M/S KIRAN INDUSTRIES, Mumbai V. THE ITO WD 9(3), Mumbai

ITA 1360/MUM/2004

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8629 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 22-10-2010
• Assessment Year: 1998-1999
• Appeal Filed On: 04-03-2004
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Keywords: Business income; Depreciation; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI S.V. MEHROTRA (AM) AND SMT ASHA VIJAYAR AGHAVAN (JM) ITA NO.1360/MUM/2004) (ASSESSMENT YEAR-1998-99) M/S. KIRAN INDUSTRIES, 246 A-Z INDL. ESTATE, GANPATRAO KADAM MARG, LOWER PAREL, MUMBAI-400 013 PAN- N.A. VS. THE ITO, WARD 9(3) , MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY: MS. MRUGAKSHI JOSHI RESPONDENT BY: SHRI S.K. SINGH O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LD. CIT(A)-XVIII MUMBAI DATED 8.12.2003 FOR THE A.Y .1998-99. 2. THE ASSESSEE FIRM IS IN THE BUSINESS OF GARMENT EXPORTS SINCE MORE THAN TWO DECADES AND TWO FACTORY STRUCTURES AD MEASURING APPROXIMATELY 29,000 SQ.FT WHICH WERE CONSTRUCTED B Y THE ASSESSEE FIRM IN TWO PHASES FIRST UPTO 1992 AND ANOTHER DU RING 1994-97. THESE STRUCTURES WERE CONSTRUCTED BY THEM FOR THE P URPOSE OF THEIR BUSINESS. FURTHER FIRM HAS REGULARLY CLAIMED DEPRE CIATION ON THE BUILDINGS UPTO THE A.Y. 1997-98. HOWEVER FOR THE A .Y. 1998-99, DUE TO DWINDLING SALES AND INCOME AND PARTIAL USE OF TH E BUILDING THE ASSESSEE HAD NOT CLAIMED DEPRECIATION FOR THE ENTI RE FACTORY PREMISES AT TIRUPUR. ITA NO1360/M/04. 2 3. THE AR OF THE ASSESSEE SUBMITTED THAT THE FIRM H AD TO ECONOMIZE TO TIDE OVER THEIR FINANCIAL DIFFICULTIES SINCE THE FIRM HAS TO PAY ITS CREDITORS OF BUSINESS AND TO PAY THE CREDITORS FOR THE COST INCURRED WITH RESPECT TO THE NEW BUILDING IN ADDITION TO TH E REGULAR OUTGOINGS ON THE UPKEEP AND MAINTENANCE OF THE PREMISES, THE FIRM DECIDED TO COMMERCIALLY EXPLOIT THE ASSETS OF THE FIRM IN THE BEST POSSIBLE MANNER, WHILE CONTINUING THEIR BUSINESS. THEREFORE , THE ASSESSEE FIRM DECIDED TO BORROW RS. 75 LACS FROM THEIR ASSOCIATE CONCERN FOR A SHORT PERIOD AND IN CONSIDERATION THEREOF AND ALLOWED THE M TO TEMPORARILY USE THE SAME BUILDING AS A CARE TAKER AND THAT TOO ONLY FOR A YEAR. THE SAME WAS ALSO EXPLICITLY PROVIDED IN THE MEMORA NDUM OF UNDERSTANDING ARRIVED BETWEEN THE ASSOCIATES. FURT HER IT WAS ALSO DECIDED THAT THE ASSOCIATE CONCERN SHALL MAINTAIN A ND UPKEEP THE PREMISES AND PAY ANY OUTGOINGS WITHOUT PAYING ANY M ONTHLY COMPENSATION TO THE ASSESSEE. 4. THE AR FURTHER SUBMITTED AS FOLLOWS: IT WAS DECIDED THAT THE ASSOCIATE CONCERN SHALL MA INTAIN AND UPKEEP THE PREMISES AND PAY ANY OUT GOINGS WITH OUT PAYING ANY MONTHLY COMPENSATION TO THE ASSESSEE. A R AVERRED THAT IT WAS NEVER THE PURPOSE OF THE ASSESS EE FIRM TO LET OUT THE PREMISES AND ENJOY RENT SINCE THE ASSES SEE HAD CONSTRUCTED THE BUILDINGS FOR THE PURPOSE OF THEIR BUSINESS. THE ASSESSEE FIRM WITHOUT THIS ARRANGEMENT WOULD HA VE HAD TO BORROW FUNDS FROM BANKS OR OTHER INSTITUTIONS WH ICH WOULD HAVE INCREASED THE FINANCIAL BURDEN IN THE FO RM OF INTEREST AND PERIODIC OUTGOINGS. FURTHER, BY THIS ARRANGEMENT THE ASSESSEE FIRM WAS ABLE TO REDUCE IT S LOSSES AND THIS IS IN A WAY MONEY EARNED FOR THE FIRM AND THE SAME IS AUTOMATICALLY REFLECTED IN THEIR FINANCIAL RESULTS. THEREFORE TAXING THE FIRM ON A NOTIONAL RENTAL INCO ME WOULD BE ERRONEOUS AMOUNTING TO DOUBLY TAXING THE FIRM BY INVOKING A WRONG PROVISION OF HOUSE PROPERTY INCOME . IN SUPPORT OF HIS CONTENTION, AR RELIED ON THE FOLLOWI NG JUDGEMENTS OF VARIOUS HIGH COURTS WHICH ARE CLAIMED TO SQUARELY APPLICABLE- ITA NO1360/M/04. 3 1. CIT VS ANAND RUBBER & PLASTICS (P) LTD. 178 ITR 301 (P&H HIGH COURT.) 2. CIT VS MALBVAR & PIONEER HOISERY (P) LTD. -221 ITR 117 (KERALA HIGH COURT) 3. CIT VS GOLDEN ENGINEERING WORKS- 256 ITR 774 (P&H HIGH COURT) 4. CIT VS NORTHERN INDIA THEATRES (P) LTD 128 ITR 49 7 (DELHI HIGH COURT) 5. CIT VS KONGARAR SPINNERS (P) LTD.- 208 ITR 645, 648(MADRAS HIGH COURT. WITHOUT PREJUDICE TO THE ABOVE CONTENTION AR SAID T HAT IT THE INCOME IS TO BE TAXED AS BUSINESS INCOME, DEPRECIAT ION ON THE BUILDING WHICH WAS REGULARLY CLAIMED BY THE ASS ESSEE FIRM BARRING THE YEAR UNDER APPEAL, SHOULD ALSO BE ALLOWED. 5. THE LEARNED CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE ARGUMENTS OF THE LEARNED AR AND THE RATIONALE OF THE ITO IN HOLDING THAT THE AL V OF THE TIRUPUR PROPERTIES WILL HAVE TO BE DETERMINED U/S. 23(1)(A) AFTER TAKING INTO CONSIDERATION THE FACT THAT THE S AME PREMISES HAD BEEN LET OUT TO A CONCERN KNOWN AS M/S . HD EXPORTS @ 3.90 PER MONTH. THE ITO NOTED THAT THE A PPELLANT HAS NOT PROVIDED THE MARKET VALUE OR RENT OR STANDA RD RENT RECOVERABLE EVEN THOUGH CALLED FOR BY THE ITO. THE ITO FOUND THAT THE BUILDINGS CONSISTED OF GROUND PLUS T HREE STORIES OF TOTAL FLOOR AREA OF 29,000 SQ. FT. HE A PPLIED THE VERY REASONABLE RATE OF RS. 3 PER SQ. FT PER MONTH FOR DETERMINING THE ALV. WHILE DOING SO, HE ALSO NOTED THAT FOR THE SAME KIND OF PREMISES, A THIRD PARTY LIKE M/S. HD EXPORTS HAVE PAID RENT OF RS. 96,000/- FOR 2050 SQ. FT. THIS COMES TO RS. 3.90 SQ. FT. PER MONTH. THUS I HAVE N O HESITATION IN HOLDING THAT THE ITO HAS BEEN MORE TH AN REASONABLE IN ADOPTING THE RENTAL RATE OF RS. 3 PER SQ. FT. 6. THE LEARNED CIT(A) FURTHER HELD AS FOLLOWS: IN THE CASE OF CIT VS PANDYAN BANK LTD. 71 ITR 707 (MAD) THE ASSESSEE BANK OWNED A BUILDING WHICH WAS AIR- ITA NO1360/M/04. 4 CONDITIONED. A SMALL PORTION OF THE BUILDING HAD B EEN LET OUT TO TWO TENANTS, BOTH ENTITLED TO AIR-CONDITIONED FA CILITIES. THE HONBLE MADRAS HIGH COURT HELD THAT THOUGH THE LETT ING OUT OF A PORTION OF THE PREMISES MAY BE CONSIDERED AS A PART OF THE ASSESSEES BUSINESS UNDER PROVISIONS OF THE BAN KING COMPANIES ACT, INCOME FROM LETTING WILL, UNDER THE I.T. ACT, ONLY BE REGARDED AS INCOME FROM PROPERTY AND NOT IN COME FROM BUSINESS. IN RAMPUR INDUSTRIES LTD VS CIT 82 ITR 23 (ALL) RENTAL INCOME FROM CERTAIN UNUSED GODOWNS DER IVED BY A COMPANY DOING RICE MILLING BUSINESS HAVE BEEN HEL D AS INCOME FROM HOUSE PROPERTY. IN MY VIEW THE RATIO OF THE ABOVE DECISIONS WOULD APPLY IN THE APPELLANTS CASE. ACCORDINGLY, THE IN COME FROM LETTING OUT THE TWO BUILDINGS IN TIRUPUR TO KKIPL, A SISTER CONCERN OF THE APPELLANT, WOULD BE TAXABLE UNDER TH E HEAD INCOME FROM HOUSE PROPERTY. ONCE THIS IS HELD, I T IS CLEAR THAT THE FACTS AND CIRCUMSTANCES OF THE PRESENT CAS E BEFORE ME ARE MORE OR LESS SIMILAR TO THOSE IN THE CASE OF TIVOLI INVESTMENT, DECIDED BY THE HONBLE MUMBAI D BENCH . APPLYING THE RATIO OF THE SAID DECISION, I WOULD HE LD THAT THE USUFRUCTUOUS OF THE INTEREST FREE DEPOSIT OF RS. 75 LAKHS RECEIVED BY THE APPELLANT HAS TO BE CONSIDERED AS R ENT WHILE DETERMINING THE ALV OF THE PROPERTY. NORMALLY, DUR ING THE PERIOD RELEVANT FOR A.Y. 1998-99, AN ANNUAL RATE OF RETURN OF 12% WOULD HAVE BEEN SAID TO BE REASONABLE. APPLYIN G THIS RATE, THE VALUE OF THE USUFRUCTUOUS WOULD BE IN THE REGION OF RS. 9 LAKHS PER ANNUM. IN THIS CONTEXT, AS OBSERVE D IN AN EARLIER PART OF THIS ORDER, THE ACTION OF THE ITO I N ADOPTING A RENTAL RATE OF RS. 3 PER SQ. FT PER MONTH HAS BEEN FOUND REASONABLE BY ME. THE RESULTANT FIGURE OF RS. 10,4 4,000/- WORKED OUT BY THE ITO IS CLOSE TO THE AMOUNT OF RS. 9 LAKHS DETERMINED AT THE RATE OF 12% OF RS. 75 LAKHS. LOO KING TO THESE FACTS, I WOULD HOLD THAT THE AOS ESTIMATE, B ASED ON MORE CONCRETE FACTS AND COMPARABLE INSTANCES, IS A BETTER ESTIMATE OF THE ALV. I ACCORDINGLY CONFIRM HIS ACT ION. 7. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(A), AS SESSEE PREFERRED AND APPEAL BEFORE US AND RAISED THE FOLLOWING GROUN DS: 1. THE LEARNED CIT(A) WAS NOT JUSTIFIED IN CONFIRM ING THE ADDITION OF RS. 8,35,200/- AS INCOME FROM HOUSE PRO PERTY. ITA NO1360/M/04. 5 2. THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE FAC TS AND CIRCUMSTANCES OF THE CASE AND THE SUBMISSIONS OF TH E APPELLANT THAT NO AMOUNT WAS CHARGEABLE UNDER THE HEAD, INCO ME FROM HOUSE PROPERTY IN RESPECT OF THE SAID PROPERTY. 3. WITHOUT PREJUDICE, EVEN THE ESTIMATE ADOPTED WHI LE COMPUTING THE SAID INCOME FROM HOUSE PROPERTY IS EXCESSIVE AN D UNREASONABLE. 8. THE LEARNED COUNSEL FOR THE ASSESSEE MS. MRUGAKS HI JOSHI VEHEMENTLY ARGUED THAT THE LOWER AUTHORITIES HAD ER RED IN MAKING THE ADDITION ON THE GROUND THAT THE AMOUNTS WERE CHARGE ABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE LEARNED COU NSEL FOR THE ASSESSEE RELIED ON THE DECISION IN THE CASE OF POPA TLAL FULCHAND VS ACIT (2009) TIOL 550 ITAT MUM WHEREIN IT HAS BEEN H ELD AS FOLLOWS: PROPERTY OWNED BY INDIVIDUALS AND USED BY A FIRM, WITHOUT PAYING ANY RENT, WHOSE PARTNERS ARE HUFS OF THE IND IVIDUALS OWNING THE PROPERTY CAN BE SAID TO BE USED FOR THE PURPOSES OF BUSINESS BY SUCH INDIVIDUALS AND CONSEQUENTLY IT S NOTIONAL INCOME IS NOT CHARGEABLE. 9. THE ASSESSEE ALSO RELIED ON THE DECISION OF HIG H COURT OF DELHI IN THE CASE OF CIT VS ASIAN HOTELS 215 CTR 84 (DEL) WHEREIN IT HAS BEEN HELD AS FOLLOWS: SECTION 23(1)(A) IS RELEVANT FOR DETERMINING THE I NCOME FROM HOUSE PROPERTY AND CONCERNS DETERMINATION OF THE AN NUAL LETTING VALUE OF SUCH PROPERTY. THAT PROVISION TALKS OF T HE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FR OM YEAR TO YEAR. THIS CONTEMPLATES THE POSSIBLE RENT THAT TH E PROPERTY MIGHT FETCH AND NOT CERTAINLY THE INTEREST IN FIXED DEPOS IT THAT MAY BE PLACED BY THE TENANT WITH THE LANDLORD IN CONNECTIO N WITH THE LETTING OUT OF SUCH PROPERTY. IT MUST BE REMEMBERE D THAT IN A TAXING STATUTE IT WOULD BE UNSAFE FOR THE COURT TO GO BEYOND THE LETTER OF THE LAW AND TRY TO READ INTO THE PROVISIO N MORE THAN WHAT IS ALREADY PROVIDED FOR. THE ATTEMPT BY LEARNED CO UNSEL FOR THE REVENUE TO DRAW AN ANALOGY FROM THE WEALTH TAX ACT, 1957 IS ALSO TO NO AVAIL. IT IS AN ADMITTED POSITION THAT THERE IS A SPECIFIC PROVISION IN THE WEALTH TAX ACT WHICH PROVIDES FOR CONSIDERING OF ITA NO1360/M/04. 6 A NOTIONAL INTEREST WHEREAS SEC. 23(1)(A) CONTAINS NO SUCH SPECIFIC PROVISION. 10. THE LEARNED COUNSEL FOR THE ASSESSEE FILED THE PAPER BOOK AND AT PAGE 44 AND 45 IT IS CLEARLY STATED AS FOLLOWS: THIS IS REFERENCE TO OUR PROPERTY SITUATED AT 398/ 1, ANGERIPALAYAM-TIRUPUR WHICH HAS BEEN OCCUPIED BY YO U AS CARE TAKER UNDER THE MOU DT. 25.3.1997. WE HEREBY CONFI RM THAT YOU HAVE HANDED OVER THE VACANT POSSESSION OF THE ABOVE PREMISES TODAY (I.E. 15.6.1998) AS PER OU7R VERBAL MUTUAL UN DERSTANDING WHICH HAS BEEN AGREED AS UNDER: 1) THE TOTAL DEPOSIT OF RS. 75,00,000/- TO BE REPAID A S FOLLOWS: A) ON 15.6.1998 RS. 40,00,000/- B) BALANCE BY 31.3.1999 11. THE LEARNED COUNSEL ALSO FILED THE BALANCE SHEE T AS ON 31.3.1996 WITH SCHEDULES FOR ASSESSMENT YEARS 1996- 97 TO 1999- 2000. WE FIND THAT THE ASSESSEE HAD TO BORROW RS. 75,00,000/- LACS FROM THEIR ASSOCIATE CONCERN FOR A SHORT PERIOD AND IN CONSIDERATION THEREOF ALLOWED THEM TO USE THE SAID BUILDING ONLY FOR A PERIOD OF ONE YEAR. THIS IS ALSO BEEN EXPLICITLY PROVIDE IN THE MEMORANDUM OF UNDERSTANDING ARRIVED BETWEEN ASSOCIATES. THE ASSES SEE FIRM ALSO MADE THE ASSOCIATE CONCERN TO PAY FOR THE MAINTENAN CE AND UPKEEP AND OUTGOINGS. WE ALSO FIND THAT WITHOUT SUCH AN ARRANGEMENT WITH ASSESSEE WOULD HAVE HAD TO BORROW FUNDS FROM OUTSID ERS AND FINANCIAL INSTITUTIONS. HENCE IT WAS A PRUDENT BUSINESS DECIS ION TO ALLOW THE SISTER CONCERN TO USE OF ITS PREMISES. THE ASSESSE E WAS ABLE TO REDUCE ITS LOSSES AND GET BETTER FINANCIAL RESULTS. FROM PAGE 45 OF THE PAPER BOOK IT IS CLEAR THAT THE INTENTION OF THE ASSESSEE WAS FOR THE PURPOSE OF BUSINESS AND NOT TO EARN RENTAL INCOME. HENCE W E ARE OF THE OPINION THAT THE INCOME IS TO BE TAXED AS BUSINESS INCOME AND CONSEQUENTLY DEPRECIATION OF THE BUILDING WHICH WAS REGULARLY CLAIMED ITA NO1360/M/04. 7 BY THE ASSESSEE FIRM BARRING THE YEAR UNDER APPEAL SHOULD ALSO BE ALLOWED. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 28 TH DAY OF JANUARY, 2011 SD/- SD/- (S.V. MEHROTRA) ( ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI, DATED 28 TH JANUARY, 2011. RJ COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CENTRAL - I CONCERNED 5. THE DR I BENCH TRUE COPY BY ORDER ASST. REGISTRAR, I.T.A.T, MUMBAI ITA NO1360/M/04. 8 DATE INITIALS 1 DRAFT DICTATED ON: 17. 01. 201 1 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 1 8 . 01 .201 1 ______ 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 FILE GOES TO THE HEAD CLERK: ______ 9 DATE ON WHICH FILE GOES TO THE AR 10 . DATE OF DISPATCH OF ORDER: ___ ___