Arihant Moti Developers Vs ITO (ITAT Pune)
ITAT Pune held that as the assessee failed to establish why the shops were sold at loss to the partners and interest persons, principle of fraud squarely gets applicable. Accordingly, disallowance of loss duly justified.
Facts- The assessee firm is engaged in the business of builders and developers. On verification of the P & L account, it was seen that the assessee had shown total sales of Rs. 10,16,24,773/- and has shown net loss of Rs. 8,50,05,404/-. It was observed that the loss was mainly due to sales made below the cost price.
On verification of the details submitted by the assessee, it was seen by the A.O that the assessee had sold total 25 shops/offices during the year under consideration. Out of these 25 shops, 6 shops were sold to the Eklavya Builders Pvt. Ld., and another six shops were sold to Shri Arun Agrawal who are partners of the assessee. Thus, out of 22 shops 12 shops have been sold to the partners. Another 7 shops have been sold to the persons from whom the assessee has taken loan. All these 19 shops sold to the partners and persons having interest in the business were sold below the cost price. It is seen that 6 shops were sold to the third parties.
It was further observed from the above that the average price of sale per sq.ft. to the third party is around Rs. 8472/- per sq.ft. whereas the average price of 19 shops sold to the partners and interested parties is Rs. 5,025/- per sq.ft. This fact clearly shows that these shops are sold to the partners at a price much below the price charged to the third parties and also below the cost price. In view of the above, vide letter dated 10-12-2018 the assessee was asked to explain why the shops were sold to the partners below the market price and why the sale price should not be estimated as per the sale price charged to the third parties.
It was contended that By selling the shops to the partners below the market price and below the cost price, the partners of the assessee have gained individually and at the same time the partnership firm has shown loss. Thus, the entire transaction is fabricated, artificial with the intent to evade tax. Thus agreements to sale to the partners are nothing but colourable devices, intentionally created to evade the tax. Therefore, the contention of the assessee is not acceptable. Accordingly, loss to the extent of Rs. 3,90,95,479/-was disallowed.
Conclusion- It was for the assessee to establish why the shops were sold to the third parties at much higher profit as compared to the partners and interested persons. The assessee has not been able to provide any justification and specific reasons neither before the A.O nor before the ld. CIT(A) regarding such sale transactions. Knowing fully well the intention to create loss and having exclusive knowledge the assessee never explained before the revenue authorities nor before this Bench the reasonableness for such transactions and chosen not to disclose the real intention of creating artificial loss is nothing but a fraud to evade payable taxes. Therefore, the principle of fraud can be squarely applied to the facts of the present case. Accordingly, we confirm the orders of the Assessing Officer as well as the ld. CIT(A) and find no merits in the appeal preferred by the assessee before us.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal preferred by the assessee emanates from order of ld. CIT(A)-5, Pune dated 14-02-2020 for A.Y.2016-17 as per the following grounds of appeal.
The ld. CIT(A)-5 Pune has erred in law as well as in law while confirming the order of the ITO Ward 7(3) Pune disallowing Rs. 3,90,95,479/- being difference between average price and actual price charged to customers for the reason stating that the sale of flats to these customers is at a lower rate than the average sale price charged to others.”
2. The relevant facts as emerging from the assessment order are that the assessee firm is engaged in the business of builders and developers. The assessee has constructed project INSPIRIA. The assessee is following project completion method of accounting in respect of the project. In response to the notices, the AR of the assessee attended and submitted the details called for before the A.O.
3. On verification of the P & L account, it was seen that the assessee had shown total sales of Rs. 10,16,24,773/- and has shown net loss of Rs. 8,50,05,404/-. It was observed that the loss was mainly due to sales made below the cost price. The details of the sales submitted by the assessee are as under:
