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Facts
The assessee, a real estate developer, faced disallowances from the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) for: compensation paid to directors (Rs. 5.07 Cr), interest expenditure (Rs. 2.24 Cr) due to high-interest rates on related party loans, and compensation for contract cancellation to M/s BDR Buildtech (P) Ltd. (Rs. 95 Lakh). Separately, the Revenue appealed the CIT(A)'s deletion of a Rs. 17.25 Cr disallowance related to compensation paid to M/s Comfort Living Hotels (P) Ltd. (CLHPL) for contract termination, which the AO considered a sham transaction due to common shareholding and lack of supporting evidence.
Held
The Tribunal allowed the assessee's appeals regarding compensation to directors and M/s BDR Buildtech, finding them to be genuine business expenditures. It also allowed the appeal against interest disallowance, ruling that Section 40A(2)(a) was not applicable as interest rates paid to related parties were comparable to or lower than those paid to unrelated parties in the real estate sector. The Revenue's appeal concerning compensation to CLHPL was dismissed, affirming the CIT(A)'s decision, as the Tribunal found the termination commercially expedient and beneficial to the assessee, leading to a more favorable agreement with a new developer.
Key Issues
1. Whether compensation paid to directors and related entities constitutes genuine business expenditure allowable under Section 37 and not disallowable under Section 40A(2)(a) of the Income Tax Act. 2. Whether interest paid on unsecured loans, including to related parties, at prevailing market rates in the unorganized real estate sector can be disallowed under Section 40A(2)(a). 3. Whether compensation paid for contract termination, leading to a more beneficial commercial agreement, is a valid business expenditure.
Sections Cited
Section 37, Section 40A(2)(a), Section 131, Section 133(6), Section 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘H’, NEW DELHI
Before: Dr. B. R. R. KumarSh. Sudhir Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the assessee and the Revenue against the order of ld. CIT(A)-9, New Delhi dated 30.08.2019.
“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 11,17,52,779/-made by the ITO.
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That on facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the addition of Rs. 5,07,00,000/- on account of compensation paid to directors without appreciating the fact that the payment was on account of commercial expediency.
The ld. CIT(A) has erred in facts and in law in upholding the disallowance of interest expenditure of Rs. 2,24,19,616/- u/s 40A(2)(a) without appreciating the fact that many payments made were to unrelated parties.
The ld. CIT(A) has erred in facts and in law in upholding the disallowance of interest expenditure of Rs. 2,24,19,616/- u/s 40A(2)(a) by estimating an ad hoc figure of 18% as the rate of interest that should be allowed.
That the ld. CIT(A) has erred in facts and in law in upholding the disallowance of Rs. 95,00,000/- without appreciating the terms of the agreement between the Appellant and BDR Buildtech Pvt. Ltd.
The ld. CIT(A) has erred in facts and in law in upholding the disallowance of Rs. 95,00,000/- whereas there was no doubt raised regarding the genuineness of the transaction.
The ld. CIT(A) has erred in facts and in law in upholding the disallowance of Rs. 2,69,91,850/-by holding that the amount was a provision whereas in fact the claim was necessitated due to the matching principles since revenue was recognized in the year under consideration.
The ld. CIT(A) has erred in facts and in law in upholding the disallowance of Rs. 21,41,313/- without considering the fact that this was the first year in which the profit and loss account was prepared and expenses were accordingly claimed in the year under consideration.”
the Revenue has raised the following grounds of appeal:
“1. Whether on the facts and circumstances of the case as well as in law, the ld. CIT(A) erred in law and on facts in deleting the disallowance of Rs.17,25,00,000/- u/s 37 of the Act on account of compensation paid to M/s Confort Living Hotels Pvt. Ltd.”
The assessee company was engaged in the business of real estate as builder in term of the main activity of the company.
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Directors Remuneration:
During the year before us, the assessee company paid a total amount of Rs. 5.07 Cr. to the Directors. On query by the AO, the assessee submitted that the Directors namely, Mr. Anil Tak, Mr. Amit Tak, Mr. Naveen Tak, Mr. Sunil Tak have advanced unsecured loans to the company during the F.Y. 2012-13 with an understanding that the same shall be repaid that a company in three months. However, due to delays to statutory accruals and obtaining to development licenses, the company could not mobilise the funds and commenced its project and repay the loans. Hence, interest amount has been paid to the Directors who have lent money. The Assessing Officer held that the Directors have provided fund to the company as interest free loan for a limited period but no time period was mentioned. The AO also held that the assessee has not submitted any loan agreement with the Directors for borrowing and to justify the claim of compensation paid to them. The AO held that merely deduction of TDS does not prove the genuineness of expenditure and held that assessee has not furnished any proof to substantiate its claim that alleged payment of compensation was paid during the normal course of business. The AO held that there was no rationale given during the assessment proceedings to include the compensation as part of the cost of the land for which the amounts have been paid and since the payment was not related to purchase of land, transfer expenses or any other expenditure pertaining to its development of the land, the amounts paid by the assessee company to the Directors is disallowable u/s 37 of the Income Tax Act, 1961.
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The ld. CIT(A) affirmed the action of the AO holding that bare deduction of TDS does not relieve the requirements u/s 37 of the Act. The ld. CIT(A) held that the payment of compensation the Directors was barely a facade to lower the tax incidence of the assessee company.
Before us during the arguments, the ld. AR submitted that the assessee has received unsecured loan aggregating to Rs.24,86,20,000/- from Tak family in AY 2012-13, details of which are as under:
Amit Tak Rs. 75,000/- Anil Tak Rs.9,27,05,000/- Sunil Tak Rs.5,82,80,000/- Naveen Tak Rs.9,75,60,000/- Total Rs.24,86,20,000/-
From the ledger account of the assessee company in the books of Shri Amit Tak for the period 01-04-2012 to 31-03- 2015 reflects the amounts received and repaid as is evident from PB 90. It was argued that the assessee company has borrowed substantial amount from the Directors and his relatives during the year 2012 on the terms that the amount would be refunded within 3 months and interest will be paid after the issue of license to the assessee company. Since, there was delay in issue of license, no interest on account of loan taken were paid for two years by the assessee company to its directors but interest was paid for the present year only as is evident from PB-85. It was also submitted that the assessee company has refunded back the entire amount including interest and in the current year. The assessee company has paid monies on account of compensating the lenders for the loss of interest which is a pure business expenditure and the & 8616/Del/2019 5 Universe Heights (India) Pvt. Ltd.
same should be allowed as revenue expenditure. The compensation has been paid only for the purpose of business and since the lenders were denied the use of the funds for an extended period of time to the Assessee Company's inability to repay the amount earlier. PB 59-84 are the various correspondences between the directors and assessee company establishing that loan were taken by the assessee company for the purpose of business but somehow the license could not be obtained due to the market situation and other factors and that is why the project got delayed but the assessee company has obtained the license in June, 2014 which was submitted before the AO during the course of assessment proceedings.
On the other hand, the ld. DR supported the order of the Assessing Officer as well as the ld. CIT(A).
Heard the arguments of both the parties and perused the material available on record.
PB-87 is confirmed copy of ledger account from Sh. Amit Tak, showing the amount of loan, interest paid and amount of compensation paid. It is a corollary fact that TDS has also been deducted on the amount of interest paid during the year. We find that PB-89 is ledger account of Sh. Amit Tak in the books of assessee for the period from 01-04-2014 to 31-03-2015. PB- 92 is confirmed copy of ledger account from Sh. Anil Tak, showing the amount of loan, interest paid and amount of compensation. PB-94 is ledger account of Sh. Anil Tak in the books of assessee for the period from 01-04-2014 to 31-03- 2015. PB-96 is confirmed copy of account from Sh. Sunil Tak, showing the amount of loan, Interest paid and amount of compensation. PB-98 is ledger account of Sh. Sunil Tak in the books of assessee for the period from 01-04-2014 to 31-03- & 8616/Del/2019 6 Universe Heights (India) Pvt. Ltd.
2015. PB-100 is confirmed copy of account from Sh. Naveen Tak, showing the amount of loan, interest paid and amount of compensation. PB-102 is ledger account of Sh. Naveen Tak in the books of assessee for the period from 01-04-2014 to 31- 03-2015. It is also not in dispute that the amount received from the Directors was utilized for the purpose of purchase of land. The amounts have been received by the company for business purpose. It cannot be assumed by the Revenue that the Directors have paid an amount of Rs.49.71 Cr. as loan for zero benefit from the company. From the above evidence, it is established beyond doubt that loans were received for the purpose of business only and amount paid to the directors was the interest paid by the assessee on the amount to the tune of Rs.49.71 Cr.
In the result, the appeal of the assessee on this ground is allowed.
Disallowance of Interest u/s 40A(2)(a):
The Assessing Officer made disallowance of Rs.4,48,39,232/- u/s 40A(2)(a) on account of alleged excess interest paid by the assessee company on the amount of loan taken from the various parties mentioned below. Facts as noted from the Assessment order are that the AO has found that the appellant has paid interest @ 24% to 27% to various parties as mentioned below:
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Name Interest Rate Interest Amount Amit Tak 24% 15,830 Anil Tak 24% 70,10,022 Sunil Tak 24% 1,23,01,072 Naveen Tak 24% 2,05,91,842 Ashiana Housing Ltd. 27% 3,78,48,669 Dinesh Agarwal 24% 26,24,517 Manoj Agarwal 24% 10,50,351 Mukesh Agarwal 24% 18,46,849 Nav Ratan Agarwal 24% 11,03,904 Sindhwani Metal 24% 10,80,000 Engineering Pvt. Ltd. Total 8,54,73,056
The AO has made the following observations in the Assessment Order:
“8.2 Assessee was asked to explain that rate of Interest at which interest was paid is not at arm's length prices and why it should not be restricted at market prices @ 12% p.a. The AR of the assessee submitted reply on 20.11.2017 to justify the claim of higher rate of interest and submitted the note on interest to justify the claim of higher rate of interest. The assessee during the hearing on 04.12.2017 filed the photocopy of POA alongwith copies of letters from directors of the company for claiming higher rate of interest as well as its correspondence with directors. However no loan agreements were submitted in this regard. Relevant part of assessee's reply dated 20.11.2017 is reproduced below:
NOTE ON INTEREST RATES The company is a unlisted having a land parcel and was conceiving a project on the same.
The company had infact received the development license for the project during F. Y. 2014-15. In the said scenario, the & 8616/Del/2019 8 Universe Heights (India) Pvt. Ltd. rate of interest @24% is a rate which is very much prevalent in unorganized real estate sector. Since organized lenders such a Banks and Financial Institutions does not lend at this stage. Further, the company had got loan form unrelated party as well i.e. Ashiana Housing Limited @ 27% p.a. Also, all the loans where unsecured and hence the risk was high.
In general, the organized lenders such as PE funds, NBFC's Banks, Financial Institutions etc also unreal estate at such stage at the rates ranging from 18% to 24% despite of having security over land and other controls. Hence, the rate 2% per month (i.e. 24% p.a.) actually paid to lenders is a rate which is very much prevalent and hence, is reasonable."
8.3 Reply of the ld. AR of assessee is not tenable in the absence of loan agreements or any other documents to prove that assessee has to pay interest at such exorbitantly high rate due to certain business expediency. It is a common experience that interest is normally paid at the rate of 12% and assessee has not been able to prove that there was some abnormal situation to warrant such high rate of interest. Therefore, the excess payment of interest of Rs.4,48,39,232/- is disallowed u/s 40A(2)(a) of the Income Tax Act, 1961 and it will be reduced the cost of land accordingly.”
Before the ld. CIT(A), the ld. AR submitted as under:
• That section 40A(2)(a) is not applicable at all in this case as most of the parties are unrelated as is evident from plain reading of assessment order and PB-85 and Assessing Officer has only doubted the rate of interest.
• That the assessee company is executing a real estate project with land purchased and has also received a development license for the same. The rate of interest @24% is a rate which is very much prevalent in the real & 8616/Del/2019 9 Universe Heights (India) Pvt. Ltd. estate sector. Further the company had got loan from unrelated party as well i.e. Ashiana Housing Ltd. @27% p.a. also, all the loans were unsecured and hence at the high risk.
• That the organized lenders such as NBFCs, banks, financial institution etc. also fund real estate at such stage at interest rates ranging from 18% to 24% despite having security overland and other controls. Hence, the rate of 24% is very much prevalent and hence is reasonable.
• That it is extremely difficult to arrange for financing of a project from banks before the construction is underway. The only way to finance a project before construction is to approach private lenders or NBFCs who only advance loans at high rates.
• That the rate of interest paid to related parties is the same or lesser than the rate of interest paid to unrelated parties as is evident from PB-85. Hence, no question arises for application of section 40(A)(2)(a) of Income Tax Act, 1961.
The ld. CIT(A) held that in FY 2012-13, the assessee has borrowed unsecured loans, on which, interest was to be charged after the appellant obtained the relevant land development licenses. Thereafter, since in the year under consideration, the appellant had actually obtained the said license, therefore, the appellant repaid the entire loan, along with the interest @ 24%. During the assessment proceedings, it was observed by the AO that the normal rate of interest on loans is 12%, as against the claim of the appellant of 24%. Thereafter, since the lenders where related to the appellant, & 8616/Del/2019 10 Universe Heights (India) Pvt. Ltd.
therefore, the AO, under the provisions of Section 40A(2)(a), disallowed the excessive interest charged at the rate of 12% and hence, made a disallowance of Rs 4,48,39,232/-.
The ld. CIT(A) has restricted the interest payment from 24% to 18% and held that interest payment @ 18% is justifiable.
For the sake of ready reference, the operative part of the order of the ld. CIT(A) is reproduced as under:
In the written submissions at appellate proceedings, the appellant has stated that it had parcel of land in Gurgaon, Haryana and that the funds were required by it for development of projects on the said property. The appellant claimed that in a practical scenario, no Bank, Financial Institution or NBFC would lend a loan to unorganized real estate companies like the appellant, owing to which, the appellant has to resort to other sources of lending. For this, the appellant placed its reliance on an RBI circular, which prohibits the Banks to lend against lands. The appellant claimed that the loan it had borrowed from the lenders, was unsecured and that such loans usually have a rate of interest ranging between 18% to 24%, as was supported by the appellant with a list of debentures and its coupon rates, as are issued by companies in similar operations as that of the appellant. Hence, the appellant claimed that the rate of interest of 24% is justified in the facts and circumstances of operations of the real estate companies like the appellant. The appellant also took support of the delay in payments to the lenders, stating that such delay leads to accretion of a higher rate of interest on the borrowings. Lastly, the appellant stated that it has also made borrowings from an unrelated party, namely, M/s Ashiana Housing Limited, on which, it had paid interest @ 27% and hence, the appellant supported the interest to be justifiable.
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6.4 On careful consideration of facts and submissions, it emanates that the AO concurs the genuineness as well as the business expediency of the interest paid upon the loan. However, the additions quests to create a debate as to the justification of the rate at which such interest is to be paid. While the appellant has paid an interest @ 24%, the AO finds 12% justifiable and since the lenders are related to the appellant company, therefore, Section 40A(2)(a) comes into play, whereby, the AO has disallowed the balance interest. That being said, to justify the excess interest, the appellant has drawn my attention towards the peculiar fact in its situation, being that in unorganized real estate sector. The appellant appropriately stated that the banks and financial institutions resist to lend money to any entity in this sector, inspite of even placing land as collateral. Therefore, the players in this sector have to necessarily opt for obtaining debts at higher rate of interest. More specifically in the case of the appellant, even the loan is unsecured, thereby freeing the appellant with any lien or mortgage over any of its assets. Such unsecured loans necessarily command a higher premium on interest over those secured by an asset. This distinguishes the applicability of 12% as rate of interest on loans, as has been contended by the AO in his assessment order.
Now, shifting the focus to the written submissions of the appellant, it has been submitted by the appellant that the normal rate of interest for the entities in its sector obtaining unsecured loans, arises to be 18%-24%, as has been demonstrated from the coupon rates of debentures 1 issued by the other real estate companies. Now, since the appellant has itself accepted that financing, in similar situation, conditions and stipulations, can be made at the lowest rate of interest of 18%, hence, it automatically proves that the appellant has indeed paid excess interest to the related party lenders. Therefore, Section 40A(2)(a) automatically comes into action, thereby disallowing the excess payment of interest to the tune of 6% and hence, under Sec 40A(2)(a), & 8616/Del/2019 12 Universe Heights (India) Pvt. Ltd. the tenable rate of interest on these loans is 18% as against 24% charged on the assessee.
6.5 The appellant has contended that it has made payment @ 27% to Ashiana Housing Limited, which is not its related concern. Thereupon, the appellant sought to justify its claim under Sec 40A(2)(a) of the Act. However, against this contention, I observe that Ashiana Housing Limited is not an NBFC, but a developer of projects, which whom even the appellant has entered into an agreement. Therefore, the interest of any random company, occasionally indulged in lending activities, cannot be called as a comparable. Rather, the comparable ought to be the interest charged by Banks or Financial Institutions in situations as that of the appellant, which in appellant’s own admission, would range between 18% to 24%. Thereby, a prudent entity would obviously latch on to a lower rate of interest, which in the present situation would obviously be 18% and hence, a justifiable rate of interest.
6.6 Lastly, the appellant has contended that since it has delayed the payment of interest, therefore, the appellant was bound to pay an extra interest to its lender. Even in this contention, I do not find any merit since the appellant did not present any loan agreement justifying or proving any penal interest that would be charged on delayed repayments of loan. Hence, this contention is rejected.
Therefore, in conclusion, taking the basis of appellants own admission, I find that interest @ 18% is justifiable under Sec 40A(2)(a) of the Act and hence, the disallowance is restricted to Rs.2,24,19,616/-. Hence, these grounds of appeal ere partly allowed and a disallowance of Rs. 2,24,19,616- is upheld.
Aggrieved with the alteration of the interest from 24% to 18%, the assessee appealed before the Tribunal.
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Before us, the ld. AR repeated the arguments taken up before the ld. CIT(A) and the ld. DR supported the order of the Assessing Officer as well as the ld. CIT(A).
Heard the arguments of both the parties and perused the material available on record.
We find that the ld. CIT(A) has not disputed any of the arguments that section 40A(2)(a) is not applicable at all in this case as most of the parties are unrelated, the assessee company is executing a real estate project with land purchased and has also received a development license for the same. The ld. CIT(A) has not disputed the prevalent market rate of interest @24% in the real estate sector. The assessee had got loan from unrelated party as well i.e. Ashiana Housing Ltd. @27% p.a. It is a fact that NBFCs, banks, financial institution etc. also fund real estate at interest rates ranging from 18% to 24%.
Hence, keeping in view the entirety of the events, we hold that the disallowance u/s 40A(2)(a) cannot be invoked automatically unless prove that the amounts paid are more than the market averages or paid in excess of the interest paid parties at arm’s length. In the present case, the assessee has paid more interest to other, outside third parties and paid less interest to the Directors. Hence, we hold that the provisions of Section 40A(2)(a) cannot be invoked.
In the result, the appeal of the assessee on this ground is allowed.
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Compensation to M/s BDR Buildtech (P) Ltd.:
The AO made disallowance of Rs.95,00,000/- u/s 37 & 40A(2)(a) on account of compensation paid to M/s BDR Buildtech (P) Ltd. on the ground that assessee has failed to prove the business purpose and are dealt with together for the sake of proper adjudication.
Excerpts from the Assessment Order.
Disallowance for Payment of Compensation of Rs.95,00,000/- 10.1 On perusal of Balance sheet and Profit & Loss account of the company, the assessee company claimed expenses on account of compensation of Rs.95,00,000/- paid to M/s BDR Buildtech Private Ltd. due to cancellation of contract agreement between assessee and M/s Comforts Living Hotels (P) ltd., which was a 100% subsidiary company of M/s BDR Builders & Developers Pvt. Ltd by executing the cancellation agreement on dt.21/02/2015 whereas agreement between land owner and developer has been cancelled on dated 11.06.2014. The appointment of Sh. Anil Tak as additional director on 17.02.2015 again after resignation was only for executing the cancellation agreement and just after executing the said agreement, Shri Anil Tak again resigned on 22.02.2015.
10.2 M/s BDR Buildtech (P) Ltd holds the 55.56% share of the assessee company up to 14.02.2015 and the Shri Rajesh Gupta, Director of the assessee company was also director in M/s BDR Buildtech (P) Ltd. up to 24.02.2015 and have influence over decision making of the assessee company in executing the agreement for compensation accordingly.
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10.3 To know the genuineness of transactions, the summons are issued to director of M/s Comfort Living (Hotel) Pvt. Ltd. on 06.12.2017 and 13.12.2017 for appearing on 12.12.2017 and 18.12.2017 respectively to prove the genuineness of transactions made by them. However, they failed to appear before the assessing authority. In spite of issuing summons twice, he deliberately did not appear. It means he has nothing to say in this matter.
10.4 In view of above facts, claim of compensation paid of Rs.95,00,000/- remained unsubstantiated. The assessee failed to produce any documentary evidence to prove the compensation was paid due to any business expediency and was paid wholly exclusively for the purpose of business. Since, the assessee had made claim, it was his responsibility to prove that the expenses were incurred for the purpose of business.
However, assessee failed to do so. Therefore, compensation paid to M/s BDR Buildtech Private Ltd, is disallowed u/s 37 and 40A(2)(a) of the Income Tax Act, 1961 and it will be reduce the cost of land accordingly.
Aggrieved, the assessee filed appeal before the ld. CIT(A).
Before the ld. CIT(A), the appellant submitted as under:
• That the assessee company has entered into an agreement with M/s BDR Buildtech (P) Ltd. to share 25% of revenue share received by the assessee under the development agreement. • In terms of the agreement, if the company failed to obtain development license for group housing project then the & 8616/Del/2019 16 Universe Heights (India) Pvt. Ltd. said company had an option to terminate the agreement and to claim compensation as per the details mentioned in the brief note. • That the assessee company had received a deposit of Rs. 18.95 crs as well under the said agreement and if the company failed to obtain development license within a prescribed timelines, the other party was entitled to terminate the contract and claim compensation. • There was no dispute that the other party had provided a substantial sum of money to the assessee company for the said agreement. Even the computation of compensation amount is defined in the agreement. • That since the compensation has been paid for cancelling/terminating the rights of the third party and the assessee company has claimed the expenditure as business expenditure.
After going through the submission, the ld. CIT(A) held that no compensation needs to be paid and affirmed the order of the Assessing Officer on this issue.
For the sake ready reference, the relevant part of the order of the ld. CIT(A) is as under:
“The appellant, vide agreement dated 21.11.2012 and 25.04.2013, entered into arrangement with BBPL, for the development of land. As per the terms of the agreement, BE was eligible to terminate the agreement, if the appellant failed to obtain the required land licenses, on the occurrence of which, the appellant was to pay Rs.15 lacs as compensation uptill 30.06.2014, post which, it had to pay Rs. 10 lacs per month up till the payment of compensation is made. This agreement was subsequently terminated on 21.02.2015. Thereafter, the appellant, in accordance with the original agreement, paid compensation Rs.95,00,000/-.
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8.3 In the assessment proceedings, it was noted by the AO that BBPL is a 100% subsidiary of M/s BDR Builders & Developers Private Limited, which, along with its other fellow subsidiaries, controlled 55.56% of shareholding in the appellant company uptill 14.02.2015. Therefore, the AO concluded that BBPL has decisive control over the appellant company, and hence, there did not actually arise any requirement for the appellant to terminate the agreement with BBPL. Further, the AO also made an observation that the original agreement between the land owner and the developer got terminated on 11.06.2014, while that with BBPL got terminated on 21.02.2015. The AO also made an observation that Sh. Anil Tak, a director of the appellant company, was made additional director on 17.02.2015 and that he again resigned on 22.02.2015, thereby concluding that he was made the director merely for the execution of this transaction. Thereafter, the AO concluded that since the appellant was not able to produce any documentary evidence to prove the compensation, therefore, he disallowed the expenditure u/s 37, as well as Sec 40A(2)(a) of the Act.
8.4 In its written submissions, the appellant contended that it had failed to obtain the required/land development license, owing to which, there was a termination of agreement between the appellant and the BBPL. It was stated that the agreement between the appellant and BBPL quantified the compensation, should there be a delay in obtain the land development license beyond 31.03.2014. The appellant stated that no summon was ever issued to the director of BBPL and hence, no adverse inference can be drawn.
8.5 Keeping in consideration the submissions and contentions of the AO and the appellant, I find that there involves two separate and mutually exclusive basis the aforesaid addition, with the first being the inability of the appellant to prove the genuineness of the transaction and the second being the inability to justify the quantum of deduction tenable. Since there two contentions are different and not & 8616/Del/2019 18 Universe Heights (India) Pvt. Ltd. dependent on each other, therefore, they are dealt and explained separately in the below paragraphs.
8.6 On the first aspect, i.e., the genuineness of the transactions, I place my reliance on the agreement between the appellant and BBPL, wherein, Clause 8 states that BBPL shall derive a power to terminate the agreement, if the appellant fails to obtain the land development licenses. Thereafter, the subsequent clauses seek to place a quantification on the amount of compensation that is to be paid by the appellant, in the event of termination. It is these clauses that are also quoted in the cancellation agreement dated 21.02.2015. Hence, I find that appellant, in accordance with the very agreement, failed to obtain the license and hence, the agreement was bound to terminate. Therefore, since the very event of termination arose out a contractual clause, hence, I do not find any infirmity as to the genuineness of the event of termination of the contract.
With respect to the observation of the AO as to the control of BBPL group, over the appellant, I again reiterate that the BDR Buildtech & Developers Private Limited and the appellant are two separate legal and commercial entities, having their operations mutually exclusive from each other. Therefore, the bare fact that the BBPL, through its group companies, holds substantial interest in the appellant, cannot be a guiding factor to create suspicion over the genuineness of the compensation payable to BBPL. It is a fact that the appellant would enter into a transaction, in a manner, best suited to its commercial interest. Nowhere is it bound to be controlled by its shareholders. Therefore, these observation of the AO does not lead to any infirmity over the genuineness of the cancellation of agreement by the appellant.
Further, with respect to the appointment and resignation of Mr. Anil Tak as the director, the AO has not indicated as to how the event proves to be of essence in concluding the compensation to be sham. The appointment and resignation of the director is a separate event, having no bearing on the & 8616/Del/2019 19 Universe Heights (India) Pvt. Ltd. compensation paid to BBPL. Also, the AO has claimed to have issued summons under Sec 131 to the directors of “Comfort Living (Hotels) Private Limited”, which, the AO states to be non complied by these directors. However, as against this, I do not find any reference as to how the summoning of directors of “Comfort Living (Hotels) Private Limited” or their absence, would support or prove the absence of genuineness of the compensation paid to BBPL.
Even otherwise, the appellant provided the financial statements of BBPL, ITR Acknowledgement for the year under consideration and the bank statement of BBPL, wherein, it is evident that BBPL has indeed received the compensation and has duly accounted the same as well, in its books of accounts. Therefore, I do not find any adversity inferring to a doubt on the genuineness of the transaction.
8.6 Now, coming on the second aspect, i.e., the justification of quantification of the compensation expense, I again lay my reliance on the agreement amongst appellant and BBPL wherewith, the appellant was supposed obtain the land license uptill 31st March 2014, failing which, the development agreement would terminate. It is a fact that the appellant, indeed, was unable to obtain the land development license up till 31 st March 2015. As a matter of fact, the appellant, in its own submissions and paper book, has provided a letter written by it to CLHP on 06.01.2014 [reference to page no 137-139 of Volume 1 of Paper Book], wherewith, it has intimated the party of its failure to obtain the required land license. The said letter, even though written to a different concern (though related to BBPL) other than BBPL, clearly indicates the appellant’s own intention and declaration on its failure to obtain the land development license. This very letter substantiates that the appellant presented its incapability to obtain the land development license, even before 31st March 2014, thus, as a matter of commercial as well as contractual prudence, leading the agreement to terminate on 06.01.2014, while on papers, the termination might have happened 21.02.2015.
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In the light of the aforesaid paragraph, I now lay my attention to Section 40A(2)(a) read with Sec 37(1), so as to consider the justification of quantification of compensation expense. In this regard, I observe that the agreement was impliedly cancelled on 06.01.2014. Therefore, had BBPL not been a related party, the appellant would have had to terminated the agreement within a time frame reasonable closer to 06.01.2014. Therefore, the fact that the appellant terminated its agreement on 21.02.2015, appears to be a mere disguise to increase the amount of compensation [As mentioned in clause 8 and 9 of the development agreement], vis-a-vis, that justifiable to an unrelated party who would have obviously terminated the agreement on 06.01.2014 itself. That being said, on a transaction with an unrelated party, there would have never arisen a stipulation of the quantification of compensation, as is stated in clause 8 and 9 of agreement dated 30.06.2014 and hence, the quantification of compensation fails on the ground of Section 40A(2)(a) of the Act.
It is not the fact of the case that the appellant has provided a circumstantial reasoning and justification of termination of land development agreement, as is done in ground 10 to 13. Rather, in the facts of the present grounds, the appellant has plainly relied on the contractual terms, which might be true on papers, but fail on the parameter as to why there was a delayed cancellation of agreement, vis-a-vis, the fact that the appellant had already expressed its inability much earlier to termination to agreement. Extending the argument further, it appears that the delayed agreement was barely to increase the amount of compensation, which as per the agreement, arose on monthly basis and hence, I do not find any justification behind such delay.
