Income Tax Appellate Tribunal - Mumbai
Vidyasagar Enterprises Llp, Mumbai vs Assessee on 21 October, 2015
आयकर अपील य अ धकरण "एफ" यायपीठ मुंबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER आयकर अपील सं./I.T.A. No. 2653/Mum/2015 ( नधारण वष / Assessment Year: 2010-11) M/s Vidyasagar Enterprises LLP The Pr. Comm. Of Income Tax 13 (formerly Vidyasagar Investments Ayakar Bhavan, M. K. Road, Private Limited) बनाम/ Mumbai 400020.
6th Floor, Business Park, S V Road,
Chincholi Phatak, Malad (W), v.
Mumbai 400064
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AABCV1066B
(अपीलाथ /Appellant) : ( यथ / Respondent)
अपीलाथ क ओर से / Appellant by : Shri Haridas Bhat
यथ क ओर से/Respondent by : Shri G M Doss
सनु वाई क तार ख / : 23-09-15
Date of Hearing
घोषणा क तार ख /
: 21.10.2015
Date of Pronouncement
आदे श / O R D E R
Per Ramit Kochar,Accountant Member.:
This appeal by the assessee company is directed against the Order by the Principal Commissioner of Income Tax-13, Mumbai (Hereinafter called "the CIT') dated 26th March 2015 passed u/s 263 of Income Tax Act,1961 (Hereinafter called "the Act") for the assessment year 2010-11.
2 ITA No. 2653/Mum/2015 (A.Y. 2010-11)Vidyasagar Enterprises LLP vs. Pr. CIT
2. The Brief facts of the case are that the assessee company case was selected for scrutiny and the assessment order dated 01st March 2013 was passed by the Assessing Officer (Hereinafter called "the AO") u/s. 143(3) of the Act. The assessee company is engaged in the business of renting of immovable property and development of property.
3. Notice u/s. 263 of the Act was issued to the assessee company on 13th March 2015 by the CIT and the assessee company was called upon to explain the following:
i) During the financial year 2009-10 pertaining to assessment year 2010-11 the assesssee company had sold immovable property having 4 shops and 72 flats to M/s Silverline Enterprise on 7th July 2009. The records reveal that while the cost of construction is Rs.12,054 per sq. meter, the selling price is Rs.10,832.38 per sq. meter.
ii) The creditworthiness of the purchaser M/s Silverline Enterprise is not verified by the Assessing Officer by analysis of bank account statements and ledger accounts of this party.
4. The assessee company replied before the CIT in proceedings u/s 263 of the Act as under:
There was a dispute between the assessee company and the developer. The Developer was M/s Sarovar Developers (P) Ltd.
This was new venture for the assessee company and had no local contacts. Property could not be sold at proper price.3 ITA No. 2653/Mum/2015 (A.Y. 2010-11)
Vidyasagar Enterprises LLP vs. Pr. CIT The cost of project went up due to delay. It led to heavy interest burden. In F.Y. 2009-10 the property market was very bad.
Hence they sold the whole property to one party.
Due to the fact that it was disputed property there was no proper realization.
5. The CIT , there-after, examined the records of assessment and observed that the Assessing Officer has not examined these two issues as per the CIT show cause notice dated 13th March 2015, in the course of assessment proceedings and they have important bearing on the assessment of the correct income of the assessee company. The CIT held that the AO has failed to verify the correctness of loss declared by the assessee company in the construction project .The CIT held that the assessee company has shown cost of construction of housing projects at Plot No. 91/2 of T.P. Scheme No. 22, New Survey No. 591, Chandkheda, Dist Gandhinagar, Gujarat having area of 2736 sq meters , of Rs.8,88,02,711/- whereas sale price of the entire project has been shown at Rs. 7,98,00,000/- Thus, there is a loss of Rs. 90,02,711/- . Further, it was noticed by the CIT that the assessee company has commercial property from which it has rental income of Rs. 1,52,01,725/- and interest income of Rs. 18,06,136 /- and inspite of income from these sources of Rs.1,70,07,861/- , the assessee company has shown gross total income only of Rs. 3,40,927/- and after claim of TDS of Rs. 27,54,028/, assessee company has claimed refund of Rs.22,90,571/- . These facts reveals that on account of loss in respect of housing project, the actual effect of rental income and interest income of Rs. 1,70,07,861/- has been negated. The AO has not investigated the facts from this angle nor has he made any enquiry from the purchasing party. The AO has also not examined the comparative selling rate of immovable properties in Dist. Gandhinagar, Gujarat. Thus, the loss of construction project 4 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT declared by the assessee company has been accepted by the A.O. without verification.
The CIT observed that as regards the second issue of non verification of creditworthiness of the purchaser, M/s Silverline Enterprise in these proceedings u/s 263 of the Act, the assessee company has submitted in their letter dated 19-03- 2015 that they are informed that the A.O. has cross summoned M/s Silverline Enterprise, verified entire deal and collected the entire information including creditworthiness of M/s. Silverline Enterprise which must be on record. The CIT called for and examined the assessment records and observed that the AO has issued two notices u/s 133(6) of the Act calling for details from M/s. Silverline Enterprise which notices were duly served but there are no evidence on record of compliances of these notices and hence , creditworthiness of M/s Silverline Enterprise was not examined by AO . Thus, the CIT held that the assessment order dated 01.03.2013 passed u/s 143(3) of the Act by the AO is considered erroneous and prejudicial to the interest of the Revenue and is set aside to the extent mentioned in the reasons given above for which the directions were issued to AO to examine these issue afresh and issue fresh assessment order.
6.Aggrieved by the orders dated 26th March 2015 passed by the CIT u/s 263 of the Act, the assessee company filed appeal before us.
7. The assessee company submitted before us that the assessee company has only one project at Gandhinagar, Gujarat and the assessee company purchased land from the M/s Sarovar Developers Pvt. Ltd. vide agreement dated 25-01-2008 for Rs. 1,16,49,300/- (inclusive of the registration charges and stamp duty). The assessee company submitted that it entered into development agreement with M/s 5 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT Sarovar Developers Pvt. Ltd. for Rs.6,75,60,000/- vide agreement dated 25-01- 2008 . The assessee company submitted that the said M/s Sarovar Developers Pvt. Ltd. failed to get the requisite clearances and the assessee company released the contracted amount after withholding Rs. 70,00,000/- and then arose dispute between the assessee company and the said M/s Sarovar Developers Private Limited. The suit was filed by M/s Sarovar Developers Pvt. Ltd. against the assessee company for recovery of their dues in the court of Hon. Principal Civil Judge of Gandhinagar, Gujarat which was registered as Suit no. C.S.No. 144 of 2009. Due to delays in getting the requisite clearances and the suit filed against the assessee company, the afore-stated project was struck and there was delay in the project whereby the costs escalated and the assessee company start looking for the buyer to sell the entire project and finally got the buyer M/s Silverline Enterprise to sell the entire project for Rs.7,98,00,000. The said buyer mediated between the assessee company and M/s Sarovar Developers Pvt. Ltd. to settle the dispute and out of court settlement was arrived at between the assessee company and M/s Sarovar Developers Pvt. Ltd. The assessee company entered into deed of cancellation as well deed of rectification both dated 20th May 2009 with M/s Sarovar Developers Pvt. Ltd. . The said Buyer M/s Silverline Enterprise paid Rs.75,00,000/- directly to M/s. Sarovar Developers Pvt. Ltd. being the out of court settlement amount and the suit was withdrawn by M/s Sarovar Developers Pvt. Ltd. for which the necessary orders were passed by Hon'ble Add. Sen. C.J.Gandhinagar on 20th May 2009 in suit no. R.C.S No. 144 of 09 disposing of the suit as withdrawn. The assessee company submitted that the sale agreement dated 07th July 2009 was entered into between M/s. Silverline Enterprise and the assessee company whereas the developer M/s Sarovar Developers Pvt. Ltd. became the confirming party and balance payment was received from the said Buyer Silverline Enterprise after adjusting the amount of Rs.75,00,000/- paid by 6 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT the said Buyer directly to M/s Sarovar Developers Private Limited and in the process there was a loss of 90,02,711/- incurred by the assessee company after taking into account extra ordinary expenses of interest and settlement amount , which loss was claimed as business loss by the assessee company in the return of income filed with Revenue and the same was allowed by the AO . The assessee company submitted that during the original assessment proceedings u/s 143(3) of the Act , there was discussions at length by the AO about this project which is the only one project undertaken by the assessee company and the Revenue has all the details about this project before it while framing original assessment order dated 01.03.2013 u/s 143(3) of the Act. The assessee company drew our attention to the para 2 & 3 of the assessment order u/s 143(3) of the Act dated 01-03-2013 which are reproduced below and reads as under wherein the project undertaken by the assessee company at Gandhinagar, Gujarat which is the sole project undertaken by the assessee company was dealt and discussed in detail by the AO:
"2. The assessee company is engaged in the business of renting of immovable property and development of property.
Disallowance of Rs.75,00,000/- u/s. 40(a)(ia):
3.1 During the year the assessee has debited Rs.75,00,OOO/ -under the head development charges . The assessee company had given its land at Chandkheda, District Gandhinagar, Gujarat for development to M/s.Sarovar Developers Pvt. Ltd. vide development agreement dtd. 25.1.2008. Sarovar developers Pvt. Ltd. had agreed to construct a building for the assessee as per approved plans for a consideration of Rs.6,75,60,000/ - . The assessee had paid Rs.6,05,60,000/ - to the contractor and Rs.70 Lacs remained outstanding. Thereafter a dispute arose between, the assessee and the contractor regarding obtaining B.U.(Building Usage) permission for the said building. This dispute was settled vide agreement dated 20.05.2009 and assessee paid Rs75 lacs on 20.5.2009 to the contractor towards development charges. However , the assessee failed to deduct tax at source u/s 194C on the payment of Rs.75 lacs. Hence, a show cause notice was issued on 6.2.2013 requesting the assessee to give reasons 7 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT with supporting evidences as to why disallowance of Rs.75,00,000/ - should not be made u/s.40(a)(ia). Assessee's reply is reproduced as under:
3.2 Reply dated.11.2.2013:
"As regards to the payment of Rs. 75,00,000/- to M/s. Sarovar Developers Pvt. Ltd. by M/s. Silver Enterprises, the payment was not paid towards construction but the said payment is the settlement amount as per the out of court settlement succeeding the suit No. 144/209 filed by M/s. Sarovar Developers Pvt. Ltd. Ltd. in the court of 5th Additional senior Civil judge, Gandhinagar, Gujrat,. The relevant papers have already been submitted and are on your records.
The said payment of Rs. 75, 00,000/- is not covered u/s. 194C of the Income Tax Act,1961 as it is not pursuant to contract but the settlement amount, the payment of which was made by M/s Silver Enterprises, the buyer of the property under reference directly out of the sale consideration to ensure that the developers does not create any problem in the deal and accordingly the developer was made a confirming party in the sale deed, copy of which is already on your record. Further we draw kind attention to the Clause No. 3(c) on Page no. 6 of Development Agreement dated 25.01.2008 which reads as under - (Copy of Relevant page enclosed marked as Annexure-1).
"Balance amount of Rs.70,00,000/- (Rupees Seventy Lacs only) within 10 days from getting Building Use permission / Occupation Certificate from the concern authorities without any omission, delay or default for any reason". Since the Developer has not obtained the Business Use Permission (BUP)/ Occupation certificate (OC) from the concerned authorities within the stipulated time hence the Developer is not entitled for the Balance contractual payment of Rs.70,00,000/- as per the said agreement.
The total contract value was Rs. 6,75,60,000/-, out of which Rs.6,05,60,000/- was paid by the assessee company and proper tax was deducted at source thereon and balance amount of Rs.70,00,000/ became non payable due to the reason stated herein above.
The amount of R.s 75,00,000/- which was paid by the buyer as mentioned in the sale deed is as per out of court settlement in-order to get sale deal through by withdrawing the suit filed by the developer. Further the payment of Rs.75,00,000/- was a settlement amount which can further be confirmed from the cancellation deed which is already on your record and not a contractual payment. We are enclosing herewith the relevant part of the cancellation deed marked as Annexure-2.8 ITA No. 2653/Mum/2015 (A.Y. 2010-11)
Vidyasagar Enterprises LLP vs. Pr. CIT The said amount of Rs.75,00,000/- was neither paid by the assessee company nor received by the assessee company from the buyer of the said property. The said amount was only accounted as expenses and added in the sale consideration following grass method of accounting as per the schedule VI of the Companies Act, 1956.
In view of the above, it is very clear that the deduction of Tax at Source on Rs.75,00,000 /- is not applicable as it is not the payment under the development agreement but towards out of court settlement in order to get the sale deal through.
In view of the above, there seems no reasons to disallow the expenses u/s. 40(a)(ia) of the Income Tax Act, 1961.
Without prejudice to the above The real sales consideration received by the assessee company is Rs.7,23,00,000/- (Rs.7,98,00,000/-less Rs.75,00,000/-) and not Rs.7,98,00,000/-. The Sum of Rs.75,00,000/- lakh paid by M/s. Silverline Enterprises - the buyer of the said property directly to M/s. Sarovar Developers Pvt. Ltd - the developer is towards out of court settlement money to withdraw the petition in order to get the sale deal allowed by the developer and also for not creating any nuisance/problem in future in the sale deal and accordingly the said developer became a confirming party in the sale deed which is already on your record.
Since the amount of Rs. 75,00,000/- was never paid by the assessee company to the developer hence there was no reason to deduct TDS there on. Since the assessee has received less amount hence it was having two options - l)to account for the net amount of Rs.7,23,00,000/- as sale value of the said property 2) to account for the gross sale and show the short receipt of Rs.75,00,000/- towards expenses and the best possible account head was development charges. The assessee is correctly accounted as per the second option.
In view of the above there is no reason that the said amount of Rs. 75,00,000/- be disallowed u/s. 40(a)(ia) of The Income Tax Act, 1961."
3.3 Assessee's reply has been perused carefully and placed on record. The arguments raised by the assessee and the grounds mentioned thereof are not acceptable. The assessee has contended that the said payment is not covered u/s. 194 C as it is not pursuant to contract. It has stated that it pertains to out of court settlement. This is not wholly correct. It is a fact that the assessee was required to pay Rs. 6,75,60,000/ -to the contractor for construction of building and such payment is covered under section 194C. In its letter dtd.1l.2.2013 the assessee has clearly stated that it has deducted tax at source on payment of Rs.6,05,60,000/ -.Thus the contention 9 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT that Rs.75 lacs is not part of this contract consideration is factually incorrect. Although the dispute arisen with the contractor was settled out of court the essence of payment is the original development contract for construction of building. As the assessee failed to pay the balance contractual consideration of Rs.70 lacs to the contractor he filed suit for recovery of the same. To avoid the litigation assessee made out of court settlement and agreed to pay Rs.75 lacs to the contractor towards development charges and interest on delayed payment. Thus the payment made by the assessee is pursuant to original contract dtd. 25-01-2008. Recovery suit acted as a catalyst to accelerate the process of payment of balance contractual consideration. Settlement deed was mere mutual agreement to ensure recovery of the outstanding contractual consideration from assessee and no further obstacle by contractor against sale of building. Hence it cannot be said that payment was made for out of court settlement and not towards construction. Once it is established that the payment has been made for construction work it attracts provisions of section 194C.
3.4 Moreover it is mentioned in the Settlement Agreement that payment of Rs. 75,00,000/ - was towards the development of the said property." The relevant clause at page 4 of the Settlement Agreement dated 20.05.2009 is reproduced as under:
"As per the said development agreement tile first party has agreed to pay the second party total construction cost of Rs.6,75,60,000/- out of which first party has paid to the second party Rs.6,05,60,000/-.
The first party has to pay the second party remaining amount of Rs.70,00,000/- on receiving of B. U. permission from competent authority. Thereafter it is settled between both the parties that due to circumstances beyond control of both B.U. permission has not been received . Hence, it is agreed between the first party and the second party that tile first party will pay Rs.75,00,000/- including interest as a full and final settlement towards the development towards the development of the said property."
3.5 From the above it can be seen that out of Rs.75,00,000/- debited by the assessee an amount of Rs.70,00,000/ - pertains to the balance consideration payable as per original contract dtd.25.1.200S. The original contract was for development of property i.e. construction of building as per approved plans. Further the balance amount of Rs.5,00,000/ - constitutes interest payment as mentioned in the agreement dated 20.05.2009.This again attracts the provisions of section 194A. As the entire payment of Rs.75 lacs has been made towards contract for development of property it attracts the provisions of section 194C.
10 ITA No. 2653/Mum/2015 (A.Y. 2010-11)Vidyasagar Enterprises LLP vs. Pr. CIT 3.6 The contention that the payment has not been made by the assessee company but paid by the buyer directly to M/s. Sarovar Developers Pvt. Ltd. to defend its stand of not effecting TDS is not tenable, The buyer, M/ s. Silverline Enterprise purchased the building so constructed from the assessee for total consideration of Rs.7,98,00,000/ - vide agreement dtd.7.7.2009 .Out of the agreed total consideration Silverline Enterprise paid Rs.75,00,000/ - to M/s. Sarovar Developers Pvt. Ltd on behalf of and at the behest of assessee towards development charges. This is clearly mentioned in the agreement dated 20.05.2009, & 7.7.2009 relevant clauses of the two agreements are reproduced as under:
a) Agreement dtd.20.5.2009:
"Accordingly M/s. Silverline Enterprises has on specific instructions of, on behalf of and on account of the First Party paid Rs.75,00,000/-[Rupees Seventy Five Lacs only] to the second party by Banker Cheque No. 702253 dated 19-5.2009, Bank of Baroda, Chankheda Branch, drawn in favour of the Second Party towards full and final payment of all their dues/outstanding including interest for delayed payment etc. under the said Development Agreement."
b) Agreement dtd.7.7.2009 "Thereafter the confirming party (M/s. Sarovar Developers Pvt. Ltd) had filed suit No. 144/2009 before 5th Addl. Senior Civil Judge, Gandhinagar Against Vidyasagar Investments Pvt. Ltd., for recovering the balance development charges and as per the instruction of Vendor(Vidyasagar Investments Pvt. Ltd.) remaining development consideration was paid by the purchaser to the confirming party."
3.7 From the above it is clear that the payment of Rs. 75,00,000/ - has been made on behalf of the assessee as consideration for development charges i.e. for construction of building. For Silverline Enterprise payment of Rs.75 lacs was purchase consideration. Whereas for the assessee it was consideration for development charges payable to M/s Sarovar Developers Pvt, Ltd attracting provisions of section 194C. Hence the assessee cannot escape the responsibility cast upon it under section 194C on the ground that the payment was made by M/s. Silverline Enterprise when it was paid on the specific instruction of the assessee company.
Applicability of Section 194C 3.8 Without prejudice to the above the provisions of section 194C and applicability in the instant case is discussed as under:
Section 194C. lays down that 11 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT " Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to-
(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, Of such sum as income-tax on income comprised therein."
3.9 On plain reading of the section it is understood that a person responsible for paying any sum to any resident for carrying out any work in pursuance of a contract between the contractor and a specified person, he has to deduct tax at the time of crediting of such sum to the account of the contractor or at the time of payment thereof whichever is earlier.
3.10 In the instant case the assessee is the person who was responsible for paying the consideration of Rs.6,75,60,000/- to M/s. Sarovar Developers Pvt. Ltd. for carrying out the work of construction of building in pursuance of contract dated 25.01.2008. As the payment of Rs.75,00,000/ - is part of the total consideration of Rs.6,75,60,000/ - assessee was responsible to effect TDS on such payment under section 194C. Although the payment of Rs.75,00,000/- has been made by M/s. Silverline Enterprise the same has been made on behalf of the assessee under the development agreement. Hence payment made by Silver Line does not alter the nature of expenditure in the hands of the assessee. For the assessee it was payment made for development of property i.e. for construction of building. Even if Silverline Enterprises had paid to the assessee the amount of Rs.75 lacs then also, the assessee was required to pay this amount to M/s. Sarovar Developers Pvt. Ltd as stipulated in agreement dtd.20.5.2009. Thus the assessee was under obligation to effect TDS u/s.194C on the said payment .
3.11 In view of the above facts and discussion it is established beyond doubt that the said expenditure of Rs.75,00,000/ - has been incurred towards contract for construction of building .Such payments attract provisions of section 194C. The assessee has failed to deduct tax at source u/s.194C, on the said payment. Hence the expenditure of Rs .75,00,000/-is hereby disallowed u/s. 40(a)(ia) of the Income Tax Act, 1961 and added back to the total income of the assessee. I am satisfied that this is 12 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT a fit case for initiating penalty u/s 271(1)(c). Penalty proceedings u/s. 271(1)(c) of the Income Tax Act, 1961 are initiated for furnishing inaccurate particulars of Income."
Thus, the assessee company submitted that the AO had before it all the relevant details about this project including cost of project , details and circumstances about this project , dispute and suit filed against the assessee company and the manner in which the sale of the project was undertaken by the assessee company during the original assessment proceedings u/s 143(3) read with Section 143(2) of the Act which culminated into an assessment order date 01-03-2013 which order has been passed by the AO after applying mind to all the details about this project which was before AO during assessment proceedings and accordingly loss was allowed by the AO. The assessee company also submitted that the additions of Rs.75,00,000/- made by the AO in the assessment order dated 01.03.2013 u/s 143(3) of the Act on account of failure of the assessee company to deduct TDS on payment of out of court settlement amount directly by M/s Silverline Enterprise to M/s Sarovar Developers Private Limited on behalf of the assessee company has already been deleted by Hon'ble Mumbai Tribunal in ITA No. 6764/Mum/2013 in the case of Vidyasagar Investments Private Limited v. The ITO for assessment year 2010-11. The assessee company submitted that the AO passed the assessment order u/s 143(3) dated 01-03-2013 after considering all the facts and material before him with respect to this project at Gandhinagar, Gujarat which is the only project undertaken by the assessee company and the AO accepted the cost of the project and consequent loss incurred by the assessee company arising out of sale of this project after due application of mind and considering all relevant material which was on records and is part of assessment records. The assessee company submitted that proceedings u/s 263 of the Act are bad in law as the AO has already accepted the cost of construction of the project and consequent loss incurred by the 13 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT assessee company after due application of mind and allowed the loss to the assessee company in original assessment proceedings u/s 143(3) of the Act which culminated into orders dated 1st March 2013. The assessee company submitted that the CIT is acting beyond its jurisdiction by asking to verify the creditworthiness of buyer of the project Silverline Enterprise. Thus, the assessee company submitted that the CIT cannot substitute his opinion to the opinion formed by the AO during assessment proceedings which was a plausible view adopted by the AO after due application of mind and hence orders passed by the AO dated 01-03-2013 u/s 143(3) of the Act are neither erroneous nor prejudicial to the interest of revenue and the orders dated 26th March 2015 passed u/s 263 of the Act by CIT are bad in law and liable to be set aside
8.The Ld. DR on the other hand relied upon the orders dated 26th March 2015 u/s 263 of the Act of the CIT and submitted that the cost of construction of the project needs to be verified as held by the CIT in his orders dated 26th March 2015 u/s 263 of the Act . The Ld. DR relied upon decision of Hon'ble Supreme Court in Malabar Industrial Company Limited v. CIT (2000) 243 ITR 83(SC) and Mumbai Tribunal in Arvee International v. Addl. CIT (2006) 101 ITD 495(Mum.) and also upon the judgment of Hon'ble Karnatka High Court in CIT v. Infosys Technologies Limited (2012) 17 taxmann.com 203(Kar.) as well judgment of Hon'ble Allahabad High Court in Jagdsih Kumar Gulati v. CIT (2004)139 Taxmann 369(All.) to contend that orders u/s 263 of the Act are proper and legal as the AO has not verified the cost of construction of the project and hence the assessment orders dated 01-03-2013 u/s 143(3) of the Act is erroneous and prejudicial to the interest of Revenue which has been rightly set aside by the CIT with directions to consider these matter afresh and frame fresh assessment order.
14 ITA No. 2653/Mum/2015 (A.Y. 2010-11)Vidyasagar Enterprises LLP vs. Pr. CIT The Ld. DR contended that so far as observation of CIT to verify credit worthiness of Buyer is concerned, the same is not pressed before the Tribunal.
9. We have considered the rival contentions, perused the material on record and case laws relied upon by the rival parties. We have observed that the assessee company has undertaken one real estate project at Gandhinagar, Gujarat and for which the assessee company purchased land from the M/s Sarovar Developers Pvt. Ltd. and also entered into development agreement with the said party . The assesseee company has explained that due to the delay in receipt of clearances , it withheld the amount of Rs.70,00,000/- payable to M/s Sarovar Developers Private Limited which prompted the said company M/s Sarovar Developers Private Limited to file suit against the assessee company for recovery of their dues in the court of Hon. Principal Civil Judge of Gandhinagar, Gujarat which was registered as suit no. C.S.No. 144 of 2009 and it is mainly the delay in receipt of clearances and subsequent court litigations which escalated costs and consequent losses suffered by the assessee company. The assessee company has submitted that then it decided to sell the entire project which was struck due to above mentioned court litigation and non receipt of clearances.The assessee company got the buyer M/s Silverline Enterprise for Rs.7,98,00,000 to sell the entire project en-bloc. The said buyer mediated between the assessee company and M/s Sarovar Developers Pvt. Ltd. to resolve the dispute between the assessee company and M/s Sarovar Developers Private Limited and then out of court settlement was arrived at between the assessee company and M/s Sarovar Developers Pvt. Ltd. The assessee company entered into deed of cancellation as well deed of rectification both dated 20th May 2009 with M/s Sarovar Developers Pvt. Ltd. . The said Buyer M/s Silverline Enterprise paid Rs.75,00,000/- directly to M/s. Sarovar Developers Pvt. Ltd. being the out of court settlement amount and the suit was withdrawn by 15 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT M/s Sarovar Developers Pvt. Ltd. for which the orders were passed by Hon'ble Add. Sen. C.J.Gandhinagar on 20th May 2009 in suit no. R.C.S No. 144 of 09 disposing of the suit as withdrawn. The assessee company entered into the sale agreement dated 07th July 2009 with M/s. Silverline Enterprise while the developer M/s Sarovar Developers Pvt. Ltd. became the confirming party and balance payment was received from the said Buyer by the assessee company after adjusting the amount of Rs.75,00,000/- paid by the Buyer directly to M/s Sarovar Developers Private Limited and in the process there was a loss of 90,02,711/- incurred by the assessee company in this project after taking into account extra ordinary expenses of interest and settlement amount , which loss was claimed as business loss by the assessee company in the return of income filed with Revenue . We have also observed that there are discussions in the order of assessment dated 1-3-2013 u/s 143(3) of the Act passed by AO whereby the details about this project are discussed by the AO. Reference to para 2 & 3 of the assessment order u/s 143(3) of the Act dated 01-03-2013 which are reproduced below establish that the details of this project were before AO in the original assessment proceedings u/s 143(3) of the Act while framing assessment order date 01-03-2013:
"2. The assessee company is engaged in the business of renting of immovable property and development of property.
Disallowance of Rs.75,00,000/- u/s. 40(a)(ia):
3.1 During the year the assessee has debited Rs.75,00,OOO/ -under the head development charges . The assessee company had given its land at Chandkheda, District Gandhinagar, Gujarat for development to M/s.Sarovar Developers Pvt. Ltd.
vide development agreement dtd. 25.1.2008. Sarovar developers Pvt. Ltd. had agreed to construct a building for the assessee as per approved plans for a consideration of Rs.6,75,60,000/ - . The assessee had paid Rs.6,05,60,000/ - to the contractor and 16 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT Rs.70 Lacs remained outstanding. Thereafter a dispute arose between, the assessee and the contractor regarding obtaining B.U.(Building Usage) permission for the said building. This dispute was settled vide agreement dated 20.05.2009 and assessee paid Rs75 lacs on 20.5.2009 to the contractor towards development charges. However , the assessee failed to deduct tax at source u/s 194C on the payment of Rs.75 lacs. Hence, a show cause notice was issued on 6.2.2013 requesting the assessee to give reasons with supporting evidences as to why disallowance of Rs.75,00,000/ - should not be made u/s.40(a)(ia). Assessee's reply is reproduced as under:
3.2 Reply dated.11.2.2013:
"As regards to the payment of Rs. 75,00,000/- to M/s. Sarovar Developers Pvt. Ltd. by M/s. Silver Enterprises, the payment was not paid towards construction but the said payment is the settlement amount as per the out of court settlement succeeding the suit No. 144/209 filed by M/s. Sarovar Developers Pvt. Ltd. Ltd. in the court of 5th Additional senior Civil judge, Gandhinagar, Gujrat,. The relevant papers have already been submitted and are on your records.
The said payment of Rs. 75, 00,000/- is not covered u/s. 194C of the Income Tax Act,1961 as it is not pursuant to contract but the settlement amount, the payment of which was made by M/s Silver Enterprises, the buyer of the property under reference directly out of the sale consideration to ensure that the developers does not create any problem in the deal and accordingly the developer was made a confirming party in the sale deed, copy of which is already on your record. Further we draw kind attention to the Clause No. 3(c) on Page no. 6 of Development Agreement dated 25.01.2008 which reads as under - (Copy of Relevant page enclosed marked as Annexure-1).
"Balance amount of Rs.70,00,000/- (Rupees Seventy Lacs only) within 10 days from getting Building Use permission / Occupation Certificate from the concern authorities without any omission, delay or default for any reason". Since the Developer has not obtained the Business Use Permission (BUP)/ Occupation certificate (OC) from the concerned authorities within the stipulated time hence the Developer is not entitled for the Balance contractual payment of Rs.70,00,000/- as per the said agreement.
The total contract value was Rs. 6,75,60,000/-, out of which Rs.6,05,60,000/- was paid by the assessee company and proper tax was deducted at source thereon and balance amount of Rs.70,00,000/ became non payable due to the reason stated herein above.17 ITA No. 2653/Mum/2015 (A.Y. 2010-11)
Vidyasagar Enterprises LLP vs. Pr. CIT The amount of R.s 75,00,000/- which was paid by the buyer as mentioned in the sale deed is as per out of court settlement in-order to get sale deal through by withdrawing the suit filed by the developer. Further the payment of Rs.75,00,000/- was a settlement amount which can further be confirmed from the cancellation deed which is already on your record and not a contractual payment. We are enclosing herewith the relevant part of the cancellation deed marked as Annexure-2.
The said amount of Rs.75,00,000/- was neither paid by the assessee company nor received by the assessee company from the buyer of the said property. The said amount was only accounted as expenses and added in the sale consideration following grass method of accounting as per the schedule VI of the Companies Act, 1956.
In view of the above, it is very clear that the deduction of Tax at Source on Rs.75,00,000 /- is not applicable as it is not the payment under the development agreement but towards out of court settlement in order to get the sale deal through.
In view of the above, there seems no reasons to disallow the expenses u/s. 40(a)(ia) of the Income Tax Act, 1961.
Without prejudice to the above The real sales consideration received by the assessee company is Rs.7,23,00,000/- (Rs.7,98,00,000/-less Rs.75,00,000/-) and not Rs.7,98,00,000/-. The Sum of Rs.75,00,000/- lakh paid by M/s. Silverline Enterprises - the buyer of the said property directly to M/s. Sarovar Developers Pvt. Ltd - the developer is towards out of court settlement money to withdraw the petition in order to get the sale deal allowed by the developer and also for not creating any nuisance/problem in future in the sale deal and accordingly the said developer became a confirming party in the sale deed which is already on your record.
Since the amount of Rs. 75,00,000/- was never paid by the assessee company to the developer hence there was no reason to deduct TDS there on. Since the assessee has received less amount hence it was having two options - l)to account for the net amount of Rs.7,23,00,000/- as sale value of the said property 2) to account for the gross sale and show the short receipt of Rs.75,00,000/- towards expenses and the best possible account head was development charges. The assessee is correctly accounted as per the second option.
In view of the above there is no reason that the said amount of Rs. 75,00,000/- be disallowed u/s. 40(a)(ia) of The Income Tax Act, 1961."
3.3 Assessee's reply has been perused carefully and placed on record. The arguments raised by the assessee and the grounds mentioned thereof are not 18 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT acceptable. The assessee has contended that the said payment is not covered u/s. 194 C as it is not pursuant to contract. It has stated that it pertains to out of court settlement. This is not wholly correct. It is a fact that the assessee was required to pay Rs. 6,75,60,000/ -to the contractor for construction of building and such payment is covered under section 194C. In its letter dtd.1l.2.2013 the assessee has clearly stated that it has deducted tax at source on payment of Rs.6,05,60,000/ -.Thus the contention that Rs.75 lacs is not part of this contract consideration is factually incorrect. Although the dispute arisen with the contractor was settled out of court the essence of payment is the original development contract for construction of building. As the assessee failed to pay the balance contractual consideration of Rs.70 lacs to the contractor he filed suit for recovery of the same. To avoid the litigation assessee made out of court settlement and agreed to pay Rs.75 lacs to the contractor towards development charges and interest on delayed payment. Thus the payment made by the assessee is pursuant to original contract dtd. 25-01-2008. Recovery suit acted as a catalyst to accelerate the process of payment of balance contractual consideration. Settlement deed was mere mutual agreement to ensure recovery of the outstanding contractual consideration from assessee and no further obstacle by contractor against sale of building. Hence it cannot be said that payment was made for out of court settlement and not towards construction. Once it is established that the payment has been made for construction work it attracts provisions of section 194C.
3.4 Moreover it is mentioned in the Settlement Agreement that payment of Rs. 75,00,000/ - was towards the development of the said property." The relevant clause at page 4 of the Settlement Agreement dated 20.05.2009 is reproduced as under:
"As per the said development agreement tile first party has agreed to pay the second party total construction cost of Rs.6,75,60,000/- out of which first party has paid to the second party Rs.6,05,60,000/-.
The first party has to pay the second party remaining amount of Rs.70,00,000/- on receiving of B. U. permission from competent authority. Thereafter it is settled between both the parties that due to circumstances beyond control of both B.U. permission has not been received . Hence, it is agreed between the first party and the second party that tile first party will pay Rs.75,00,000/- including interest as a full and final settlement towards the development towards the development of the said property."
3.5 From the above it can be seen that out of Rs.75,00,000/- debited by the assessee an amount of Rs.70,00,000/ - pertains to the balance consideration payable as per original contract dtd.25.1.200S. The original contract was for development of property i.e. construction of building as per approved plans. Further the balance 19 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT amount of Rs.5,00,000/ - constitutes interest payment as mentioned in the agreement dated 20.05.2009.This again attracts the provisions of section 194A. As the entire payment of Rs.75 lacs has been made towards contract for development of property it attracts the provisions of section 194C.
3.6 The contention that the payment has not been made by the assessee company but paid by the buyer directly to M/s. Sarovar Developers Pvt. Ltd. to defend its stand of not effecting TDS is not tenable, The buyer, M/ s. Silverline Enterprise purchased the building so constructed from the assessee for total consideration of Rs.7,98,00,000/ - vide agreement dtd.7.7.2009 .Out of the agreed total consideration Silverline Enterprise paid Rs.75,00,000/ - to M/s. Sarovar Developers Pvt. Ltd on behalf of and at the behest of assessee towards development charges. This is clearly mentioned in the agreement dated 20.05.2009, & 7.7.2009 relevant clauses of the two agreements are reproduced as under:
a) Agreement dtd.20.5.2009:
"Accordingly M/s. Silverline Enterprises has on specific instructions of, on behalf of and on account of the First Party paid Rs.75,00,000/-[Rupees Seventy Five Lacs only] to the second party by Banker Cheque No. 702253 dated 19-5.2009, Bank of Baroda, Chankheda Branch, drawn in favour of the Second Party towards full and final payment of all their dues/outstanding including interest for delayed payment etc. under the said Development Agreement."
b) Agreement dtd.7.7.2009 "Thereafter the confirming party (M/s. Sarovar Developers Pvt. Ltd) had filed suit No. 144/2009 before 5th Addl. Senior Civil Judge, Gandhinagar Against Vidyasagar Investments Pvt. Ltd., for recovering the balance development charges and as per the instruction of Vendor(Vidyasagar Investments Pvt. Ltd.) remaining development consideration was paid by the purchaser to the confirming party."
3.7 From the above it is clear that the payment of Rs. 75,00,000/ - has been made on behalf of the assessee as consideration for development charges i.e. for construction of building. For Silverline Enterprise payment of Rs.75 lacs was purchase consideration. Whereas for the assessee it was consideration for development charges payable to M/s Sarovar Developers Pvt, Ltd attracting provisions of section 194C. Hence the assessee cannot escape the responsibility cast upon it under section 194C on the ground that the payment was made by M/s. Silverline Enterprise when it was paid on the specific instruction of the assessee company.
Applicability of Section 194C 20 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT 3.8 Without prejudice to the above the provisions of section 194C and applicability in the instant case is discussed as under:
Section 194C. lays down that " Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to-
(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, Of such sum as income-tax on income comprised therein."
3.9 On plain reading of the section it is understood that a person responsible for paying any sum to any resident for carrying out any work in pursuance of a contract between the contractor and a specified person, he has to deduct tax at the time of crediting of such sum to the account of the contractor or at the time of payment thereof whichever is earlier.
3.10 In the instant case the assessee is the person who was responsible for paying the consideration of Rs.6,75,60,000/- to M/s. Sarovar Developers Pvt. Ltd. for carrying out the work of construction of building in pursuance of contract dated 25.01.2008. As the payment of Rs.75,00,000/ - is part of the total consideration of Rs.6,75,60,000/ - assessee was responsible to effect TDS on such payment under section 194C. Although the payment of Rs.75,00,000/- has been made by M/s. Silverline Enterprise the same has been made on behalf of the assessee under the development agreement. Hence payment made by Silver Line does not alter the nature of expenditure in the hands of the assessee. For the assessee it was payment made for development of property i.e. for construction of building. Even if Silverline Enterprises had paid to the assessee the amount of Rs.75 lacs then also, the assessee was required to pay this amount to M/s. Sarovar Developers Pvt. Ltd as stipulated in agreement dtd.20.5.2009. Thus the assessee was under obligation to effect TDS u/s.194C on the said payment .
3.11 In view of the above facts and discussion it is established beyond doubt that the said expenditure of Rs.75,00,000/ - has been incurred towards contract for 21 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT construction of building .Such payments attract provisions of section 194C. The assessee has failed to deduct tax at source u/s.194C, on the said payment. Hence the expenditure of Rs .75,00,000/-is hereby disallowed u/s. 40(a)(ia) of the Income Tax Act, 1961 and added back to the total income of the assessee. I am satisfied that this is a fit case for initiating penalty u/s 271(1)(c). Penalty proceedings u/s. 271(1)(c) of the Income Tax Act, 1961 are initiated for furnishing inaccurate particulars of Income."
The AO after discussions made additions of Rs 75,00,000/-u/s 40(a)(ia) of the Act with respect to payment of Rs.75,00,000/- made directly by the buyer M/s Silverline Enterprise to M/s Sarovar Developers Private Limited on behalf of the assessee company being out of court settlement amount without deduction of TDS which was considered by the AO as having paid towards the development of the said property which addition was finally deleted by Mumbai Tribunal in ITA No. 6764/Mum/2013 in Vidyasagar Investments Private Limited v. The ITO for assessment year 2010-11. It was also noted by the AO that the assesssee company has made balance payment of Rs.6,05,60,000/- to M/s Sarovar Developers Private Limited towards construction of the project after deducting TDS as per the Act. Thus, it could not be said that the AO has not considered this project , its cost of construction, sale of project and other facts and circumstances surrounding this project which is the sole project undertaken by the assessee company, while framing the assessment order dated 01-03-2013 u/s 143(3) of the Act. The AO accepted the loss sustained by the assessee company in this project to be allowed to be set off against other income of the assessee after application of mind and considering relevant material on record which was one of the plausible view taken by the AO which view cannot be considered as an erroneous view. The CIT also has not brought on record that how the view undertaken by the AO could be considered as erroneous and prejudicial to the interest of Revenue. Regarding the second contention of the CIT for passing orders dated 26th March 2015 u/s 263 of the Act about the verification of credit worthiness of the buyer, the same is stated 22 ITA No. 2653/Mum/2015 (A.Y. 2010-11) Vidyasagar Enterprises LLP vs. Pr. CIT before us by the Ld. DR to be not pressed by the Revenue. We, therefore, hold that the order passed by the CIT dated 26th March 2015 u/s 263 of the Act is not sustainable in law and is hereby set aside and the orders dated 01st March 2013 passed u/s 143(3) of the Act by the AO are restored. We order accordingly.
10. In the result, the assessee's appeal is allowed ..
प रणामतः नधा रती क अपील वीकृत क जाती है ।
Order pronounced in the open court on October 21st , 2015
Sd/- Sd/-
(Joginder Singh) (Ramit Kochar)
या यक सद य / Judicial Member लेखा सद य / Accountant Member
मंब
ु ई Mumbai; दनांक Dated : 21.10.2015
Pooja.
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु त(अपील) / The CIT(A)
4. आयकर आयु त / CIT - concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मंब
ु ई / DR, ITAT, Mumbai
6. गाड फाईल / Guard File
आदे शानुसार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai