Per Bench These are appeals by the assessee against the common order dated 13.11.2013 of the CIT(Appeals)-VI, Bangalore relating to assessment years 2007-08 to 2011-12. ITA Nos.152 to 156/Bang/2014 Page 2 of 17
2. The only issue that arises for consideration in all these appeals is as to whether the CIT(Appeals) was justified in sustaining the order of the Assessing Officer in disallowing the payments made by the assessee to Bruhat Bangalore Mahanagara Palike (BBMP), while computing the income from business of letting out of various shops in Madivala Commercial Complex. The facts that are necessary for the purpose of adjudication of the aforesaid common issue are as follows.
3. The assessee is a company, which carries on business as jewellers. There was a search action u/s. 132 of the Act in the case of the assessee on 2.9.2012. In view of the provisions of section 153A of the Act, notices were issued by the AO to assess/reassess the total income of six assessment years immediately preceding the assessment year relevant to previous year in which search is conducted. In the course of assessment proceedings for the A.Y. 2007-08 to 2010-11, the AO noticed that the assessee had declared income from business, which also included income from letting out of commercial complex at Madivala, which the assessee had taken on lease from BBMP. As already stated, the assessee was in regular business of trading in jewellery. The assessee entered into a lease agreement with BMP on 18.11.2005 in respect of the premises known as Madivala Commercial Plaza, Bangalore. The lease was for a period of 30 years from 18.11.2005. The rents payable for the lease was to be paid in quarterly rests, starting from November, 2005. The rents payable for the period from Nov. 2005 to May, 2007 has some bearing on the case and the ITA Nos.152 to 156/Bang/2014 Page 3 of 17 same is set out in the lease deed dated 18.11.2005 in Schedule 2 as follows:- Sr.No. Concession payment Concession Payment Amount (Rupees) 1 November 2005 6990000 2 February 2006 6990000 3 May 2006 6990000 4 August 2006 6990000 5 November 2006 7339500 6 February 2007 7339500 7 May 2007 7339500
4. The property taken on lease consisted of land to the extent of
8161.90 sq.m. and the structure thereon from 1 st to 7 th floors built on the said land, excluding the ground floor. The assessee was given a licence agreement to refurbish, operate and maintain the building for the period of lease. The assessee also had a right to sub-let the premises taken on lease.
5. The assessee sub-let the premises taken on lease from BMP to a company by name Kausthubha Projects Pvt. Ltd. (KPPL). The terms of the sub-lease are contained in the agreement dated 1.3.2006. As per this agreement, the premises taken on lease by the assessee from BMP was sub-let to KPPL. The monthly rents payable by KPPL is set out in Schedule 2 to the agreement dated 1.3.2006. It is not in dispute that the rents payable by the sub-lessee to the assessee are much greater than ITA Nos.152 to 156/Bang/2014 Page 4 of 17 what the assessee as a lessee had to pay to BMP. The sub-lease was to commence from the date of agreement and was for a period of 29 years.
6. As we have already seen, the payment of rent by the assessee to BMP was to commence from November, 2005. The first quarterly payment ought to have been made by the assessee on or before 25.11.2005. The assessee, however, made the payment of first quarterly rent only on
20.4.2006. The assessee did not make payment of the rents upto
30.5.2008. On 30.5.2008, the assessee and BMP entered into the supplementary agreement whereby the arrears of rent payable by the assessee to BMP which was quantified at a sum of Rs.1,16,50,000 towards arrears of rent for the period from Nov., 2005 to March, 2008 together with interest on such arrears of Rs.23,30,000, in all amounting to Rs.1,39,80,000 was agreed to be paid by the assessee. The sum of Rs.1,16,50,000 was agreed to be paid in 20 equal quarterly instalments, as per the time schedule given in Schedule 2 of the original agreement. The sum of Rs.23,30,000 was also agreed to be paid by the assessee to BBMP.
7. Consequent to the supplementary agreement, the rents payable by the assessee to BMP as per the original agreement and as per the supplementary agreement were as follows:- ITA Nos.152 to 156/Bang/2014 Page 5 of 17 Assessment Year 2007-08 2008-09 2009-10 2010-11 2011-12 Rent as per original Lease deed 2,86,59,000 3,00,91,950 3,15,56,548 3,31,76,376 3,48,35,194 Rent as per Revised deed 2,93,22,842 3,19,24,476 3,50,91,548 3,66,71,376 3,83,30,194
8. Though the sub-lease of the premises was to commence from 1.3.2006, the payment of rent was to commence only from the month of Apr. 2007. To this effect, there was an agreement between the assessee and KPPL dated 24.3.2006. Therefore, for the A.Y. 2007-08, the assessee did not receive any rent from KPPL from the tenant.
9. The AO after analyzing the transactions found that the rents paid by the assessee to BBMP was much greater than the rent that it received from KPPL for the very same property. In this regard, the AO has drawn the following chart:- A.Y. (1) Concession payment amount payable/paid to BBMP (Rs) (2) Receivable/received from KPPL as per original and supplementary agreement (Rs.) (3) Difference (Rs.) (4) Amount claimed in the return of income (Rs.) (5) 2006-07 - - - - 2007-08 29322842 - 29322842 29322842 2008-09 31924476 30000000 1924476 31924476 2009-10 35091548 31500000 3591548 35091548 2010-11 36671376 33075002 3596374 36671376 2011-12 38330194 34728750 3601444 38330194 ITA Nos.152 to 156/Bang/2014 Page 6 of 17
10. The AO called upon the assessee to show cause as to why the aforesaid excess claim of expenditure relating to payments made to BBMP should not be disallowed. The assessee, in reply to the query of the AO, pointed out that the circumstances under which the rents payable by it to BBMP for the A.Y. 2007-08 to 2011-12 was greater than what the assessee has to receive as rent on sub-letting from KPPL, which we have narrated in the earlier part of this order. The assessee submitted that the transaction of sub-lease was a genuine transaction and was done keeping in mind the commercial expediency. The assessee also pointed out that the rents that it had paid to BBMP had to be allowed as a deduction while computing income from lease of the property u/s. 37(1) of the Act. The AO, however, was of the view that the explanation furnished by the assessee was not acceptable. He was of the view that by the impugned transaction of sub- lease, the assessee was incurring a loss and doing so will not make good business sense. Thereafter, the AO proceeded to analyse the shareholding pattern of the Assessee and the sub-tenant and found that there were common shareholders and common directors in the Assessee company as well as the company of the Sub-lessee. The following details were extracted by the AO in this regard: ITA Nos.152 to 156/Bang/2014 Page 7 of 17 Share holding details of common share holders in M/s. Davanam Jewellers Pvt Ltd. and M/s. Kausthubha Projects Pvt. Ltd. PERCENTAGE OF SHAREHOLDING IN ASSESSMENT YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 NAME OF SHARE HOLDER DJPL KPPL DJPL KPPL DJPL KPPL DJPL KPPL DJPL KPPL DJPL KPPL D V Harish
22.15 7.8 22.15 7.8 22.15 7.8 17.33 0.4 22 7.8 17.33 0.04 D V Aravind
22.15 7.6 22.15 7.6 22.15 7.6 15.98 0.4 22 7.6 15.98 0.04 D V Ravindranath
22.15 7.8 22.15 7.8 22.15 7.8 15.59 0.4 22 7.6 15.59 0.04 D S Venkatanaryana Setty 22.15 7.8 22.15 7.8 22.15 7.8 17.12 0.4 22 7.8 17.12 0.04 DCPL - - - - - - 24.69 74.5 - - 24.69 74.5 Total of the above persons
88.60 31.00 88.60 31.00 88.60 31.00 90.71 76.10 88 31.00 90.71 76.10 DJPL: DAVANAM JEWELLERS PRIVATE LTD. KPPL: KAUSTHUBHA PROJECTS PVT LTD. DCPL: DAVANAM CONSTRUCTIONS PRIVATE LTD.
11. From the above share holding pattern, the AO was of the view that the Assessee and the sub-tenant were related parties. The transaction of sub-lease was not at arms length. The AO also noticed that the total income of KPPL from 2007-08 to 2011-12 was as given below: A.Y. Total Income 2007-08 (-) 565662 2008-09 17610100 2009-10 18372970 2010-11 (-) 9658516 2011-12 Nil The AO observed that except for the Assessment years 2008-09 and 2009- 10, KPPL has reported losses. The losses are on account of various other ITA Nos.152 to 156/Bang/2014 Page 8 of 17 transactions including huge cost on borrowals which have been used for various other projects/investments. If the lease of Madiwala Complex was to be considered as a separate business venture, KPPL would have made good profits. According to the AO it was difficult to get lease of property from a Government body as the rates of lease are very reasonable compared to prevailing market conditions. According to the AO there was no reason why the Assessee having bid successfully for such a lease decided to sub-lease it rather than earn income on its own. The AO also was of the view that the Assessee was not in the business of dealing in development or construction of properties. Its primary business was running a jewellery shop. According to the AO the Assessee could not explain the business sense of entering into a sub-lease. According to the AO, the only inference that can be drawn in the circumstances was that the assessee was used only as a layer or a vehicle for obtaining the lease and to transfer it. According to the AO it was KPPL which was interested in the BMP Contract, but could not participate in the tendering process initiated by the BMP because KPPL was managed and owned substantially by Sri.D.K.Shivakumar, who was the Honble Minister for Urban Development in the Government of Karnataka between the years 2002 and 2004. Since KPPL did not want its name to be associated directly in the Concessionaire Agreement with BMP, whose jurisdiction fell under the Ministry of Urban Development, it used the assessee company as a medium or channel to overcome the procedural difficulties in winning the contract in its own ITA Nos.152 to 156/Bang/2014 Page 9 of 17 name. The AO therefore concluded that the assessee was brought in as an intermediary only to win the contract and transfer it back to KPPL immediately. Therefore, the transaction in the books of the assessee has to be ignored and the losses claimed against it disallowed. Accordingly, for all the assessment years, the difference between the amount paid by the assessee to BMP and the amount received from KPPL was disallowed by the AO.
12. On appeal by the assessee, the CIT(A) confirmed the order of the AO, observing as under:- 8. I notice from records that the appellants other sister concern M/s Davanam Constructions Pvt Ltd in Notes forming part of Accounts for the year ended 31 st March 2007 in Schedule-L has mentioned that:-
The Company has taken a Demand Loan from Andhra Bank, Bangalore amounting to Rs. 28 crores. Pursuant to an agreement with Mr D K Shivakumar and Mr D K Kempegowda, the Company has passed on the liabilities to the extent of CTS-2 (69% and 10%) of the respective shares in favour of Mr D K Shivakumar and Mr D Kempegowda respectively on the understanding that the said Demand Loan will be repaid by them. Consequently, the company has accounted interest attributable to its share alone. In the event of the aforesaid parties do not dear the liability, the company is liable to pay the same.This dearly establishes the relationship between the appellant group of cases with Sri D K Shivakumar as asserted by the Assessing Officer. ITA Nos.152 to 156/Bang/2014 Page 10 of 17
9. During the course of appeal, the appellant has not been able to contradict the findings of the Assessing Officer. Also. the appellant has not been able to show before me that the Concession Agreement entered into with BBMP was for a business purpose. There is no evidence on record to suggest that after obtaining lease for Madivala Commercial Complex from BBMP, the appellant tried to use the same for its own business or made an effort to further lease it out for profit either through advertisement or otherwise, before the same was leased out to M/s Kausthuba Projects Pvt Ltd for a loss.
10. Under such circumstances,. I am unable to differ with the inference of the Assessing Officer and the expenditure so incurred by the appellant cannot be treated as an expenditure for the purpose of business allowable u/s 37(1) of the I T Act. The Assessing Officer has already given credit to the amount received/receivable from M/s Kausthuba Projects Pvt Ltd. As such, the difference in the receipt and expenditure with respect to this Concession Agreement cannot be allowed as expenditure as rightly held by the Assessing Officer. The same is upheld.
13. Aggrieved by the order of the Tribunal, the assessee is in appeal before the Tribunal.
14. We have heard the submissions of the ld. counsel for the assessee, who reiterated the submissions as were made before the AO. It was also pointed out by him that after the expiry of the period for which the assessee had to pay the arrears of rent from Nov. 2005 to Apr. 2008 in 20 equal quarterly instalments, the amounts payable by it to BMP will be less than what the assessee would receive from the sub-tenant KPPL. In this regard, it was submitted that the property was sub-leased for a period of 29 years ITA Nos.152 to 156/Bang/2014 Page 11 of 17 and it was only in the initial few years that the Assessee incurred losses, more so on account of reasons mentioned above. The Assessee had another 25 years to recover the losses incurred in the initial few years. This fact has been demonstrated in the table below: Financial Year Payment to BBMP Original Instalment Arrears Total Receipt from KPPL Profit/(Loss) on sub-lease 2011-12 3,65,76,954 34,95,000 4,00,71,954 3,82,88,448 (17,83,506) 2012-13 3,84,05,802 34,95,000 4,19,00,802 4,02,02,868 (16,97,934) 2013-14 4,03,26,092 - 4,03,26,092 4,22,13,012 18,86,920 2014-15 4,23,42,396 - 4,23,42,396 4,43,23,664 19,18,268
15. It was submitted that it was clear that even as per the revised lease terms the Assessee stood to make profits from FY 2013-14 after completion of payment of arrears along with interest. To that effect, the argument of the Ld. AO that the terms of sub-lease were fixed in a manner so as to cause losses to the Assessee year after year lacks any merit and the addition made ought to be quashed.
16. It was pointed out that fixing a sub-tenant on good terms and conditions would involve considerable time which again will result in the Assessee loosing rents for the period interregnum. The rent paid by the sub-tenant was much more than what the Assessee had to pay BMP as rent. It was also pointed out that as per the terms of sub-lease with KPPL, the Assessee was entitled on a year on year basis, increase of 5% on the lease rentals which is at par with the industry norms. It was also pointed out ITA Nos.152 to 156/Bang/2014 Page 12 of 17 that the Assessee received a security deposit of Rupees four crores from KPPL. In contrast, the Assessee was not required to pay any security deposit to the BMP. Considering the above, it was argued that one could safely conclude that sub-leasing the property to KPPL not only made business sense but was also at par with the industry norms. Therefore, the argument of the Ld. AO that the deed was entered into so as to favour the Assessees sister concern is not correct and is contrary to facts on record.
17. The ld. DR placed strong reliance on the order of the AO/CIT(A).
18. We have considered the rival submissions. At the outset it needs to be emphasized that the Act does not prohibit transactions with related parties. In fact the provisions of Sec.40A(2)(a) only lays down that such transactions have to be tested on the parameters laid down in those provisions. The provisions of Sec.40A(2)(a) of the Act lays down that to the extent the consideration for transaction with related party transaction is excessive or unreasonable having regard to (a) the fair market value of the goods, services or facilities for which the payment is made or (b) the legitimate needs of the business or profession of the assessee or (c) the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by the AO to be excessive or unreasonable shall not be allowed as a deduction. In the present case the AO has not proceeded to examine the transaction in the light of any of the parameters laid down in the Act. He has proceeded on the basis that the transaction of lease in ITA Nos.152 to 156/Bang/2014 Page 13 of 17 favour of the Assessee itself was for and on behalf of KPPL and for the reason that KPPL was managed and owned substantially by Sri.D.K.Shivakumar, who was the Honble Minister for Urban Development in the Government of Karnataka between the years 2002 and 2004. Since KPPL did not want its name to be associated directly in the lease with BMP, whose jurisdiction fell under the Ministry of Urban Development, it used the assessee as a medium or channel to overcome the procedural difficulties in winning the contract in its own name. The lessor is BMP and such motive cannot be attributed to BMP. The conclusions of the AO are also not correct for the reason that the rent paid by the Assessee to BMP would be higher only for the initial 5 years (20 quarterly installments of rent) when the arrears of rent of Rs.1,16,50,000 towards arrears of rent for the period from Nov., 2005 to March, 2008 is added to the originally agreed rent between the Assessee and BMP. The AO has not disputed that the liability for the increased rent is relatable to the period relevant to AY 07-08 to 2011-12. In such circumstances the claim of the Assessee that after the expiry of the period for which the assessee had to pay the arrears of rent from Nov. 2005 to Apr. 2008 in 20 equal quarterly instalments, the amounts payable by it to BMP will be less than what the assessee would receive from the sub-tenant KPPL is correct. Therefore it cannot be said that the transaction was commercially not a viable transaction and ought not to have been entered into by the Assessee. Admittedly the rent paid by the sub-tenant was much more than what the Assessee had to pay BMP as ITA Nos.152 to 156/Bang/2014 Page 14 of 17 rent. Even going by the parameters laid down in Sec.40A(2)(a) of the Act, the rent paid by the Assessee to BMP would be comparable transaction with a third party and since the rent paid by KPPL is much more than the rent paid by the Assessee to BMP, the arms length price test has to be considered as having been satisfied. As per the terms of sub-lease with KPPL, the Assessee was entitled on a year on year basis, increase of 5% on the lease rentals. The Assessee received a security deposit of Rupees four crores from KPPL. In contrast, the Assessee was not required to pay any security deposit to the BMP. All the above factors have been totally ignored by the Revenue authorities. Considering the above circumstances, it can be said that there is nothing on record to suggest that sub-leasing the property to KPPL did not make business sense. Therefore, the conclusion of the revenue authorities that the deed was entered into so as to favour the Assessees sister concern is not correct.
