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TMI Blog2020 (1) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No. 1731, 1732, 6114, 2001, 2002, 5827/Del/2014, ITA No. 913, 914, 1253/Del/2017 - - - Dated:- 26-12-2019 - Sh. H. S. Sidhu And Dr. B. R. R. Kumar, JJ. Appellant by : Sh. I. P. Bansal, Adv. Sh. Vivek Bansal, Adv. Respondent by : Ms. Nidhi Srivastava, CIT DR ORDER Dr. B. R. R. Kumar, j. The present appeals filed by the assessee are directed against the orders of the ld. CIT (A)-1 dated 13.01.2014, 28.08.2014 orders of the ld. CIT (A)-23 dated 22.12.2016 and the appeals filed by the revenue are directed against the orders of the ld. CIT (A)-1 dated 13.01.2014, 28.08.2014 and order of the ld. CIT (A)-23 dated 22.12.2016, New Delhi . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent of ₹ 56,79,06,899/- for the relevant assessment year, in respect of parties from whom confirmations were not received before the conclusion of assessment proceedings. 1.2 That the CIT(A) erred on facts and in law in not admitting and considering the confirmations received from 23 parties on the ground that- (i) the appellant had exhausted opportunity to file the said confirmations at an earlier stage; (ii) Revenue had no opportunity to examine/rebut the said evidences. 2. That the CIT(A) erred on facts and in law in holding that the disbursement of income as per the revenue sharing agreement with EMLL, was not diversion of income by overriding the title, but application of income. 2.1 That the CIT(A) erred on facts and in law in not appreciating that in essence, under the arrangement between the parties, the entire project was awarded and executed on the strength of EMLL and EMLL had, in fact, paid 75% of the total consideration to the appellant. 2.2 That the CIT(A) erred on facts and in law in not allowing deduction of expenditure incurred towards services obtained fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the disbursement of income as per the revenue sharing agreement with M/s Emmar MGF Land Ltd. (hereinafter referred to EMLL ), was not diversion of income by overriding the title, but application of income. 2. That the CIT(A) erred on facts and in law in not appreciating that in essence, under the arrangement between the parties, the entire project was awarded and executed on the strength of EMLL and EMLL had, in fact, paid 75% of the total consideration to the appellant. 3. That the CIT(A) erred on facts and in law in not allowing deduction of expenditure incurred towards services obtained from EMLL, at 25% of revenue, actually paid as per the terms agreed between the appellant and EMLL, and instead allowing deduction of cost/expenses incurred by EMLL in providing support to the appellant. 4. That the CIT(A) erred on facts and in law in adopting its own method of computing reasonable expenditure that ought to have been incurred by the appellant in relation to services obtained from EMLL, which is not permissible in law. 7. In ITA No. 914/Del/2017, the assessee has raised fol lowing grounds: 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in deleting the addition of Rs.₹ 100.54 crores made by the Assessing Officer on account of Inflated/Bogus Construction Cost . 3. On the facts and circumstances of the case, the ld. CIT (A) has erred in law in deleting the addition of ₹ 211,23,81,220/- made by the AO on account of Sham agreement. 4. On the facts and circumstances of the cases, the ld. CIT (A) has erred in law in determination of business income for A.Ys. 2009-10 and 2011-12. 5. On the facts and circumstances of the case, the ld. CIT (A) has erred in law in deleting the addition of ₹ 6,54,80,690/- under the head income from other sources capital gain. 10. In ITA No. 5827/Del/2014, the revenue has raised following grounds: 1. The order of ld. CIT (A) is not correct in law and facts. 2. On the facts and circumstances of the case, the ld. CIT (A) has erred in deleting the addition of ₹ 49,91,82,918/- out of total addition of ₹ 51,60,00,000/- made by the Assessing Officer on account of Inflated/Bogus Construction Cost . 