MILESTONE FINVEST LIMITED ,MUMBAI V. THE ASSISTANT COMMISSIONER OF INCOME TAX RANGE, 5(2), MUMBAI

ITA 3836/MUM/2024

AI Insights

Milestone Finvest Limited appealed against the order of the National Faceless Appeal Centre (NFAC) / CIT(A), which confirmed the addition of Rs. 70,00,000 as unexplained expenditure under section 69C and taxed it under section 115BBE. The amount was paid as compensation/interest due to the termination of an MOU with MCAF, where Milestone Finvest was to help in deploying funds in warehouse projects. The Tribunal examined whether the payment was a legitimate business expense or an unexplained expenditure. The Tribunal concluded that the payment was part of a genuine business transaction and thus allowable as a business expenditure.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 26518 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2018-2019
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R.R. MAKWANA
• Assessee Lawyers: MADHUR AGARWAL
• Keywords: Set aside; Business expenditure; Unexplained expenditure; Bogus
• Section: 69C; 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, ‘D’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & MS. PADMAVATHY S, ACCOUNTANT MEMBER ITA No.3836/Mum/2024 (Assessment Year :2018-19) Milestone Finvest Limited PS56, 3rd Floor COWRKS, Birla Centurion Compound Pandurang, Budhkar Marg Worli, Mumbai – 400 030 Vs. The Assistant Commissioner of Income Tax, Range 5(2), Aayakar Bhavan Mumbai- 400 021 PAN/GIR No.AAACJ3852A (Appellant) .. (Respondent) Assessee by Shri Madhur Agarwal Revenue by Shri R. R. Makwana, Addl.CIT Date of Hearing 27/02/2025 Date of Pronouncement 06/03/2025 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 12/06/2024 passed by NFAC / CIT(A) for the quantum of assessment passed u/s.143(3) for the A.Y.2018-19. 2. In various grounds of appeal the assessee has challenged the addition of Rs.70,00,000/- on account of disallowance of interest / compensation and levying tax rate of 115BBE as ld. AO has made addition u/s.69C. ITA No.3836/Mum/2024 Milestone Finvest Limited 2 3. The brief facts are that assessee is a NBFC having income from interest income and also deriving income from referral fees. During the year assessee has made an offer to Milestone Commercial Advantage Fund (MCAF) which is an investment fund having certificate of registration as a Category II Alternative Investment Fund (AIF) which is regulated by SEBI. The entire income of MCAF is exempt u/s. 10(23FBA) in the hands of MCAF and is taxable in the hands of investors / contributors of AIF as per the provision of Section 115UB. The offer to MCAF was to deploy funds raised by MCAF in an investment opportunity. A Memorandum of Understanding (MOU) there entered on 03/04/2017 for sourcing a deal for investment of funds raised by MCAF from various investors / contributors of the AIF. The relevant terms of MOU reads as under:- “1. Finvest will help MCAF for making investment/deployment in the warehouse projects and also to raise fund from Financial Institution by leveraging this asset 2. Initial commitment of the said investment will not be more than Rs.20 Crores and MCAF will make a provision for such amount 3. Finvest will be paid 1% of the investment as transaction fees. Such fees will be paid at the time of deployment of fund 4. MOU will remain valid for a period of 71 days from the date of its signing (both days inclusive) 5. If Finvest is unable to conclude the deal in 71 days or if before the said 71 days if any party terminates the agreement, Finvest will pay 18% p.a. interest to MCAF for initial commitment amount i.e. Rs. 20 Crores from the date of signing this agreement” ITA No.3836/Mum/2024 Milestone Finvest Limited 3 4. The assessee could not conclude the deal for investment within a period of 71 days as agreed under the MOU within the period of 71 days, MCAF terminated the MOU vide letter dated 12/06/2017. Due to termination of MOU, assessee had to make the payment of compensation determined @18% per annum on the initial commitment amount of Rs.20 Crores for the period of 71 days from MCAF. Accordingly, assessee had to pay compensation / interest of Rs.70,00,000/- which was calculated in the following manner:- MOU dale April 3, 2017 Termination date June 12, 2017 No of days 71 days Initial commitment amount Rs. 20,00,00,000 Rate of interest 18% p.a. Amount of interest payable on termination Rs.70,00,000 5. The ld. AO disallowed the said compensation / interest on the ground that, on one hand assessee is saying it is an interest expense debited to the profit and loss account of Rs.70,00,000/-; and at the same time he has stated that it has paid compensation of Rs.70,00,000/-. Since assessee could not establish whether it is an interest or compensation he disallowed the amount of Rs.70,00,000/- and made addition u/s 69C. ITA No.3836/Mum/2024 Milestone Finvest Limited 4 Thus, this was the only ground for making the disallowance. However, he levied taxes u/s.115BBE after invoking section 69C. 6. The ld. CIT(A) has confirmed the addition and held that no reasons have been given for the termination of MOU which is vague and not specific and assessee has failed to justify the huge compensation of Rs.70,00,000/- for 71 days paid to sister concern, i.e., Milestone Commercial Advantage Fund (MCAF). 7. Before us ld. Counsel for the assessee submitted that assessee had entered into an agreement for providing services to MCAF for the purpose of making investment / deployment of funds for sourcing a deal of warehouse investment. The assessee was to raise funds from financial institutions while leveraging the assets for which assessee was entitled for a referral fees @1% of the investment. Since assessee could not arrange or help MCAF for making investment / deployment in the warehouse projects and to raise funds from financial institutions within the period of 71 days as agreed in the MOU, the agreement was terminated and as per the agreement assessee was liable to pay compensation in the form of interest @18% on the initial commitment amount i.e. Rs.20 Crores. He further submitted that this was part of the business activity of the assessee and assessee had in fact earned referral fees from other parties of Rs.58,50,000/- from such kind of transaction. One very important submissions which he made was that MCAF is neither a related party nor a sister concern and assessee does not even hold any units issueD by MCAF. In support of his contention he ITA No.3836/Mum/2024 Milestone Finvest Limited 5 has filed details of Directors and shareholders of the assessee and trustees of MCAF and also filed a structure chart before us. Thus, the allegation of the ld. CIT (A) is that it is a sister concern is false. He further clarified that investor of the MCAF are not related or connected to the assessee and the entire payment of compensation in the nature of interest is taxable in the hands of the investors as the MCAF is only a pass through entity as per the provision of Section 10(23FBA) r.w.s. 115UB of the Act. He also drew our attention to the audited annual accounts of MCAF and Form No.64C / 64D. Thus, it was stated that assessee did not get any advantage either directly or indirectly by paying the compensation and it was purely a business transaction with commercial / business exigency, accordingly, the compensation paid as per the terms of MOU is purely a business expenditure allowable to the assessee. 8. On the other hand ld. DR relying upon the order of the ld. AO and ld. CIT (A) submitted that here in this case there is no evidence that assessee was committed to arrange investments of Rs.20 Crores and within a short span of 71 days assessee had paid compensation of Rs.70,00,000/- without even earning a single rupee from MCAF. Thus, the entire transaction do not give credibility of any business expediency so as to allow the payment of Rs.70,00,000/- as an allowable interest / business expenditure. 9. We have heard both the parties, perused the relevant finding given in the impugned order as well as material placed on record. ITA No.3836/Mum/2024 Milestone Finvest Limited 6 In so far as the ld. AO is concerned, his entire finding is based on the fact that assessee is not clear whether it is interest or compensation and therefore, he has made the disallowance; whereas the ld. CIT (A) has questioned the transaction and the reasons for termination and that assessee has failed to justify the payment of huge compensation of Rs.70,00,000/- for 71 days. According to him the payment has been made to sister concern. 10. First of all as pointed out by the ld. Counsel, Milestone Commercial Advantage Fund, i.e., MCAF is neither a sister concern nor a related party nor assessee holds any units or any investment in MCAF. Even the Directors and shareholders of the assessee company and the trustees of MCAF are different and nowhere, they are connected to each other. Thus, the observation of the ld. CIT (A) is not emanating from any records. The assessee is NBFC and one of the activities carried out by the assessee company is on account of a referral fees, i.e., referring the investments to various investment funds or other parties in which it gets a referral fees. As part of this activity, assessee had entered into an MOU on 03/04/2017 with MCAF where assessee had approached MCAF for sourcing a deal of warehouse investment. After analyzing the documents and the proposal of the said deal, MCAF entered into an agreement with the assessee company. The relevant terms of MOU has been incorporated above. The aforesaid terms clearly spells out that assessee has been helping to MCAF for making investment / deployment in the warehouse projects and also to raise fund from financial ITA No.3836/Mum/2024 Milestone Finvest Limited 7 institutions. The assessee had made an initial commitment of Rs.20 Crores and MCAF has made a provision of such amount. In lieu of these services, assessee will be paid 1% of the investment as transaction fees at the time of deployment of the fund. As per the agreement, assessee had to arrange the investment of Rs. 20 Crores within a period of 71 days failing which the agreement will get terminated and assessee has to pay interest @18% per annum to MCAF for the initial commitment amount of Rs.20 Crores from the date of assigning of this agreement. The letter for termination of MOU dated 12/06/2017 has been placed in the paper book before us. Thus, the business commitment done by the assessee could not be performed within the stipulated time. As per the agreement assessee was under obligation to pay the compensation in the form of interest which worked out to Rs.70,00,000/-. Once assessee has entered into an agreement for facilitating investment with the MCAF and for raising funds as a part of its business activity which would have enabled assessee to earn transaction fee / referral fee which is a part of its activity, then it cannot be held that it was not part of any business transaction. Neither the ld. AO nor ld. CIT (A) has carried out any enquiry from MCAF nor neither is it a case that MCAF is not a genuine fund. As brought on record during the F.Y. 2016-17 MCAF has raised funds from various investors and has made huge investments in liquid mutual funds. If an agreement has been entered for rendering services and relevant documents and agreement have been furnished, then it cannot be said to be some kind of an afterthought or any kind of ITA No.3836/Mum/2024 Milestone Finvest Limited 8 colourable device once it is established that there is no nexus between the assessee and MCAF. It is an undisputed fact that assessee has made payment of Rs.70,00,000/- as per the terms of agreement entered during the course of business then such payment neither can be held to be bogus nor for any non- business purpose. The considerations which arise during the course of business as a part of commercial / business expediency, the same cannot be questioned or can be doubted by the ld. AO without bringing any adverse material on record that it is some kind of make-belief arrangement or some kind of colourable device. Both ld. AO and ld. CIT(A) have decided this issue in a very slip shot manner without even considering the relevant records or bringing any adverse material on record. Apart from that, we are unable to appreciate how Section 69C can be invoked, i.e., unexplained expenditure outside the books. When assessee has duly shown the payment from the books and claimed as an expenditure debited to the profit and loss account, then how section 69C can be invoked. Accordingly, the reasons given by the ld. AO and the ld. CIT (A) for making the addition is set aside and the claim of assessee is allowed. Thus, addition of Rs.20 Crores is deleted. 10. In the result, appeal of the assessee is allowed. Order pronounced on 6th March, 2025. Sd/- (PADMAVATHY S) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 06/03/2025 KARUNA, sr.ps ITA No.3836/Mum/2024 Milestone Finvest Limited 9 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// "