land does not exceed 36 months. Hence, we hold that the land cannot be treated as a long-term capital asset, and consequently, the benefit of indexation under the second proviso to section 48 of the Act is not available to the assessee. Accordingly, the alternative argument of the assessee is also dismissed.

The Second Issue of the assessee relates to addition of 9. Rs.83,62,670/- made by the Ld. AO u/s.40(a)(i) of the Act. In this regard, the Ld. AR submitted that the assessee incurred professional fees of Rs.2,50,88,000/- paid to CBRE South Asia Pvt. Ltd. for rendering advisory services in connection with the divestment of 100% shareholding in WEPL. He further submitted that the expenditure was wholly and exclusively incurred in connection with the transfer of shares in WEPL, the profit on transfer of which the Ld. AO has taxed as income under the head of “Capital Gain”. However, the Ld. AO made an addition of Rs.83,62,670/- out of the said expenditure under section 40(a)(i) of the Act on the ground that tax was not deducted at source (TDS) on the said payment. The Ld. AR also submitted that section 40(a)(i) of the Act applies only to income chargeable under the head “Profits and gains of business or profession” and not to income chargeable under the head “Capital gains”. It was submitted that since the impugned payment was wholly and exclusively in connection with the transfer of shares, the provisions of section 40(a)(i) of the Act is not applicable, and no addition can be made in the hands of the assessee. Finally, the Ld. AR prayed before the Bench to delete the addition made by the Ld. AO.

11.1 In the present case, there is no dispute about the facts that the expenditure of Rs.2,50,88,000/- was incurred wholly and exclusively in connection with transfer of shares in WEPL and the Ld. AO has also taxed the profit on transfer of the shares as capital gains. In our considered view, since the expenditure incurred by the assessee is not related to income assessable under the head “Profits and gains of business or profession”, the machinery of section 40(a)(i) cannot be imported into computation of capital gains. In any event, the disallowance mechanism under section 40(a)(i) cannot extend to capital gains computation. Accordingly, we hold that the addition made under section 40(a)(i) of the Act in respect of expenditure related to computation of capital gains is unsustainable. Therefore, the addition of Rs.83,62,670/- made by the Ld. AO under section 40(a)(i) of the Act is directed to be deleted.

Order pronounced in the open Court on 10th Sept., 2025.