TMI Blog2020 (6) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... en is whether such purchase is at arm s length and it was made for the purpose of business of the assessee or not. In this case, there is no doubt of whatsoever with regard to purchases of materials for the purpose of development of land. In fact, the assessee has established nexus between materials purchase and land development at Nagpur. The ld. CIT(A), having accepted the fact that development work has been executed, has disallowed 50% adhac expense without assigning any reasons. When 50% direct expense is genuine, then remaining 50% cannot be non-genuine merely because it was purchased from associate concern. Therefore, we are of the considered view that the AO as well as the ld. CIT(A) were erred in disallowing direct expenses materials purchase. Hence, we direct the AO to delete additions made towards direct expenses materials. Additions made towards contract charges - HELD THAT:- Order passed u/s 245D(4) in the case of the assessee firm has clearly recorded categorical findings that accommodation bills taken by M/s Metcon India is in connection with works undertaken for contract with assessee firm for development work at Nagpur land. Therefore, once addition on total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are directed against order of the Commissioner of Income Tax (Appeals) 3, Thane, dated 15/12/2017 and they are pertains to Assessment Year 2009-10. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed-off by this consolidated order. 2. The Revenue has raised the following grounds of appeal: 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the expenditure of ₹ 31.42 crores on account of bogus contractual expenditure. (a) The Ld. CIT(A) erred in holding that the tax paid by M/s Metcon India at the maximum marginal rate will grant immunity to the assessee even when both are two different entities and there is no question of double taxation involved. (b) The Ld. CIT(A) decided the issue without appreciating that the Hon'ble Income Tax Settlement Commission rejected the plea of the Department citing that it cannot revisit the additions made in the assessment order passed by the Assessing Officer before the Search action in view of the decision of the Hon'ble IT AT in All Cargo Logistics. (c) The Ld. CIT(A) decided the issue without ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... htra State Handloom Corporation Limited for a consideration of ₹ 8,05,00,000 and registered by paying stamp duty of ₹ 43,52,100/-. As per the terms of MOU, the assessee is required to clear illegal encroachments in land, levelling of land, Rock cutting and other works before the said land is being conveyed to sellers. Further, to keep the land in sealable condition, the assessee had assigned land development work to M/s Metcon India, a category AA government contractor and accordingly, a separate work order and agreement is entered into with the contractor with scope of work to be done and for this purpose a sum of ₹ 36,08,96,156/ has been paid to M/s Metcon India, and debited to profit and loss account under the head contract charges. The assessee had also incurred various other expenditures, including direct expenses materials purchase amounting to ₹ 9,00,00,000/-, brokerage payment of ₹ 100,93, 118/-, amount paid for arbitration award amounting to ₹ 5,00,00,000/-, compensation to retiring partners of ₹ 71,00,000/- and salary and wages expenditure of ₹ 30,00,000/-. 5. The case has been selected for scrutiny and during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Salary Wages ₹ 30,00,000 Total ₹ 50,10,89,283/- Aggrieved by the above additions, the appellant is in appeal, before me. 3.0 Relevant extract from the Assessment order: 14.1. First ground for rejecting the claim of the assessee based on facts culled from the submissions made by the assessee and from external sources available in public domain,: a). Few photographs of the plot at Nagpur taken on 24.12.2011 are placed on record. These photographs reveal the actual condition of the subject and even as on i.e. 24.12.2011. The land is neither levelled nor showing any sign having been developed . In short, there is nothing to indicate that the land claimed to have been developed by the assessee at a cost over ₹ 61 crores (₹ 49.84 + ₹ 11.65 Crores) has any features of a Development Land . The terrain and topography of the ground in similar to that of the adjoining and surrounding plots. In fact, the adjacent land is still owned and used by M/s MSHC as its office. Outside of the said land in the adjoining plots there are residential buildings, office bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le being signed by the assessee and M/s NPPL on 04.02.2008 this fact, in combination with the fact that the assessee has admitted that the work had to be taken up in hurry for which it had incurred an expenditure of ₹ 11.65 crores in FY. 2007-08 by allotting the work to its sister concern M/s Metconlndia, indicates that the work of development was completed on or before 05.09.2008. i.e. the date of execution of the deed. In view of the facts detailed above the claim of the assessee that it had incurred an expenditure of ₹ 49.84 crores on Development of land in this year is not only unreasonable, but also baseless and unsubstantiated. Therefore the claim cannot be accepted and disallowance as discussed in subsequent paragraphs is made. 14.2. Second ground for rejecting the claim of the assessee based on accounts and bank statements:- A) On going through the sale deed of the Nagpur property dated 05.09.2008, the balance sheet as at 31.03.2008 and the bank statements of Canara Bank A/c No. 0119201003280 the following discrepancies are noticed. I) Receipts shown in balance sheet as on 31.03.2008 (liability side):- a) Unse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year. This is not the correct fact. As per the Audit Report and Annexures for FY 2007-08 and FY 2008-09, this sum of ₹ 16,08,69,806/- is actually the loans taken by the assessee from the relatives of the partners and sister concerns. Since this is the extent of ₹ 16.08 crores is taken as explained. B. Closing and opening balances of important ledgers accounts As per the balance sheet as at 31.03.2008: Closing credit balance of M/s Metcon India is ₹ 1,35,29,969/- Closing credit balance of M/s Tarash Developers Pvt. Ltd. (TDPL) is Rs, Nil As per the signed copies of confirmation of accounts (from the books of the -assessee-)* Opening credit balance of M/s Metconlndia is ₹ 12,28,36,328/ -Opening credit balance of M/s TDPL is ₹ 27,42,598/- Opening credit balance of M/s Metcon India is ₹ 64,010/- Opening credit balance of M/s TDPL is Rs.