ZUBEDA REAL ESTATE PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

“1. That the impugned order dated 02.09.2011 passed by the learned Commissioner of Income-tax-(Appeals)-XXI, New Delhi is bad in law and wrong on facts. 2. That on the facts and circumstances of the case, the ld. Commissioner of Income-tax(Appeals)-XXI has erred in law in upholding the action of the Assessing Officer in making disallowance u/s the income-tax Act, 1961 amounting to Rs. 14,55,376/- paid by the assessee to the consolidator for transfer of rights.

That on facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals)-XXI has erred in law in not appreciating that the disallowance of the said sum of Rs. 14,55,376/- which is included in purchases during the year has no impact on appellant’s profit liable to tax as the entire purchases from part of closing stock of the appellant at the year end.”

The facts are that the assessee is a private limited company incorporated on 16.03.2006 and engaged in the business of real estate and other allied activities as stated in the Memorandum & Articles of Association of the appellant company. The assessee company had incurred a loss of Rs. 20,211/- as per provisions of Income Tax Act, 1961 during the financial year 2006-07.

Challenging the impugned order, the learned counsel of the assessee has contended that on the facts and circumstances of the case, the ld. CIT(A) has erred in law in upholding the action of the Assessing Officer in making disallowance u/s 40(a)(ia) of the Income Tax Act, 1961 amounting to Rs. 14,55,376/- paid by the assessee to the consolidator for transfer of rights; that on the facts and circumstances of the case, the ld. CIT(A) has erred in holding that the consolidator was working as an agent of the assessee and hence the assessee ought to have deducted TDS on amount paid to the consolidator u/s 194C or 194H of the Income Tax Act, 1961; and that on the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law in not appreciating that the disallowance of said sum of Rs.14,55,376/- which is included in purchases during the year has no impact on appellant's profit liable to tax as the entire purchases form part of closing stock of the appellant at the year end.

The Id. counsel for the assessee has further placed reliance on the Tribunal

Ld. DR on the other hand, has strongly relied on the impugned order. It

Before the ld. CIT(A), the assessee contended that the amount involved was not of Rs.4,20,15,641/-, since Vikram Electric Equipment P. Ltd. had been paid only Rs.1,24,33,376/-. It was on this contention of the 1953(Del)2011 assessee that the ld. CIT(A) directed the AO to verify the actual amount involved.

It has been maintained by the assessee all through that the payment to Vikram Electric Equipment P. Ltd. was on account of transfer of certain rights of Vikram Electric Equipment P. Ltd. in the lands transferred to the assessee and was not towards any services rendered. As a consolidator, Vikram Electric Equipment P. Ltd. was to contact the local farmers in and around Gurgaon, who were willing to sell their land. Vikram Electric Equipment P. Ltd. was making payments from its account to the farmers and thereto have certain rights in the land. On the ultimate transfer of land to the assessee through Vikram Electric Equipment P. Ltd., the final payment was to be made to the farmers. Towards the right of Vikram Electric Equipment P. Ltd., 2% of the cost of land (in some cases, even a higher amount) was to be paid to Vikram Electric Equipment P. Ltd., as mutually agreed. This was the mutually agreed price. Vikram Electric Equipment P. Ltd. worked for land acquisition and after scrutiny of the concerned documents of the land, Vikram Electric Equipment P. Ltd. would suggest the appropriate land for purchase by the assessee. Vikram Electric Equipment P. Ltd. thus acted with the farmers on its own account rather than for and on behalf of the assessee, on Assessment year 2007-08 principle to principle basis, with the farmers on the 1953(Del)2011 one hand and the assessee on the other. The assessee contends that this being so, the provisions of neither section 194 C , nor section 194 H get attracted to the payment made by the assessee to Vikram Electric Equipment P. Ltd. The payment along with payment made to the farmers directly represented the purchase of the cost of land and had been correctly treated as such in the assessee's books of account. It has been contended that alternatively, in any case, the payment made to Vikram Electric Equipment P. Ltd. has not affected the taxable profits of the assessee during the year. The total purchases were lying as closing stock, as observed by the Taxing authorities also and the effect of adjustment with regard to the amount paid to Vikram Electric Equipment P. Ltd. would arise only on and in the instances of sale of land by the assessee . It is as such that it has been claimed that no disallowance u/s 40(a)(ia) of the Act is called for, much less any consequential action u/s 201 of the Act. It has been contended that Vikram Electric Equipment P. Ltd. had an important role to play as a consolidator, since the assessee required contiguous land holdings in order to develop a colony. In case any land which was agreed to be acquired by Vikram Electric Equipment P. Ltd. was not found to be suitable, it was Vikram Electric Equipment P. Ltd. which would have to bear the consequences, indicating that Vikram Electric Equipment P. Ltd. was not 1953(Del)2011 acting as an agent on behalf of the assessee, but was working on a principle to principle basis, independently.

