M/s. KASYAP SWEETNERS LTD., MUMBAI V. ADDL CIT Rg. - 6(2), MUMBAI

ITA 1248/MUM/2006

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49224 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 26-05-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 21-02-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S C TIWARI
• Keywords: Cost of acquisition; Fair market value; Valuation report

Judgement Text

1 ITA NO. 1248/MM/2006 (ASST YEAR 2003-04) ITA NO. 298/MUM/2008 (ASST YEAR2005-06) IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI H HH H BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI J SUDHAKAR REDDY, J SUDHAKAR REDDY, J SUDHAKAR REDDY, J SUDHAKAR REDDY, AM AM AM AM & SHRI & SHRI & SHRI & SHRI VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM ITA NO. ITA NO. ITA NO. ITA NO. 1248/M 1248/M 1248/M 1248/MU UU UM/2006 (ASST YEAR 2003 M/2006 (ASST YEAR 2003 M/2006 (ASST YEAR 2003 M/2006 (ASST YEAR 2003- -- -04) 04) 04) 04) ITA NO. 298/MUM/2008 ITA NO. 298/MUM/2008 ITA NO. 298/MUM/2008 ITA NO. 298/MUM/2008 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR2005 2005 2005 2005- -- -06 0606 06) )) ) KASYAP SWEETENERS LTD 10 MARATHANDA ROAD 84 DR A B MARG WORLI NAKA MUMBAI 400 025 VS THE ADDL. COMMR OF INCOME TAX RANGE 6(2), MUMBAI ( (( (APPELLANT APPELLANT APPELLANT APPELLANT) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO.AABCK3538M AABCK3538M AABCK3538M AABCK3538M A SSESSEE BY SHRI S C TIWARI REVENUE BY SHRI M R KUBAL PER PER PER PER VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO, , , , JM JMJM JM THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE SEPARATE ORDERS DATED 15.12.2005 AND 19.10.2008 OF THE CIT(A) FOR THE AYS 2003-04 & 2005-06 RESPECTIVELY. 2 THE ONLY COMMON ISSUE ARISES IN THESE APPEALS IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) IS JUSTIFIED IN CONFIRMING THE DISALLOWANCE U/S 40A(2)(B) OF THE I T ACT OF RS. 28,32,000/- ON ACCO UNT OF THE RENT PAID BY THE ASSESSEE COMPANY IN RESPECT OF THE RESIDENTIAL ACCOMMODATIO N PROVIDED TO THE MANAGING DIRECTOR OF THE COMPANY. 3 DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS HIRED A RESIDENTIAL HOUSE FROM MRS NEETA KASHYA P, WIFE OF SHRI C K KASHYAP, MANAGING DIRECTOR OF THE ASSESSEE COMPANY, FOR RENT OF RS. 3 LACS PER MONTH AND THE ABOVE HOUSE IS BEING USED BY THE MANAGING DIRECTOR OF THE COMPANY AS HIS RESIDENCE. THE ASSESSING OFFICER WAS OF THE VIEW THAT CONSIDERING THE COST OF THE HOUSE, WHICH IS RS. 3,29,38,000/- 2 ITA NO. 1248/MM/2006 (ASST YEAR 2003-04) ITA NO. 298/MUM/2008 (ASST YEAR2005-06) THE RENT PAID AT RS. 3 LACS PER MONTH IS NOT REASO NABLE; ACCORDINGLY, HE HAS ADOPTED THE RETURN ON THE INVESTMENT AT 9% AS A REASONABLE REN T AND DISALLOWED RS. 10,20,580/- FOR THE AY 2003-04. 3.1 ON APPEAL, THE CIT(A), THOUGH HELD THAT THE RET URN OF INVESTMENT SHOULD BE 12% INSTEAD OF 9%; HOWEVER, HE HAS ENHANCED THE DISALLO WANCE TO RS. 28,32,000/- BY ADOPTING THE RENT OF THE RESIDENTIAL ACCOMMODATION AT 40% O F THE SALARY OF THE MANAGING DIRECTOR. 3.2 FOR THE AY 2005-06, THE ASSESSING OFFICER MAD E DISALLOWANCE OF RS. 28,32,000/- WHICH WAS CONFIRMED BY THE CIT(A) BY FOLLOWING THE ORDER FOR THE ASSESSMENT YEAR 2003-04. 4 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE ASSESSEE HAD SHIFTED ITS OFFICE FROM RATLAM TO MUMBAI. THE RESIDENTIAL ACCOM MODATION WAS PURCHASED BY THE WIFE OF THE MANAGING DIRECTOR AND GIVEN ON RENT TO THE A SSESSEE COMPANY. HE HAS FURTHER SUBMITTED THAT WHEN THE ASSESSING OFFICER AS WELL AS THE CIT(A) HAVE NOT FOUND THE RENT PAID BY THE ASSESSEE COMPANY IS MORE THAN THE PREVA ILING MARKET RENT OF THE PROPERTY AS THE SAME IS SITUATED IN THE POSH AREA OF MUMBAI AT PEDA ROAD; THEREFORE, THE CRITERIA ADOPTED BY THE ASSESSING OFFICER AS WELL AS THE C IT(A) ARE NOT PERMISSIBLE UNDER THE PROVISIONS OF LAW. HE REFERRED THE PROVISIONS OF SE C. 40A(2)(B) AND SUBMITTED THAT THE DISALLOWANCE CAN BE MADE IF THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES, OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEG ITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE. THE LD AR OF THE ASSES SEE SUBMITTED THAT AS FAR AS THE FAIR MARKET RENT OF THE PRESENT PREMISES IN QUESTION IS CONCERNED, THE LOWER AUTHORITIES HAVE NOT DOUBTED THE SAME THAT THE RENT PAID BY THE ASSESSEE IS EXCESSIVE OR UNREASONABLE IN COMPARING TO THE PREVAILING FAIRE MARKET RENT IN TH E AREA. 3 ITA NO. 1248/MM/2006 (ASST YEAR 2003-04) ITA NO. 298/MUM/2008 (ASST YEAR2005-06) 4.1 AS FAR AS LEGITIMATE NEEDS OF THE BUSINESS OF T HE ASSESSEE IS CONCERNED, THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT ADOPTING 40% OF THE SALARY BY THE CIT(A) HAS NO BASIS TO DECIDE THE LEGITIMATE NEEDS OF THE ASSESSEE. HE H AS FURTHER CONTENDED THAT THE ESTIMATION AND ADOPTION OF 40% SALARY OF THE MANAGING DIRECTOR REGARDING THE RENT FOR THE RESIDENTIAL ACCOMMODATION IS ARBITRARY ACTION ON THE PART OF TH E LOWER AUTHORITIES. THE FORMULA ADOPTED BY THE LOWER AUTHORITIES WAS WITHOUT ANY BASIS WHER EAS THE ASSESSEE HAS FURNISHED THE VALUATION REPORT IN SUPPORT OF THE PAYMENT OF RENT. HE HAS FURTHER SUBMITTED THAT WHEN THE RENT RECEIPT HAS BEEN SUBJECTED TO TAX IN THE HANDS OF MRS NEETA KASHYAP, THEN THERE WILL BE NO REVENUE LOSS. THUS, THE ACTION OF THE CIT(A ) IN ADOPTING THE REASONABLE RENT IS ARBITRARY, VERBOSITY AND WITHOUT ANY BASIS. HE HA S FILED THE COPY OF THE ASSESSMENT ORDER DATED 28.2.2006 IN THE CASE OF MRS NEETA KASHYAP FO R THE ASSESSMENT YEAR 2003-04 AND SUBMITTED THAT SHE HAS OFFERED THE LEASE RENT FOR T AXATION. 4.2 THE LD DR ON THE OTHER HAND HAS RELIED UPON THE ORDER OF THE CIT(A) AND REFERRED PARA 2.6 OF THE IMPUGNED ORDER. 5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER HAS DISALLOWED THE R ENT PAID TO THE EXTENT OF RS. 10,20,580/- FOR THE ASSESSMENT YEAR 2003-04 BY ADOPTING REASON ABLE RENT ON THE INVESTMENT BEING COST OF ACQUISITION OF THE HOUSE PROPERTY IN QUEST ION AT 9% AND ACCORDINGLY, THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAS PAID THE RENT I N QUESTION EXCESS TO THE EXTENT OF RS. 10,20,580/-. THE ASSESSING OFFICER HAS COMPUTED T HE RENT PAID BY THE ASSESSEE COMPANY AT RS. 36 LACS PER ANNUM PLUS 11% AS INTEREST ON D EPOSIT OF RS. 35 LACS AND THEREFORE, WORKED OUT THE ANNUAL RENT AT RS. 39,85,000/-. ON APPEAL, THE CIT(A) WAS OF THE VIEW THAT THE REASONABLE NORMAL ACCEPTED RENT IN MUMBAI IS AT 12%; THEREFORE, HE FOUND THAT THE FAIR RENT OF THE PROPERTY IN QUESTION SHOULD BE RS. 29,64,420/- INSTEAD OF RS. 36 LACS PAID BY THE ASSESSEE. HOWEVER, THE CIT(A) WENT TO TAKE A DIFFERENT OPINION ON THE DISALLOWANCE U/S 4 ITA NO. 1248/MM/2006 (ASST YEAR 2003-04) ITA NO. 298/MUM/2008 (ASST YEAR2005-06) 40A(2) WITH RESPECT TO THE RENT PAID BY THE ASSESSE E. THE CIT(A) WAS OF THE VIEW THAT THE REASONABLE RENT SHOULD BE 40% SALARY OF THE MANAGI NG DIRECTOR OF THE ASSESSEE COMPANY AND ACCORDINGLY, HE HAS ESTIMATED RS. 7,68,000/- AS REASONABLE RENT AND THE BALANCE OF RS. 28,32,000/- WAS DISALLOWED U/S 40A(2) RESULTANT THERE WAS ENHANCEMENT FOR DISALLOWANCE. IT IS CLEAR FROM THE ORDER OF THE LO WER AUTHORITIES THAT THEY HAVE ADOPTED THE CRITERIA FOR REASONABLE RENT ON THE COST OF THE PRO PERTY IN QUESTION AS ADOPTED BY THE ASSESSING OFFICER; WHEREAS THE CIT(A) HAS ADOPTED 4 0% OF THE SALARY AS REASONABLE RENT FOR THE ACCOMMODATION TO THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY. THUS, IT IS CLEAR THAT THE DISALLOWANCE MADE BY THE LOWER AUTHORITIES IS ON THE GROUND THAT EXCESSIVE OR UNREASONABLE RENT PAID BY THE ASSESSEE COMPANY FOR PROVIDING RESIDENTIAL ACCOMMODATION TO THE MANAGING DIRECTOR. 6 AS PER THE PROVISIONS OF SUB.SEC. 2(A) OF SEC. 40 A, THE EXCESSIVE OR UNREASONABLE EXPENDITURE CAN BE DISALLOWED ONLY WHEN THE SAID EX PENDITURE IS HIGHER THAN THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES. THE PRO VISIONS OF SEC. 40A(2)(A) READ AS UNDER: 2(A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THIS SUB SECTION, AND THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPE NDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEG ITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED B Y OR ACCRUING TO HIM THERE FROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY H IM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION (B)........................ 6.1 THE LOWER AUTHORITIES HAVE NOT GIVEN ANY FINDIN G THAT THE RENT PAID BY THE ASSESSEE IS EXCESSIVE OR UNREASONABLE IN COMPARISON TO THE FAIR MARKET RENT PREVAILING IN THE AREA. THEREFORE, WHEN THE DISALLOWANCE IS NOT BASED ON TH E EXCESSIVENESS OF THE RENT IN COMPARISON TO THE FAIR MARKET RENT THEN THE FAIR M ARKET RENT ADOPTED BY THE LOWER AUTHORITIES IS BEYOND THE SCOPE OF PROVISIONS OF SE C. 40A(2)(A). EVEN OTHERWISE, WHILE COMPUTING THE REASONABLE RENT ON THE INVESTMENTS BE ING THE COST OF THE PROPERTY, THE LOWER 5 ITA NO. 1248/MM/2006 (ASST YEAR 2003-04) ITA NO. 298/MUM/2008 (ASST YEAR2005-06) AUTHORITIES HAVE FAILED TO CONSIDER THE RESIDENTIAL ACCOMMODATION TO DIRECTOR WOULD FALL UNDER PERQUISITE AND ALSO TAXABLE IN THE HANDS OF T HE DIRECTOR. FURTHER, THE LANDLORD OF THE PROPERTY HAS OFFERED THE RENTAL INCOME TO TAX AND T HE SAME WAS ASSESSED AS PER THE ASSESSMENT ORDER FILED BY THE LD AR THEN IT CANNOT BE A REVENUE LOSS WITH RESPECT TO THE RENT PAID BY THE ASSESSEE. 6.2 AS REGARDS THE LEGITIMATE NEEDS OF THE BUSINES S OF THE ASSESSEE IS CONCERNED, THOUGH THE LOWER AUTHORITIES HAVE NOT GONE INTO THI S ASPECT; HOWEVER, IT IS SETTLED PROPOSITION OF LAW THAT THE TAX AUTHORITIES CANNOT STEP INTO THE SHOE OF THE BUSINESSMAN FOR TAKING BUSINESS DECISION. WHEN THE RENT IS PAID FO R PROVIDING THE RESIDENTIAL ACCOMMODATION TO THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY TH EN THE LEGITIMATE NEEDS HAS TO BE CONSIDERED BY TAKING INTO ACCOUNT THE ROLE OF THE M ANAGING DIRECTOR OF THE ASSESSEE COMPANY AND NOT THE SALARY DRAWN BY THE MANAGING D IRECTOR. THE LOWER AUTHORITIES HAVE NOT GIVEN ANY FINDINGS THAT THE RENT PAID FOR THE A CCOMMODATION PROVIDED TO THE MANAGING DIRECTOR IS NOT CONSONANCE WITH THE SERVICES AND TH E ROLE OF THE MANAGING DIRECTOR IN THE BUSINESS OF THE ASSESSEE COMPANY. THEREFORE, IN VIE W OF THE ABOVE DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE DISALLOWANCE MADE BY TH E LOWER AUTHORITIES IS NOT JUSTIFIED AND THE SAME IS LIABLE TO BE REJECTED. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LOWER AUTHORITIES QUA THIS ISSUE. 7 IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED ON THE 29 TH , DAY OF JUNE 2011. SD/- SD/- ( (( ( J SDHAKAR REDDY J SDHAKAR REDDY J SDHAKAR REDDY J SDHAKAR REDDY ) )) ) ACCOUNTANT MEMBER ( (( ( VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO ) )) ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 29 TH JUNE 2011 RAJ* 6 ITA NO. 1248/MM/2006 (ASST YEAR 2003-04) ITA NO. 298/MUM/2008 (ASST YEAR2005-06) COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI