M/s Davanam Jewellers P. Ltd., V. D.C.I.T.,

ITA 152/BANG/2014

• Counselvise Citation: 15221114 RSA 2014
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 20-08-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 27-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Fair market value; Commercial expediency
• Section: 153A; 37(1); 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NOS.152 TO 156/BANG/2014 ASSESSMENT YEARS : 2007-08 TO 2011-12 M/S. DAVANAM JEWELLERS (P) LTD., # 8, KAMARAJ ROAD, COMMERCIAL STREET JUNCTION, BANGALORE 560 042. PAN : AACCD 1447R VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI ZAIN AHMED KHAN, C.A. RESPONDENT BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II(DR) DATE OF HEARING : 20.8.2014 DATE OF PRONOUNCEMENT : 28.8.2014 O R D E R PER BENCH THESE ARE APPEALS BY THE ASSESSEE AGAINST THE COM MON 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 SUSTAI NING THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING THE PAYMENTS MADE BY THE ASSESSEE TO BRUHAT BANGALORE MAHANAGARA PALIKE (BBMP), WHILE CO MPUTING THE INCOME FROM BUSINESS OF LETTING OUT OF VARIOUS SHOPS IN MA DIVALA COMMERCIAL COMPLEX. THE FACTS THAT ARE NECESSARY FOR THE PURP OSE OF ADJUDICATION OF THE AFORESAID COMMON ISSUE ARE AS FOLLOWS. 3. THE ASSESSEE IS A COMPANY, WHICH CARRIES ON BUS INESS AS JEWELLERS. THERE WAS A SEARCH ACTION U/S. 132 OF T HE 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 TH E TOTAL INCOME OF SIX ASSESSMENT YEARS IMMEDIATELY PRECEDING THE ASSESSME NT 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 A LSO INCLUDED INCOME FROM LETTING OUT OF COMMERCIAL COMPLEX AT MADIVALA, WHICH THE ASSESSEE HAD TAKEN ON LEASE FROM BBMP. AS ALREADY STATED, T HE ASSESSEE WAS IN REGULAR BUSINESS OF TRADING IN JEWELLERY. THE ASSE SSEE ENTERED INTO A LEASE AGREEMENT WITH BMP ON 18.11.2005 IN RESPECT OF THE PREMISES KNOWN AS MADIVALA COMMERCIAL PLAZA, BANGALORE. THE LEASE WA S FOR A PERIOD OF 30 YEARS FROM 18.11.2005. THE RENTS PAYABLE FOR THE L EASE 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 ASSESS EE WAS GIVEN A LICENCE AGREEMENT TO REFURBISH, OPERATE AND MAINTAIN THE BU ILDING FOR THE PERIOD OF LEASE. THE ASSESSEE ALSO HAD A RIGHT TO SUB-LET TH E 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 ASSES SEE 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. T HE SUB-LEASE WAS TO COMMENCE FROM THE DATE OF AGREEMENT AND WAS FOR A P ERIOD 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 BEFOR E 25.11.2005. THE ASSESSEE, HOWEVER, MADE THE PAYMENT OF FIRST QUARTE RLY RENT ONLY ON 20.4.2006. THE ASSESSEE DID NOT MAKE PAYMENT OF TH E RENTS UPTO 30.5.2008. ON 30.5.2008, THE ASSESSEE AND BMP ENTE RED 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 M ARCH, 2008 TOGETHER WITH INTEREST ON SUCH ARREARS OF RS.23,30,000, IN ALL AM OUNTING TO RS.1,39,80,000 WAS AGREED TO BE PAID BY THE ASSESSE E. THE SUM OF RS.1,16,50,000 WAS AGREED TO BE PAID IN 20 EQUAL QU ARTERLY INSTALMENTS, AS PER THE TIME SCHEDULE GIVEN IN SCHEDULE 2 OF THE OR IGINAL AGREEMENT. THE SUM OF RS.23,30,000 WAS ALSO AGREED TO BE PAID BY T HE ASSESSEE TO BBMP. 7. CONSEQUENT TO THE SUPPLEMENTARY AGREEMENT, THE R ENTS PAYABLE BY THE ASSESSEE TO BMP AS PER THE ORIGINAL AGREEMENT A ND 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 COMM ENCE 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 TH AT 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, T HE 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 P AYMENTS MADE TO BBMP SHOULD NOT BE DISALLOWED. THE ASSESSEE, IN REPLY T O 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 TH AN WHAT THE ASSESSEE HAS TO RECEIVE AS RENT ON SUB-LETTING FROM KPPL, WH ICH WE HAVE NARRATED IN THE EARLIER PART OF THIS ORDER. THE ASSESSEE SUBMI TTED THAT THE TRANSACTION OF SUB-LEASE WAS A GENUINE TRANSACTION AND WAS DONE KEEPING IN MIND THE COMMERCIAL EXPEDIENCY. THE ASSESSEE ALSO POINTED O UT THAT THE RENTS THAT IT HAD PAID TO BBMP HAD TO BE ALLOWED AS A DEDUCTIO N 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 T HE ASSESSEE WAS NOT ACCEPTABLE. HE WAS OF THE VIEW THAT BY THE IMPUGNE D TRANSACTION OF SUB- LEASE, THE ASSESSEE WAS INCURRING A LOSS AND DOING SO WILL NOT MAKE GOOD BUSINESS SENSE. THEREAFTER, THE AO PROCEEDED TO AN ALYSE THE SHAREHOLDING PATTERN OF THE ASSESSEE AND THE SUB-TE NANT AND FOUND THAT THERE WERE COMMON SHAREHOLDERS AND COMMON DIRECTORS IN THE ASSESSEE COMPANY AS WELL AS THE COMPANY OF THE SUB-LESSEE. T HE 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 PROJ ECTS 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 17.3 3 0.04 D V ARAVIND 22.15 7.6 22.15 7.6 22.15 7.6 15.98 0.4 22 7.6 15.9 8 0.04 D V RAVINDRANATH 22.15 7.8 22.15 7.8 22.15 7.8 15.59 0.4 22 7.6 15.5 9 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 WA S OF THE VIEW THAT THE ASSESSEE AND THE SUB-TENANT WERE RELATED PARTIE S. THE TRANSACTION OF SUB-LEASE WAS NOT AT ARMS LENGTH. THE AO ALSO NOT ICED 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 YEAR S 2008-09 AND 2009- 10, KPPL HAS REPORTED LOSSES. THE LOSSES ARE ON ACC OUNT 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, KP PL 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 VE RY REASONABLE COMPARED TO PREVAILING MARKET CONDITIONS. ACCORDIN G 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 BU SINESS OF DEALING IN DEVELOPMENT OR CONSTRUCTION OF PROPERTIES. ITS PRIM ARY BUSINESS WAS RUNNING A JEWELLERY SHOP. ACCORDING TO THE AO THE ASSESSEE COULD NOT EXPLAIN THE BUSINESS SENSE OF ENTERING INTO A SUB-L EASE. ACCORDING TO THE AO, THE ONLY INFERENCE THAT CAN BE DRAWN IN THE CIR CUMSTANCES 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 WHI CH WAS INTERESTED IN THE BMP CONTRACT, BUT COULD NOT PARTICIPATE IN THE TEND ERING PROCESS INITIATED BY THE BMP BECAUSE KPPL WAS MANAGED AND OWNED SUBSTANT IALLY BY SRI.D.K.SHIVAKUMAR, WHO WAS THE HONBLE MINISTER FO R URBAN DEVELOPMENT IN THE GOVERNMENT OF KARNATAKA BETWEEN THE YEARS 20 02 AND 2004. SINCE KPPL DID NOT WANT ITS NAME TO BE ASSOCIATED DIRECTL Y IN THE CONCESSIONAIRE AGREEMENT WITH BMP, WHOSE JURISDICTION FELL UNDER T HE MINISTRY OF URBAN DEVELOPMENT, IT USED THE ASSESSEE COMPANY AS A MEDI UM 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 TRANSF ER IT BACK TO KPPL IMMEDIATELY. THEREFORE, THE TRANSACTION IN THE BOOK S OF THE ASSESSEE HAS TO BE IGNORED AND THE LOSSES CLAIMED AGAINST IT DISALL OWED. ACCORDINGLY, FOR ALL THE ASSESSMENT YEARS, THE DIFFERENCE BETWEEN THE AM OUNT PAID BY THE ASSESSEE TO BMP AND THE AMOUNT RECEIVED FROM KPPL W AS 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 TH E 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 ASSESSI NG OFFICER. ALSO. THE APPELLANT HAS NOT BEEN ABLE TO SHOW BEFOR E 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 COM MERCIAL COMPLEX FROM BBMP, THE APPELLANT TRIED TO USE THE S AME FOR ITS OWN BUSINESS OR MADE AN EFFORT TO FURTHER LEASE IT OUT FOR PROFIT EITHER THROUGH ADVERTISEMENT OR OTHERWISE, B EFORE THE SAME WAS LEASED OUT TO M/S KAUSTHUBA PROJECTS PVT L TD FOR A LOSS. 10. UNDER SUCH CIRCUMSTANCES,. I AM UNABLE TO DIFF ER WITH THE INFERENCE OF THE ASSESSING OFFICER AND THE EXPE NDITURE SO INCURRED BY THE APPELLANT CANNOT BE TREATED AS AN E XPENDITURE 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 PROJE CTS PVT LTD. AS SUCH, THE DIFFERENCE IN THE RECEIPT AND EXPENDITURE WITH RESPECT TO THIS CONCESSION AGREEME NT 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 ASS ESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 14. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSE L 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 PER IOD FOR WHICH THE ASSESSEE HAD TO PAY THE ARREARS OF RENT FROM NOV. 2005 TO AP R. 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 F OR 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 A SSESSEE 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 20 13-14 AFTER COMPLETION OF PAYMENT OF ARREARS ALONG WITH INTERES T. 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 YE AR 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 AG AIN 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 TER MS 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 NOR MS. IT WAS ALSO POINTED OUT ITA NOS.152 TO 156/BANG/2014 PAGE 12 OF 17 THAT THE ASSESSEE RECEIVED A SECURITY DEPOSIT OF RU PEES FOUR CRORES FROM KPPL. IN CONTRAST, THE ASSESSEE WAS NOT REQUIRED TO PAY ANY SECURITY DEPOSIT TO THE BMP. CONSIDERING THE ABOVE, IT WAS A RGUED THAT ONE COULD SAFELY CONCLUDE THAT SUB-LEASING THE PROPERTY TO KP PL NOT ONLY MADE BUSINESS SENSE BUT WAS ALSO AT PAR WITH THE INDUSTR Y NORMS. THEREFORE, THE ARGUMENT OF THE LD. AO THAT THE DEED WAS ENTERED IN TO SO AS TO FAVOUR THE ASSESSEES SISTER CONCERN IS NOT CORRECT AND IS CON TRARY 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 TRANSA CTIONS WITH RELATED PARTIES. IN FACT THE PROVISIONS OF SEC.40A(2)(A) O NLY LAYS DOWN THAT SUCH TRANSACTIONS HAVE TO BE TESTED ON THE PARAMETERS LA ID 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 RELAT ED 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 T HE 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 UN REASONABLE 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 TRA NSACTION 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 SUBSTANTIALL Y BY SRI.D.K.SHIVAKUMAR, WHO WAS THE HONBLE MINISTER FO R URBAN DEVELOPMENT IN THE GOVERNMENT OF KARNATAKA BETWEEN THE YEARS 20 02 AND 2004. SINCE KPPL DID NOT WANT ITS NAME TO BE ASSOCIATED DIRECTL Y IN THE LEASE WITH BMP, WHOSE JURISDICTION FELL UNDER THE MINISTRY OF URBAN DEVELOPMENT, IT USED THE ASSESSEE AS A MEDIUM OR CHANNEL TO OVERCOM E THE PROCEDURAL DIFFICULTIES IN WINNING THE CONTRACT IN ITS OWN NAM E. THE LESSOR IS BMP AND SUCH MOTIVE CANNOT BE ATTRIBUTED TO BMP. THE CONC LUSIONS 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 QU ARTERLY 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 D ISPUTED THAT THE LIABILITY FOR THE INCREASED RENT IS RELATABLE TO TH E PERIOD RELEVANT TO AY 07-08 TO 2011-12. IN SUCH CIRCUMSTANCES THE CLAIM OF TH E 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 QUARTE RLY INSTALMENTS, THE AMOUNTS PAYABLE BY IT TO BMP WILL BE LESS THAN WHAT THE ASSESSEE WOULD RECEIVE FROM THE SUB-TENANT KPPL IS CORRECT. THERE FORE IT CANNOT BE SAID THAT THE TRANSACTION WAS COMMERCIALLY NOT A VIABLE TRANSACTION AND OUGHT NOT TO HAVE BEEN ENTERED INTO BY THE ASSESSEE. ADM ITTEDLY 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 S EC.40A(2)(A) OF THE ACT, THE RENT PAID BY THE ASSESSEE TO BMP WOULD BE COMPA RABLE 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 TE RMS OF SUB-LEASE WITH KPPL, THE ASSESSEE WAS ENTITLED ON A YEAR ON YEAR B ASIS, INCREASE OF 5% ON THE LEASE RENTALS. THE ASSESSEE RECEIVED A SECUR ITY DEPOSIT OF RUPEES FOUR CRORES FROM KPPL. IN CONTRAST, THE ASSESSEE WA S NOT REQUIRED TO PAY ANY SECURITY DEPOSIT TO THE BMP. ALL THE ABOVE FACT ORS HAVE BEEN TOTALLY IGNORED BY THE REVENUE AUTHORITIES. CONSIDERING TH E ABOVE CIRCUMSTANCES, IT CAN BE SAID THAT THERE IS NOTHING ON RECORD TO S UGGEST THAT SUB-LEASING THE PROPERTY TO KPPL DID NOT MAKE BUSINESS SENSE. THERE FORE, THE CONCLUSION OF THE REVENUE AUTHORITIES THAT THE DEED WAS ENTERE D INTO SO AS TO FAVOUR THE ASSESSEES SISTER CONCERN IS NOT CORRECT. 19. EVEN PROCEEDING ON THE BASIS THAT THERE HAS BEE N ATTEMPT BY THE ASSESSEE AT TAX PLANNING, A COMBINED READING OF THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WALFOR T SHARE & STOCK BROKERS (P) LTD. 326 ITR 1 (SC) AS WELL AS AZADI BA CHAO ANDOLAN 263 ITR 706 (SC) AND VODAFONE INTERNATIONAL HOLDINGS B.V. V S. UOI 341 ITR 1 (SC) WOULD SHOW THAT ALL TAX PLANNING IS NOT ILLEGAL/ILL EGITIMATE/IMPERMISSIBLE. IT IS ONLY WHEN COLOURABLE OR DUBIOUS DEVICES ARE EMPLOYE D 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 PROCE ED ON THE BASIS OF THE INTENTION AS EXPRESSED IN THE TRANSACTION OR DO CUMENT. IF THAT IS CHALLENGED AS NOT TRUE ON GOOD GROUNDS THEN THE REA L INTENTION CAN BE LOOKED INTO. IF IT IS FOUND THAT THE ARRANGEMENT I S A MAKE-BELIEVE AFFAIR, OR A DUBIOUS DEVICE AND THE REAL INTENTION WAS TAX EVASI ON THEN THE ARRANGEMENT NEED NOT BE GIVEN EFFECT TO. IN CASES WHERE TRANSACTIONS OR ARRANGEMENT ARE EVIDENCED BY WRITTEN AGREEMENT/ARRA NGEMENT IT IS NOT POSSIBLE TO REWRITE THE AGREEMENT/ARRANGEMENT. THE RIGHT OF THE PARTIES TO ENTER INTO TRANSACTIONS ACCORDING TO THEIR FREE WIL L AND CHOICE HAS ALWAYS BEEN PROTECTED, THE ONLY RIDER BEING THAT BOTH THE PROFESSED INTENTION AND THE REAL INTENTION SHOULD BE THE SAME. ANY TRANSACT ION 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 SUPR EME 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 THER EFORE 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 COM E TO A CONCLUSION THAT IT WAS KPPL WHICH WAS INTERESTED IN THE BMP CONTRACT, BUT COULD NOT PARTICIPATE IN THE TENDERING PROCESS INITIATED BY T HE BMP BECAUSE KPPL ITA NOS.152 TO 156/BANG/2014 PAGE 16 OF 17 WAS MANAGED AND OWNED SUBSTANTIALLY BY SRI.D.K.SHIV AKUMAR, WHO WAS THE HONBLE MINISTER FOR URBAN DEVELOPMENT IN THE G OVERNMENT OF KARNATAKA BETWEEN THE YEARS 2002 AND 2004. THERE IS ALSO NO BASIS FOR THE FURTHER CONCLUSION OF THE AO THAT SINCE KPPL DID NO T WANT ITS NAME TO BE ASSOCIATED DIRECTLY IN THE CONCESSIONAIRE AGREEMENT WITH BMP, WHOSE JURISDICTION FELL UNDER THE MINISTRY OF URBAN DEVEL OPMENT, IT USED THE ASSESSEE AS A MEDIUM OR CHANNEL TO OVERCOME THE PRO CEDURAL DIFFICULTIES IN WINNING THE CONTRACT IN ITS OWN NAME. THE CONCLUSI ONS 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 LOS SES CLAIMED AGAINST IT DISALLOWED, CANNOT BE SUSTAINED AND IS HEREBY VACAT ED. THE LOSS AS CLAIMED BY THE ASSESSEE IS THEREFORE DIRECTED TO BE ALLOWED. 21. FOR THE REASONS GIVEN ABOVE, WE ALLOW THE APPEA LS OF THE ASSESSEE. 22. IN THE RESULT THE APPEALS BY THE ASSESSEE ARE A LLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF AUGUST, 2014. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R 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.