2015 (8) TMI 1414 - AT - Income Tax

Disallowance of payment made made to M/s. Alishan Estates (P) Ltd - as per AO transaction is a sham transaction - AO treated the said amount as an expenditure by holding that the assessee should have deducted the tax at source - Held that - As regards the sham transaction, at the outset, we do not support the order of the AO for the reasons that the transactions were made by a valid written contract/agreement on various terms and conditions with the two said parties, which are essential for such a joint venture project. This has not been denied by the AO. The AO has not pointed out any defect in the said agreement entered between the assessee and Alishan Estates Pvt. Ltd. In lieu of the said agreement dtd. 10/07/2005 M/s. Alishan Estates Pvt. Ltd was to procure pre-specified land for purchase, to make all the necessary legal arrangements for such land and to find out suitable buyer for the said land and profit was to be shared between the assessee and M/s. Alishan Estates P.Ltd in ratio 25 75. The profit includes loss as well. Had there been a loss whether the AO would have treated the said transaction as a sham transaction, obviously the answer is No. Since joint venture has earned a profit and same was shared between the said two parties. Therefore, we are of the view that the transaction is completely in lieu of joint venture agreement. The AO is not justified in treating the said payment made by the assessee to the joint venture partner, M/s. Alishan as an expenditure and no TDS is required to be deducted on the profit so shared between the said two joint venture partners. In the circumstances and facts of the present case the addition so made by the AO is without any basis and is purely on surmises and conjectures. - Decided against revenue

Summary

Issues:
1. Whether the transaction of Rs. 5,17,48,439/- is a sham transaction as per Chapter XVII-B of the Income Tax Act.
2. Whether the order of the AO disallowing the amount under section 40(a)(ia) is justified.

Analysis:
1. The AO contended that the transaction was a sham, and the amount should have been subject to tax deduction at source. However, the ITAT Kolkata found that the transaction was based on a valid written agreement with specific terms and conditions between the parties. The AO failed to identify any defects in the agreement, which outlined the joint venture project details. The ITAT held that the transaction was genuine, as evidenced by the profit-sharing arrangement and the absence of any loss treatment. The ITAT concluded that the AO's disallowance lacked a legal basis and was speculative, leading to the deletion of the addition by the CIT(A).

2. The AO disallowed the amount under section 40(a)(ia) for failure to deduct tax at source. The ITAT Kolkata observed that the AO's reasoning lacked substance, as the transaction was legitimate and did not require tax deduction at source. The ITAT emphasized that the AO's decision was based on suspicion rather than concrete evidence, contrary to the principles of a valid assessment under section 143(3) of the Income Tax Act. Additionally, the AO's failure to follow natural justice principles by issuing a show cause notice just before the assessment deadline further weakened the validity of the disallowance. The ITAT upheld the CIT(A)'s decision to delete the addition, citing various court precedents supporting the assessee's position.

In conclusion, the ITAT Kolkata dismissed the revenue's appeal, affirming the legitimacy of the transaction and the deletion of the disallowance under section 40(a)(ia) by the CIT(A). The judgment highlighted the importance of substantiated assessments based on legal grounds and adherence to natural justice principles in tax proceedings.