( ₹ 27,42,59s/- transferred to current account of partner) As per bank statement (Canara Bank A/c. No. -) Payments made to M/s Metcon India is ₹ 42,47,27,694/- Payments made to M/s TDPL is ₹ 7,45,00,000/- As per balance sheet as at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on law as per the provision of the IT Act, 1961 A). The claim in respect of development expenses is being made u/s 37 of the IT Act, 1961 section 37 read as under: Any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee lid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head of profits and gains of business or profession [Explanation. - For the removal of doubts, it is here by declared that any expenditure incurred by as assessee for any purpose which is as offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The emphasis is on 'laid out or expended wholly and exclusively for the purpose of the business. It is further explained that any amount incurred for any purpose which is as offence or prohibited by law cannot be deemed to have been incurred for the purpose at barrier. Therefore, even i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m for the expenditure of ₹ 49.84 crores. As land out in the P L Account is rejected and a fair estimate of around ₹ 2.33 crores is allowed as development expenses. To conclude, after considering the entire subject matter and all the explanations offered by the assessee the total expenditure that could have been possibly incurred on the 9.41 acres of land is estimated at a reasonable figures of ₹ 2.33 crores for this year. 15. Other points:- 15.1. compensation/damage as per Arbitration Award There is a claim of Rs, 5 crores in the profit and loss account under the head compensation/damage as per Arbitration Award . Details were called for and the same were furnished. In brief, the facts on this point are as follows. On 14,09.2006 the assessee firm signed a Memorandum of Understanding (MOU) with M/s Hindustan Continental Ltd. (HCL) Andheri, Mumbai to develop construct a residential cum commercial building on the land at Nagpur. Under the terms of the MOU M/s HCL had undertaken to construct a building after developing the land entirely at its cost. For this purpose the assessee firm had asked for ₹ 10 crores bank guarantee. As per the terms, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of the assessee is not verifiable hence claim of brokerage expenses is disallowed. 15.3 Compensation paid to retired partners: During the year the assessee has claimed to have paid ₹ 71 lakhs as compensation to Dinesh Shah Group and Navinchandra Shah Group who were the erstwhile partners of the assessee firm. Vide letter dated 12.09.2011 the assessee explains that there were dispute and difference of opinion amongst these group of partners and due to this it was decided to discontinue association with them and a retirement deed was made on 01.04.2008. Accordingly, compensation of ₹ 71 lakhs has been paid to them. In support of his claim Retirement Deed dated 01.04.2008 is furnished. However, it is seen from the balance sheet as on 31.03.2008 that the capital accounts of these two shah groups are not appearing with either credit or debit balance in Balance Sheet. Therefore there is no justification for making such compensation payments and making it a charge on profits of this year. Even if the payment is genuine it cannot be allowed as a debit in the P/L A/c since it is more of an appropriation of profit and cannot be deducted from profits. Mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional written submissions from time to time and filed all possible evidences including, bills and vouchers in respect of all expenses, including contract charges etc.,. The assessee had also filed agreements with M/s Metcon India for awarding works contract for development of land and payment details and argued that the work order has been issued after obtaining competitive bidding. The payment to contractor has been made after deducting applicable TDS as per law. The evidences of the work having been physically under taken were furnished including photographs taken at site. Similarly, the assessee had filed all evidences in respect of direct expenses material purchase, arbitration award expenses, salary and wages and compensation paid to retired partners and explained under what circumstances it was forced to pay compensation to outgoing partners. 