INCOME TAX ACT, 1961

Section 40A(2)(b)

Business disallowance under section 40A(2)(b) - Excessive or unreasonable payment - Payment made out of commercial expediency -

Assessee- company engaged in real estate development. AO noticed that assessee had constructed and transferred the hotel project at Jaipur named as 'Hotel Fortune Select Metropolitan', Jaipur to one of their associated company M/s. Multitude Infrastructure Pvt. Ltd., for Rs. 95 crores. Out of this sale consideration, the company paid Rs. 57 crores (60% of Rs.95 crores) to another associated company, M/s. MGF Development Ltd. as per 'Collaboration Agreement' entered with it allegedly in F.Y. 2004-05 relevant to assessment year 2005-06 for providing & securing of fund requirements, bank guarantee and technical expertise in successful completion of the project. Transaction was also reflected in annexure-2, which was 'particulars of payments made to persons specified under section 40A(2)(b) of Audit Report under section 44AB. AO disallowed the amount of Rs. 57 crores claimed to be part of revenue sharing agreement. Held: For section 40A(2)(b) to be attracted, there must be expenditure and that too excessive expenditure. It was not a case of expenditure but revenue sharing. Further, on account of excessive expenditure separate disallowance had been made. It was incorrect to state that 60% of the revenue was shared by assessee with MGFD. What was shared was 60% of the revenue generated from sale of hotel, and not the entire project. It was not disputed that assessee was merely the landowner, and yet assesse received about 58% of gross revenues in the project. MGFD, on the other hand, having provided equity, bulk of funding requirement, brand, marketing and logistics, shared only 42% of the gross revenues. This is in keeping with market practice in similar project development cases, could not be said to be excessive. Also the case was not one of diversion of income by overriding tine but one of revenue sharing on joint project development. when AO was not discarding contribution of MGFD towards completion of project which was for financing, implementation, providing brand name and other technical assistance for completion of the project, accordingly, there was a commercial expediency in incurring the expenditure and AO had no power to sit in the arm chair of businessman and decide as to what would be the reasonable expenditure required to be incurred. Accordingly, disallowance could not be sustained.

REFERRED :

FAVOUR : in assessee's favour

A.Y. : 2010-11

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