Sale below market price/ cost price with intention to create loss is fraud to evade payable taxes: ITAT

The relevant facts as emerging from the assessment order are that the assessee firm is engaged in the business of builders and developers. The assessee has constructed project INSPIRIA. The assessee is following project completion method of accounting in respect of the project.

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 net loss of Rs. 8,50,05,404/-. It was observed that the loss was mainly due to sales made below the cost price.

On verification of the details submitted by the assessee, it was seen by the A.O that the assessee had sold total 25 shops/offices during the year under consideration. Out of these 25 shops, 6 shops were sold to the Eklavya Builders Pvt. Ld., and another six shops were sold to Shri Arun Agrawal who are partners of the assessee. Thus, 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 loan. All these 19 shops sold to the partners and persons having interest in the business were sold below the cost price. It is seen that 6 shops were sold to the third parties.

It was further observed from the above that the average price of sale per sq.ft. to the third party is around Rs. 8472/- per sq.ft. whereas the average price of 19 shops sold to the partners and interested parties is Rs. 5,025/- per sq.ft. This fact clearly shows that these shops are sold to the partners at a price much below the price charged to the third parties and also below the cost price. In view of the above, vide letter dated 10-12-2018 the assessee was asked to explain why the shops were sold to the partners below the market price and why the sale price should not be estimated as per the sale price charged to the third parties.

The submission furnished by the assessee were considered. The contention of the assessee was that all these shops were sold at price more than the stamp duty valuation and hence the provisions of section 43CA were not applicable. It was also contended that the sale was booked in the year 2015-16 as against the loss taken against the said shops in the year 2013-14 and hence the prices prevailing at the time of agreement were less.

The facts showed that the assessee has himself sold the shops at some agreed price between the partners. The assessee has himself cause a loss by selling the shops below the cost price to the partners and interested parties. The fact clearly showed that the only intention to sale the shops below the cost price is to create a loss. The transactions are purposely shown to be carried out in the year 2014-15 as it was already decided by the assessee to book the loss. The entire transaction show the intention and purpose of the assessee to create loss. By selling the shops to the partners below the market price and below the cost price, the partners of the assessee have gained individually and at the same time the partnership firm has shown loss. Thus, the entire transaction is fabricated, artificial with the intent to evade tax.

In view of the above the price for sale made to the partners and interested parties were taken at Rs. 8,472/- which was the average price of sale made to the third parties. By applying this rate the sale of the assessee estimated at Rs. 14,07,20,252/- (16612 x 8472). Hence the loss to the extent of Rs. 3,90,95,479/- was disallowed.

Income Tax Appellant Tribunal

9. We observe from the findings of the ld. A.O that he has examined in detail the facts and circumstances involved in the assessee’s case and has successfully demonstrated that the assessee has himself caused the loss by selling shops below the cost price to the partners and interested parties. It has been brought out by the ld. A.O that the assessee intentionally sold the shops to the partners and interested parties in order to create loss. By selling shops to the partners below the market price and below the cost price, the partners of the assessee have gained individually and at the same time, the partnership firm has shown loss. Thus, the entire transaction is fabricated artificially with intent to evade tax. For the same financial year i.e. 2015-16 relevant to A.Y. 2016-17 the assessee had booked the sale of 25 units of shops/offices wherein in respect of 19 such units substantial amount of low sale price was booked and that too such sale were effected to the partners of the assessee-firm and also to the interested persons, though at the same time six units sold to other third party had generated much higher profit from such sale than the sales effected in the case of 19 such units. The assessee’s further contention during the assessment proceedings that all the units were sold at a higher price than the stamp duty valuation and therefore, the provisions of section 43CA of the Act are not attracted, this argument does not have any legal basis to sustain since it was never the case of the Assessing Officer that he had invoked the provisions of section 43CA of the Act while determining the disallowance of loss of Rs. 3,90,95,479/-. On the contrary, the case of the department is that the assessee has done a fraud on the department by creating the artificial loss to evade taxes. These facts have been ratified and upheld by the ld. CIT(A) also. When a fraud is committed it vitiates everything. As per the investigation by the Department undoubtedly the assessee had 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 the third parties which have generated much higher profit from such sale. Therefore, fraudulent conduct of the assessee to defraud the revenue by evading taxes and for that purpose creating artificial loss in this case is established beyond reasonable doubt. Before us, the ld. A.R of the assessee could not establish through evidences/reasoning regarding the legal sanctity of the transactions in question. The ld. A.R was also unable to establish that the transaction of the assessee fell within the purview of tax planning, on the contrary, however, the facts have demonstrated conclusively that it is a case of tax evasion.

10. There is yet one more reason as to why we are inclined to confirm the addition made by Assessing Officer, in view of the well settled principle of law that fraud vitiate everything and even principle of natural justice have no application and such transaction is void ab initio. The Hon’ble Supreme Court in the case of Friends Trading Co. vs. Union of India in Civil Appeal No.5608 of 2011 vide order dated 23.09.2022 held in the context of availment of alleged forged DEPB under the Customs Act, wherein, it was found DEPB licenses were forged and it was held that the exemption benefit availed on such forged DEPB are void ab initio on the principle that fraud vitiate everything and the period of limitation was held to have no application and the Department was held to be justified in invoking the extended period of limitation and the fact that whether the beneficiary had no knowledge of about the fraud/forged and fake DEPB licenses have no bearing the imposition of custom duty. The ratio of judgement is squarely applicable to the transaction under consideration before us.

11. Further, the application of principle of the fraud under judicial Acts was considered by the Hon’ble Supreme Court in the case of Smt. Badami (Deceased) by her L.R. vs. Bhali in Civil Appeal No.1723 of 2008 dated 22.05.2012, wherein, the Hon’ble Apex Court held as follows :

“20. In S. P. Chengalvaraya Naidu (dead) by L.Rs. v. Jagannath (dead) by L.Rs. and others [AIR 1994 SC 853] this court commenced the verdict with the following words:-

““Fraud-avoids all judicial acts, ecclesiastical or temporal” observed Chief Justice Edward Coke of England about three centuries ago. It is the settled proposition of law that a judgment or decree obtained by playing fraud on the court is a nullity and non est in the eyes of law. Such a judgment/decree

– by the first court or by the highest court – has to be treated as a nullity by every court, whether superior or inferior. It can be challenged in any court even in collateral proceedings.”

21. In the said case it was clearly stated that the courts of law are meant for imparting justice between the parties and one who comes to the court, must come with clean hands. A person whose case is based on falsehood has no right to approach the Court. A litigant who approaches the court, is bound to produce all the documents executed by him which are relevant to the litigation. If a vital document is withheld in order to gain advantage on the other side he would be guilty of playing fraud on court as well as on the opposite party.

22. In Smt. Shrist Dhawan v. M/s. Shaw Brothers [AIR 1992 SC 1555] it has been opined that fraud and collusion vitiate even the most solemn proceedings in any civilised system of jurisprudence. It has been defined as an act of trickery or deceit. The aforesaid principle has been reiterated in Roshan Deen v. Preeti Lal [AIR 2002 SC 33], Ram Preeti Yadav v. U. P. Board of High School and Intermediate Education and other [(2003) 8 SC 311] and Ram Chandra Singh v. Savitri Devi and others [(2003) 8 SCC 319].

23. In State of Andhra Pradesh and another v. T. Suryachandra Rao [AIR 2005 SC 3110] after referring to the earlier decision this court observed as follows:-

“In Lazaurs Estate Ltd. v. Beasley [(1956) 1 QB 702] Lord Denning observed at pages 712 & 713, “No judgment of a Court, no order of a Minister can be allowed to stand if it has been obtained by fraud. Fraud unravels everything.” In the same judgment Lord Parker LJ observed that fraud vitiates all transactions known to the law of however high a degree of solemnity. ”

24. Yet in another decision Hamza Haji v. State of Kerala & Anr. [AIR 2006 SC 3028] it has been held that no court will allow itself to be used as an instrument of fraud and no court, by way of rule of evidence and procedure, can allow its eyes to be closed to the fact it is being used as an instrument of fraud. The basic principle is that a party who secures the judgment by taking recourse to fraud should not be enabled to enjoy the fruits thereof.”

12. In the present case also, the assessee has sold the shops to the partners below the market price and below the cost price, by which the partners of the assessee have gained individually and at the same time, the partnership firm has shown loss. Similarly sale of shops/offices were executed in favour of interested persons from whom the assessee had taken loans again at a price much below the market price. It was within the exclusive knowledge of the assessee regarding the veracity of these transactions. It was for the assessee to establish why the shops were sold to the third parties at much higher profit as compared to the partners and interested persons. The assessee has not been able to provide any justification and specific reasons neither before the A.O nor before the ld. CIT(A) regarding such sale transactions. Knowing fully well the intention to create loss and having exclusive knowledge the assessee never explained before the revenue authorities nor before this Bench the reasonableness for such transactions and chosen not to disclose the real intention of creating artificial loss is nothing but a fraud to evade payable taxes. Therefore, the principle of fraud can be squarely applied to the facts of the present case. Accordingly, we confirm the orders of the Assessing Officer as well as the ld. CIT(A) and find no merits in the appeal preferred by the assessee before us.

13. In the result, appeal of the assessee is dismissed.

For Official Judgment Download PDF Given Below: