Principle of fraud applies on failure to establish why shops were sold at loss to partners

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:

4. 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. The details of the sales made to the third parties are as under:

5. 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. In response to the above show cause notice assessee vide a letter dated 18-12-2018 has furnished its reply which is reproduced as under:

“1. Sale of shops to partners:

The agreement for transfer of flats in respect of those allotted to partners were made in the year 2014. The sale is not booked in the year 2014 only for the reason that possession of these flats were not handed over to the partners. The ledger accounts of the flats are attached herewith. It shows that the money is received from partners against sales of flats is over and above the capital a/c and further the partner in their individual capacity have taken loan from Pandharpur Co­op. Bank Rs. 3 cr. Against these flats and have paid the amount to the firm so through the shops/flats are sold to the partners hey are entered with following the legal procedures and formalities. All these shops are sold at a price more than the stamp duty valuation of the sod shops and permissions of sec. 43CA are not applicable in this case.

Though the sale is booked in the year 2015-16 on actual possession given basis the agreement is registered and loan taken against the said shop is in the year 2014-15 and I is but natural that prices prevailing at the time of agreement will prevail and the statement that since the sale is booked in the year 2015-16 prices at the market rate for the same should be of the year 2015-16 is not correct and the assessee has correctly shows the sale in the books of accounts at a price at which the agreement is entered with the partners and thee cannot be any addition on this ground.

The prices given to the outsiders and prices charged to partners is a management decision and is not subject to judgment of assessing officer.

In this circumstances addition on this ground is unwarranted and uncalled for.”

6. The submission furnished by the assessee were considered. The contention of the assessee was that all these shops were sold at price more than the stamp duty valuation and hence the provisions of section 43CA were not applicable. It was also contended that the sale was booked in the year 2015-16 as against the loss taken against the said shops in the year 2013-14 and hence the prices prevailing at the time of agreement were less. The submission of the assessee clearly showed that the assessee had not furnished any valid explanation of selling the shops to the assessee’s own partners below the cost price or below the price charged to the third parties. The facts showed that the assessee has himself sold the shops at some agreed price between the partners. The assessee has himself cause a loss by selling the shops below the cost price to the partners and interested parties. The fact clearly showed that the only intention to sale the shops below the cost price is to create a loss. The transactions are purposely shown to be carried out in the year 2014-15 as it was already decided by the assessee to book the loss. The entire transaction show the intention and purpose of the assessee to create loss. 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.

7. In view of the above the price for sale made to the partners and interested parties were taken at Rs. 8,472/- which was the average price of sale made to the third parties. By applying this rate the sale of the assessee estimated at Rs. 14,07,20,252/- (16612 x 8472). Hence the loss to the extent of Rs. 3,90,95,479/-was disallowed.

