2022 (12) TMI 1305 - AT - Income Tax

Accrual of income - Addition pertaining to option premium received on sale of 20 flats as the income in the hands of the appellant - Whether option agreement between the appellant and Hypercity is a normal business transaction and not a sham transaction? - terms and conditions of the option agreement entered as commercially prudent - Case of the Revenue is that, this agreement was a sham transaction, which was only meant to divert profits from the assessee to HRPL - HELD THAT - We agree with the Ld. AR that this option agreement was a commercially expedient transaction as it enabled the assessee to obtain interim funding in the form of interest-free deposits with embedded option, for its project without interest/cost and it also indirectly secured the commitment from HRPL to buy twenty (20) flats in their proposed development, whose construction had not even commenced by then, and whose sales/bookings until then was sluggish (assessee had only obtained two other bookings until FY 2010-11). The fact that HRPL, a reputed company and a subsidiary of M/s Shoppers Stop Ltd, chose to participate in this proposed development, enhanced the bankability of the project. It was also pointed out to us that, the option price agreed in 2010 was commensurate with the prevailing market value for stamp duty purposes and therefore it was not a case that the option to acquire twenty (20) flats was given to related party, HRPL at understated values. On the issue of loans of Rs.135.23 crores advanced by the assessee to its sister concerns, it is noted that they were given in the course of business and were interest bearing, and on which the assessee had derived interest income to tune of Rs.25.67 crores. On the other hand, the interest-free deposits with embedded option received from HRPL were not only interest-free but also did not entail any cash outflow. On conspectus of these facts, we agree with the finding of the Ld. CIT(A) in holding the option agreement between the assessee and HRPL to be commercially expedient and thus acceptable. Understandably, until the construction work began, there was little need of funds by the assessee. It was only when the certificate for commencement of construction was received on 27.05.2013, that the actual requirement for working capital arose, and until then the assessee had admittedly been able to secure interest free option deposits from HRPL to the tune of Rs.48.66 crores (upto FY 2013-14) against twenty (20) flats. Having regard to these facts, even this doubt raised by the Ld. DR regarding the staggered manner of payment of option deposits, is found to be untenable. Apart from the above reasons, we are also unable to countenance the action of the Ld. DR in questioning the necessity and purpose for entering into option agreement, on the premise that, it is the assessee s prerogative to decide the manner in which it wants to run its business and the Department cannot replace the wisdom of the assessee. Revenue cannot decide or dictate as to how an assessee should conduct its business or maximize its profits. It is by now well settled in law that, the Revenue cannot step into the shoes of the businessman for determining reasonableness and business expediency. Hence, the Ld. DR could not have questioned the necessity, purpose and manner of raising of funds by the assessee, in the form of option deposits from HRPL, as it was outside the domain and jurisdiction of the Revenue. Courts have time and again observed that, whether the transaction is expedient for the purpose of business has to be looked at by the Income-tax Authorities from the view-point of the assessee as a prudent businessman and not from the armchair of the AO. The Courts have observed that it is the assessee who knows its business. It is its success or failure in the business, which is material to it. It is not for the income-tax authorities to suggest, or advice, or to presume or surmise as to the expedience of the transaction. For the aforesaid reasons, we hold that the Ld. DR could not have questioned the commercial necessity for the assessee to have entered into the option agreements with HRPL. Assessee has also demonstrated before us that, it was also not the case, that by entering into this option agreement, the assessee had shifted profits to HRPL thereby reducing its tax liability. It is not in dispute that, both the assessee and HRPL are assessed in the status of company at the same applicable tax rates. It is also not the case of the Revenue that HRPL did not credit the revenues derived from sale/assignment of options as income in its books of accounts. Assessee had brought forward losses to the tune of Rs.156 crores from earlier years. Hence, even taking into account the addition of Rs.98 crores made by the AO, there were sufficient losses available with the assessee to set-off such addition and also carry forward remaining losses to future years, and hence it did not result in creation of any tax liability upon the assessee. Although, we agree with the Ld. CIT(A) that, this fact alone cannot be a decisive factor to decide the acceptability of the option agreement, but having regard to the overall facts and circumstances of the case as already discussed in the foregoing, this fact pointed out by the Ld. AR does have persuasive value. Addition made by the AO is held to be unjustified both on facts and in law. Accordingly, the Ground No. 1 of the appeal of the assessee is allowed and the Ground No. 1 of the appeal of Revenue is dismissed. Disallowance u/s 14A - assessee had made suo-moto disallowance - CIT(A) allowed the appeal of the assessee by holding that the disallowance u/s 14A was to be restricted to the extent of exempt income, by following the decision of State Bank of Patiala 2018 (11) TMI 1565 - SC ORDER - HELD THAT - Having heard rival submissions and perusing the material on records including the impugned order, we do not find any infirmity in the order of Ld.CIT(A) deleting the further disallowance made by the AO u/s 14A of the Act. Accordingly, Ground no. 2 of the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Addition of option premium received from Hypercity Retail Ltd. on the sale of 20 flats.
2. Deletion of addition by the CIT(A) regarding sham transactions.
3. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Option Premium Received from Hypercity Retail Ltd. on Sale of 20 Flats:
The assessee, a private limited company engaged in real estate development, entered into an option agreement with Hypercity Retail Ltd. (HRPL) for the sale of 20 flats in the 'Artesia' project. The Assessing Officer (AO) contended that the option agreement was a device to divert profits, adding Rs.175.15 crores to the assessee's income. The AO substituted the revenues to Rs.835 crores instead of Rs.660 crores declared by the assessee, resulting in an additional income of Rs.98,25,58,185/-. The CIT(A) held the option agreements as commercially acceptable and not a sham, but allowed the AO to examine the reasonableness of the transaction value. The CIT(A) recomputed the income, confirming an addition of Rs.10,67,26,046/- and deleting Rs.87,58,32,139/-.

2. Deletion of Addition by the CIT(A) Regarding Sham Transactions:
The CIT(A) found the option agreements to be a legitimate financing model in the real estate market, rejecting the AO's blanket inference of profit shifting. The CIT(A) noted that HRPL had contributed over Rs.104 crores as option deposits and assumed project risks, thus the transaction could not be disregarded. However, the CIT(A) emphasized the need for the assessee to demonstrate the arm's length nature of the transaction. The CIT(A) pegged the benchmark option price at Rs.30,522/- per sq. ft., recomputing the income and confirming an addition of Rs.10,67,26,046/-.

3. Disallowance under Section 14A of the Income Tax Act:
The AO made a further disallowance of Rs.1,78,177/- under Section 14A, invoking Rule 8D(2)(iii), despite the assessee's suo-moto disallowance of Rs.4,10,266/-. The CIT(A) allowed the appeal, restricting the disallowance to the extent of exempt income, following the Supreme Court decision in Pr.CIT Vs State Bank of Patiala.

Judgment:
The Tribunal considered the rival arguments, examining the option agreement's commercial prudence and market conditions at the time of agreement. The Tribunal rejected the Revenue's hindsight bias and benchmarking analysis, holding the option price reasonable based on prevailing market conditions and ready reckoner rates. The Tribunal concluded that the addition of Rs.98,25,58,185/- was unjustified, allowing the assessee's appeal and dismissing the Revenue's appeal. The Tribunal also upheld the CIT(A)'s decision on the Section 14A disallowance, dismissing the Revenue's ground.