Breitling Properties Pvt. Ltd.,, Pune vs Assessee

M/s. Breitling Properties Pvt. Ltd., Flat No.4, Madhusudan, B-79, Chotani Marg, Kalyani Nagar, Pune - 411014 .. Appellant PAN No.AACCR1724R

Vs.

DCIT, Circle-1(1), Pune .. Respondent

Appellant by : Shri Kishor Phadke Department by : Shri B.C. Malakar Date of Hearing : 02-06-2015 Date of Pronouncement : 17-06-2015

ORDER

PER R.K. PANDA, AM :

This appeal filed by the assessee is directed against the

order dated 16-11-2012 of the CIT(A)-I, Pune relating to

Assessment Year 2009-10.

2. The only ground raised by the assessee reads as under :

"The Ld.CIT(A) erred in law and on facts in confirming the addition of Rs.1,11,00,000/- made by Ld. AO to the taxable income of the appellant, on account of road access expenditure charged to the sister concern by way of debit note."

3. Facts of the case, in brief, are that the assessee is a

Private Limited company engaged in the business of property

dealing and development of land. It filed its return of income on

24-09-2009 declaring total income of Rs.98,75,400/-. During

the course of assessment proceedings the Assessing Officer

noted that as against sale proceeds of Rs.23,31,00,000/- the

assessee has shown the same at Rs.22,20,00,000/- after 2

reducing an amount of Rs.1,11,00,000/-. He therefore asked

the assessee to justify and explain regarding such reduction. It

was explained by the assessee that it has acquired land of about

63,460 sq.mtrs from Waghmare family for the purpose of setting

up SEZ in Hinjewadi at total cost of Rs.22,11,46,210/- which

includes all incidental expenditure. Since this land was

insufficient to develop SEZ he transferred the said land to Indo

Global Infotech City Pvt. Ltd. (in short 'IGICPL') which is a group

company for a consideration of Rs.23,31,00,000/- vide

registered sale deed on 28-08-2008. This sale is booked by the

assessee in its books of account at Rs.23,31,00,000/- on 29-08-

2008. On the same day, vide a journal entry the assessee has

reduced Rs.1,11,00,000/- from the aforesaid amount. It was

further submitted that when the assessee sold the said land

there was no approach road to this land. The assessee had an

understanding with IGICPL to provide an approach road for the

land, therefore, vide journal entry he reduced the amount.

3.1 However, the Assessing Officer was not satisfied with the

explanation given by the assessee. He observed that a perusal of

the agreement shows that nowhere it has been mentioned that it

is the responsibility of assessee company to provide

approach/access road to the land sold by it to IGICPL. There is

no documentary evidence suggesting that there was a liability on

the assessee to provide access road to the land. There is also no

evidence suggesting the working of such expenditure to the tune

of Rs.1,11,00,000/-. The Assessing Officer further noted that a

survey was conducted at the premises of the assessee and

during such survey no such document regarding this liability of

assessee was found. Therefore, he held that it is not clear as to 3

how the assessee has arrived at such an amount of liability. The

submission of the assessee that it was a mutual understanding

between the assessee company and IGICPL was not accepted by

the Assessing Officer.

4. Referring to the provisions of section 37(1) the Assessing

Officer held that in order to claim the expenditure as deductible

u/s.37(1) of the I.T. Act the expenditure must be laid out wholly

and exclusively for the purpose of business carried on by the

assessee. Referring to the decision of Hon'ble Supreme Court in

the case of Indian Molasses Company Pvt. Ltd. Vs. CIT reported

in 37 ITR 66 he submitted that considering the terms of sale in

the registered sale deed the Assessing Officer came to the

conclusion that this is not an allowable expenditure in the

hands of the assessee since there was no liability on the

assessee to incur such an expenditure. He observed that the

transaction of debiting sale by Rs.1,11,00,000/- in books of

account and reducing the sale consideration is not a genuine

transaction but is done with a view to reduce sales consideration

and accordingly to reduce taxable business profits. He

accordingly disallowed the claim of expenditure of

Rs.1,11,00,000/- out of the sale of Rs.23,31,00,000/- and added

the same to the total income of the assessee.

5. Before CIT(A) the assessee more or less reiterated the same

arguments as made before the Assessing Officer. It was

submitted that the transfer to IGICPL was recorded at

Rs.23,31,00,000/- on 28-08-2008 at a modest mark up of the

purchase cost of Rs.21.50 crores even after adjustment of

Rs.1,11,00,000/-. The net consideration remains at Rs.22.20

crores which is much more than the market value of Rs.10.73 4

crores as on 28-08-2008. This itself prove the bonafides of the

transaction. It was argued that as per the debit note dated 29-

08-2008 the liability of the approach road was determined at

Rs.2,80,80,000/- out of which the share of the assessee was

determined approximately at 40% of the above amount which

was rounded off to Rs.1,11,00,000/-. It was submitted that the

total road access cost was estimated by IGICPL and charged on

estimate basis in the expectation that land access should be

procured by IGICPL. However, IGICPL has been able to enter

into lease agreement with some owners of land bearing Survey

No.256 amounting to approximately Rs.60 lakhs till date. It was

argued that though the agreement with IGICPL did not mention

the debit note on account of road development, the nature of the

transaction was of commercial expedient in nature. For the

above proposition the decision of Hon'ble Madras High Court in

the case of CIT Vs. Associated Electrical Agents reported in 135

taxmann 12 was relied upon. It was further argued that IGICPL

has already reduced land cost in its books by Rs.1,11,00,000/-,

therefore, disallowance in the case of the assessee will lead to

double taxation. It was further argued that the aspect of non

genuineness of the expenditure is not proved. Further, liability

need not always be a contractual one. On the basis of

understanding between the two parties, both sides have passed

necessary accounting entries. The auditors have also duly

disclosed the necessary facts in Note No.4 of Schedule F of the

report. It was accordingly argued that the addition made by the

Assessing Officer should be deleted.

6. However, the CIT(A) was not convinced with the arguments

advanced by the assessee and upheld the addition made by the 5

Assessing Officer. While doing so, she observed that the sale

deed value was fixed by way of mutual consent between the two

parties. Neither the purchase deed of the land in question by

the assessee nor the subsequent sale deed carry any mention of

provision of road access by the assessee. She further noted from

the first and second schedule of the sale deed that the land has

been transferred "together with all privileges, easements and

appurtenances" and "together with all and singular yards, areas,

compounds, ditches, fences, trees, drain ways, paths, passages,

common gullies etc." Thus, the land has been transferred on as

is where is basis without any specific provision for providing the

access road. Further, the stamp duty of Rs.93,24,000/- as well

as penalty of Rs.11,18,880/- has been paid on 21-06-2011 by

IGICPL. Similarly, the cost of road cost if required under SEZ

Act would be the sole responsibility of IGICPL. Further, IGICPL

has more or less abandoned plans of developing the SEZ.

Therefore, it cannot be said to be a contractual obligation on the

part of the assessee. She further observed that as per the

working in the debit note dated 29-08-2008, 40% of the cost of

land plus road development cost has been debited to the

assessee's account. There is no justifiable reason furnished for

such apportionment. According to the Ld. CIT(A) this

apportionment would be understandable if the assessee was

40% partner in the SPV, and not in the facts and circumstances

of this case where assessee is contending that the liability for

such expenditure vests on him. She observed that even till date

IGICPL has not been able to successfully build or develop an

approach road. It has, despite best efforts, been able to only

lease some lands for getting some kind of access to the property

and incurred an expenditure of about Rs.60 lakhs till date. 6

Therefore, even otherwise, the expenditure claimed to have been

reduced from the sale consideration, Rs.1.11 crores is only a

contingent and not actual liability. In fact, it is seen that on the

basis of a request by IGICPL for withdrawal of formal approval

for setting up sector specific SEZ for IT/ITES at Hinjewadi, the

SEZ Board of Approval vide its 43rd meeting held on 18-11-2010

approved this request. Consequently, the issue of providing

approach road for SEZ becomes merely academic. The

argument that disallowance by Assessing Officer has led to

double taxation since IGICPL has already reduced land cost in

its books by an equivalent amount is also incorrect argument

since the sale deed value is recorded in the deed at Rs.23.31

crores and there can be no reason to deviate from that figure by

any of the two sides.

7. So far as the argument of the assessee before her that the

expenditure should be allowed in view of commercial expediency

even though the sale agreement with IGICPL dated 28-08-2008

did not contain any clause with regard to the debit note on

account of road development, she observed that a perusal of the

development agreement as well as the general power of attorney

in favour of the assessee show that as power of attorney holder

the assessee being developer has not been specifically authorised

or delegated the task of identifying as well as providing any

approach road. Further, the property in question stood

transferred on as is where is basis to the predecessor. After

going through the Memorandum and Articles of Association the

Ld.CIT(A) further observed that the assessee did not intend to

establish a SEZ. The purpose behind purchase of plots in

Hinjewadi was to construct buildings, offices and housing 7

complexes, which it later abandoned and instead transferred to

its sister concern. In view of the above she also dismissed the

argument relating to commercial expediency.

8. Aggrieved with such order of the CIT(A) the assessee is in

appeal before us.

