VIRTUOUS SHOPPING CENTERS LTD,MUMBAI vs. ITO 1(3)(4), MUMBAI

3 M/s Trent Hypermarket Private Ltd. Assessment Years: 2012-13 & 2013-14 As evident, the assessee is aggrieved by the fact that business receipts & interest income were assessed under the head Income from other sources and consequently, business expenses were disallowed. 1.4 The Ld. AR, drawing attention to various documents as placed in the paper-book, advanced arguments to assail the stand of lower authorities. The synopsis of submissions has also been filed which has duly been considered by us. The Ld. DR, on the other hand, supported the orders of lower authorities and submitted that impugned order would not require any interference on our part. 1.5 We have carefully heard the rival submissions and perused relevant material on record. We have also deliberated upon various judicial pronouncements as cited during the course of hearing. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. Assessment Proceedings 2.1 The material facts are that the erstwhile assessee M/s Virtuous Shopping Centre Ltd., as noted by Ld. AO, was stated to be engaged in retail business of lifestyle products, grocery, fruits & vegetables, apparels, books, music, household appliances & other merchandises. The assessee had 100% subsidiary namely M/s Commonwealth Developers Private Ltd. (CDPL). During the year, the assessee received development management fees from CDPL and offered the same as business income. It also earned interest on loans granted to M/s CDPL which were also offered as Business Receipts. Though the assessee submitted relevant agreement with M/s CDPL, however, it was noted that the agreement was signed by the assessee only on first page and the same was without date & without proper identification etc. The same 4 M/s Trent Hypermarket Private Ltd. Assessment Years: 2012-13 & 2013-14 prompted Ld. AO to issue notice u/s 133(6) to M/s CDPL requiring it to confirm the transactions along with documentary evidences. The agreement as supplied by M/s CDPL was found to be similarly deficient. Accordingly, the assessee was show-caused as to why the management fees be not treated as unexplained income taxable under the head Income from other sources as against business receipts shown by the assessee. In the absence of any business activity, the assessee was also directed to justify allowability of various expenses debited in Profit & Loss Account. The Ld. AO also demanded the details of personnel etc. employed by the assessee to carry out business activities. 2.2 In defense, the assessee submitted that the agreement has been signed and accepted by both the entities and pursuant to same, the invoices were also raised by the assessee against M/s CDPL. The payment was received through banking channels after compliance with Tax Deduction at Source (TDS) provisions. If both parties acted in agreement and subsequent events corroborate it, then this would not invalidate the agreement. The attention was drawn to reply of M/s CDPL regarding selection criteria adopted for engaging the assessee company. The employee details, note on selection criteria of Mr. Peter Young who was stated to have carried out the services on behalf of the assessee, his work experience and prior working details, copy of appointment letter and job agreement with salary details etc. was also furnished as demanded by Ld. AO. Mr. Peter Young was stated to be key person who undertook / executed the job on behalf of the assessee. 2.3 The attention was drawn to assessee’s main object as mentioned in the Memorandum of Association. The main object would, inter-alia, include to carry on the business of developing real estate for the purpose 5 M/s Trent Hypermarket Private Ltd. Assessment Years: 2012-13 & 2013-14 of commercial, industrial or residential use and other immovable properties and act as realtors, builders, contractors, designers, architects, consultants, developers, construction managers of all types of real estate development. Pursuant to main objects, the assessee acquired M/s CDPL who was the owner of a mall in the name of Pride Mall. The assessee also filed documents in support of the fact that various expenditures were incurred for business purposes only and therefore, the same were allowable deduction. The perusal of financial statements would show that the assessee had earned fees of Rs.145 Lacs along with interest income of Rs.217.87 Lacs as received from M/s CDPL @10% on loans granted by the assessee. As against the same, the assessee incurred employee cost of Rs.130.36 Lacs, finance cost of Rs.220.02 Lacs & other expenses for Rs.14.07 Lacs. 2.4 The assessee further explained that in the year 2011-12, pride mall project was in initial phase. In initial phase, Mr. Peter Young rendered services such as preparing business plans, carry out financial feasibility of project, appointment & selection of vendors for various services and appraise board from time to time on various development of the project. In support, the invoices raised by various vendors were also furnished. 2.5 However, Ld. AO observed that the agreement was deficient. Upon perusal of documents, it was observed that certain amount being paid to Mr. Peter Young was being paid by some other entity. The break-up of salary paid to Mr. Peter Young would show that the variable component i.e. Key Result Area does not provide any specifics services provided or the objects achieved. The reply of the assessee as well as M/s CDPL did not provide any specific details of the services rendered. The perusal of financial statements of M/s CDPL revealed that there was hardly any 6 M/s Trent Hypermarket Private Ltd. Assessment Years: 2012-13 & 2013-14 addition to the project except payment of development management fees and interest on loan as payable to the assessee. Various deficiencies were also noted in the invoices issued by the vendor. Therefore, it was concluded that the fess did not have the characteristics of business transactions and could not be considered as business receipts. Since the assessee could not show correlation of expenses for earning of such income, the same would not be allowable deduction against the same except ROC fees and Audit fees which were required for continuity of the assessee. 2.6 Regarding interest income, it was observed that the assessee was neither a banking company nor NBFC and therefore it could not undertake interest earning as business activity. Therefore, the difference of interest receipts of Rs.217.87 lacs and finance cost of Rs.220.02 Lacs which amount to net (-) Rs.3.85 Lacs was to be taxed under the head income from other sources. Appellate Proceedings 3. During appellate proceedings, the assessee did not appear before Ld. CIT(A) but merely relied upon written submissions which were considered while passing the impugned order. The Ld. CIT(A), after going through the same, observed that no new evidences could be furnished by the assessee with respect to various claims and therefore, the action of Ld. AO was confirmed. Aggrieved, the assessee is in further appeal before us. Our findings & Adjudication 4.1 Upon perusal of orders of lower authorities as well as documents on record, it could be gathered that the main object of the assessee (as per Memorandum of Association; Page nos. 103 to 154 of Paper Book)

Facts being pari-materia the same as in AY 2012-13, our adjudication as contained therein shall mutatis mutandis apply to this year also. In other words, business receipts as well as interest income would be assessable as Business Income. The deduction of business expenditure shall be allowed to the assessee subject to verification by Ld. AO. The assessee’s appeal stand allowed. The revenue’s appeal stand dismissed. Conclusion 7. Both the appeals of the assessee stand allowed whereas the appeal of revenue stand dismissed.