2003-VIL-345-GAU-DT

Equivalent Citation: [2003] 262 ITR 73, 184 CTR 78, 133 TAXMANN 573

GAUHATI HIGH COURT

Date: 07.05.2003

SHREE CONSTRUCTION AND INVESTMENT CO.

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX.

BENCH

Judge(s)  : P. P. NAOLEKAR., A. H. SAIKIA.

JUDGMENT

The judgment of the court was delivered by

P.P. NAOLEKAR C.J.-Heard Mr. G.N. Sahewalla, learned counsel for the appellant, and Mr. U. Bhuyan, learned standing counsel for the income-tax.

The appeal is admitted on the following questions of law:

"(1) Whether, on the facts and circumstances of the case, the learned Tribunal was justified in upholding the addition of Rs. 3,00,000 on account of consultancy and liaison charges without there being a finding by the learned Assessing Officer that no services were rendered by Assam Vegetable and Oil Products Pvt. Ltd. to the appellant-firm?

(2) Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in making the disallowance under the head 'Land development' when it would be clear and evident from the records of the instant case that the land acquired was in the better interest of the trading activities of the appellant-firm?

(3) Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in making the disallowances under the head 'Additions' under section 40A(3) of the Income-tax Act when, on the facts and circumstances of the case, it would be evident and clear that the appellant-firm in view of the unavoidable and explainable circumstances had to make the aforesaid cash payments.

The question of law arises in the following facts and circumstances of the case.

That the appellant-firm, namely, Shree Construction and Investment Co., is a firm engaged in the business of real estate development. Since the assessment year 1989-90, the appellant-company is engaged in the construction of a multi-flat housing complex known as "Santigram", Guwahati. For this project the appellant-company has entered into an agreement on November 1, 1988, with S.B. Housing Co-operative Society Ltd., which was engaged in implementation of the said housing complex for residential and commercial purposes. Under the agreement, the appellant-firm agreed to provide a plot of land measuring 17 bighas, O katha, 14 lechas or say 2,44,816 sq. ft. and to build thereon in the form of buildings/flats/structures, etc. The structures required to be constructed on the area measuring 3,16,710 sq. ft. for a composite consideration of Rs. 7,07,67,001 only including the cost of the land. Under the contract, the project was required to be completed within a period of 3 (three) years from the date of agreement. The appellent-company further entered into an agreement dated August 20, 1988, with Assam Vegetable and Oil Products Pvt. Ltd., for payment of consultancy and supervision charges of the aforesaid project. Under this agreement, the consultancy firm has to provide all kinds of consultancy and super-vision services including getting prepared the structural planning, designing and details of all civil works and also to supervise the day-to-day progress of the work at all stages and the consultancy firm was to be paid, in lieu of the services rendered, three per cent. Of the payment received by the appellant-company against the construction work. As per the appellant, during the year under appeal, a sum of Rs. 4,70,518 was paid by the appellant-company to Assam Vegetable and Oil Products Pvt. Ltd., as consultancy charges and the appellant-company claimed the deduction as business expenditure of this amount which has been paid to the consultancy firm. The assessing authority disallowed the consultancy charges whereas the Commissioner (Appeals) allowed the charges but the Tribunal accepting the findings of the Commissioner of Income-tax (Appeals) disallowed the charges of consultancy partly. The finding arrived at by the Tribunal is that the payment as consultancy charges purportedly has been made to the company whose directors are close relatives of the partners of the assessee-firm and, thus, it can be safely assumed that the payment of consultancy charges is inflated. However, the Tribunal accepted the contentions of the assessee-firm that the payments were male to the consultancy company in terms of the agreement entered into on August 20, 1988, that these payments have been made by account payee cheque, that it is not disputed that the said consultancy and service charges have been paid for rendering services for construction and supervising works of the housing society. The Tribunal has arrived at the finding that the payment of inflated charges were made only on the basis that the directors of the consultancy firm are closely related with the partners of the assessee-firm.

In our considered view the reasoning adopted by the Tribunal for disallowing the part of consultancy charges is not based on business practice or on the basis of any material placed on record. The findings arrived at by the Tribunal on the consultancy charges are rather based on surmises and conjectures. It is a well known fact that in business circles when work is allocated preference is given to one's relatives or near ones, if it is so possible, considering the confidentiality of the persons concerned. Simply because some of the partners of the firm are close relatives of the directors of the consultancy company the consultancy charges cannot be disallowed, which have been paid in accordance with the contract entered into between the parties. This has been proved by producing evidence that the payment is made by account payee cheques. In the usual trade practice, when the construction is undertaken it cannot be said that the service of consultancy is not procured. There is no evidence on record that the consultancy charge of three per cent. as agreed under the agreement have not usually been paid in the nature of the work carried out by the assessee. No evidence has been led or produced by the Department indicating that the consultancy charge paid to the consultancy firm were not in conformity with the usual trade practice followed in the area. In the absence of any material on record it is not possible for us to hold that the consultancy charges as claimed by the assessee are not being paid to the consultancy firm. For these reasons, we do not agree with the findings arrived at by the Income-tax Appellate Tribunal that the assessee had not paid the whole of the consultancy charges as paid by it and paid lesser amount to the consultancy company. The findings arrived at by the Tribunal in that regard are set aside and we accept the findings recorded by the Income-tax Appellate Tribunal and in consequence thereof, we hold that the assessee/appellant is entitled for a deduction of an amount of Rs. 4,70,518 which has been paid by it as consultancy charge.

On the other issue which relates to the amount spent for purchase of land and development charge of Rs. 4,18,000, the assessee claimed that under the agreement he was required to construct a school building and also to develop the children's park for the residents of the housing society and for that he has purchased the land and paid the sale price and also spent an amount for development. It was found by the Tribunal that the identity of the land-owner was not established. The amount so claimed had been sought to be paid in cash. The Assessing Officer found that there was over writing and erasing of entry in the cash book relating to the claim made by the assessee. During the course of arguments, learned counsel for the assessee/appellant has admitted that the alleged sale of the land was not by registered sale deed and it was only by way of purchase of the possessory right of the land. Under the relevant building laws in the State of Assam, a person having possessory right over the land would not be entitled for sanction of buildings plan of the school by the sanctioning authority nor would be entitled to develop the park on such land. In the absence of possibility of permission or sanction of building plan or approved plan of the building for construction of the school and for development of the park, the assessee would not have, its a prudent businessman, spent considerable amount for purchase of the plot with possessory right over the land only. The whole transaction appears to be a hoax to us. Thus we do not find any reason to interfere with the finding arrived at in that regard by the Tribunal.

The other question is relating to payments made to parties in cash. It is a fact that payments amounting to Rs. 93,213 had been made in cash. Under section 40A(3) of the Income-tax Act, any payment exceeding an amount of Rs. 10,000 has to be made by cheque. The Tribunal on appreciation of relevant facts and circumstances reached the conclusion that the payments by way of cash has not been proved by the assessee. Whether the cash payment is made by the assessee to three parties is a question of fact and thus this court does not have jurisdiction to interfere with the pure question of fact. Learned counsel for the appellant is unable to show us any circumstance on the basis of which we can arrive at a conclusion that the findings arrived at by the Assessing Officer or the Tribunal are perverse. The Tribunal has rightly disallowed the claim of the assessee for Rs. 93,213.

For the aforesaid reasons, the appeal is partly allowed as indicated above and the appellant/assessee is entitled for deduction of an amount of Rs. 4,70,518 only. Accordingly, the appeal stands disposed of.

 

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