3. On that facts and circumstances of the case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 2009-10 AY 2010-11 AY 2011-12 Total 1 M/S Adon SYSTEM Solution Pvt. LTD, A- 28 Sector 16, Noida -201307 6,87,228 - - 6,87,228 2 M/S Amrit Stones, Suppliers Sastri Nagar Colony, Head Post Office Road, Jalore 13,57,096 51,99,597 - 65,56,693 3 M/s B.N. Traders, 249, commercial complex, Cycle Market, Jhandewalan, New Delhi-110055 1,74,24,033 1,74,24,033 4 M/S Daga Trading Company Pvt Ltd Y- 162, Loha Mandi Naraina, New Delhi- 110028 4,86,90,325 4,86,90,325 5 M/s Dees Gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/S euro Ceramics Ltd, Boston House, Ground Floor, Suren Road, Chakala, Andheri (e) Mumbai - 1,93,'56,645 9,05,972 2,02,62,617 15 M/S. Farewood Industries Ltd, 4/605, Old MahabalipuramRoad, Opp Nehru Nagar Perungudi, Chennai 600096 - 5,75,66,590 11,93,243 5,87,59,833 16 M/S Furncraft, 2 nd Floor, 125, Shahpurjat, New Delhi-110049 - 3,74,12,218 3,74,12,218 17 M/s MK-Furncraft Pvt Ltd 2nd Floor, 125, Shahpurjat, New Delhi-110060 - 1,72,91,865 23,64,494 1,96,56,359 18 M/S H8i Rjohnson (i) Ltd 501, Surya Kiran Building, k. marg, Connaught Place, New Delhi-110001 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 20,04,181 - 20,04,181 27 M/s Rockland Developers Engineers, D-8, Basement Street No.1 Laxmi Nagar DELHI-110092 - 38,48,000 - 38,48,000 Total(B) 23,69,919 1,86,91,655 9,27,796 2,19,89,370 Total(A+B=C) 17,76,06,532 56,79,06,899 3,64,85,47 78,19,98,908 Add: Transaction pertaining to FY 2007-08 (D) - 4,75,95,711 Total Addition as per CIT(A) order(C+D) 82,95,94,619 14. The ld. DR, on the other hand, argued that the revenue never had the opportunity of examining the confirmations filed at a lat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the upfront reserve price at ₹ 300 crore was not changed. An addendum to the RFP was issued on 08.06.2007. Only two bids were received in response to the RFP - from M/s DLF Ltd. and M/s EMAAR MGF Consortium. The DLF bid was rejected in the technical evaluation. Emaar-MGF was awarded the contract at upfront payment bid of ₹ 321 crore. 17. The assessee company is a special purpose vehicle (SPV) incorporated primarily to execute the CGV project at New Delhi for the purpose of housing the athletes and officials participating in the CWG 2010. The promoters of the assessee company and its share-holding originally at the time of bidding for the RFP for CWG 2010 (letter dated 15.06.2007 addressed to DDA) were as under: (i) Emaar Properties PJSC, Dubai - 26% (ii) Emaar MGF Land Private Limited - 25% (iii) MGF Developments Limited - 25% (iv) Discovery Estates Limited - 24% 18. Thus, at incorporation, 51% equity was owned by Emaar group of Dubai and 49% by the MGF group of Delhi. Subsequently, the equity structure of the SPY underwent some modification and the equity ownership became as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. Based on the above calculation, the assessee based on accounting standard 9 recognized revenue of ₹ 317.71 crores for the relevant assessment year. The Assessing Officer challenged the estimated construction cost of ₹ 1027.06 crores. Based on the Shunglu Committee report, the AO held that the entire construction work was subcontracted to an entity namely, Ahluwalia Construction India Ltd. (ACIL) at ₹ 2875 per sq. ft. Based on that, the AO held that the total construction cost cannot exceed to ₹ 752.35 crores and accordingly estimated project cost was worked to ₹ 1322.71 crores against ₹ 1597.43 crores estimated by the assessee. Due to this reduction in estimated costs, the Percentage completion was worked out to 69.32% instead of 57.40% computed by the assessee. Accordingly, the revenue of the assessee was reworked to ₹ 511.59 crores by stating that the assessee has under stated its revenue by ₹ 193.87 crores. Hence, the Assessing Officer made an addition of ₹ 87.97 crores to the income of the assessee. 21. After relying on Shunglu Committee Report, the AO observed that the Assessee has sub-contracted the enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. The maximum construction cost in accordance with the development agreement which was to be borne by Emaar MFG was ₹ 2875/- per Sq. feet only. If the same rate is applied to the total plinth area of 26,16,878.60 Sq. feet as mentioned in the Evaluation Committee recommendations, the total construction cost works out to ₹ 752.35 Crs only. The Evaluation Committee has however considered the construction contract cost at ₹ 1168.21 Crs as worked out by the financial expert K.N Goyal Co. Thus, the construction cost considered was wrongly padded by ₹ 415.86 Crs (i.e. ₹ 1158.21 Crs - 752.35 Crs). C. The total project cost, therefore, should have been ₹ 1224 Cr instead of ₹ 1639.86 Crs as worked out by the HLC consultant. D. Emaar MGF Construction Private Ltd. has borrowed funds from SBI, Overseas Branch Javvahar Vyapar Bhavan, New Delhi. In the proposal submitted, the total project cost has been shown at ₹ 1264 Cr, which corresponds to the project cost computed by HLC's consultant after considering the construction cost of ₹ 752.35 Cr. It is pertinent to note that in the projections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction Cost 7,523,500,000 4,864,894,906 Finance Interest of CWG 826,289,133 482,755,297 Rs Subvention Interest 190,153,059 - Bank Guarantee / LC Charges 58,535,414 23,497,769 Interest from EMGF 335,939,104 258,569,803 Admin Overhead 89,476,232 28,347,214 Contingencies 323,068,881 Total 13,227,199,756 9,170,320,049 POC (Cost Incurred/Estimated Cost) 9,170,320,049/13,227,199,756 = 69.3293% Agreement executed ₹ 737.91 crores Revenue to be recognized: 69.3293% of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rguments before us, the ld. DR submitted her arguments in writing which is as under: Construction of excess FAR The Site selected for the CWG village had an approved FAR of 1.67 initially, which was increased to an FAR of 2.00 by the Delhi City Master plan 2021 which came into force effective form 07th February, 2007. He Project was, thus, approved with a built-up area of 2,05,140 square meters by the Building Section of DDA on 18th March, 2008. (para 4.26 of the report). However, an actual FAR of 2,30,689.33 square meters was built as per the plan submitted by Emaar MGF for obtaining Completion certificate from DDA. The Developer, therefore, constructed an area of 25,549.33 square meters in excess of the approved plans. This was almost 12.5% more than the approved FAR. Excess Cost of Project The assessee company adopted percentage of completion method (POCM) of accounting for recognition of revenue from real estate project being executed i.e. CWGV project. As per the POCM method of accounting, the revenue of project is recognized based upon the percentage of completion achieved at the end of the financial year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction (India) Ltd. (Hence forth referred to as ACIL). In fact, it is seen that the said works contract was executed between Emaar MGF Construction Pvt. Ltd. and Ahluwalia Contracts (India) Ltd. The assessee has applied for loan to State Bank of India and the proposal submitted has been examined. The TDS returns of the assessee for the relevant period and the Project Report submitted by the Developer to SBI while seeking loans were also examined. Marshalling of Facts: The entire construction and development work of Residential Facility and Residential Apartments was awarded to Ahluwalia Contracts (i) Ltd. by Emaar MGF Construction Private Ltd. vide project Development Agreement dated 10th July 2008, on cost price basis with a Target Price Cap of ₹ 2875/- per Sq. Ft. on actual achievement of FAR. It was specifically agreed upon vide clause 6 of the contract that in no case the price of ₹ 2875/- shall exceed at the completion of the project for entire scope of work. The contract price included payment for supply of all labour, equipment, materials, plant machinery, tools, transportations, framework, scaffolding, construction of civil works ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracts (I) Ltd. In order to further validate the above discussed date pertaining to ascertainment of actual construction cost, position regarding actual payments made/ bills provided for by Emaar Constructions (P) Ltd in respect of Ahluwalia Contracts (I) Ltd, were verified by HLC's consultant from the TDS Returns filed by Emaar MGF Construction (P) Ltd. Scrutiny of T.D.S Returns of FY07-08,08-09 09-10 revealed that gross bills raised by Ahluwalia Contracts (I) Ltd to Emaar Contructions(P) Ltd amounted to only approx. ₹ 600 Crores which is way below the projected construction cost of ₹ 1168.21 Crores reckoned in the note put up to the evaluation committee. 24. Rebutting the above arguments, the ld. AR submitted that there have been more enlargement in the scope and specification in cost as per the estimate and as per the execution which is as under: S.No. Description of item PDA / RFP As per Execution 1. Toilets - Flooring Cladding Imported Ceramic Tiles / V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Concrete Blocks and Fly Ash Bricks are being used. 12. Sky Lights Poly carbonate sheet Laminated Glass 13. Modular Kitchens Not mentioned Provided in all kitchens 14. Lifts 2 in each tower Addl. Provided 15. Basement Ventilation System Not considered System is provided for huge basement 16. Basement Ventilation Tunnel Not considered Addl. Provided 17. Other MEP Items for Addl. Basement Area 781466 Sft System is provided for huge Basement of 1543177 Sft. 18. Soil There was no provision or disclosure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the Budgetary expenditure on the project is ₹ 1597.43 crores as on 31st March 2009 and actual expenditure upto this date is ₹ 917.03 crores. This will yield a ratio for POCM at 57.40% (₹ 