7. The ld. CIT(A) after considering relevant evidences filed by the assessee and also taken into account remand report furnished by the AO has partly allowed appeal filed by the assessee, where he has allowed 50% relief towards direct expenses materials purchases and out of addition of ₹ 9,00,00,000/- a sum of ₹ 4,50,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance of direct expenses material of ₹ 9,00,00,000/- under provisions of section 37(1) of the Act, I am in agreement with the AO that the onus to prove that the expenditure in question has been incurred wholly and exclusively for the purpose of business is on the appellant. The appellant has contended that the expenditure in question has been incurred exclusively and wholly for the purpose of business. To support this proposition it has furnished accounting details and other ancillary records such as work orders, MOU, photographic evidences of the site etc. It has also been contended that the land development had commenced in the earlier year i.e. A.Y.2008-09 and the contract granted to Metcon India in the earlier year has not been questioned. In fact, even subsequent to the completion of assessment under appeal, no reassessment or Revisional proceedings have been initiated for the immediate preceding year i.e,A.Y.2008-09. Therefore, where the land development had not been doubted in the earlier year, there was no reason to doubt the same in the subsequent year particularly, when there was no change in the facts and circumstances of the case. The appellant contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned to Metcon India and the contract receipts are reflected in the accounts of Metcon India, d ) In response to AO's query, the JT. MD of MSHCL (Vendor of the Land) has confirmed of the existence of nalas, ponds and other illegal encroachment in the land at the time of sale, vide D.O.NO.MSHC/ESTT/2883/2012 dated 27.03.2012. e) In response to AO's letter dtd. 25.11.20U, M/s.Nunlet Projects Private Limited, vide letter dated 19.12.2011 has confirmed and the same is reproduced as below:- (v) a) Date of execution of sale deed: 05 September 2008 . b) (i) Total Land area acquired:9.41 Acres (38,085.19 Sq.Mtrs) (ii)) Whether any encroachments and illegal occupations were there at the time of agreement: c) During the initial stages of negotiations and site visits, we have found that there were lot of hutments, encroachments and illegal occupations on the said property. As the negotiations progressed with the Hallmark Developers, we made it clear that we wanted that land free from all encumbrances, free from illegal encroachments and occupations, etc. and most importantly in the leveled ant presentable form. Hallmark Developers got the entire land cleare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d) Status of land after purchase: After the purchase of land, we are in process of developing the land. The concept and design etc. has been finalized and submitted in the concerned authorities. But now the delay has happened mainly due to, some modifications in the policy of the concerned authorities. V) In fact, even subsequent to the completion of assessment under appeal, no reassessment or Revisional proceedings have been initiated for the immediate preceding year i.e. A.Y.2008-09. Therefore, where the land development had not been doubted in the earlier year, there was no reason to doubt the same in the subsequent year particularly, when there was no change in the facts and circumstances of the case. The appellant contended that the contract charges had been paid to Metcon India in the earlier year also. vi) The fact that Metcon India had been assigned the contract after obtaining competitive bids cannot be ignored. The contentions of the appellant that even the subsequent search proceedings initiated did not reveal the exchange of cash in lieu of cheques payments made for contractor charges have considerable force in support of the genuineness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted to reduce the taxable profit. In view of the above, the additions of ₹ 34,08,96,165/- made by the AO is deleted and the appeal of the appellant on this ground is partly allowed. (i) I have gone through the contentions of the AO and the submissions of the appellant. I find that the payments in question have been made in pursuance of arbitration proceedings. Where the payments have been made in pursuance of arbitration the sanctity cannot be doubted particularly when it has not been established that the arbitration proceedings are sham. The payments in question have been verified by the AO and the recipients have appeared in person and deposed to having received the amount. The nature of dispute has been highlighted which also has not been challenged by the AO.The payments in question have been disclosed by way of receipts and included in the return of income filed by HCL. Merely, because the other directors of HCL were not aware of the intricacies of the dealing cannot be the reason for doubting the payment of arbitration charges. The death of the director handling the dealings with the appellant and other directors not fully acquainted with the matter cannot be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenses in question were not incurred exclusively and wholly for the purpose of business. Settling personal disputes with the funds of the appellant firm is not an expenditure incurred for the purpose of business as argued by the appellant. Merely, because a claim has been allowed in the earlier year does ispo facto lead to the conclusion that the same should be accepted in the subsequent year? The principle of res judicata operates in income tax proceedings. Each year is a separate and independent year and the findings in one year do not automatically become binding in the other years. Therefore, in view of the fact that the expenditure in question was not incurred exclusively and wholly for the purpose of business the same deserves to be disallowed and the additions is hereby confirmed. (i) I agree with the contentions of the AO. The appellant has not furnished any cogent reason for retaining such staff in spite of there being no commercial business after the sale of Nagpur land. Financial and commercial prudence dictates that the businessman would try to maximize his profits and thereby maintaining such large no. of employees would not be a sound financial proposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided the issue without appreciating the fact that direct expenses of ₹ 5.91 crores claimed by the assessee on account of purchases made from M/s JB Enterprises is bogus as the party is one of the hawala entry provider as per the list prepared by the Sales Tax Department and the assessee failed to prove the genuineness of the party. Similarly, direct expenses of ₹ 2.92 crores claimed by the assessee on account of purchases made from M/s Tarash Developers is bogus as the party is one of the partner in the assessee firm and had no stock to supply to the assessee. The ld. DR further submitted that the ld. CIT(A) has erred in allowing 50% relief without assigning any reasons as to why and how 50% expenditure out of purchases from those two parties becomes genuine, when facts brought out by the AO clearly suggest that purchases claimed to have made from two parties is bogus and nongenuine. 10. The ld. AR for the assessee, on the other hand submitted that the ld. CIT(A) has erred in partially allowed relief in respect of direct expenses materials purchase, even though the assessee had filed complete details of purchases with necessary evidences. The ld. CIT(A) has failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of the assessee firm, where it has been clearly held that accommodation bills taken by M/s Metcon India is in connection with works undertaken for contract with assessee firm for development work at Nagpur land. Therefore, once addition on total expenditure was having been made in the name M/s Metcon India, the Revenue recommending making additions of similar amount in the case of the assessee was out rightly rejected by the ITSC. The CIT(A) after considering relevant facts has rightly rejected claim of the AO and has deleted addition towards contract charges. 11. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We have also carefully considered materials placed before us. The solitary issue that came up for our consideration from ground no. 1and 2 of Revenue appeal and ground no. 1 of assessee appeal is disallowances of certain expenditure incurred in relation to development of land at Nagpur. The fact with regard to sale of land at Nagpur for the impugned assessment year was not disputed by the assessing officer. In fact, the AO has accepted revenue generated from sale land. The only dispute is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available record, we find that the assessee has furnished complete details with regard to direct expenses materials, including bills from the suppliers. The AO has disallowed a sum of ₹ 9,00,00,000/- only the ground that major purchases is from sister concern and one of the supplier is in the list of hawala dealers as prepared by Sales Tax Department. The fact that major purchases have been made from associate concern does not alter the situation and it does not give power to the assessing officer to disallow whole expenditure on that ground alone. Further, the fact that one of the purchaser is in the list of entry provider as prepared by Sales Tax Department is also not sufficient to infer that the purchases from said party is non-genuine. The additions which have been made by the AO are on a purely estimate and adhoc basis and there is no reference whatsoever to the basis of disallowances. There is no bar under any law for purchases from associate/ sister concern and when there is no bar under law, the AO cannot disallow entire expenditure for the simple reason that it has been purchased from associate concern. But, what is to be seen is whether such purchase is at arm s l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 25-11-1011 has also confirmed having done all works before land was sold to them as agreed in MOU, including conversion of land from industrial to non-industrial purpose, clearing illegal encroachments and hutments, excavation of land, levelling, rock cutting, fencing etc.,. The photographs taken at site for having done development work at land have been filed before the AO which clearly proves development work at land. In fact the assessee has done all works as agreed in their MOU with purchaser of land, including, conversion of land from industrial to non-industrial purpose, put up fencing including retaining wall around the land. The AO has disregarded all evidences and made additions only on the basis of his own assessment of land position and photographs taken at site on 24-12-2011, without confronting those evidences to the assessee for its rebuttal. The AO has arrived at a conclusion on the basis of his own assessment of possible expenditure required for development of land per acre, without appreciating the fact that the nature of land matters when it comes to amount of expenditure required to be spent for development. In this case, as per details available with us, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that M/s Metcon India has been give work after due diligence and tender process cannot be ignored. The confirmations of vendor of land M/s MSHCL and the purchaser of land M/s NPPL is also cannot be ignored. From the above, it is undoubtedly proved that the assessee had undertaken land development work. We, therefore, are of the considered view that the AO was completely erred in disallowed contract charges paid to M/s Metcon India for development of land at Nagpur. 14. We, further noted another important aspect of the matter in light of order of the Income Tax Settlement Commission passed in the case of the assessee u/s 245D(4) of the Income Tax Act, 1961. The Hon ble Settlement Commission in the order passed u/s 245D(4) in the case of the assessee firm has clearly recorded categorical findings that accommodation bills taken by M/s Metcon India is in connection with works undertaken for contract with assessee firm for development work at Nagpur land. Therefore, once addition on total expenditure was having been made in the name M/s Metcon India, the Revenue recommending making additions of similar amount in the case of the assessee was out rightly rejected by the ITSC ..... X X X X Extracts X X X X X X X X Extracts X X X X
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