Calcutta H.C : Whether since revenue had not been able to establish any defect or fault in transaction between assessee and ‘Alishan’, impugned order passed by Tribunal was to be upheld

High Court Of Calcutta

Pr.CIT-3, Kolkata Vs. Entrepreneurs (Calcutta) (P.) Ltd.

Section 37(1)

Assessment year 2005-06

Aniruddha Bose And Arindam Sinha, JJ.

G.A. No. 754 Of 2016

ITAT No.133 Of 2016

September 13, 2017


1. This appeal of the Revenue originates from an order of scrutiny assessment made for the assessment year 2006-07 adding to the business income of the assessee a sum of Rs.5,17,48,439/-. The assessee had sold land measuring ‘129 kanal 17 Maria’ situated in Faridabad, Haryana to another incorporated company for a consideration of Rs.12,98,50,000/- in the relevant previous year. As it appears from the assessment order, the said land was purchased in the financial year under consideration for Rs.6,08,52,081/-. The assessee claimed as expenditure the said sum of Rs.5,17,48,439/-, which was paid to another corporate entity, Alishan Estates Pvt. Ltd. as compensation in connection with the subject land transaction. The assessee’s stand is that the said sum was paid in performance of its obligation under a Memorandum of Understanding (MOU) executed on 10th July, with Alishan. The assessing officer found Alishan to be a “paper/jama kharchi” company, which was used by the assessee to reduce its profits. The copy of the Memorandum of Understanding was made available to the Commissioner of Income Tax (Appeals), and has been produced before us as well. The assessee’s position is that payment to Alishan was legitimate consideration for certain services rendered by Alishan in pursuance of the (MOU). The services which Alishan was to undertake included identifying the buyer and also carrying out various other tasks relating to sale of the property involved. The assessing officer had directed addition of the entire sum to the assessee’s income chargeable to income tax as the assessee had not deducted TDS in respect of such payment, invoking the provisions of section 40(a)(ia) of the Income Tax Act, 1961. The MOU between Alishan and the assessee, inter alia, contained the following clause:—

“THAT alishan shall be entitled to claim share in the profit on sale of Land realizes by ECPL in the ratio of 75% of Alishan and 25% to ECPL”

2. The assessing officer disallowed this expenditure of Rs.5,17,48,439/- in relation to the said transaction on compensation payment to Alishan, inter alia, holding :—

“Thus, discussion at para 2 and 3 show that expenditure claim of Rs.5,17,48,439/- is not allowable for two distinct reasons – firstly under section 40(a)(ia) of Act; secondly the transaction being a ‘sham transaction’.”

3. The assessee went up in appeal before the Commissioner of Income Tax. The assessee had defended the transaction before the assessing officer as genuine transaction. On the question of invoking the provisions of section 40(a)(ia) of the Act, the assessee’s contention was that it was sharing of profit in a joint venture. Assessee’s position is that sharing of profit with joint venture partner does not attract TDS provisions. The Commissioner, in his order, observed and held:—

“Besides, the AO himself says that M/s. Alishan Estates Pvt. is not showing this amount as income. In fact, his contention is that the appellant is making a false claim as because, M/s. Alishan Estates Pvt. Ltd. has not accounted for this amount at all. The AO has in fact stated that the books of M/s. Alishan Estates Pvt. Ltd. are duly audited and it is impossible that the alleged accrued income has not been reflected. It is to be mentioned that the paper book submitted by the appellant which was forwarded to the AO contained an affidavit by one Pramod Sharma acting on behalf of M/s.Alishan Estates Pvt. Ltd., attesting to the receipt of this amount as compensation. Further Page- 8 of the said paper book identified the said person as a director of M/s.Alishan Estates Pvt. Ltd. No comments in any of the remand reports are seen to be forthcoming from the AO on this. In the absence of any adverse view on this evidence, it is difficult to justify the AO’s assertion that the appellant is making a false claim.”

4. The aforesaid decision of the Commissioner was carried up in appeal by the Revenue before the Income Tax Appellate Tribunal, “C” Bench, Kolkata. The appeal was registered as ITA No.1677/Kol/2010 and was dealt with by the Tribunal by its order dated 13th August, 2015 in which the Commissioner’s decision was sustained. The Tribunal, inter alia, held :—

“8. We have heard the rival contentions and perused the facts of the case. The main contention of the AO for making addition/disallowance as mentioned hereinabove is that the transaction is a sham transaction. Secondly, the AO treated the said amount as an expenditure by holding that the assessee should have deducted the tax at source. Therefore, he made a disallowance taking support of the provisions contained in section 40(a)(ia) of the I.T. Act 1961. As regards the sham transaction, at the outset, we do not support the order of the AO for the reasons that the transactions were made by a valid written contract/agreement on various terms and conditions with the two said parties, which are essential for such a joint venture project. This has not been denied by the AO. The AO has not pointed out any defect in the said agreement entered between the assessee and Alishan Estates Pvt. Ltd. In lieu of the said agreement dtd.10/07/2005 M/s. Alishan Estates Pvt. Ltd. was to procure pre-specified land for purchase, to make all the necessary legal arrangements for such land and to find out suitable buyer for the said land and profit was to be shared between the assessee and M/s. Alishan Estates P. Ltd. in ratio 25:75. The profit includes loss as well. Had there been a loss whether the AO would have treated the said transaction as a sham transaction, obviously the answer is No. Since joint venture has earned a profit and same was shared between the said two parties. Therefore, we are of the view that the transaction is completely in lieu of joint venture agreement. The AO is not justified in treating the said payment made by the assessee to the joint venture partner, M/s. Alishan as an expenditure and no TDS is required to be deducted on the profit so shared between the said two joint venture partners. In the circumstances and facts of the present case the addition so made by the AO is without any basis and is purely on surmises and conjectures. The ld. CIT(A) has rightly deleted the addition made by the AO. We do not find any infirmity in the order of the ld. CIT(A) . We uphold the same. The grounds raised by the revenue are dismissed.”

5. The commissioner found the assessee’s stand to be as per law on both the counts on which the assessing officer had given his findings. The assessing officer drew adverse inference from the profit sharing ratio, which was loaded against the land-owner and was in favour of its joint venture partner in 75%-25% ratio. The assessing officer had analysed the accounts of Alishan and observed that the said sum was not shown in its books in the financial year 2005-06. Payment was made to Alishan in the next financial year, i.e. 2006-07. The Commissioner, upon considering the materials on record held against the finding of the assessing officer that the said sum of Rs.5,17,48,439/- was in the nature of expenditure, non-deduction of tax therefrom would lead to disallowance under Section 40(a) (ia) and transaction between the assessee and Alishan was sham to be “perverse, illegal and contrary to law.”

6. Five questions were suggested before us for admission of the appeal by the Revenue, but what has been pressed before us at the time of hearing on admission of the appeal, is question No.2 which reads:—

“Q.2. Whether having regard to the admitted facts where the assessee could not produce M/s.Alishan Estates Pvt.Ltd. before the assessing officer to prove that the transaction is genuine and the said company is existing, the Learned Tribunal erred in law in overlooking the material part of the finding of the Assessing Officer and most erroneously upheld the order of the Commissioner of Income Tax (Appeals).”

7. At the stage of admission, we shall, thus, examine this question only. Our attention has been drawn by Mr. Ghoshal, learned advocate appearing for the Revenue to various deficits in the operations of Alishan to establish that the arrangement between the assessee and Alishan constituted sham transaction. He has also taken us through different provisions of the 1961 Act. He has emphasized on failure on the part of the assessee to produce Alishan to establish genuineness of the transaction and primarily for this reason he seeks overturning of the findings of the Commissioner and the Tribunal.

8. Whether a transaction is sham or not is essentially a question of fact. The assessing officer, in his order recorded that service of notice to Alishan had been returned unserved, and two of its directors also could not be found at their given addresses. These factors formed the basis of the assessing officer’s conclusion about business activities of Alishan. The Commissioner, however, found the assessing officer’s conclusion that it was a sham transaction between the assesse and Alishan to be in direct conflict with the assessing officer’s own acceptance of the assessee’s case that services rendered by Alishan were of specialized, professional and technical nature. Upon analyzing the Memorandum and other materials on record, the Commissioner accepted the assessee’s stand that the said sum was not expenditure incurred by the assessee to attract the provisions of Sections 194H or 194J of the 1961 Act. As a consequence, the question of disallowance of payment by applying the provisions of Section 40(a) (ia) could not arise. These findings by the Commissioner are based on appreciation of materials on record. The Tribunal also concurred with the findings of the Commissioner. The Tribunal, in its decision under appeal, observed that the assessing officer did not point out any defect in the “settlement/contract”.

9. Mr. Ghoshal submits that the assessing officer was right in expressing his view that the explanation on payment to Alishan was not satisfactory on the ground that the recipient company was a paper company and the entire transaction was sham. But two statutory appellate authorities expressed contrary view. There is no cloud on remittance of the said sum to Alishan, which has been referred to as a paper company by the assessing officer. But the Revenue has not been able to establish any defect or fault in the transaction itself between the assessee and Alishan. The transaction of purchase and sale of the land by the assessee pursuant to the MOU is not in dispute. Doubt has been sought to be raised on lopsided profit sharing arrangement, which according to the Revenue, is a colourable device adopted for evading tax. But as we have already observed, the first and the second appellate bodies, upon appreciation of evidence did not find any reason to negate the transaction as sham, which would have rendered assessee’s explanation unsatisfactory. We do not find any perversity in the findings of the Commissioner or the Tribunal, arrived at on the basis of appreciation of materials on record. We do not think that any substantial question of law arises in this appeal.

10. We accordingly dismiss the appeal. The application shall also stand dismissed.

11. There shall, however, be no order as to costs.

[Citation : 400 ITR 521]