Transaction entered in pursuance of MOU can not be said sham or colourable device to avoid tax

Transaction entered in pursuance of MOU can not be said sham or colourable device to avoid tax when payments and MOU not disputed, Joint Venture payments not attract TDS Provisions-High Court

ABCAUS Case Law Citation:
ABCAUS 2103 (2017) (10) HC

In the instant case, the assessee company had sold land to another company. The assessee claimed 25% of the sale consideration as expenditure which was paid to another corporate entity as profit sharing in connection with the subject land transaction. According to the assessee the said sum was paid in performance of its obligation under a Memorandum of Understanding (MOU) executed with the receiver company (JV Partner). It was stated that the services which JV partner undertook included identifying the buyer and also carrying out various other tasks relating to sale of the land involved.

However, the Assessing Officer (AO) regarded the JV partner a mere paper company, which was used by the assessee to reduce its profits. The AO made addition of the entire sum paid to the JV partner to the income of the assessee for two reasons – firstly u/s 40(a)(ia) and secondly the transaction being a ‘sham transaction’.

The CIT(A) allowed the appeal of the asssessee. The Revenue contested the order of the CIT(A) before the Income Tax Appellate Tribunal(ITAT) which sustained the order of the CIT(A).

The Hon’ble High Court observed that the commissioner Appeals had found the stand of the assessee was be as per law on both the counts on which the Assessing Officer had given his finding i.e., non deduction of TDS and holding the transaction as sham.

Out of the questions raised by the Revenue, the Hon’ble High Court examined only whether the failure of the assessee to produce JV partner company proved that the transaction was not genuine and the said company was a paper company.

The Hon’ble High Court observed that CIT(A) had however found that the AO’s finding of sham transaction was in direct conflict with his own acceptance of the assessee’s case that services rendered by the JV partner were of specialized, professional and technical nature. CIT(A), based on appreciation of materials on record, accepted the assessee’s stand that the said sum was not expenditure incurred by the assessee so as to attract the TDS provisions. Therefore, there was no question of disallowance u/s 40(a) (ia). The Tribunal also concurred with the findings of the Commissioner and observed that the AO did not point out any defect in the settlement or the MOU.

The Hon’ble High Court noted that remittance made to the JV partner was not doubted. Also, the Revenue was not been able to establish any defect or fault in the transaction made by the assessee pursuant to the MOU which was not disputed.

The Hon’ble High Court did not find any perversity in the findings of the CIT or the Tribunal which were duly arrived at on the basis of appreciation of materials on record. The appeal of the Revenue was dismissed holding that no substantial question of law arose.