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Income Tax Appellate Tribunal, DELHI BENCH : D : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : D : NEW DELHI
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.5828/Del/2014 Assessment Year: 2010-11 ACIT, Vs Vishnu Apartments Pvt. Ltd., Central Circle-7, Sheela Bhawan, New Delhi. 8, Motilal Atal Road, Jaipur. PAN: AAACV6397E (Appellant) (Respondent) Assessee by : Shri I.P. Bansal & Shri Vivek Bansal, Advocates; & Ms Suman Sapra, CA Revenue by : Shri J.K. Mishra, CIT, DR Date of Hearing : 18.12.2019 Date of Pronouncement : 30.01.2020 ORDER PER R.K. PANDA, AM: This appeal filed by the Revenue is directed against the order dated 14th August, 2014 of the CIT(A)-1, New Delhi relating to assessment year 2010-11. 2. The grounds raised by the Revenue are as under:- “1. The order of Ld. CIT(A) is not correct in law and facts.
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On the facts and circumstances of the case, the Ld. CIT(A) has erred in law in deleting the addition of Rs.47,07,37,143/- made by the AO on account of ‘Sham Transaction of Revenue Sharing.’ 3. The appellant craves leave to add, amend any/all the ground of appeal before or during the course of hearing of the appeal.”
Facts of the case, in brief, are that the assessee is a company engaged in the 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 & Indirect expenditure incurred or Integrated hotel Project was being shown as capital work in progress, under Fixed Assets. The company in the year 2004-05 has entered into a collaboration agreement with MGF Development Limited, whereby MGF Development Limited shall provide and secure fund requirement of the Project, provide bank guarantees
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and other assurances to enable the company to raise resources and contribute its technical, infrastructural, administrative and marketing expertise in successful completion of the project. In consideration to above, the company shall compensate MGF Development Limited by way of attribution of agreed percentage of gross revenue accrued, either through sale of Integrated Hotel project or its running thereof over a period of time. During the year, the company has sold its Integrated Hotel project at the consideration of Rs.95 crores and accordingly the company has attributed Rs.57 crores (60% of Rs.95 Crores) as per the terms of the above agreement. The sales of Integrated Hotel project amounting to Rs. 95 Crores is shown in the Profit and loss account after netting off Revenue attributed to collaborator amounting to Rs. 57 crores.” 3.1 He further noted that this transaction is also reflected in annexure-2, which is “particulars of payments made to persons specified u/s. 40A(2)(b) of Audit Report u/s. 44AB, which is as follows:-
Name Nature of Payment Amount MGF Development Ltd. Revenue attribution on sale of hotel site Rs.57,00,00,000/-
From the collaboration agreement dated 6th September, 2004, the AO noted 4. that the assessee, i.e., the first party acquired the land measuring 7426.26 sq. mtrs for the purpose of construction and development of commercial mall and a luxury hotel at Plot No.1, Opposite Nehru Sahkar Bhawan, Bais Godown, Jaipur. Both the parties agreed to collaborate through pulling of financial, infrastructure and technical recourses/skills for their mutual benefits. The AO analysed the various terms and conditions of the agreement. He noted that the fact of revenue attribution on sale of hotel site attributable to M/s MGF Development Ltd., was never reported in any of the income tax returns filed, balance sheet, Profit & Loss Account, notes to the account and annexures of transactions related to the related parties in terms of section 40A(2)(b) of the IT Act or annexures of loan and 3
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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 filed.
The AO issued notice to the assessee company asking them to specifically give complete details as to the transactions with MGF Development Ltd., and furnish collaboration agreement entered into with MGF Development Ltd. in F.Y. 2004-05. He also asked the assessee to furnish the complete details on cost contribution by MGF Development Ltd. since inception on the integrated project at
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Jaipur to produce the original agreement and also give the name of signatory to the agreement. The AO further asked the assessee to furnish the details of cost incurred by M/s MGF Development Ltd., and the role played for construction. The AO also asked the assessee to justify the payment of Rs.57 crores as a revenue sharing @ 60% of hotel share consideration to M/s MGF Development Ltd. under the guise of revenue sharing agreement dated 6th September, 2001.
It was submitted by the assessee that MGF Development Ltd.: a) Provided finance to the assessee company towards the construction cost of integrated project at Jaipur; b) Assisted the company in securing finance from bank/institutions by providing corporate bank guarantee of M/s MGF Development Ltd.; c) Provided technical and management competence as to the development of project; d) Allowed the assessee company to use the brand value of “MGF Metropolitan” which is the registered trade mark of M/s MGF Development Ltd. 7. It was further submitted by the assessee that as per the initial estimate, the cost of the project was estimated to be Rs.75 to Rs.80 crores and MGF Development Ltd. had agreed to provide financial support in terms of 60% of the total cost of the project and its brand expertise in the real estate field as per the various clauses of the agreement and in view of the above roles and responsibility
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assumed by MGF in the development of the project, it was agreed that MGF shall receive percentage share in gross revenue generated by the projects towards the activities undertaken by MGF. It was further submitted that the assessee has acquired business loan from bank amounting to Rs.15 crores for which MGF Development Ltd. had provided guarantee.
7.1 However, the AO was not satisfied with the arguments advanced by the assessee and disallowed the amount of Rs.57 crores claimed to be part of revenue sharing agreement. Para 5.17 of the order of the AO reads as 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 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 the benefit will accrue to M/s. MGF Development Ltd. also in the form of higher dividend. 6
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v) M/s. MGF Development Ltd., being the shareholder holding more than 40% of shares, was in any case, responsible for arranging the funds required for executing the ‘Integrated Project at Jaipur’. "Even without there being an agreement to this effect, it was the responsibility of the owners of the company to arrange for the funds. By virtue of being the owner of the assessee company the associated company having substantive share holding had already assumed the inherent risks associated with the project. Therefore, such assumption of risk could not be a factor for revenue sharing between the related entities. vi) No TDS has been deducted from this payment and therefore even the provisions of section 40(a)(ia) would get attracted. vii) If the ‘Collaboration Agreement’ is assumed words to 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. viii)Since the transaction is between two related entities it is hit by the provisions of section 40A(2)(a). Execution of agreement dated 06.09.2004 is a self serving document and there are no real and tangible services rendered by the holding company to the assessee company for claiming this amount as its share of revenue. ix) 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. x) There are several 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. xi) The agreement dated 06.09.2004 is a sham agreements in the nature of colorable devices executed with an intention of reducing the tax liability.”
However, since MGF Development Ltd. has provided finance towards the cost of construction and had incurred some opportunity cost in terms of loss of
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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 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. 2007-08. This loss of interest is the opportunity cost contributed by M/s. MGF Development Ltd. towards the cost of Integrated Project at Jaipur. 5.19 Similarly, to some extent it is true that the assessee company is enjoying the brand image of MGF Metropolitan in its project at Jaipur comprising of shopping mall and hotel. However, the cost of brand is not linked to the actual cost incurred by M/s. MGF Development Ltd. but as per the prevailing market practice, the cost of brand is normally charged by the brand owner on the basis of its visibility, respect and reputation. Normally the brand fee charged by the brand owner are varying in the range of 0.5% to 5%, in the Indian scenario. Thus, taking the visibility and reputation of MGF Group in the real estate business in which brand/image is really important to attract the customers for sale of the unit in shopping malls project. Therefore, taking a moderate view the cost of brand utilization i.e. brand fee is taken @ 3% of the sale of units sold in shopping mall and hotel project. At this rate, the sale effected by the assessee company since A.Y. 2004-05 to A.Y. 2009-10 comes to Rs.134,96,94,844/- and the brand fee @ 3% comes to Rs.4,04,90,845/-. Thus, taking a very liberal view, the assessee’s company contention for utilization of finance and brand image provided by M/s. MGF Development Ltd. could utmost be rewarded to the extent of interest at Rs.5,87,72,012/- and brand fee at Rs. 4,04,90,845/-, which can be allowed as a 8
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fair compensation payable to M/s. MGF Development Ltd, as against the sharing of revenue @ 60% of hotel project at Jaipur at Rs. 57,00,00,000/-. Therefore, the revenue shared at Rs. 57,00,00,000/- is found to be excess to the extent of Rs. 47,07,37,143/-, which is in excess of amount fairly attributable towards the use of finance (Interest at Rs.5,87,72,012/- & Brand Fee at Rs. 4,04,90,845/-) totaling to Rs. 9,92,62,857/-. 5.20 In view of the reasons discussed above in detail, the amount of Rs. 47,07,37,143/- is hereby disallowed, being not backed by commercial expediency and emanating out of sham transaction between two related entities. Penalty u/s 271(1)(C) is being issued for submitting inaccurate particulars of income. {Addition Rs. 47,07,37,143/-}”
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 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 sale of mall and revenue generated from hotel business was to be shared as per agreed terms. The total cost of the project was Rs.95 crore, out of which the land cost was about Rs.10 crore. MGFD provided funds of about Rs.65 crore for the project from time to 9
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time, constituting 68% of the fund requirement for the project. The entire project generated revenue of about Rs.135 crore, out of which Rs.57 crore was shared as revenue by the appellant with MGFD out of sale proceeds of Rs.95 crore realized from the hotel portion. The revenue shared was, as per agreement, 60% of the sale proceed of hotel but only 42% of the entire revenue of Rs.135 crore generated from sale of hotel as well as mall portion. 4.4 The revenue has disallowed a large portion of the income / revenue allocated to MGFD (Rs.47,07,37,143/-) and allowed only Rs.4,04,90,845/- for branding being 3% of the total sales of hotel and mall at Rs. 134.97 crore and another Rs.5,87,72,012/- being interest payable @ 12% on the daily closing balance method. Thus, the revenue has allowed expenditure / revenue sharing to the extent of Rs.9,92,62,857/- out of Rs.57,00,00,000/- actually shared. To reach such conclusion various observations made by the revenue, which are summarized, and my findings thereto are given, as under: Observation of Revenue (1) 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. 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. If the ‘Collaboration Agreement’ is assumed words to 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-
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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., the shareholder holding more than 40% of shares, was in any case, responsible for arranging the funds required for executing the ‘Integrated Project at Jaipur’. Even without there being an agreement to this effect, it was the responsibility of the owners of the company to arrange for the funds. By virtue of being the owner of the assessee company the associated company having substantive share holding had already assumed the inherent risks associated with the project. Therefore, such assumption of risk could not be a factor for revenue sharing between the related entities. Finding No doubt MGFD holds equity in the appellant, but business transactions are entered into on commercial considerations. It is not for the revenue to step into the shoes of the businessman. Yes, if there are related party transactions, it may be seen whether the transactions are in terms of commercial and expediency at arm’s length (this aspect is discussed later). In fact the arrangement does not affect long-term profitability, as the appellant does not have much activity / revenues after completion of this project whereas MGFD is a flagship company having continued activities and revenues. Transfer of profits to MGFD generates income taxes in its hands both in the year under consideration and in the future. Observation of Revenue (3) No TDS has been deducted from this payment and therefore even the provisions of section 40(a)(ia) would get attracted. Finding TDS is attracted strictly in terms of provisions contained u/s 190 to 206A of the Act. There is no provision to deduct tax on sharing of revenue / income on joint project development. Observation of Revenue (4)
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Since the transaction is between two related entities it is hit by the provisions of section 40A(2)(a). Execution of agreement dated 06.09.2004 is a self serving document and there are no real and tangible services rendered by MGF to the assessee company for claiming this amount as its share of revenue. There are several 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 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
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hand, having provided equity, bulk of funding requirement, brand, marketing and logistics, has shared only 42% of the gross revenues. This is in keeping with the market practice in similar project development cases and cannot be said to be excessive. 4.6 I also find that the present case is not one of diversion of income by overriding tine but one of revenue sharing on joint project development. 4.7 It is seen from the records that the administrative expenses of the appellant were only Rs.4,95,371/- (last year Rs.32,34,088/-), which included salary of Rs.85,067/- (last year Rs.5,33,661/-). On the other hand, the administrative expenses of MGFD were Rs.4,75,94,931/- (last year Rs.9,55,82,501/-), besides personnel expenses of Rs.2,89,94,163/- (last year Rs.5,22,08,595/-). This itself establishes that the appellant was only the land- owner and the entire project was actually executed by MGFD. In this view of the matter, and keeping in view the market practice, the revenue shared by MGFD should have been Rs.81 crore (i.e. @ 60% of Rs. 135 crore) and not Rs.57 crore (being 42% of gross project revenue). 4.8 Apart from the conclusion reached in Para-4.7 above, I also find that the revenue of Rs.57 crore included in the revenue of MGFD and offered to tax as its income has been accepted in the assessment framed by the revenue u/s 143(3) in that case on 25.05.2012. In the circumstances, there is no case for any disallowance of the revenue shared by the appellant with MGFD in the joint development agreement for the Jaipur project. I hold accordingly, and delete the addition Rs.47,07,37,143/-. These grounds of appeal are allowed.”
Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
The ld. CIT-DR strongly challenged the order of the CIT(A) in granting the relief of Rs.47.07 crores added by the AO. He submitted that the original collaboration 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
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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. 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 so- called collaboration agreement, the claim of the assessee, which is solely based on the collaboration agreement, cannot be admitted legally.
The ld. DR further submitted that once an amount is reduced from the gross receipts, but, booked in the nature of expense, then it has to be decided on the touchstone of section 37 of the IT Act, 1961. The assessee has merely claimed
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expense for fixed percentage on the basis of the so-called agreement and no specific details of expenses claimed have been furnished. The onus is always on the assessee to substantiate that the expenses have been claimed wholly and exclusively for the purpose of business. In the instant case, the assessee has not proved any nexus between the business and expenses claimed. Further, in the reply dated 5th February, 2013, MGF Development Ltd. has not given the reply regarding specific details of services provided to the assessee. He submitted that this was an integrated project consisting of shopping malls upto three floors and hotel of 4-6 floors. Revenue sharing was done only for the hotel and not for shopping mall. Further, no TDS has been made from the payments made against services provided. The provisions of section 40A(2)(b), according to the ld. CIT, DR were also required to be examined for considering the issue of sharing of revenue. He submitted that this project was not developed as a joint venture. The gross revenue from the business has to be shown in the Profit & Loss Account and against which the expenses can be claimed in the Profit & Loss Account. However, the assessee, in the garb of collaboration agreement has diverted a major part of the sale proceeds/revenue to a related party. He submitted that since the AO has already allowed interest expenses of Rs.5.87 crores on the fund given by MGF Development Ltd. to the assessee on day-to-day balance and has also allowed the expenses on account of brand fee @3% on sale of unit sold in shopping mall and hotel project amounting to Rs.4,04,90,845/- crores, both totaling
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to Rs.9.91 crores, the order of the ld.CIT(A) be reversed and that the order of the AO be restored.
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.
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.
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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 1 (SC), he submitted that the Hon’ble Supreme Court while agreeing with the view taken by the Hon’ble Delhi High Court in the case of Dalmia Cement (Bharat) Ltd. (supra) has held that no businessman can be compelled to maximize its profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own point but that of a prudent businessman. He also relied on the following decisions:- i) CIT vs. Rajan Nanda (2012) 349 ITR 8 (Del); ii) Vodafone South Ltd. vs. CIT (2015) 378 ITR 410 (Del); and iii) CIT vs. Rockman Cycle Industries (P) Ltd. (2011) 331 ITR 401 (P&H).
He accordingly submitted that the order of the CIT(A) be upheld and the grounds raised by the Revenue should be dismissed.
We have considered the rival arguments made by both the parties, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee company, in the instant case, developed a commercial shopping complex-cum-hotel complex at Jaipur. The hotel project, named ‘Hotel Fortune Select Metropolitan’ was sold to an associated concern M/s Multitude Infrastructure Pvt. Ltd. for Rs.95 crores out of which 60% of the same, i.e., an 17
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amount of Rs.57 crore was transferred to another associated concern M/s MGF Development Ltd. (MGFD) on the basis of a collaboration agreement entered into in A.Y. 2005-06 as consideration for providing funds, bank guarantee and technical expertise for the project. Since the existence of the agreement was never reported in the audited accounts of any year and the assessee, according to the AO, could not substantiate with corresponding details, etc., the AO held that there was no justification for making 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
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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 given by the ld.CIT(A) are irrelevant and, therefore, the well reasoned order of the AO should be restored and the order passed by the CIT(A) should be set aside. It is the submission of the ld. Counsel for the assessee that the ld.CIT(A) has passed a speaking and well reasoned order and, therefore, the same should be upheld wherein he has discussed all the points threadbare which needs no interference.
We find considerable force in the arguments advanced by the ld. Counsel for the assessee. It is an admitted fact that the AO in the order itself has allowed an amount of Rs.5,87,72,012/- being the utilization of funds provided by M/s MGF Development Ltd. Similarly, he has also allowed an amount of Rs.4,04,90,845/- towards brand fee as a fair compensation payable to M/s MGFD. Thus, the AO, in the instant case, has admitted the brand value of MGFD and the finance provided by the MGFD to the assessee. It is also an admitted fact that in the order passed 19
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u/s 143(3) in the case of MGFD, the amount of Rs.57 crores has been accepted by the AO as the share of revenue @ 60% of the hotel project at Jaipur. We, therefore, find merit in the submission of the ld. Counsel for the assessee that when the AO is not discarding the contribution of MGFD towards the completion of the project which is for the financing, implementation, providing brand name and other technical assistance for completion of the project, therefore, there is a commercial expediency in incurring the expenditure and the AO has no power to sit in the arm chair of the businessman and decide as to what would be the reasonable expenditure which is required to be incurred.
We find the Hon’ble Delhi High court in the case of CIT vs. Dalmia Cement (supra) has observed as under:- “7.It is to be noted that, in the present case, the question that has been raised 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 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.” 20
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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 under:- “34. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”
We find the Hon’ble Supreme Court in the case of CIT vs. Rajan Nanda [2012] 349 ITR 8, has observed as under: - “25. After giving our due and thoughtful consideration to the submissions of the parties of both sides, we feel that the assessee has been able to make out a case in its favour and order of the Tribunal does not call for any interference. We are persuaded by the following reasons in support of this view of ours: (i) to (v) ……………………… (vi) Once the legal provisions and the outlook of Department itself based on such legal provisions permit the assessee to have the tax planning of this nature, and the course of action taken by the assessee is permissible under law, the argument of colourable device cannot be advanced 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 21
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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 expenditure as a prudent businessman would incur for the purpose of business. (iii) Once it is established that there was nexus between the expenditure and the purpose of the business, not necessarily the business of the Assessee itself, the Revenue cannot put itself in the armchair of the businessman and decide how much of the expenditure is reasonable having regard to the circumstances of the case.” 22. We find the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Rockman Cycle Industries (P.) Ltd. [2011] 331 ITR 401 (Punjab & Haryana) has observed as under:- “23. In view of our aforesaid discussion and pronunciation of law, as referred to above, the question referred for consideration by the larger Bench can very well be answered by opining that the Assessing Officer or the appellate authorities and even the courts can determine the true legal relation resulting from a transaction. If some device has been used by the assessee to conceal true nature of the transaction, it is the duty of the taxing authority to unravel the device and determine its true character. However, the legal effect of the transaction cannot be displaced by probing into the "substance of the transaction". The taxing authority must not look at the matter from their own viewpoint but that of a prudent businessman. Each case will depend on its own
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facts. The exercise of jurisdiction cannot be stretched to hold a roving enquiry or deep probe.”
Since, in the instant case, the AO has accepted the contribution of MGF Development Ltd., towards the completion of the project by providing financing and technical expertise, providing brand name and other technical assistance for the completion of the project and when the assessee has proved the commercial expediency in incurring the expenditure, therefore, in view of the decisions cited (supra) and the detailed reasoning given by the ld.CIT(A) against each allegation raised by the AO, which has been reproduced in the preceding paragraphs, we are of the considered opinion that the order of the CIT(A) does not suffer from any infirmity. Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed.
In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 30.01.2020. Sd/- Sd/- (KULDIP SINGH) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 30th January, 2020. dk
ITA No.5828/Del/2014