KPMS Jain School Private Limited , Hyderabad V. Dy. Commissioner of Income Tax , Circle-2(1), Hyderabad

ITA 182/Hyd/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3752 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-A
• Next Hearing Date: 25-02-2020
• Assessment Year: 2012-2013
• Appeal Filed On: 08-02-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D J P ANAND
• Keywords: Business income; Depreciation; Business expenditure
• Section: 143(3); 37(1); 201; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A - SMC BENCH : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA NO. 182 /HYD./2019 ASSESSMENT YEAR: 201 2 - 13 KPMS JAIN SCHOOL PVT. LTD. VS. DY.CIT, CIRCLE 2(1) PLOT NO.73, JEERA HYDERABAD SECUNDERABAD - 500 003 TELANGANA. PAN: AACCK9043Q (APPELLANT) (RESPONDENT) FOR ASSESSEE : SH. SUNIL KUMAR, AR. FOR REVENUE : SH. D.J.P. ANAND, D.R. DATE OF HEARING : 05 / 02 / 2020 DATE OF PRONOUNCEMENT : 28 /0 2 /20 20 O R D E R THIS IS ASSESSEES APPEAL FOR A.Y. 201 2 - 1 3 AGAINST THE ORDER OF LD.CIT(A) - II , HYDERABAD DATED 13.11.2018 . 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY WHICH WAS SET UP FOR RUNNING A SCHOOL. DURING THE RELEVANT A.Y. THE ASSESSEE HAD DERIVED INCOME FROM HOUSE PROPERTY AND OTHER SOURCES AND ACCORDINGLY FILED ITS RETURN OF INCOME ON 28.09.2012 ADMITTING TOTAL INCOME OF RS.32,70,190/ - AFTER SETTING OF F LOS S ES OF RS.41,562/ - . AS THE RETURN OF INCOME WAS SELECTED FOR SCRUTINY THROUGH CASS, THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) WERE INITIATED. ITA NO.182/HYD/2019 AY: 2012 - 13 M/S KPMS JAIN SCHOOL (P) LTD. 2 2.1 . DURING THE ASSESSMENT PROCEEDINGS, T HE A.O. NOTICED THAT THE ASSESSEE H AD SHOWN INCOME OF RS.62,50,000/ - AS RENT FROM THE BUILDING BUT HAS TREATED THE SAME AS BUSINESS INCOME AND HAS CLAIMED EXPENDITURE OF DI RECTORS REMUNERATION, SALARIES, DEPRECIATION AND OTHER OPERATING COSTS ETC. THEREFROM. THE AO OBSERVED THAT THE ASSE SSEE IS NOT IN THE BUSINESS OF LETTING OUT OF PROPERTIES, AND THEREFORE HELD THAT THE RENTAL INCOME IS NOT THE BUSINESS INCOME OF THE ASSESSEE AND HAS TO BE TREATED AS INCOME FROM HOUSE PROPERTY ONLY. HE, THEREFORE, DISALLOWED THE BUSINESS EXPENDITURE CLAIMED THEREFROM. HE ALSO OBSERVED THAT ASSESSEE HAD RECEIVED INTEREST INCOME OF RS.14,77,674/ - FROM FD S MADE WITH HDFC BANK LTD. THE ASSESSEE EXPLAINED THAT THE FD S ARE FROM RENTAL DEPOSITS FROM TRUST SET UP FOR SCHOOL. HE HELD THAT THIS INTEREST INCOME IS TO BE TREATED AS INCOME FROM OTHER SOURCES . HE THEREAFTER , SET OFF THE LOSSES OF EARLIER YEARS AND ARRIVED AT THE TAXABLE INCOME OF RS.47,37,650/ - . AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) STATING THAT AO HAS INAPPROPRIATELY DISALLOWED BUSINESS EXPENDITURE AND HAS WRONGLY TREATED INTEREST INCOME AS INCOME FROM OTHER SOURCES RATHER THAN BUSINESS INCOME . THE CIT(A) HOWEVER CONFIRMED THE ASSESSMENT ORDER AS FAR AS THE INTEREST INCOME TO BE TREATED AS INCOME FROM OTHER SOURCES IS CONCERNED. AS REGARDS DISALLOWANCE OF BUSINESS EXPENDITURE IS CONCERNED, HE HELD THAT SINCE THE ASSESSEE HAS NOT CARRIED OU T ANY BUSINESS ACTIVITY DURING THE RELEVANT P Y , THERE CAN BE NO DEDUCTION ALLOWED PERTAINING TO DIRECTORS REMUNERATION AND SALARIES ETC . HE ALSO DISALLOWED THE CLAIM OF DEPRECIATION. ITA NO.182/HYD/2019 AY: 2012 - 13 M/S KPMS JAIN SCHOOL (P) LTD. 3 3. AGAINST THIS ORDER OF CIT(A) , THE ASSESSEE IS IN SECOND APPEAL BE FORE THE TRIBUNAL BY RAISING THE FOLLOWING GROUNDS OF APPEAL. 1. IN COMPUTING THE TOTAL INCOME THE LEARNED ASSESSING OFFICER HAS MADE THE FOLLOWING ADDITIONS: - A) EXPENDITURE CLAIMED TOWARDS BUSINESS INCOME NOT A LLOWED: RS.6,39,122/ - B) INTEREST FROM BANK TREATED AS INCOME FROM OTHER SOURCES AND NOT UNDER THE HEAD INCOME FROM BUSINESS. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS UPHELD THE ORDER PASSED. 3. FOR THAT, YOUR PETITIONER CRAVES THE RIGHT TO ADD TO, AMEN D OR MODIFY THE ABOVE GROUNDS OF APPEAL EITHER BEFORE OR AT THE TIME OF HEARING OF APPEAL, IF IT IS CONSIDERED NECESSARY. 4. THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE COMPUTATION OF INCOME THE ASSESSEE HAD OFFERED RENTAL INCOME AS INCOME FROM HOUSE PROPERTY ONLY AND THAT THE FINDING OF THE AO THAT ASSESSEE HAD OFFERED RENTAL INCOME AS BUSINESS INCOME IS INCORRECT. FURTHER, HE SUBMITTED THAT THE INTEREST INCOME HAS BEEN TREATED AS INCOME FROM OTHER SOURCES BY THE AO AND NOT UNDER THE HEAD INCOME FROM BUSINESS. HE SUBMITTED THAT HE HAS NO GRIEVANCE AGAINST THIS TREATMENT . H OWEVER, HE SUBMITTED THAT THE ASSESSEE BEING A COMPAN Y IS LIABLE TO MAINTAIN ITS OFFICE AND IS LIABLE TO INCUR EXPENDITURE SUCH AS SALAR IES ETC. TO MAINTAIN HIS OFFICE AND ITS STATUS AS A COMPANY. HE SUBMITTED THAT THIS EXPENDITURE HAS TO BE ALLOWED TO THE ASSESSEE AND IF IT IS DONE SO THE BUSINESS INCOM E WOULD RESULT IN A LOSS WHICH CAN BE SET OFF AGAINST THE INCOME FROM HOUSE PROPERTY U/S 71(2) OF THE ACT. HE THUS PRAYED FOR A DIRECTION TO THE AO TO ALLOW THE SET OFF OF THE LOSS. FURTHER , HE ALSO SUBMITTED THAT THE ASSESSEE HAD INCLUDED THE ITA NO.182/HYD/2019 AY: 2012 - 13 M/S KPMS JAIN SCHOOL (P) LTD. 4 INTEREST INCOME UNDER BUSINESS INCOME, BUT WHILE TREATING THE INTEREST INCOME AS INCOME FROM OTHER SOURCES , THE AO HAS NOT REDUCED THE SAME FROM PROFIT AND LOSS ACCOUNT AND, THEREFORE, THERE IS A DOUBLE ADDITION OF THE SAME AMOUNT. 5. LD.DR WAS ALSO HEARD WHO SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 6. HAVING REGARD TO RIVAL CONTENTIONS AND MATERIAL PLACED ON RECORD, I FIND THAT THE ASSESSEE HAS OFFERED THE RENTAL INCOME AS INCOME FROM HOUSE PROPERTY ONLY. THEREFORE, THERE CANNOT BE ANY CLAIM OF EXPENDITURE AGAINST SUCH RENTAL INCOME AND WHEN THERE IS N O SUCH CLAIM, THERE CANNOT BE ANY DISALLOWANCE. 6.1 . THE SECOND SOURCE OF INCOME IS THE INTEREST INCOME AND I FIND THAT IT HAS BEEN CORRECTLY BROUGHT TO TAX AS INCOME FROM OTHER SOURCES . AS POINTED OUT BY THE LD.COUNSEL FOR THE ASSESSEE IF THE SAID INCOME HAS BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT, THEN THE SAME HAS TO BE REDUCED THEREFROM WHILE ARRIVING AT THE BUSINESS INCOME. FURTHER , THE ASSESSEE BEING A COMPANY IS REQUIRED TO MAINTAIN ITS STATUS AS A COMPANY AND FOR THE SAID PURPOSE ASSESSEE IS LIABLE TO INCUR CERTAIN EXPENDITURE AS CLAIMED BY ASSESSEE SUCH AS SALARIES, DIRECTORS REMUNERATION AND DEPRECIATION ETC. I FIND THAT THESE ARE THE EXPENSES WHICH ARE NECESSARY TO MAINTAIN ITS STATUS AS A COMPANY, THEREFORE, THE SAME IS ALLOWABLE AS BUSINESS EXPENDITURE. AS LONG AS ASSESSEE HAS SET ITA NO.182/HYD/2019 AY: 2012 - 13 M/S KPMS JAIN SCHOOL (P) LTD. 5 UP HIS BUSINESS BUT HAS NOT BEEN ABLE TO CARRY ON BUSINESS FOR ONE OR OTHER REASONS , IT DOES NOT MEAN THAT EXPENDITURE CANNOT BE ALLOWED. 6.2. THIS IS THE VIEW TAKEN BY THE COORDINATE BENCH OF MUMBAI TRIBUNAL IN ITA 3722 /20 09 IN THE CASE OF TANSY IN VESTMENTS P VT. LTD. VS. ACIT VIDE ORDER DATED 24/11/2010 (TO WHICH I AM THE SIGNATORY) . FOR READY REFERENCE PARA 5 THEREOF IS REPRODUCED HEREUNDER. 5. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY THE COORDINATE BENCH, AND WE ARE IN CONSIDERED AGREEMENT WITH THE SAME. THE ASSESSEE BEING AN ARTIFICIAL JURIDICAL PERSON, IT NE EDS TO INCUR CERTAIN EXPENDITURE TO KEEP ITSELF AFLOAT AND HAVE ITS CONTINUED EXISTENCE. UNLIKE A NATURAL PERSON, A COMPANY CAN ONLY OPERATE THROUGH OTHER NATURAL PERSONS - WHETHER EMPLOYEES OR OTHERS. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE EXPENDITURE OF THE ASSESSEE COMPANY ARE EXCESSIV E OR UNREASONABLE VIS - A - VIS ITS LEGITIMATE BUSINESS REQUIREMENTS. THE H ONBLE HIGH COURTS, AS REFERRED TO IN THE COORDINATE BENCH ORDER, HAVE CONSISTENTLY HELD IN THE CASE OF THE CORPORATE ASSESSEES SUCH EXPENSES HAVE TO BE ALLOWED AS DEDUCTION IRRESPECTI VE OF WH ETHER OR NOT THE ASSESSEE IS ENGAGED IN ACTIVE BUSINESS AND EVEN IF ASSESSEE HAS ONLY PASSIVE INCOMES. THE MERE FACT THAT NO BUSINESS OPERATIONS HAVE BEEN CARRIED OUT IN THE RELEVANT PREVIOUS YEAR ALSO DOES NOT LEAD TO THE CONCLUSION THAT THE ASS ESSEE CEASED TO BE IN BUSINESS. UNLESS THE BUSINESS IS ABANDONED OR CLOSED AND EVEN IF BUSINESS IS AT A DORMANT STAGE WAITING FOR PROPER MARKET CONDITIONS TO DEVELOP, THE EXPENDITURE INCURRED IN THE COURSE OF SUCH A BU SINESS IS TO BE ALLOWED AS DEDUCTION . 6.3. SIMILAR VIEW HAS BEEN EXPRESSED BY HYDERABAD BENCH OF THE TRIBUNAL IN ITA 325/HYD/2018 IN THE CASE OF M/S MAYANK SHELTERS ITA NO.182/HYD/2019 AY: 2012 - 13 M/S KPMS JAIN SCHOOL (P) LTD. 6 AGRO P LTD. VS. ITO VIDE ORDER DATED 31/01/2020. FOR READY REFERENCE, RELEVANT PARAS ARE REPRODUCED HEREUNDER. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, I FIND THAT THERE IS NO DISPUTE THAT THE ASSESSEE HAS SET UP ITS BUSINESS BUT HAS NOT BEEN ABLE TO ENTER INTO ANY TRANSACTION FOR DEVELOPMENT OF THE LAND OR FOR CARRYING ON ITS REAL ESTA TE BUSINESS. AS HELD BY THE HON'BLE COURTS IN CATENA OF DECISIONS, THE ASSESSEE IS ELIGIBLE FOR CLAIM OF BUSINESS EXPENDITURE IF IT HAS SET UP THE BUSINESS AND WAS READY TO CARRY ON ITS OPERATIONS. IN THE CASE BEFORE ME ALSO, THE ASSESSEE HAS SET UP REAL E STATE BUSINESS BUT WAS UNABLE TO GET ANY CONTRACTS FOR REAL ESTATE BUSINESS. IN SUCH CIRCUMSTANCES, THE EXPENDITURE INCURRED BY THE ASSESSEE TO MAINTAIN ITS BUSINESS PREMISES ITSELF IS ALLOWABLE AS BUSINESS EXPENDITURE. THEREFORE, I HOLD THAT THE BUSINESS EXPENDITURE IS AN ALLOWABLE EXPENDITURE ULS 37(1) OF THE ACT. 6. THE SECOND ISSUE IS THE ALLOWABILITY OF THE SET OFF OF THE BUSINESS LOSS FROM THE INCOME FROM HOUSE PROPERTY. SECTION 71 OF THE LT. ACT ALLOWS THE SET OFF OF THE LOSSES FROM ANY HEAD OTHER T HAN CAPITAL GAIN FROM THE INCOME FROM ANY OTHER HEAD. THEREFORE, THE BUSINESS LOSS IS ALLOWABLE FROM THE INCOME FROM HOUSE PROPERTY. THE AO IS THEREFORE, DIRECTED TO ALLOW THE SAME. GROUND OF APPEAL NO.1 IS ACCORDINGLY ALLOWED. 7. RESPECTFULLY FOLLOWING THE SAME, I DIRECT THE AO TO COMPUTE THE BUSINESS INCOME AND IF IT WO ULD RESULT IN LOSS, THE SAME IS LIABLE TO BE SET OFF AGAINST INCOME FROM HOUSE PROPERTY. THE AO IS DIRECTED TO RECOMPUTE THE INCOME ACCORDINGLY. 8 . IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 28 TH FEBRUARY, 2020 . SD/ - (P MADHAVI DEVI) JUDICIAL MEMBER DATED: 28 TH FEBRUARY, 2020 . *GMV ITA NO.182/HYD/2019 AY: 2012 - 13 M/S KPMS JAIN SCHOOL (P) LTD. 7 COPY FORWARDED TO: 1. M/S KPMS JAIN SCHOOL PVT. LTD. PLOT NO.73, JEERA, SECUNDERABAD . 2. DY.CIT, CIRCLE 2 ( 1 ), HYDERABAD 3. CIT(A) - 2 HYDERABAD 4. PR.CIT - 2 , HYDERABAD 5. D.R. ITAT HYDERABAD 6. GUARD FILE ITA NO.182/HYD/2019 AY: 2012 - 13 M/S KPMS JAIN SCHOOL (P) LTD. 8 1. DRAFT DICTATED ON 2 5 /0 2 /20 20 2. DRAFT PLACED BEFORE THE AUTHOR 27 /0 2 /20 20 3. DRAFT PLACED BEFORE THE SECOND MEMBER 4. DRAFT APPROVED BY SECOND MEMBER 5. APPROVED DRAFT COMES TO SRPS 6. KEPT FOR PRONOUNCEMENT 28 /0 2 /20 20 7. FILE SENT TO BENCH CLERK