INCOME TAX ACT, 1961

Section 4

Income - Diversion by overriding title - Sharing of gross revenue with holding company in return to service provided by that company -

Assessee-company engaged in promotion, construction, development and sale of integrated township, residential and commercial multi-storey buildings, complexes, hotels houses and apartments, transferred the revenue sharing of 25% to its holding company EMMAR MGF Land Limited pursuant to an agreement dated 7-4-2008 entered into by assessee and its holding company. AO took the view that quantum of sharing revenue out of gross sales was inordinately high, which would result in transfer of entire profit from the project to holding company and thus agreement dated 7-4-2008 was Sham agreement in the nature of colourable device executed with an intention of reducing the tax liability. The assessee explained that as per agreement dated 7-4-2008 entered into by assessee with its holding company titled as revenue sharing agreement pursuant to which the holding company will provide to the assessee company end to end support in planning, development, construction, marketing and sale of its project namely Commonwealth Games Village 2010. As per the terms of the arrangement the company shall be liable to pay 24% with effect from 1-7-2009 of the gross revenue earned by it through sale proceeds from building and structure proposed to be constructed in the said project except in the case of sale of flats to the Delhi development authority, the company was liable to pay 17% of the gross revenue derived by the company. Accordingly the revenue for the year in the books of the assessee company was Rs. 1,29,996,970 of gross revenue shared with the holding company. Held: Assessee was under obligation to part away with source of income to holding company and it was not its volition alone, to give away the revenue that could have been otherwise accrued to assessee. An agreement entered into by holding company with assessee for providing financial security cover and to part away 24% sales proceeds was clearly a case of division of source of income between holding company and assessee. Flats to be constructed, by assessee company were the source of income and holding company had created a lien over 24% for a quid pro quo thereof and therefore took away 25% share from the sale proceeds. It was not a case that entire sale proceeds of flats and therefore, income there from would have accrued to assessee and 25% thereof had been applied or given away by assessee to the holding company. Assessee acted as a collector of revenue for holding company of receipt to the extent of 25% of sale proceeds. Thus 24% belonged to holding company by virtue of contributions made and the agreement entered and payment of the disbursement income to holding company was diversion of income by overriding title and not mere application of income. Accordingly, concerned agreement could not be treated as mere Sham.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2012-13

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