MEHRA CAPITAL SERVICES P. LTD, MUMBAI V. ITO 2(2)(3), MUMBAI

ITA 1072/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49033 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 09-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 10-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Assessee Lawyers: H P SHAH
• Keywords: Business income; Depreciation
• Section: 37(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH J, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY (A.M) ITA NO.1072/MUM/2010(A.Y. 2005-06) M/S. MEHRA CAPITAL SERVICES PVT. LTD.,, 2 ND FLOOR, K.K.CHAMBERS, SIR. P.T.MARG, P.M.ROAD, FORT, MUMBAI 01 PAN:AAACN 6607N (APPELLANT) VS. THE ITO 2(2)(3), MUMBAI. (RESPONDENT) APPELLANT BY : SHRI H.P.SHAH RESPONDENT BY : SHRI S.K.SINGH ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 15/12/2009 OF CI(A)-V, MUMBAI RELATING TO ASSESSMENT YEAR 2005 -06. 2. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN TH E BUSINESS OF INVESTMENT IN SHARES. THE ALSO EARNS INTEREST INCO ME AND RENTAL INCOME. FOR ASSESSMENT YEAR 2005-06 THE ASSESSEE FILED A RE TURN OF INCOME SHOWING A LOSS OF RS.44,640/-. ON GOING THROUGH THE P&L A/ C. THE AO NOTICED THAT THE COMPANY HAD THE FOLLOWING RECEIPTS DURING THE Y EAR. 1 LTCG (UNITS) 477 2 STCG (UNITS) 34072 3 LTCG (SHARES) 328547 4 STCG(SHARES) 451417 ITA NO.1072/MUM/2010(A.Y. 2005-06) 2 5 PROFIT IN SHARE TRADING 3781 6 DIVIDEND INCOME 1830943 7 INTEREST INCOME 782498 8 OTHER INCOME 1910034 HOWEVER, THE EXPENSES INCURRED WERE AS UNDER: 1) DEPRECIATION 174180/- 2) ADMINISTRATION EXPENSES 837385/- 3) PERSONNEL EXPENSES 269807/- 4) FINANCIAL EXPENSES 1493826/- ACCORDING TO THE AO FOR EARNING BUSINESS INCOME O F RS.3781/- AND OTHER SOURCES OF RS.18,30,943/- UNDER THE HEAD DIVIDEND WHICH IS EXEMPT AND INTEREST INCOME OF RS. 7,82,498/- THE ASSESSEE HAS CLAIMED TO HAVE INCURRED THE ABOVE EXPENSES. ACCORDING TO THE AO THE EXPENS ES CLAIMED AS DEDUCTION BY THE ASSESSEE COULD NOT BE ALLOWED AS DEDUCTION F OR THE ABOVE REASON. 3. IN REPLY THE ASSESSEE SUBMITTED THAT THOUGH THE INCOME FROM SHARE TRADING WAS ONLY RS. 3781/- THE TOTAL TURNOVER OF P URCHASE AND SALE OF SHARES WAS RS. 5.50 LACS APPROXIMATELY. THE ASSESS EE ALSO POINTED OUT THAT THE ASSESSEE HAS EARNED INCOME FROM OTHER SOURCES AND EXPENSES IN EARNING THOSE INCOME HAS TO BE ALLOWED UNDER SECTION 57(1) OF THE INCOME TAX ACT,1961 (THE ACT). 4. THE AO HOWEVER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE. HE HELD AS FOLLOWS: 1. INCOME FROM BUSINESS WAS NEGLIGIBLE COMPARED TO T HE INCOME EARNED UNDER THE HEAD STCG AND LTCG. THE DIVIDEND INCOME EARNED WAS EXEMPT UNDER SECTION 10(34) OF THE ACT. ONLY INTER EST INCOME WAS TAXABLE. THUS IT WAS CLEAR THAT THE EXPENSES CLAIM ED UNDER THE HEAD ADMINISTRATIVE EXPENSES, PERSONAL EXPENSES AND FINA NCE EXPENSES CANNOT BE ALLOWED IN FULL. ITA NO.1072/MUM/2010(A.Y. 2005-06) 3 2. THE ENTIRE EXPENSES DEBITED IN THE P&L ACCOUNT CANN OT BE ALLOWED UNDER THE HEAD INCOME FROM BUSINESS BECAUSE IT CANN OT BE SAID THAT ALL THESE EXPENSES WERE INCURRED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS. 3. THE EXPENSES DEBITED IN THE P&L ACCOUNT CANNOT BE RELATED TO STCG AND LTCG. 4. COMPARED TO THE BUSINESS INCOME, THE MAJOR PART OF THE INCOME EARNED IS MOSTLY ON INVESTMENTS AND OTHER SOURCES, WHICH DOES NOT LEAVE ANY ROOM FOR SUCH EXPENSES. LOOKING INTO THE TOTAL ACTIVITY OF THE COMPANY AS A WHOLE PART OF THE EXPENSES ARE ATTRIBU TABLE TO THE INCOME EARNED UNDER THE HEAD BUSINESS INCOME AS W ELL AS INCOME FROM OTHER SOURCES, AND THE BALANCE IS ATTRIBUTABL E TO ALL THE OTHER INCOME EARNED BUT ARE CLAIMED EXEMPT AS PER THE I.T . ACT. ON THE ABOVE CONCLUSION, THE AO DISALLOWED 50% OF A LL THE EXPENSES INCURRED UNDER THE HEAD ADMINISTRATION EXPENSES, DEPRECIA TION AND PERSONNEL EXPENSES TOTALLING TO RS.7,87,780/-. THE DISALLOW ANCE U/S. 37(1) @ 50% WAS THUS MADE AT RS. 3,93,890/- BY THE AO. AGGRIEV ED BY THE AFORESAID ADDITION THE ASSESSEE PREFERRED AN APPEAL BEFORE TH E CIT(A). 4. THE CIT(A) ISSUED SHOW CAUSE NOTICE DATED 27/8/2 009 PROPOSING ENHANCEMENT OF THE DISALLOWANCE MADE BY THE AO AT 5 0% TO 100%. BEFORE CIT(A) THE ASSESSEE HAS SUBMITTED THAT PERSONNEL EX PENSES OF RS.2,69,807/- RELATE TO STAFF, MEMBERS, EMPLOYEES AS SALARY AND A LLOWANCE PAID DURING THE YEAR. THE COMPANY HAD TWO DIRECTORS: MR. J.T. POON JA AND MRS. SANGEETA POONJA WHO DID NOT TAKE ANY REMUNERATION. THEY WER E NOT USING MOTOR CAR BECAUSE EACH OF THEM WERE HAVING THEIR OWN CAR AND CLAIM EXPENSES FROM THEIR PERSONAL INCOME. MOTOR CAR WAS THUS USED FOR BUSINESS PURPOSE BY THE ASSESSEE. WITH REGARD TO DEPRECIATION OF RS.1, 71,480/-, IT WAS CLAIMED THAT SINCE THE CAR IS OWNED BY THE ASSESSE USED FOR THE PURPOSE OF BUSINESS, DEPRECIATION CANNOT BE DISALLOWED. SIMILARLY IT W AS SUBMITTED ALL THE OTHER EXPENSES WERE ALLOWABLE BECAUSE THE ASSESSEE CARRIE D ON BUSINESS AND ALSO HAD INCOME UNDER THE HEAD INCOME FROM OTHER SOURCE S. ITA NO.1072/MUM/2010(A.Y. 2005-06) 4 5. THE CIT(A) HOWEVER WAS OF THE VIEW THAT THE BUSI NESS RECEIPTS WERE QUITE NEGLIGIBLE COMPARED TO THE EXPENSES DEBITED BY THE ASSESSEE AGAINST THE BUSINESS INCOME THE OTHER INCOME EARNED BY THE ASS ESSEE WAS CAPITAL GAINS DIVIDEND AND INTEREST INCOME. IN THESE CIRCU MSTANCES THE CIT(A) WAS OF THE VIEW THAT THE WHOLE OF THE EXPENSES DEBITED IN THE P&L ACCOUNT COULD NOT BE ALLOWED AS A DEDUCTION. HE WAS ALSO OF THE VIEW THAT THE DISALLOWANCE OF 50% OF THE EXPENSES DEBITED TO THE P&L ACCOUNT W AS ON THE LOWER SIDE. HE ACCORDINGLY ENHANCED THE DISALLOWANCE TO 75% OF THE EXPENSES DEBITED IN THE P&L ACCOUNT. AGGRIEVED BY THE ORDER OF THE CIT (A) THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 6. WE HAVE HEARD THE RIVAL SUBMISSION. THE LD. COU NSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD CARRIED ON BUSINESS DURING THE PREVIOUS YEAR AND IRRESPECTIVE OF THE QUANTUM OF INCOME EARN ED, EXPENSES HAVE TO BE ALLOWED AS DEDUCTION. IT WAS SUBMITTED THAT IT HA S NOT BEEN FOUND BY THE REVENUE AUTHORITIES THAT THE EXPENDITURE IN QUESTIO N HAS NOT BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION. IT WAS ALSO SUBMITTED THAT THE EXPENDITURE ON ACCOU NT OF DEPRECIATION WAS IN RELATION TO MOTOR CAR, COMPUTER, AIR CONDITIONERS, FURNITURE AND FIXTURES AND OFFICE EQUIPMENT HAVE TO BE ALLOWED IN FULL UNDER S ECTION 32 OF THE ACT. IT WAS ALSO SUBMITTED THAT THE ADMINISTRATIVE AND PERS ONAL EXPENSES WERE INCURRED FOR THE PURPOSE OF CARRYING ON BUSINESS OF THE ASSESSEE AND THE SAME SHOULD BE ALLOWED AS DEDUCTION. IT WAS ALSO P OINTED OUT THAT NO SALARY WAS PAID TO DIRECTORS. 7. THE LD. D.R RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSION. IT IS SEEN FROM THE ORDERS OF THE LOWER AUTHORITIES THAT THE INCURRING OF THE IMP UGNED EXPENSES HAS NOT BEEN DOUBTED. IT IS ALSO NOTICED THAT THE ONLY REA SON FOR MAKING THE IMPUGNED DISALLOWANCE WAS BECAUSE INCOME EARNED UND ER THE HEAD ITA NO.1072/MUM/2010(A.Y. 2005-06) 5 BUSINESS VIZ., PROFIT IN SHARE TRADING WAS A SUM OF RS.3781/-. BESIDES THE ABOVE THE ASSESSEE HAS ALSO EARNED INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES OF RS. 19,10,034/-. NEITHER THE AO N OR THE CIT(A) HAS EXAMINED THE NEXUS OF THE EXPENSES DEBITED IN THE P &L ACCOUNT WITH INCOME FROM BUSINESS AND INCOME FROM OTHER SOURCES. IN SU CH CIRCUMSTANCES WE HAVE TO PROCEED ON THE ASSUMPTION THAT THE NEXUS OF THESE EXPENSES WITH THE EARNING OF INCOME FROM BUSINESS AND INCOME FROM OTHER SOURCES HAS NOT BEEN DOUBTED BY THE REVENUE AUTHORITIES. IF THAT B E SO, THEN THE ONLY REASON THAT REMAINS FOR SUSTAINING THE IMPUGNED DISALLOWAN CE IS THE FACT THAT INCOME FROM BUSINESS IS A MEAGER SUM OF RS.3781/-. ANOTHER ASPECT WHICH HAS NOT BEEN CONSIDERED BY THE REVENUE AUTHORITIES IS THE FACT THAT THE ASSESSEE HAD INCOME FROM OTHER SOURCES AGAINST WHIC H THE EXPENSES DEBITED IN THE P&L ACCOUNT CAN BE ALLOWED AS A DEDUCTION. IN ANY EVENT, WE ARE OF THE VIEW THAT THE DEPRECIATION WHICH IS A STATUTORY ALLOWANCE COULD NOT BE DISALLOWED. TAKING INTO CONSIDERATION ALL THE ABO VE CIRCUMSTANCES WE HOLD THAT THE DEPRECIATION HAS TO BE ALLOWED IN FULL. T HE ADMINISTRATIVE EXPENSES AND PERSONAL EXPENSES HAVE TO BE DISALLOWED AT 50% AS DONE BY THE AO. IN DOING SO WE ALSO TAKE INTO CONSIDERATION THE FACT T HAT THE ASSESSEE HAS NOT BEEN ABLE TO FULLY JUSTIFY THE NATURE OF EXPENSES D EBITED IN THE P&L ACCOUNT IN SUCH A WAY TO DISPEL ANY DOUBTS ON THE NEXUS OF THESE EXPENSES WITH THE BUSINESS OF THE ASSESSEE OR THE EARNING OF THE INCO ME FROM OTHER SOURCES. THUS THE APPEAL OF THE ASSESSEE IS ALLOWED IN PART AS INDICATED ABOVE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 20 TH DAY OF MAY, 2011. SD/- SD/- (J.SUDHAKAR REDDY ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 20 TH MAY.2011 ITA NO.1072/MUM/2010(A.Y. 2005-06) 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RJ BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.1072/MUM/2010(A.Y. 2005-06) 7 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 9/5/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 10/5/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER