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2020 (2) TMI 81 - AT - Income TaxAdditions towards Revenue sharing - Joint Venture Agreement - Sham Transaction of Revenue Sharing or not - as submitted that in the joint venture project in the urban cities in India, the share of land owner is usually 35% to 50% whereas the assessee, in the instant case, has share of only 42% of the gross project revenue - HELD THAT - In the order passed u/s 143(3) in the case of MGFD, the amount of ₹ 57 crores has been accepted by the AO as the share of revenue @ 60% of the hotel project at Jaipur. We, therefore, find merit in the submission of the ld. Counsel for the assessee that when the AO is not discarding the contribution of MGFD towards the completion of the project which is for the financing, implementation, providing brand name and other technical assistance for completion of the project, therefore, there is a commercial expediency in incurring the expenditure and the AO has no power to sit in the arm chair of the businessman and decide as to what would be the reasonable expenditure which is required to be incurred. AO has accepted the contribution of MGF Development Ltd., towards the completion of the project by providing financing and technical expertise, providing brand name and other technical assistance for the completion of the project and when the assessee has proved the commercial expediency in incurring the expenditure, therefore, detailed reasoning given by the CIT(A) against each allegation raised by the AO, which has been reproduced in the preceding paragraphs, we are of the considered opinion that the order of the CIT(A) does not suffer from any infirmity. Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed.
Issues Involved:
1. Legality of the CIT(A)'s order. 2. Deletion of the addition of ?47,07,37,143/- made by the AO on account of 'Sham Transaction of Revenue Sharing'. 3. Validity and genuineness of the collaboration agreement between the assessee and MGF Development Ltd. 4. Commercial expediency and reasonableness of the revenue sharing agreement. 5. Application of provisions under section 40A(2)(a) and section 40(a)(ia) of the IT Act. Detailed Analysis: Issue 1: Legality of the CIT(A)'s Order The Revenue contended that the CIT(A)'s order was incorrect in law and facts. The CIT(A) deleted the addition of ?47,07,37,143/- made by the AO, which was challenged by the Revenue. The Tribunal upheld the CIT(A)'s order, finding no infirmity in the detailed reasoning provided by the CIT(A) against each allegation raised by the AO. Issue 2: Deletion of the Addition of ?47,07,37,143/- The AO disallowed the amount of ?47,07,37,143/- claimed under the revenue-sharing agreement, considering it a sham transaction. The AO allowed only ?9,92,62,857/- (comprising interest and brand fee) and disallowed the balance. The CIT(A) deleted this addition, noting that the assessee was merely the landowner and the entire project was executed by MGF Development Ltd., making the revenue share reasonable. The Tribunal upheld this view, noting that the revenue received by MGFD was offered to tax and accepted in the assessment framed by the Revenue. Issue 3: Validity and Genuineness of the Collaboration Agreement The AO questioned the genuineness of the collaboration agreement, stating it was an afterthought and never produced in original. The CIT(A) found that the agreement's existence or validity had no impact on the commercial expediency of the transaction, as MGFD provided significant contributions to the project. The Tribunal agreed, emphasizing that the AO had admitted the brand value and finance provided by MGFD. Issue 4: Commercial Expediency and Reasonableness of the Revenue Sharing Agreement The AO argued that the revenue sharing was excessive and not backed by commercial expediency. The CIT(A) countered this by stating that business transactions are entered into on commercial considerations and the revenue cannot step into the shoes of the businessman. The Tribunal supported this view, citing various judicial precedents, including the Delhi High Court's decision in CIT vs. Dalmia Cement (Bharat) (P) Ltd. and the Supreme Court's decision in S.A. Builders Ltd. vs. CIT, which emphasized that the revenue cannot decide the reasonableness of expenditure from its own viewpoint but must consider the perspective of a prudent businessman. Issue 5: Application of Provisions under Section 40A(2)(a) and Section 40(a)(ia) The AO applied section 40A(2)(a), considering the transaction between related entities as excessive. The CIT(A) noted that the provision applies to expenditure, not revenue sharing. The AO also mentioned the non-deduction of TDS under section 40(a)(ia). The CIT(A) found no provision requiring TDS on revenue sharing in joint project development. The Tribunal upheld these findings, noting that the AO had already allowed interest and brand fee, recognizing the contributions of MGFD. Conclusion The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal. The Tribunal found that the CIT(A) had provided a well-reasoned and detailed analysis, addressing each of the AO's objections comprehensively. The Tribunal emphasized that the revenue cannot interfere with the commercial decisions of a business and must consider the perspective of a prudent businessman. The deletion of the addition of ?47,07,37,143/- was thus upheld, recognizing the commercial expediency and contributions of MGFD towards the project.
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