Mantri Properties Pvt. Ltd., Pune V. Income-tax Officer,

ITA 1124/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1794 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 18-05-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 26-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANIL CHAWARE
• Assessee Lawyers: N W KHARE
• Keywords: Depreciation; Business expenditure; Commercial expediency

Judgement Text

] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE , . . , # BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM . / ITA NO.1124/PN/2014 % % / ASSESSMENT YEAR : 2007-08 MANTRI PROPERTIES PVT. LTD., 161, MODIBAUG, GANESHKHIND ROAD, PUNE 411016 PAN NO.AACCM5271C . / APPELLANT V/S ITO, WARD-11(1), PUNE . / RESPONDENT / ASSESSEE BY : SHRI N.W. KHARE / REVENUE BY : SHRI ANIL CHAWARE / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE O RDER DATED 29-11-2013 OF THE CIT(A)-I, PUNE RELATING TO ASSE SSMENT YEAR 2007-08. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COMPANY AND FILED ITS RETURN OF INCOME ON 24-10-2007 DECLARING TOTAL LOS S OF RS.14,19,857/- AFTER SETTING OFF OF THE CURRENT YEAR BUSINES S LOSS AGAINST THE LONG TERM CAPITAL GAIN OF THE CURRENT YEAR. FROM THE PROFIT AND LOSS / DATE OF HEARING :18.05.2016 / DATE OF PRONOUNCEMENT:20.05.2016 2 ITA NO.1124/PN/2014 ACCOUNT FILED BY THE ASSESSEE THE AO NOTED THAT THE ON LY INCOME DISCLOSED BY THE ASSESSEE IS FROM SALE OF LAND AT BHUGAON WHICH HAS BEEN OFFERED AS LONG TERM CAPITAL GAIN. NO OTHER INCOME HA S BEEN SHOWN AND NEITHER THERE IS ANY OPENING OR CLOSING WORK IN PROG RESS. HOWEVER, THE ASSESSEE HAS CLAIMED VARIOUS EXPENSES SUCH AS SALARIES OF PERSO NNEL INCLUDING SITE DEVELOPMENT EXPENSES, OTHER EXPENSES AND DEPRECIATION AS PER SCHEDULE 4, 5 AND 6 OF THE AUDIT REPORT. HE, THER EFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO HOW THE SAID EXPENDITURE ARE ALLOWABLE AS BUSINESS EXPENDITURE WHEN THERE IS NO BUSINESS ACTIVITY O F DEVELOPMENT AND CONSTRUCTION DURING THE YEAR. 3. IT WAS SUBMITTED THAT THE COMPANY WAS INCORPORATED ON 22-02-2001 AND IS IN EXISTENCE FROM A.Y. 2000-01. THE COM PANY IS PRIMARILY ENGAGED IN CONSTRUCTION BUSINESS AND PROPERTY DEVELOPMENT AND ALLIED SERVICES. IT HAS COMPLETED 2 PROJECTS SUCCESS FULLY IN PAST ASSESSMENT YEARS AND THE COMPANY ALSO PROVIDED PROJEC T CONSTRUCTION RELATED SERVICES TO THE CONSTRUCTION INDUSTRY. ALTHOUGH THE ASSESSEE HAS NOT RECEIVED ANY REVENUE DURING THIS YEAR, HOWEVER, IT DO ES NOT MEAN THAT ASSESSEE COMPANY DOES NOT HAVE ANY BUSINESS SET UP OR HAS CEASED TO DO BUSINESS ACTIVITY. ON THE CONTRARY THE COMPANY A S A GOING CONCERN IS IN EXISTENCE AND OWNS REASONABLE INFRASTRUCTUR E, ASSETS AND HAS EMPLOYED LABOUR FORCE AND IS READY/IN A POSITION TO EX ECUTE CONTRACTS/RENDER SERVICES. IT WAS SUBMITTED THAT DURIN G THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE COMPANY HAS INCURRED TH E FOLLOWING MAJOR EXPENSES : SR.N O. PARTICULARS RUPEES 1. PERSONNEL COSTS 12,01,641 2. SITE DEVELOPMENT CHARGES 2,96,665 3. RENT PAID 2,43,000 4. TRAVELLING AND CONVEYANCE 2,96,232 5. USAGE CHARGES 1,77,000 6. POSTAGE AND TELEPHONE 1,58,620 3 ITA NO.1124/PN/2014 7. OFFICE ELECTRICITY CHARGES 63,389 8. LEGAL AND PROFESSIONAL FEES 42,798 9. SALES PROMOTION EXPENSES 38,230 10. INSURANCE 1,23,042 11. DEPRECIATION ON FIXED ASSETS 3,33,088 IT WAS SUBMITTED THAT THE ABOVE EXPENSES ARE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 4. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE HELD THAT THE PERSONNEL COST OF RS.12,0 1,641 INCLUDES SALARY OF RS.8.27 LAKHS TO THE DIRECTORS. FURTHER, THE SALA RY PAID TO 7 PERSONS OUT OF WHICH 2 ARE RECEPTIONISTS, 3 ARE ACCOUNTA NTS, 1 IS ARCHITECT AND 1 ESTATE MANAGER. THEREFORE, THE EXPEND ITURE CLAIMED ON ACCOUNT OF PERSONNEL IS AGAINST THE PRINCIPLE OF COMMERCIAL E XPEDIENCY ESPECIALLY WHEN THE BUSINESS IS IN DORMANT CONDITION. IN V IEW OF THE ABOVE, THE AO DISALLOWED 50% OF REMUNERATION PAID TO THE D IRECTORS OUT OF PERSONNEL COST AND ACCORDINGLY MADE ADDITION OF RS.4,13,500/-. 4.1 SIMILARLY, ON ACCOUNT OF RENT AND USAGE CHARGES CLAIMED BY THE ASSESSEE THE AO NOTED THAT A SUBSTANTIALL AMOUNT HAS BEEN INCURRED TOWARDS RENT FOR THE RESIDENTIAL PREMISES OF THE DIRECTOR. SINCE NO SUCH RENT WAS PAID IN THE PRECEDING YEAR AND SINCE THE RENT HAS BEEN PAID TO THE WIFE OF THE DIRECTOR WHO IS SPECIFIED PERSON U/S.40A(2)(B), THE AO DISALLOWED AN AMOUNT OF RS.3 LAKHS BEING RENT PAID FOR THE RESIDENCE OF THE DIRECTORS RS.2,43,000/- AND RENT PAID FOR FURNITURE RS.57,000/-. 5. SO FAR AS SALES PROMOTION AND OTHER EXPENSES ARE CO NCERNED HE NOTED THAT IN ABSENCE OF ANY WORK IN PROGRESS OR FINISHE D GOODS AVAILABLE WITH THE ASSESSEE TO SELL, SUCH EXPENDITURE APPE ARS TO BE UNREASONABLE. FURTHER, BILLS TO THE EXTENT OF RS.29,905/- P ERTAINS TO 4 ITA NO.1124/PN/2014 SISTER CONCERN M/S.GLOBAL CONSTRO. HE THEREFORE DISALLOWED RS.29,905/- OUT OF SALES PROMOTION AND OTHER EXPENSES. 6. SO FAR AS TRAVELLING AND TELEPHONE EXPENSES ARE CONCE RNED, THE AO NOTED THAT THE ASSESSEE HAS CLAIMED RS.2,96,232/- ON TRAVELLING AND RS.1,58,620/- ON POSTAGE AND TELEPHONE TOTALLING TO RS.4,52, 852/-. HE NOTED THAT THE TRAVELLING EXPENSES INCLUDE TRAVEL TO BANG KOK, MALAYSIA AND KAULALUMPUR. THE EXPLANATION OF THE ASSESSEE THAT IT HAS BEEN SHOWN FOR VENTURING INTO A NEW BUSINESS OF MINING WAS REJE CTED BY THE AO. HE ACCORDINGLY DISALLOWED AN AMOUNT OF RS.2,27,426/- B EING 50% OUT OF THE EXPENSES OF RS.4,54,852/-. THE AO SIMILARLY DISA LLOWED AN AMOUNT OF RS.1,17,453/- BEING 50% OF DEPRECIATION ON CARS FO R PROBABLE PERSONAL USE. THE AO DISALLOWED RS.35,419/- OUT OF ELECTRIC ITY CHARGES OF RS.63,389/- WHICH RELATED TO THE BUNGALOW WHERE THE PA RENTS OF THE ASSESSEE ARE RESIDING AND THE RESIDENCE OF ONE OF THE DIR ECTORS. THE AO ALSO DISALLOWED AN AMOUNT OF RS.1,86,448/- OUT OF THE JOB WO RKS CLAIMED BY THE ASSESSEE ON THE GROUND THAT SUBSTANTIAL AMOUNT OF JOB WORK EXPENDITURE PERTAINS TO RADHIKAS BUNGALOW AND FLAT AT MODIBAGH WHICH ARE RESIDENTIAL PREMISES OF THE DIRECTOR AND HIS RELA TIVES. THUS, THE AO MADE TOTAL DISALLOWANCE OF RS.13,10,151/-. 7. IN APPEAL THE LD.CIT(A) GAVE PART RELIEF TO THE ASSESS EE FOR WHICH THE ASSESSEE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. IN THE FACTS & CIRCUMSTANCES OF THE CASE, THE LD.CI T(A)-I, PUNE ERRED IN CONFIRMING THE DISALLOWANCE OF THE FOLLOWING EXPE NSES : REMUNERATION TO DIRECTORS - RS.4,13,500/- RENT EXPENSES - RS.3,00,000/- SALES PROMOTION EXPENSES - RS.29,905/- TRAVELLING, POSTAGE AND TELEPHONE EXP. - RS.1,63,978/- DEPRECIATION - RS.1,17,453/- ELECTRICITY EXPENSES - RS.35,419/- JOB WORK CHARGES - RS.93,224/- 5 ITA NO.1124/PN/2014 2. THE ASSESSEE CRAVES LEAVE TO ADD, AMEND OR ALTER THE GROUNDS OF APPEAL. THE ASSESSEE PRAYS FOR DELETION OF THE DISALLOWANCE OF VARIOUS EXPENSES AS MEN TIONED HEREINABOVE. 8. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET DID NOT PRESS FOR THE DISALLOWANCE OF THE FOLLOWING EXPENSES : 1. SALES PROMOTION EXPENSES - RS.29,905/- 2. ELECTRICITY EXPENSES - RS.35,419/- 3. JOB WORK CHARGES - RS.93,224/- 9. SO FAR AS THE OTHER DISALLOWANCE IS CONCERNED, HE SUBM ITTED THAT THE CIT(A) IS NOT JUSTIFIED IN SUSTAINING THE ABOVE ADDITION. HE SUBMITTED THAT THE AO AND CIT(A) CANNOT SIT IN JUDGEMENT REGARDING THE COMMERCIAL EXPEDIENCY OR REASONABLENESS OF THE VARIOUS ITE MS OF EXPENSES INCURRED BY THE ASSESSEE. 10. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 11. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIO US DECISIONS CITED BEFORE US. SO FAR AS THE DISALLOWANCE OF REMUNERATIO N OF RS.4,13,500/- ON ACCOUNT OF REMUNERATION TO DIRECTORS IS CONCERNED WE FIND THE AO DISALLOWED 50% OF THE PAYMENT OF SALARY TO THE DIRECTORS AS BEING NOT WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES. W E FIND THE CIT(A) UPHELD THE ACTION OF THE AO ON THE GROUND THAT TH E ASSESSEE EXCEPT STATING THAT THE DISALLOWANCE WAS TOTALLY UNCALLED FOR, UNJUSTIFIED AND UNTENABLE COULD NOT JUSTIFY INCURRING OF SUCH EXPENDIT URE ESPECIALLY 6 ITA NO.1124/PN/2014 WHEN THE BUSINESS WAS TOTALLY DORMANT DURING THE YEAR AND NO ACTIVITY RELATING TO CONSTRUCTION BUSINESS WAS CARRIED OUT BY THE ASSESSEE. HE THEREFORE UPHELD DISALLOWANCE OF 50% OF THE REMUNERATION T O DIRECTORS. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN THE SUBSEQUENT YEAR THE ASSESSEE COMPANY HAS STARTED GE TTING REVENUE RECEIPTS AND THE PERSONNEL COST HAS ALSO GONE UP TO RS .15.23 LAKHS AS AGAINST RS.12.01 LAKHS DURING THE YEAR. THE DIRECTORS HAV E BEEN PAID SALARY OF RS.9,00,000/- EACH IN A.YRS. 2008-09 AND 2009-10 AND NO DISALLOWANCE HAS BEEN MADE BY THE AO. WE FIND FORCE IN THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE. ALTHOUGH N O REVENUE RECEIPTS ARE GENERATED DURING THE YEAR, HOWEVER, THE C OMPANY IS IN EXISTENCE AND HAS STARTED GENERATING REVENUE IN THE NE XT YEAR, A FACT STATED BY THE LD. COUNSEL FOR THE ASSESSEE AND NOT CO NTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. IN THE IMMEDIATELY PREC EDING ASSESSMENT YEAR, THE COMPANY HAS PAID REMUNERATION OF R S.9,00,000/- AND NO DISALLOWANCE HAS BEEN MADE. IN OUR OPINION, ONCE A DIRECTOR IS IN EMPLOYMENT HIS SALARY SHOULD NOT BE REDUCED IN A PARTIC ULAR YEAR BECAUSE THERE IS NO GENERATION OF REVENUE. THE LOGIC GIV EN BY THE REVENUE AUTHORITIES IN THE INSTANT CASE IN OUR OPINION IS N OT JUSTIFIED. WE THEREFORE SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO DELETE THE DISALLOWANCE OF RS.4,13,500/- OUT OF REMUNERATION TO DIRECTORS. 12. SO FAR AS THE PAYMENT OF RENT IS CONCERNED, IT IS AN ADMITTED FACT THAT NO SUCH RENT WAS PAID IN THE PRECEDING YEAR WHEN THE BUSINESS WAS GOING ON. WHEN THERE IS NO BUSINESS ACTIVITY DURING T HE YEAR, THERE WAS NO JUSTIFICATION FOR GIVING RENT OF RS.2,43,000/- FOR RES IDENCE OF THE DIRECTOR. FURTHER, THE RENT HAS BEEN PAID TO THE WIFE OF THE DIRECTOR WHO IS A SPECIFIED PERSON U/S.40A(2)(B). SIMILARLY, THE USAGE CH ARGE OF RS.57,000/-, I.E. RENT FOR THE FURNITURE ALSO IS UNCALLED FOR UN DER THE 7 ITA NO.1124/PN/2014 FACTS AND CIRCUMSTANCES OF THE CASE. WE, THEREFORE, UPHO LD THE ORDER OF THE CIT(A) IN DISALLOWING THE RENT EXPENSES OF RS. 3 LAKHS. 13. SO FAR AS THE DISALLOWANCE OF RS.1,63,978/- OUT OF TRAVE LLING, POSTAGE AND TELEPHONE EXPENSES IS CONCERNED, WE FIND THE ASSESSEE HAS TRAVELLED TO BANGKOK, MALAYSIA AND KAULALUMPUR WHICH ARE MA INLY TOURIST SPOTS. NOTHING HAS BEEN PRODUCED BEFORE US THA T THE ASSESSEE HAS GONE TO THESE PLACES IN RELATION TO HIS BUSINESS ACT IVITY AND WHICH HAS RESULTED INTO SOME BUSINESS. NO SUCH PROOF WAS ALSO FILED THAT HE HAD DISCUSSED WITH SOME PEOPLE/BUSINESS HOUSES THERE ON ACCOUNT OF MINING ACTIVITY. MERELY STATING THAT ASSESSEE TRAVELLED T O THESE PLACES FOR VENTURING INTO NEW BUSINESS OF MINING IS NOT CONVINCING. THEREFORE, AN AMOUNT OF RS.1,48,116/- BEING 50% OF TRAVELLING EXPENSES OUT OF RS.2,96,213/- IS JUSTIFIED. HOWEVER, SINCE THE ASSESSEE IS A PRIVATE LIMITED COMPANY, THE DISALLOWANCE OF 50% OF TELEPHONE EXPENS ES, I.E. RS.79,310/- OUT OF RS.1,58,620/- AND 50% DEPRECIATION ON MO TOR CARS AMOUNTING TO RS.1,17,453/- OUT OF RS.2,34,906/- IS NOT JUSTIFIE D. THE ADDITION, IF ANY, CAN BE MADE IN THE HANDS OF THE DIRECTORS AS PERQUISITE. 14. SO FAR AS THE DISALLOWANCE OF ELECTRICITY EXPENSES OF RS .35,419/- IS CONCERNED, WE FIND THE SAME HAS RIGHTLY BEEN DISALLOWED BY THE AO AND UPHELD BY THE CIT(A) SINCE THE SAME RELATES TO THE B ILLS OF RADHIKA BUNGALOW WHERE THE PARENTS OF THE ASSESSEE ARE RESIDING AND BILLS O F THE RESIDENCE OF ONE OF THE DIRECTORS SHRI SANDIP MANTRI. GROU ND RAISED BY THE ASSESSEE IS ACCORDINGLY PARTLY ALLOWED. IN VIEW OF THE ABOVE DISCUSSION, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. 8 ITA NO.1124/PN/2014 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20-05-2016. SD/- SD/- ( SUSHMA CHOWLA ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER IQ.KS PUNE ; DATED : 20 TH MAY , 2016. LRH'K ' (*+ ,+ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. % ( ) - THE CIT(A)-I, PUNE 4. 5. THE CIT-I, PUNE ( ++,, ,, IQ.KS / DR, ITAT, A PUNE; 6. 0 / GUARD FILE. / BY ORDER , // ( + //TRUE COPY //// 23 + , / SR. PRIVATE SECRETARY ,, IQ.KS / ITAT, PUNE