Income Tax Appellate Tribunal - Delhi
Universe Heights Private Limited, ... vs Ito Ward 27(1), New Delhi on 6 September, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'H', NEW DELHI
Before Dr. B. R. R. Kumar, Accountant Member
Sh. Sudhir Kumar, Judicial Member
ITA No. 8125/Del/2019 : Asstt. Year : 2015-16
Universe Heights (India) Pvt. Ltd., Vs Income Tax Officer,
5G/1, Everest 46C, Chowringee Ward-27(1),
Road, Kolkata-700071 New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AABCU4605K
ITA No. 8616/Del/2019 : Asstt. Year : 2015-16
Income Tax Officer, Vs Universe Heights (India) Pvt. Ltd.,
Ward-27(1), DTJ 422, DLF Tower-B, Jasola
New Delhi District Centre, Jasola
New Delhi-110025
(APPELLANT) (RESPONDENT)
PAN No. AABCU4605K
Assessee by : Sh. Saubhagya Aggarwal, Adv. &
Sh. Vineet Bhatnagar, Adv.
Revenue by : Ms. Monika Dhami, CIT-DR
Date of Hearing: 30.07.2024 Date of Pronouncement: 06.09.2023
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the assessee and the Revenue ag ainst the order of ld. CIT(A)-9, New Delhi dated 30.08.2019.
2. In ITA No. 8125/Del/2019, the assessee has raised the following grounds of appeal:
"1 . T ha t ha v in g re ga rd t o t he f a ct s a nd c irc um s ta nc es o f t he c as e , L d. CI T (A ) ha s e rr ed in la w a nd o n fac t s in co nf irm ing t he a dd it io n of Rs . 11 ,1 7 ,52 ,77 9 /-m a d e b y t h e I T O. 2 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
2. T ha t on f ac t s a n d ci rc um s ta nc es of the c a s e, t he L d. CI T (A ) ha s e rred in up h old ing t h e a d d it ion of Rs. 5, 07 ,00 ,0 00 /- on a cc o unt of c o mp ens a t i on pa id t o d irec t o rs w it h out ap p rec iat ing t he fac t t hat t he pa y m ent w as on ac c ou nt of c om m e rc ia l e xp ed i enc y .
3. T he ld . C I T ( A ) ha s er red in fac t s a nd in la w in up hold ing t he dis a llow a nc e o f in t e rest ex p e nd it ur e o f Rs . 2 ,2 4 ,19 ,6 1 6 /- u /s 40 A (2 ) (a ) w it ho ut a pp r ec ia t in g t he fa c t tha t m a ny p a y m e nt s m ad e w e re t o un re l at ed p a rt ies .
4. T he ld . C I T ( A ) ha s er red in fac t s a nd in la w in up hold ing t he dis a llow a nc e o f in t e rest ex p e nd it ur e o f Rs . 2 ,2 4 ,19 ,6 1 6 /- u /s 40 A (2 ) (a ) b y es t im a ti ng a n ad hoc f ig ure of 1 8 % as t h e ra t e of int e rest t ha t s ho uld b e a llow ed .
5. T ha t t he ld. CI T (A ) ha s e rred in fac t s a nd in la w in up ho ld in g t he d is a ll ow a nc e of Rs . 95 ,0 0 ,00 0 / - w it ho ut a pp r ec ia t in g t h e t e rm s of t he a g reem ent bet w ee n t h e Ap p ella nt a nd BD R B uild t ec h P v t. Lt d .
6. T he ld . C I T ( A ) ha s er red in fac t s a nd in la w in up hold ing t he dis a llow a nc e of Rs . 95 ,0 0 ,00 0 /- w he re as t her e wa s n o d oub t ra is ed reg ar d in g t h e ge nui nen es s of t h e tra ns ac t i on.
7. T he ld . C I T ( A ) ha s er red in fac t s a nd in la w in up hold ing t he dis a llow a nc e of Rs . 2,6 9 ,9 1 ,85 0 /-b y hold ing t ha t t he a m o unt wa s a p rov is i on w h er ea s in fa c t t h e c la im wa s n ec ess it at ed due t o t he m a tc hi ng p r inc ip l es s i nc e re v e nu e w a s rec og niz ed i n t he y ea r und er c o ns id era t i on.
8. T he ld . C I T ( A ) ha s er red in fac t s a nd in la w in up hold ing t he dis a llow a nc e of Rs . 2 1,4 1, 31 3 /- w it ho ut c ons id e rin g t he fac t t hat t his w as th e fi rs t y ea r in w hic h t he pro f it a nd los s ac c o unt wa s p rep a r ed a nd ex p ens es w er e ac c ord in gly c la im ed in t he y ea r und er c o ns id era t i on. "
3. In ITA No. 8616/Del/2019, the Revenue has raised the following grounds of appeal:
"1 . W h et he r on t h e fac t s a nd c irc u ms t a nc es o f t he ca s e as w el l a s in la w , t he ld. CI T (A ) er red in law a nd o n fa c ts in d e let ing t he d is a llow a nc e o f Rs .1 7 ,2 5, 00 ,00 0 /- u/s 3 7 o f t h e Ac t on a cc o unt of c omp ens a t i on pa id to M /s Co nf or t L iv in g H ot e ls Pv t . Ltd ."
4. The assessee company was eng aged in the business of real estate as builder in term of the main activity of the company.
3 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
Directors Remuneration:
5. During the year before us, the assessee company paid a total amount of Rs. 5.07 Cr. to the Directors. On query by the AO, the assessee submitted that the Directors namely, Mr. Anil Tak, Mr. Amit Tak, Mr. Naveen Tak, Mr. Sunil Tak have advanced unsecured loans to the company during the F.Y. 2012-13 with an understand ing that the same shall be repaid that a company in three months. However, due to delays to statutory accruals and obtaining to development licenses, the company could not mobilise the funds and commenced its project and repay the loans. Hence, interest amount has been paid to the Directors who have lent money. The Assessing Officer held that the Directors have provided fund to the company as interest free loan for a limited period but no time period was mentioned. The AO also held that the assessee has not sub mitted any loan agreement with the Directors for borrowing and to justify the claim of compensation paid to them. The AO held that merely deduction of TDS does not prove the genuineness of expenditure and held that assessee has not furnished any p roof to substantiate its claim that alleged payment of compensation was paid during the normal course of business. The AO held that there was no rationale given during the assessment proceedings to include the compensation as part of the cost of the land for which the amounts have been paid and since the payment was not related to purchase of land, transfer ex penses or any other expenditure pertaining to its development of the land , the amounts paid by the assessee company to the Directors is disallowab le u/s 37 of the Income Tax Act, 1961.
4 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
6. The ld. CIT(A) affirmed the action of the AO holding that bare deduction of TDS does not relieve the requirements u/s 37 of the Act. The ld. C IT(A) held that the payment of compensation the Directors was barely a facade to lower the tax incidence of the assessee company.
7. Before us during the arguments, the ld. AR submitted that the assessee has received unsecured loan aggregating to Rs.24,86,20,000/- from Tak family in AY 2012-13, details of which are as under:
Amit Tak Rs. 75,000/-
Anil Tak Rs.9,27,05,000/-
Sunil Tak Rs.5,82,80,000/-
Naveen Tak Rs.9,75,60,000/-
Total Rs.24,86,20,000/-
8. From the ledger account of the assessee company in the books of Shri Amit Tak for the period 01-04-2012 to 31-03- 2015 reflects the amounts received and repaid as is evident from P B 90. It was arg ued that the assessee company has borrowed substantial amount from the Directors and his relatives during the year 2012 on the terms that the amount would be refund ed within 3 months and interest will be paid after the issue of license to the assessee company. Since, there was delay in issue of license, no interest on account of loan taken were paid for two years by the assessee company to its directors b ut interest was paid for the present year only as is evident from PB-85. It was also submitted that the assessee company has refunded back the entire amount including interest and in the current year. The assessee company has paid monies on account of comp ensating the lenders for the loss of interest which is a p ure business expenditure and the 5 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
same should be allowed as revenue expenditure. The compensation has been paid only for the purpose of business and since the lenders were denied the use of the funds for an extended period of time to the Assessee Company's inability to repay the amount earlier. PB 59-84 are the various correspondences between the directors and assessee company estab lishing that loan were taken by the assessee company for the purpose of b usiness but somehow the license could not be obtained due to the market situation and other factors and that is why the project got delayed but the assessee company has obtained the license in June, 2014 which was submitted before the AO during the course of assessment proceedings.
9. On the other hand, the ld. DR supported the ord er of the Assessing Officer as well as the ld. CIT(A).
10. Heard the arguments of both the parties and perused the material availab le on record.
11. PB-87 is confirmed copy of ledger account from Sh. Amit Tak, showing the amount of loan, interest paid and amount of compensation paid. It is a corollary fact that TDS has also been deducted on the amount of interest paid during the year. We find that PB-89 is ledger account of Sh. Amit Tak in the books of assessee for the period from 01-04-2014 to 31-03-2015. PB- 92 is confirmed copy of ledger account from Sh. Anil Tak, showing the amount of loan, interest paid and amount of compensation. PB-94 is ledger account of Sh. Anil Tak in the books of assessee for the period from 01-04-2014 to 31-03- 2015. PB-96 is confirmed copy of account from Sh. Sunil Tak , showing the amount of loan, Interest paid and amount of compensation. PB-98 is ledger account of Sh. Sunil Tak in the books of assessee for the period from 01-04-2014 to 31-03- 6 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
2015. PB-100 is confirmed copy of account from Sh. Naveen Tak, showing the amount of loan, interest paid and amount of compensation. P B-102 is ledger account of Sh. Naveen Tak in the books of assessee for the period from 01-04-2014 to 31- 03-2015. It is also not in d ispute that the amount received from the Directors was utilized for the purpose of purchase of land. The amounts have been received by the company for business purpose. It cannot be assumed by the Revenue that the Directors have paid an amount of Rs.49.71 Cr. as loan for zero benefit from the company. From the above evidence, it is estab lished beyond doubt that loans were received for the purpose of business only and amount paid to the directors was the interest paid by the assessee on the amount to the tune of Rs.49.71 Cr.
12. In the result, the appeal of the assessee on this ground is allowed.
Disallowance of Interest u/s 40A(2)(a):
13. The Assessing Officer made disallowance of Rs.4,48,39,232/- u/s 40A(2)(a) on account of alleged excess interest paid by the assessee company on the amount of loan taken from the various parties mentioned below. Facts as noted from the Assessment order are that the AO has found that the appellant has paid interest @ 24% to 27% to various parties as mentioned below:
7 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
Name Interest Rate Interest Amount Amit Tak 24% 15,830 Anil Tak 24% 70,10,022 Sunil Tak 24% 1,23,01,072 Naveen Tak 24% 2,05,91,842 Ashiana Housing Ltd. 27% 3,78,48,669 Dinesh Agarwal 24% 26,24,517 Manoj Agarwal 24% 10,50,351 Mukesh Agarwal 24% 18,46,849 Nav Ratan Agarwal 24% 11,03,904 Sindhwani Metal 24% 10,80,000 Engineering Pvt. Ltd. Total 8,54,73,056 14. The AO has made the following observations in the Assessment Order:
"8 .2 As s es s ee w a s as k ed t o ex p la in t ha t rat e of I nt eres t a t w h ic h int eres t w a s pa id is not at a rm 's le ng t h pr ic es a nd w hy it s ho uld not b e res tr ic t ed at m a rk et p ric es @ 1 2 % p .a .
T h e A R o f t h e as s ess e e s ubm it t ed rep ly on 2 0 .1 1 .20 1 7 to j us t ify t he c la im o f hi ghe r ra t e of int e rest a nd s u bm itt ed t he not e on in t e rest to j us t ify t he c la im of hig he r r at e of int e rest . T he a s s es s ee d u ring t he he ari ng on 04 .12 .2 01 7 f iled t h e p hot oc opy of P OA a lon gw it h c op ies of lett ers f rom di rect ors of t h e c o mp a n y fo r c la im ing h ighe r ra t e o f int er es t a s w el l as it s c or resp ond enc e w it h d ir ec t ors . H ow ev er no lo a n a gr eem e nt s w er e s ub m it t ed in t his r ega rd . R e le v a nt pa rt of a s s es s ee 's r ep ly da t e d 20 .1 1 .2 017 is rep r oduc ed be lo w :
N O T E ON I N T E R E S T R A T ES T h e c omp a ny is a un lis t e d h av ing a la nd p a rc el a nd w a s c onc eiv ing a proj ec t o n t h e s a m e.
T h e c om pa ny had i nfac t r ec e iv ed t he d ev elopm en t lic e ns e f or t he p roj ec t d u rin g F . Y . 20 14 - 15 . I n t he s a id s c e na rio, t he 8 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
ra t e of int eres t @ 24 % is a ra t e w hic h is v ery m uc h pre v a le nt in un orga n iz ed rea l es t at e s ec t or . Sinc e or ga niz ed l end ers s uc h a Ba nk s an d F ina nc i a l I ns t it ut io ns do es n ot le nd a t t h is s ta ge . F u rt her, t he c om p a ny ha d g ot lo a n fo rm un rel at ed pa rt y as w el l i. e. A sh ia n a H o us ing L im ited @ 27 % p .a . A ls o , a l l t he loa ns w he re uns ec ured a nd he nc e t he r is k w as high .
In ge ne ra l , t he or g an iz ed lend e rs s uc h a s PE fu nds , N BF C' s Ba nk s , F i na nc ia l I ns tit ut ions et c a ls o un rea l est a t e a t s uc h s ta ge at t he ra t es ra n gin g f rom 18 % t o 2 4 % d es p it e of ha v i ng s ec u rit y ov er la n d a nd ot her co nt ro ls . H enc e, t he rat e 2% p er m o nt h (i. e. 24 % p. a. ) a c t ua lly pa id t o le nd e rs is a ra t e w hic h is v er y m uc h p r ev a le nt a nd h enc e, is r eas ona b le . "
8.3 R e p ly o f t he ld. A R of as s ess e e is not t ena b le in t he a bs enc e of lo a n a g re em en ts or any ot h er d oc um ents to pr ov e t hat as s es s ee ha s t o p a y int e rest a t s uc h ex orb it a nt ly hi gh ra t e d ue t o c e rt a in b us ines s ex p ed ienc y . It is a c om m on e xp e rie nc e t ha t int e res t is no rm a lly p a id at t he rat e o f 12 % a nd a s s es s ee ha s not b ee n a b le t o pr ov e t ha t t he re w a s s om e a b n orm a l s it ua t io n to w a rra nt s uc h hig h ra t e of int e rest . T h er ef or e, t he e x c es s p a y me nt of int er es t of Rs .4 ,48 ,3 9 ,2 32 /- is dis a llow ed u/s 4 0 A (2 ) (a ) of t h e I nc om e Ta x Ac t , 1 96 1 and it w ill be red uc ed the c os t of la nd a cc o rd ingl y ."
15. Before the ld . C IT(A), the ld. AR submitted as und er:
• That section 40A(2)(a) is not applicab le at all in this case as most of the parties are unrelated as is evid ent from plain read ing of assessment order and PB-85 and Assessing Officer has only doub ted the rate of interest.
• That the assessee company is executing a real estate project with land purchased and has also received a development license for the same. The rate of interest @24% is a rate which is very much prevalent in the real 9 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
estate sector. Further the company had got loan from unrelated party as well i.e. Ashiana Housing Ltd . @27% p.a. also, all the loans were unsecured and hence at the high risk .
• That the organized lenders such as NBFCs, banks, financial institution etc. also fund real estate at such stage at interest rates ranging from 18% to 24% despite having security overland and other controls. Hence, the rate of 24% is very much prevalent and hence is reasonable.
• That it is extremely difficult to arrange for financing of a project from banks before the construction is underway. The only way to finance a project before construction is to approach private lenders or NBFCs who only advance loans at high rates.
• That the rate of interest paid to related parties is the same or lesser than the rate of interest paid to unrelated parties as is evident from PB-85. Hence, no question arises for application of section 40(A)(2)(a) of Income Tax Act, 1961.
16. The ld . CIT(A) held that in FY 2012-13, the assessee has borrowed unsecured loans, on which, interest was to be charged after the appellant obtained the relevant land development licenses. Thereafter, since in the year under consideration, the appellant had actually obtained the said license, therefore, the appellant repaid the entire loan, along with the interest @ 24%. During the assessment proceedings, it was observed by the AO that the normal rate of interest on loans is 12%, as against the claim of the appellant of 24%. Thereafter, since the lenders where related to the appellant, 10 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
therefore, the AO, under the provisions of Section 40A(2)(a), disallowed the excessive interest charged at the rate of 12% and hence, made a d isallowance of Rs 4,48,39,232/-.
17. The ld . CIT(A) has restricted the interest payment from 24% to 18% and held that interest payment @ 18% is justifiable.
18. For the sake of ready reference, the operative part of the order of the ld. CIT(A) is reproduced as under:
In the w ritt en s ubm is s ions at a pp el la t e p roce ed ings , t he ap p e lla nt ha s s t at ed t ha t it ha d pa rc e l o f la nd in G ur ga on, H ary a n a a nd t ha t t he fu nds w ere req u ired by it f or de v e lop m e nt of p r oj ect s on t h e s a id p r op ert y . T he ap p el l ant c la im ed t hat in a p rac t ic a l sc e na rio , no Ba nk , F in anc ia l Inst it ut i on or NB F C w ou ld l end a loa n t o uno rg a niz ed rea l es t at e c om p a nies lik e t he a pp ella nt , ow in g t o w hic h, t h e ap p e lla nt h as t o res o rt t o ot h er s ourc es o f lend in g. F o r t his , th e a pp ell a nt p lac e d its r eli a nc e o n a n R BI c irc ula r, w h ic h pr ohib it s the Ba n k s to le nd a g a ins t la nd s . The ap p el l ant c la im ed t ha t t he loa n i t had b o rro w ed f ro m t he le nd ers , w as uns ec ured a nd t h at s uc h loa ns us u a lly h av e a ra t e o f int e rest ra ngi ng b et w ee n 1 8% t o 2 4 %, as was s upp o rt ed by t he ap p e lla nt w it h a lis t o f d eb en t ur es a n d it s co up on rat es , as ar e iss u ed b y c om p a nies in s im ila r op erat ions as t ha t of t h e ap p e lla nt . H e nc e, t he a pp e lla nt c la i m e d t ha t the r at e of int er es t of 24 % is j us t i fied in t he fa ct s a nd c irc um s ta nc es of op era t ions of t he r ea l es ta t e c omp a ni es l ik e t he a p p e lla nt . T h e a pp e lla nt a ls o to ok s upp ort o f t he de la y in p a ym ents t o th e le nd e rs , st at ing tha t s uc h d ela y le ad s t o a c c r et ion of a hig he r rat e of in te rest on t he b o rr ow ings . L a st ly , the ap p e lla nt s t a t ed t ha t it ha s a ls o m a d e b orro w in gs fr om a n unr ela t ed p a rty , n am el y, M /s As h ia n a H ous ing Lim it ed , o n w h ic h, it h ad p a id int er es t @ 27 % a nd he nc e , t he ap p el la nt s upp ort e d t h e int er es t t o b e j us t i fia b le .11 ITA Nos. 8125 & 8616/Del/2019
Universe Heights (India) Pvt. Ltd.
6.4 On c a ref ul c ons id erat ion of fa ct s a nd subm is s ions , it em a nat es t hat t he A O c o nc urs t he g enu ine nes s as w e ll as the bus i nes s e x p ed ienc y of the int er es t pa id up o n t he loa n.
H ow e v e r, t h e a d d it io ns q ues ts to c rea t e a d eba t e as to t he j us t if ic a t io n of t h e rat e a t w hic h s uc h i nt e res t is to b e pa id . W h ile t he a p p e lla nt ha s p a id a n int er es t @ 2 4 % , t he A O fin ds 12 % j us t if iab le a n d si nc e t h e lend e rs are rel at ed t o t he ap p e lla nt c om pa ny , t he refo re , Sec t io n 40 A (2 )( a ) c o mes i nt o pla y , w he reb y , th e A O ha s d is a llow e d th e ba la nce i nt e re s t. T hat b e ing s a id , t o j us t ify t he e xc ess i nt e res t , t he ap p el la nt ha s d ra w n my at t e nt ion t ow a rd s t he pec ulia r fa c t in i ts s it u at ion , b e ing t ha t in un or ga n iz ed rea l est a t e s ec t or. T he app ell a nt a pp rop ria t e ly s t at ed t ha t t he ba nks a nd f ina nc ia l ins t it ut io n s res is t t o le nd m one y to a ny ent it y in th is s ec t or , ins p it e of even p lac in g la nd as c o llat er a l. T he ref ore , t h e p lay ers in t his s ect or ha v e t o nec ess a r ily op t f or ob t a inin g d eb ts at h igh er ra t e of int e res t. M ore s pec i fica lly in t he c as e of t he ap p el l an t, ev en t h e l oa n is uns ec ured, t h er eb y f re ein g t h e a pp ella nt w it h a n y lie n o r mo rt ga ge ov er a ny of it s as s et s . S uc h uns ec ur ed loans nec es s a r ily c om ma nd a high er p r em i um on int e rest o ve r th os e s ec ur ed by an a s se t . T his d is t i ngu is hes t he ap p lic a b ilit y of 1 2 % as ra t e of int e res t o n loa ns , a s ha s b ee n c ont e nd ed b y t he A O in h is a s s es s m ent or d er.
N ow , s hift ing t he f oc us t o t he w ritt en s ubm is s ions of t h e ap p e lla nt , it has b ee n s ubm it t ed b y t h e a pp ell a nt t ha t t he no rm a l ra t e of int er es t f or t h e en t it ies in its s ec t or ob ta ini n g uns ec ured loa ns , a ris es to be 18 % -2 4 %, as has b ee n de m o ns t rat ed f rom th e c o up o n ra t es of de b e nt ures 1 is s ue d by t he ot he r r ea l es ta t e c o mp a ni es . N ow , s inc e t h e ap p el la nt ha s it s e lf a c c ep t e d t ha t fin a nc i ng, in s im ila r s it ua t io n, c ond it ions a nd s t ip ula t i ons , c a n b e m a d e at t he l ow es t ra t e of int er es t of 18 % , henc e, it a ut om at i c al ly p ro v es t hat the ap p e lla nt ha s in d e ed p a id e xc ess int er es t t o t he re la t e d p a rt y len de rs . T he re fore , Sec t io n 40 A (2 )( a ) aut o ma t ic a lly c om es int o ac t ion, t h er eb y d is a llow ing t he exc ess pa ym ent of int er es t t o t h e t une of 6 % a n d he nc e, u nd e r Sec 40 A(2 )( a ), 12 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
th e t e na b le ra t e of int er es t o n t hes e loa ns is 18 % a s a g a ins t 24 % c h arg ed o n t he a s s es s ee .
6.5 Th e a p p ella nt has c o nt e nd ed t ha t it ha s m a d e p ay m ent @ 2 7 % t o As hia na H o us ing Li m it ed , w hic h is n ot its re la t ed c once rn . T he re up o n, t he ap p e lla nt s o ught t o j us t ify it s c la im und er S ec 40 A (2 )( a ) of t he Ac t . H ow ev er , a ga i ns t t his c ont e nt i on, I obs er v e t hat As h ia na H o us ing L im it ed is not a n N BF C, b u t a dev el op e r of p roj ec ts , w h ic h w h om ev en the ap p e lla nt has ent er ed int o an a gre em e nt. T he refo re , t he int er es t of a ny ra nd o m c om p a ny , oc c as io na lly in d ulg ed in len d in g a c t iv it i es , c an not b e c a lled a s a c o mp ar ab le. R a t he r, th e c om p a rab le ou ght t o b e t he int er es t c ha rg ed b y Ba nk s o r Fi na nc ia l I ns t it ut ion s in s it ua t io ns as t ha t of t h e ap p e lla n t, w h ic h in a pp e lla nt ' s ow n a d m is s ion, w ou ld ra nge b et w ee n 18 % t o 2 4 % . T h ere by , a p rud ent ent it y w o uld ob v ious l y la t c h on t o a lo w er ra t e o f int er es t , w hic h in t h e p res ent s it ua t io n wo uld obv ious l y b e 1 8% a nd henc e, a jus t if ia b le r at e of int er es t .
6.6 Las t ly , t he a pp e lla nt ha s c ont e nd ed t ha t s inc e it h as de lay ed t he p a y m ent of int e res t, t he re f ore, t he a ppe lla nt w as bo und t o p ay a n e xt ra int er es t t o it s le nd e r. Ev e n i n t his c ont e nt i on, I do no t f ind a ny m er it s inc e t he a pp e lla nt d id not p r es e nt a ny loa n a gr ee m e nt j us t ify i ng o r p r ov ing a ny pe na l int er es t t hat wo uld b e c ha rged on d e lay ed repa ym ents of loa n. H e nc e, t his c ont ent io n is rej ec t ed .
T h eref ore , in c onc l us ion , t a k ing t he b a s is of a p p el la nts ow n ad m iss io n, I f ind t ha t int e res t @ 1 8 % is j ust if iab le und e r S ec 40 A (2 )( a ) of t h e Ac t a nd he nc e , t he d is a llo wa nc e is res t r ic t e d to Rs .2, 24 ,1 9 ,6 16 / -. H enc e, t hes e g ro und s of a p p ea l ere pa rt ly a ll owe d a nd a dis a llow a nc e of Rs . 2, 24, 19 ,6 1 6 - is up hel d.
19. Aggrieved with the alteration of the interest from 24% to 18%, the assessee appealed before the Tribunal.
13 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
20. Before us, the ld. AR repeated the arguments taken up before the ld. CIT(A) and the ld . DR supported the order of the Assessing Officer as well as the ld. CIT(A).
21. Heard the arguments of both the parties and perused the material availab le on record.
22. We find that the ld. C IT(A) has not disp uted any of the arguments that section 40A(2)(a) is not applicable at all in this case as most of the parties are unrelated, the assessee company is executing a real estate project with land purchased and has also received a development license for the same. The ld. C IT(A) has not disputed the prevalent market rate of interest @24% in the real estate sector. The assessee had got loan from unrelated party as well i.e. Ashiana Housing Ltd. @27% p.a. It is a fact that NBFCs, banks, financial institution etc. also fund real estate at interest rates ranging from 18% to 24%.
23. Hence, keeping in view the entirety of the events, we hold that the disallowance u/s 40A(2)(a) cannot be invoked automatically unless prove that the amounts paid are more than the market averages or paid in excess of the interest paid parties at arm's leng th. In the present case, the assessee has paid more interest to other, outside third parties and paid less interest to the Directors. Hence, we hold that the provisions of Section 40A(2)(a) cannot be invoked.
24. In the result, the appeal of the assessee on this ground is allowed.
14 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
Co mpensation to M/s BDR Buildtech (P) Ltd.:
25. The AO made disallowance of Rs.95,00,000/- u/ s 37 & 40A(2)(a) on account of comp ensation paid to M/s BDR Buildtech (P) Ltd. on the ground that assessee has failed to prove the business purpose and are dealt with tog ether for the sake of proper adjudication.
26. Excerpts from the Assessment Order.
Disallowanc e f or Payment of Compensation of Rs.95,00,000/- 10.1 On perusal of B alanc e sheet and Profit & Loss account of t he c ompa ny, the as s essee company claim ed expens es on acc ount of compensation of Rs.95,00,000/- paid to M/s BDR B uildtec h Privat e L td. due to canc ellati on of contract agr eement between ass essee and M/s C omf ort s Living Hot els (P) ltd., whic h was a 100% subsidiary company of M/s BDR B uilders & Dev elopers Pvt. Ltd by exec uting the canc ellation agreement on dt.2 1/02/2015 whereas agreement between land owner and devel oper has been canc elled on dated 11.06.2014. The appoi nt ment of S h. Anil Tak as additional direc tor on 17.02 .2015 again after resi gnation was only for exec uting t he canc ellation agreem ent and j us t after executing the s aid agreement, Shri Anil Tak again resi gned on 22.02.2015.
10.2 M/s BDR B uildtec h (P) Ltd holds the 55.56% share of the assess ee company up to 14.02.2015 and the Shri Rajesh G upta, Director of the ass es see c ompany was also direc tor i n M/s BDR B uildtec h (P ) Ltd. up to 24.02.2015 and have i nfluenc e over decision making of the ass essee company i n ex ec uti ng t he agreem ent for c ompens ation accordi ngl y.
15 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
10.3 To know t he genuineness of transac tions, the sum mons are issued t o dir ector of M/s C omf ort Li ving (Hot el) Pv t. Ltd. on 06.12.2017 and 13.12.2017 for appeari ng on 12.1 2.2017 and 18.12 .2017 respectively to prove the genui neness of transact ions made by t hem. However, t hey failed to appear before t he ass es sing authority. In spite of issui ng summons twice, he deliber ately did not appear. It means he has nothing to say in this matt er.
10.4 In vi ew of abov e facts, claim of c ompens ati on paid of Rs.95,00,000/- r emai ned unsubs tantiated. The assess ee failed t o pr oduce any doc umentary evidence to prove t he compensati on was paid due to any business expedi enc y and was paid wholly exclusively f or the purpos e of b usi ness. Si nc e, the assess ee had made cl aim, it was his respons ibility to prove that t he expenses were incurred for the purpose of b usi ness .
However, ass essee failed to do s o. Therefore, compens ati on paid to M/s BDR B ui ldtec h Private Ltd, is disallowed u/s 37 and 40A(2)(a) of the Income Tax Act, 1961 a nd it will be reduc e t he cost of land acc ordi ngly.
27. Aggrieved, the assessee filed appeal before the ld. CIT(A).
28. Before the ld . C IT(A), the appellant submitted as under:
• That the assessee company has entered into an ag reement with M/s BDR Buildtech (P) Ltd. to share 25% of revenue share received by the assessee under the development agreement.
• In terms of the agreement, if the company failed to obtain development license for group housing project then the 16 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
said company had an option to terminate the agreement and to claim compensation as per the details mentioned in the brief note.
• That the assessee company had received a deposit of Rs. 18.95 crs as well under the said agreement and if the company failed to obtain development license within a prescribed timelines, the other party was entitled to terminate the contract and claim compensation.
• There was no d ispute that the other party had provided a substantial sum of money to the assessee company for the said agreement. Even the comp utation of compensation amount is defined in the agreement.
• That since the compensation has been paid for cancelling/terminating the rights of the third party and the assessee company has claimed the expenditure as business expenditure.
29. After going through the submission, the ld. C IT(A) held that no compensation needs to be paid and affirmed the order of the Assessing Officer on this issue.
30. For the sake ready reference, the relevant part of the order of the ld. CIT(A) is as under:
"T he app ell a nt , v id e a gre em e nt d at ed 2 1. 11 .2 0 12 and 25 .0 4 .20 1 3, ent e red int o a rra ng em en t w it h BBP L , f or t he de v e lop m ent of la n d. As p er t he t e rm s o f t he a gr ee me nt , BE wa s e lig ib le t o t e rm ina t e t he a gr eem e nt , if t he a pp ella nt f a iled t o ob t a in t h e req u ired la nd lic e ns es , on t he oc c u rr enc e of w h ic h, t he a pp ella nt w as to p a y Rs .1 5 lac s as c om p e ns at ion up t il l 3 0 .06 .2 0 14 , p os t w hic h, it ha d to p a y Rs . 1 0 lac s p er m ont h up t ill t h e pa y m ent of c om p ens at ion is ma d e . T h is a gre em ent wa s s ub s eq u en t ly t erm ina t ed on 2 1. 02 .2 01 5 . T h er ea ft er, t he a p pe lla nt , in ac c ord a nc e w it h the o rig ina l a gre em ent , pa id c om p e ns a t io n Rs .9 5 ,0 0,0 0 0 /-.17 ITA Nos. 8125 & 8616/Del/2019
Universe Heights (India) Pvt. Ltd.
8.3 In t h e a s s es s m ent pr oc e ed ings , it w as not ed b y t he A O t hat BBP L is a 100% s ub s id ia ry of M /s BD R Bu ild e rs & D ev elop e rs P r iv at e L im it ed , w h ic h, a lo ng w it h its ot h er f e llo w s ub s id ia ries , c o nt rol led 55 .56 % of s ha re hold ing in t he a pp e lla nt c o mp a n y up t il l 14 .0 2 .2 01 5. T h er ef or e, the AO c onc lud ed t hat BBP L has d ec is iv e c on t r ol o v e r t h e ap p ella nt c om p a ny , a nd h enc e, t he re d id n ot ac t ua l ly a ris e a ny req u ire m e nt f or t he ap pe lla nt t o t erm in at e th e a g ree m ent w it h BBP L. F u rt h er , t h e A O a ls o m a d e a n obs e rv a t i on t hat t he or igi na l a g ree m ent b et w e en t he la nd ow n er a nd t he d e v e lop er got t erm in at ed on 1 1.06 .2 0 14 , w hi l e t ha t w it h BBP L g ot t erm in at ed o n 2 1. 0 2 .2 015 . T he A O a ls o m ad e a n ob s e rv a t ion t hat Sh . A ni l T ak , a d irec t o r of t he a pp ella nt c om p a ny , wa s m ad e a d d it ion a l d ir ec t or o n 17 .02 .2 0 15 a nd t h at h e a g a in res ign ed o n 22 .0 2 .2 01 5 , t her eb y c onc lud ing t ha t h e w a s m ad e t he d irec t o r me re ly f or t h e ex ec ut io n of t his tr a ns a c tio n. T h er ea ft er, t h e A O c o nc lud ed t h at s inc e t he ap p e llan t w as n ot a b le to p rod uc e a ny doc u m e nt a ry ev id e nc e to p ro v e the c om p e ns a t io n, t he re f ore , h e d is a llo w e d t h e ex p e nd it u re u /s 37 , a s w ell a s Sec 4 0 A (2 )(a ) of t h e Ac t.
8.4 In it s w r itt en s u bm is s i ons , t he a pp ella nt c on t e nd ed t hat it ha d f a iled t o obt a in t h e r eq u ired /l a nd d e v e lop m e nt lic ens e, ow ing t o w h ic h, t he re w as a t e rm ina t io n of a g reem ent b et w een t he ap p el la nt a nd t he BBP L. I t w as s t a t ed t hat t h e a gr ee me nt bet w ee n t he a p p el lan t a nd BB P L q ua nt if ied t h e c om p e ns a t io n , s ho uld t he re b e a d ela y in obt a in t h e la nd d e v e lop me nt lic e ns e be y o nd 31 .0 3 .2 01 4 . T h e ap p ella nt s t a t ed t ha t no s u mm on wa s e v er is s ued t o t he dir ec t or of BBP L a nd he nc e, no adv e rs e in fe re nc e c a n b e d ra w n.
8.5 K eep in g in co n s id era t i on t he s ub m is s ions a nd c ont e nt ions o f t he A O a nd t he a p p e lla nt, I f ind t h at t he re in v ol v es tw o s ep a rat e a nd m ut u a lly ex c lus iv e bas is t he a fo res a id a dd it io n, w it h t he f irst b e ing t he ina b ilit y of t he a pp e lla nt t o p rov e t he ge nui nen es s o f t h e t ra ns ac t ion a nd t he s ec o nd b e ing t h e in ab ilit y t o j ust ify t he q ua nt um o f d ed uc t ion t ena b le . Si nc e t her e t w o c o nt e nt ions a re d iff ere nt a nd n ot 18 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
dep e nd ent on e ac h ot he r, t he re f ore , t he y are d e a lt and e xp la in ed s e pa rat el y in t he b elo w pa ra gra p hs.
8.6 On t he f irs t as p ec t , i.e. , t he g en uine nes s of t he t ra ns ac t ions, I p lac e m y re lia nc e on t h e a g reem ent b et w e en t he ap p e lla nt a nd BBP L , w he re in, Cl a us e 8 s ta t es t ha t B BP L s ha ll d e riv e a p o w er to t er m in at e t he a gr eem ent , if t he a pp e lla nt fa ils to ob ta in t he la nd d ev el opm e nt lic ens es . T h er ea ft er, the subs eq ue nt c la us es s e ek to p la c e a qu a nt if ic a t io n o n t he am ou nt of c om pe ns a t io n t ha t is t o b e pa id b y t he a pp e lla nt , in t h e ev ent of t e rm ina t io n. It is t h es e c la us es t ha t a r e a ls o q u ot ed in t h e c a nc ell at ion a gr ee me nt da t ed 2 1. 02 .20 15 . H enc e, I f ind t ha t a pp e lla nt , i n a cc o rd a nc e w it h t he v ery a gr eem e nt , fa il ed t o ob t a in t he lic ens e a nd he nc e , th e a gr eem e nt was b oun d to te rm ina t e . T h ere f or e, s inc e t he v e ry ev e nt of t er m inat ion a r os e out a c o nt rac t ua l c la us e, he nc e, I do not f ind a ny inf irm it y as to t he ge nu ine ness of t h e e v e nt o f t erm in at ion of t he co ntra c t.
W it h res p ect t o t he obs er va t io n of t he A O as t o the c ont r ol of BBP L gr oup , ov er t he a p p e lla nt , I a ga in r eit e rat e th at t he BD R Bui ldt ec h & D e v e lo pe rs P riv a t e L im it e d a nd t he a p p ella nt a re two s ep a rat e le ga l a nd c om m erc ia l e nt i t ies , ha v i ng t h eir op era t ions m ut u a lly ex c lus iv e fr om ea c h ot h er . T here fo re , t he ba re f a c t t ha t t he BBP L, t h rou gh it s gr oup co m pa n ies , holds s ub s ta nt ia l i nte res t in t he a pp e lla nt , c a nnot be a gui ding fac t or to c reat e s usp ic ion ov er t he ge nuin en es s of t he c om p e ns a t io n p ay a bl e t o BBP L. I t is a fa c t t ha t t h e a p p ella nt wo uld e nt e r int o a t ra ns a ct ion , in a m a nne r, b es t s uit ed t o it s c om m erc i a l int er es t . N ow he re is it b ou nd t o b e c ont ro lle d by it s s ha r eh old ers. T her ef or e, t hes e ob s erv a t io n o f t he A O d oes not lea d to a ny infir m it y ov er the g en uin enes s of the c anc ella t i on of a gre em e nt b y t h e a p pe ll a nt.
F urt he r, w it h res p ec t t o t he a p p o int m e nt a nd res i gna t io n of Mr . A ni l T a k as t he direc t o r, t he A O ha s n ot ind ic at ed as to ho w t h e ev ent p r ov es to b e of es s enc e i n c o nc lud ing t he c om p e ns a t io n t o b e s ha m . T he a pp o int me nt a nd res i gna t io n of t he d irec to r is a s ep a rat e e v e nt , ha v ing no b ea ri ng o n t he 19 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
c om p e ns a t io n p a id to BBP L. A ls o , t he A O ha s c la im ed t o ha v e is s ued s um m o ns u n de r Sec 1 31 t o t h e d irec t o rs of " Com fo rt L iv i ng (H ot els ) P r iv a t e L im it ed " , w hic h , t he A O s t at es t o be no n c om p li ed b y t h es e d irec t o rs . H ow e v e r, a s a ga ins t t his , I do not f ind a ny r ef eren c e as t o how t he s um m o ning of d irec t o rs of " Com f o rt L iv i ng (H ot els ) P riv at e L im ited " o r t he ir a bs enc e, wo uld s up p or t or pro v e t h e a bs enc e o f g enu ine ne s s of t he c om p e ns a t io n pa id t o BBP L. Ev en ot he rw is e , th e a pp e lla nt p rov id ed the f ina nc ia l s ta t em ents of BBP L , I T R Ac k now led ge me nt f or t he ye ar und er c ons id e ra t io n a n d t h e ba nk st a t e m e nt o f BB P L , w her ein, it is e v id ent t hat BB P L has ind eed rec eiv ed t he c om p e ns at ion a nd ha s d uly a c c o unt ed t he s a m e a s w e ll, i n it s b ooks of a c c ounts . T h er ef or e, I d o not f ind a n y a dv ers it y inf er rin g t o a d o ubt on t he g enu ine nes s o f t he t ra ns ac t ion.
8.6 N ow , c om ing on t he s ec o nd as p ec t, i.e. , t he j ust if ic a t ion of q ua nt ifica t i on of t he c om p e ns at ion ex p e ns e, I a ga i n la y my re lia nc e on t he a gre em e nt am ongs t a pp ell a nt a nd BB PL w h er ew it h , t h e a pp ell a nt w as s u pp os ed o bt a in t h e la nd lic e ns e up t il l 3 1s t Ma rc h 201 4 , fa ilin g w h ic h, t he d e v e lop me nt a gre em ent wou ld t erm i nat e. I t is a f a ct t hat t he a p p el lan t, in d ee d, w as un ab le to ob ta in t he la nd d ev elop m ent l ic ens e up t ill 3 1 s t Ma rc h 2 01 5 . A s a m at t e r o f fa c t, t he a pp ell a nt , i n it s ow n s ubm is s io ns a nd pa p e r bo ok , ha s p r ov id ed a lett er w r it t en by it t o CLH P o n 0 6 .01 .2 0 14 [re f ere nc e t o pa g e no 13 7 -1 3 9 of V o lum e 1 of Pa p e r B ook ] , w her ew it h , it has int im at ed t he p art y of it s fa ilur e t o o bta in t he req uir ed la nd lic ens e. T he s a id let t er , ev e n t ho ug h w rit t en t o a d if f eren t c onc e rn (t ho ugh re la t ed to BBP L ) ot he r t ha n BBP L , c lea rl y ind ic at es t he a pp e lla nt ' s ow n int ent io n a nd d ec la ra t io n on its fa ilur e to obt a in t he la nd de v e lop m e nt lic en s e. T h is v ery le tt er s ub s ta nt iat es t ha t th e ap p e lla nt p res ent ed its inc apa b ilit y t o obt a in t he la nd d ev el op m e nt lic e ns e, e v e n b efo re 31s t M a rc h 20 14 , t h us , as a m at t er of co m m e rc ia l as w e ll a s c o nt rac t ua l pr ud enc e , lea d in g t he a gr eem e nt t o t erm in at e o n 0 6 .01 .2 01 4 , w h ile on p ap e rs , th e t er m in at ion m ig ht hav e h ap pe ned 21 .0 2 .20 1 5.20 ITA Nos. 8125 & 8616/Del/2019
Universe Heights (India) Pvt. Ltd.
In t he lig ht o f t he a f ores a id pa ra gra p h , I now la y m y at t e nt ion t o Sec t ion 4 0 A (2 ) (a ) r ea d w it h Sec 3 7( 1 ), s o a s t o c on sid er t he j us t if ic a t io n o f qua nt if ic at ion of c o mp ens a t io n e x p ens e. I n t his re ga rd, I obs erv e t hat t he a g re em en t w as im p li ed ly c anc elle d on 0 6 .0 1 .20 1 4 . T he ref o re, ha d BB P L n ot b een a re la t ed p a rt y , the a ppe lla nt w o uld ha v e ha d t o t e rm ina t ed t he a gre em ent w it hi n a t im e f ra m e rea s on ab l e c los e r to 06 .0 1 .20 1 4. T he re f ore, t he f ac t t hat t he a p p e lla nt t erm in at ed it s a gr ee m e nt o n 2 1 .02 .2 015 , a pp e a rs t o b e a m e re d is gu is e t o inc r ea s e t he a m ou nt of c om p ens a t i on [ As m e nt ion ed in c la us e 8 a nd 9 of the de v e lop m e nt a gr ee me nt ], v is -a -v is , th at j us t ifia b l e t o a n unr ela t ed p a rt y w ho w ou ld ha v e ob v io us ly t erm in at ed t he a gr eem e nt on 0 6. 01 .2 0 14 it s elf. T ha t b e ing s ai d, on a t ra nsa c t io n w it h a n u nre la t ed p a rt y , t he re w o uld ha v e n ev er a ris en a s t ip ul at ion of t he q ua nt if ic a t io n of c om p e ns a t io n, a s is s ta te d i n c la us e 8 a nd 9 of a gr ee m e nt da t ed 3 0 .0 6. 20 1 4 a nd he nc e, t he q ua nt ifica t i on of c om p e ns a t io n f a ils o n t he g ro und of S ect ion 4 0 A (2 )( a ) of t he Ac t .
It is no t t h e fa c t of t he c a s e t ha t t h e a pp el la nt has p rov i d ed a c irc ums t a n t ia l r ea s onin g a nd j us t if ic a t ion of t e rm ina t io n of la nd d ev elop m ent a gre em e nt, as is d o ne in gr ound 10 t o 1 3 . R a t he r, in t h e f a c ts of t he p r es e nt grounds , t h e app ell a nt ha s pl a in ly re lied o n t h e c ont ra c t ua l t e rm s , w h ic h m ig ht b e t r ue on pa p e rs , b ut f a il on t he p a ra m et er a s t o w h y t h er e wa s a de la y e d c a nc el lat ion of a gr ee m e nt , v is -a -v is , t h e fa c t t ha t t he a pp e lla nt ha d a lr ea dy e xp res s e d its ina b ilit y m uc h ea rlie r to t erm in at ion t o a gr eem e nt . Ex t end ing t he a r gum e nt f ur t h er, it a pp ea rs t ha t t h e d e lay ed a gr eem e nt w a s ba re ly t o inc reas e t he a m o unt o f c o mp ens a t i on, w hic h a s p er t he a gr eem e nt , a r os e on m on t hl y b as is a nd he nc e , I d o n ot f ind a ny j ust if ic at ion be hin d s uc h d e la y .
In v ie w of m y d e lib er at ion he re a b ov e a nd fac t ua l ma t rix of t he c a s e, I d o not f ind a n y j us t if ic at ion of t h e c om p e ns a t io n, und e r S ec 4 0 A (2 )(a ) r ea d w it h Sec 3 7 (1 ) a nd he nc e, t he a dd it io n is c o nf irm ed in t he ha nd s of t he a p p el lan t.21 ITA Nos. 8125 & 8616/Del/2019
Universe Heights (India) Pvt. Ltd.
Ac c ord in gly , I d is m is s t he g ro und s o f ap p ea l a n d henc e, t he dis a llow a nc e is d ir ec t ed t o b e up h eld .
31. Aggrieved, the assessee filed appeal before the Tribunal.
32. Before us, the ld. AR reiterated the arguments taken up before the ld. C IT(A) that the assessee company had received a deposit of Rs. 18.95 crs as well under the said agreement and if the company failed to obtain development license within a prescribed timelines, the other party was entitled to terminate the contract and claim compensation. There was no dispute that the other p arty had provided a substantial sum of money to the assessee company for the said agreement. Even the computation of compensation amount is defined in the agreement. It was argued that since the compensation has been paid for cancelling/terminating the rights of the third party and the assessee company has claimed the expenditure as business expenditure.
33. The ld. DR relied on the order of the ld. CIT(A) and the order of the Assessing Officer.
34. Heard the arguments of both the parties and perused the material availab le on record.
35. We find that the AO has made the addition on the ground that assessee has not submitted any documentary evidence to substantiate its claim whereas assessee has submitted agreements mad e between the parties showing that land was purchased, licence has been obtained and business gets started but this process got delayed and that is why agreements gets cancelled and compensation was paid which is in the nature of pure business expenditure which is allowable u/ s 37. The AO has further observed that summons was issued to the directors 22 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
of the said company but they did not turn up to explain its case. In fact, summons was not issued to the Director of M/s BDR. Even then failure to respond to the summons issued by the Department by the recipient company which is in reg ular business of real estate and filing return of income cannot be disadvantageous to the assessee in the absence of any other material brought on record. To examine straight, there was no dispute that the assessee company has received Rs.18.95 Cr. as deposit from M/s BDR Buildtech to share 25% of the revenue received by the assessee under the development agreement. After cancellation of the agreement, the assessee had returned the deposit of Rs.18.95 Cr. to M/s BDR Buildtech which is also not in dispute. The amount of Rs.95,00,000/ - is paid as compensation to M/s BDR Build tech for cancellation of the agreement. Even otherwise, the amount paid was equivalent or even less than to the interest one can earn on Rs.18.95 Cr. at the market rate. The revenue authorities have also failed to give credence to the fact that the assessee while utilizing the Rs.18.95 Cr. received from the M/s BDR Buildtech has also suppose to share 25% of the revenue. After cancelling the agreement with M/s BDR Buildtech, the assessee repaid the deposit of Rs.18.95 Cr. and also got back the share of 25% which he subsequently sold to another party. Hence, the amount paid by the assessee of Rs.95,00,000/- on the amount of Rs.18.95 Cr. received from M/s BDR Buildtech can be as well treated as business expenditure.
36. In the result, the appeal of the assessee on this ground is allowed.
23 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
Disallowance of Rs.2,69,91,850/-:
37. The amount of expenditure does not pertain to the year before us but for A.Y. 2016-17, A.Y. 2017-18, A.Y. 2018-19, hence, the addition made by the AO during the year is upheld with d irections to allow the expenditure in the year to which it belongs to.
38. In the result, the appeal of the assessee on this ground is dismissed.
Disallowance of Rs.21,41,313/-:
39. This ground raised by the assessee is dismissed as not pressed.
40. In the result, the appeal of the assessee is allowed as well as the Revenue is dismissed.
ITA No. 8616/Del/2019Co mpensation to M/s Comfort Living Hotels (P) Ltd.:
41. This ground of the Revenue is d irected against the deletion by the ld. CIT(A), of the disallowance of Rs.17.25 Cr. made by the AO on account of compensation paid to M/s Comfort Liv ing Hotels (P) Ltd . for cancellation of agreement between the assessee company and the said company on the ground that assessee has failed to prove the business purpose. Brief facts of the issue were that the AO has disallowed the expenditure on the ground that the development agreement was terminated on the same day that the development license was allotted to the company. The cancellation deed is also disbelieved by the AO. The AO has also disbelieved the transaction as the shareholding pattern suggested that the 24 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
shareholders of the Appellant company and M/s Comfort Living Hotels P . Ltd. was common and that Mr. Rajesh Gupta and M/s BDR Buildtech P. Ltd. owned 47.7% of the Appellant's shares and were therefore in a position to influence the decision making process of the Appellant Company. The AO has also mentioned that the compensation was not at arm's length. The AO also asked for documentary evidence of the work done by CLHPL for which it got such a large compensation. The AO then came to a conclusion that in the absence of any evidence of work done, there was no loss caused to the other contracting party for which it was compensated.
42. Excerpts from the order of the Assessing Officer "9 .1. On perusal of Bala nce sheet a nd Profit & L oss account of the c ompany , it noticed that assessee any has claimed expenses on acc ount 'c ompensati on' paid Rs. 17,25,00,000/- to M/s C omf ort Living H otels (P ) Ltd. (C LHPL) as revenue expenditure paid for canc ellation of contract agreement made between the assess ee company and M/s Comfort Living Hotels (P) L td., s ubsidiary company of M/s B DR Builders 86 Developers Pvt. Ltd. on 23.08.2013. As per t he Cla use No. 13.5 of Contract agreement exec uted 28.03.2013 between ass es see company and M/s Comfort living Hotels (P) Ltd. terms of termi nati on of c ontrac t are as under :
"T er m inat ion p rio r t o gra nt of D e v e lop m e nt lic e ns e :
P rio r t o t h e gra nt of D ev e lop m e nt L ic en s e by D TP C i f eit he r of t he pa rt ies i.e. t he L a nd o w ne r or t he D ev elop e r w is hes t o t erm in at e t his D ev elop m ent a g reem en t fo r a ny r ea s ons , th e a gre em ent can be te rm ina t ed w it h t he m ut ua l c o ns ent of pa rt ies.25 ITA Nos. 8125 & 8616/Del/2019
Universe Heights (India) Pvt. Ltd.
In t he ev ent of t e rm ina t i on b y m ut u a l c ons en t, t he pa rt y t erm in at ing t he D ev elopm en t a gre em e nt s ha ll pay c om p e ns a t io n t o t he ot h er p a rt y . T h e a m ou nt o f c om p e ns a t io n s ha ll b e d ec id ed m ut ua l ly in a cc o rd a nc e w it h los s of P rofi t an d da m a ges c a us ed t h e ot he r pa rt y.
H ow ev er, t h e D ev e l op m e nt A g re em en t c ann ot b e t e rm ina t ed onc e D e v e lop m e nt lic ens e is ob t a in ed an a gr ee m en t is re gist er ed ."
9.2 On going t hrough this claus e, it seems t hat assess ee company exec uted the Deed of Canc ellation on s ame day when devel opment licens e got by the c ompany. The termi nati on agreement execut ed on judicial stamp paper whic h is not f or the purpose of executing a greements is not hi ng but creat ion of a document to gi ve colour of genui neness to an otherwis e sha m transac tion.
9.3 The ass ess ee has not brought any doc umentary evidence on rec ord to prove the ext raordi nary c onditi ons whic h led it to termi nate the c ontract on the very dat e the company got t he devel opment licens e. Further , no proof was f urnished t o j us tify t he comp utation of the amount of compens ati on. Thus, it remai ned unexplained tha t what was t he busi ness expedi ency and wha t was t he basis of c omputation of t he compensation.
9.4 On perusal of S hare holdi ng pa ttern of the company bet ween 01.04.2014 to 31.03.2015, it is observ ed t hat Comf ort Livi ng Hot els Pvt . Ltd. holds 32,00,000 shares of the assess ee company which com es to 18.30% of Total Equity a nd M/s BDR B uildtec h Pvt. Ltd. holds 51,55,000 whic h c omes to 29.401% of t otal Equity Share Capital. Thus, BDR B uilder a nd Devel oper Pv t. Lt d. is holding company of M/s C omf ort Livi ng Hotels (P) Ltd.
26 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
9.5 Duri ng the Peri od 28.03.2013 to 12.08.201, M/s Comf ort Livi ng Hotels (P) Ltd. (100% subsidiary com pany of M/s B DR B uilders and Dev eloper s Pvt. Ltd.) and M/s BDR Buildt ec h (P ) Ltd. holds 47.70% s hares of ass essee company and t he direc tor S hri Ra jes h Gupta was also director i n M/s BDR Buildtech Pvt. Ltd. and BDR B uilders and Dev elopers Pvt. Ltd. wer e s ame group c ompani es and hav e i nfluence ov er decisi on making of the asses see company .
9.6 From the above facts, it can easi ly be c oncl uded tha t M/s B DR Buildtec h (P) Lt d. and S ri Rajesh Gupta were in a positi on to i nfluenc e the decision ma king proc ess of t he ass essee c ompany and accordi ngly decided to pay exorbitant compensation. The amount of compens ation paid t o M/s C omfort Living H otels Pvt. Ltd. of Rs.17,25,00,000/- was decided mutually by the both compani es and mentioned i n deed of canc ellation is not as per arm's length prices. No explanati on regarding basis of s uc h huge amount of comp ensa tion was f urnished during t he ass es sment proceedi ng.
9.7 The AR of t he asses s ee was asked to s ubmit t he doc ument ary evidence for work executed by CLHPL v ide questi on no. 3 of the notice u/s 142(1) of the Ac t dated 01.11.2017. But t he assess ee has not f urnished any doc ument ary evidence in res pect of the af oresaid issue. Further, vide note s heet entry dated 13.12.2017 the assess ee c ompa ny was again asked to furnis h doc ument ary evidence i n respec t of work ex ecuted by CLHPL in s upport for payi ng c ompens ati on of Rs . 17.25 Cr. In res ponse t o this, The AR of t he ass essee s ubmitted the reply on 15.12.2017 and mentioned t hat t hey do not hav e a ny docum entary evidenc e i n support of claim and 27 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
hav e only deed of ca ncellation. The rel evant part of assess ee's reply is reproduc ed bel ow:
"N O TI CE ON CO M P EN SA T I O N P AI D TO C OMF O R T LI V I NG H OT EL S P R I V A T E LI M I T ED T h e c om pa ny ha d e nt er ed int o a d ev e lop m e nt a g re em ent w it h M /s Com f ort L iv i ng H ot e ls P r iv a t e L im it ed . I n t erms o f t he s ai d a gr eem ent , I n c as e o f t erm in at ion o f t he a gre em e nt b y of t he pa rt ies , t he d e v e lop er wa s e nt it l ed t o c om p e ns at ion b a s ed f or t he los s of op p ort u nit y a n d t he t i m e a nd ef fo rts p ut by t hem . T he d ev elop e r i. e. Com fo rt L iv ing H ot e ls P riv at e L im i ted ha d d one a lot o f p re pa rat or y w ork s uc h a s t im e t o t im e m ee t in gs w it h the la nd ow n ers . L ia s onin g w it h va rio us dep a rt m e nt s , c o nd uc t in g m a rk e t r es ea rc h and s u rv e ys, bu ild i ng up t ea m a nd pla nn ing etc . A ls o t he d ev el op e r ha d pu t his en t ir e f oc us o n t he p r oj ec t , it c oul d n ot lo ok f or ot he r opp o rt unit y in the m a rk et . T he de v e lop er w as p a id c om p e ns a t io n f o r s uc h t im e a nd en erg y as w ell as t he los s of opp o rt unit y . F urt he r, e v e ry s uc h w o rk do not ha v e an y s up p o rt i ng d oc um ent with it . C om p e ns at ion are p r ima ril y c om m erc i a l t ra ns a c t io ns a im ed at c om p e ns a t ing t he ot he r pa rt y f or t he los s s uf f ered by it by ent e rin g int o th e t ra ns ac t ion. T he d oc um ent w he re in bot h the p a rt ies ha v e a gre ed f or s uc h c om p e ns a t io n a nd t er m inat e t h e a g reem ent ha s a lr ea d y b ee n s ubm it t ed b y us ."
9.8 Further, notice u/s 133 (6 ) of t he Income Tax Act, 1961 ha ve issued to M/s CL HPL on dated 20.03.2017 and 23.10.2017 for the c omplianc e on dat ed 24.03.2017 and 06.11.2017 respectivel y. In respons e t o the notice dated 15.03.2017, t he company filed only ba nk st atement and ITR and no ot her details filed as required and notice dat ed 23.10.2017 r emained un-replied in s pecifically asked to furnish the details of development work done by it from the dat e DA t o date of termi nation of DA f or whic h huge c ompens ati on wa s given to it.
28 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
9.9 The s ummons are issued to director of M/s C omfort Living (Hotel) Pvt. Ltd. on dat ed 06.12.2017 and 13.12.2017 for appeari ng on 12.12.2017 and 18.12.2 017 res pecti vel y to prove the genui neness of transac tions made by t hem b ut he failed to appear bef ore t he assessi ng a uthority. I n complianc e of first s ummon u/s 131 of t he Act da ted 06.12.2017. The AR of the asses s ee appeared before the ass essi ng a uthorit y and argded that accordi ng to s ummon personal ly or aut horiz ed repres entative may appear and there is no requirement to personal deposition. However, it was cl early menti oned i n the s ummons t hat the direc tor was requi red f or personal deposition of director duly authorized by t he board of com pany. Howev er to meet the objecti on of t he AR of t he ass essee, s ummon u/s 131 of the Act was again iss ued on 13.12.2017 for compliance on 18.12.2017 and also sent by email on 13.12.2017. In spite of iss ui ng summons twic e, t he director of t he company deliberately did not appear. Whic h l ogic ally leads to concl usion that he has nothi ng to say i n this mat ter? H owever, r eply has been submit ted by post on 22.12.2017 enclosing simply Balanc e S heet and P&L Account and Devel opment rent agreement etc but has not f urnished any reply on the work ex ecuted by it f or which huge c ompensati on of Rs. 17.25 Crore was paid to it by the ass essee c ompany .
9.10 The assess ee's reply is duly c onsidered and found unacc eptable. It is bey ond imagi nation that s uc h huge amount of c ompensation was paid without any doc ument ary evi dence or without any basis f or computa tion of c ompensati on. There mus t be some detail about the claim of c ompensa tion and also basis f or it. The claima nt s hould hav e given a ny detail of loss inc urred by it t o claim the c ompensation. Howev er, in the 29 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
instant cas e all such evidenc es or details are c onspicuous by their absence. It appears t hat the a ss essee com pany was too eager to pay c ompens ati on to t he other party and c ompensati on was not paid f or some busi ness expedi enc y. As was seen in the cas e of pay ment of compens ation f or l oss of i nt erest and pa yment of i nterest at high rate as discuss ed above, it appears that assess ee, instead of bei ng i nterest ed in prot ec ting interest of its business and mi nimize its expenses, is more i nterested t o pa y exorbit ant s ums to it s related parties f or whic h no plausible expla nation or logi cal evidences exist. It has only made some st ory to justify such claim and fai led t o prove them by produci ng cogent doc ument ary evidence.
9.11 As the ass essee itsel f c onfess ed i n its reply dat ed 15.12.2017 that they do not have any doc umenta ry evidence f or expens es or work exec uted by the CL HPL for whic h assess ee have to pay compensati on a t time of canc ellation of c ontract exec uted on 28.03.2013 by simply exec uti ng deed of cancellation on dated 11.06.2014. Merely exec uti ng the deed of cancellation and making pa yment through banki ng cha nnel and b ook entry does not es tablis h the genuineness of expenditure and genui nenes s of expenditure depends upon doc ument ary evi denc e which is not available with assess ee as c onf es sed.
9.12 It is evident from the table of shar eholdi ng menti oned i n clause no.4 t hat all the c ompens ati on was paid only aft er tra nsf erri ng t he entire shar eholdi ng f orm one entity t o anot her entity and c ompensati ons paid only f or transf erri ng of entire s hareholdi ng not for canc ellation of contracts . The assessee tri ed to give 30 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
col ours to the transac tions by way of cancellati on of contracts.
9.13 From the above detail and discus sion it is clear tha t assess ee in order to av oid tax on its i nc ome by and with t he purpose to reduc e its inc ome a rtificially by increasi ng its expens es , has made paym ent of compens ation f or canc ellation of c ontr act to a company in which its dir ect or was s ubstantially int eres ted. The Canc ellation A greement was exec uted on a judicial stamp paper which is not t he common practice. The A greement was not registered. There was no basis f or c omputa tion of compensation. There was no evidenc e of any loss inc urred by the other c ontracting company for which it was c ompens at ed. There was no bas is for c omputation of such huge com pensation. The assess ee f ailed t o produce any proof i n respect of the abov e poi nts despit e having been asked agai n and agai n. Thus, it can be c oncluded tha t as sess ee paid the above sum considerati ons ot her tha n the any busi ness c onsiderati on.
9.14 In view of t he above facts , claim of c ompensati on paid of Rs . 17,25,00,000/- t o M/s C omfort Living H otels Pvt. L td, is disallowed u/s 37 of the Inc ome Tax A ct, 1961 and added back to Income from B usiness and Profession."
43. Aggrieved, the assessee filed appeal before the ld. CIT(A).
44. The ld . CIT(A) deleted the addition hold ing that the AO erred in quantification of the amount of compensation as well as deeming the company and its shareholders as one entity for ignoring the separate legal entities.
31 ITA Nos. 8125 & 8616/Del/2019Universe Heights (India) Pvt. Ltd.
45. Aggrieved, the Revenue filed app eal before the Tribunal. Before us, the ld. DR argued that, • The amounts have been paid to C LHPL which is a subsidiary company of M/s BDR Builders.
• The CLHPL and M/s BDR builders hold 18.3% and 29.4% of equity share capital in the assessee company and hence there was collusion.
• The Directors in both the companies are also common and hence collusion is clearly proved.
• Since, the Directors are common, the assessee paid exorbitant compensation to CLHPL which is not allowable as per provisions of Section 40A(2)(a).
• The assessee has not furnished any documentary evidences before the AO in respect of the work executed by the C LHPL.
• In response to the notices issued by the AO, CLHPL filed only bank statement and ITR and the other queries remained unanswered.
• Summons g iven to the Directors were not comp lied with. • There was no documentary evidence for the work executed or expenses incurred by CLHPL.
46. Rebutting the arguments of the ld. DR, the ld. AR submitted that the company had entered into a development agreement with M/s Comfort Living Hotels (P) Ltd. (C LHPL). In terms of the said agreement, in case of termination of the agreement by either of the parties, the developer was entitled to compensation based on loss of opportunity and the time and efforts put by them. It was argued that the d eveloper i.e. CLHPL had done a lot of preparatory work such as time to time meetings with the landowners, liasoning with various 32 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
departments, conducting market research and survey, build ing up team and planning etc. It was further argued that assessee company got an opportunity to associate with a new builder at better terms therefore it was always beneficial for the assessee to terminate this agreement and enter into a new agreement. It was argued that the compensation is primarily a commercial transaction aimed at compensating the other party for loss suffered by it into the transaction since the affected party will no longer be a part of the project.
47. The ld. AR reiterated the evidences submitted before the revenue authorities which are, • Brief note on compensation paid to CLHP L.(P B-127) • Detailed note on compensation paid to CLHPL.(P B-128) • Development agreement dated 28-03-2013 between the assesse company and CLHPL. (PB-130-136) • Clause B - L a n d o w n e r is t h e a b s o l u t e , le g a l , b e n e f ic ia l a n r e g i s t e r e d owner e n t it le d to the vacant and peaceful p o s s e s s io n of 16 A c re s c a g r ic u lt u ra l l a n d s it u a t e d a t v i l la g e D h u n e la , S e c t o r- 3 3 , S o h n a , G u r ga o i H a r y a n a , o n wh ic h t h e la n d o w n e r h a s a p p l ie d f o r c h a n g e l a n d u s e a n d is s u e L O I f o r d e v e lo p m e n t o f t h e r e s id e n t i a l g r o u p h o u s in g p r o j e c t .
• Clause 13.5 - P r i o r t o t h e g r a n t o f d e v e lo p m e n t l ic e n c e b y D T C P if e it h e r o f t h e p a r t ie s i. e . t h e la n d o w n e r o r t h e d e v e lo p e r w is h e s t o t e rm i n a t e t h i s d e v e lo p m e n t a g re e m e n t f o r a n y r e a s o n , t h e a g re e m e n t c a n b e t e r m in a t e w it h t h e m u t u a l c o n s e n t o f b ot h t h e pa r t ie s .
• Clause 6.1 - Owner s h a ll be e n t i t le d 30% of the re v e n u e a c o n s id e ra t io n .
48. Further, it was submitted that the land owner shall be entitled for 35% of the revenue which was more beneficial to the assessee. The main argument was that the assessee is benefited by paying the compensation to CLHPL and he got higher revenue share and consideration for selling development 33 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
rights. Hence, the payment made to CLHPL was in the business interest as it proved to be beneficial in monetary terms.
49. Heard the arguments of both the parties and perused the material availab le on record.
50. We have examined the rationale given by the ld. CIT(A). The relevant part is as under:
"7 .2 I have c onsidered the fac ts of t he ground, contention of the AR of the appellant and impugned order. The fa cts of thes e gr ounds are that the appella nt, vide an agreement dt. 28.03.2013, entered into a land dev elopment agreement with CL HPL , wherewith, the appellant gra nted t he devel opment rights over its land to CLHPL, i n lieu of a s hare 30% of revenue obt ained from selling of properties. In addition to t his share of revenue, the appellant was als o entitled to rec eiv e Rs.9,01,00,000/- as the c onsiderati on towa rds transf er of dev elopment rights. Thereaf ter , si nce t he appella nt c ould not obtai n the land dev el opment licens e, t he appellant decided to t ermi nat e the agreement with CLHPL, thereby ent eri ng i nt o a cancellation deed on 11.06.2014. In accordanc e with the canc ellation deed, the appellant was suppos ed to pay C LHPL with a c ompensation of Rs.17,25,00,000/-.
7.3 In t he asses sment proc eedings, t he AO observed tha t the agreement between the app ellant a nd CL HPL entitled either of the party t o exi t the agreement, by compens ating f or the loss and damages ca used to the ot her p arty. It was als o not ed by t he AO that the agreement s eeks to bar s uc h terminati on of agreement, onc e the land dev elopment licens e is obtai ned. Placing relia nce to this cl a use of the agreement, the AO obs erved 34 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
tha t the canc ellation of deed and receipt of dev el opment licens e was on the same dat e. It was further remar ked by the AO that t he appellant has not brought any c ondition or situation t hat could prove the requirement of termi nati ng t he c ontract with CLHPL. The A O sta ted tha t the stamp paper, wherein, the canc ellation deed is inc orporated, is merely t o disguise a sham transac tion. The AO emphasiz ed on the fact t hat for the y ear-under consideration, C LHPL held 18.30% of t he appellant, whil e the holdi ng c ompany of CL HPL, i.e., B DR B uildtech & Devel opers Pri vat e Limited, held 29.40% share of the appellant, thereby poi nti ng out that the entire group and its direct or, S . Rahesh Gupta, hel d decisi on maki ng power in the appellant company , owi ng to whic h, t here c ould nev er have arisen an opportuni t y to the appellant to termi nate an agreement wi th the entities controlling it's operations. The A O also stated that the appellant could neit her provide a ny doc umentary evidenc e supporting any work done by CL HPL , nor c oul d it provide a reas onable basis s uppor ti ng the c omputation of the am ount of compens ation payable -to C LHPL. Further, the AO, as against his notices u/s 133(6) to CLHPL, states that the even the company could not provide details of any dev elopment wor k it had done for the appellant, nor could it provide any reasona ble worki ng behi nd derivation of amount of c ompens ation paid to it by the appellant. The AO also took supp ort of his summons u/s 131, wherewith, he requisitioned the personal deposition of direc tors of CLHPL, whom he claims did not appear. The A O noted that the c ompens ation was paid to C LHP L only a fter the change i n shareholdi ng of the appellant. T he AO stated tha t the appella nt itself has conf es sed of ther e bei ng no details of any expendit ure i nc urred by CLH PL, on its behalf, s o as to support the claim of compensati on. The AO obs erved that the compens ation of exorbit antly high, 35 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
without any basis or j ustificati on a nd henc e, disallowable u/s 37 of the Ac t.
7.4 In its submissi ons bef ore m e, the appellant s ubmits tha t it had ent ered i nto an agreement wi th CLHPL, wherewith, the a ppellant was to ob tai n a 30% share in the revenue, along with Rs. 9,01,0 0,000/- as revenue for transf er of devel opment rights . Through its paper book [ref erence to page no 55-69 of V olume 2 of Pap er B ook], the appellant hi ghlighted t hat t his ar rangement was ent ered t hrough an agreement on 28.03.2013. Amongst ot her clauses of t he agreement , the appellant hi ghlighted tha t t he agreem ent entitled either of the parti es to termi nate the c ontract , s ubject to a c ompensation commens urat e t o t he profit or loss and damages. T he appellant stat ed t hat it was unable to obt ai n the required land devel opment license, owi ng t o which, it sought to termi nate its agreement with CLHPL on 11.06.2014. However, i n ap pel lants claim, si nc e CLHP L had expended time & eff orts f or meeting wit h la ndowners , perf ormed extensive liasoni ng activities in vari ous departments, conduc ted regul ar market research, s urveys and pla nni ng etc, t hese eff orts and cos ts were to be compensated, a- along with the oppor tunity c ost lost by CLHPL by dedicati ng its time to the appellant compa ny. Thereby, the appellant c ontended that t he compens ati on of Rs.17,25,00,000/- is mut ually agreed and s ettled upon amongst t he appellant and CLH PL. I n order to justi fy its termi nati on the agreement wit h CLH PL, the appellant present ed its a greement with M/s As hiana Hous ing Limited, wher ewith, the appellant stated that the said company was a well reputed a nd promi nent player i n the mar ket, as agai nst CLHPL, and t hat the t erms of the contract with M/s Ashiana H ousing Limited wer e mor e favora ble t han that of t he ers twhil e contract. Therewith, 36 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
appellant j ustifi ed the c ommercial expediency behi nd termi nati ng the agreement with CL HPL . Further t o t he above, the appellant also relied upon the replies of CLHPL, direc ted t o the AO response to notice u/s 133(6), to prove the genui neness of the payment of compens ation, the summons u/s 131, the appellant f urnished a medi cal rec ord claimi ng the ill health o director t o be the reason behi nd hi s abs enc e befor e the AO.
