2 Sections 40(a)(ia), 194H and 194J – Business expenditure – Disallowance – Payments subject to TDS – Compensation paid to joint venture partner under MOU – Finding that agreement not sham – Payment cannot be treated as expenditure required to deduct tax at source – Disallowance for failure to deduct tax not attracted

1.      
(2018) 400 ITR 521 (Cal)

Principal
CIT vs. Entrepreneurs (Calcutta) Pvt. Ltd.

A.Y.:
2006-07, Date of Order: 13^th Sept., 
2017

For the A. Y. 2006-07, the
assessee claimed as expenditure a sum of Rs. 5,17,48,439 paid to company A, as
compensation in connection with a land transaction. The assessee’s explanation
was that the amount was paid in performance of its obligation under a
memorandum of understanding with A under which A and the assessee were to share
the profit on sale of land in the ratio of 75% to A and 25% to the assessee,
that the services to be rendered by A included identifying the buyer and also
carrying out various other tasks in respect of the sale of the landed property
involved. The Assessing Officer was of the view that A was a sham company. He
treated the entire sum of compensation paid to A as the assesee’s income
chargeable to tax, on the grounds that the transaction was a sham, and that the
assessee had not deducted tax at source on the amount, invoking the provisions
of section 40(a)(ia).

The Tribunal held that the
transactions were made by a valid written contract on various terms and
conditions between the parties, which were essential for a joint venture
project. Such facts were not denied nor were any defects found in the agreement
by the Assessing Officer. It further held that the transaction was in lieu of
the agreement and the Assessing Officer was not justified in treating the
payment of compensation as an expenditure and that no tax at source was
required to have been deducted on the profit so shared between the two joint
venture partners and deleted the addition.   

On appeal by the Revenue,
the Calcutta High Court upheld the decision of the Tribunal and held as under:

“i)   Whether a transaction was sham or not was a
question of fact. The Commissioner (Appeals) had found the Assessing Officer’s
conclusion that it was sham transaction between assessee and A to be in direct
conflict with the Assessing Officer’s own acceptance that the services rendered
by A were of specialised, professional and technical in nature. Upon analyzing
the memorandum of understanding and other materials on record, the Commissioner
(Appeals) had accepted the contention of the assessee that the compensation paid
was not an expenditure incurred so as to attract the provisions of sections
194H and 194J requiring tax deduction at source. As a consequence, the question
of disallowance of the payments applying the provisions of section 40(a)(ia)
could not have arisen.

ii)   The findings of the Commissioner (Appeals),
concurred with by the Tribunal, were based on appreciation of material on
record. Further, the Tribunal had recorded that the Assessing Officer did not
point out any defect in the “settlement/contract”. There was no perversity in
the findings of the Commissioner (Appeals) and the Tribunal. No question of law
arose.”