9911796707
TMI Blog2014 (6) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in case of the assessee and others on 22-08-2008. In response to notice u/s.153A the assessee filed his return of income on 30-03-2009 disclosing total income of Rs. 12,10,26,580/-. During the course of assessment proceedings the AO noted that the assessee has paid brokerage to M/s. Regenesis Project Management Company Pvt. Ltd. (Regenesis PMCPL) which is a related party of the assessee. This brokerage has been paid by the assessee to the above party for the sale of Jambhe land. The land has been sold to M/s.Kolte Patil Developers Ltd. (KPDL in short) which is the flagship concern of the group. The AO, therefore, asked the assessee to explain as to why the brokerage paid to M/s. Regenesis PMCPL amounting to Rs. 25,96,400/- for the impugned assessment year (Rs.5,17,549/- for A.Y. 2007-08 and Rs. 4,20,455/- for A.Y. 2008-09) should not be disallowed. 3.1 It was explained by the assessee that KPDL wanted to undertake a massive project on the lands owned by the Directors and their relatives at Hinjewadi. Since KPDL did not have necessary experience and contacts, it decided to set up the subsidiary, namely Regenesis PMCPL to undertake a dialogue with investors and financers and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the assessee and other individuals of KPDL group was devised to reduce the tax liability through what was apparently a colourable device/arrangement. He held that the assessee had not only worked out lesser short term capital gains by claiming the brokerage expenses but also the entire transaction had been so arranged so as to result in negligible or Nil income/losses in the hands of the related concern namely Regenesis PMCPL. He, therefore, proceeded to disallow brokerage amounts claimed to have been paid from the computation of short term capital gains in the hands of the assessee. 5. Before the CIT(A) it was submitted that the AO was not justified in disallowing the brokerage paid by the assessee on the ground that the same has been paid to avoid tax. It was submitted that the brokerage has been paid as per MOU dated 03-10-2005 between the assessee and Regenesis PMCPL which specifies the reasons for payment of brokerage and the duties and services to be provided by Regenesis PMCPL. The observation of the AO that the land in question have been sold to KPDL was challenged. It was submitted that the lands have not been sold to KPDL but to the joint venture company namely I- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmission during the course of assessment proceedings before the A.O. copy of which is enclosed (refer page no. 1 to 9). 3. It is submitted before Your Honour that while disallowing the brokerage paid by the appellant, the learned A.O. has stated that the Regenesis PMCPL is a subsidiary of the KPDL and Rajesh Patil & Milind Kolte are the Directors of the company with 50% each beneficial ownership/ of the equity shares is factually incorrect, it is submitted before Your Honour that Regenesis PMCPL is a subsidiary of KPDL but Rajesh Patil & Milind Kolte are not having 50% each beneficial ownership of the company. In support of this the share holding pattern of the Regenesis is enclosed (refer page no. 10s). 4. The learned A. O. has not appreciated the facts of the case properly and therefore, we bring the correct facts relating to the transaction, the reason of payment of brokerage by the appellant to Regenesis PMCPL as under. a) The appellant and the family members acquired some lands in Jambhe, Pune. Kolte Patil Group had also acquired some lands on its own in this area and it was realized that the land would fetch very good profits if a township is constructed thereon but if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and between 2006-07 and 2007-08 in the case of Smt. Ankita Rajesh Patil) . It was realized that this land would fetch higher profits if a township is constructed thereon, rather than development in bits and pieces. Since KPDL did not have the financial strength to develop such a large project of 300 to 400 acres, it was interested in finding a partner to invest funds and develop the project along with KPDL. Since the Kolte Patil Group did not have necessary experience and contacts, a subsidiary called Regenesis PMCPL was formed and assigned to the task of finding a suitable JV partner. Through professional expertise available to Regenesis PMCPL, the assessee was able to successfully negotiate with ICICI Ventures and get a good price for the impugned lands to be transferred to the JV. This was possible only due to the marathon efforts of the Regenesis PMCPL. The services of Regenesis PMCPL was necessary and instrumental in successfully transferring the land of the assessee at a better price and therefore, the payment of brokerage made by the assessee to Regenesis PMCPL is reasonable and fully justified. 8. However, the CIT(A) was not satisfied with the explanation given by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the appellant is a better price since the sale consideration is prima facie as per the market value. The market value is known to be an indicator of reasonable rate that the property would fetch in the market and not per se an indicator of the best rate that the appellant could have received, especially in the context that the agreement in question is not related to outright sale but is a development agreement. It has been argued that the brokerage is justified on account of the future profits that would accrue if the township were to be constructed rather than the land being developed in small pieces. This argument does not hold good in the appellant's case since in the hands of the appellant as an individual it is only the capital gains that attracts taxation and not profits that would accrue in future. The appellant individual and other individuals of the group namely Shri Naresh A. Patil, Shri Milind D. Kolte and Smt. Ankita R. Patil are not entitled to share in the profits as per the JV agreement dated 23.2.2006. 5.2. I have examined the Memorandum of Understanding (MOD) signed by the appellant and other individuals of the Kolte Patil Group and KPDL with Regenesis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion as agreed by Clause (4) of the MOU would be paid by each of the entities at the rate of 1.5% for the first tranche of minimum 100 acres and for additional area @ 0.5% of the transaction value, subject to not simply the sale/transfer of land but the higher objective of securing a partner for joint investment and development of a township. Clause (4) reads as under: 4. KPDL, RAP (the appellant), MDK, NAP and ARP have agreed to pay individually for the first tranche of minimum 100 Acres @ 1.5% and subsequently for the additional area @ 0.5% of the transaction value of their respective lands to Regenesis as its fee in the event Regenesis is successful in securing investment by real estate funds etc. into Jambhe lands along with KPDL as developer. 5.4. The lands sold/ assigned by the appellant to the joint venture are at par with the market value of the lands and no higher or better price as has been claimed, has been actually earned. The future profits that would accrue at a later date would not accrue in the hands of the individuals but in the hands of the company i.e. KPDL. Therefore, the Assessing Officer is right in holding that the payment of the brokerage is not justifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would further show the payment of brokerage and commission has not only reduced the liability in the hands of the appellant but also by making Regenesis PMCPL a partner in the Joint Venture, shared the profits ultimately earned on the joint venture with Regenesis PMCPL which is a group company of Kolte Patil Developers and a related concern to the appellant. The appellant has not benefited by the payment of brokerage in the profit sharing to be earned on the later date by the joint venture. 5.6. The Delhi High Court in the case of Smt Sita Nanda vs CIT reported in 251 ITR 575 has held that the expression "expenditure incurred wholly and exclusively in connection with such transfer" as used in Section 48(i) means expenditure incurred which is necessary to effect the transfer. Even if an expenditure has some nexus with the transfer, it does not qualify for such deduction unless it is incurred wholly and exclusively in connection with such transfer. Therefore, the interest paid by the assessee towards belated payment of the unearned increase charged by the LDO towards permission to transfer leasehold rights in respect of a land was held to be inadmissible. The operative part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brokerage paid and the subsequent transfer of the land, which is anyways a fait accompli. 5.8. During the course of appellate proceedings, on 16.11.2012 and further on 27.11.2012 along with other details, the Ld. ARs were requested to produce evidences and correspondences and / or any other documentary evidences regarding the services rendered by Regenesis PMCPL in accordance with and for prosecution of the MOU dated 3.10,2005 between the appellants and Regenesis PMCPL. However, other than the list of Senior Executives employed by Regenesis PMCPL, their qualifications and the amount of salary/ professional fees paid during the financial years 2005-06 to 2008-09, no such evidences has been filed. The argument advanced by the AR is that since the key personnel have left the company for other assignments along with their laptops etc. it is not possible on the part of the appellant to produce any written or documentary evidences to show that services have been rendered. It has been submitted that the key personnel were having suitable experience in the fields of finance, marketing, engineering etc. and were thus competent to carry out the work. The qualifications of all employees viz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to Regenesis is prima facie not linked to the transfer of land but to the identification of suitable investment partner to develop the lands into a special township. The transfer of lands is only incidental to the entire arrangement. b) The appellant has received the prevalent market price of the land and nothing more than the same, although he has entered into a development agreement and not simply a sale agreement. c) The real beneficiaries in the whole process are not only the appellants who want to claim the brokerage and reduce their capital gainstaxes but also Regenesis PMCPL who offered Nil to nominal incomes and also get entitled to a share of the residual profits of the joint venture, if any. d) The act of payment of brokerage to an interested party by the appellant who is the CEO of the brokerage company is certainly a colourable transaction. The Assessing Officer has rightly questioned the necessity of payment of brokerage when it is the intention to develop the land through KPDL all along, as a co-developer. e) Perhaps the most crucial aspect in the whole affairs is the lack of any documentary/ written evidences as to the services actually rendered by the br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the buyer for the land sold by the assessee and brokerage paid by the assessee could not be allowed as a deduction u/s 48 against the capital gains earned against sale of the said land. 3] The learned CIT(A) failed to appreciate that - a. The assessee had paid the said brokerage to M/s. Regenesis PMCPL towards the services rendered by it to find a buyer for the land of the assessee and hence, the same was incurred wholly and exclusively for the purposes of transfer of land and therefore, the same was allowable to the assessee as a deduction u/s 48 of the Act. b. M/s. Regenesis PMCPL had helped the assessee to sale the land at a substantially profits and hence, the amount of brokerage paid by the assessee in accordance with the MOU entered with the said party ought to have been allowed as a deduction against the capital gains earned on sale of the said land. c. The rate of brokerage paid by the assessee to M/s. Regenesis PMCPL was between 0.50 to 1.50% of the sale consideration which was quite reasonable as compared to market rate of 2% and hence, there was no reason to make any disallowance in respect of the same. d. The assessee had actually paid the said brokerage amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transaction value for the additional area sold over and above 100 acres in consideration of the services rendered by Regenesis for finding the potential investor. 10.1 He submitted that for the purpose of finding the potential investors, Regenesis employed various persons with high educational qualifications and vast experience in the field of Realty market. Referring to page 249 of the paper book, he drew the attention of the Bench to the details of the educational qualifications and past experience of the key employees of Regenesis and submitted that the various persons employed were highly qualified and specialized in the field of realty market. He submitted that some of the employees had worked with renowned organisations in the realty market like Mahindra Realty, Knight Frank, ICICI One Source Ltd., ICICI Bank (Property Service Division), HDFC, Reliance Industries Ltd., DLF Universal Ltd., etc. etc. Referring to page 248 of the paper book he drew the attention of the Bench to the high salary paid to those employees by their erstwhile employers. 10.2 He submitted that with persistent efforts to woe investors, Regenesis succeeded in pursuing ICICI Venture Funds Managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party to the shareholders agreement itself indicates that Regenesis was the main person who had brokered the deal. He submitted that during the course of assessment proceedings it was pointed out that only because Regenesis was instrumental in finalizing the deal, ICICI had allowed to make Regenesis a party to the said shareholders' agreement and also share some profits. If Regenesis had no role to play in the finalization of the deal, there was no reason to make it a party to the said agreement. This fact itself indicates that because of the efforts put in by Regenesis, ICICI Venture had agreed to be a partner to develop the land along with Kolte Patil. 10.4 As regards the observation of Ld. CIT(A) that the assessee had sold the land at prevailing market rates and the assessee had not sold lands at more than the prevailing market prices for which she has referred to one sale agreement in para 5.1 of her order, the Ld. Counsel for the assessee submitted that the said observation of the learned CIT(A) is not correct. Referring to page 250 of the paper book which contains the cost of land and sale proceeds he submitted that substantial capital gains were earned on the sale of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of the land. He submitted that only if a good investor was found, he would have been able to sell the lands at substantial amounts and earn capital gain. Thus, finding of the investor had a direct nexus with the sale of lands and this fact is also evident since the sale consideration of the lands is mentioned in the shareholders agreement. 10.7 He submitted that Regenesis had earned substantial profits of Rs. 6,53,864/- in A.Y.2006 - 07 (page 39 of Paper Book), Rs. 11,63,183/- in A.Y.2007 - 08 (page 65) and Rs. 25,42,095/- in A.Y.2008 - 09 (Refer page 98 of Paper Book). Therefore, the learned CIT(A) is not justified in holding that Regenesis had declared Nil or nominal income in these years and thus, the payment of brokerage was made to avoid payment of taxes by the assessee. He submitted that Regenesis had declared a loss in A.Y.2009 - 10. However, in that year the assessee has not paid any brokerage to the said company. He submitted that, if at all, the assessee wanted to avoid payment of taxes, then he would have certainly paid brokerage to Regenesis in A.Y. 2009-10 also since the said company would not have been required to pay any taxes on the said brokerage income as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertake the above activities. He accordingly submitted that Regenesis, which undertook the above activities by employing various experts, was a distinct entity from the assessee and the other members of the Kolte Patil Group and hence, there was no reason to hold that the formation of the said company was merely a colourable device to avoid payment of taxes. 10.9 Referring to paper book page 255 he submitted that the assessee has also paid service tax @ 12.24% on the brokerage paid to Regenesis. If the activity of finding potential investors would have been conducted individually by the Kolte Patil Group members, then they would not have required to incur the additional liability towards service tax and this fact also proves that the assessee had not entered into any colourable transaction to avoid taxes by making payments to Regenesis. 10.10 As regards the allegation of CIT(A) that the assessee has not furnished the documentary evidences in respect of the services rendered by Regenesis he submitted that the actual data regarding services rendered by Regenesis was in the laptops of the key employees engaged by Regenesis. He submitted that all these employees left after 3-4 years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) where the Ld.CIT(A) has mentioned that the real beneficiaries in the whole process are not only the assessees who want to claim the brokerage and reduce their capital gain taxes but also Regenesis PMCPL who offered NIL to nominal income and also get entitled to share of the residual profit of the joint venture. He submitted that either KPDL or the assessees could have employed the persons appointed by Regenesis to find potential investors. Therefore, at the most, some proportionate expenses towards salary of those persons may be allowed. But even that is also not necessary. He accordingly submitted that the order of the CIT(A) be upheld. 12. The Ld. Counsel for the assessee in his rejoinder submitted that KPDL i.e. Kolte Patil Developers Ltd. is a public limited company and even if it itself had employed the various employees for the purpose of locating potential investors for the lands owned by the various family members of the Kolte Patil Group, then it would have certainly charged the individual members for the expenses incurred by it for finding the potential investor to develop their lands and thus, in that case, the assessee and the other members would have paid the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage but also Regenesis PMCPL who offered NIL to nominal income are also get entitled to a share of the residual profit of the joint venture. 13.2 It is the submission of the Ld. Counsel for the assessee that the transaction is not at all a coulourable device since the company Regenesis PMCPL has paid tax on its income which is not marginal but substantial, the assessee has paid service tax for the brokerage so paid. It is also the submission of the Ld. Counsel for the assessee that as per the MOU Regenesis had agreed to explore potential investors, institutional investors and real estate funds etc. who may co-invest with KPDL to develop a big township project. Without the assistance of Regenesis PMCPL, which was a professionally managed company by hiring experts from real estate business, the assessee and the other members could not get such huge price and enmass transfer of the land. We find merit in the above submission of the Ld. Counsel for the assessee. From the various details furnished by the assessee in the paper book we find Regenesis had employed various persons with high educational qualifications and vast experience in the field of realty market since some of the emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enesis PMCPL has offered NIL to nominal income and the assessee claimed the brokerage to reduce the capital gain tax also does not find much force. 13.5 We further find merit in the argument of the ld. Counsel for the assessee that when the total capital gain earned by the assessee is Rs. 26.13 crores for the A.Y. 2006-07 to A.Y. 2008-09 and he has duly paid taxes thereon and the capital gain earned by the individual members of the group is Rs. 148.95 crores there was no justification on the part of the assessee to claim such a meagre commission for sale of the land which is hardly 0.5% to 1.5% as against the prevailing market rate of about 2% and above. In this view of the matter we find merit in the submission of the Ld.counsel for the assessee that the payment of brokerage at Rs. 25,96,400/- was an expenditure incurred wholly and exclusively in connection with the transfer of the land which is an allowable expenditure u/s.48(i) of the I.T. Act. We therefore set-aside the order of the CIT(A) and direct the AO to delete the disallowance made. ITA Nos.1356 and 1357/PN/2013 (Shri Rajesh Anirudha Patil) (A.Yrs. 2007-08 and 2008-09) : 14. The assessee in the above appeals has chall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d jewellery in the hands of not only the appellant but also all members of his family such as wife, children and parents. The order of the Assessing Officer, in my view, deserves to be upheld since it is extremely reasonable and also in accordance with the Board's Instruction on this subject. Accordingly, Grounds No. 1 to 3 for A.Y. 2009- 10 are treated as dismissed. 18. Ground No.4 : Under this ground, the appellant has only sought to reserve the right to amend, alter or add to the grounds of appeal. Since no such rights have been exercised during appellate proceedings, as such, at this stage, the ground is infructuous and may be treated as dismissed. 19. In consequence of the above, the appeal is treated as dismissed." 16.1 Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 17. After hearing both the sides we do not find any infirmity in the order of the CIT(A). Admittedly the AO has already given credit for explaining the jewellery belonging to the family members as per the instruction of the CBDT. The assessee could not bring on record anything more to prove that he has purchased the jewellery out of his withdrawals. In absence of the same, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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