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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: Shri M. Balaganesh
This appeal of the assessee arises out of the order passed by the Learned CIT(A), VI in Appeal No. 81/CIT(A)-VI/Wd-6(2)/10-11/Kol dated 14-03-2012 for the Asst Year 2007-08 of the Act against the assessment order passed by the Learned AO u/s. 147/143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
2. The assessee has raised additional ground of appeal questioning the validity of re- assessment proceedings as below:- “That on the facts and in the circumstances of the case, the initiation of proceedings U/s. 147 of Income Tax Act, 1961 is erroneous and bad in law.”
2.1 The brief facts of this issue are that the assessee is a non-banking finance company filed its return of income for the AY 2007-08 on 30-11-2007 declaring taxable income at Rs.48,410/-. This return was processed u/s. 143(1) of the I.T Act 1961.
1 M/s. Lucky Commotrade P.Ltd 2.2 We find that the ld.AO had sought to re-open the proceedings for the assessment year 2007-08 based on an information received from the ld.AO of M/s.Bhagwati Sponge Pvt. Ltd [ In short ‘M/s. BSPL] that a sum of Rs.1,23,50,000/- was paid by the assessee to M/s. BSPL, which has been offered to tax by the said party for which no services were actually rendered by the said party to the assessee. Moreover, the ld.AO of M/s. BSPL also found that the said party had adjusted the depreciation amount with the income offered in the sum of Rs.1,23,50,000/- and ultimately declared only taxable loss. This transaction in the opinion of the ld.AO of M/s. BSPL is a colorable transaction to avoid the payment of tax. Hence, he passed on this information to the ld.AO of the assessee to take necessary action in the hands of the assessee. Based on this, the ld.AO sought to re- open the assessment for the assessment year 2007-08 in the hands of the assessee on the premise that the said transaction of Rs. 1,23,50,000/- is to be added as income of the assessee and hence, he had reason to believe that income had escaped assessment.
2.2 In the re-assessment proceedings the ld.AO added this sum of Rs.1,23,50,000/-as unexplained cash credit, which was upheld by the ld.CIT(A).
2.3 We have heard the rival submissions. We find that the information as received from the ld.AO of M/s. BSPL by the ld.AO of the assessee constituted information, which could trigger the re-opening proceedings u/s. 147 of the Act. Hence, we are not in agreement with the arguments of the ld.AR that the ld.AO did not have reason to believe that the income has escaped assessment as he had no tangible material to re-open the assessment. Now we reproduce the reasons recorded by the ld.AO herein below:-
“In course of assessment proceedings for Asstt. Year 2007-08, in respect of my assessee named Bhagwati Sponge Pvt.Limited, PAN : AACCB3462A, it has been noticed that my assessee claimed to had received a profit/award of Rs.12350000 ( on accrual basis) being 98.8% of the profit of the project as per agreement between my assessee and your assessee named Lucky Commotrades Pvt. Ltd the copy of the said agreement furnished by my assessee is enclosed. On scrutiny it has been noticed that my assessee has neither rendered any service, financial assistance and support for the said project
2 M/s. Lucky Commotrade P.Ltd nor invested any sum of money. As such the question of taking 98.8% of the income even on accrual basis in the hand of my assessee does not arise at all. In fact, my assessee has claimed big amount as depreciation/additional depreciation, subsidy etc and submitted return for A.Y 2007-08 claiming big amount of loss. Hence my assessee has taken the above profit under the guise of an agreement (referred to above) without suffering any tax. In turn Lucky Commotrade Pvt. Limited, having jurisdiction under you, have avoided tax on Rs.1,23,50,000 by transferring the same to my assessee under a colourable transaction……” It is noticed from the agreement dated 07.12.2005 between M/s. Lucky Commotrade Pvt. Ltd and M/s. Bhagwati Sponge Pvt. Ltd that M/s. Bhagwati Sponge Pvt. Ltd shall invest the total amount being the proportionate share of M/s. Lucky Commotrade Pvt. Ltd for fulfilling the project SJDA [Siliguri Jalpaiguri Development Authority] and M/s. Lucky Commotrade Pvt. Ltd would be working as an agent only and the profit from the project shall be distributed between the two parties as follows:- 1. M/s. Lucky Commotrade Pvt. Ltd 1.20% 2. M/s. Bhagwati Sponge Pvt. Ltd 98.8% Total 100% But, from the information it is noticed that M/s. Bhagwati Sponge Pvt. Ltd has neither render any service, financial assistance and support for the said project nor invested any sum of money and failed to fulfill the condition of the agreement. From the above information and facts of the case it is nothing but a case of diversion of income to evade the tax under mutual understaning between the two parties. As a result, 98.8% of profit or income i.e Rs.12350000/- has been escaped assessment in the hands of M/s. Lucky Commotrade Pvt. Ltd during the F.Y 2006-07 relevant to A.Y 2007- 08. Under the facts and circumstances of the case, I have reason to believe that income chargeable to tax has escaped assessment in this case. Notice u/s. 148 of the I.T Act, 1961 is issued.”
2.4 From the aforesaid reasons as recorded by the ld.AO, we find that the ld.AO had reason to believe that income indeed has escaped assessment for the purpose of re- opening the proceedings u/s. 147 of the Act. As sufficiency of reasons need not be gone into at the time of re-opening the proceedings, the information passed on by the ld.AO of M/s. BSPL definitely constitutes information and warranting re-opening of proceedings. Hence, the additional ground raised by the ld.AR, which goes to the root of the matter is hereby admitted and dismissed.
3 M/s. Lucky Commotrade P.Ltd
The only issue to be decided in this appeal is as to whether in the facts and circumstances of the case a sum of Rs.1,23,50,000/- being the amount shown as payable by the assessee towards share of profit to M/s. BSPL could be added as unexplained cash credit and whether the same could be construed as a colorable transaction.
3.1 The brief facts of this issue are that the assessee along with 9 other companies referred to as ‘TERAI’ Consortium and was allotted the project for development of township by Siliguri Jalpaiguri Development Authority [ In short ‘SJDA’]. The assessee and M/s. BSPL had entered into an agreement dated 7th December 2005, wherein M/s. BSPL shall invest the total amount being the proportionate share of assessee and also render services on behalf of the assessee for fulfilling the project. The assessee would work only as an agent in the subject mentioned transaction. It was also mutually agreed between the two parties ie. the assessee and M/s. BSPL, by this said agreement, that profit derived from this project shall be shared in the following ratio:- a) Assessee’s share @ 1.2%, and b) M/s. BSPL’s share @98.8% 3.2 It was observed by the ld.AO of M/s. BSPL that M/s. BSPL did not render any services and did not provide any financial assistance for the said project. Hence, the ld.AO issued a show cause as to why the liability created in the books of assessee as amounts payable to M/s. BSPL be treated as unexplained cash credit. In response to this, it was pleaded before the ld.AO that due to lack of financial capacity, being member of the TERAI Consortium, the assessee entered into said agreement on 07-12-2005 with M/s. BSPL for providing infrastructure support and consideration for the same shall be based on profit sharing arrangement @ 98.8%. Later certain disputes arose between the members of the Consortium and 6 members decided to withdraw from the said project. On 22-05-2006 the ‘TERAI’ entered into an agreement with M/s. Unitech ( 2nd highest bidder) so that their bid was accepted by ‘SJDA’ and accepted a lump sum compensation of Rs.6,50,00,000/-. After withdrawal of the 6 members from the project, a new
4 M/s. Lucky Commotrade P.Ltd agreement dated 24-03-2007 was made between the remaining 4 members of the Consortium. The assessee received a sum of Rs.1,25.00,000/- from M/s. Unitech as 20% share of the lump sum compensation in terms of the agreement entered on 24-03-2007. As per the agreement entered by the assessee with M/s. BSPL on 7-12-2005, the assessee has to pay @ 98.8% of Rs.1,25,00,000/- i.e Rs.1,23,50,000/- to M/s. BSPL. In consonance with the agreement the assessee decided to share Rs.1,23,50,000 to M/s. BSPL and, accordingly, showed the same in the liabilities side as amounts payable to M/s. BSPL and proceeded to offer @ 1.2% of Rs.1,25,00,000/- i.e Rs.1.50,000 being the income that is available at its disposal for deployment for the purpose of compensation as income of the assessee. In other words, a sum of Rs.1,50,000/- ultimately fell on the head of the assessee and decided to offer the same as its income. The ld.AO proceeded to add the liability of Rs.1,23,50,000/- as income of the assessee for the assessment year 2007-08 as unexplained cash credit merely based on information given by the ld.AO of M/s. BSPL and not appreciating the said agreement dated 07-12-2005 entered into between the two parties and also made observation that the subject mentioned agreement is only a colorable device and is an afterthought to avoid the payment of tax. Hence, it only amounts to diversion of the income at source. On 1st appeal, the same was confirmed by the ld.CIT(A). Aggrieved, the assessee is in appeal before us on the following grounds:-
1(a) That on the facts and in the circumstances of the case, ld.CIT(A) has erred in including compensation of Rs.1,23,50,000/- in the hands of the appellant by relying on extraneous and irrelevant consideration. (b) That the observation and finding of ld.CIT(A) that MOU executed on 07.12.2005 between the appellant and M/s. Bhagwati Sponge Pvt. Ltd is not genuine and/ or a colourable device are erroneous and arbitrary. ( c) That on the facts and in the circumstances of the case, ld. CIT(A) has erroneously relied on the decision of the ITAT Kolkata Bench in the case of M/s. Ellenbarrie Exim Ltd for (ITA No.1871/Kol/2008 dt. 21.7.2011) since facts are distinguishable and separate.
That on the facts and in the circumstances of the case, the sum of Rs.1,23,50,000/- having already been considered in the hands of 5 M/s. Lucky Commotrade P.Ltd
M/s. Bhagwati Sponge Pvt. Ltd, the inclusion of the same in the hands of the appellant is contrary to law. “ . 3.3 The ld. AR apart from reiterating the facts mentioned hereinabove mainly empahsised on said agreement entered into between the assessee and M/s. BSPL on 7-12- 2005. He argued that the assessee is under contractual obligation to share the profit received from TERAI project @ 98.8% amounting to Rs.1,23,50,000/-. He further argued that defect pointed out by the ld. CIT(A) in his order that non judicial stamp paper in which the said agreement dated 7-12-2005 was entered into between the two parties did not contain the name of the stamp vendor. He argued that this cannot be a reason for doubting the veracity of the agreement as not mentioning the name of the stamp vendor and the agreement is not within the domain and control of the assessee. Moreover, this agreement was filed before the ld.AO at the time of assessment proceedings itself. Hence, the same cannot be treated as an afterthought. He further argued that contents of the agreement were not doubted by the revenue. He further argued that merely because the recipient of the profit share in the compensation i.e M/s. BSPL had taken the benefit of certain depreciation and thereby declaring net loss in its return will not automatically lead to doubting the genuineness of the transaction. He also argued that allowability of depreciation is a legitimate right provided to an assessee under the statute. He further argued that the ld.CIT(A) had not brought out any cogent reason as to how he drew an inference that this transaction is not genuine and it is a colorable transaction. In response to this, the ld.DR argued that burden of proof that the transaction per se is genuine is on the assessee and the agreement dated 7-12-2005 is only an afterthought. Accordingly, he prayed before us for confirmation of the orders of the lower authorities.
We have heard the rival submissions and perused the material available on record. The facts and circumstances stated herein above are not reiterated for the sake of brevity and for the reason that the same are not disputed by both the parties before us. We find that the assessee had entered into an agreement dated 07-12-2005 for the purpose of implementing the said project which was awarded by the SJDA, for which necessary infrastructure including financial assistance agreed to be provided by M/s. M/s. BSPL for 6 M/s. Lucky Commotrade P.Ltd a consideration of profit share @ 98.8% from the said project. We also find that the assessee had acted only as an agent of M/s. BSPL being member of the TERAI Consortium. We find lot of force in the arguments of the ld.AR that merely because the recipient of money M/s. BSPL had declared net loss due to claim of depreciation, the contractual obligation discharged by the assessee herein by paying Rs.1,23,50,000/- to M/s. BSPL cannot be doubted. We also find that the contents of the agreement are not doubted by the revenue except merely pointing out a minor defect that the stamp paper in which the said agreement was entered did not contain the name of the stamp vendor. We find that the assessee had entered into a profit sharing arrangement with M/s. BSPL. It had discharged its contractual obligation pursuant to the said profit sharing arrangement. We find that the ld.AO had observed that M/s. BSPL had not rendered any services to earn this compensation of Rs.1,23,50,000/-. If it is so, then the ld.AO of M/s. BSPL ought not to have brought the same to tax as business income of M/s. BSPL. Similarly, the assessee herein had offered Rs.1,50,000/- being @ 1.2% profit of Rs.1,25,00,000/- as its business income, which has been accepted as business income by the ld.AO irrespective of the fact that the assessee also had not rendered any services for the implementation of the said project. The assessee had merely got this compensation amount for getting out of the SJDA project. The assessee herein had acted faithfully to discharge its contractual obligation by sharing the profit of Rs.1,23,50,000/- with M/s. BSPL. In these circumstances, it can only be concluded that the assessee had received the compensation of Rs.1,25,00,000 from M/s. Unitech only because he is a member of Consortium in the capacity of an agent of M/s. BSPL. We find that the assessee has rightly treated the profit share payable to M/s. BSPL as a liability in its books as on 31-3-2007. We find that the assessee had merely acted as a post office for collecting Rs.1,23,50,000/- from M/s. Unitech Ltd and pass on the same to M/s. BSPL based on profit sharing arrangement. We find that only Rs.1,50,000/- is the income that ultimately fell on the head of the assessee, which would enter the stream of taxation We also find that M/s. BSPL had also rightly offered the same of Rs.1,23,50,000/- as its business income on accrual basis for the assessment year 2007-08 as right to receive the same has clearly been established in the hands of M/s. BSPL. The revenue cannot proceed to tax the compensation receipt of 7 M/s. Lucky Commotrade P.Ltd Rs.1,23,50,000/- in both the parties’ hands by merely forgetting the profit sharing arrangement agreed in the said agreement dt. 7.12.2005 between the assessee and M/s. BSPL. We also find that the burden of proof has been clearly discharged by the assessee in the instant case. Therefore, the case law relied upon by the ld.DR on the decision of the Hon’ble Supreme Court in the case of Dr. K.George Thomas Vs. CIT reported in 156 ITR 412(SC) is not relevant to the facts of the case. We also find that the decision of Kolkata ITAT relied upon by the learned CIT(A) in the case of ITO, W 7(3), Kolkata Vs. M/s. Ellenbarrie Exim Ltd in dt. 21.7.2011 is on the issue of payment of commission based on an agreement and is distinguishable from the facts of the present case. In view of the above, the ground nos.1(a), (b) ( c) and 2 raised by the assessee are allowed.
In the result, the appeal of the assessee is partly allowed. THIS ORDER IS PRONOUNCED IN OPEN COURT ON 4 / 12 /2015