8. The ld. CIT(A) on this issue had observed and held as follows:

4.12 I have carefully perused the assessment order and the submission of the appellant as above. I find the contention of the appellant is devoid of merit. The AO in the assessment order after detailing the facts relating to sale of shops/offices by the appellant firm to its partners and also the interested persons from whom loans had been taken by payment of interest vis-a-vis the sale of the same to third parties/persons, had demonstrated as to how such sales at a lower price than the cost of the shops/offices booked in the accounts of the appellant itself and further the sale of the same at a lesser price of each unit than the sale price of the same from 6 shops/offices sold to third parties, had generated the artificial loss in a camouflaged manner by the appellant with an ulterior motive intentionally to evade tax by creating such artificial loss. For the same financial year 2015-16, relevant to AY 2016-17, the appellant had booked the sales of 25 such units of shops/offices wherein in respect of 19 such units, substantial amount of low sale. price was booked and that too such sales were made to the partners of the appellant firm and also the interested persons, though at the same time 6 such units sold to the other third parties had generated a much higher profit from such sales than the sales effected in the case of 19 such units. It was only possible as the said partners and the interested persons along with the firm could camouflage the whole affairs of the purported transactions in a concocted pre-determined manner as there was no involvement of any other third party(ies) in such transactions and hence the same could be done as per the whims of the partners of the appellant firm. The contention of the appellant during assessment proceeding that though the sale was booked in the year 2015-16 on actual possession basis, the agreement was registered and loans taken against the shop in the year 2014-15 and further that it was natural that the prices prevailing at the time of agreement should prevail and that the statement of the sales booked in the year 2015-16 at the prices of market rate, in my considered opinion, was a futile attempt of the. appellant to substantiate that though the sales of the said units were made’ to the partners and interested persons, there was no violation of law or ‘evasion of tax. The appellant’s further contention during the assessment proceedings that all the units were sold at a higher price than the stamp duty valuation and therefore the provisions of section 43CA were not attracted, considering the facts of the case of the appellant, in my opinion, is not teneable, factually and legally. It is not a case of the AO that he had attracted the provisions of section- 43CA of the Act while giving his findings for determining the disallowance of loss of Rs. 3,90,95,479/-. The factual aspects discussed for such disallowance in the assessment order were that the 19 units of shops/offices were sold by the appellant during the same financial year at an average cost of Rs. 5,025/- per sq. ft. to the partners of the appellant’s firm and also to the persons who had substantial interest in the firm, whereas, 6 units were sold to third parties in the same financial year at an average .cost of Rs. 8,4 72/-. The AO therefore concluded that such an effort of the appellant was a colorable device adopted to artificially create the loss and therefore in a fabricated manner such loss was created by the appellant only with the intention to evade tax. I do not find any fault in the findings of the AO in this regard. Reference may be made to the decision of the Hon’ble Supreme Court in the case McDowell Co Ltd Vs. Commercial Tax Officer, (1985) 154 ITR 148 (SC), wherein the Hon’ble Apex Court has held that, “The Tax Planning may be legitimate provided it is within the framework of Law. Colorable devices cannot be part of tax planning …. “. In the case of Dy. CIT Vs. Pawankumar Malhotra [2010] 2 ITR (Trib) 250 (Delhi), the Hon’ble Tribunal found that the Assessing Officer had come to the conclusion after meticulous enquiry as regards the purchases found by him as sham transactions treating the difference as undisclosed income and therefore the departmental appeal was allowed restoring the order of the Assessing Officer. The deduction of expenses at 5% for arrangement of such sham transactions, though allowed by the appeal 1st Appellate affirming the same, the Hon’ble Tribunal relying upon the Supreme Court decisions in the case of  McDowell and Co Ltd Vs. CTO (supra) and the case of Samruddhi Dayal VS. CIT.{1995) 214 ITR 801 (SC) wherein the former case dealt with tax planning and not on sham transactions and in the later case, the inference was based upon tests of human probabilities contended that the Assessee’s version of facts was unbelievable and hence was to be entitled to be discarded. Similarly, in the case of A. Mauritius (XYZ India), In re (201.2) 343 ITR 455/206 Taxman 631 (AAR), referring to the above decision of McDowell and Co Ltd (supra) and other two decisions of the Hon’ble Supreme Court in the cases of Union of India Vis. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) and Vodafone International Holdings B. V. Vs. UOI (2012) 341 ITR 1 (SC), the Authority of Advance Ruling held on the issue of Tax Planning contending that the inference was one of tax avoidance It is felt that it is no more permissible for the Assessee to avoid tax merely by choosing legal means available to it, where it ·is clearly a colorable transaction. The facts of the case of the appellant of either evading or avoiding the tax can be judged on the above parameters decided in various judicial decisions. It is therefore immaterial as to whether the appellant had sold the 19 units to the partners and interested persons at a higher price than the stamp duty valuation and hence provisions of section 43CA could not be attracted when the facts was discussed by the AO revealed after analysis and enquiry that the appellant had sold the said units at considerable lesser sale price that the market value prevailing in this relevant assessment year for which the appellant had sold the other 6 units to the third parties. The AO, in fact, had taxed the difference amount of sale price of the units after analysis and comparison of the sale of the units in the same period to one group who were partners and interested persons’ and the other group who were the third parties. While in the first group of cases the appellant could camouflage the documents and transaction being self-serving, in other group of cases the same was far-fetched and could not be done and therefore the correct sale price had to be shown. During the appellate proceedings, no further facts and evidences have. been adduced/furnished and also no such additional explanation was given in the submission dated 07.06.2019 by the appellant.

4.1.3 In view of the facts of the case of the appellant has discussed in detail above and various decision cited by me, I hold that the AO had correctly and justifiably computed the disallowance of loss to the extent of Rs.3,90,95,4 79/-, thereby reducing the appellant’s claim of loss of Rs 8,50,05,404/- by the said amount and assessing the total income of the appellant at loss of Rs. 4,59,09,925/-, effectively making the addition of the amount of Rs. 3,90,95,4791-. The addition so made is therefore confirmed.”

9. We observe from the findings of the ld. A.O that he has examined in detail the facts and circumstances involved in the assessee’s case and has successfully demonstrated that the assessee has himself caused the loss by selling shops below the cost price to the partners and interested parties. It has been brought out by the ld. A.O that the assessee intentionally sold the shops to the partners and interested parties in order to create loss. By selling 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 artificially with intent to evade tax. For the same financial year i.e. 2015-16 relevant to A.Y. 2016-17 the assessee had booked the sale of 25 units of shops/offices wherein in respect of 19 such units substantial amount of low sale price was booked and that too such sale were effected to the partners of the assessee-firm and also to the interested persons, though at the same time six units sold to other third party had generated much higher profit from such sale than the sales effected in the case of 19 such units. The assessee’s further contention during the assessment proceedings that all the units were sold at a higher price than the stamp duty valuation and therefore, the provisions of section 43CA of the Act are not attracted, this argument does not have any legal basis to sustain since it was never the case of the Assessing Officer that he had invoked the provisions of section 43CA of the Act while determining the disallowance of loss of Rs. 3,90,95,479/-. On the contrary, the case of the department is that the assessee has done a fraud on the department by creating the artificial loss to evade taxes. These facts have been ratified and upheld by the ld. CIT(A) also. When a fraud is committed it vitiates everything. As per the investigation by the Department undoubtedly the assessee had sold considerable units at a much lesser sale price than the market value prevailing. On the other hand, the assessee had sold six units to the third parties which have generated much higher profit from such sale. Therefore, fraudulent conduct of the assessee to defraud the revenue by evading taxes and for that purpose creating artificial loss in this case is established beyond reasonable doubt. Before us, the ld. A.R of the assessee could not establish through evidences/reasoning regarding the legal sanctity of the transactions in question. The ld. A.R was also unable to establish that the transaction of the assessee fell within the purview of tax planning, on the contrary, however, the facts have demonstrated conclusively that it is a case of tax evasion.

10. There is yet one more reason as to why we are inclined to confirm the addition made by Assessing Officer, in view of the well settled principle of law that fraud vitiate everything and even principle of natural justice have no application and such transaction is void ab initio. The Hon’ble Supreme Court in the case of Friends Trading Co. vs. Union of India in Civil Appeal No.5608 of 2011 vide order dated 23.09.2022 held in the context of availment of alleged forged DEPB under the Customs Act, wherein, it was found DEPB licenses were forged and it was held that the exemption benefit availed on such forged DEPB are void ab initio on the principle that fraud vitiate everything and the period of limitation was held to have no application and the Department was held to be justified in invoking the extended period of limitation and the fact that whether the beneficiary had no knowledge of about the fraud/forged and fake DEPB licenses have no bearing the imposition of custom duty. The ratio of judgement is squarely applicable to the transaction under consideration before us.

11. Further, the application of principle of the fraud under judicial Acts was considered by the Hon’ble Supreme Court in the case of Smt. Badami (Deceased) by her L.R. vs. Bhali in Civil Appeal No.1723 of 2008 dated 22.05.2012, wherein, the Hon’ble Apex Court held as follows :

“20. In S. P. Chengalvaraya Naidu (dead) by L.Rs. v. Jagannath (dead) by L.Rs. and others [AIR 1994 SC 853] this court commenced the verdict with the following words:-

““Fraud-avoids all judicial acts, ecclesiastical or temporal” observed Chief Justice Edward Coke of England about three centuries ago. It is the settled proposition of law that a judgment or decree obtained by playing fraud on the court is a nullity and non est in the eyes of law. Such a judgment/decree

– by the first court or by the highest court – has to be treated as a nullity by every court, whether superior or inferior. It can be challenged in any court even in collateral proceedings.”

21. In the said case it was clearly stated that the courts of law are meant for imparting justice between the parties and one who comes to the court, must come with clean hands. A person whose case is based on falsehood has no right to approach the Court. A litigant who approaches the court, is bound to produce all the documents executed by him which are relevant to the litigation. If a vital document is withheld in order to gain advantage on the other side he would be guilty of playing fraud on court as well as on the opposite party.

22. In Smt. Shrist Dhawan v. M/s. Shaw Brothers [AIR 1992 SC 1555] it has been opined that fraud and collusion vitiate even the most solemn proceedings in any civilised system of jurisprudence. It has been defined as an act of trickery or deceit. The aforesaid principle has been reiterated in Roshan Deen v. Preeti Lal [AIR 2002 SC 33], Ram Preeti Yadav v. U. P. Board of High School and Intermediate Education and other [(2003) 8 SC 311] and Ram Chandra Singh v. Savitri Devi and others [(2003) 8 SCC 319].

23. In State of Andhra Pradesh and another v. T. Suryachandra Rao [AIR 2005 SC 3110] after referring to the earlier decision this court observed as follows:-

“In Lazaurs Estate Ltd. v. Beasley [(1956) 1 QB 702] Lord Denning observed at pages 712 & 713, “No judgment of a Court, no order of a Minister can be allowed to stand if it has been obtained by fraud. Fraud unravels everything.” In the same judgment Lord Parker LJ observed that fraud vitiates all transactions known to the law of however high a degree of solemnity. ”

24. Yet in another decision Hamza Haji v. State of Kerala & Anr. [AIR 2006 SC 3028] it has been held that no court will allow itself to be used as an instrument of fraud and no court, by way of rule of evidence and procedure, can allow its eyes to be closed to the fact it is being used as an instrument of fraud. The basic principle is that a party who secures the judgment by taking recourse to fraud should not be enabled to enjoy the fruits thereof.”

12. In the present case also, the assessee has sold the shops to the partners below the market price and below the cost price, by which the partners of the assessee have gained individually and at the same time, the partnership firm has shown loss. Similarly sale of shops/offices were executed in favour of interested persons from whom the assessee had taken loans again at a price much below the market price. It was within the exclusive knowledge of the assessee regarding the veracity of these transactions. 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.

13. In the result, appeal of the assessee is dismissed.

Order pronounced in the open court on this 3^rd day of April 2023.