In view of my deliberation here above and factual matrix of the case, I do not find any justification of the compensation, under Sec 40A(2)(a) read with Sec 37(1) and hence, the addition is confirmed in the hands of the appellant.
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Accordingly, I dismiss the grounds of appeal and hence, the disallowance is directed to be upheld.
Aggrieved, the assessee filed appeal before the Tribunal.
Before us, the ld. AR reiterated the arguments taken up before the ld. CIT(A) that the assessee company had received a deposit of Rs. 18.95 crs as well under the said agreement and if the company failed to obtain development license within a prescribed timelines, the other party was entitled to terminate the contract and claim compensation. There was no dispute that the other party had provided a substantial sum of money to the assessee company for the said agreement. Even the computation of compensation amount is defined in the agreement. It was argued that since the compensation has been paid for cancelling/terminating the rights of the third party and the assessee company has claimed the expenditure as business expenditure.
The ld. DR relied on the order of the ld. CIT(A) and the order of the Assessing Officer.
Heard the arguments of both the parties and perused the material available on record.
We find that the AO has made the addition on the ground that assessee has not submitted any documentary evidence to substantiate its claim whereas assessee has submitted agreements made between the parties showing that land was purchased, licence has been obtained and business gets started but this process got delayed and that is why agreements gets cancelled and compensation was paid which is in the nature of pure business expenditure which is allowable u/s 37. The AO has further observed that summons was issued to the directors & 8616/Del/2019 22 Universe Heights (India) Pvt. Ltd.
of the said company but they did not turn up to explain its case. In fact, summons was not issued to the Director of M/s BDR. Even then failure to respond to the summons issued by the Department by the recipient company which is in regular business of real estate and filing return of income cannot be disadvantageous to the assessee in the absence of any other material brought on record. To examine straight, there was no dispute that the assessee company has received Rs.18.95 Cr. as deposit from M/s BDR Buildtech to share 25% of the revenue received by the assessee under the development agreement. After cancellation of the agreement, the assessee had returned the deposit of Rs.18.95 Cr. to M/s BDR Buildtech which is also not in dispute. The amount of Rs.95,00,000/- is paid as compensation to M/s BDR Buildtech for cancellation of the agreement. Even otherwise, the amount paid was equivalent or even less than to the interest one can earn on Rs.18.95 Cr. at the market rate. The revenue authorities have also failed to give credence to the fact that the assessee while utilizing the Rs.18.95 Cr. received from the M/s BDR Buildtech has also suppose to share 25% of the revenue. After cancelling the agreement with M/s BDR Buildtech, the assessee repaid the deposit of Rs.18.95 Cr. and also got back the share of 25% which he subsequently sold to another party. Hence, the amount paid by the assessee of Rs.95,00,000/- on the amount of Rs.18.95 Cr. received from M/s BDR Buildtech can be as well treated as business expenditure.
In the result, the appeal of the assessee on this ground is allowed.
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Disallowance of Rs.2,69,91,850/-:
The amount of expenditure does not pertain to the year before us but for A.Y. 2016-17, A.Y. 2017-18, A.Y. 2018-19, hence, the addition made by the AO during the year is upheld with directions to allow the expenditure in the year to which it belongs to.
In the result, the appeal of the assessee on this ground is dismissed.
Disallowance of Rs.21,41,313/-:
This ground raised by the assessee is dismissed as not pressed.
In the result, the appeal of the assessee is allowed as well as the Revenue is dismissed.
Compensation to M/s Comfort Living Hotels (P) Ltd.:
This ground of the Revenue is directed against the deletion by the ld. CIT(A), of the disallowance of Rs.17.25 Cr. made by the AO on account of compensation paid to M/s Comfort Living Hotels (P) Ltd. for cancellation of agreement between the assessee company and the said company on the ground that assessee has failed to prove the business purpose. Brief facts of the issue were that the AO has disallowed the expenditure on the ground that the development agreement was terminated on the same day that the development license was allotted to the company. The cancellation deed is also disbelieved by the AO. The AO has also disbelieved the transaction as the shareholding pattern suggested that the & 8616/Del/2019 24 Universe Heights (India) Pvt. Ltd.
shareholders of the Appellant company and M/s Comfort Living Hotels P. Ltd. was common and that Mr. Rajesh Gupta and M/s BDR Buildtech P. Ltd. owned 47.7% of the Appellant’s shares and were therefore in a position to influence the decision making process of the Appellant Company. The AO has also mentioned that the compensation was not at arm’s length. The AO also asked for documentary evidence of the work done by CLHPL for which it got such a large compensation. The AO then came to a conclusion that in the absence of any evidence of work done, there was no loss caused to the other contracting party for which it was compensated.
Excerpts from the order of the Assessing Officer “9.1. On perusal of Balance sheet and Profit & Loss account of the company, it noticed that assessee any has claimed expenses on account 'compensation' paid Rs. 17,25,00,000/- to M/s Comfort Living Hotels (P) Ltd. (CLHPL) as revenue expenditure paid for cancellation of contract agreement made between the assessee company and M/s Comfort Living Hotels (P) Ltd., subsidiary company of M/s BDR Builders 86 Developers Pvt. Ltd. on 23.08.2013. As per the Clause No. 13.5 of Contract agreement executed 28.03.2013 between assessee company and M/s Comfort living Hotels (P) Ltd. terms of termination of contract are as under:
"Termination prior to grant of Development license:
Prior to the grant of Development License by DTPC if either of the parties i.e. the Land owner or the Developer wishes to terminate this Development agreement for any reasons, the agreement can be terminated with the mutual consent of parties.
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In the event of termination by mutual consent, the party terminating the Development agreement shall pay compensation to the other party. The amount of compensation shall be decided mutually in accordance with loss of Profit and damages caused the other party.
However, the Development Agreement cannot be terminated once Development license is obtained an agreement is registered."
9.2 On going through this clause, it seems that assessee company executed the Deed of Cancellation on same day when development license got by the company. The termination agreement executed on judicial stamp paper which is not for the purpose of executing agreements is nothing but creation of a document to give colour of genuineness to an otherwise sham transaction.
9.3 The assessee has not brought any documentary evidence on record to prove the extraordinary conditions which led it to terminate the contract on the very date the company got the development license. Further, no proof was furnished to justify the computation of the amount of compensation. Thus, it remained unexplained that what was the business expediency and what was the basis of computation of the compensation.
9.4 On perusal of Share holding pattern of the company between 01.04.2014 to 31.03.2015, it is observed that Comfort Living Hotels Pvt. Ltd. holds 32,00,000 shares of the assessee company which comes to 18.30% of Total Equity and M/s BDR Buildtech Pvt. Ltd. holds 51,55,000 which comes to 29.401% of total Equity Share Capital. Thus, BDR Builder and Developer Pvt. Ltd. is holding company of M/s Comfort Living Hotels (P) Ltd.
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9.5 During the Period 28.03.2013 to 12.08.201, M/s Comfort Living Hotels (P) Ltd. (100% subsidiary company of M/s BDR Builders and Developers Pvt. Ltd.) and M/s BDR Buildtech (P) Ltd. holds 47.70% shares of assessee company and the director Shri Rajesh Gupta was also director in M/s BDR Buildtech Pvt. Ltd. and BDR Builders and Developers Pvt. Ltd. were same group companies and have influence over decision making of the assessee company.
9.6 From the above facts, it can easily be concluded that M/s BDR Buildtech (P) Ltd. and Sri Rajesh Gupta were in a position to influence the decision making process of the assessee company and accordingly decided to pay exorbitant compensation. The amount of compensation paid to M/s Comfort Living Hotels Pvt. Ltd. of Rs.17,25,00,000/- was decided mutually by the both companies and mentioned in deed of cancellation is not as per arm's length prices. No explanation regarding basis of such huge amount of compensation was furnished during the assessment proceeding.
9.7 The AR of the asses see was asked to submit the documentary evidence for work executed by CLHPL vide question no. 3 of the notice u/s 142(1) of the Act dated 01.11.2017. But the assessee has not furnished any documentary evidence in respect of the aforesaid issue. Further, vide note sheet entry dated 13.12.2017 the assessee company was again asked to furnish documentary evidence in respect of work executed by CLHPL in support for paying compensation of Rs. 17.25 Cr. In response to this, The AR of the assessee submitted the reply on 15.12.2017 and mentioned that they do not have any documentary evidence in support of claim and & 8616/Del/2019 27 Universe Heights (India) Pvt. Ltd. have only deed of cancellation. The relevant part of assessee's reply is reproduced below:
"NOTICE ON COMPENSATION PAID TO COMFORT LIVING HOTELS PRIVATE LIMITED The company had entered into a development agreement with M/s Comfort Living Hotels Private Limited. In terms of the said agreement, In case of termination of the agreement by of the parties, the developer was entitled to compensation based for the loss of opportunity and the time and efforts put by them. The developer i.e. Comfort Living Hotels Private Limited had done a lot of preparatory work such as time to time meetings with the landowners. Liasoning with various departments, conducting market research and surveys, building up team and planning etc. Also the developer had put his entire focus on the project, it could not look for other opportunity in the market. The developer was paid compensation for such time and energy as well as the loss of opportunity. Further, every such work do not have any supporting document with it. Compensation are primarily commercial transactions aimed at compensating the other party for the loss suffered by it by entering into the transaction. The document wherein both the parties have agreed for such compensation and terminate the agreement has already been submitted by us."
9.8 Further, notice u/s 133 (6) of the Income Tax Act, 1961 have issued to M/s CLHPL on dated 20.03.2017 and 23.10.2017 for the compliance on dated 24.03.2017 and 06.11.2017 respectively. In response to the notice dated 15.03.2017, the company filed only bank statement and ITR and no other details filed as required and notice dated 23.10.2017 remained un-replied in specifically asked to furnish the details of development work done by it from the date DA to date of termination of DA for which huge compensation was given to it.
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9.9 The summons are issued to director of M/s Comfort Living (Hotel) Pvt. Ltd. on dated 06.12.2017 and 13.12.2017 for appearing on 12.12.2017 and 18.12.2017 respectively to prove the genuineness of transactions made by them but he failed to appear before the assessing authority. In compliance of first summon u/s 131 of the Act dated 06.12.2017. The AR of the assessee appeared before the assessing authority and argded that according to summon personally or authorized representative may appear and there is no requirement to personal deposition. However, it was clearly mentioned in the summons that the director was required for personal deposition of director duly authorized by the board of company. However to meet the objection of the AR of the assessee, summon u/s 131 of the Act was again issued on 13.12.2017 for compliance on 18.12.2017 and also sent by email on 13.12.2017. In spite of issuing summons twice, the director of the company deliberately did not appear. Which logically leads to conclusion that he has nothing to say in this matter? However, reply has been submitted by post on 22.12.2017 enclosing simply Balance Sheet and P&L Account and Development rent agreement etc but has not furnished any reply on the work executed by it for which huge compensation of Rs. 17.25 Crore was paid to it by the assessee company.
9.10 The assessee's reply is duly considered and found unacceptable. It is beyond imagination that such huge amount of compensation was paid without any documentary evidence or without any basis for computation of compensation. There must be some detail about the claim of compensation and also basis for it. The claimant should have given any detail of loss incurred by it to claim the compensation. However, in the & 8616/Del/2019 29 Universe Heights (India) Pvt. Ltd. instant case all such evidences or details are conspicuous by their absence. It appears that the assessee company was too eager to pay compensation to the other party and compensation was not paid for some business expediency. As was seen in the case of payment of compensation for loss of interest and payment of interest at high rate as discussed above, it appears that assessee, instead of being interested in protecting interest of its business and minimize its expenses, is more interested to pay exorbitant sums to its related parties for which no plausible explanation or logical evidences exist. It has only made some story to justify such claim and failed to prove them by producing cogent documentary evidence.
9.11 As the assessee itself confessed in its reply dated 15.12.2017 that they do not have any documentary evidence for expenses or work executed by the CLHPL for which assessee have to pay compensation at time of cancellation of contract executed on 28.03.2013 by simply executing deed of cancellation on dated 11.06.2014. Merely executing the deed of cancellation and making payment through banking channel and book entry does not establish the genuineness of expenditure and genuineness of expenditure depends upon documentary evidence which is not available with assessee as confessed.
9.12 It is evident from the table of shareholding mentioned in clause no.4 that all the compensation was paid only after transferring the entire shareholding form one entity to another entity and compensations paid only for transferring of entire shareholding not for cancellation of contracts. The assessee tried to give & 8616/Del/2019 30 Universe Heights (India) Pvt. Ltd. colours to the transactions by way of cancellation of contracts.
9.13 From the above detail and discussion it is clear that assessee in order to avoid tax on its income by and with the purpose to reduce its income artificially by increasing its expenses, has made payment of compensation for cancellation of contract to a company in which its director was substantially interested. The Cancellation Agreement was executed on a judicial stamp paper which is not the common practice. The Agreement was not registered. There was no basis for computation of compensation. There was no evidence of any loss incurred by the other contracting company for which it was compensated. There was no basis for computation of such huge compensation. The assessee failed to produce any proof in respect of the above points despite having been asked again and again. Thus, it can be concluded that assessee paid the above sum considerations other than the any business consideration.
9.14 In view of the above facts, claim of compensation paid of Rs. 17,25,00,000/- to M/s Comfort Living Hotels Pvt. Ltd, is disallowed u/s 37 of the Income Tax Act, 1961 and added back to Income from Business and Profession.”
Aggrieved, the assessee filed appeal before the ld. CIT(A).
The ld. CIT(A) deleted the addition holding that the AO erred in quantification of the amount of compensation as well as deeming the company and its shareholders as one entity for ignoring the separate legal entities.
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Aggrieved, the Revenue filed appeal before the Tribunal. Before us, the ld. DR argued that, • The amounts have been paid to CLHPL which is a subsidiary company of M/s BDR Builders. • The CLHPL and M/s BDR builders hold 18.3% and 29.4% of equity share capital in the assessee company and hence there was collusion. • The Directors in both the companies are also common and hence collusion is clearly proved. • Since, the Directors are common, the assessee paid exorbitant compensation to CLHPL which is not allowable as per provisions of Section 40A(2)(a). • The assessee has not furnished any documentary evidences before the AO in respect of the work executed by the CLHPL. • In response to the notices issued by the AO, CLHPL filed only bank statement and ITR and the other queries remained unanswered. • Summons given to the Directors were not complied with. • There was no documentary evidence for the work executed or expenses incurred by CLHPL.
Rebutting the arguments of the ld. DR, the ld. AR submitted that the company had entered into a development agreement with M/s Comfort Living Hotels (P) Ltd. (CLHPL). In terms of the said agreement, in case of termination of the agreement by either of the parties, the developer was entitled to compensation based on loss of opportunity and the time and efforts put by them. It was argued that the developer i.e. CLHPL had done a lot of preparatory work such as time to time meetings with the landowners, liasoning with various & 8616/Del/2019 32 Universe Heights (India) Pvt. Ltd.
departments, conducting market research and survey, building up team and planning etc. It was further argued that assessee company got an opportunity to associate with a new builder at better terms therefore it was always beneficial for the assessee to terminate this agreement and enter into a new agreement. It was argued that the compensation is primarily a commercial transaction aimed at compensating the other party for loss suffered by it into the transaction since the affected party will no longer be a part of the project.
The ld. AR reiterated the evidences submitted before the revenue authorities which are, • Brief note on compensation paid to CLHPL.(PB-127) • Detailed note on compensation paid to CLHPL.(PB-128) • Development agreement dated 28-03-2013 between the assesse company and CLHPL. (PB-130-136) • Clause B - Land owner is the absolute, legal, beneficial an registered owner entitled to the vacant and peaceful possession of 16 Acres c agricultural land situated at village Dhunela, Sector-33, Sohna, Gurgaoi Haryana, on which the land owner has applied for change land use and issue LOI for development of the residential group housing project. Clause 13.5 - Prior to the grant of development licence by DTCP if • either of the parties i.e. the land owner or the developer wishes to terminate this development agreement for any reason, the agreement can be terminate with the mutual consent of both the parties. • Clause 6.1 - Owner shall be entitled 30% of the revenue a consideration.
Further, it was submitted that the land owner shall be entitled for 35% of the revenue which was more beneficial to the assessee. The main argument was that the assessee is benefited by paying the compensation to CLHPL and he got higher revenue share and consideration for selling development & 8616/Del/2019 33 Universe Heights (India) Pvt. Ltd.
rights. Hence, the payment made to CLHPL was in the business interest as it proved to be beneficial in monetary terms.
Heard the arguments of both the parties and perused the material available on record.
We have examined the rationale given by the ld. CIT(A). The relevant part is as under:
“7.2 I have considered the facts of the ground, contention of the AR of the appellant and impugned order. The facts of these grounds are that the appellant, vide an agreement dt. 28.03.2013, entered into a land development agreement with CLHPL, wherewith, the appellant granted the development rights over its land to CLHPL, in lieu of a share 30% of revenue obtained from selling of properties. In addition to this share of revenue, the appellant was also entitled to receive Rs.9,01,00,000/- as the consideration towards transfer of development rights. Thereafter, since the appellant could not obtain the land development license, the appellant decided to terminate the agreement with CLHPL, thereby entering into a cancellation deed on 11.06.2014. In accordance with the cancellation deed, the appellant was supposed to pay CLHPL with a compensation of Rs.17,25,00,000/-.
7.3 In the assessment proceedings, the AO observed that the agreement between the appellant and CLHPL entitled either of the party to exit the agreement, by compensating for the loss and damages caused to the other party. It was also noted by the AO that the agreement seeks to bar such termination of agreement, once the land development license is obtained. Placing reliance to this clause of the agreement, the AO observed & 8616/Del/2019 34 Universe Heights (India) Pvt. Ltd. that the cancellation of deed and receipt of development license was on the same date. It was further remarked by the AO that the appellant has not brought any condition or situation that could prove the requirement of terminating the contract with CLHPL. The AO stated that the stamp paper, wherein, the cancellation deed is incorporated, is merely to disguise a sham transaction. The AO emphasized on the fact that for the year-under consideration, CLHPL held 18.30% of the appellant, while the holding company of CLHPL, i.e., BDR Buildtech & Developers Private Limited, held 29.40% share of the appellant, thereby pointing out that the entire group and its director, S. Rahesh Gupta, held decision making power in the appellant company, owing to which, there could never have arisen an opportunity to the appellant to terminate an agreement with the entities controlling it’s operations. The AO also stated that the appellant could neither provide any documentary evidence supporting any work done by CLHPL, nor could it provide a reasonable basis supporting the computation of the amount of compensation payable -to CLHPL. Further, the AO, as against his notices u/s 133(6) to CLHPL, states that the even the company could not provide details of any development work it had done for the appellant, nor could it provide any reasonable working behind derivation of amount of compensation paid to it by the appellant. The AO also took support of his summons u/s 131, wherewith, he requisitioned the personal deposition of directors of CLHPL, whom he claims did not appear. The AO noted that the compensation was paid to CLHPL only after the change in shareholding of the appellant. The AO stated that the appellant itself has confessed of there being no details of any expenditure incurred by CLHPL, on its behalf, so as to support the claim of compensation. The AO observed that the compensation of exorbitantly high, & 8616/Del/2019 35 Universe Heights (India) Pvt. Ltd. without any basis or justification and hence, disallowable u/s 37 of the Act.
7.4 In its submissions before me, the appellant submits that it had entered into an agreement with CLHPL, wherewith, the appellant was to obtain a 30% share in the revenue, along with Rs. 9,01,00,000/- as revenue for transfer of development rights. Through its paper book [reference to page no 55-69 of Volume 2 of Paper Book], the appellant highlighted that this arrangement was entered through an agreement on 28.03.2013. Amongst other clauses of the agreement, the appellant highlighted that the agreement entitled either of the parties to terminate the contract, subject to a compensation commensurate to the profit or loss and damages. The appellant stated that it was unable to obtain the required land development license, owing to which, it sought to terminate its agreement with CLHPL on 11.06.2014. However, in appellants claim, since CLHPL had expended time & efforts for meeting with landowners, performed extensive liasoning activities in various departments, conducted regular market research, surveys and planning etc, these efforts and costs were to be compensated, a- along with the opportunity cost lost by CLHPL by dedicating its time to the appellant company. Thereby, the appellant contended that the compensation of Rs.17,25,00,000/- is mutually agreed and settled upon amongst the appellant and CLHPL. In order to justify its termination the agreement with CLHPL, the appellant presented its agreement with M/s Ashiana Housing Limited, wherewith, the appellant stated that the said company was a well reputed and prominent player in the market, as against CLHPL, and that the terms of the contract with M/s Ashiana Housing Limited were more favorable than that of the erstwhile contract. Therewith, & 8616/Del/2019 36 Universe Heights (India) Pvt. Ltd. appellant justified the commercial expediency behind terminating the agreement with CLHPL. Further to the above, the appellant also relied upon the replies of CLHPL, directed to the AO response to notice u/s 133(6), to prove the genuineness of the payment of compensation, the summons u/s 131, the appellant furnished a medical record claiming the ill health o director to be the reason behind his absence before the AO.
7.5 On considering the contentions raised by the AO in the impugned order, as counter the appellant in its submissions, it is first prudent to analyze the documents submitted t appellant, so as to adjudicate the grounds of appeal under consideration.
The appellant entered into an agreement dated 28.03.2013, wherein, I observe that clause 13.5 mandates the party terminating the agreement to pay a compensation to the aggrieved party, on the basis of mutual discussion amongst themselves. Further, the appellant has presented the cancellation agreement dt. 11.06.2014, whereby, I observe that the amount of Rs.17,25,00,000/- has been mutually and amicably resolved by the appellant and CLHPL amongst themselves. Further, the appellant has also provided its agreement dt. 24.07.2014, with Ashiana Housing Limited, wherewith, the appellant demonstrated that it is now entitled to a revenue share of 35% and a consideration of Rs.12,50,00,000/- towards selling of development rights, viz. a viz, the agreement with CLHPL, whereby, the revenue share would have been 30% and revenue towards selling of development rights to be Rs.9,01,00,000/-. That apart, the appellant also generated Rs.15,00,00,000/- from Ashiana Housing Limited, as a security deposit.
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Hence, I observe that the documents duly establish the commercial necessity as well as prudence of the appellant towards termination of agreement with CLHPL and a simultaneous agreement with M/s Ashiana Housing Limited. Further, the financial statements of CLHPL and an explanation of nature of engagement of appellant with CLHPL, highlights the genuineness and the essence of the compensation.
7.6 In the light of the above documents, I now come on to the first and the foremost contention raised by the AO for disallowing the compensation. In the assessment order, the AO has stated that the appellant has been unable to provide any circumstance leading to termination of agreement with CLHPL. However, in this regard, I observe that the AO has erred in failing to take into consideration the fact that the operations of business are the prerogative of the appellant. Therefore, the decision of terminating or carrying on a business arrangement, would depend upon the commercial decision and viability studies of the appellant and its constituent board of directors. Hence, no adversities can be drawn concerning the commercial decision to terminate the agreement. Even otherwise, the appellant has provided a glaring demonstration of the fact that the termination of agreement lead to a subsequent agreement with a well reputed real estate developer, with a better commercial arrangement than the erstwhile agreement.
The AO has also relied upon circumstantial records stating that CLHPL, along with its holding company, held around 47.70% of shareholding of the appellant company, and thus, it had substantial influence over decision making power in the operations of the appellant company. Accordingly, it was connected by the AO that there would & 8616/Del/2019 38 Universe Heights (India) Pvt. Ltd. never have arisen extraordinary situation leading to termination of agreement between the appellant and CLHPL. However, as against this observation of the AO, I find that the AO has erred in noting that a Company and its shareholders are two separate legal entities, with each having its independence. That being said, the independent operations of the appellant company would obviously ensure that it enters into business arrangements that would best suit its commercial requirements. In the case of the appellant, the appellant has duly reflected that the termination of agreement with CLHPL lead to a better and a more profitable trade arrangement with M/s Ashiana Housing Limited.
7.7 Now, coming on to the second contention of the AO, i.e., the quantification of the amount of compensation, it has been noted by the AO that the appellant has failed to adduce any justification for deriving the amount of compensation. The AO remarks that the appellant has failed to provide evidence of any commercial activity conducted by CLHPL, so as to justify the determination and quantification of the amount of compensation. It has been contended by the AO that even CLHPL, against notices u/s 133(6) has been unable to provide the details of the activities it has performed on the parcel of land owned by the appellant. In respect of the observation, I find merit in the contention of the appellant, that a land development and construction agreement would require loads of planning, time and efforts, some of which might be intangible and incapable of being quantified in the financial statements. The appellant also CLHPL in its reply, has concurred with the fact that it had undertaken several necessary activities like planning, liasoning, structuring etc, be it preliminary to the development project. These activities demand time cost and & 8616/Del/2019 39 Universe Heights (India) Pvt. Ltd. opportunity cost rather than actual cost and hence, it natural to consider these factors while paying compensations to an aggrieved party. Another aspect to look around the quantification of amount of compensation could also be the fact CLHPL, being a developer, possesses required staff, equipments, resources and all other materials, that are required to undertake such development and construction activities. The expenses, being in the nature of regular activities of CLHPL, are accounted as business expenses, as I see from the Financial Statements of CLHPL submitted by the appellant. The activities that might be performed by CLHPL are those of overhead nature, the presence which, even if not quantified or separately identified, cannot be denied. Hence, I do not find any merit in the observation of the AO.
7.8 From the assessment order, I find that the AO has not been able to bring out cogent reasoning behind there being any absence of efforts by CLHPL, as had been put by it post entering into agreement with the appellant. Rather, the appellant and CLHPL, both have mutually and unanimously provided their consent towards the presence of such efforts, work and time, which automatically calls for a reimbursement to the aggrieved party, i.e., CLHPL. This, in congruence with the fact that the agreement entered amongst both the parties mandate the requirement of payment of some compensation or damage, goes on to further substantiate the relevance and the business requirement of the compensation. A step further, the fact that both the parties, in mutual understanding and belief, entered into a cancellation agreement, which was legally executed, with the amount of compensation payable by the appellant clearly & 8616/Del/2019 40 Universe Heights (India) Pvt. Ltd. mentioned and stated, further goes on to justify the tenability of the claim of the appellant.
In the assessment order, the AO has contended that it had issued summons u/s 131, requiring the physical appearance of the director, and that the director did not appear before him. However, the appellant, during this proceeding, drew my attention to the medical report of the director of CLHPL, thereby, excusing the non appearance of the director. The fact that this report was submitted by CLHPL directly, as has been accepted by the AO to be received on 22.12.2017, does not lead to any adverse inference in the case of appellant. Further, the documents furnished by the appellant duly presents that CLHPL has offered the compensation income to tax. That being said, even otherwise, I observe that the failure of the physical disposition of the director, in the light of adequate documents and replies furnished by the appellant, duly fulfills the requirement and hence, the absence of director of a separate and independent entity, does not produce any infirmity in the case of the appellant.
7.8 Lastly, the AO has stated that the termination of the agreement and the receipt of required land license, occurred on the same date. Therewith, the AO stated that the compensation barely to give color to a sham - transaction. However, from the paper book [reference to page no 55-69 of Volume 2 of Paper Book and Pg 141-143 of Volume 1 of Paper Book] and the submissions of the appellant, I find that the communication of termination was done by the appellant, much earlier than the cancellation deed. Therefore, the said observation stands irrelevant. Even otherwise, I do not find any merit in this observation of the AO, since the AO has not demonstrated & 8616/Del/2019 41 Universe Heights (India) Pvt. Ltd. as to how he has perceived the transaction to be sham. As instead, I observe that the AO has barely relied on the circumstantial evidence to support his contention, without pointing out any specific indication as to how there arose such doubt as to genuineness of the transaction. The termination or fulfillment of an agreement is best to be left for the commercial decisions of the appellant and even if the termination is on the same day as that of the license, that does not entitle the AO to look into the business decisions of the appellant company.
7.9 In view of my detailed deliberation and factual matrix of the case and on the basis of the documents submitted by the appellant, I find merit in the contention of the appellant and hence, the grounds of appeal are upheld and the addition is deleted. Appellant succeed in these grounds of appeal.”
51. Having heard the arguments of both the parties, having perused the order of the Assessing Officer and the order of the ld. CIT(A), we find that as per the agreement with CLHPL, the assessee was to obtain 30% of the share in the revenue along with Rs.9,01,00,000/- as revenue for transfer of development rights. The compensation paid to CLHPL of Rs.17.25 Cr. is mutual agreed and settled. After cancellation of the agreement and payment of compensation to CLHPL, the assessee received revenue share of 35% instead of 30% earlier and also received security deposit of Rs.15,00,000/- and consideration of Rs.12,50,00,000/- towards development rights which was earlier Rs.9,01,00,000/-. Hence, on going through the facts, it is amply proved that by cancelling their agreement and paying compensation to CLHPL and the assessee subsequently entered into agreement with M/s Ashiana Housing Ltd., the assessee was benefited by increased revenue share, increased price for & 8616/Del/2019 42 Universe Heights (India) Pvt. Ltd.
development rights and also security of Rs.15,00,00,000/- and hence, we hold that the payment made by the assessee is in the business interest and decision of the ld. CIT(A) is hereby affirmed.
In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed. Order Pronounced in the Open Court on 06/09/2024.