Brief about the case
Assessee Company was engaged in the business of property dealing and development of land. During the course of assessment year under consideration it procured a land for development of SEZ. Later, since land was insufficient to develop SEZ, it sold the land to one of its sister concern ‘Indo Global Infotech City Pvt Ltd’ (IGICPL) for a consideration of Rs.23.31 Crore as mentioned in the registered sale deed.
With Mutual consent, the assessee company reduced the sale consideration in its books of account by Rs.1.11 Crore vide a journal entry on the basis of debit note raised by IGICPL to provide an approach road for the land and accordingly IGICPL also reduced the purchase consideration with the said amount claimed on the basis of debit note.
During the assessment proceedings, A.O. rejected the debit note as a valid proof and made an addition to total income of the assessee by Rs.1.11 Crore which is confirmed by CIT(A).
Contention of the Revenue
Neither there is documentary evidence nor the sale deed carry any mention of provision of road access by the assessee.
Moreover, 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.” as mentioned in first and second schedule of sale deed. Thus, the land has been transferred on as is where is basis without any specific provision for providing the access road.
Further there is no justifiable calculation of arriving figure of Rs.1.11 Crore. Transaction of debiting sale in the books of account and reducing the sale consideration is not a genuine transaction but it has been done with a view to reduce the taxable business profits. Submission of the assessee that it was a mutual understanding between the parties does not show any business exigency as Memorandum and Articles of Association did not intend to establish a SEZ. The purpose behind purchase of plots was to construct buildings, offices and housing complexes, which it later abandoned and instead transferred to its sister concern.
Contention of the Assessee
Liability need not to always be a contractual one. On the basis of understanding between the two parties, both sides have passed necessary accounting entries. 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.1.11 Crore.
Just because the debit note was not registered, it cannot be rejected. Disallowance will lead to double taxation as IGICPL has already reduced land cost in its books.
Ld. Counsel of the assessee relied on the decision of Hon’ble Madras High Court in the case of Associated Electrical Agencies, wherein it was held that payment made having regard to commercial expediency need not necessarily have their origin in contractual obligations.
Held by ITAT
Case cited by the assessee is not applicable to the facts of the present case. 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.
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 Crore 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 amount is immaterial under the facts and circumstances of the case. Since the sale deed mentions the sale price of Rs.23.31 Crore 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 the result, the appeal filed by the assessee is dismissed.