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2014 (9) TMI 204 - AT - Income TaxPayment made to Bruhat Bangalore Mahanagara Palike disallowed Sub-lease of property to sister concern - The assessee pointed out that the rents that it had paid to BBMP had to be allowed as a deduction while computing income from lease of the property u/s. 37(1) of the Act. Held that - The conclusions of the AO are also not correct for the reason that the rent paid by the Assessee to BMP would be higher only for the initial 5 years when the arrears of rent towards arrears of rent for the period from Nov. 2005 to March, 2008 is added to the originally agreed rent between the Assessee and BMP - the claim of the Assessee that after the expiry of the period for which the assessee had to pay the arrears of rent from Nov. 2005 to Apr. 2008 in 20 equal quarterly instalments, the amounts payable by it to BMP will be less than what the assessee would receive from the sub-tenant KPPL is correct - as per the terms of sub-lease with KPPL, the Assessee was entitled on a year on year basis, increase of 5% on the lease rentals - there is nothing on record to suggest that sub-leasing the property to KPPL did not make business sense. Relying upon CIT Vs. Walfort Share & Stock Brokers (P) Ltd. 2010 (7) TMI 15 - SUPREME COURT - there is no basis for the AO to come to a conclusion that it was KPPL which was interested in the BMP Contract, but could not participate in the tendering process initiated by the BMP because KPPL was managed and owned substantially by Sri. D.K. Shivakumar, who was the Hon ble Minister for Urban Development in the Government of Karnataka between the years 2002 and 2004 - the conclusions of the AO that the assessee was brought in as an intermediary only to win the contract and transfer it back to KPPL immediately and therefore the transaction in the books of the assessee has to be ignored and the losses claimed against it disallowed, cannot be sustained - The loss as claimed by the Assessee is to be allowed Decided in favour of assessee.
Issues Involved:
1. Whether the CIT(Appeals) was justified in sustaining the order of the Assessing Officer (AO) in disallowing the payments made by the assessee to Bruhat Bangalore Mahanagara Palike (BBMP) while computing the income from the business of letting out various shops in Madivala Commercial Complex. Issue-wise Detailed Analysis: 1. Justification of Disallowance by CIT(Appeals): The primary issue revolves around whether the CIT(Appeals) was justified in upholding the AO's decision to disallow the payments made by the assessee to BBMP. The assessee, a jeweller, had leased the Madivala Commercial Complex from BBMP and subsequently sub-let it to Kausthubha Projects Pvt. Ltd. (KPPL). The AO noted that the rent paid by the assessee to BBMP was higher than the rent received from KPPL, leading to a loss. The AO suspected that the transaction was not at arm's length due to common shareholders and directors between the assessee and KPPL. 2. Analysis of Transactions and Commercial Viability: The AO analyzed the transactions and found that the rent paid by the assessee to BBMP was significantly higher than the rent received from KPPL. The AO concluded that the sub-lease transaction was not commercially viable and was intended to benefit KPPL, a related party. The AO also noted that KPPL had reported losses in most years except for 2008-09 and 2009-10, suggesting that the lease arrangement was not profitable for the assessee. 3. Examination of Shareholding Patterns: The AO examined the shareholding patterns and found common shareholders and directors between the assessee and KPPL, leading to the conclusion that the transaction was not at arm's length. The AO believed that the assessee was used as an intermediary to secure the lease from BBMP, which KPPL could not do directly due to its association with a political figure. 4. CIT(Appeals) Findings: The CIT(Appeals) upheld the AO's decision, noting that the assessee could not demonstrate that the lease agreement with BBMP was for business purposes. The CIT(Appeals) highlighted the relationship between the assessee and KPPL and found no evidence that the assessee attempted to use the leased property for its own business or to lease it out profitably before sub-letting it to KPPL. 5. Assessee's Arguments: The assessee argued that the sub-lease was a genuine transaction made with commercial expediency. They pointed out that the initial losses were due to arrears of rent and interest but would turn profitable in subsequent years. The assessee also emphasized that the sub-lease terms included a 5% annual increase in rent and a significant security deposit from KPPL, which made the transaction commercially viable. 6. Tribunal's Analysis and Conclusion: The Tribunal noted that the Income Tax Act does not prohibit transactions with related parties but requires them to be tested for reasonableness under Section 40A(2)(a). The AO did not examine the transaction based on the parameters laid down in the Act but concluded that the transaction was not at arm's length due to the relationship between the parties. The Tribunal found that the rent paid by the assessee to BBMP would be higher only for the initial years due to arrears and interest, and the transaction would be profitable in the long run. The Tribunal concluded that the sub-lease was a genuine transaction and commercially viable, and there was no basis for the AO's conclusion that the assessee was merely an intermediary. 7. Legal Precedents and Tax Planning: The Tribunal referenced Supreme Court decisions indicating that not all tax planning is illegitimate. Only transactions that are sham, colorable devices, or subterfuges for tax evasion are impermissible. The Tribunal found that the transaction between the assessee and KPPL was genuine, with the professed intention matching the documented intention. 8. Final Decision: The Tribunal vacated the AO's conclusions and directed that the losses claimed by the assessee be allowed. The appeals by the assessee were allowed, and the disallowance of payments made to BBMP was overturned. Conclusion: The Tribunal concluded that the sub-lease transaction was genuine and commercially viable, and the disallowance of payments made to BBMP by the AO and CIT(Appeals) was not justified. The appeals by the assessee were allowed, and the losses claimed were directed to be allowed.
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