7.5 On considering the c ontentions rais ed by t he AO i n the impugned order, as count er the appellant in its submissi ons , it is first prudent t o analyz e the d ocuments submitt ed t app ellant, so as t o adj udicate t he grounds of appeal under c onsi deration.
The appellant ent ered into an agreement dat ed 28.03.2013, wherei n, I obs erve that claus e 1 3.5 mandates t he party termi nating the agreement to pay a compens ation to the aggrieved part y, on t he basis of mut ual disc ussion a mongst t hemselves . Fur ther, the appellant has p resented the canc el lation agreem ent dt. 11.06.2014, whereb y, I obs erve that the amount of Rs.17,25,00,000/- has been mutually a nd amicably res ol ved by the appella nt a nd C LHPL amongst thems elves. Further, the appellant has also provi ded its agreement dt. 24.07.2014, with Ashia na H ousing Limited, wherewi th, t he appellant demons trat ed t hat it is now entitl ed to a rev enue s hare of 35% and a consideration of Rs.12,50,00,000/- towards selling of development rights, viz. a viz , the agreement with CLHPL, wher eby, t he rev enue shar e would have been 30% and revenue t owards selling of devel opment rights to be Rs.9,01,00,000/-. That apa rt, t he appellant also generated Rs .15,00,00,000/- from Ashiana Housi ng Limited, as a securit y deposit.37 ITA Nos. 8125 & 8616/Del/2019
Universe Heights (India) Pvt. Ltd.
Hence, I obs erve that the doc uments dul y establish t he commer cial nec ess ity as well as prudenc e of the appellant towards termi nation of a greement wit h CLH PL and a simultaneous agreement wi th M/s As hiana H ous ing Limited. Furt her, the fi nancial s tat ements of CLHPL a nd an explanation of natur e of engagement of appellant wit h CLHPL, highlights the genui neness and the ess enc e of the compens ation.
7.6 In t he light of the above docum ents , I now c ome on to the firs t and t he f oremost cont ention raised by t he AO f or disallowi ng the c ompensati on. In the assess ment order, the A O has stated that t he appellant has been unable to provide any circ umstanc e leadi ng t o t ermi nat ion of agreement wi t h CLHPL . However, i n t his regard, I observe t hat the AO has err ed i n failing to tak e int o consideration the fac t t hat t he oper ations of busi ness ar e the prerogative of the appella nt. Ther efore, the decis ion of t ermi nating or carryi ng on a business arrangement, woul d depend upon the c ommercial decisi on and viability studi es of t he appella nt and its constituent board of directors. Henc e, no adversiti es can be d rawn concer ni ng the c ommercial decision t o t ermi nat e t he agreem ent. Even ot herwis e, the appellant has pr ovided a glari ng demonstrati on of t he f act that the t ermi nation of agreement l ead t o a s ubsequent agreement with a well reputed r eal estate developer, with a bett er comm ercial arr angement t han t he erstwhil e agreement.
The A O has also relied upon circum sta ntial rec ords stating tha t CLHPL , along wit h its holding compa ny, held ar ound 47.70% of s har eholdi ng of t he appellant company, a nd thus , it had s ubs tantial infl uence over decision making power in the operations of the appellant company. Accordi ngly, it was connected by the AO t hat there would 38 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
nev er have arisen ext raordi nary situation leadi ng to termi nati on of agreement between t he appellant a nd CLHPL. Howev er, as agai nst this observation of the A O, I find that the A O has erred in noti ng that a C ompany a nd its shareholders are t wo separa te legal entities , with eac h having its i ndependence. That bei ng said, t he independent operations of the appella nt company woul d obviousl y ens ure that it ent ers into business ar rangements that woul d best s ui t its c ommercial requirements. In the c ase of the appellant, the appellant has duly r efl ect ed tha t the termi nati on of agreement wi th CLHPL lead to a better a nd a more profitabl e trade arrangement wi th M/s A shia na Housing Limit ed.
7.7 Now, c omi ng on t o t he s ec ond cont ention of t he AO, i.e., the qua ntific ation of t he amount of c ompensati on, it has been noted by the AO that the appellant has failed to adduc e any justification f or deriving the am ount of compens ation. T he AO remarks t hat the appellant has failed to pr ovide evidenc e of any com mercial ac tivity conduc ted by CL HPL , s o as t o justi fy t he determi nation and qua ntification of t he amount of compensati on. It has been cont ended by t he AO that even CLHPL, agains t notices u/s 133(6) has been unabl e to provide the details of the activiti es it has perf ormed on t he par cel of land owned by t he a ppellant . In res pect of the observati on, I find merit i n the cont ention of the appellant, that a land dev elopment a nd c onstruc tion agreement would require loads of planni ng, time and efforts , some of which might be i ntangible and incapabl e of bei ng quanti fied i n the financial sta tements. The appellant also CLHPL in its reply , has c onc urred wi th t he f act that it had undertaken several necessa ry activities like planni ng, lias oni ng, struc turi ng etc, be it preliminary to the dev elopment proj ect. Thes e activities dema nd time cos t a nd 39 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
opportunity c os t rather tha n ac tua l cost a nd hence, it nat ural to consider these fact ors whil e paying compens ations to an aggri eved party. Another aspec t t o look around the q uantification of amount of c ompensation could also be t he fac t CL HPL, bei ng a developer, poss ess es requi red staff , equipments, res ourc es a nd all ot her materials, that ar e requi red to undertak e such dev elopment and construc tion acti vities. The expenses, bei ng in the nature of r egular acti vities of C LHP L, ar e accounted as business expens es , as I s ee fr om the Fi na ncial Statements of CL HPL s ubmitted by the appellant. The activities t hat might be per form ed by CLHPL ar e thos e of overhead na ture, the pres ence which, even i f not quantified or sepa rately identifi ed, cannot be deni ed. H ence, I do not fi nd any merit i n the observat ion of t he AO.
7.8 From t he assess ment order, I fi nd tha t the A O has not been able to bring out c ogent reas oni ng behi nd ther e bei ng any absenc e of eff orts by CL HPL , as had been put by it pos t enteri ng into agreement with the app ellant. Rather, t he appella nt and C LHPL, bot h have m utually a nd unanimously provided their c ons ent towards the presenc e of suc h eff orts, work and time, whi ch aut omatically c alls f or a reimburs ement to the aggrieved party, i.e., CLH PL. This, in congruence with the fac t t hat t he agr eement ent ered amongs t bot h the parties manda te the requirement of payment of some c ompensation or damage, goes on to further s ubst antiate the rel evanc e and the busi ness requi rement of the compens ati on. A step f urther, t he fac t that bot h the parties , in mut ual understandi ng a nd belief, ent ered into a canc ellation agreement , which was legally exec uted, wi th the amount of compensation pay abl e by the appella nt clearly 40 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
menti oned and stated, further goes on t o justif y the tenability of t he cl aim of t he appellant.
In t he assess ment order , the AO has contended that it had issued s ummons u/s 131, requi ri ng the physical appearanc e of t he director, and that the director did not appear bef ore him. However, the appellant, duri ng this proc eedi ng, drew my attention to the m edical repor t of the direc tor of CLHPL, thereby, excusi ng the non appearanc e of t he direc tor . The fact that t his report was submitt ed by CLHPL directly, as has been accepted by the AO t o be rec eived on 22.12.2017, does not lead to any adv ers e i nf erence in the cas e of a ppellant. Further, t he doc uments furnished by the appellant duly presents that CLHPL has off ered the comp ensati on inc ome to tax. That bei ng said, ev en otherwis e, I obs erv e that the f ailure of the physical disposition of t he director, i n the light of adequate doc uments and r eplies f urnis hed by the appellant, duly fulfills the requirement a nd henc e, t he abs enc e of director of a separa te and independent ent ity, does not produc e any i nfirmity in the case of the appellant.
7.8 Lastly, the AO has stated that the t ermi nation of the agreement and t he rec eipt of requi r ed land license, occurred on the same date. Therewi th, the AO st ated that the c ompensation barely to giv e color to a s ham - transaction. However, f rom the paper book [reference t o page no 55-69 of Vol ume 2 of P aper Book a nd Pg 141-143 of V ol ume 1 of Paper Book] and the submissions of the appellant, I fi nd that t he c ommuni cation of termination was done by the appellant, much earlier than the canc ellation deed. Theref ore, the s aid obs ervati on stands irrel evant. Ev en otherwis e, I do not find any merit in thi s observati on of the AO, si nc e the AO has not demonstrated 41 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
as t o how he has perc eived the tr ansacti on t o be s ham. As inst ead, I obs erve that the A O has barely relied on t he circumstantial evi denc e to s upport his c ontention, without poi nti ng out a ny s peci fic indication as t o how t here a rose such doubt as to genui neness of the tra nsacti on. The termi nati on or ful fillment of an agreement is bes t to be left for the c ommercial decisions of the appellant a nd even if the t ermi nation is on the same day as t hat of the licens e, that does not entitle the AO to l ook i nt o t he busi ness decisions of the appellant c ompany.
7.9 In view of my detailed deliberation and fact ual mat rix of the c ase and on the bas is of the docum ents submitt ed by t he app ellant, I fi nd merit in t he contention of the appellant and henc e, the grounds of appeal ar e upheld and the addition is del eted. Appellant succ eed in these grounds of appeal."
51. Having heard the arguments of both the parties, hav ing perused the order of the Assessing Officer and the order of the ld. CIT(A), we find that as per the agreement with CLHPL, the assessee was to obtain 30% of the share in the revenue along with Rs.9,01,00,000/- as revenue for transfer of development rights. The compensation paid to CLHPL of Rs.17.25 Cr. is mutual agreed and settled. After cancellation of the agreement and payment of compensation to CLHPL, the assessee received revenue share of 35% instead of 30% earlier and also received security deposit of Rs.15,00,000/- and consideration of Rs.12,50,00,000/- towards development rights which was earlier Rs.9,01,00,000/-. Hence, on going through the facts, it is amply proved that by cancelling their agreement and pay ing compensation to CLHPL and the assessee subsequently entered into agreement with M/s Ashiana Housing Ltd., the assessee was benefited by increased revenue share, increased price for 42 ITA Nos. 8125 & 8616/Del/2019 Universe Heights (India) Pvt. Ltd.
development rig hts and also security of Rs.15,00,00,000/- and hence, we hold that the payment made by the assessee is in the business interest and decision of the ld . C IT(A) is hereby affirmed.
52. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed . Order Pronounced in the Open Court on 06/09/2024.
Sd/- Sd/-
(Sudhir Kumar) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 06/09/2024
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR