M/S Angelica Properties Pvt Ltd., Pune V. DCIT, Pune

ITA 1724/PUN/2012

• Counselvise Citation: 172424514 RSA 2012
• Duration Of Justice: 1 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-04-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 24-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 22-08-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P L PATHADE
• Keywords: Revenue expenditure
• Section: 143(3); 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHE A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO.1724/PN/2012 (ASSESSMENT YEAR : 2008-09) M/S ANGELICA PROPERTIES PVT. LTD., 301, PHOENIX, OPP. RESIDENCY CLUB, BUND GARDEN ROAD, PUNE 411 001. PAN : AAFCA8644J . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(1), PUNE. . RESPONDENT ASSESSEE BY : MR. DHARMESH SHAH DEPARTMENT BY : MR. P. L. PATHADE DATE OF HEARING : 24-02-2014 DATE OF PRONOUNCEMENT : 16-04-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL BY THE ASSESSEE IS DIRECTED AG AINST AN ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, PUNE DA TED 24.02.2012 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 27.12.2010 PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2008-09. 2. IN THIS APPEAL, THE ONLY ISSUE RAISED BY THE ASS ESSEE IS WITH REGARD TO THE DISALLOWANCE OF BROKERAGE & COMMISSION EXPENSES OF RS.1,64,69,459/- INCURRED BY THE ASSESSEE. 3. IN BRIEF, THE FACTS ARE THAT THE APPELLANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS INTER-ALIA ENGAGED IN THE BUSINESS OF CONSTRUCTION AND DEVELOPMENT OF IT PARK AND HOTELS, ETC.. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, IT FILED A RETURN OF INCOME DECLARING ITA NO.1724/PN/2012 A.Y. : 2008-09 A LOSS OF RS.94,61,888/-, WHICH WAS SUBJECT TO SCRU TINY ASSESSMENT UNDER SECTION 143(3) OF THE ACT. THE ASSESSING OFFICER N OTICED THAT IN THE PROFIT & LOSS ACCOUNT THE ASSESSEE COMPANY HAD DEBITED AN EX PENDITURE OF RS.1,64,69,459/- ON ACCOUNT OF BROKERAGE AND COMMIS SION. ASSESSEE EXPLAINED THAT IT HAD PAID THE SAID AMOUNT AS BROKE RAGE TO M/S FLORA PREMISES PVT. LTD., MUMBAI FOR FINDING A TENANT FOR ITS BUIL DING, MATRIX IT TOWER AT PUNE WHICH WAS STILL UNDER CONSTRUCTION. THE LEASE AGRE EMENT WAS DATED 24.05.2007 WHICH WAS ENTERED WITH M/S EMERSON ELECT RIC CO. INDIA LTD.. ON THE DATE OF LEAVE AND LICENSE AGREEMENT THE BUILDIN G SOUGHT TO BE LEASED OUT WAS NOT COMPLETE AND THUS LEASE WAS TO COMMENCE ON THE DATE WHEN BUILDING WAS READY AND AFTER THE ASSESSEE COMPLETED THE FIT OUTS AND OTHER NECESSITIES NEEDED BY THE TENANT AS PER THE TERMS OF THE SAID A GREEMENT. THE ASSESSEE HAD NOT RECEIVED ANY LEASE RENT DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. IT WAS FOUND THAT IN THE SUBSEQUENT ASSESSMENT YEAR OF 2009-10, ASSESSEE HAD STARTED RE CEIVING THE LEASE INCOME WHICH WAS DECLARED IN THE RETURN OF INCOME OF THE S UBSEQUENT YEAR AS INCOME FROM HOUSE PROPERTY. IN THE SAID BACKGROUND, ASSE SSEE JUSTIFIED THE CLAIM OF THE BROKERAGE EXPENSES INCURRED AT RS.1,64,69,459/- AS A REVENUE EXPENDITURE WHICH WAS DEBITED IN THE PROFIT & LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE. FIRSTLY, THE ASSESSING OFFICER OBSERVED THAT THERE WAS NO INCOME EARNED BY THE ASSESSING OFFICER WHICH COULD BE CONNECTED OR C ONSIDERED TO HAVE BEEN EARNED IN CONNECTION WITH THE PAYMENT OF BROKERAGE. ACCORDING TO THE ASSESSING OFFICER FOR AN EXPENDITURE TO BE DEDUCTIB LE IN TERMS OF SECTION 37(1) OF THE ACT, IT SHOULD BE INCURRED WHOLLY AND EXCLUS IVELY IN CONNECTION WITH THE BUSINESS CARRIED ON BY THE ASSESSEE. THE ASSESSING OFFICER HELD THAT THE EXPENDITURE ON BROKERAGE WHICH IS CLAIMED BY THE AS SESSEE HAD NO NEXUS WITH THE TRADING RECEIPT OF THE ASSESSEE EITHER DURING T HE YEAR UNDER CONSIDERATION OR EVEN IN THE ENSUING YEAR BECAUSE THE INCOME FROM LEASING OF THE BUILDING WAS DECLARED BY THE ASSESSEE IN THE SUBSEQUENT YEAR AS INCOME FROM HOUSE ITA NO.1724/PN/2012 A.Y. : 2008-09 PROPERTY. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS CARRIED IN APPEAL BEFORE THE CIT(A), WHO HAS SINCE UPHELD THE STAND OF THE ASSESSING OFFICER. NOT BEING SATISFIED WITH THE ORDER OF THE CIT(A), ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT ASSESSEE WAS ENGAGED IN THE CONSTRUCTION OF AN IT P ARK BUILDING CALLED MATRIX IT TOWER AT PUNE, WHICH WAS STILL UNDER CONSTRUCTIO N DURING THE YEAR UNDER CONSIDERATION. MEANWHILE, ASSESSEE WAS ABLE TO FIN D A TENANT FOR THE SAID BUILDING DURING THE CONSTRUCTION STAGE; BECAUSE IN SUCH A SITUATION THE ULTIMATE FIT OUTS AND CONSTRUCTION COULD BE CARRIED OUT IN A CCORDANCE WITH THE REQUIREMENTS OF THE PROSPECTIVE TENANT/USER OF THE PREMISES. THE LEARNED COUNSEL POINTED OUT THAT ASSESSEE WAS NOT IN THE BU SINESS OF LEASING BUILDINGS BUT WAS IN THE BUSINESS OF CONSTRUCTING IT AND SELL ING IT TO AN INVESTOR; AND, FOR THAT PURPOSE IT CONSIDERED THAT IF AN ALREADY LET-O UT BUILDING WOULD BE OFFERED TO A BUYER, IT WOULD FETCH HIGHER RETURNS. THEREFORE, ASSESSEE UNDERTOOK THE SAID ACTIVITY OF LOCATING A TENANT, WHO WOULD OCCUPY IT ON ITS COMPLETION AND THUS EXPENSES INCURRED BY WAY OF BROKERAGE AND COMMISSIO N FOR FINDING A TENANT WAS A BUSINESS EXPENSE. THE LEARNED COUNSEL POINTE D OUT THAT AFTER COMPLETION OF CONSTRUCTION, ASSESSEE HAS SOLD THE B UILDING INCLUSIVE OF THE RENTAL ARRANGEMENT AND THE SAME HAS HELPED THE ASSE SSEE IN FETCHING A BETTER PRICE. THE LEARNED COUNSEL POINTED OUT THAT THE AS SESSEE UNDERTOOK THE AFORESAID EXERCISE AS A PART OF A BUSINESS MODEL OF CONSTRUCTION AND SELLING A PRE-LEASED BUILDING TO THE ULTIMATE BUYER, BECAUSE IT WOULD ENSURE THE BUYER TO HAVE BETTER RETURNS ON HIS INVESTMENT. IN THIS MAN NER, IT IS SOUGHT TO BE CANVASSED THAT THE EXPENDITURE IN QUESTION WAS INCU RRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND WAS TH US AN ALLOWABLE EXPENDITURE IN TERMS OF SECTION 37(1) OF THE ACT. ITA NO.1724/PN/2012 A.Y. : 2008-09 5. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE APPEARING FOR THE REVENUE HAS REFERRED TO THE ORDERS OF THE A UTHORITIES BELOW IN SUPPORT OF THE CASE OF THE REVENUE. IT IS REITERATED THAT IN THE PRESENT YEAR THERE IS NO NEXUS BETWEEN THE IMPUGNED EXPENDITURE AND THE INCO ME ASSESSABLE AND EVEN IN THE SUBSEQUENT ASSESSMENT YEAR THE INCOME F ROM THE LEASING OF THE BUILDING WAS DECLARED AS INCOME FROM HOUSE PROPERT Y AND THEREFORE THE IMPUGNED EXPENDITURE COULD NOT BE ALLOWED AS A DEDU CTION U/S 37(1) OF THE ACT. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESE NTATIVE, THE ASSESSING OFFICER MADE NO MISTAKE IN OBSERVING THAT UNDER THE HEAD INCOME FROM HOUSE PROPERTY ONLY SPECIFIED EXPENDITURES ARE ALLOWED A S A DEDUCTION AND THERE IS NO PROVISION LIKE SECTION 37 (1) OF THE ACT TO ALLO W ANY EXPENDITURES RELATING TO THE INCOME UNDER THE HEAD BUSINESS. FURTHER, ACC ORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THE CLAIM OF THE ASSES SEE THAT LEASING OF THE PROPERTY WAS A PART OF BUSINESS ACTIVITY TO FETCH H IGHER PRICES FOR THE BUILDING ON ITS SALE IS ALSO NOT JUSTIFIED. THERE WAS NO MA TERIAL TO SUPPORT THE AFORESAID ASSERTION. IN THIS CONNECTION, A REFERENCE HAS BEE N MADE TO THE FINDING OF THE CIT(A) ON THIS ASPECT TO THE EFFECT THAT ASSESSEE H AS SOLD THE PROPERTY MUCH AFTER LETTING OUT, WHICH WOULD SHOW THAT IT WAS NOT A BUSINESS MODEL OF THE ASSESSEE TO CONSTRUCT AND SELL THE PROPERTY ONLY AF TER FINDING A TENANT FOR IT. FOR ALL THE ABOVE REASONS, THE CLAIM OF THE ASSESSE E IS SOUGHT TO BE OPPOSED. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IN THE PRESENT CASE, THE CLAIM OF THE ASSESSEE IS THAT IT HAS INCU RRED EXPENDITURE ON PAYMENT OF BROKERAGE AND COMMISSION TO M/S FLORA PREMISES P VT. LTD., MUMBAI FOR FINDING A TENANT FOR ITS BUILDING, MATRIX IT TOWER AT PUNE WHICH WAS STILL UNDER CONSTRUCTION. ALTHOUGH, THE LEASE AGREEMENT IS DAT ED 24.05.2007, I.E. A DATE FALLING WITHIN THE PREVIOUS YEAR RELEVANT TO THE AS SESSMENT YEAR UNDER CONSIDERATION, HOWEVER, THE COMMENCEMENT OF THE LEA SE IS STATED TO BE ONLY POST-COMPLETION OF THE BUILDING, WHICH HAS HAPPENED IN THE SUBSEQUENT ASSESSMENT YEAR. THE ASSESSEE HAS RECEIVED THE LEA SE RENTALS ALSO IN THE ITA NO.1724/PN/2012 A.Y. : 2008-09 SUBSEQUENT ASSESSMENT YEAR WHEN THE LEASE ARRANGEME NT ACTUALLY COMMENCED. IT IS ALSO NOT IN DISPUTE THAT THE LEAS E RENTALS HAVE BEEN DECLARED IN THE SUBSEQUENT YEAR AS INCOME FORM HOUSE PROPER TY. DURING THE YEAR UNDER CONSIDERATION, THE EXPENDITURE TOWARDS BROKER AGE AND COMMISSION FOR FINDING TENANT FOR THE SAID BUILDING IS CLAIMED AS REVENUE EXPENDITURE DEDUCTIBLE IN TERMS OF SECTION 37(1) OF THE ACT. T HE PHRASEOLOGY OF SECTION 37(1) OF THE ACT INTER-ALIA PRESCRIBES THAT THE EXP ENDITURE SHOULD BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. IN THE PRESENT CASE, THE ISSUE CANVASSED BY THE ASSESSEE IS THAT I T IS IN THE BUSINESS OF CONSTRUCTION AND DEVELOPMENT OF IT PARK AND HOTELS AND ITS BUSINESS MODEL ENVISAGED THAT BEFORE SELLING THE BUILDING/IT PARK CONSTRUCTED BY IT, IT FINDS A TENANT FOR THE SAME AND THEREAFTER SELLS IT TO THE ULTIMATE CUSTOMER ALONGWITH THE TENANCY ARRANGEMENTS. THEREFORE, IT IS SOUGHT TO BE JUSTIFIED THAT THE ACTIVITY OF FINDING A TENANT FOR THE BUILDING UNDER CONSTRUCTION IS AN ACTIVITY FOR THE PURPOSES OF BUSINESS AND THUS THE EXPENDITURE I S ALLOWABLE IN TERMS OF SECTION 37(1) OF THE ACT. IN SO FAR AS THE PROPOSI TION SOUGHT TO BE CANVASSED BY THE ASSESSEE IS CONCERNED, IT CANNOT BE DISPUTED IN PRINCIPLE, SO HOWEVER, WHAT IS REQUIRED TO BE EXAMINED IS AS TO WHETHER UN DER THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, SUCH A PROPOSITI ON ENABLES THE ASSESSEE TO SUPPORT ITS CLAIM OF DEDUCTIBILITY OF EXPENDITUR E OF RS.164,69,459/- UNDER SECTION 37(1) OF THE ACT DURING THE YEAR UNDER CONS IDERATION. FACTUALLY, IT IS EVIDENT THAT THE BUILDING WHICH IS SOUGHT TO BE LEA SED OUT IS STILL UNDER CONSTRUCTION DURING THE YEAR AND EVEN THE LEASE AGR EEMENT IN QUESTION HAS NOT COMMENCED DURING THE YEAR UNDER CONSIDERATION. THEREFORE, IT IS ONLY AFTER THE COMPLETION OF THE BUILDING AND COMMENCEMENT OF THE LEASE AGREEMENT THAT THE PROPOSITION CANVASSED BY THE ASSESSEE CAN BE TE STED. FOR THE PRESENT, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE IMPUGNED EXPENDITURE CAN AT BEST BE TAKEN AS A PART OF THE C OST OF CONSTRUCTION AND DEVELOPMENT OF THE BUILDING, WHICH THE ASSESSEE HAS SOLD IN THE SUBSEQUENT YEARS. NOTABLY, THE COST OF DEVELOPMENT AND CONSTR UCTION OF BUILDING IN ITA NO.1724/PN/2012 A.Y. : 2008-09 QUESTION HAS BEEN SHOWN AS CAPITAL WORK-IN-PROGRESS BY THE ASSESSEE IN ITS BALANCE SHEET, SINCE IT WAS INCOMPLETE AND UNDER CO NSTRUCTION. BE THAT AS IT MAY, WE ARE ONLY TRYING TO SAY THAT THE CLAIM OF TH E ASSESSEE THAT THE SAID EXPENDITURE WAS ALLOWABLE AS REVENUE EXPENDITURE IN TERMS OF SECTION 37(1) OF THE ACT DURING THE YEAR UNDER CONSIDERATION IS N OT WELL FOUNDED, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. THUS, ON THIS ASPECT ASSESSEE HAS TO FAIL. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH APRIL, 2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G . S. PANNU) JUDICIAL MEMBER ACCOUNT ANT MEMBER PUNE, DATED : 16 TH APRIL, 2014 SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-I, PUNE; 4) THE CIT-I, PUNE; 5) THE DR A BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE