FIVE STARS SHIPPING CO. P.LTD, MUMBAI V. DCIT CEN CIR 47, MUMBAI

ITA 2152/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92751 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 20-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 30-03-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MADHUVANI; MANOJ SHARMA
• Assessee Lawyers: S U PATHAK
• Keywords: Business income; Principle of natural justice; Earning of tax free income; Period of limitation; Additional evidence; Corroborative evidences; Time period of passing order
• Section: 143(3); 14A

Judgement Text

F IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBEWR ./ I.T.A. NOS. 2151 /MUM/2012 ( / ASSESSMENT YEAR: 2007-08 FIVE STARS SHIPPING CO. PVT. LTD., UNIT NO. 3, BRADY GLADYS PLAZA, 1/447 SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013. / VS. DY. COMMISSIONER OF INCOME TAX- CENTRAL CIRC LE 47, AAYAKAR BHAVAN, MUMBAI 400 020. ./ PAN : AAACF0530B ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NOS. 2767 /MUM/2012 ( / ASSESSMENT YEAR : 2007-08 DY. COMMISSIONER OF INCOME TAX- CENTRAL CIRC LE 47, AAYAKAR BHAVAN, MUMBAI 400 020. / VS. FIVE STARS SHIPPING CO. PVT. LTD., UNIT NO. 3, BRADY GLADYS PLAZA, 1/447 SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013. ./ PAN : AAACF0530B ( / APPELLANT ) .. ( / RESPONDENT ) ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 2 ./ I.T.A. NOS. 2152 /MUM/2012 ( / ASSESSMENT YEAR: 2008-09 FIVE STARS SHIPPING CO. PVT. LTD., UNIT NO. 3, BRADY GLADYS PLAZA, 1/447 SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013. / VS. DY. CO MMISSIONER OF INCOME TAX- CENTRAL CIRC LE 47, AAYAKAR BHAVAN, MUMBAI 400 020. ./ PAN : AAACF0530B ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NOS. 2766 /MUM/2012 ( / ASSESSMENT YEAR : 2008-09 DY. COMMISSIONER OF INCOME TAX- CENTRAL CIRC LE 47, AAYAKAR BHAVAN, MUMBAI 400 020. / VS. FIVE STARS SHIPPING CO. PVT. LTD., UNIT NO. 3, BRADY GLADYS PLAZA, 1/447 SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013. ./ PAN : AAACF0530B ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY SHRI S.U. PATHAK REVENUE BY : MS. MADHU VANI & SHRI MANOJ SHARMA / DATE OF HEARING : 03-06-2015 / DATE OF PRONOUNCEMENT : 11-06-2015 [ ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 3 !' / O R D E R PER R.C. SHARMA, A.M . : THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE A ND REVENUE AGAINST THE ORDER PASSED BY THE LD. CIT(A) 38, MUMBAI FOR THE ASSESSMENT YEARS 2007-08 & 2008-09 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961. 2. COMMON GROUNDS HAVE BEEN TAKEN IN BOTH THE ASSES SMENT YEARS UNDER CONSIDERATION, THEREFORE, BOTH THE APPEALS WERE HEA RD TOGETHER AND DISPOSED OF BY THIS SINGLE CONSOLIDATED ORDER FOR THE SAKE O F CONVENIENCE. 3. FIRST, WE SHALL TAKE UP THE APPEAL FOR A.Y. 2007 -08. 4. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGA GED IN THE BUSINESS OF SHIP MANAGEMENT. IT IS ALSO INVOLVED IN THE ACTIVITY OF HORSE BREEDING AND OWNING AND MAINTAINING RACE HORSES. IN THE RETURN OF INCOM E FOR A.Y. 2007-08, THE ASSESSEE CLAIMED AGRICULTURAL INCOME OF RS. 8,01,17 5/- AND LEASE RENT ON AGRICULTURAL LAND AT RS. 26,59,140/-. DURING THE CO URSE OF ASSESSMENT PROCEEDINGS, A.O. HAS EXAMINED THE AGRICULTURAL INC OME OF RS.8,01,175/-, STATED TO HAVE BEEN EARNED FROM THE LAND TAKEN ON L EASE FROM THREE DIRECTORS OF THE ASSESSEE COMPANY TO WHOM LEASE RENTS AGGREGA TING TO RS.26,59,1401- WAS PAID. THE A.O HAS STATED THAT 7/12 EXTRACTS OF THE REVENUE RECORDS PERTAINING TO AGRICULTURAL OPERATIONS DID NOT GIVE ANY DETAILS OF AGRICULTURE ACTIVITIES ON THE LANDS TAKEN ON LEASE. IT IS FURTH ER STATED THAT THE DETAILS OF AGRICULTURAL INCOME AND EXPENDITURE WERE ALSO NOT F URNISHED. THEREFORE, A.O ISSUED A SHOW CAUSE NOTICE DATED 24.12.2009 TO THE ASSESSEE WHEREIN IT WAS STATED THAT 7/12 EXTRACTS DID NOT INDICATE ANY AGRI CULTURE ACTIVITIES THAT WERE CARRIED ON AND THE YIELD OF GRASS DISCLOSED IN THE 7/12 RECORDS IS ATTRIBUTABLE TO THE NATURAL ACTIVITY. IT WAS FURTHER STATED THAT SINCE THE DETAILS OF ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 4 AGRICULTURAL INCOME AND EXPENDITURE ALONG WITH THE VOUCHERS WERE NOT FURNISHED TO SUBSTANTIATE THE CLAIM OF AGRICULTURAL INCOME, THE INCOME STATED TO HAVE BEEN EARNED FROM AGRICULTURAL INCOME AMOUNT ING TO RS.8,01,175/-WAS PROPOSED TO BE DISALLOWED AND THE SAME WAS PROPOSED TO BE TREATED AS INCOME FROM OTHER SOURCES. FURTHER, THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY THE LEASE RENTS OF RS.26,59,1401- PAID TO THE D IRECTORS OF THE COMPANY TOWARDS THE LANDS TAKEN ON LEASE SHOULD NOT BE DISA LLOWED. IN RESPONSE TO THE SHOW CAUSE NOTICE DATED 24.12.2009, THE ASSESSEE CO MPANY VIDE-THE SUBMISSION DATED 29.12.2009 HAS STATED THAT THE ASS ESSEE COMPANY OWNS A LARGE EXTENT OF LAND AND HAS ALWAYS USED THE LANDS TO RAISE AGRICULTURAL PRODUCTS, WHICH ARE SUITABLE FOR CONSUMPTION BY THE HORSES AND BY THE STAFF. ANY SURPLUSES WERE SOLD TO PERSONS IN THE NEARBY LO CALITIES NOT WITH AN INTENTION OF EARNING INCOME BUT TO AVOID WASTAGE OF PERISHABLE GOODS. DURING THE YEAR UNDER CONSIDERATION, THE COMPANY TOOK AGRI CULTURAL LAND ON LEASE FROM THE DIRECTORS AND PAID LEASE RENTALS AS PER TH E LEASE DEEDS. IT IS FURTHER STATED THAT PADDOCK GRASS, OATS, GRAMS AND VEGETABL ES ETC. WERE GROWN BY USING UNSKILLED PERSONNEL AND CASUAL WORKERS. IT WA S FURTHER STATED THAT THE DETAILS OF AGRICULTURAL PRODUCE, WHICH WAS SOLD IN THE MARKET WERE ALSO BEING FURNISHED. IT WAS CONTENDED THAT IT WAS INCORRECT T O STATE THAT THE DETAILS CALLED FOR WERE NOT FILED. 5. THE A.O DID NOT AGREE WITH THE CONTENTIONS OF TH E ASSESSEE FOR THE REASON THAT 7/12 EXTRACTS BELONGED TO THE FINANCIAL YEAR 2004-05 AND F.Y.2007-08 BUT NOT THE PERIOD F.Y.2006-07. THE A.O . HAS TAKEN A VIEW IN THE ASSESSMENT THAT SINCE THE GRASS GROWS NATURALLY, IT IS NOT AN AGRICULTURAL PRODUCE, ACCORDING TO THE AO, THE CLAIM OF THE ASSE SSEE THAT CERTAIN GRAMS, VEGETABLES ETC. PRODUCED ARE NOT SUPPORTED BY ANY E VIDENCE IN THE FORM OF 7/12 EXTRACTS. THE A.O TOOK THE VIEW THAT THERE WAS NO AGRICULTURAL ACTIVITY CARRIED ON THE LANDS TAKEN ON LEASE AND, THEREFORE, THE INCOME CLAIMED TO HAVE BEEN EARNED FROM AGRICULTURAL ACTIVITIES HAS T O BE TREATED AS INCOME ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 5 UNDER 'OTHER SOURCES'. FURTHER, IT WAS HELD THAT TH E EXPENDITURE INCURRED TOWARDS THE LEASE RENT PAID TO THE DIRECTORS AS DIS ALLOWABLE. A.O HAS ALSO TAKEN AN ALTERNATIVE STAND TO THE EFFECT THAT SINCE THE LEASE RENT PAID TO THE DIRECTORS PERTAINS TO EARNING INCOME, WHICH IS EXEM PTED FROM TAXATION, THE EXPENDITURE IN RELATION TO EARNING SUCH INCOME CANN OT BE ALLOWED IN VIEW OF THE PROVISIONS OF SECTION 14 A OF THE ACT. THEREFOR E, A.O HAS NOT ONLY DISALLOWED THE ENTIRE EXPENDITURE CLAIMED TOWARDS A GRICULTURAL OPERATIONS AMOUNTING TO RS.26,59,1401- BUT HAS ALSO BROUGHT TO TAX AN AMOUNT OF RS.8,O 1, 175/- UNDER THE HEAD OTHER SOURCES. 