The stand of the Department, on the other hand, has been that MOU signed by the assessee and Vikram Electric Equipment P. Ltd. lays down that Vikram Electric Equipment P. Ltd. was acting as an agent of the assessee, rendering services, for which, the provisions of section 194 H of the Act are applicable and it is correctly applied by the ld. CIT(A).

In this regard, it is seen that clause 3.2 of the MOU between the assessee and Vikram Electric Equipment P. Ltd. makes it clear that Vikram Electric Equipment P. Ltd. or its agent agreed to assign their rights to purchase the land in favour of the assessee. It would be appropriate to reproduce here, the said clause 3.2:- Assessment year 2007-08 3.2 In consideration of the consolidator or its agent/nominee assigning its rights to purchase the land in favour of the Buyer Company and causing the Land Owners to execute the Sale Deeds directly in favour of the Buyer Company, the Buyer Company shall pay the Consolidator such sum as may be mutually agreed. However, it is specifically agreed by the Consolidator that no sum shall accrue to it on this account till it procures 27 acres of land for the Buyer Company (unless 1953(Del)2011 the Buyer Company decides to procure less than 27 acres through the Consolidator) and all the issues relating to possession and mutation f such land are settled to the satisfaction of the Buyer Company."

The above clause also makes it evident that unless the assessee decided to procure less than 27 acres of land through Vikram Electric Equipment P. Ltd., Vikram Electric Equipment P. Ltd., was to procure 27 acres of land for the assessee, failing which, no payment was to be made by the assessee to Vikram Electric Equipment P. Ltd.

This clearly shows that Vikram Electric Equipment P. Ltd. was transacting on a principle to principle basis and it cannot be said that the payment was made by the assessee to Vikram Electric Equipment P. Ltd. for rendering of any service. The provisions of section 194 H of the Act are, therefore, not at all applicable.

Moreover, the amount paid to Vikram Electric Equipment P. Ltd. was duly reflected by the assessee in the purchases closing stock. No sales had been made during the year under consideration. It has not been shown to be otherwise. In such a scenario, in our considered opinion, no disallowance is called for.

Further still, the chart at page 16 of the assessee's paper book shows that almost 2% of the sale value was being paid by the assessee to Vikram Electric Equipment P. Ltd. as consideration for transferring Vikram Electric Equipment P. Ltd.'s rights. This was in terms of the afore-mentioned clause 3.2 of the MOU between the assessee and Vikram Electric Equipment P. Ltd. It has not been shown if such payment is not a fair compensation paid by the assessee to Vikram Electric Equipment P. Ltd. which, anyhow, is not an impediment in Assessment year 2007-08 holding, as above, that the transactions between the assessee and Vikram Electric Equipment P. Ltd. are on a principle to principle basis, not attracting the provisions of section 194 H of the Act.

Pertinently, no addition having been made for the year by the AO, the alternate contention of the assessee to the effect that no addition can be made during the year, stands accepted by both the Authorities below.

The provisions of section 40(a)(ia) of the Act in any case do not apply, the assessee having not claimed any deduction for any expenses on account of payment to Vikram Electric Equipment P. Ltd , either in its profit and loss account or in the computation of taxable income filed. It was only that the AO recorded a loss of Rs.19,700/-. This obviously, did not include any addition of either Rs.4.02 crores or Rs.1.24 crores.

In view of the above discussions, the grievance of the assessee is found to be correct and is accepted as such.”

The above judgment in the case of “Finian Estates” (supra) has not been shown to have been set aside or overturned on appeal. The facts presently before us are in pari materia with those in ‘Finian Estates’ (supra). That being so, the finding of the ld. CIT(A) to the effect that the relationship between the assessee company and M/s VEEL is that of principal and agent and not of principal and principal, is not found to be correct. In this regard, clause 3.2 of the MoU between the assessee and M/s VEEL as considered in ‘Finian Estates’(supra) needs to be reiterated and stressed. Further, during the year, undisputedly, no sales were made, due to which fact itself no disallowance is called for, as, again, held in ‘Finian Estates’(supra).

In view of the above, finding merit in the grievance sought to be raised by the assessee, the same is accepted. 8 Assessment year 2007-08 10. In the result, the appeal filed by the assessee is allowed.