TMI Blog2017 (11) TMI 719X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of 100.80 Cr from the inventories of the assessee? - Held that:- The chronology of events clearly shows that the application was made in the joint names of the assessee, OM and WW. The land was also allotted by MIDC on the said application made by the three joint venture partners. Thereafter MIDC on an application made by the JV partners approved the relinquishment of interest in the said land by two JB partners OM and WW in favour of the assessee on payment of specified premium. It is relevant to note that records of MIDC proved that the assessee, OM and WW were the joint owners of the plot of land till the relinquishment of rights by OM and WW was approved by MIDC which showed the transaction being genuine and out of business consideration. A business decision was taken by the assessee to purchase the interest from two JV partners to which two partners also agreed to sell their interest to the assessee which is also a business decision taken by them in the best interest of the business. Moreover all the three parties are unrelated parties and not related to each other. Therefore the transaction can not be said to be non genuine and sham. Further we failed to understand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax (Appeals) - 52, Mumbai ('PCIT'), has in his order under section 250 of the Income-tax Act, 1961 ('the Act') erred on the following grounds: 1. In upholding that initiation of reassessments proceedings under section 147 of the Act on the basis that income chargeable to tax had escaped assessment is valid and proper in law. 2. In upholding that the amount payable by the Appellant to M/S Metals Ltd ('OM') and Wellwisher Construction and Finance Pvt Ltd ('WW') amounting to ₹ 100.80 crores reflected in its books of accounts under the head 'Inventories', is a non-business expenditure. 3. In upholding the disallowance of interest expense attributable to the monies borrowed for financing the payments to OM and WW and reducing such interest from the value of 'Inventories'. 3. The facts in brief are that the assessee is a company incorporated with the objectives of undertaking construction and development of residential and commercial projects. The assessee is presently developing an IT SEZ at Airoli, Navi Mumbai. The assessee filed the return of income on 23.11.2006 declaring a total income of ₹ 2,95,82 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The reasons recorded by the AO read as under: From the perusal of records, it is found that the assessee company has Increase in Stock in its Profit Loss Account at ₹ 152,79,93,507j- and has carried forward the same as Inventories in its Balance Sheet. During the course of assessment proceeding vide letter dated 31.05.2010, the assessee company has given details of S.Creditors showing Payable to Om Metals at ₹ 46,87,50,000/- and Payable to Wellwisher Construction Finance Pvt. Ltd. at ₹ 46,87,50,000/-. Subsequently, certain information was called for from the assessee company vide letter dated 19.05.2010, in reply to which, the assessee company vide letter dated 18.10.2008 the assessee submitted the ledger account of Om Metals and Wellwisher Construction and Finance Pvt Ltd which is reproduced as under : Well Wisher Construction Finance Pvt Ltd Ledger Account 01.04.2005 to 31.03.2006 Debit Credit 19-09-2005 To Vijaya Bank Payment 3,00,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... totaling to ₹ 151,38,62,500/-. (50,40,00,000 + 50,40,00,000 + 50,58,62,500) and has carried this value to the Balance Sheet as Inventories . The assessment of OM. for A Y 2008-09 was completed in Dec., 2010 by the jurisdictional AO at Jaipur which was subsequently forwarded to this office. The details annexed with this assessment order brings various glaring and shame transaction entered between the assessee B. Raheja Builders Pvt Ltd, Wellwisher Construction Finance Pvt. Ltd., and OM. i. M/s. B. Raheja Builders PVI. Ltd. applied to MIDC for 50 acres of plot at Airoli, Navi Mumbai for developing IT Park on 14/2/2005. ii. Subsequently, on 16/8/2005, a joint Venture Agreement was entered between B. Raheja Builders Pvt. Ltd, Wellwisher Construction Finance Pvt. and OM and they made an application to MIDC on 18/8/2005 (This application dated 18/8/2005 has not been submitted by Om Metals when called by the Assessing Officer.) iii. Subsequently one more application was made to MIDC on 09.09.2005 for 100 acres of land at Airoli, purported to made jointly by all the three parties, but the project that highlights their capability as builders/developer, fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is sham and cannot be regarded as business transaction, and the corresponding expenditure cannot be allowed as being incurred for the purpose of business. Accordingly, the claim of ₹ 50,40,00,000/- each against Wellwisher Construction Finance Pvt. Ltd. and OM., debited in Profit Loss Account which has been subsequently capitalized as Inventories in Balance Sheet, cannot be allowed as business expenditure since no genuine business relation can be established. Also the interest expense attributable to this non-genuine payment made to these two entities viz. Wellwisher Construction Finance Pvt Ltd (Rs.3,53,50,000) and OM. (Rs3,52,50,000j-), needs to be disallowed since the same has not been incurred wholly and exclusively for the purpose of the business. Thus, the assessee company has not made correct claim regarding its expenses claimed and debited in its books of accounts for the current financial year under consideration. Therefore, I have reasons to believe that due to