DCIT 10(1), MUMBAI V. RAJMUNDRA REAL ESTATE P.LTD, MUMBAI

ITA 1946/MUM/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1883 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 23-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 11-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANILKUMAR DHONDIAL
• Assessee Lawyers: JITENDRA SINGH
• Keywords: Recovery proceedings; Business income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE S/SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER AND AMARJIT SINGH, JUDICIAL MEMBER / I .T.A. NO.1946/MUM/2013 ( / ASSESSMENT YEAR: 2009-10) THE DCIT 10(1) 455, AAYAKAR BHAVAN, 4 TH FLOOR, M.K.MARG, MUMBAI - 400020 / VS. M/S. RAJMUNDRA REAL ESTATE PVT. LTD. 1858-34, KHERNAGAR, NEAR P.F.OFFICE, BANDRA(E), MUMBAI - 400051 ./ ./ PAN/GIR NO. : AACCD1807B ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY: SHRI K. GO P A L & SHRI JITENDRA SINGH DEPARTMENT BY: SHRI ANILKUMAR DHONDIAL / DATE OF HEARING: 12.10.2015 /DATE OF PRONOUNCEMENT: 16.12.2015 ! / O R D E R PER AMARJIT SINGH, JM: THE REVENUE HAS FILED THE APPEAL AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-21, MUMBAI [HE REINAFTER REFERRED TO AS THE LEARNED CIT(A)] DATED 11.12.2012 RELEVANT TO THE A.Y. 2009-10. 2. THE FACTS OF THE CASE ARE THAT THE APPELLANT HAD ACQUIRED THE ASSETS OF KHANDESH MILL IN 2002-03 BY VIRTUE OF AN ORDER PASS ED BY DRT, AURANGABAD. THE COMPANY BORROWED FUNDS IN YEAR OF 2002-03 TO AC QUIRE ALL THE ASSETS OF KHANDESH MILLS FROM DRT, AURANGABAD. SINCE THEN TH E LOAN WAS CONTINUED IN THE BOOKS OF THE COMPANY AND EVERY YEAR ITS INTERES T WAS DEBITED TO THE BOOKS OF THE COMPANY. THE COMPANY HAD CONTRIBUTED CONDITION AL DEVELOPMENT RIGHTS OF ITA NO.1946/MUM/2013 ASSESSMENT YEAR: 2009-10 2 SOME OF THESE DEVELOPED LANDS TO CERTAIN PARTNERSHI P FIRMS AND RETAINED WITH ITSELF THE OWNERSHIP RIGHTS OF THE SAID LANDS. THE CONDITIONAL DEVELOPMENT RIGHTS OF SOME PORTIONS OF THE LAND SO CONTRIBUTED TO THE FIRMS WERE REFLECTED IN THE BOOKS OF THE COMPANY AS CONTRIBUTION OF THE COMPANY TOWARDS ITS SHARE OF CAPITAL IN THE FIRM. THE FIRMS SUCH AS CRESCENT EN TERTAINMENT & TOURISM LTD., CRESCENT RESIDENCY PVT. LTD. AND JALGAON COMMERCIAL SPACES HAD REVALUED THE CONTRIBUTION MADE BY THE COMPANY IN THEIR BOOKS OF ACCOUNTS. THE CAPITAL CONTRIBUTION AND REVALUATION RESERVE OF THE PARTNER SHIP FIRMS IS AS UNDER: SR. NO. INVESTMENT IN CAPITAL CONTRIBUTION REVALUATION RESERVE AS AT 31/03/09 AS AT 31/03/08 1 CRESCENT ENTERTAINMENT & TOURISM LTD. 20,00,000 39,99,60,000 40,19,60,000 40,19,60,000 2 CRESCENT RESIDENCY PVT. LTD 4,50,000 12,31,83,000 12,36,33,000 -- 3 JALGAON COMMERCIAL SPACES 49,50,000 11,43,87,065 11,93,37,065 49,50,000 TOTAL 74,00,000 63,75,30,065 64,49,30,065 40,69,10 ,000 3. ASSESSING OFFICER IN HIS ASSESSMENT ORDER HAD AP PLIED SECTION 14A R.W. RULE 8D AND DISALLOWED THE EXPENDITURE FOR EARNING THE INCOME WHICH IS NOT PART OF TOTAL INCOME. IN THE COMPUTATION OF RULE 8 D, ASSESSING OFFICER HAD CONSIDERED THE AVERAGE VALUE OF INVESTMENT BASED ON THE REVALUATION CARRIED OUT BY THE PARTNERSHIP FIRM AS VALUE OF INVESTMENT AND ADDED UNDER RULE 8D DISALLOWED THE EXPENDITURE. THE ASSESSEE FILED THE APPEAL BEFORE LEARNED CIT(A) WHO BY RELYING UPON THE ORDER PASSED BY THE MUMBAI BENCH AND KOLKATA BENCH CITED AS UNDER ALLOWED THE APPEAL: (I) HITESH GAJARIA APPEAL NO.993/MUM/2007 (II) SUDHIR KAPADIA APPEAL NO.7888/MUM/2003 (III) HAMID A. MOOCHHALA APPEAL NO.2218/MUM/2010 (IV) BEHARILAL AGARWAL APPEAL NO.1816/KOL/2009 ITA NO.1946/MUM/2013 ASSESSMENT YEAR: 2009-10 3 LEARNED CIT(A) HAS ARRIVED AT THIS CONCLUSION THAT SECTION 14A R.W. RULE 8D IS NOT APPLICABLE TO THE PRESENT CASE. HOWEVER, FINDI NG OF LEARNED CIT(A) IS HEREBY REPRODUCED FOR READY REFERENCE: I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF TH E CASE. THE APPELLANT IN THE PARTNERSHIP FIRMS HAD ON LY CONTRIBUTED THE DEVELOPMENTAL RIGHTS FROM THE PART OF THE LAND PURCHASED THROUGH THE DEBT RECOVERY PROCEEDINGS. O N THIS LAND ONLY APPELLANT HAD BORROWED THE LOAN. THE A.O. AT THE MAXIMUM CAN DISALLOW THE EXPENDITURE INCURRED BY TH E APPELLANT ONLY ON THE AMOUNT OF INVESTMENT MADE BY THE APPELLANT IN THE PARTNERSHIP FIRM NOT ON THE REVALU ATION RESERVE WHICH WAS CREATED BY PARTNERSHIPS AFTER RECEIVING T HE CONTRIBUTION. FURTHER TO THE ABOVE, ITAT MUMBAI HEL D THAT 'IN A PARTNERSHIP FIRM, FIRM IS ASSESSING TAX AND LATER BASED ON THE SHARE OF THE PARTNERSHIP WHICH IS TRANSFERRED TO TH E INDIVIDUAL PARTNER AND INDIVIDUAL PARTNER'S INCOME IS EXEMPT F ROM THE TAX AS THE AMOUNT IS ASSESSED TO TAX IN THE PARTNERSHIP FIRM. CHARACTER OF THE INCOME ALSO DOES NOT CHANGE. CHAR ACTER OF THE INCOME IN THE ASSESSMENT WILL BE BUSINESS INCOM E AND WHILE IT IS ALLOCATED TO THE PARTNER SAME CHARACTERISTICS IT CARRIES. THE EXEMPTION PROVIDED TO THE PARTNER IS ONLY IN ORDER TO AVOID THE DOUBLE TAXATION ON THE SAME INCOME. THE ITAT HELD A S UNDER: 'HEARD BOTH THE PARTIES, PERUSED THE MATERIAL AVAIL ABLE ON RECORD AND WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF THE TRIBUNAL MUMBAI BENCH IN THE CASE OF HITESH D. GAJARIA VS. ACIT CITED SUPRA, WHEREIN THE HON'BLE TRIBUNAL HAS HELD AS UNDER: '4. WE HAVE CONSIDERED THE ARGUMENTS OF THE PARTIES AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT SI MILAR ISSUE WAS CONSIDERED BY 'C' BENCH OF THE MUMBAI TRIBUNAL VIDE ORDER DATED 26 TH FEBRUARY, 2007 IN THE CASE OF SHRI SUDHIR KPADI US. ITO IN ITA NO. 7888/ M/ 03 AND THE TRIBUN AL DEALT WITH THE ISSUE IN THE FOLLOWING MANNER: ITAT MUMBAI BENCH 'J' IN THE CASE OF SUDHIR DETTARASM PATH VS. DCIT 2 SOT 678 (MUM) HAS CONSIDE RED THE QUESTION OF TAXING THE EXPENDITURE WHILE COMPUTING INCOME OF A PARTNER AGAINST SALARY RECEIVED BY THE PARTNER FROM THE FIRM. THE TRIBUNAL HELD THAT THE SALARY FROM THE FIRM IN WHICH THE ASSESSEE IS A PARTNER IS IN THE NATURE OF BUSINESS INCOME U/S.28(V) AND THEREFORE, INTEREST PAID BY THE PARTN ER ON MONEY BORROWED FOR CONTRIBUTING CAPITAL HAS TO BE ALLOWED AS DEDUCTION IN THE HANDS OF THE ASSESSEE. IN RESPECT OF THE NATURE OF THE SHARE IN THE PROFITS OF A FIRM, IN THE HANDS OF THE PARTNER, THE SUPREME COURT HAS CONSIDERED THE ISSUE IN THE C ASE OF CIT, MADRAS VS. RM CHIDAMBARAM PILLAI 106 ITR 292. THE C OURT WAS EXAMINING THE NATURE OF SHARE OF PROFITS RECEIV ED BY A ITA NO.1946/MUM/2013 ASSESSMENT YEAR: 2009-10 4 PARTNER. THE COURT HELD THAT A FIRM IS NOT A LEGAL PERSON EVEN THOUGH IT HAS SOME ATTRIBUTES OF PERSONALITY. IN IN COME TAX LAW A FIRM IS A UNIT OF ASSESSMENT, BY SPECIAL PROV ISIONS, BUT IS NOT A FULL PERSON. SINCE A CONTRACT OF EMPLOYMENT R EQUIRES TWO DISTINCT PERSONS, THE EMPLOYER AND THE EMPLOYEE, TH ERE CANNOT BE A CONTRACT OF SERVICE, IN STRICT LAW, BETWEEN A FIRM AND ONE OF ITS PARTNERS. PAYMENT OF SALARY TO A PARTNER REPRES ENTS A SPECIAL SHARE OF THE PROFITS. SALARY PAID TO A PART NER RETAINS THE SAME CHARACTER OF THE INCOME IN THE FIRM. THE ITAT, MUMBAI BENCH 'H' IN THE CASE OF ACIT VS. RUSTOM J, GAGRAT HAS CONSIDERED THE VERY SAME ISSUE FOR THE ASSESSMENT Y EAR 97-98 IN ITS ORDER DATED 21/12/04 IN ITA NO. 3860/ M/ 00, TH ERE ALSO THE TRIBUNAL HAS HELD IN FAVOUR OF ASSESSEE THAT DEDUCT ION IS PERMISSIBLE UNDER LAW. WHEN WE EXAMINE THE ISSUE IN THE LIGHT OF THE ABOVE JUDGEMENT AND DECISIONS, WE FIND THAT THE CLAIM MAD E BY THE ASSESSEE IS ACCEPTABLE IN LAW. THE SUPREME COURT IN THE CASE OF CIT MADRAS, VS. R. M.CHIDAMBARAM PILLAI HAS HELD TH AT SALARY PAID TO A PARTNER RETAINS THE SAME CHARACTER AS INC OME OF THE FIRM. THIS LEADS US TO THE NEXT STEP; I.E. THE ABAS E OF PROFITS RECEIVED BY A PARTNER FROM THE FIRM RETAINS THE SAM E CHARACTER OF BUSINESS INCOME. THE SAID BUSINESS INCOME IS EXE MPT FROM THE LEVY OF TAX ONLY IN THE HANDS OF THE ASSESSEE; BUT IT IS TAXABLE IN THE HANDS OF THE FIRM. THE ASSESSEE PARTNER GETS ITS SHARE OF PROFIT FROM THE FIRM AFTER FIRM HAS BEEN SUBJECTED TO TAX IN ITS HANDS. THEREFORE, IT IS NOT POSSIBLE TO HOLD THE VI EW THAT THE SHARE INCOME IN THE HANDS OF A PARTNER IS ALL TOGET HER TAX FREE; ON THE OTHER HAND THE SHARE IS TAX SUFFERED INCOME IN THE HANDS OF THE FIRM. THEREFORE, SEC.14A IS NOT APPLICABLE I N THAT CASE. THE SHARE INCOME OF THE FIRM IS EXEMPT FROM THE TAX U/S.10(2A), NOT IN THE ABSOLUTE SENSE. IT IS ONLY TO AVOID DOUB LE TAXATION; ONCE IN THE HANDS OF THE FIRM AND SECONDLY IN THE H ANDS OF THE PARTNER. THEREFORE, WE FIND THAT THE PROVISIONS OF SECTION 14A WOULD NOT APPLY TO THE ASSESSEE/PARTNER AND IT IS N OT NECESSARY FOR THE ASSESSING AUTHORITY TO DISALLOW THE PROPORT IONATE EXPENDITURE FROM THE CLAIM OF THE ASSESSEE. THEREFO RE, THE DISALLOWANCE OF RS. 3,09,972/ - IS DELETED AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW RS. 3, 95, 500/ - CLAI MED BY THE ASSESSEE. THIS FINDING IS FORTIFIED BY THE FACT THA T THE ASSESSEE/PARTNER IS NOT ALLOWED TO CLAIM ANY CONVEY ANCE EXPENDITURE FROM THE FIRM AS PROVIDED IN THE PARTNE RSHIP DEED. WE FIND THAT THE ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF 'E' BENCH OF THE TRIBUN AL IN THE CASE OF SHRI BHARAT S. RAUT IN ITA NO.9212/MUM/2004 AND CO NO.212/MUM/2005 VIDE ORDER DATED 25TH JUNE, 2008. THUS RESPECTFULLY FOLLOWING THE PRECEDENT, WE DELETE THE DISALLOWANCE. ITA NO.1946/MUM/2013 ASSESSMENT YEAR: 2009-10 5 4. IN VIEW OF THE ABOVE SAID CIRCUMSTANCES WE ARE O F THE VIEW THAT THE LEARNED CIT(A) HAS PASSED THE ORDER UNDER CHALLENGE ON THE BASIS OF ORDER PASSED BY THE ITAT MUMBAI BENCH AND KOLKATA BENCH C ASE CITED AS UNDER: (I) HITESH GAJARIA APPEAL NO.993/MUM/2007 (II) SUDHIR KAPADIA APPEAL NO.7888/MUM/2003 (III) HAMID A. MOOCHHALA APPEAL NO.2218/MUM/2010 (IV) BEHARILAL AGARWAL APPEAL NO.1816/KOL/2009 THE FACTS OF THE PRESENT CASE ARE NOT DIFFERENT TO THE FACTS OF THE CASE RELIED BY THE ASSESSEE. THEREFORE FINDING NO GROUND TO INTER FERE WITH THE ORDER IN QUESTION WE DISMISSED THE PRESENT APPEAL. 5. IN RESULT THE APPEAL OF THE REVENUE IS HEREBY DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH DECEMBER, 2015 SD/- SD/- (N.K.BILLAIYA) (AMARJIT SINGH) / ACCOUNTANT MEMBER #$ /JUDICIAL MEMBER % & MUMBAI; ' DATED : 16 TH DECEMBER, 2015 MP MP MP MP !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ( ) / THE CIT(A)- 4. ( / CIT 5. )*+ $$,- , ,- , % & / DR, ITAT, MUMBAI 6. +./ 0 / GUARD FILE. / BY ORDER, ) $ //TRUE COPY// % / & ' (DY./ASSTT. REGISTRAR) , % & / ITAT, MUMBAI