6. BEFORE THE LD. CIT(A), THE ASSESSEE FILED WRITTE N SUBMISSION ALONG WITH EVIDENCES PERTAINING TO THE AGRICULTURAL ACTIVITIES . THE LD. CITA) SENT ALL THESE DOCUMENTS TO THE A.O. FOR HIS REMAND REPORT. THE LD . CIT(A) AFTER CONSIDERING THE ASSESSEES SUBMISSION AS WELL AS THE REMAND REP ORT HELD THAT THE EXPENDITURE INCURRED FOR EARNING AGRICULTURAL INCOM E HAS TO BE SET OFF AGAINST THE INCOME FROM AGRICULTURAL OPERATIONS. CONSEQUENT LY, THE EXPENDITURE AMOUNTING TO RS. 26.59 LAKHS WAS SET OFF AGAINST TH E INCOME OF RS. 8.01 LAKHS AND THE RESULTANT LOSS FROM AGRICULTURAL OPERATIONS AMOUNTING TO RS. 18.57 LAKHS WAS TREATED AS THE NET DISALLOWANCE U/S 14A O F THE ACT. THE PRECISE OBSERVATION OF THE LD. CIT(A) AS UNDER:- 10. I HAVE CAREFULLY EXAMINED THE FACTS OF THE CAS E, THE ADDITIONAL EVIDENCES AND THE WRITTEN SUBMISSIONS OF THE APPELL ANT, THE REMAND REPORT SUBMITTED BY THE A.O AND THE REJOINDER FILED BY THE APPELLANT. IT IS A FACT THAT THE 7/12 EXTRACTS ARE NOT SO METICUL OUSLY MAINTAINED BY THE STATE REVENUE AUTHORITIES TO ACCURATELY REFLECT S THE AGRICULTURAL OPERATIONS AND THE DETAILS OF CROPS GROWN. THEREFOR E, IT EVIDENCES FURNISHED BY THE APPELLANT ALSO CANNOT BE REJECTED ON THE GROUND THAT CANNOT BE TREATED AS A CLINCHING EVIDENCE TO DECIDE THE ISSUE. THE CORROBORATIVE EVIDENCES FURNISHED BY THE APPELLANT ALSO CANNOT BE REJECTED ON THE GROUND THAT THE SAME ARE NOT FULLY IN AGREEMENT WITH THE 7/12 EXTRACTS. 11. ON A PERUSAL OF THE PAPER BOOK SUBMITTED BY THE APPELLANT, IT IS SEEN THAT PAGE NOS. 2 TO 24 PERTAIN TO 7/12 EXTRACT S OF THE FARM. IN THE ENCLOSURE WITH THE LATTER DATED 19.03.2010, THE LD. A.R. OF THE ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 6 APPELLANT HAS SUBMITTED THAT THE 7/12 EXTRACTS REFL ECT THAT MANGO TREES, COCONUT TREES, GUAVA, JAMUN, RICE, CASHEW NU T ETC. ARE BEING GROWN. IT IS FURTHER SUBMITTED THAT THE PAGE NOS.25 TO 37 OF THE PAPER BOOK PROVIDED THE DETAILS OF THE SALE OF AGRICULTUR AL PRODUCE WHICH WERE PART OF THE BOOKS OF ACCOUNTS MAINTAINED. IT IS SEE N FROM THE DETAILS MADE AVAILABLE IN THE PAPER BOOK THAT FRENCH BEANS, CABBAGE, CAULIFLOWERS, CARROT, CUCUMBER, LADIES FINGER, MANG O ARE SOLD DURING THE RELEVANT PREVIOUS YEAR WHICH CONSTITUTED THE AG RICULTURAL INCOME THAT WAS CREDITED TO THE PROFIT & LOSS ACCOUNT UNDE R THE HEAD OTHER INCOME. THE LEASE AGREEMENTS ENTERED INTO WITH THE DIRECTORS/ LAND OWNERS OF THE AGRICULTURAL LAND, THE WRITTEN SUBMIS SIONS FILED AND CORROBORATIVE EVIDENCES FURNISHED PROVIDE A REASONA BLE BASIS FOR THE APPELLANT TO CLAIM THAT THE AGRICULTURAL ACTIVITIES WERE CARRIED OUT AT THE LEASED LANDS. ACCORDING TO THE APPELLANT, A.O WAS R EQUESTED TO VISIT THE FARM AND SEE THE FACTUAL POSITION. IN SUCH CIRCUMST ANCES, THE ONLY OPTION AVAILABLE BEFORE THE A.O WAS TO ESTABLISH TH AT NEITHER THE SPECIAL GRASS NOR THE FRUIT BEARING TREES AND VEGETABLE CRO PS EXISTED IN THE LANDS TAKEN ON LEASE. BUT NO SUCH FACTUAL VERIFICAT ION WAS CARRIED OUT BY THE A.O. THEREFORE, ON THE BASIS OF THE AVAILABL E MATERIALS, IT HAS TO BE CONCLUDED THAT AGRICULTURAL OPERATIONS WERE CARR IED OUT ON THE LANDS TAKEN ON LEASE. ACCORDINGLY, THE INCOME STATED TO H AVE BEEN EARNED FROM AGRICULTURE CANNOT BE BROUGHT TO TAX AS THE IN COME UNDER THE HEAD OTHER SOURCES. A.O IS HEREBY DIRECTED TO DELET E THE ADDITION OF RS.8,01,175/-. THE OTHER CONNECTED ISSUE IS THE ALL OWABILITY OF LEASE RENTS PAID TO THE DIRECTORS OF THE APPELLANT COMPAN Y FOR LEASING THE LANDS TO THE APPELLANT. IN TERMS OF SECTION 14A OF THE ACT, EXPENDITURE INCURRED IN RELATION TO EARNING ANY EXEMPTED INCOME IS LIABLE TO BE DISALLOWED. IN THIS CASE, EARNING OF AGRICULTURAL I NCOME INVOLVED EXPENDITURE OF LEASE RENTS AMOUNTING TO RS.26,59,14 01- AND THE SAME IS RIGHTLY DISALLOWED. THEREFORE, THE SAID DISALLOW ANCE IS UPHELD IN TERMS OF SECTION 14A OF THE ACT. THE EXPENDITURE IN CURRED FOR EARNING AGRICULTURAL INCOME HAS TO BE SET OFF AGAINST THE I NCOME FROM AGRICULTURAL OPERATIONS. CONSEQUENTLY, THE EXPENDIT URE AMOUNTING TO RS.26,59,1401- HAS TO BE SET OFF AGAINST THE INCOME OF RS.8,01,175/- AND THE RESULTANT LOSS FROM AGRICULTURAL OPERATIONS AMOUNTING TO RS.L8,57,965/- HAS TO BE TREATED AS THE NET DISALLO WANCE U/S. 14A OF THE ACT. 7. AGAINST THE ABOVE ORDER OF THE LD. CIT(A), BOTH THE ASSESSEE AND REVENUE ARE IN FURTHER APPEAL BEFORE US. 8. RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECOR D PERUSED. WE FOUND THAT DURING THE COURSE OF APPELLATE PROCEEDINGS, TH E LD. CIT(A) FOUND THAT THE ASSESSEE HAS NOT GIVEN DUE OPPORTUNITY TO PRODUCE T HE EVIDENCE, INSOFAR AS THE A.O. HAD GIVEN NOTICE FOR PRODUCING THE EVIDENC E ONLY AT THE FAG END OF THE ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 7 ASSESSMENT PROCEEDINGS I.E. 10 TO 15 DAYS TIME. U NDER THESE CIRCUMSTANCES, THE LD. CIT(A) ADMITTED THE ADDITIONAL EVIDENCE FIL ED BEFORE HIM AND SENT THE SAME TO THE A.O. FOR HIS REMAND REPORT. FROM THE R ECORD WE FOUND THAT THE ASSESSEE HAS A BUSINESS OF MAINTAINING A STUD FARM AT NANOLI NEAR TALEGAON, PUNE. IT HAS ITS OWN LAND AND IT HAS ALSO TAKEN ABO UT 133 ACRES OF LAND ON RENT FROM DHUNJIBHOY FAMILY. THE ASSESSEE USES THE LAND FOR STUD FARM AND ALSO FOR AGRICULTURAL OPERATIONS. IT HAS ABOUT 4 LA KHS TREES OF GAUVA, JAMBHUN, MANGO, COCONUT, ETC. ETC. ON THE LAND AND IT ALSO GROWS PADDOCK (DHOOP) GRASS FOR THE HORSES, RICE, VEGETABLES ON T HIS LAND. IT SELLS SOME AGRICULTURAL PRODUCE LIKE VEGETABLES AND FRUITS IN THE MARKET WHILE PART OF THIS PRODUCE IS UTILISED BY THE ASSESSEE FOR ITS EMPLOYE ES ON THE FARM. IT HAS EARNED RECEIPT OFRS.801,175/- FROM SALE OF SUCH AGR ICULTURAL PRODUCE AND WHICH THE A.O. TREATED AS NON AGRICULTURAL INCOME. AFTER CONSIDERING THE REMAND REPORT, THE LD. CIT(A) HAS RECORDED A CATEGO RICAL FINDING TO THE EFFECT THAT THE ASSESSEE HAD CARRIED ON AGRICULTURAL OPERA TIONS AND EARNED INCOME OF RS. 8,01,175/-. THE GRASS IS PADDOCK GRASS (DHOOP G RASS) WHICH IS SPECIALLY PLANTED AS IT IS A FEED FOR THE HORSES. IT DOES NO T HAVE SPONTANEOUS GROWTH AND HENCE, IT IS AN AGRICULTURAL ACTIVITY. IN THE FOLLOWING CASES, IT HAS BEEN HELD THAT IF THE GRASS IS PLANTED, IT IS AN AGRICUL TURAL ACTIVITY. A) ITO VS. KANCHANLAL MANCHA RAM (1988) 32 TTJ (AHD.)( TM) 38 B) ACIT VS. PZ ESTATES (P) LTD. (2005) 2 SOT 563 (DEL) . THE LD. CIT(A) AFTER CONSIDERING THE CORROBORATIVE EVIDENCE FILED ON RECORD, OBSERVED THAT THE ASSESSEE HAD SOLD FRENCH BEANS, C ABBAGE, CAULIFLOWERS, CARROT, CUCUMBER, LADIES FINGER, MANGO DURING THE R ELEVANT PREVIOUS YEAR WHICH CONSTITUTED THE AGRICULTURAL INCOME WHICH WAS CREDITED TO THE P&L ACCOUNT UNDER THE HEAD OTHER INCOME. THE LD. CIT (A) ALSO RECORDED A FINDING TO THE EFFECT THAT 7/12 EXTRACTS REFLECTED THAT MAN GO TREES, COCONUT TREES, GUAVA, JAMUN, RICE, CASHEW NUT ETC. ARE BEING GROWN . THE FINDING RECORDED BY THE LD. CIT(A) HAS NOT BEEN CONTROVERTED BY THE LD. D.R. BY BRINGING ANY ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 8 POSITIVE MATERIAL ON RECORD, WE, THEREFORE, FIND NO REASON TO INTERFERE WITH THE FINDINGS RECORDED BY THE LD. CIT(A) HOLDING THAT TH E ASSESSEE HAD EARNED AGRICULTURAL INCOME OF RS. 8,01,175/-. WITH REGARD TO LEASE RENT EXPENDITURE OF RS. 26,59,140/- INCURRED BY THE ASSESSEE, THE LD . CIT(A) HAS DISALLOWED THE SAME ON THE PLEA THAT THE EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME. WE ALSO FIND THAT THE LEASE RENT WAS PAID TO THE DIRECTORS OF THE ASSESSEE COMPANY FOR LEASING THE LANDS TO THE ASSES SEE WHICH DESERVES TO BE DISALLOWED U/S 14A OF THE ACT TO THE EXTEND ATTRIBU TABLE TO EARNING OF EXEMPT INCOME. 9. THE REVENUE HAS ALSO TAKEN A GROUND WITH REGARD TO ADDITIONAL EVIDENCE ACCEPTED BY THE LD. CIT(A) WITHOUT GIVING OPPORTUNI TY TO THE A.O. IN THIS REGARD, WE FOUND THAT THE A.O. HAS NOT GIVEN SUFFIC IENT OPPORTUNITY TO THE ASSESSEE, INSOFAR AS THE DOCUMENTS WERE ASKED AT TH E FAG END OF THE ASSESSMENT PROCEEDINGS, THEREFORE, THE ASSESSEE COU LD NOT FURNISH THE SAME BEFORE THE A.O. THESE DOCUMENTS WERE FILED BEFORE THE LD. CIT(A) WHO HAS SENT ALL THESE DOCUMENTS TO THE A.O. FOR HIS REMAND REPO RT. THE A.O. HAS EXAMINED ALL THESE DOCUMENTS AND SENDS HIS REMAND REPORT. A CCORDINGLY, THERE IS NO VIOLATION OF RULE 46A INSOFAR AS THE A.O. HAS BEEN GIVEN DUE OPPORTUNITY BY THE LD. CIT(A) BY EXAMINING THE DOCUMENTS AND GIVE HIS REPORT. AFTER CONSIDERING THE REMAND REPORT SENT BY THE A.O., THE LD. CIT(A) HAS DECIDED THE ISSUE. THUS THERE IS NO CONTRAVENTION OF RULE 46A, WE, THEREFORE, DO NOT FIND ANY MERIT IN THE GROUND TAKEN BY THE REVENUE. 10. IN VIEW OF THE ABOVE, WE DISMISS THE GROUNDS TA KEN BY THE REVENUE WITH RESPECT TO THE AGRICULTURAL INCOME AND UPHOLD THE D ISALLOWANCE OF EXPENDITURE INCURRED IN THE FORM OF LEASE RENTALS FOR EARNING E XEMPT INCOME U/S 14A OF THE ACT. ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 9 11. THE A.O. HAS ALSO DISALLOWED AN EXPENDITURE OF RS. 60,42,28,258/- BY OBSERVING THAT THE ASSESSEE DISCLOSED ONLY SHIP MAN AGEMENT FEES OF RS.7,53,06,251/-, WHILE TOTAL RECEIPTS PERTAINING T O SHIP MANAGEMENT SEGMENT OF THE BUSINESS AMOUNTED TO RS.71,03,08,157 /-. IT WAS FURTHER POINTED OUT BY THE A.O. THAT THE ASSESSEE HAD NOT P ROVED THE EXPENDITURE AMOUNTING TO RS.60,42,28,258/-AS LAID OUT FOR THE P URPOSE OF EARNING THE SHIP MANAGEMENT BUSINESS INCOME. FURTHER, IT WAS ST ATED IN THE SHOW CAUSE NOTICE DATED 24.12.2009 THAT THE EXPENDITURE OF RS. 60,42,28,258/- IS LIABLE TO BE DISALLOWED U/S 40(A)(IA) SINCE THE TDS PROVISION S WERE NOT COMPLIED WITH. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE FURNISHED A REPLY WHEREIN IT WAS STATED THAT IT HAD BEEN CONSISTENTLY FOLLOWI NG THE ACCOUNTING PRACTICE OF EXCLUDING THE REIMBURSEMENT AMOUNTS RECEIVED FROM M /S. GREAT EASTERN SHIPPING COMPANY LIMITED AND M/S FIVE STAR BULK CAR RIER LIMITED, WHICH HAVE ENGAGED THE APPELLANT FOR SHIP MANAGEMENT. IT WAS FURTHER STATED THAT THE ACCOUNTING TREATMENT WAS APPROVED BY THE ITAT I N ITS OWN' CASE FOR THE A.Y. L989-90 VIDE ORDER IN APPEAL NO.ITAL3577/MUM/9 3 DATED 01.09.2003. NO DISALLOWANCE U/S 40(A)(IA) OF THE ACT WAS CALLED FOR SINCE THE TDS PROVISIONS UNDER THE APPLICABLE SECTIONS, SUCH AS 1 92 - SALARY, 194 - INTEREST, 194C-CONTRACTS, 194 H - COMMISSION I BROKERAGE, 194 I - RENT AND 194J - PROFESSIONAL OR TECHNICAL SERVICES HAVE BEEN COMPLI ED WITH AND THE TDS RETURNS HAVE ALSO BEEN FILED. IT WAS FURTHER SUBMIT TED THAT COPIES OF CERTIFICATES ISSUED BY M/S BANSI S. MEHTA & CO., CH ARTERED ACCOUNTANTS, CERTIFYING THAT THE COMPANY SPENT I INCURRED OPERAT ING EXPENSES RELATING TO 15 SHIPS AMOUNTING TO RS.37,67,12,168/- DURING APRIL, 2006 TO MARCH, 2007 ON BEHALF OF M/S. GREAT EASTERN SHIPPING COMPANY LIMIT ED WAS BEING FURNISHED FOR THE PERUSAL OF THE A.O. A SIMILAR CERTIFICATE CERTIFYING THE EXPENSES RELATING TO SIX SHIPS AMOUNTING TO RS.10,31,46,275/ - ON BEHALF OF M/S. FIVE STAR BULK CARRIER LIMITED WAS SUBMITTED IN RESPONSE TO THE SHOW CAUSE NOTICE DTD.24.12.2009. HOWEVER, A.O DISAGREED WITH THE EXP LANATIONS AND WRITTEN SUBMISSIONS FILED DURING THE ASSESSMENT PROCEEDINGS AND DISALLOWED AN ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 10 AMOUNT OF RS.60,42,28,258/-. IN ADDITION, A.O ALSO HAS TAKEN A STAND IN THE ASSESSMENT ORDER THAT THE ASSESSEE DID NOT COMPLY W ITH THE TDS PROVISIONS AND, THEREFORE, THE SAID EXPENDITURE IS ALSO DISALL OWED U/S 40(A)(IA) OF THE ACT. 12. THE WRITTEN SUBMISSIONS AND THE PAPER BOOK DAT ED 05.02.2010, SUBMITTED DURING THE APPEAL PROCEEDINGS, WAS FORWAR DED TO THE A.O AND A REMAND REPORT WAS CALLED FOR. A.O IN THE REMAND REP ORT DATED 07.05.2010 HAS FIRSTLY OBJECTED TO THE ADDITIONAL EVIDENCES SUBMIT TED BY THE APPELLANT DURING THE APPEAL PROCEEDINGS ON THE GROUND THAT SUCH DETA ILS AND EVIDENCES WERE NOT SUBMITTED DURING THE ASSESSMENT PROCEEDINGS. ON THE ISSUE OF ADMISSION OF ADDITIONAL EVIDENCES, THE APPELLANT IN ITS REJOI NDER DATED 23RD AUGUST, 2010 HAS TAKEN A STRONG OBJECTION. IT IS SUBMITTED THAT A.O HAD NOT CARED TO LOOK INTO THE ISSUES TILL THE FAG END OF THE ASSESSMENT YEAR AND OUT OF THE 21 MONTHS AVAILABLE AT HIS DISPOSAL, A.O CHOSE TO ISSU E A SHOW CAUSE NOTICE AS LATE AS ON 14.12.2009 AND FURTHER ON 24.12.2009. AC CORDING TO THE APPELLANT, DESPITE VERY FEW DAYS OF TIME GIVEN BY THE A.O., TH E AVAILABLE DETAILS WERE FURNISHED. THEREFORE, THE APPELLANT CONTENDED THAT THE OBJECTIONS RAISED BY THE A.O FOR ADMITTING THE DETAILS/ADDITIONAL EVIDEN CES REQUIRED WITH REFERENCE TO THE HUGE DISALLOWANCES MADE ARE NOT IN ACCORDANC E WITH THE PRINCIPLES OF NATURAL JUSTICE. BY THE IMPUGNED ORDER, THE LD. CIT (A) DELETED THE DISALLOWANCE AFTER OBSERVING AS UNDER:- 15. ON A CAREFUL EXAMINATION OF THE FACTS OF THE CASE, THE STAND OF THE A.O AND THE CONTENTIONS OF THE APPELLANT, IT IS SEE N THAT A. A HAS, IN FACT, TAKEN UP THE SCRUTINY OF THE ISSUES RESULTING IN SU BSTANTIAL ADDITIONS ONLY TOWARDS THE FAG END OF THE LIMITATION PERIOD, WHICH IS EVIDENT FROM THE SHOW CAUSE NOTICE DATED 24.12.2009. THE TIME MADE A VAILABLE TO THE APPELLANT WAS NOT ADEQUATE TO PROVIDE THE INFORMATI ON AND ALL THE DETAILS AND EVIDENCES WITH REGARD TO THE ISSUES RAISED BY T HE A.O IN THE SHOW CAUSE NOTICE. HOWEVER, THE APPELLANT IS STATED TO H AVE FURNISHED THE INFORMATION AVAILABLE AT ITS DISPOSAL. SINCE ADEQUA TE OPPORTUNITY WAS NOT PROVIDED TO THE APPELLANT, IT IS ONLY FAIR AND JUST THAT THE ADDITIONAL EVIDENCES AND RELEVANT DETAILS SUBMITTED DURING THE APPEAL PROCEEDINGS ARE ADMITTED IN TERMS OF RULE 46A OF THE LT. RULES, 1962. THEREFORE, THE OBJECTIONS RAISED BY THE A.O IN THE REMAND REPORT W ERE LIABLE TO BE OVERRULED AND THE ADDITIONAL EVIDENCES AND THE RELE VANT DETAILS ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 11 FURNISHED BY THE APPELLANT DURING THE APPEAL PROCEE DINGS WERE REQUIRED TO BE TAKEN ON RECORD AND DECIDED ON MERITS. 16. AS REGARDS THE MERITS OF THE ISSUES, EVEN DURIN G THE REMAND PROCEEDINGS, A.O DID NOT GIVE ANY FURTHER OPPORTUNI TY TO THE APPELLANT AND DID NOT FULLY EXAMINE THE ISSUE OF GENUINENESS OF THE EXPENSES INCURRED AND THE COMPLIANCE OF THE TDS PROVISIONS S O AS TO QUANTIFY AND SUBSTANTIATE THE DISALLOWANCES, IF ANY. A.O MERELY RAISED CERTAIN GENERAL OBSERVATIONS TO DISREGARD THE ADDITIONAL EVIDENCES AND SUBMISSIONS FURNISHED BY THE APPELLANT IN SUPPORT OF THE ALLOWA BILITY OF THE EXPENSES AMOUNTING TO RS.60.42 CRORES. 