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2020 (1) TMI 458 - AT - Income TaxAdditions - High construction of cost of developments activities relating to construction activities of the CWG - Additions on the basis of budgeted estimates used in Percentage of Completion Method (POCM). - the addition has been made solely based on the Shunglu Committee Report. - Held that - The object of the Shunglu Committee was to determine, if the purchase of 333 additional flats by DDA was according to the norms / rules and had not caused any loss to the exchequer. Its object was not to determine the cost or expenditure to the assessee, indeed, the assessee was never called to the proceedings of the Shunglu Committee, nor was any input / clarification taken from the assessee. It can also be find that another government agency, the Labour Commissioner, has accepted the cost of the assessee for the purpose of levy of labour cess on the CGV project. What is primarily required is to prove the inflation in the cost of construction is to determine, investigate and prove whether any expenditure claimed in the P L account or said to be incurred for construction are bogus or inflated. This inflation could be either on payment of sub-contractors or cost of materials. Nowhere, the method of accounting standard followed by the assessee has been disputed, in fact, no grounds could be brought out by the Assessing Officer to alter the percentage shown by the assessee except the document of estimated cost. The factor such as increase in the input cost, exit of the main contractor, change in the specification are not considered by the Assessing Officer. In the instant case, there has been no evidence of inflation of purchases, the Assessing Officer has not rejected the books of account, the accounts have been accepted but altered the profits based on the estimated project cost. This cannot be said to be legally tenable. - Additions deleted. Profit sharing agreement - Diversion of income by overriding title or mere application of income - Additions towards 25% of share of Consortium partner - The share of revenue to the holding company was declared in its return of income and assessed by the department accordingly. - Held that - The assessee company was a Special Purpose Vehicle (SPV) created to execute CWG project as one of main conditions of CWG project was that it should be undertaken by an SPV. SPV could not undertake such a large project without financial support from either its shareholder or any external party. The assessee is under the obligation to part away with the source of income to the holding company and it was not its volition alone, to give away the revenue that could have been otherwise accrued to them. An agreement entered into by the holding company with the assessee for providing financial security cover and to part away 25% sales proceeds was clearly a case of division of source of income between the holding company and the assessee. The flats to be constructed, by the assessee company were the source of income and the holding company had created a lien over 25% for a quid pro quo thereof and therefore took away 25% shares from the sale proceeds. It is not a case that the entire sale proceeds of flats and therefore, the income there from would have accrued to the assessee and 25% thereof had been applied or given away by the assessee to the holding company. The assessee acts as a collector of revenue for the holding company of the receipt to the extent of 25% of the sale proceeds. The 25% belongs to the holding company by virtue of the contributions made and the agreement entered. If there is an obligation before an income accrues and the assessee is under compulsion to discharge his obligation, it would be a case of diversion by superior title but, where there is no compulsion and no pre-existing obligation, but it is assessee s choice to create an obligation on himself either before income received, accrues of arisen or thereafter, it would only be a case of application of income. A compulsion at source imposed by a third party is necessary to create a superior title. Just because diverted income is collected by the assessee himself for and on behalf of the beneficiary; it cannot be inferred that it was only an application and not diversion. In the instant case, the assessee has been obligated by virtue of the agreement to divert the income at source and also for the contributions made by the holding company. Thus, we hold that the revenue sharing agreement entered with the holding company by the assessee is diversion of income by overriding title. - Additions deleted. Interest income - Netting off - interest has been netted off against project cost - Held that - Having considered the facts of the case, Sections 56, 57 and the provisions relating to Section 28, Section 36 37, and the provisions of Section 71 of the Income Tax Act, 1961 and the judgments on the issue, we hereby hold that in the instant case where the assessee is taxed at the maximum marginal rate, the addition would be revenue neutral. - No additions. Decided in favor of assessee and against the revenue.
Issues Involved:
1. Adverse inference regarding unsubstantiated purchases. 2. Disbursement of income as per the revenue-sharing agreement. 3. Deletion of addition made by the Assessing Officer on account of wrong budgeted estimates used in the Percentage of Completion Method (POCM). 4. Deletion of addition made by the Assessing Officer on account of sham transactions. 5. Deletion of addition made by the Assessing Officer under the head "income from other sources." Detailed Analysis: 1. Adverse Inference Regarding Unsubstantiated Purchases: The assessee argued that the CIT(A) erred in observing that the Assessing Officer (AO) could draw an adverse inference regarding unsubstantiated purchases amounting to ?17,76,06,532/- and ?56,79,06,899/- for different assessment years, as confirmations from 23 parties were not received before the conclusion of assessment proceedings. The CIT(A) did not admit these confirmations on the grounds that the appellant had exhausted the opportunity to file them earlier and that the Revenue had no chance to examine/rebut them. The Tribunal directed the matter back to the AO to conduct necessary enquiries and investigations to determine the allowability of this expenditure. 2. Disbursement of Income as per the Revenue-Sharing Agreement: The CIT(A) held that the disbursement of income as per the revenue-sharing agreement with EMLL was not a diversion of income by overriding title but an application of income. The assessee contended that the entire project was executed on the strength of EMLL, which had paid 75% of the total consideration. The Tribunal found that the revenue-sharing agreement was a genuine arrangement and not a sham transaction. It was concluded that the payment made to EMLL was obligatory and constituted a diversion of income by overriding title, not merely an application of income. The Tribunal dismissed the Revenue's contention that the transaction was a sham. 3. Deletion of Addition Made by the AO on Account of Wrong Budgeted Estimates Used in POCM: The AO challenged the estimated construction cost of ?1027.06 crores, asserting that the total construction cost could not exceed ?752.35 crores based on the contract with Ahluwalia Construction India Ltd. (ACIL). This led to a reworking of the revenue to ?511.59 crores, resulting in an addition of ?87.97 crores to the income of the assessee. The Tribunal found that the addition was based solely on the Shunglu Committee Report, which was not intended to determine the cost or expenditure of the assessee. The Tribunal noted that the increase in costs due to changes in specifications and the exit of ACIL from the project were valid reasons for the higher estimated costs. The Tribunal held that the AO's re-computation and consequent addition were not legally tenable and directed the deletion of the addition. 4. Deletion of Addition Made by the AO on Account of Sham Transactions: The AO had taxed the 25% share of the holding company (EMLL) in the hands of the assessee, disregarding the collaboration agreement. The Tribunal found that the agreement between the assessee and EMLL was genuine and that the revenue-sharing arrangement constituted a diversion of income by overriding title. The Tribunal dismissed the Revenue's contention that the transaction was a sham and upheld the genuineness of the contributions made by EMLL. 5. Deletion of Addition Made by the AO under the Head "Income from Other Sources": The AO treated the interest income as "income from other sources" instead of "business income," thereby not allowing the assessee to reduce it from the project cost. The Tribunal found that the interest income was inextricably linked to the business of the assessee and was a by-product of the business. The Tribunal held that the interest income should be treated as part of the business income and that the addition would be revenue-neutral as the assessee was taxed at the maximum marginal rate. The Tribunal upheld the order of the CIT(A) and declined to interfere. Conclusion: The Tribunal allowed the appeals of the assessee and dismissed the appeals of the Revenue, directing the deletion of the additions made by the AO and upholding the genuineness of the revenue-sharing agreement and the treatment of interest income as business income.
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