2017 (11) TMI 719 - AT - Income Tax

Re-opening of assessment u/s 147 - reasons of believe - Held that - There was failure on the part of assessee to disclose fully and truly all material facts for completion of assessment during the assessment proceedings. The case laws relied upon by the assessee are not applicable to the facts of the case as the necessary agreements qua joint venture, relinquishing the interest in the said land were not furnished before the AO in the course of assessment proceedings and there is a failure on the part of the assessee to disclose the material facts during the course of assessment and hence in our opinion the re-opening is validly done under 1st proviso to section 147 of the Act. We are, therefore, inclined to hold that re-opening of assessment u/s 147 of the Act is valid and accordingly the ground raised by the assessee is dismissed. Non genuine and sham transaction - whether transaction of purchase of interest in 50 acres of land from two companies OM and WW was sham and non genuine and thereby upholding the reduction of 100.80 Cr from the inventories of the assessee? - Held that - The chronology of events clearly shows that the application was made in the joint names of the assessee, OM and WW. The land was also allotted by MIDC on the said application made by the three joint venture partners. Thereafter MIDC on an application made by the JV partners approved the relinquishment of interest in the said land by two JB partners OM and WW in favour of the assessee on payment of specified premium. It is relevant to note that records of MIDC proved that the assessee, OM and WW were the joint owners of the plot of land till the relinquishment of rights by OM and WW was approved by MIDC which showed the transaction being genuine and out of business consideration. A business decision was taken by the assessee to purchase the interest from two JV partners to which two partners also agreed to sell their interest to the assessee which is also a business decision taken by them in the best interest of the business. Moreover all the three parties are unrelated parties and not related to each other. Therefore the transaction can not be said to be non genuine and sham. Further we failed to understand as to how a transaction which is assessed to tax in the hands of two JV partners by the revenue treating the same as genuine was treated as sham in the hands of assessee. In our considered view the assessee has entered into the transaction of purchasing the interest in the land from the said two parties and after purchase, became the exclusive owner of the said land and therefore the said expenditure is wholly and exclusively incurred for the purpose of business and should be allowed to the assessee. Beside, the involvement of multiple agencies including Govt authorities like MIDC and AOs of OM and WW, professional consultants and escrow agents specially when none of them were related to each other further lends credence to the contention of the ld AR. The mere irregularities in the documents as pointed by the ld DR can not be the basis to draw conclusion as to genuineness of the transaction. So far as the reasonableness of the transaction is concerned, the valuation by the registered valuer and the DVO were largely same and can not be ignored and lost sight of while deciding reasonableness of the transaction. After considering the rival contentions, records, written submissions and case laws filed by both the parties we are of the view that the order of PCIT upholding the order of AO treating the purchase of interest in the land from OM and WW as sham is incorrect and can not be sustained. Thus we set aside the order of PCIT on this issue and accordingly appeal of the assessee is allowed.

Issues Involved:
1. Validity of the initiation of reassessment proceedings under section 147 of the Income-tax Act.
2. Legitimacy of the transaction involving the purchase of interest in land from two companies (OM and WW) and its treatment as a non-business expenditure.
3. Disallowance of interest expense on borrowed funds used for payments to OM and WW.

Issue-wise Detailed Analysis:

1. Validity of the Initiation of Reassessment Proceedings under Section 147:

The assessee contested the reassessment proceedings initiated under section 147, arguing that all material facts were disclosed during the original assessment, and hence, the reassessment was invalid. The assessee's main contention was that the reassessment was based on facts that emerged after the original assessment, particularly the assessment order of OM Metals Ltd., which was not available during the original assessment. The assessee cited various case laws to support the argument that reopening after four years is invalid unless due to non-disclosure of material facts by the assessee.

The Tribunal upheld the reassessment proceedings, noting that the assessee failed to disclose all material facts during the original assessment. The Tribunal observed that the agreements related to the joint venture and the relinquishment of interest in the land were not furnished during the original assessment, leading to a failure in disclosing material facts. The Tribunal concluded that the reopening was valid under the first proviso to section 147 of the Act due to the assessee's failure to disclose fully and truly all material facts.

2. Legitimacy of the Transaction Involving the Purchase of Interest in Land:

The assessee argued that the transaction involving the purchase of interest in land from OM and WW for ?100.80 crores was genuine and incurred for business purposes. The assessee contended that both OM and WW were involved in the joint venture and the transaction was not a sham. The assessee highlighted that the payments were made through banking channels and the transaction was taxed in the hands of OM and WW, thus proving its genuineness.

The Tribunal found that the transaction was genuine and not a sham. It noted that the land was allotted to the joint venture partners by MIDC, and the relinquishment of interest in the land was approved by MIDC. The Tribunal emphasized that the same transaction was treated as genuine in the hands of OM and WW by the revenue authorities, and hence, it could not be treated as non-genuine in the hands of the assessee. The Tribunal concluded that the expenditure was incurred wholly and exclusively for business purposes and allowed the deduction.

3. Disallowance of Interest Expense on Borrowed Funds:

The assessee challenged the disallowance of interest expense on borrowed funds used for payments to OM and WW. The assessee argued that since the transaction was genuine, the interest expense should be allowed as a deduction.

The Tribunal, having held the transaction to be genuine, directed the AO to allow the interest expense incurred on the borrowed funds used for the payment to OM and WW. The Tribunal emphasized that the same transaction could not be treated as genuine in the hands of OM and WW and non-genuine in the hands of the assessee.

Conclusion:

The Tribunal allowed the appeals of the assessee, holding that the reassessment proceedings were valid, the transaction involving the purchase of interest in land was genuine, and the interest expense on borrowed funds used for the payment to OM and WW was allowable as a deduction. The Tribunal directed the AO to delete the disallowance and treat the transaction as genuine for tax purposes.

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