omission or failure on the part of the assessee with regard to incorrect claim of these expenses being non genuine, income chargeable to tax amounting to ₹ 100,80,00,000/- has escaped a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring in either any investment or capital or technical expertise to the joint venture. In fact, the assessee company belongs to Rah~ja Group of cases, which is a quite well-known builder group having long experience on construction business and had also developed an IT. Park at Bangalore and, therefore, it is not the case that the assessee company lacked such expertise and, therefore, needed help of other companies to do it. Further, the entire cost of the plot of land itself was only ₹ 50 crores, and, therefore, it is not understandable as to how and why the assessee paid a whopping amount of ₹ 100.80 crores to the joint venture partners only for lending their names for a period of three days Considering the overall facts of the case, the whole exercise appears to be colourable device employed by the assessee with a view to avoid payment of taxes. 9. It is also relevant to mention over here that the assessee company in A.Y. 2006-07, had shown the sum of ₹ 100.80 crores in its accounts in the form of inventories and no separate entry as such, as amount paid to OM. and Wellwisher Construction Finance Pvt. Ltd., had been mentioned in the accounts. For clarity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntry has been passed in respect of the amount of ₹ 100.80 Crores paid to OM. and Wellwisher Construction Finance Pvt. Ltd. The assessee has included this amount as cost of land/premium for development rights. However, the payments made to OM. and Wellwisher Construction Finance Pvt. Ltd. is neither land cost, nor premium paid for development rights. Thus, the assessee had not shown this amount properly in its books of accounts. In fact, the above fact is nowhere visible in the financial statements or the details filed by the assessee during the course of original assessment proceedings. It is in these circumstances that the AO held that the assessee had not disclosed the correct and material facts about wrong valuation of its inventory, either while filing the return of income or during the course of original assessment proceedings, and I tend to agree with the learned AO in this regard.' Since all material facts were apparently not disclosed by the assessee, either with the return of income or in the original assessment proceedings, it cannot claim now that it had disclosed all material facts. Consequently, various case laws relied upon by the assessee are distinguis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OM and WW for ₹ 100.80 Cr was debited in the inventories and the payment outstanding to each of these parties was shown in the balance sheet as on 31.3.2006. Even during the original assessment the AO raised specific query qua the inventories and sundry creditors which the assessee supplied furnishing the details of inventories which included the payment to MIDC, OM and WW and the details of sundry creditors which included the amounts payable to two parties vide letter dated 18.10.2008. No further details were sought by the AO after examination and verification of records and written submissions by the assessee. The ld AR also pointed out that while recording reasons, AO started the reasons by using the line from the perusal of records it is found that the company has .. which clearly showed that AO recorded the reasons on perusal of assessment records and documents and information available in the assessment file which proved the fact that there was no failure on the part of the assessee to disclose fully and truly all material and primary facts. The ld AR also argued that the AO has nowhere alleged that there has been failure on the part of assessee in disclosing the full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up. The assessee's paperbook is based on evidences taken by K. Raheja Group from the AO. The assessee neither before the AO nor during appellate proceedings before Ld.PCIT or before Hon'ble ITAT submitted any evidences so required and existing with the Vijay Raheja Group. To have a Holistic view about the transaction for the impugned assessment, entire material as gathered by AO, Ld.PCIT were made part of departmental book. Evidences gathered by the AO of OM during the course of assessment of OM and also by the assessing officer of WW was included in the department's paper book. These evidences reflect that assessee neither submitted nor interested to submit such crucial evidences before the AO or appellate authority to hide crucial information. Further, there are different averments made by assessee at different level without producing and substantiating the same with evidences. The ld DR submitted that the upon examination of the assessment records as has been filed in the paper book it is amply clear that no details were called for by the AO and filed by the assessee in respect of joint venture, joint application for allotment of land from MIDC, terms and conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase as the assessee has concealed the disclosure of material facts and thus the re-opening has correctly been made. Finally the ld DR prayed before the bench that the order of PCIT upholding the re-opening is correct and deserved to be upheld. 4.6. We have heard the rival contentions of the parties and perused the relevant records placed before us including the various case laws relied by both the parties and also the rebuttal by the ld AR. The undisputed facts are that the assessee bought over the interest in the land allotted by the MIDC from two other companies namely M/S OM. and M/S Well Construction and Finance Pvt Ltd for a consideration of ₹ 100.80 Cr. In the present case the assessment has been completed on 22.12.2008 u/s 143(3) of the Act and was re-opened by issue of notice u/s 148 of the Act on 28.5.2012 apparently four years after the end of relevant assessment year. The case of the assessee was re-opened after the AO of the assessee received information from the AO of M/S OM after the assessment of OM for AY 2008-09 was framed in December, 2010 stating that the transaction between assessee, OM and WW was a sham and non genuine. As per the provisions of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. 5.1. The facts in brief are that the assessee and two other companies jointly applied for 100 acres of land to MIDC for development of IT SEZ in Airoli, Navi Mumbai and 50 acres were allotted to these three partners for a consideration of ₹ 50,58,62,500/- .The assessee purchased the interest of the said two companies for ₹ 100.80 Cr and the said companies relinquished their interest accordingly vide agreement dated 10.12.2005. The said transaction was undertaken after obtaining necessary approval from MIDC. Pursuant to the said agreement the assessee paid some money to these companies and the outstanding was duly provided for in the books of the assessee as compensation to these companies by increasing the inventories by ₹ 100.80 Cr. According to the AO the payment of ₹ 100.80 Cr to these two companies in lieu of relinquishment of interest in the land was not justified for the reason that the two companies (joint venture partners) decided to quit the JV within three days of entering into JV agreement and AO observed that by just applying for the piece of land no rights were created in favour of these companies and more so that nothing was mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .8O crores out of the closing work-in-progress of the assessee in respect of the concerned project. 15. I have examined the facts of the case. Before proceeding further, it will be relevant to mention the sequence of events, as mentioned by the assessee itself before the AO, as under :- Date Event 16/08/2005 The assessee company entered into a joint venture agreement with Wellwisher Construction Finance Pvt. Ltd. and OM., with a object of Developing an IT. Park in Navi Mumbai. 18/ 8/2005 The companies jointly made an application to MIDC for allotment of land for developing an IT park. 19/O8/2005 After signing the joint venture agreement the companies mutually decided to part ways and the assessee company proposed to go ahead independently with the project in case the plot is allotted to them jointly. 19/O8/2005 The assessee company made payment of ₹ 3 crores up front to Wellwisher Construction and Finance Pvt.Ltd. on 19/8/2005 as a token amount for relinqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the assessee company, which was followed by another request letter dated 21.8.2007 29.10.2007 MIDC finally granted permission for assignment of rights in plot of land in favour of the assessee company, on payment of permission o f ₹ 78,89,700. From the above sequence of events, mentioned by the assessee itself before the AO, it is quite clear that on 16/8/2005, the assessee company entered into a joint venture with OM. and Wellwisher Construction Finance Put. Ltd., with the so-called object of developing an I. T. Park in Navi Mumbai. It further appears that they jointly made an application to MIDC on 18/8/2005 for allotment of land for development of I. T. Park. Immediately thereafter, on 19/8/2005, OM. and Wellwisher Construction Finance Pvt. Ltd. decided to part ways with the assessee, as far as the project is concerned, and the' 'assessee decided to proceed with the project independently. Subsequently, on 15/9/2005, MIDC offered a plot of land to the assessee company, though it is claimed that it was offered to all the three companies, and thereafter on 23/9/2005, the proposal of allotment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject and even the entire amount for the plot, payable to MIDC, had been paid by the assessee company, but still they were paid a whopping amount of ₹ 1 00.80 crores. Further, as stated above, one of the partners of the joint venture was paid a sum of ₹ 3 crores just after two days of formation: of the so-called joint venture and before allotment of the land by MIDC, which indicates that the entire exercise was pre-planned at the end of the assessee. It is further relevant to mention over here that as per the allotment letter dated 14/11/2005' issued by MIDC, a plot of land of 50 acres was allotted for an amount of ₹ 50 crores. However, the assessee has paid a total amount of ₹ 1 00.80 crores to the joint venture partners, which is more than two times of the cost of the plot of land. The assessee has not been able to explain the basis of computing the compensation payable to the joint venture partners, at a huge amount of ₹ 100.80 crores. This gives rise to serious doubts about the genuineness of the. whole transaction. 16. Before me, the learned AR has mentioned that certain observations of the AO regarding date of application for allotment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relinquishing their rights. Surprisingly, the agreements dated 10/12/2005 do not mention any reason for termination of the joint venture and as to how the compensation is computed. In any case, it has not been explained as to how the compensation for the so called goodwill could be valued at an amount more than two times of the cost of the land. Hence, this explanation of the assessee is only an after-thought and the; same cannot be accepted. Further, the assessee company itself is a renowned developer of real estate and it was already developing an IT' park at Banqalore. The assessee company also had adequate infrastructure, manpower, financial strength, etc., to develop the IT park independently. It is also not the case that the MIDC would have allotted the land only in the name of more than one company. Therefore, the decision to form a joint venture, only to be terminated immediately thereafter, itself appears to be without any valid reason. 18. The learned AR has also contended that the AO's assumption that the joint venture was dissolved on 19/8/2005 was wrong, as the agreement for termination of the joint venture was entered into only on 10/12/2005, and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. However, I do not agree with such contention of the learned AR. Merely because certain expenses are incurred by the assessee in connection .with a transaction, such transaction cannot be held to be a genuine one. The assessee may deliberately incur certain expenses to show that a non-genuine transaction is a genuine transaction. Whether a.' transaction is a genuine one or not is to be decided after considering all the relevant facts of the case. In the present case, firstly, the assessee has not established that it had to enter into the joint venture agreement for bona fide and genuine business purposes, as it could have applied for allotment of the land on its own. Secondly, the assessee has. not explained satisfactorily as to why the joint venture agreement was terminated, only after three days of formation, even though a formal agreement in this regard may have been signed later. It is further fortified from the fact that the assessee paid a sum of ₹ 3crores to one of the joint venture partners, Wellwisher Construction Finance Put. Ltd., on 19/8/2015 itself, even before any land could be allotted to the joint venture by the MIDC, which gives rise to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d joint venture agreement was taken by the parties and the assessee company had also started making payments to OM. and Wellwisher Construction Finance Put. Ltd., in this regard, on 19/8/2005 itself. Therefore, it is not understood as to how the market value as on 28/2/2007 could be considered as the basis for making the payment of ₹ 100.80 Crores. As stated above, the assessee company had made a payment of ₹ 3 crores to one of the joint venture partners, viz. Wellwisher Construction Finance Put. Ltd., for allegedly relinquishing their rights in land, even before the allotment of the plot in question, and at that stage, it was not even certain that the land will be allotted to the joint venture by MIDC. In other words, the assessee company had made such payment, when the party concerned did not have any rights to be relinquished. This also shows that the entire arrangement was pre-determined. In the facts and circumstances of the case, the valuation report filed by the assessee during appellate proceedings also does not justify the payment of ₹ 1 00.80 crores to the above-mentioned companies. 22. It may be clarified here that the fact that the correspond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... civilization. But, surely, it is high time for tho judiciary in India too to part its ways from the principle of Westminister and the alluring logic of tax avoidance. We now live In a welfare state whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that It stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taking statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally, or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd. v. Bengal Hotels Limited(1) where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax. It is neither ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the AO that the two companies did not have any role in the acquisition of land and they were just name lenders is wrong and devoid of any basis. The ld AR submitted that the transaction as entered into between the joint venture partners was not a sham as the Sham transaction involves concealing true nature and reality of transactions and is a subterfuge to offset against another transaction which is not apparent in the books. The ld AR contended that the modus operandi of the JV proved that it was not purported to either gain any tax benefit. The assessee and two other JV partners were not related parties. The AO has only described the transaction as sham but has failed to point out any features of sham transaction. The ld AR taking us through the chronology of events such as initial agreement to terminate the JV agreement was made on 10.12.2005 four months after application for allotment was made, quantum of payment to out going JV partners was not fixed in the termination agreement entered on 10.12.2005 but formula to calculate was mentioned, final termination of JV agreement taking place on 6.8.2007 nearing after two years of its formation, payment to JV partners only upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wton Studio Ltd Vs CIT 28 ITR 378 (Mad), (ii) Raman and Raman Ltd Vs CIT 46 ITR 400(Mad), (iii) CIT Vs Walchand Co Pvt Ltd 65 ITR381 SC, (iv) JK Woollen Manufacture Vs CIT 72 ITR 612 SC, (v) CIT Vs Dhanrajgiri Raja Narasingirji 91 ITR 544 SC, (vi) Sasoon J.David and Co Pvt Ltd Vs CIT 118 ITR 261 SC, (vii) CIT Vs National Rayon Commercial Co Ltd 193 ITR 744 Bom, (viii) CIT Vs Dalmia Cement (B) Ltd 254 ITR 377 (Del). On the reasonability of the payment, the ld AR argued that value as per registered valuer s report by the assessee was ₹ 1,25,72,94,500/- whereas as per DVO it was ₹ 1,23,90,08,000/- which was almost same and there was not much difference and therefore reasonability of the same cannot be questioned. 5.5. Per contra, the ld.DR while strongly opposing the arguments of the ld AR submitted that the transaction entered into between the assessee and the other two JV partners was sham. Taking us through the facts in chronology of the case, the ld DR submitted that the Jt.Venture agreement dt.16.08.2005 was executed between assessee, WW and OM. Though this unregistered JV on ₹ 100 stamp paper was submitted before the AO of OM whereas another JV agreement w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esolution. It can be concluded that not only the impugned transaction is based on make belief papers but also gave birth to several irregularities under the Companies Act also. These transactions are therefore, sham transaction. 5.6. The AO vide letter dt.25.02.2013 called for various details u/s. 131 of the Act from MIDC. Such details were supplied by MIDC vide letter dt.7.05.2013.The AO vide letter dt.02.07.2013 supplied these information to assessee and called for comment on the Joint Venture agreement as supplied by MIDC. The assessee vide letter dt.04.07.2013 called for copy of letter of MIDC dt.07.05.2013 which was provided. After seeking an adjournment vide letter dt.10.07.2013, the assessee made a reply to AO vide letter dt.15.07.2013 filing the chronology of events in a tabular form and submitted explanation in respect of the transaction. Following are the important findings from the details so furnished by the MIDC which included file noting related to allotment of the land. The assessee jointly with M/s. WW and M/s. OM made an application dt.09.09.2005 to Jt.CEO of MIDC for allotment of 100 acres land for the development of IT.Park. This letter has reference of one ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point 4 it is mentioned that The Raheja Group are the promoters and pvt. Ltd. ( JVC or Company). The parties have now agreed that M/s. WW and M/s.OM shall each subscribe for and acquire 125 equity shares of ₹ 100 / - each in JVC so that WW, OM and Raheja Group shall hold the paid up equity share capital of JVC in the ratio 10: 10:80 with the intention of making assessee a joint venture company and to request MIDC to issue appropriate letters of allotment of the applied plot in favour of JVC . It is important to note here that effect of share holding was given by assessee as evident from audited balance sheet on 3l.03.2006. It is also evident that only after entering of such agreement dt.10.12.2006, the proceeding for allotment of land started as evident from the order sheet noting of MIDC office (PB pg.168 to 186). At pg.176 the order sheet noting dt.14.12.05 reflect the submission of Joint Venture share subscription agreement dt.10.12.2005 by which M/s.B.Raheja Builders Pvt. Ltd. shall be the Joint Venture company and other applicant i.e OM and WW will acquire share in JVC i.e assessee's company and develop the plot jointly. It is therefore, relinquishment of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Silk Mills - (1982) ITR 0546 Finally the ld DR prayed that in view of facts and legal submissions cited by him the transaction was just a make belief arrangement and was a sham transaction not entered into for the business of the assessee wholly and exclusively and therefore was rightly rejected by the lower authorities. 5.7. In the rebuttal, the ld AR submitted that the facts of the decisions relied on by the ld DR are clearly distinguishable on facts and therefore not applicable. In the case of Killick Nixon Ltd Vs DCIT 2012 81 CCH 0066 the Hon ble Bombay high court has held that where a transaction is a sham and not genuine then it cannot be considered to be part of tax planning or legitimate avoidance of tax liability. In the case of the assessee it is not a sham transaction as the receipts were assessed in the hands of recipients and not doubted. The AR finally submitted that the decisions relied upon by the ld DR are not be applicable to the assessee s case as they are rendered or pronounced on different set of facts and circumstances. Thus transaction cannot be regarded as sham and non genuine. Hence the disallowance made by the AO is prayed to be deleted. 5.8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted by OM and paid due taxes thereon. In the case of the WW the money received from the assessee was treated as capital receipt and MAT was paid thereon. The AO accepted the same in the assessment framed u/s 143(3) of the Act however the CIT invoked revisionary jurisdiction u/s 263 of the Act which stood quashed by the ITAT. In other words the amounts paid by the assessee to OM and WW were taxed in their hands as genuine transaction by the deptt. It is difficult to understand that when the revenue treated the transaction as genuine in the hands of two JV partners, how the same transaction can be non genuine and sham in the hands of the assessee. Moreover the chronology of events clearly shows that the application was made in the joint names of the assessee, OM and WW. The land was also allotted by MIDC on the said application made by the three joint venture partners . Thereafter MIDC on an application made by the JV partners approved the relinquishment of interest in the said land by two JB partners OM and WW in favour of the assessee on payment of specified premium. It is relevant to note that records of MIDC proved that the assessee, OM and WW were the joint owners of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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