17. THEREAFTER, THE APPELLANT BY LETTER DATED 04TH JANUARY, 2011 SUBMITTED THAT THE ASSESSMENT PROCEEDINGS FOR THE A .Y.2008-09 WERE CONCLUDED AND THE ASSESSING OFFICER HAS EXAMINED TH E GENUINENESS OF EXPENSES INCURRED AND THE COMPLIANCE WITH THE TDS P ROVISIONS OF THE SIMILAR EXPENDITURE INCURRED IN THE RELEVANT PREVIO US YEAR FOR THE A .. Y.2008-09. ON THAT BASIS, IT WAS SUBMITTED THAT SIN CE THE A. A HAD DENIED A PROPER OPPORTUNITY TO THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS FOR A.Y.2007-08, THE REQUIRED DETAILS A ND EXPLANATIONS COULD NOT BE FURNISHED, WHICH RESULTED IN A HUGE DISALLOW ANCE OF RS.60.42 CRORES IN THE ASSESSMENT ORDER FOR A.Y.2007-08. THE REFORE, IT WAS SUBMITTED THAT THE MATTER MAY BE REMANDED BACK TO T HE A.O, ONCE AGAIN, FOR VERIFICATION OF THE DETAILS AND FOR SUBMISSION OF THE REPORT. A COPY OF THE ASSESSMENT ORDER FOR A.Y.2008-09 WAS ALSO FILED IN SUPPORT OF THE CONTENTION. CONSIDERING THE LARGENESS OF THE DISALL OWANCE MADE BY THE' A.O ON AN IDENTICAL ISSUE IN THE A.Y.2007-08, BUT N OT MADE IN THE A.Y.2008-09 (ENTIRE EXPENDITURE WAS ALLOWED) AND TH E INCONCLUSIVENESS OF THE FIRST REMAND REPORT, A.O WAS, ONCE AGAIN, DI RECTED BY LETTER DATED 14.02.2011 TO VERIFY THE WRITTEN SUBMISSIONS AND TH E EVIDENCES FILED BY THE APPELLANT IN SUPPORT OF THE ALLOWABILITY OF THE EXPENSES OF RS.60.42 CRORES AND SUBMIT A REMAND REPORT. A.O, IN THE REMA ND REPORT, HAS ONCE AGAIN RAISED SAME OBJECTIONS AGAINST THE ADMISSION OF THE DETAILS AND ADDITIONAL EVIDENCES, BUT NOT ESTABLISHED ANY NON-C OMPLIANCE ON THE PART OF THE ASSESSEE IN FURNISHING ANY SPECIFIC INFORMAT ION THAT WAS CALLED FOR DURING THE ASSESSMENT PROCEEDINGS. MERELY ISSUING A SHOW CAUSE NOTICE AS LATE AS 24TH DECEMBER, 2009 AND CONCLUDING THE A SSESSMENT ON 29TH DECEMBER, 2009, WHEREIN DISALLOWANCE OF ALMOST THE ENTIRE EXPENDITURE FOR EARNING THE SHIP MANAGEMENT FEE IS RESORTED TO CANNOT BE CONSIDERED AS GIVING ANY WORTHWHILE OPPORTUNITY TO A TAXPAYER. ASSESSING OFFICER HAS COMPLETELY DISREGARDED THE PRINCIPLES OF NATURA L JUSTICE WHILE ADOPTING SUCH A COURSE OF ACTION, WHICH HAS RESULTE D IN A HUGE TAX DEMAND. INSTEAD OF CONCEDING THE FACT OF INADEQUATE OPPORTUNITIES GIVEN TO THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAS REPEATED HIS OBJECTIONS AGAINST THE ADM ISSION OF THE BASIC INFORMATION THAT IS REQUIRED TO DECIDE THE ISSUES O N MERITS. THE REQUIREMENT OF GIVING PROPER OPPORTUNITY BY THE ASS ESSING OFFICER TO THE ASSESSEE IS EMPHASIZED BY THE HON'BLE SUPREME COURT IN THE CASE OF TIN ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 12 BOX COMPANY V. CIT [249 ITR 216 (SC)]. IT IS ALSO R ELEVANT TO REFER TO THE FACT THAT A.O HAS EXAMINED THE ALLOWABILITY OF THE EXPENDITURE INCURRED FOR EARNING THE SHIP MANAGEMENT FEE AND THE COMPLIA NCE WITH THE TDS PROVISIONS ON THE SAID EXPENDITURE DURING THE ASSES SMENT PROCEEDINGS FOR A.Y.2008-09 AND ALLOWED THE ENTIRE EXPENDITURE IN THE ASSESSMENT ORDER DATED 25TH DECEMBER, 2010. HOWEVER, WITH REGA RD TO THE SIMILAR DISALLOWANCE MADE IN THE A.Y.2007-08, A.O, IN THE R EMAND REPORT DATED 21.02.2011 HAS, ONCE AGAIN, OBJECTED TO THE ADMISSI ON OF THE REQUIRED INFORMATION / EVIDENCES. SUCH AN APPROACH IS FOUND TO BE INCONSISTENT WITH THE A.O'S OWN FINDINGS SINCE ON AN IDENTICAL I SSUE ENTIRE EXPENDITURE HAS BEEN ALLOWED IN THE ASSESSMENT ORDER FOR THE A. Y.2008-09. THEREFORE, THE OBJECTIONS RAISED BY THE A.O ARE FOU ND TO BE IN CONTRAVENTION OF RULE 46A OF THE INCOME TAX RULES A ND, THEREFORE, UNWARRANTED. IN THE LIGHT OF THE ABOVE AND SINCE IT IS A CASE WHERE THE APPELLANT WAS NOT PROVIDED WITH ADEQUATE OPPORTUNIT Y DURING THE, ASSESSMENT PROCEEDINGS, THE SAID OBJECTIONS ARE HER EBY OVERRULED. 18. AS REGARDS THE MERITS, A.O IN THE SECOND REMAND REPORT DATED 21.02.2011HASEXAMINED THE DETAILS WITH REGARD TO TH E EXPENDITURE OF RS.60.42 CRORES INCURRED AND THE TDS COMPLIANCES TH EREOF. THE ASSESSING OFFICER EXAMINED AND HAS CATEGORICALLY CE RTIFIED THAT THE APPELLANT COMPANY HAS COMPLIED WITH THE APPLICABLE TDS PROVISIONS IN RESPECT OF THE EXPENDITURE AMOUNTING TO RS. 60,42,2 8,258/-. WHILE EXAMINING THE DETAILS AND EVIDENCES FURNISHED BY TH E APPELLANT DURING THE REMAND PROCEEDINGS, A.O HAS NEITHER RAISED ANY ISSUES NOR BROUGHT ANY OTHER MATERIAL ON RECORD TO DOUBT THE GENUINENE SS OF THE EXPENSES INCURRED TOWARDS THE SHIP MANAGEMENT ACTIVITIES. TH E EXPLANATION OF THE APPELLANT THAT THE SHIP MANAGEMENT FEE CREDITED TO THE P&L A/C WAS ARRIVED AT, AFTER NETTING OFF THE EXPENSES, IS NOT FOUND TO BE INCORRECT OR INCONSISTENT WITH THE ACCOUNTING POLICIES OF THE AP PELLANT COMPANY. THE APPELLANT HAS CITED THE DECISION OF THE HON'BLE ITA T IN THE APPELLANT'S OWN CASE FOR THE A.Y.1989-90 VIDE ORDER IN APPEAL NO.ITAJ3577/MUMJ93 DATED 01.09.2003, IN SUPPORT OF ITS STAND. THEREFORE, HAVING REGARD TO THE MATERIALS PLACED ON RECORD AND THE FINAL REMAND REPORT OF THE A.O, THE ENTIRE DISALLOWANCE O F RS.60,42 CRORES MADE IN THE ASSESSMENT ORDER IS FOUND TO BE UNWARRA NTED. ACCORDINGLY, THE ENTIRE DISALLOWANCE OFRS.60,42,28,258/- IS HERE BY DELETED. 13. REVENUE IS IN APPEAL BEFORE US AGAINST THE ABOV E DISALLOWANCE. 14. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FO UND FROM RECORD THAT THE A.O. HAS DISALLOWED AN EXPENDITURE OF RS. 60.42 CRORES INCURRED ON SHIP MANAGEMENT FEES OF RS. 71.03 CRORES EARNED BY IT. T HE ASSESSEE IS IN THE BUSINESS OF MANAGING THE SHIPS. IT HAS AGREEMENTS F OR MANAGEMENT OF THE ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 13 SHIPS WITH GREAT EASTERN SHIPPING CO. AND FIVE STAR BULK CARRIER LTD. (AGREEMENTS ON PAGE 28 TO 58). IN THE COURSE OF THI S BUSINESS, THE ASSESSEE INCURS VARIOUS EXPENSES WHICH ARE REIMBURSED BY THE SHIPPING COMPANIES. THE A.O. HELD THAT THE ASSESSEE HAS NOT DEDUCTED TD S ON THE VARIOUS EXPENSES INCURRED AND THAT IS WHY HE DISALLOWS THE ABOVE AMOUNT OF RS.60.42 CRORES U/S 40(A)(IA)]. AS THE ASSESSEE WAS NOT GIVE N DUE OPPORTUNITY TO PRODUCE THE EVIDENCE, THE LD. CIT(A) ALLOWED THE AD DITIONAL EVIDENCE WHICH WAS FORWARDED TO THE A.O. FOR REMAND REPORT. DURIN G REMAND PROCEEDINGS, THE A.O. EXAMINED WITH REGARD TO THE EXPENDITURE OF RS. 60.42 CRORES INCURRED ON EARNING THE SHIP MANAGEMENT BUSINESS INCOME AND ALSO THE TDS COMPLIANCE THEREON. IN THE REMAND REPORT, THE A.O. CATEGORICALLY MENTIONED THAT THE ASSESSEE HAD DEDUCTED AND PAID TDS AND COM PLIED WITH THE TDS PROVISIONS IN RESPECT OF EXPENDITURE AMOUNTING TO R S. 60.42CRORES. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THE ENTIRE DETAILS O F THE EXPENSES, THE DETAILS OF TDS DEDUCTED ON VARIOUS EXPENSES AND THE CHALLAN S FOR TDS PAYMENTS, ETC. ETC. THE ASSESSEE FURTHER SUBMITTED THAT THE A.O. D ID NOT GIVE SUFFICIENT OPPORTUNITY AT THE TIME OF ASST. AND THAT IS WHY, H E WRONGLY MADE THE DISALLOWANCE. THE CIT(A) REMANDED THE MATTER BACK T O THE A.O. FOR VERIFICATION AND THE A.O. IN THE REMAND REPORT FIND PLACE IN THE PAPER BOOK HAS ACCEPTED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TDS WHE REVER DEDUCTIBLE. HE HAS GIVEN A DETAILED REMAND REPORT ON THIS ISSUE AN D THUS, THE A.O. ACCEPTED THAT THE ASSESSEE HAS DEDUCTED THE TDS WHEREVER APP LICABLE. IT IS TO BE NOTED THAT THE DISALLOWANCE U/S 40(A)(IA) CAN BE MADE ONL Y WHEN TAX IS DEDUCTIBLE AS PER LAW ON THE PAYMENT AND IT IS NOT DEDUCTED. R ELIANCE IS PLACED ON 116 ITD 328] ITAT GAUHATI BENCH DECISION IN THE CASE OF GEORGE WILLIAMSON LTD. AND DELHI H.C. DECISION IN [323 ITR 130] IN THE CAS E OF VAN OORD ACZ INDIA LTD. THUS, THE A.O. ON FULL VERIFICATION DID NOT FI ND ANY DISCREPANCY AND HE HAS CLEARLY STATED IN THE REMAND REPORT THAT THE AS SESSEE HAS DEDUCTED AND PAID TDS WHEREVER APPLICABLE AND ACCORDINGLY, THE L D. CIT(A) HAS ALLOWED THE RELIEF. WE ALSO FOUND THAT A.O. HIMSELF IN ALL THE OTHER ASSTS. INCLUDING A.Y. ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 14 2008-09 HAS NOT MADE SUCH DISALLOWANCE AND HAS ACCE PTED THAT THE ASSESSEE HAS MADE TDS PAYMENTS. THE LD. CIT(A) ALSO RECORDED A CATEGORICAL FINDING AFTER CONSIDERING THE REMAND REPORT THAT THE A.O. HAS NEITHER RAISED ANY ISSUES NOR BROUGHT ANY OTHER MATERIAL ON RECORD TO DOUBT THE GENUINENESS OF THE EXPENSES INCURRED TOWARDS THE SHIP MANAGEMENT A CTIVITIES. THE LD. CIT(A) HAS ALSO OBSERVED THAT THE SHIP MANAGEMENT FEES HAS ARRIVED AT AFTER NETTING OFF THE EXPENSES IS NOT FOUND TO BE INCORRECT OR IN CONSISTENT WITH THE ACCOUNTING POLICIES OF THE ASSESSEE COMPANY. WE FO UND THAT THE ITAT IN ASSESSEES OWN CASE FOR A.Y. 1989-90 VIDE ORDER DAT ED 01-09-2003 HAS APPROVED THE ACCOUNTING POLICY FOLLOWED BY THE ASSE SSEE COMPANY. 15. IN VIEW OF THE ABOVE DISCUSSION AND CONSIDERING THE REMAND REPORT WHEREIN A.O. HAS HIMSELF CERTIFIED THAT THE ASSESSE E COMPANY HAS COMPLIED WITH THE APPLICABLE TDS PROVISIONS IN RESPECT OF TH E EXPENDITURE AMOUNTING TO RS. 60.42 CRORES WHICH WERE GENUINE AND THERE WAS N O CONTRAVENTION OF TDS PROVISIONS WHILE MAKING PAYMENT FOR SUCH EXPENSES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(A). WE ACCORDINGL Y DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDING OF LD. CIT(A) DELETING T HE DISALLOWANCE OF EXPENSES INCURRED ON SHIP MANAGEMENT. 16. THE A.O. HAS ALSO DISALLOWED LOSSES FROM ACTIVI TY OF HORSE BREEDING AND OWNING AND MAINTAINING RACE HORSES AMOUNTING TO RS. 3,08,56,448/-. IN THIS RESPECT, THE A.O HAS EXAMINED THE ACTIVITIES UNDERT AKEN BY THE ASSESSEE. IT WAS OBSERVED THAT THE ASSESSEE HAS BEEN CARRYING ON THE BUSINESS OF (I) SHIP MANAGEMENT AND (II) OWNING AND MAINTAINING HORSE BR EEDING FARM CUM-RACE HORSES. IT IS STATED BY THE A.O, IN THE ASSESSMENT ORDER, THAT THE TOTAL RECEIPTS FROM THE ACTIVITIES OF OWNING AND MAINTAINING HORSE BREEDING FARM CUM RACE HORSES WERE SHOWN AT RS. 4,75,70,114/- AND THE EXPE NDITURE INCURRED ON THE SAID ACTIVITY WAS SHOWN AT RS.5,44,43,044/- AND THE REBY A NET LOSS OF RS.68,72,9301- WAS DISCLOSED. A.O ALSO HAS POINTED OUT THAT SOME OF THE ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 15 EXPENDITURE, EVEN THOUGH DIRECTLY ATTRIBUTABLE TO T HE SAID ACTIVITY OF OWNING AND MAINTAINING THE RACE HORSES, THE SAME WAS CLAIM ED SEPARATELY UNDER VARIOUS HEADS THEREBY UNDERSTATING THE EXPENDITURE. THE AGGREGATE OF THE EXPENDITURE WAS ARRIVED AT RS.2,05,82,087/-. ACCORD INGLY, IN THE SHOW CAUSE NOTICE, THE TOTAL EXPENDITURE WAS ARRIVED AT RS.7,5 0,25,131/- (5,44,43,044 + 2,05,82,087). FURTHER, THE A.O EXAMINED THE COMMON EXPENDITURE DEBITED IN THE P&L A/C, WHICH INCLUDED DIRECTORS' REMUNERATION OF RS.1,12,20,0001- AND POINTED OUT THAT THE SAID EXPENDITURE HAS TO BE BIF URCATED BETWEEN THE ACTIVITIES OF SHIP MANAGEMENT AND OWNING & MAINTAIN ING RACE HORSES. BY CONSIDERING ALL THE ABOVE EXPENSES, THE ASSESSING O FFICER ARRIVED AT THE LOSS ATTRIBUTABLE TO THE HORSE BREEDING ACTIVITIES AND O WNING & MAINTAINING RACE HORSES AT RS.3,08,56,448/~. IN THE SAID SHOW CAUSE NOTICE, A.O PROPOSED TO DISALLOW THE SET-OFF OF THE ABOVE EXPENDITURE OF RS .3,08,56,448/- AGAINST THE BUSINESS INCOME I.E., THE INCOME EARNED FROM SHIP M ANAGEMENT FEE AND PROPOSED TO ALLOW CARRY FORWARD OF THE SAID EXPENDI TURE, IN TERMS OF SUB- SECTION (3) OF SECTION 74A OF THE ACT. 17. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSES SEE SUBMITTED A DETAILED REPLY AND THE SAME IS FULLY REPRODUCED IN PARA 5.3 OF THE ASSESSMENT ORDER. THE SALIENT FEATURES OF THE REPLY OF THE ASSESSEE A RE THAT THE ASSESSEE IS INVOLVED IN THE ACTIVITY OF LIVESTOCK BREEDING AND THE SAID ACTIVITY IS NOT HIT BY SECTION 74A(3) OF THE ACT; THE SAID PROVISIONS ARE APPLICABLE ONLY TO A CASE OF AN ASSESSEE WHO IS THE OWNER OF HORSES MAINTAINED F OR RUNNING IN HORSE RACES; THERE WAS NO IOTA OF MATERIAL EVIDENCE WHICH CAN LEAD TO THE INFERENCE THAT THE ASSESSEE WAS MAINTAINING HORSES FOR PARTIC IPATING IN RACES. THE ASSESSEE HAS ALSO EXPLAINED THE NATURE OF THE BUSIN ESS. IT IS SUBMITTED THAT IN THE YEAR 1994, THE APPELLANT ENTERED INTO THE BUSIN ESS OF LIVESTOCK BREEDING CONSTITUTING THOROUGHBRED HORSES AT THE COMPANY'S F ARM ESTABLISHED AT VILLAGE NANOLI DISTRICT, PUNE. FOR THE PURPOSE OF THIS BUSI NESS, THE COMPANY HAS CONSTRUCTED STABLES AND OTHER NECESSARY STRUCTURES AT THE COMPANY'S FARM, IT ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 16 IS EXPLAINED THAT THE HORSE BREEDING IS REPRODUCTIO N IN HORSES WHICH IS A HUMAN-DIRECTED PROCESS INVOLVING SELECTIVE BREEDING OF ANIMALS AND AIDED BY PLANNED MATING FOR ACHIEVING THE DESIRED CHARACTERI STICS IN THE PROGENY. THE HORSE BREEDING ACTIVITY INVOLVED HORSE BREEDING / R EPRODUCTION IN THE HORSES BY SELECTIVE BREEDING, EMPLOYMENT OF SKILLED WORKER S, MANAGEMENT OF STABLES, ENGAGING SUPERVISORS AND MANAGERS TO RUN THE STUD F ARM OPERATIONS. ETC. FURTHER MODEM BREEDING MANAGEMENT & TECHNOLOGIES IN CREASE THE RATE OF CONCEPTION, A HEALTHY PREGNANCY AND SUCCESSFUL FOAL ING. IT WAS FURTHER SUBMITTED THAT THE BUSINESS MAINLY INVOLVED THE SAL E OF TWO YEAR OLD HORSES WHICH ARE BRED AT THE FARM; THE COMPANY OWNED BROOD MARES (A FEMALE HORSE USED FOR BREEDING), WHICH ARE COVERED BY STALLIONS; STALLIONS AND BROODMARES NEVER PARTICIPATE IN RACES, BUT THEY ONLY PARTICIPA TE IN BREEDING ACTIVITIES. APPELLANT HAS FURTHER EXPLAINED THE NATURE OF THE I NDUSTRY AND EMPHASIZED THAT IT IS A SPECIALIZED INDUSTRY WHICH HAS TO BE U NDERSTOOD AS SUCH. ONCE A FOAL IS BORNE, IT IS MAINTAINED AT THE FARM FOR TWO YEARS AND IS SOLD BY A PRIVATE SALE OR THROUGH AUCTIONS CONDUCTED BY THE T URF CLUB AUTHORITIES; THE HORSE BREEDING BUSINESS REQUIRES SERVICES OF EXPERT PATERNITY DOCTORS, EXPERT TRAINERS AT THE BREEDING FARM; AT THE FARM THE BROO DMARES BELONGING TO OTHER OWNERS ARE ALSO MAINTAINED FOR WHICH THE ASSESSEE C HARGES A FIXED MONTHLY AMOUNT, WHICH IS A BUSINESS INCOME OF THE FARM. 18. THE ASSESSEE HAS TAKEN A STAND THAT HORSE BREED ING IS AN INDUSTRY NOT ONLY IN INDIA BUT VARIOUS PARTS OF THE WORLD WHICH INVOLVES RAISING, MARKETING AND MANAGEMENT OF VALUABLE LIVESTOCK. HORSE BREEDIN G INVOLVES MULTIFARIOUS ACTIVITIES; ONE SUCH ACTIVITY IS TO IDENTIFY STALLI ONS AND MARES AND SOURCE THE SAME FOR IMPORT; THE FORMALITIES OF IMPORT INVOLVES COORDINATION AT VARIOUS LEVELS SUCH AS OBTAINING A LICENCE FOR IMPORT IN AC CORDANCE WITH THE PROCEDURES LAID DOWN BY THE DIRECTOR GENERAL OF FOR EIGN TRADE, BASED ON THE RECOMMENDATIONS OF THE SPONSORING AUTHORITY NAMELY DIRECTOR ANIMAL HUSBANDARY AND VATERNARY SERVICES OF STATE GOVERNME NT. IT WAS ALSO ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 17 SUBMITTED THAT THE APPELLANT'S FARM WAS FIRST INDIA 'S ISO CERTIFIED FARM. IT IS FURTHER SUBMITTED THAT THE OBJECTIVE OF IDENTIFICAT ION OF HIGH QUALITY HORSES CAN ONLY BE ACHIEVED IF SELECTED HORSES ARE PUT TO REAL GROUND TEST BY WAY OF RACES. ACCORDINGLY, SOME OF THE TWO YEAR OLDS ARE S ELECTED AND RETAINED FOR RUNNING THEM IN RACES AND THOSE WHO PERFORM ARE UTI LIZED IN BREEDING BUSINESS BECAUSE ITS PROGENY FETCHES A GOOD PRICE. FOR THIS PURPOSE, THE HORSES ARE TRAINED AT THE FARM AND PRODUCTS HAVE TO BE SHOWCASED TO THE POTENTIAL PURCHASERS. FOR THIS REASON, A FEW HORSES ARE ENTERED INTO THE RACES SO AS TO EARN GOOD REPUTATION AS A BREEDER AND TO E NSURE BETTER PRICE FOR THE PROGENIES PRODUCED IN THE STUD FARM OF THE ASSESSEE . IT IS FURTHER STATED THAT THE BREEDERS DO NOT PARTICIPATE IN THE HORSE RACES BUT THEIR HORSES RUN WHEN THERE IS A PROSPECTIVE BUYER WHO WANTS TO SEE THE P OTENTIAL OF THE HORSE BEFORE BUYING. THEREFORE, IT IS NECESSARY TO PARTICIPATE I N VARIOUS RACES CONDUCTED BY THE TURF CLUBS AT VARIOUS RACING CENTRES AND EXPENS ES ARE INCURRED ON ENTRY FEE, REGISTRATION ETC. WHICH NECESSARILY HAVE TO BE INCURRED THROUGH TURF CLUBS. IT IS ALSO STATED BY THE ASSESSEE IN THE REP LY THAT THE STAKE MONEY WON BY THE HORSES ALSO CONSTITUTES AN INCOME OF THIS BU SINESS. THUS, THE BUSINESS IS ONLY OF HORSE BREEDING AND PLACING SOME OF THE H ORSES OCCASIONALLY FOR RACES IS INCIDENTAL TO THE CORE BUSINESS. IT IS FURTHER S TATED THAT THE HORSES PUT TO RACING CONSTITUTED A SMALL PERCENTAGE AS COMPARED T O THE TOTAL NUMBER OF HORSES SOLD; OUT OF APPROXIMATELY 300 HORSES, ABOUT 15% OF THE HORSES PARTICIPATED IN THE RACES; THERE ARE STALLIONS AND BROODMARES WHICH ONLY PARTICIPATE IN BREEDING ACTIVITIES AND DO NOT PARTI CIPATE IN RACES. IT WAS FURTHER SUBMITTED THAT MUCH MORE DETAILS COULD BE F URNISHED; HOWEVER, ONLY A CONCISE PARTICULARS WERE MADE AVAILABLE AND IN THE EVENT THE A.O IS NOT SATISFIED; IT WAS REQUESTED THAT TECHNICAL PERSONS WOULD MAKE FURTHER SUBMISSIONS AND SUBMIT FURTHER EVIDENCES TO EXPLAIN THE HORSE BREEDING ACTIVITY. ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 18 19. BY THE IMPUGNED ORDER, THE LD. CIT(A) PARTLY AL LOWED THE ASSESSEES CLAIM AFTER OBSERVING AS UNDER:- THE FACTS OF THE CASE, THE STAND TAKEN BY THE A.O IN THE ASSESSMENT ORDER AND THE CONTENTIONS OF THE APPELLANT DURING T HE ASSESSMENT PROCEEDINGS AS WELL AS DURING THE APPEAL PROCEEDING S HAVE BEEN CAREFULLY CONSIDERED. FURTHER, THE CONTENTIONS OF T HE A.O RAISED IN THE REMAND REPORT AND THE WRITTEN SUBMISSIONS OF THE AP PELLANT WHEREIN THE STAND OF THE A.O HAS BEEN CONTESTED ARE CAREFULLY E XAMINED. A.O HAS EXAMINED THE ACCOUNTING INFORMATION SUBMITTED BY TH E APPELLANT DURING THE REMAND PROCEEDINGS AND HAS STATED THAT THE BIFU RCATION IN TERMS OF HORSE BREEDING ACTIVITY AND RACING ACTIVITY IS IN C ONSONANCE WITH THE PROFIT & LOSS ACCOUNT SUBMITTED BY THE ASSESSEE BEF ORE THE ASSESSING OFFICER. HOWEVER, IT IS STATED BY THE A.O IN THE RE MAND REPORT THAT THE ASSESSEE HAS NOT PROVIDED THE 'RACING' AND 'BREEDIN G' BUSINESS INCOMES SEPARATELY IN THE RETURN OF INCOME OR DURING THE SC RUTINY PROCEEDINGS. ON A PERUSAL OF THE ASSESSMENT ORDER, IT IS SEEN THAT APPELLANT'S WRITTEN SUBMISSION FILED BEFORE THE A.O WHICH IS MADE A PAR T OF THE ASSESSMENT ORDER ITSELF (ALSO REPRODUCED IN PAGE NOS.24 TO 31 SUPRA) INDICATES THAT THESE ISSUES WERE ALSO RAISED BY THE APPELLANT DURI NG THE ASSESSMENT PROCEEDINGS ITSELF. IN PARA 2.7 OF THE WRITTEN SUBM ISSIONS OF THE ASSESSEE, SOME OF THESE CONTENTIONS WERE RAISED. '2. 7 WITHOUT PREJUDICE, IN CASE YOU ARE NOT AGREEI NG TO OUR SUBMISSION OF THIS BUSINESS ACTIVITY, INCOME / LOSS FROM OWNING AND MAINTAINING RACE HORSE HAS TO BE DETERMINED AS PER THE PROVISIONS OF EXPLANATION (A)(II) TO SUB-SECTION 3 OF SECTION 74A OF THE ACT. LOSS PER THIS PROVISION MEAN STAKE MONEY L ESS EXPENDITURE INCURRED 'WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF MAINTAINING RACE HORSES'. THUS, THERE IS NO WARRANT FOR CONSIDERING OTHER EXPENSES ON PROPORTIONATE BASIS E TC. AND ONLY EXPENDITURE INCURRED 'WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF MAINTAINING RACE HORSES' CAN BE CONSIDERED. THE OTH ER EXPENSES ARE FOR BREEDING AND COVERING AND HAVE NOT BEEN INC URRED FOR RACES. FOR EXAMPLE, SPONSORSHIP EXPENSES AND LEGAL & PROFESSIONAL FEES AS STATED IN ARE FOR THE BUSINESS RELATING TO ADVERTISEMENT OF SHIPPING BUSINESS AND BREEDING BUS INESS. MOST OF THE PROFESSIONALS ARE ASSOCIATED WITH THE SHIPPI NG BUSINESS OF THE COMPANY AND ARE ASSOCIATED WITH BREEDING BUSINE SS OF THE COMPANY. ALL BREEDING EXPENSES ARE NOT RELATED TO O NLY MAINTAINING OF THE RACE HORSES. DURING THE YEAR UND ER CONSIDERATION, THE COMPANY HAD ON AN AVERAGE 300 HO RSES OWNED BY IT AT THE FARM AND HORSES OF THE CLIENTS AT THE FARMS AND ONLY 40, SAY 15% PARTICIPATED IN THE RACES. THERE ARE ST ALLIONS AND BROODMARES WHICH NEVER PARTICIPATED IN THE RACES BU T THEY ONLY PARTICIPATED IN THE BREEDING ACTIVITIES. APART FROM THE ABOVE, THE COMPANY INCURRED VARIOUS EXPENSES UNDER THE HEAD SP ONSORSHIP ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 19 EXPENSES, LEGAL AND PROFESSIONAL FEES ETC. WHICH AR E COMMON EXPENSES RELATING TO THE SHIP MANAGEMENT BUSINESS A ND BREEDING BUSINESS OF THE COMPANY AND SUCH EXPENSES HAD BENEF ITED THE COMPANY IN GETTING SHIPPING BUSINESS AND BREEDING B USINESS. THESE EXPENSES ARE DIRECTLY RELATED TO THE PROMOTIO N OF ITS BUSINESS OF SHIP MANAGEMENT AND BREEDING OF LIVESTO CK AND HENCE THESE ARE LEGITIMATE EXPENSES INCURRED EXCLUSIVELY FOR PROMOTION AND MARKETING OF THE COMPANY'S BUSINESS. WITHOUT PR EJUDICE TO WHAT HAS BEEN STATED ABOVE, WE ARE SUBMITTING HEREW ITH WORKING OF THE PROFIT AND LOSS ACCOUNT ON 46 HORSES WHO PAR TICIPATED IN THE RACES AND WON THE STAKES MONEY AND EXPENSES DIRECTL Y ATTRIBUTABLE TO THEM (ANNEXURE D.) 19.8 THEREFORE, THE ASSESSEE HAD IMPLICITLY RAISED AN ALTERNATIVE CONTENTION DURING THE ASSESSMENT PROCEEDINGS ITSELF . HOWEVER, A. A HAS NOT CONSIDERED THE CONTENTIONS OF THE ASSESSE E SO AS TO DETERMINE BREAKUP OF THE INCOMES AND EXPENDITURE PE RTAINING TO BREEDING ACTIVITIES AND RACING ACTIVITIES AS TWO DI STINCT ACTIVITIES. INSTEAD A.O HAS TREATED BOTH THE ACTIVITIES AS FALL ING UNDER SECTION 74A(3) OF THE ACT WHICH DEALS WITH ONLY THE LOSSES ARISING ON ACCOUNT OF OWNING & MAINTAINING RACE HORSES. THE RE MAND REPORT ON THIS ISSUE IS A COMMON REMAND REPORT IN RESPECT OF THE A.Y.2007-08 AND 2008-09. AS VERIFIED AND REPORTED B Y THE A.O IN THE REMAND REPORT, THE INCOMES & EXPENDITURE PERTAI NING TO BREEDING ACTIVITY AND RACING ACTIVITY WERE FOUND TO BE CAPTURED UNDER TWO DIFFERENT ACCOUNTING CODES IN RESPECT OF BOTH THE ASSESSMENT YEARS. THEREFORE, AS FAR AS THE FACTUAL MATRIX IS CONCERNED, THE APPELLANT HAS ONLY BROUGHT TO THE NO TICE OF THE A.O THE ACCOUNTING DATA PERTAINING TO THE INCOME & EXPE NDITURE OF BREEDING ACTIVITY AND RACING ACTIVITY, WHICH WAS VE RIFIABLE FROM THE BOOKS OF ACCOUNTS. 19.9 ON A CAREFUL EXAMINATION OF THE FACTUAL MATRIX AND ACCOUNTING INFORMATION, IT IS APPARENT THAT THE APP ELLANT HAS BEEN CARRYING ON THE BUSINESS OF A STUD FARM WHICH WAS C OMMENCED SEVERAL YEARS AGO. THERE ARE CERTAIN DISTINCT STREA MS OF INCOME WHICH ARE ATTRIBUTABLE TO ONLY HORSE BREEDING ACTIV ITIES I STUD FARM. THEY ARE TRAINING FEES, COVERING FEES, LIVERY EXPENSES, SALE OF LIVESTOCK ETC. THESE STREAMS OF INCOME CANNOT BE CO NSIDERED AS INCOME DERIVED FROM OWNING & MAINTAINING THE RACE H ORSES. FOR INSTANCE, AN AMOUNT OF RS.L,94,64,9201- IS RECOVERE D ON ACCOUNT OF LIVERY EXPENSES FROM OTHER HORSE OWNERS, WHO HAVE U TILIZED THE STABLES AND OTHER SERVICES OF THE STUD FARM OF THE APPELLANT. APPELLANT HAS SUBMITTED THAT THE NATURE OF THE RECE IPT AND THE QUANTUM OF THE RECEIPT WERE REFLECTED IN THE BOOKS OF ACCOUNTS AND IDENTIFIABLE WITH DISTINCT ACCOUNTING CODES. SIMILA RLY OTHER RECEIPTS ATTRIBUTABLE TO THE HORSE BREEDING ACTIVITIES OF TH E STUD FARM AND THE RECEIPTS ATTRIBUTABLE TO THE RACING ACTIVITIES SUCH AS STAKE ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 20 MONEY ARE DISTINCT IN NATURE AND THE SAME WERE IDEN TIFIABLE IN THE BOOKS OF ACCOUNTS UNDER DIFFERENT ACCOUNTING CODES. AS STATED BY THE A.O IN THE REMAND REPORT, THE INCOME & EXPENDIT URE BREAKUP PROVIDED SPECIFICALLY FOR STUD FARM AND RACING WAS VERIFIED VIS-A- VIS THE P & L ACCOUNT DURING THE REMAND PROCEEDINGS . AS STATED IN THE REMAND REPORT, THE BREAKUP SUBMITTED BY THE APP ELLANT FOR THE STUD FARM AND RACING INCOME IS IN CONSONANCE WITH T HE P & L ACCOUNT SUBMITTED BEFORE THE A.O. THEREFORE, THE BI FURCATION AS SUBMITTED BY THE APPELLANT WAS VERIFIABLE WITH REFE RENCE TO THE BOOKS OF ACCOUNTS MAINTAINED AND THE SAME HAS BEEN CARRIED OUT BY THE A.O DURING THE REMAND PROCEEDINGS. 19.10 ON A CAREFUL EXAMINATION OF THE CONTENTIONS O F THE A.O IN THE ASSESSMENT ORDER, IT IS SEEN THAT A.O HAS NOT CONSI DERED THE HORSE BREEDING ACTIVITY AS A DISTINCT BUSINESS ACTIVITY F ROM HORSE RACING ACTIVITY. INSTEAD A.O HAS TREATED THESE TWO DISTINC T ACTIVITIES AS A SINGLE ACTIVITY OF OWNING & MAINTAINING THE RACE HO RSES AND ACCORDINGLY THE LOSS AS COMPUTED BY THE A.O IN THE ASSESSMENT ORDER IS ALLOWED TO BE CARRIED FORWARD U/S.74A(3) O F THE ACT. THE FACTUAL INFORMATION AND THE ACCOUNTING DATA DO. NOT SUPPORT THE CONCLUSIONS AS ARRIVED AT IN THE ASSESSMENT ORDER. FOR INSTANCE, THE APPELLANT HAS ALSO HIGHLIGHTED THE FACT THAT ON LY A SMALL PERCENTAGE OF THE TOTAL NUMBER OF HORSES HAVE PARTI CIPATED IN THE RACES. IT IS ALSO EMPHASIZED THAT HORSES SUCH AS ST ALLIONS AND BROODMARES ARE COMPLETELY DEDICATED TO THE HORSE BR EEDING ACTIVITY IN THE STUD FARM AND ARE NOT ENGAGED IN RA CING ACTIVITIES. SIMILARLY THE EXPENSES PERTAINING TO THE BREEDING A ND COVERING CANNOT BE ATTRIBUTED TO THE RACING SEGMENT. ATTENTI ON HAS BEEN DRAWN TO THE PROVISIONS OF SUB-SECTION (3) OF SECTI ON 74A OF THE ACT SO AS TO, EMPHASIZE THAT LOSS HAS TO BE COMPUTED UN DER THESE PROVISIONS BY TAKING INTO ACCOUNT THE INCOME BY WAY OF STAKE MONEY AND THE AMOUNT BY WHICH SUCH INCOME FALLS SHO RT OF THE AMOUNT OF EXPENDITURE WHICH IS LAID OUT BY THE ASSE SSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAINTAINING RACE HORSES. 19.11 ON A CAREFUL EXAMINATION OF THE ABOVE CONTENT IONS OF THE APPELLANT, IT IS SEEN THAT THE STAND TAKEN BY THE A .O IN THE ASSESSMENT ORDER IS ERRONEOUS. ON THE OTHER HAND, T HE MAIN GROUNDS OF APPEAL OF THE APPELLANT THAT THE ENTIRE ACTIVITY HAS TO BE TREATED AS HORSE BREEDING ACTIVITY AND RACING ACTIV ITY BEING ONLY INCIDENTAL TO THE MAIN ACTIVITY OF HORSE BREEDING A CTIVITY, THE SAME OUGHT TO BE CONSIDERED AS A PART OF THE BUSINESS AC TIVITY OF MAINTAINING A HORSE BREEDING FARM IS ALSO NOT FULLY JUSTIFIED. AS OBSERVED IN THE FOREGOING PARAGRAPHS, HORSE BREEDIN G ACTIVITY AND RACING ACTIVITY ARE TWO DISTINCT ACTIVITIES, WHICH ARE DISTINGUISHABLE ON THE BASIS OF THE FACTUAL INFORMA TION AND ACCOUNTING DATA. ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 21 19.12 THE ISSUE OF HORSE BREEDING ACTIVITY AS A DIS TINCT BUSINESS ACTIVITY IS CONSIDERED IN THE LIGHT OF DECISION OF HON 'BLE MADRAS HIGH COURT IN THE CASE OF MRS.KAMALA MUTHIA VS. CIT (259 ITR 184) (MADRAS). AS HELD, CARRYING ON AN ACTIVITY IN AN ORGANIZED MANNER NOT ONLY IN THE YEAR IN QUESTION BUT ALSO IN THE PRIOR YEARS AND ALSO IN THE SUBSEQUENT YEARS WITH A PROFIT MOTI VE IS A COMMERCIAL ACTIVITY. ANY SUCH COMMERCIALLY ORGANISE D ACTIVITY CARRIED ON BY AN ASSESSEE, WITH A PROFIT MOTIVE, HA S TO BE VIEWED AS A BUSINESS ACTIVITY. IN THE CASE OF THE APPELLAN T, THE HORSE BREEDING ACTIVITY IS NOTHING BUT A BUSINESS ACTIVIT Y. THEREFORE, THE PROFITS OR LOSSES ARISING FROM SUCH AN ACTIVITY HAV E TO BE TREATED AS BUSINESS PROFITS OR LOSSES AND THE SAME HAVE TO BE COMPUTED UNDER THE HEAD BUSINESS. ON THE OTHER HAND, THE LOS S AS COMPUTED BY THE APPELLANT IN TERMS OF THE RACING SE GMENT, AND VERIFIED BY THE A.O DURING THE REMAND PROCEEDINGS, HAS TO BE CARRIED FORWARD U/S. 74 A(3) OF THE ACT. THE STAND TAKEN BY THE A.O IN THE ASSESSMENT ORDER IS NOT LEGALLY TENABLE SINCE IT IS NOT INTENDED AS PER THE SCHEME OF COMPUTATION OF INCOME UNDER INCOME TAX ACT TO SET OFF BUSINESS LOSS, ARISING ON ACCOUNT OF HORSE BREEDING ACTIVITY, AGAINST THE PROFITS EARNED IN TH E SEGMENT OF OWNING & MAINTAINING RACE HORSES - IN AN EVENT THER E IS A LOSS IN THE HORSE BREEDING ACTIVITY AND THERE IS A PROFIT I N THE SEGMENT OF OWNING & MAINTAINING RACE HORSES. THEREFORE, A.O IS HEREBY DIRECTED. TO ALLOW THE SET OFF OF ONLY THE BUSINESS LOSS ARRIVED AT IN RESPECT OF HORSE BREEDING ACTIVITY AMOUNTING TO RS. 1,89,92,554/- AGAINST THE OTHER BUSINESS INCOME AND CARRY FORWARD THE LOSS ARRIVED AT IN THE RACING SEGMENT AMOUNTING TO RS.L, 18,63,894/- IN TERMS OF SECTION 74A(3) OF THE ACT. AGAINST THE ABOVE ORDER OF LD. CIT(A), BOTH ASSESSE E AND REVENUE ARE IN APPEAL BEFORE US. 20. THE GRIEVANCE OF THE ASSESSEE AND REVENUE RELAT ES TO THE DISALLOWANCE OF LOSSES FROM ACTIVITY OF OWNING AND MAINTAINING R ACE HORSES AMOUNTING TO RS. 3,08,56,448/-, WE FOUND THAT LIVESTOCK BREEDING INDUSTRY WHEREIN THE ASSESSEE HAS INCURRED EXPENDITURE AND ALSO EARNED R EVENUE. THE ASSESSEE IS MAINTAINING A STUD FARM. ITS BUSINESS IS THAT OF B REEDING AND ONLY 15% OF ITS HORSES TAKE PART IN THE RACING ACTIVITY. OVER ALL, IT INCURRED A LOSS OF RS. 3,08,56,448/-. IT HAS SET OFF OF THIS LOSS AGAINST THE INCOME FROM SHIPPING BUSINESS AS PER THE P&L ACCOUNT. THE A.O. HELD THA T BREEDING AND RACING ACTIVITIES CONSTITUTE ONE ACTIVITY U/S 74A THE LOSS FROM THE ACTIVITY OF OWNING ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 22 AND MAINTAINING RACE HORSES CANNOT BE SET OFF AGAIN ST ANY OTHER INCOME AND IT CAN BE CARRIED FORWARD AND SET OFF ONLY AGAINST THE INCOME FROM THE ACTIVITY OF OWNING AND MAINTAINING THE RACE HORSES IN THE FUTUR E YEARS. ACCORDINGLY, THE A.O. DISALLOWED THE SET OFF OF LOSS FROM THE STUD F ARM AGAINST THE PROFITS FROM THE SHIP MANAGEMENT ACTIVITY. THE CIT(A) OBSERVED T HAT 15% OF THE ASSESSEE'S HORSES TAKE PART IN RACING. THE BREEDING AND RACING ACTIVITIES ARE SEPARATE. THE MAJOR ACTIVITY IS THAT OF BREEDING. THE ASSESSE E HAS ON AN AVERAGE AROUND 300 HORSES AND ONLY 40 HORSES RUN IN THE RACES. HE DID NOT ACCEPT THE ASSESSEE'S CONTENTION THAT ENTIRE LOSS IS FROM BREE DING ACTIVITY AS RACING ACTIVITY IS ONLY INCIDENTAL TO THE BREEDING ACTIVIT Y. IT WAS ALSO OBSERVED THAT ASSESSEE SUBMITTED A COLUMNER PROFIT AND LOSS ACCOU NT OF THE RACE HORSES OWNING AND MAINTENANCE ACTIVITY AND BREEDING HORSES OWNING AND MAINTENANCE ACTIVITY FOR THE YEAR ENDED 31 ST MARCH 2007. THIS BIFURCATION WAS DONE ON THE BASIS OF SEPARATE COST CODE AND LED GER ACCOUNTS MAINTAINED IN THE BOOKS OF ACCOUNTS TO RECORD THE RECEIPTS AND EXPENDITURE IN RESPECT OF RACE HORSES AND BREEDING HORSES. IN THE REMAND REPO RT, THE A.O. HAS AGREED THAT THE BIFURCATION IS IN CONSONANCE WITH THE P & L ACCOUNT. ACCORDINGLY, THE CIT(A) HAS HELD THAT THE LOSS OF RS. L,18,63,894/- IS FROM RACING ACTIVITY AND HE DID NOT ALLOW THE SET OFF OF THIS LOSS AGAINST T HE BUSINESS INCOME FROM SHIP MANAGEMENT ACTIVITY. WHILE HE HELD THAT THE LOSS OF RS. L,89,92,554/- IS FROM BREEDING ACTIVITY AND HE ALLOWED THE SET OFF OF TH IS LOSS AGAINST THE INCOME. THE REVENUES GROUND IS THAT THE ENTIRE LOSS SHOULD BE DISALLOWED FOR SET OFF AS IT IS FROM THE RACING ACTIVITY WHILE THE ASSESSE E'S APPEAL IS ON THE ISSUE THAT THE ENTIRE LOSS SHOULD BE ALLOWED FOR SET OFF. THE ASSESSEE HAS ALSO SHOWN THE BIFURCATION OF ITS RECEIPTS FROM STUD FARM AND IT I S TO BE NOTED THAT OUT OF THE TOTAL RECEIPTS OF RS.4,75,70,112/- FROM THIS ACTIVI TY, STAKES WON IN THE RACES ARE AMOUNTING TO RS. 69,51,746/- ONLY AND HENCE, TH IS INDICATES THAT RACING INCOME IS JUST 15% OF TOTAL INCOME AND BREEDING IS THE MAIN ACTIVITY. THE ASSESSEE HAS GIVEN ITS OBJECT IN THE MEMORANDUM OF ASSOCIATION WHICH IS THE BREEDING ACTIVITY. AS PER TURF CLUB REGULATIONS RAC ING AND BREEDING ARE TWO ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 23 BRANCHES AND ADMINISTRATION OF THESE BRANCHES COME FROM SEPARATE BODIES. THUS, A.O. WAS NOT JUSTIFIED IN HOLDING THAT THE EN TIRE ACTIVITY IS OF MAINTAINING HORSES FOR RUNNING IN RACES. THE CIT(A) HAS CORRECTLY APPRECIATED THAT THE LOSS FROM RACING ACTIVITY SHOULD BE BIFURC ATED FROM THE BREEDING ACTIVITY AND THAT LOSS SHOULD ONLY BE DISALLOWED FO R SET OFF AGAINST BUSINESS INCOME. ACCORDINGLY, ON THE BASIS OF FACTS AND FIGU RES, HE HAS CORRECTLY HELD THE LOSS OF RS.1,18,63,894/- PERTAINS TO RACING ACT IVITY AND THE SAME IS TO BE DISALLOWED FOR SET OFF WHILE THE BALANCE LOSS OF RS .1,89,92,554/- IS FROM BREEDING ACTIVITY AND IT IS ALLOWED TO BE SET OFF A GAINST THE INCOME FROM SHIP MANAGEMENT BUSINESS AS SECTION 74A CANNOT BE APPLIE D TO THE LOSS FROM BREEDING BUSINESS. THE LD. CIT(A) HAS RECORDED A CA TEGORICAL FINDING TO THE EFFECT THAT THE COMPANY HAD ON AN AVERAGE 300 HORSE S OWNED BY IT AT THE FARM AND HORSES OF THE CLIENTS AT THE FARMS OUT OF WHICH ONLY 15% PARTICIPATED IN THE RACES, THEREFORE, THE LOSS INCURRED TO THE ACTI VITIES ATTRIBUTABLE TO RACE HORSES CANNOT BE ALLOWED TO BE SET OF AGAINST OTHER INCOME IN VIEW OF PROVISIONS OF SECTION 74A OF THE ACT. THE DETAILS FILED BY THE ASSESSEE WAS SENT BY THE LD. CIT(A) TO THE A.O. FOR REMAND REPOR T. THE A.O. HAS VERIFIED THE INCOME AND EXPENDITURE OF COMPOSITE LIVESTOCK BUSIN ESS AS WELL AS RACING ACTIVITY WITH BOOKS OF ACCOUNT AND FOUND THE SAME I N CONSONANCE WITH THE BOOKS OF ACCOUNT SUBMITTED BY THE ASSESSEE COMPANY. AFTER CONSIDERING THE REMAND REPORT AND CORROBORATIVE EVIDENCES, THE LD. CIT(A) RECORDED A CATEGORICAL FINDING TO THE EFFECT THAT IT CONSTITUT ES ONLY AROUND 15% OF THE GROSS RECEIPT, THEREFORE, ONLY LOSS INCURRED THEREO N IS LIABLE TO BE DISALLOWED U/S 74A TO BE SET OFF AGAINST OTHER INCOME. SECTIO N 74A IS NOT APPLICABLE FOR THE ACTIVITY OF BREEDING OF HORSES SINCE THESE HORS ES ARE MAINTAINED FOR BREEDING AND SELLING AND NOT FOR RUNNING HORSE RACE S. THE ACTIVITY OF BREEDING OF HORSES IS SIMILAR TO THAT OF POULTRY OR PIGGERIE S ETC. WHERE THE ANIMALS ARE BRED FOR THE PURPOSE OF SELLING. SECTION 74A IS NO T APPLICABLE FOR SUCH BREEDING ACTIVITY. THE LD. CIT(A) ALSO FOUND THAT DURING THE REMAND PROCEEDINGS, THE A.O. REPORTED THAT INCOME AND EXPE NDITURE PERTAINING TO ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 24 BREEDING ACTIVITY AND RACING ACTIVITY WERE FOUND TO BE CAPTURED UNDER TWO DIFFERENT ACCOUNTING CODES IN RESPECT OF BOTH THE A SSESSMENT YEARS. THE LD. CIT (A) ALSO FOUND THAT AN AMOUNT OF RS. 1.94 CRORE S IS RECOVERED ON ACCOUNT OF LIVERY EXPENSES FROM OTHER HORSE OWNERS, WHO HAV E UTILIZED THE STABLES AND OTHER SERVICES OF THE STUD FARM OF THE ASSESSEE. A FTER CONSIDERING THE REMAND REPORT AND CORROBORATIVE EVIDENCES FILED BEFORE HIM , THE LD. CIT(A) REACHED TO THE CONCLUSION THAT ONLY THE BUSINESS LOSS IN RESPE CT OF HORSE BREEDING ACTIVITY AMOUNTING TO RS. 1,89,92,554/- WAS LIABLE TO BE SET OFF AGAINST BUSINESS INCOME WHEREAS LOSS OF RS. 1,18,63,894/- I S FROM HORSE RACING ACTIVITY NOT ELIGIBLE FOR SET OFF AGAINST BUSINESS INCOME IN VIEW OF PROVISIONS OF SECTION 74A OF THE ACT. THE FINDINGS RECORDED BY TH E LD. CIT(A) ARE AS PER MATERIAL ON RECORD, THUS WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS OF LD. CIT(A) AND ACCORDINGLY WE CONFIRM THE SAME. 21. THE ASSESSEE HAS TAKEN ADDITIONAL GROUND WITH R EGARD TO DISALLOWANCE OF LEASE RENT OF RS. 26,59,140/- PAID TO THE DIRECT ORS OF THE COMPANY. THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT THE ADDITIONAL GROUND IS PURELY A LEGAL GROUND AS ALL THE FACTS ARE ON RE CORD AND THE SAME MAY BE ADMITTED IN VIEW OF SC DECISION IN THE CASE OF NTPC [229 ITR 383]. SECONDLY, ON MERITS, THE ASSESSEE SUBMITS ~HAT IT IS TOTALLY WRONG TO CONSIDER THAT THE ENTIRE LAND IS USED FOR AGRICULTURAL PURPOSES. ASSE SSEE GROWS PADDOCK GRASS ON PORTION OF THE LAND BUT THE SAME PORTION IS ALSO USED FOR HORSES WHO EAT THIS GRASS. THE ASSESSEE USES ALL THESE LANDS FOR S TUD FARM PURPOSES WHEREIN THE HORSES ARE KEPT. THE BOUNDARY PORTION OF THE LA ND IS FOR THE TREES TO GIVE THE SHADOW AND WHICH BEAR THE FRUITS AND WHICH RESU LT IN AGRICULTURAL INCOME. THUS, A SUBSTANTIAL PORTION OF THE LAND IS USED FOR THE STUD FARM AND NOT AS AN AGRICULTURAL LAND AND THEREFORE, THE ENTI RE LEASE RENTAL FOR 133 ACRES OF LAND CANNOT BE DISALLOWED. IF A SMALL PORTION OF AROUND 5% OF THE LEASE RENTAL IS DISALLOWED U/S 14A THE ASSESSEE HAS NO OB JECTION. ACCORDINGLY, THE ASSESSEE REQUESTS FOR ALLOWING OF THE ADDITIONAL GR OUND OF APPEAL. ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 25 22. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND WE DO NOT FIND ANY MERIT IN THE ADDITIONAL GROUND SO RAISED BY THE ASSESSEE. WE FIND THAT THE ASSESSEE COMPANY PAID LEASE RENT TO THE DIRECTORS. THE LEAS E RENT WAS PAID IN RESPECT OF LAND USED FOR AGRICULTURAL INCOME WHICH IS EXEMP T. SINCE THE EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME, THE LD. CIT (A) HAS CORRECTLY DISALLOWED THE CLAIM U/S 14A OF THE ACT. ACCORDING LY, THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS DISMISSED. 23. AS THE GROUNDS RAISED BY ASSESSEE AND REVENUE I N A.Y. 2008-09 ARE SIMILAR TO THE GROUNDS TAKEN IN A.Y. 2007-08, FOLLO WING THE REASONING GIVEN IN A.Y. 2007-08, WE CONFIRM THE ACTION OF LD. CIT(A) I N A.Y. 2008-09. 24. IN THE RESULT, APPEALS OF ASSESSEE AND REVENUE ARE DISMISSED IN BOTH THE YEARS. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH JUNE, 2015. !' # $% &! ' 11-06-2015 ( ) SD/- SD/- (SUSHMA CHOWLA) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER $ 5 MUMBAI ; &! DATED 11-06-2015 .6../ RK RKRK RK , SR. PS ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M /12 26 ! '#$% &%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. 7 () / THE CIT(A) 43, MUMBAI 4. 7 / CIT -CENTRAL -IV, MUMBAI 5. :;( 66<= , <= , $ 5 / DR, ITAT, MUMBAI F BENCH 6. (?@ A / GUARD FILE. ' / BY ORDER, : 6 //TRUE COPY// (/') * ( DY./ASSTT. REGISTRAR) , $ 5 / ITAT, MUMBAI