19. Even proceeding on the basis that there has been attempt by the Assessee at tax planning, a combined reading of the decisions of the Honble Supreme Court in the case of CIT Vs. Walfort Share & Stock Brokers (P) Ltd. 326 ITR 1 (SC) as well as Azadi Bachao Andolan 263 ITR 706 (SC) and Vodafone International Holdings B.V. Vs. UOI 341 ITR 1 (SC) would show that all tax planning is not illegal/illegitimate/impermissible. It is only when colourable or dubious devices are employed or transactions are sham or when arrangements are a mere subterfuge, as part of tax planning can it be said that they are illegal, illegitimate, and impermissible. For ITA Nos.152 to 156/Bang/2014 Page 15 of 17 ascertaining what the real intention of the parties was, it is permissible to go behind the documents. Generally one must proceed on the basis of the intention as expressed in the transaction or document. If that is challenged as not true on good grounds then the real intention can be looked into. If it is found that the arrangement is a make-believe affair, or a dubious device and the real intention was tax evasion then the arrangement need not be given effect to. In cases where transactions or arrangement are evidenced by written agreement/arrangement it is not possible to rewrite the agreement/arrangement. The right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same. Any transaction in which the professed intention and the intention gathered from the documentation are the same must be considered to be genuine.
20. The principle, as explained by the Honble Supreme Court as above, if applied to the fact of the present case; it can safely be concluded that the professed intention and the intention gathered from the documentation are the same and the transaction of sub-lease must therefore be considered as genuine. The revenue has proceeded on an erroneous basis that the assessee was used only as a layer or a vehicle for obtaining the lease and to transfer it. There is no basis for the AO to come to a conclusion that it was KPPL which was interested in the BMP Contract, but could not participate in the tendering process initiated by the BMP because KPPL ITA Nos.152 to 156/Bang/2014 Page 16 of 17 was managed and owned substantially by Sri.D.K.Shivakumar, who was the Honble Minister for Urban Development in the Government of Karnataka between the years 2002 and 2004. There is also no basis for the further conclusion of the AO that since KPPL did not want its name to be associated directly in the Concessionaire Agreement with BMP, whose jurisdiction fell under the Ministry of Urban Development, it used the assessee as a medium or channel to overcome the procedural difficulties in winning the contract in its own name. The conclusions of the AO that the assessee was brought in as an intermediary only to win the contract and transfer it back to KPPL immediately and therefore the transaction in the books of the assessee has to be ignored and the losses claimed against it disallowed, cannot be sustained and is hereby vacated. The loss as claimed by the Assessee is therefore directed to be allowed.
21. For the reasons given above, we allow the appeals of the Assessee.
22. In the result the appeals by the Assessee are allowed. Pronounced in the open court on this 28 th day of August, 2014. Sd/- Sd/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member Bangalore, Dated, the 28 th August, 2014. /D S/ ITA Nos.152 to 156/Bang/2014 Page 17 of 17 Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file By order Assistant Registrar / Senior Private Secretary ITAT, Bangalore.