9. The Ld. Counsel for the assessee strongly challenged the

order of the CIT(A). He submitted that it was a genuine

transaction. Since the assessee was unable to complete the SEZ

it transferred the land to the sister concern IGICPL. Since there

was no approach road the assessee agreed for bearing a part of

the approach road which was determined at Rs.1.10 lakhs. On

the basis of the debit note raised by IGICPL the assessee has

reduced the cost from the sale consideration and the amount is

payable to IGICPL. He submitted that just because the debit

note was not registered it cannot be rejected. He submitted that

the amount of Rs.1.10 crores has not entered into the coffers of

the assessee. Further, the CIT(A) without appreciating the facts

of the case rejected the claim of the assessee that the debit note

also becomes a part of the contract.

10. So far as the decision relied on by the Assessing Officer is

concerned, he submitted that the said decision is not applicable

to the facts of the present case. Referring to the decision of the

Hon'ble Madras High Court in the case of Associated Electrical

Agencies (Supra) he submitted that the Hon'ble High Court in

the said decision has held that payments made having regard to

commercial expediency need not necessarily have their origin in

contractual obligations. If an assessee carrying on business

finds that it is commercially expedient to incur certain 8

expenditure directly or indirectly, it would be open to such an

assessee to do so notwithstanding the fact that a formal deed

does not precede the incurring of such expenditure. Therefore,

when the expenditure was incurred indirectly to facilitate

carrying on of business or to preserve their existing source of

income with a view to safeguarding business and also increasing

their profit in future, such an expenditure is an allowable

deduction. He accordingly submitted that the amount of

Rs.1,11,00,000/- should be allowed as deduction.

11. The Ld. Departmental Representative on the other hand

heavily relied on the order of the CIT(A). He submitted that a

survey was conducted in this case u/s.133A of the Act on 24-03-

2009 where the assessee had offered an amount of Rs.1 crore as

additional income on account of provision written back. The

audit report is dated 31-04-2009. During the course of survey

no such document relating to such liability of the assessee was

found. The sale deed does not contain any obligation on the part

of the assessee either to bear a part of the cost towards the

approach road nor was there any agreement to this effect prior

to the sale deed. The assessee has transferred the land on as is

where is basis. Here, the transaction is between the 2 related

concerns. All these things clearly state that the so called debit

note is just a self-serving document and cannot be allowed as an

expenditure in the hands of the assessee. It cannot be deducted

from the sale consideration. He submitted that the case decision

relied on by the Ld. Counsel for the assessee is distinguishable

and not applicable to the facts of the present case. He

accordingly submitted that the order of the CIT(A) be upheld and

the ground raise by the assessee be dismissed.

9

12. We have considered the rival arguments made by both the

sides, perused the orders of the Assessing Officer and the CIT(A)

and the Paper Book filed on behalf of the assessee. We have also

considered the various decisions cited before us. There is no

dispute to the fact that the assessee vide sale deed

No.6547/2008 dated 28-08-2008 transferred the land to IGICPL

for a total consideration of Rs.23.31 crores. We find the

assessee vide journal entry dated 29-08-2008 reduced such sale

consideration by Rs.1.11 crores to Rs.22.20 crores that due to

its inability to provide access road to the land. We find the

Assessing Officer disallowed such reduction of Rs.1.11 crores

and made addition to the total income of the assessee on the

ground that none of the agreements relating to sale and

purchase of land mention this specific liability on the part of the

assessee. No documentary proof evidencing such liability was

produced before him nor any working was given as to how the

liability was arrived at. For the above proposition, he relied on

the decision of the Hon'ble Supreme Court in the case of Indian

Molasses Company Pvt. Ltd., (Supra). We find the Ld.CIT(A)

upheld the action of the Assessing Officer.

13. It is the submission of the Ld. Counsel for the assessee

that merely because debit note was not registered the amount of

Rs.1.11 crores which has not been received by the assessee

cannot be added to the total income. It is also the case of the

Ld. Counsel for the assessee that this debit note becomes a part

of the contract. From the copy of the conveyance deed, we find

the total consideration has been determined at Rs.23.31 lakhs.

The ledger account of Indo Global Infotech City Pvt. Ltd., to 10

IGICPL in the books of the assessee shows that the assessee has

started paying him money from December 2007. The first

instalment of Rs.1.50 lakhs was paid on 14-12-2007, the next

payment of Rs.1 crore paid on 17-12-2007, Rs.60 lakhs on 19-

12-2007, Rs.90 lakhs on 11-01-2008 and so on. No

documentary evidence was produced by the assessee from

December 2007 onwards till 29-08-2008 that assessee has to

bear a part of the expenditure towards approach road. No

document was found during the course of survey regarding the

liability of the assessee for such debit note or the liability on the

part of the assessee for such approach road. Under these

circumstances, we do not find any infirmity in the order of the

CIT(A) holding that the amount of Rs.1.11 crores cannot be

reduced from the sale consideration of Rs.23.31 lakhs. In view

of the above and in view of the detailed reasonings given by the

CIT(A) we find no infirmity in the same.

14. So far as the decision of the Hon'ble Madras High Court in

the case of Associated Electrical Agencies (Supra) relied on by

the Ld. Counsel for the assessee is concerned, we find the same

is not applicable to the facts of the present case. In that case,

two assessees were agents of a company, which manufactured

television sets. As per the assessees, 70 per cent of the

production of the company was marketed through them. The

company was promoted by persons whose relatives were

partners in the assessee-firms. However, the majority of the

shares in the company were not held by those promoters.

Substantial part was held by the public sector companies and a

large part by private shareholders and about 26 per cent by the

promoters. The managing director of the company belonged to 11

the promoters group. The assessees, following mercantile system

of accounting, claimed certain sums towards advertisement

expenses and towards the difference in price of the TV sets as

allowable expenditure and also produced before the Assessing

Officer the debit notes issued by the company. They also

produced before the Assessing Officer a letter from the said

company which was signed by the managing director of said

company. The caption of said letter was 'Sharing of marketing

expenses and revision of price for the year 1991-92' and said

letter recorded the facts that the television market was in a

recessionary trend; that sales and margin were under great

strains and that the assessees had appreciated that it would not

be appropriate to cut down the advertising and marketing

expenses in view of the competition getting tougher in the

declining market and, accordingly, the assessees had agreed

having regard to the past mutual benefits that they had obtained

from the company to share the financial strain that the company

was facing. The manner in which that strain was to be shared as

set out in that letter was that the assessees would share 50 per

cent of the advertisement expenses and the company itself would

meet the balance 50 per cent. The letter also recorded the

agreement reached earlier with the assessees that the assessees

would pay an additional price for TV sets. The Assessing Officer,

while accepting that the assessees maintained their books on

mercantile system, was, nevertheless, of the view that that was a

post-accounting exercise undertaken solely for the purpose of

reducing the taxable profit of the assessees and that the letter

issued by the company was not capable of being regarded as an

agreement under which an enforceable liability was cast on the

assessees. He, therefore, disallowed the sums. On appeal, the 12

Commissioner upheld the view of the Assessing Officer. On

further appeal, the Tribunal held that the expenses claimed by

the assessees were allowable, as they were incurred indirectly to

facilitate the carrying on of the business or to preserve their

existing source of income with a view to safeguard the business

and also increase their profits in future. Under such

circumstances the Hon'ble High Court upheld the order of the

Tribunal.

15. However, in the instant case there is no past mutual

benefit. This is only a one time sale. There is no continuity of

sale to the sister concern so as to facilitate the carrying on of the

business or to preserve their existing source of income with a

view to safeguard the business and also increase profits in

future.

16. As already observed earlier neither there is an agreement

for bearing the part of the cost of the approach road nor

anything mentioned in the sale deed about incurring of any

expenditure towards the approach road. The sale was on as is

where is basis without any specific provision for providing the

access road. The schedule in the sale deed also mentions the

land has been transferred "together with all privileges,

easements and appurtenances" and "together with all and

singular yards, areas, compounds, ditches, fences, trees, drain

ways, paths, passages, common gullies etc." Therefore, the

journal entry passed by the assessee reducing an amount of

Rs.1,11,00,000/- in our opinion is only to reduce the taxable

income without any enforceable liability on the part of the

assessee. The argument of the Ld. Counsel for the assessee that

the other side has also reduced the purchase price by equivalent 13

amount is immaterial under the facts and circumstances of the

case. Since the sale deed mentions the sale price of

Rs.23,31,00,000/- and there is no such obligation on the part of

the assessee to bear any part of the expenditure towards the

approach road as per the sale deed or as per any agreement,

prior to the sale, therefore, the same in our opinion cannot be

allowed as a deduction from the sale price. Even if the assessee

bears a part of such expenditure, it will be out of its own capital

and cannot be an allowable expenditure in the hands of the

assessee. In this view of the matter and in view of the detailed

reasoning given by the Ld.CIT(A), we find no infirmity in her

order. Accordingly, the same is upheld and the ground raised by

the assessee is dismissed.

17. In the result, the appeal filed by the assessee is dismissed.

Pronounced in the open court on 17-06-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 17th June, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A)-I, Pune 4. CIT-I, Pune 5. The D.R, "B" Pune Bench 6. Guard File

By order

// True Copy // Senior Private Secretary ITAT, Pune Benches, Pune