917.03 / 1597.43 X 100 = 57.40%). In this budgetary estimate of expenditure construction cost has been taken at ₹ 1027.06 crores. Thus, other budgetary cost of the project comes out to be ₹ 570.37 crores (₹ 1597.43 - ₹ 1027.06). However, by adopting cost of construction at ₹ 2875 per square feet, total cost of construction has been worked out by AO at ₹ 752.34 crores. The same amount has been taken as budgetary estimate by him and included in the other cost to work out total budgetary cost at ₹ 1322.71 crores (₹ 752.34 + ₹ 570.37), this figure has been used by AO as denominator to determine ratio of POCM at 69.32% (₹ 917.03 / 1322.71 X 100 = 69.32%). It has lead to a high ratio of allocable revenue which is incorrect as per accounting principles because one has only to adopt budgetary estimate of total expenditure and not part of the budgetary expenditure. 28. It was further argued that the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount for alleged work carried out in the project, which has not been accepted by the appellant. The appellant, on the other hand, has raised the counter claim on ACIL for refund of the additional; payments made to ACIL on account of, inter alia, short adjustment of owners material supplied by the appellant to ACIL and liquidated damages on account of defective / deficient work carried out by ACIL along with interest thereon, for which the appellant had to incur extra cost to remedy the defective work done by AGIL and to pomp lefty the pending/unfinished work, so as to hand over the Project in time. It is a matter of record that the appellant had incurred the aforesaid additional costs, which resulted in increase in the overall cost of the Project, which was duly considered by the Financial Consultant appointed by the DDA before purchasing additional flats from the appellant at ₹ 11,000 per sq. ft., while bailing out the appellant from financial distress and providing funds to the appellant, in order to complete the project within the stipulated time limits. The said fact was also accepted by the Labour Commissioner in the assessment order passed, while levying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and perused the material available on record. 34. Primarily, we find that the addition has been made solely based on the Shunglu Committee Report. 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. The issue of the purchase of materials is also dealt in this order while dealing with the ground taken up by the assessee relating to purchase of mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. System of accounting adopted by the assessee cannot be rejected on the grounds that gross profit disclosed by the assessee was low. It is also a fact and as submitted by the revenue that the assessee had constructed 230,689.33 sq. mt. against the approved built up area of 205,140 sq. mt. In that case, it is a natural corollary that the cost incurred for construction of the plots would be more than the estimated cost. The fact that the DDA purchased the flats for ₹ 11,000 per sq. ft. and sold in auction @ ₹ 24,000 per sq. ft. has been ignored by the Assessing Officer and took a fixed stance that the cost of construction cannot be more than RSs2875 per sq. ft. 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. The re-computation and the consequent addition made by the Assessing Officer is hereby directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ames Village to Delhi Development Authority. The project was located within the revenue limits of Village Chirag Janubi, near Akshardham Temple at Noida crossing on land measuring about 11 hectres. iv. The contract was a project of great national importance and consequently DDA decided to develop this project under a Public Private Partnership ( PPP ) Model. The partnership in this prestigious project meant a great leap for any private developer, not only commercially but also as demonstration of its quality and execution capabilities. v. The DDA released a Request for Proposal on 2007. It detailed the techno-commercial requirements of the project that were supposed to be met by the private partner. The salient features of the minimum commercial requirements to be fulfilled by the bidder were as under: Pre-bidding stage a) Bid security of ₹ 10 crores to be deposited b) The bidder should have a net worth of ₹ 100 crores c) The reserve price for the bid was ₹ 300 crores Post-bidding stage a) Technically qualified bidder to provide 25% of the quoted upfront ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e letter addressed by the consortium to DDA and also mentioning that assessee company is a legal form of consortium is enclosed as Annexure L. x. At the time of arriving at the understanding to create the legal entity of the consortium i.e., assessee company it was mutually agreed among the members of the consortium that M/s Emaar MGF Land Private Limited will provide entire finance and guarantees and in lieu thereof it will take 25% of the revenue out of the sale proceeds of the project. In order, to give a legal shape to this understanding a Collaboration Agreement was drafted and executed on 07.04.2008. 37. EMCPL entered into a Collaboration Agreement dated 7 April, 2008 with EMLL. The snippets of the agreement between EMCPL (the assessee) and EMLL are as under: i. That it is agreed between the parties that the total estimated cost of the above stated project will be in the range of ₹ 1550 to 1650 crores spread over a period of three years. ii That the Party of the second part has agreed to secure initial and vital funds requirements of the project by way of Equity Capital Contribution and also by way of Quasi Equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried compensation to the party of the second part by the party of the first part will be mutually decided only after the completion of such Bulk/Institutional sales . MISCELLANEOUS a) That it is mutually agreed that there exists clear demarcation of the roles and responsibilities of the parties of this collaboration; the party of the first part being exclusive developer and executor and the party of the second part being financial collaborator for successful completion of the project. From the terms of the agreement, there is a clear demarcation of the roles and responsibilities of the assessee and EMLL whereby the assessee is an exclusive developer and executor and EMLL is commercial and financial collaborator. The cost estimated for the CWG Project was to range between ₹ 1550 to 1650 crores. The estimated cost was to spread over a period of three years. Referring to the pre-conditions mentioned in the bid, M/s Emaar MGF Land Limited agreed to secure initial and vital fond requirements of the project by way of Equity Capital contribution and also by way of Quasi Equity in the shape of deposits / advances for which it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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. At the time of bidding itself, EMLL provided funds to the extent of ₹ 221 crores which was used to pay ₹ 321 crores to DDA. Monies paid by EMLL are as under: Date Amount in INR Purpose 03-M-07 25,50,00,000 Amount Paid for DDA as Earnest Money for Commonwealth Game Village 04-Aug-07 60,37,50,000 amount Paid for DDA Selection of Project Developers for construction of residential Project of Commonwealth Games Village 04-Aug-07 60,00,00,000 amount Paid for DDA Selection of Project Developers for construction of residential Project of Commonwealth Games Village 14-Jun-07 10,00,00,000 Amount Paid for sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the bid requirement, EMLL paid original bid amount along with a bank guarantee of ₹ 400 crores which was also arranged by EMLL either directly or by providing corporate guarantee. iii. Further, it is also important to note that Board of Directors (BoD) of EMLL has approved and agreed to provide financial support to the assessee company as and when required. iv. EMLL stood guarantor for loans from the financial institutions for the assessee EMCPL, where the guarantee in the form of Corporate Guarantee was given by EMLL. v. EMLL took the commercial risk, also related to delay in completion of project, drop in sales and financial crunch. vi. EMLL made direct intervention by way of infusion of capital/quasi capital as and when EMCPL faced a credit crunch from lenders side. The contribution made by EMLL as on March 31, 2009 stood at ₹ 270 crs. vii. The DDA invoked, bank guarantee of . 183 crs and EMLL provided the following contribution to meet the obligation of EMCPL towards the guarantor banks: ₹ 11,41,000 on October 30,2010; ₹ 29,07,00,000 on November 4, 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the contents of agreement dated 07.04.2008. In spite of repeated opportunities, the assessee failed to furnish the agreement dated 08.05.2008. (iv) The holding company was already paid interest cost towards deployments of funds and hence adequately compensated. (v) Inherent and associated risks claimed by the holding company are only a bogey. It is not understood what kind of Inherent and associated risks embedded, in the project are being assumed by the holding company. (vi) The holding company is virtually holding entire share holding of assessee Company. It was responsible for arranging the funds for the CWGV project. By virtue of being owner of the assessee company the holding company has already assumed the inherent risks associated with the project. (vii) The manner of accounting treatment of the said, sum of ₹ 105,90,46,740 is also dubious as much as the same has been reduced from the turnover instead of debiting it separately in the P/L account. (viii) No TDS has been deducted from this payment and therefore even the provisions of section 40(a)(ia) of the Act would get attracted. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counter arguments of the AR 1. Reliance upon agreement dated 07.04.2008 is an afterthought. This document never existed and surfaced for the first time during present assessment proceedings. The cop of the agreement has been provided/submitted to the AO during the course of assessment proceedings on 29.11.2011. There was no earlier occasion for the assessee to submit/provide the same. On the other hand, the agreement was executed on a stamp paper which was purchased prior to 07.04.2008 and the agreement was signed by the parties on that date. An affidacit of the director of the holding company to this effect has also been executed. 2. Agreement dated 07.04.2008 is sham and transactions between assessee company and its holding company involving transfer of 25% of the gross revenue is nothing but sham and is arranged to reduce tax liability (of the assessee company) and is a colourable device. There is no material to show that the agreement is intended to reduce tax liability of the assessee company. In fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) to keep the contractee i.e., DDA appraise of the development and ensure fulfillment of the terms of contract (iii) to stand as a guarantor before DDA and the financial institution (iv) the contract was awarded on the basis of goodwill of the holding company and fulfillment of technical qualification in the bid which, only holding company possessed.. The assessee was a newly created and hence could not boast of experience and technical qualification required to bid in the contest (v) Bid security and reserve price could only be provided by the holding company (vi) Net worth required to compete in the bid could be possessed only by the holding company (vii) Only holding company was capable of fulfilling post bidding compliance as stated above (In the statement of facts) Further, the cost of capital provided by the holding company to the assessee was not commensurate with the market rate. The rate of interest on which money could be borrowed ranges from 15% to 24% whereas the holding company charged only a nominal rate ranging from 5% to 7%, Hence, it is incorrect to draw inference that holding company was adequately compensated. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of its technical competence and initial security in bid furnished to the DDA. Without involvement of the holding company in the consortium, the project could not have been won from the DDA. While stating the facts above, we have already highlighted as to what services have been, rendered and what role the holding company has played prior to bidding and after bidding. At the cost of repetition, it is submitted that the holding company had played following role: (i) Pre-bidding stage i. Bid security of ₹ 10 crs to be deposited ii. The bidder should have a net worth of ₹ 100 crs iii. The reserve price for the bid was ₹ 300 crs (ii) Post-bidding stage i. Technically qualified bidder to provide 25% of the quoted upfront amount less any bid security (EMCPL bid ₹ 321 crs) ii. Technically qualified bidder to provide balance 75% of the quoted upfront amount within 3 days of award of the bid (EMCPL bid ₹ 321 crs) iii. Technically qualified bidder to provide performance guarantee of ₹ 400 crs. iv. Seed capital/working capital for the project where estimated cost was ₹ 1550 crs to ₹ 1650 crs 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hared the revenue. The revenue sharing is on account of the guarantees and overall risks undertaken by the holding company on failure of the Assessee, either on incompletionof the project, or delay in the project, or incurring of losses, or failure to collect revenue by disposing of flats or due to some other reasons. Since the assessee did not have assets and it was the net worth of holding company, on whose guarantee, the DDA financial institutions were satisfied, the revenue sharing by the holding company was even otherwise, justifiable. It is not for charging the lower rate of interest and thereafter compensating it by revenue sharing, but it is the case of taking risk and guarantees and arranging the finance and taking risk therefore, the holding company shared the revenue. In fact, the creation of the assessee but for commercial expediency has pave the way for payment of taxes, which could have otherwise avoided, if the project was to be completed by the holding company on its own. 10. The transaction is hit by provisions of Section 40a(2)(b). Relied on the ld. CIT (A) s order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ched the assessee as his income. Obligations, no doubt, there ape in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged m apply out of his income and am amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow, it is the first hind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o transfer dated July 24, 1962, ruled out and totally excluded the application of section 60. There appeared to be clear inconsistency between the assessment of capital gains on the transfer of the factories on the one hand and the finding of accrual of income since the computation of capital gains were affected by treating the gross amount of consideration as the sale price. The Income-tax Officer thus by implication accepted the profits as belonging to the transferee and not the transferor-otherwise, the net amount paid alone ought to have been taken as the sale price. The High Court's judgment, therefore, not only suffered from apparent inconsistency but on a totality of the situation was inherently Contradictory. The profits arising from the working of the two cement factories situated in Pakistan for the year October 1, 1962 to September 30, 1963, and for the year October 1, 1963 to September 30, 1964, were not taxable in the hands of the assessee-company. The Hon ble Kerala High Court in Sarala Devi (K.) (Smt.) Vs. Commissioner of Income-tax 1996 222 ITR 211 (Ker) held that it nature of obligation which is a decisive factor. It held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. The revenue s contention that the entire transaction is sham and aimed at only to divert the income to EMLL cannot be said to be correct based on the facts and the judicial pronouncements. We have considered the contributions by the holding company which is as under: Pre-bidding a) Bid security of ₹ 10 crores to be deposited b) The bidder should have a net worth of ₹ 100 crores c) The reserve price for the bid was ₹ 300 crores Post-bidding d) Technically qualified bidder to provide 25% of the quoted upfront amount less any bid security (EMCPL bid ₹ 321 crs) e) Technically qualified bidder to provide balance 75% of the quoted upfront amount within 3 days of award of the bid (EMCPL bid ₹ 321 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HDFC Ltd. 50 - 50 HSBC - 50 50 Corporate Guarantee of EMLL Land Total 250 400 650 51. Thus, keeping in view the entire factum of the case, we hereby hold that the payment made to EMLL is obligatory and diversion of income by overriding title. The revenue contention that this is a sham transaction cannot be accepted in view of the contribution made by the EMLL and also keeping in view that the amounts have been duly offered to taxation in their respective entities. The ground no. 3 of the appeal of the revenue is dismissed and ground no. 2 of the appeal of the assessee is allowed. 52. The ground no. 4 of the revenue appeal: The assessee has challenged the addition made by the AO by treating the Interest Income as income from Other Sources instead of income from Business thereby not allowing the assessee to reduce the same from the project co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax under the head other sources, the interest expenditure will increase and the business income of the appellant would get reduced accordingly. The only business of the appellant company is the CGV project and all funds are raised for and realized from this project only. Therefore, temporary deployment of funds in financial investments and income generated therefrom is inextricably linked to and a by-product of the business of the appellant. Therefore, such income is to be treated as part of business income of the appellant. There is no basis or justification to charge such income under the head other sources. Further, there would not be any impact on the taxable income of the appellant as either the income under the head income from business will decrease or the increased business loss will be set off against income from other sources u/s 71. Accordingly, these grounds of appeal are allowed. The addition made is deleted. 58. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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