Facts of the Case

The present appeal pertains to Assessment Year 2010–11, wherein the Revenue challenged the order dated 30.01.2020 passed by the Income Tax Appellate Tribunal.

The core issue arises from a collaboration agreement dated 06.09.2004 executed between the assessee (Vishnu Apartments Pvt. Ltd.) and MGF Development Ltd. for an integrated hotel project in Jaipur, involving construction of a mall and a hotel (Hotel Fortune Select Metropolitan).

The project was later transferred/sold to Multitude Infrastructure Pvt. Ltd. for ₹95 crores, while total revenue generated amounted to ₹135 crores.

Under the agreement:

  • MGF was responsible for funding, bank guarantees, and technical expertise
  • The assessee agreed to pay 60% of revenue to MGF
  • A total of ₹57.07 crores was paid to MGF

The Assessing Officer (AO) treated the arrangement as a sham transaction and made an addition of ₹47.07 crores (after adjustments).

  • The CIT(A) deleted the addition
  • The ITAT upheld the deletion

 

Issues Involved

  1. Whether the collaboration agreement between the assessee and MGF Development Ltd. was a sham transaction.
  2. Whether the addition of ₹47.07 crores made by the AO was justified.
  3. Whether revenue sharing under commercial arrangements can be disallowed by questioning business expediency.

 

Petitioner’s Arguments (Revenue)

  • The collaboration agreement was merely a colorable device/sham to divert income.
  • The payment of ₹57.07 crores to MGF lacked genuine commercial basis.
  • The AO rightly made addition after adjusting for technical expertise and brand value.

 

Respondent’s Arguments (Assessee)

  • The agreement imposed real obligations on MGF, including:
    • Providing funds
    • Offering technical assistance
    • Granting brand value
  • Payments made were genuine business expenditure arising from commercial arrangement.
  • The same income had already been accepted and taxed in the hands of MGF.

 

Court Findings / Order

  • The AO failed to establish that the collaboration agreement was a sham.
  • Key factual findings noted:
    • Expenses funded by MGF were allowed by AO
    • Brand fee paid to MGF was accepted
    • ₹57.07 crores received by MGF was taxed under Section 143(3)
  • The Tribunal rightly applied the principle that:

The AO cannot sit in the “armchair of a businessman” to decide reasonableness of expenditure

  • Once the amount is accepted and taxed in the hands of the recipient (MGF), addition cannot be made again in the hands of the assessee.
  • The Court concluded:
    • No substantial question of law arises
    • Appeal dismissed

 

Important Clarification

  • Commercial expediency must be judged from the perspective of the businessman, not the Revenue.
  • If a transaction is accepted as genuine in the hands of one party, double taxation through disallowance in another’s hands is not permissible.
  • The burden lies on Revenue to prove a transaction is a sham, not merely suspect.

 

Sections Involved

  • Section 143(3) of the Income Tax Act, 1961 – Assessment
  • Principles relating to allowability of business expenditure & commercial expediency


Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS01122023ITA6732023_171316.pdf

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