The Pune bench of the Income Tax Appellate Tribunal (ITAT) has held that the sale of shops below market price amounts to fraud to tax evasion and upheld the disallowances.
Arihant Moti Developers, the assessee firm is engaged in the business of builders and developers. The assessee has constructed project INSPIRIA. The assessee is following the project completion method of accounting in respect of the project. In response to the notices, the AR of the assessee attended and submitted the details called for before the A.O.
On verification of the P & L account, it was seen that the assessee had shown total sales of Rs. 10,16,24,773/- and has shown a net loss of Rs. 8,50,05,404/-. It was observed that the loss was mainly due to sales made below the cost price.
It was viewed by the A.O. that the assessee had sold a total of 25 shops/offices during the year under consideration. Out of these 25 shops, 6 shops were sold to Eklavya Builders Pvt. Ld., and another six shops were sold to Shri Arun Agrawal who are partners of the assessee.
Out of 22 shops 12 shops have been sold to the partners. Another 7 shops have been sold to the persons from whom the assessee has taken a loan. All these 19 shops sold to the partners and persons having an interest in the business were sold below the cost price. It is seen that 6 shops were sold to third parties.
By selling the shops to the partners below the market price and the cost price, the partners of the assessee have gained individually and at the same time, the partnership firm has shown a loss. Thus, the entire transaction is fabricated, artificial with the intent to evade tax. The loss to the extent of Rs. 3,90,95,479/- was disallowed. On appeal, the CIT(A) upheld the findings of the AO.
It was evident that the assessee intentionally sold the shops to the partners and interested parties to create a loss. By selling shops to the partners below the market price and the cost price, the partners of the assessee have gained individually and at the same time, the partnership firm has shown a loss.
As per the Department investigation, the assessee undoubtedly sold considerable units at a much lesser sale price than the market value prevailing. On the other hand, the assessee had sold six units to third parties which generated much higher profit from such sale. Therefore, the fraudulent conduct of the assessee to defraud the revenue by evading taxes and for that purpose creating an artificial loss was established beyond reasonable doubt.
A two-member bench comprising Shri R S Syal, Vice President and Shri Partha Sarathi Chaudhury, (Judicial) observed that knowing fully well the intention to create loss and having exclusive knowledge the assessee never explained shows that the real intention of creating artificial loss is nothing but a fraud to evade payable taxes.
The ITAT confirmed the orders of the Assessing Officer as well as the CIT(A) and dismissed the appeal filed by the assessee.
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