DHADDA DIAMONDS P.LTD, MUMBAI V. ITO 5(1)(3), MUMBAI

ITA 257/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3635 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2011-2012
• Appeal Filed On: 09-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Tax effect; Unabsorbed depreciation
• Section: 143(3); 14A; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH , MUMBAI BEFORE SRI MAHAVIR SINGH, J UDICIAL MEMBER ITA NO . 257 /MUM/201 5 (A.Y:2011 - 12 ) DHADDA DIAMONDS PVT. LTD., 1208, PANCHRATNA, OPERA HOUSE, MUMBAI 400 004 VS. THE INCOME TAX OFFICER, WARD - 5(1)(3) , ROOM NO.569, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI 400 021 PAN:AAACD 0539 L APPELLANT .. RESPONDENT APPELLANT BY .. SHRI YOGESH THAR SHRI FARIL BHATT, ARS RESPONDENT BY .. SHRI DURGA DUTT, SR. DR DATE OF HEARING .. 16 - 08 - 2016 DATE OF PRONOUNCEMENT 16 - 0 8 - 2016 O R D E R PER MAHAVIR SINGH , JM : THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF ORDER OF CIT ( A) - 9 , MUMBAI IN APPEAL NO. CIT ( A) - 9 / 5(1 ) ( 3)/603 / 20 13 - 14 DATED 10 - 10 - 2014 . ASSESSMENT WAS FRAMED BY ITO - 5(1 ) ( 3) , MUMBAI FOR THE ASSESSMENT YEAR 20 11 - 12 U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) VIDE HIS ORDER DATED 1 1 TH FEBRUARY , 2014 . 2. FIRST TWO ISSUES IN THIS APPEAL IS REGARDING DISALLOWANCE MADE BY THE AO U/S 14A READ WITH RULE 8 OF THE INCOME TAX RULES, 1962 (HEREINAFTER T HE RULE) AND SET OFF OF CARRY FORWARD UNABSORBED DEPRECIATION PERTAINING TO EARLIER YEARS. THE LEARNED COUNSEL FOR THE ASSESSEE STATED THAT HE HAS INSTRUCTIONS FROM THE ASSESSEE NOT TO PRESS THESE TWO ISSUES. ACCORDINGLY, BOTH THE ISSUES ARE DISMISSED AS WITHDRAWN. 3. THE ONLY SURVIVING ISSUES IS AS REGARDS TO THE ADDITION MADE BY THE AO AND CONFIRMED BY THE CIT (A) IN RESPECT TO NOTIONAL RENT ADDED AS INCOME FROM HOUSE PROPERTY U/S 22 OF THE ACT AMOUNTING TO RS.38,48,380/ - . ITA NO. 257 /MUM/20 1 5 2 4. BRIEF FACTS LEADING TO T HE ABOVE ISSUE ARE THAT THE ASSESSEE COMPANY OWN SIX UNITS VIZ. UNIT NO.1208, 120 3, 1207, 1207A, 1 601 AND 1601A IN THE BUILDING OPERA HOUSE. THE ASSESSEE CLAIMED BEFORE THE AO THAT IT IS A PARTNER IN ONE PARTNERSHIP FIRM. THIS PARTNERSHIP FIRM IS CARRYIN G ON BUSINESS, BUT NO RENT IS CHARGED BY THE ASSESSEE COMPANY IN RESPECT TO THESE UNITS. ACCORDING TO THE AO, THE ASSESSEE IS OWNER OF THE SAID PREMISE AND IT HAS NOT UTILIZED THE SAME FOR THE PURPOSE OF ITS BUSINESS AND ACCORDINGLY NOTIONAL RENT IN TERMS OF THE PROVISIONS OF SECTION 22 OF THE ACT HAS TO BE TAXED AS INCOME FROM HOUSE PROPERTY. ACCORDINGLY, HE CHARGED MARKET RENT AT RS.38,48,380/ - AND TAXED ACCORDINGLY. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT (A) WHO ALSO CONFIRMED THE ACTION OF THE AO RELYING ON EARLIER DECISION OF ITAT FOR ASSESSMENT YEARS 2003 - 04 AND 2004 - 05. AGGRIEVED, NOW THE ASSESSEE IS IN SECOND APPEAL BEFORE THE TRIBUNAL. 5. I HAVE HEARD THE RIVAL CONTENTIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. BEFORE ME, THE LEARNED COUNSEL FOR THE ASSESSEE FIRST OF ALL DREW MY ATTENTION TO THE ASSESSEES PAPER BOOK PAGE 95 WHEREIN A COPY OF A LETTER WAS FILED BEFORE THE TRIBUNAL WITHDRAWING THE APPEAL ON THE GROUND THAT THE PAST UNABSORBED LOSSES ARE SUFFICIENT TO SET OFF INCOME EVEN AFTER ESTIMATION OF NOTIONAL INCOME AND AS SUCH PRACTICALLY, THERE IS NO TAX EFFECT SUFFERED BY THE ASSESSEE. THEREFORE, THE ASSESSEE WITHDREW THE APPEAL FOR THESE TWO ASSESSMENT YEARS. THE LEARNED COUNSEL ALSO DREW MY ATTENTION TO PAGES 96 AND 97 WHEREBY THE TRIBUNAL IN ITA NO.5172 AND 5173/MUM/2011 VIDE ORDER DATED 04 - 10 - 2012 PERMITTED THE WITHDRAWAL. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER STATED THAT THE ASSESSEE COMPANY BEING A PARTNER IN THE FIRM, IT IS CARRYING ON THE BUS INESS AND ALSO CARRYING ON BUSINESS FROM THE SAME PREMISES OWNED BY THE ASSESSEE COMPANY, THERE IS NO NEED TO EST I MATE NOTIONAL RENT. FOR THIS ARGUMENT HE TOOK ME THROUGH THE CASE LAW OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS RASIKLAL BALA BHA I (1979) 119 ITR 303 (GUJ.) , WHEREIN THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SHANTIKUMAR NAROTTAM MORARJI VS CIT (1955) 27 ITR 69 (BOM) WAS CONSIDERED AND THE SAME WAS ANSWERED AS UNDER: - ITA NO. 257 /MUM/20 1 5 3 7. BROADLY, TWO POINTS WOULD ARISE FOR ANSWER ING THE QUESTION REFERRED TO US, NAMELY, (I) IS THE ASSESSEE CARRYING ON BUSINESS? AND, (II) IS HE OCCUPYING THE HOUSE PROPERTY FOR PURPOSES OF SUCH BUSINESS? IT IS IMPLICIT THAT PROFITS OF SUCH BUSINESS, PROFESSION OR VOCATION MUST BE ASSESSABLE TO TAX. T HERE CANNOT BE MUCH CONTROVERSY SO FAR AS THE FIRST POINT IS CONCERNED. THE POSITION IS FORTUNATELY CONCLUDED BY THE TWO DECISIONS, ONE OF THE HIGH COURT OF BOMBAY AND ANOTHER OF THIS COURT. IN SHANTIKUMA R NAROTTAM MORARJI V. CIT [1955] 27 ITR 69 (BOM), A QUESTION AROSE WHETHER A PARTNER IN A REGISTERED FIRM IS ENTITLED TO CLAIM DEDUCTION AGAINST THE SHARE OF THE PROFITS INCLUDED IN HIS TOTAL INCOME WHEN THE SHARE HAS BEEN ASCERTAINED ON THE ASSESSMENT OF THE FIRM WITH REGARD TO ITS PROFITS. THE DIVISION BENCH CONSISTING OF CHAGLA C.J. AND TENDOLKAR J., WHILE ANSWERING THE QUESTION IN FAVOUR OF THE ASSESSEE, ADDRESSED ITSELF TO THE QUESTION AS TO WHAT EXACTLY THE RIGHTS OF A PARTNER IN A REGISTERED FIRM AR E WITH REGARD TO DEDUCTIONS UNDER S. 10(2) OF THE INDIAN I. T. ACT, 1922. THE REVENUE CONTENDED BEFORE THE DIVISION BENCH OF THE BOMBAY HIGH COURT THAT S. 10 HAD NO APPLICATION AT ALL SINCE IT DEALT WITH THE PROFITS OF A BUSINESS CARRIED ON BY THE ASSESSEE EXCLUSIVELY AND SOLELY. REJECTING THIS CONTENTION, CHAGLA C.J., SPEAKING FOR THE DIVISION BENCH, HELD AS UNDER (P. 76 ): 'MR. JOSHI SAYS THAT A FIRM UNDER THE INDIAN INCOME - TAX ACT IS AN ASSESSABLE ENTI TY AND, THEREFORE, A DISTINCTION MUST BE MADE BETWEEN A BUSINESS CARRIED ON BY A FIRM AND A BUSINESS CARRIED ON BY AN INDIVIDUAL. ALTHOUGH A FIRM IS AN ASSESSABLE ENTITY UNDER THE INDIAN INCOME - TAX ACT A FIRM IS NOT A LEGAL ENTITY. IN THE EYE OF THE LAW, A FIRM IS A COMPENDIOUS EXPRESSION USED TO INDICATE THAT SEVERAL PERSONS CONSTITUTING THAT FIRM ARE CARRYING ON A BUSINESS. BUT THAT COMPENDIOUS EXPRESSION CANNOT GIVE TO THE FIRM A LEGAL ENTITY OR A LEGA L EXISTENCE. IN LAW IT IS ONLY THE PARTNERS WHO EXIST AND WHO CARRY ON THE BUSINESS. IT IS EQUALLY TRUE THAT LOOKING TO THE DEFINITION OF 'PARTNERSHIP' IN SECTION 4 OF THE PARTNERSHIP ACT, WHEN YOU HAVE A PARTNERSHIP BUSINESS, THE BUSINESS IS CARRIED ON BY EACH OF THE PARTNERS, AND THE DEFINITION OF A PARTNERSHIP IN THE PARTNERSHIP ACT HAS BEEN INCORPORATED IN THE INDIAN INCOME - TAX ACT , IN SECTION 2(6B) . THEREFORE, THE CONTENTION THAT SECTION 10(1) CANNOT APPLY TO A PARTNER IN A REGISTERED FIRM IS UNTENABLE BECAUSE HE DOES CARRY ON THE BUSINESS ALTHOUGH THAT BUSINESS HAPPENS TO BE A PARTNERSHIP BUSINESS, AND, THEREFORE, IF ANY PROFITS AND GAINS ARE DERIVED BY THE ASSESSEE FROM THE BUSINESS CARRIED ON BY HIM, THOSE PROFITS AND GAINS MUST BE BROUGHT TO TAX ONLY UNDER THE HEAD, VIZ., THE HEAD FALLING UNDER SECTION 10(1) WHICH IS THE HEAD OF BUSINESS.' 8. BEFORE A DIVISION BENCH OF THIS COURT, CONSISTING OF K. T. DESAI C.J. AND P. N. BHAGWATI J. (AS THEY THEN WERE), A QUESTION AROSE IN SITARAM MOTIRAM JAIN V. CIT [1961] 43 ITR 405 (GUJ), WHETHER AN ASSESSEE IS ENTITLED TO SET OFF HIS LOSS IN THE INDIVIDUAL BUSINESS AGAINST THE SHARE OF THE PROFITS O F A FIRM IN WHICH HE WAS A PARTNER TAKING OVER BUSINESS AS A RUNNING CONCERN. THE DIVISION BENCH, ANSWERING THE QUESTION IN FAVOUR OF THE ASSESSEE, POSED A CRUCIAL QUESTION, WHETHER A BUSINESS WHICH HAS BEEN CARRIED ON BY A ITA NO. 257 /MUM/20 1 5 4 PARTNERSHIP CAN BE REGARDED AS B USINESS CARRIED ON BY A PARTNER, AND HELD (P. 412 ): 'A 'PARTNERSHIP' IS DEFINED BY SECTION 4 OF THE INDIAN PARTNERSHIP ACT AS THE RELATION BETWEEN PERSONS WHO HAVE AGREED TO SHARE THE PROFIT OF A BUSIN ESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL. WHEN A FIRM CARRIES ON BUSINESS, IT IS A BUSINESS CARRIED ON BY THE PARTNERS OF THAT FIRM. ONE PARTNER IS THE AGENT OF THE OTHER IN CARRYING ON THAT BUSINESS. WHEN A PARTNERSHIP CARRIES ON A BUSINESS EAC H PARTNER THEREOF CARRIED ON THAT BUSINESS. THE LANGUAGE USED IN SECTION 24(2) REQUIRES THAT THE BUSINESS SHOULD BE CONTINUED TO BE CARRIED ON BY THE INDIVIDUAL CONCERNED. THE REQUIREMENTS OF THAT SECTIO N ARE SATISFIED WHEN A PARTNER CARRIES ON THE SAME BUSINESS WHICH WAS CARRIED ON PREVIOUSLY BY HIM ON HIS SOLE ACCOUNT. WHAT WAS URGED BEFORE US WAS THAT THE WORDS 'CONTINUED TO BE CARRIED ON BY HIM' MEANT THAT IT WAS CONTINUED TO BE CARRIED ON BY HIM AND NO OTHER PERSON. THERE IS NO WARRANT FOR ADDING THE WORDS 'AND NO OTHER PERSON' HAVING REGARD TO THE LANGUAGE USED IN THIS SUB - SECTION.' 9. IN VIEW OF THESE TWO DECISIONS, THE FIRST POINT DOES NOT APPEAR TO BE DOUBTFUL AT ALL AS TO WHETHER A PARTNER OF A FIRM CAN BE SAID TO BE CARRYING ON HIS BUSINESS WHEN HE CARRIES ON THAT BUSINESS THROUGH PARTNERSHIP. THE ANSWER IS OBVIOUSLY IN THE AFFIRMATIVE AS HAS BEEN HELD BY THE TWO DECISIONS ABOVE. THE LEARNED GOVERNMENT PLEADER FOR THE REVENUE WANTED TO DISTINGUI SH THESE TWO DECISIONS ON THE GROUND THAT THEY ARE PERTAINING TO THOSE ASSESSMENT YEARS BEFORE 1956 - 57 WHEN A REGISTERED FIRM WAS NOT A DIFFERENT ENTITY IN THE SENSE THAT IT WAS NOT LIABLE TO PAY FIRM TAX SINCE IT WAS IN 1956 THAT THE INDIAN I. T. ACT, 192 2, WAS AMENDED SO AS TO MAKE THE FIRM LIABLE TO PAY FIRM TAX. WE MUST FRANKLY ADMIT THAT WE ARE NOT IMPRESSED BY THIS DISTINCTION WHICH IS WITHOUT ANY DIFFERENCE. THE QUESTION IS : CAN IT BE SAID THAT THE PARTNER IS CARRYING ON HIS BUSINESS WHEN THE BUSINE SS IS THAT OF A FIRM IN WHICH HE IS A PARTNER ? THE SAME QUESTION CAME UP FOR DECISION BEFORE THIS COURT AGAIN IN CIT V. ARUN INDUSTRIES [1966] 61 ITR 241 (GUJ) IN A SLIGHTLY DIFFERENT CONTEXT. IT INVOL VED A QUESTION OF INTERPRETATION OF S. 15C OF THE INDIAN I. T. ACT, 1922, IN ITS APPLICATION TO A REGISTERED FIRM AND AROSE OUT OF THE ASSESSMENT OF A REGISTERED FIRM FOR THE ASSESSMENT YEAR 1961 - 62. THE QUESTION WAS WHETHER EXEMPTION UNDER S. 15C WAS AVAILABLE BOTH TO THE REGISTERED FIRM AND TO THE PARTNERS. IN THAT PERSPECTIVE THE DIVISION BENCH OF THIS COURT, CONSISTING OF J. M. SHELAT C.J. AND P. N. BHAGWATI J. (AS THEY THEN WERE), WAS FACED WITH A PR OBLEM WHETHER THE BENEFIT UNDER S. 15C(1) IS ALSO AVAILABLE TO A PARTNER IN A FIRM WHICH ENGAGES ITSELF IN MANUFACTURING OR PRODUCING ARTICLES IN THE INDUSTRIAL UNDERTAKING. THE DIVISION BENCH QUOTED WIT H APPROVAL THE PASSAGE EXTRACTED ABOVE FROM SITARAM MOTIRAM JAIN'S CASE [1961] 43 ITR 405 (GUJ) AND HELD AS UNDER (P. 250 ): 'THERE IS, THEREFORE, NOTHING IN SUB - SECTION (6) WHICH SHOULD COMPEL US TO HOLD THAT IN THE CASE OF A REGISTERED FIRM, THE ASSESSEE CONTEMPLATED BY SUB - SECTION (1) CAN ONLY BE THE REGISTERED FIRM AND NOT A PARTNER OF THE REGISTERED FIRM. WHERE A REGISTERED FIRM ITA NO. 257 /MUM/20 1 5 5 MANUFACTURES OR PRODUCES ARTICLES IN THE INDUSTRIAL UNDERTAKING, EVERY PARTNER OF THE REGISTERED FIRM DOES SO AND HE WOULD, T HEREFORE, BE AN ASSESSEE WITHIN THE MEANING OF SECTION 15C , SUB - SECTION (1), AND WOULD BE ENTITLED TO CLAIM THAT NO TAX IS PAYABLE BY HIM IN RESPECT OF HIS SHARE OF THE EXEMPTED PROFITS IN HIS INDIVIDUAL ASSESSMENT.' 10. WE, THEREFORE, FEEL NO HESITATION IN AGREEING WITH THE LEARNED ADVOCATE FOR THE ASSESSEE THAT THE ASSESSEE MUST BE HELD TO BE CARRYING ON BUSINESS WHEN THAT BUSINESS IS A BUSINESS OF A PARTNERSHIP FIRM SINCE THE FIRM AS A PARTNERSHIP FIR M HAS NO LEGAL ENTITY AND, AS HELD BY COURTS, THAT IT IS A COMPENDIOUS EXPRESSION FOR ALL THE PARTNERS . FINALLY, THE LEARNED COUNSEL FOR THE ASSESSEE ALSO DREW MY ATTENTION TO THE DECISION OF CO - ORDINATE BENCH OF THE T RIBUNAL IN THE CASE OF INDIRA JAIN V S ITO (BOM) (2012) 52 SOT 270 (BOM.) WHEREIN IT HAS B EEN HELD THAT WHILE COMPUTING INCOME FROM HOUSE PROPERTY, THE PORTION OF THE PROPERTY USED BY THE ASSESSEE COMPANY IN WHICH THE ASSESSEE IS A PARTNER, INCOME CANNOT BE ASSESSED U/S 22 OF THE ACT ON NOTIO NAL BASIS. THE LEARNED COUNSEL FOR THE ASSESSEE DREW MY ATTENTION TO PARA 5.1 OF THE TRIBUNAL ORDER WHICH READS AS UNDER: - THE HONBLE HIGH COURT OF ALLAHABAD IN CASE OF MUSTAFA KHAN (SUPRA) AND HONBLE HIGH COURT OF GUJARAT IN THE CASE OF RASIKLAL BALABH AI (SUPRA) HAVE TAKEN THE VIEW THAT THE PROPERTY USED BY THE PARTNERSHIP FIRM IN WHICH THE ASSESSEE IS A PARTNER HAS TO BE TREATED AS THE USER FOR PURPOSE OF BUSINESS OF THE ASSESSEE. THE HONBLE HIGH COURTS HAD FOLLO WED THE VIEW EARLIER TAKEN BY TH E HONB LE HIGH COURTS OF BOMBAY IN THE CASE OF SHANTIKUMAR NAROTTAM MORARJI V. CIT [1955] 27 ITR 69 IN WHICH IT WAS HELD THAT WHEN PARTNERSHIP CARRIED ON BUSINESS, EACH PARTNER THEREOF CARRIED ON THAT BUSINESS. FOLLOWING THE JUDGMENTS, WE HOLD THAT PORTION OF THE PROPERTY USED BY THE PARTNERSHIP FIRM IN WHICH ASSESSEE IS A PARTNER HAS TO BE EXCLUDED FROM THE TOTAL INCOME. AS REGARD THE PORTION USED BY THE COMPANY IN WHICH THE ASSESSEE WAS SHARE HOLDER AND DIRECTOR, THE SAME IN OUR VIEW CANNOT BE CONSIDERED FOR EXC LUSION AS COMPANY HAS SEPARATE AND DISTINCT IDENTITY AND BUSINESS CARRIED ON BY THE COMPANY CANNOT BE CONSIDERED AS BUSINESS DONE BY SHARE HOLDER OR DIRECTOR. THEREFORE, THE PORTION OCCUPIED BY THE COMPANY FOR ITS BUSINESS HAS TO BE CONSIDERED WHILE COMPUT ING HOUSE PROPERTY. 6. I HAVE CONSIDERED THE ISSUE AND NOTICED THE FACT THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND IS A PARTNER IN A PARTNERSHIP FIRM WHICH CARRIES ON BUSINESS FROM THE SAME PREMISES WHICH IS OWNED BY THE ASSESSEE. IN SUCH CIRCUMS TANCES, WHETHER RENT FROM HOUSE PROPERTY IS TO BE ASSESSED U/S 22 OF THE A CT AS NOTIONAL RENT OR NOT, THE ISSUE HAS BEEN ANSWERED BY THE HONBLE BOMBAY ITA NO. 257 /MUM/20 1 5 6 HIGH COURT IN THE CASE OF SHANTIKUMAR NAROTTAM MORARJI V. CIT [1955] 27 ITR 69 . SUBSEQUENTLY, THE SAME HAS BEEN FOLLOWED BY THE CO - ORDINATE BENCH OF THE TRIBUNAL IN TH E CASE OF SMT. INDIRA JAIN (SUPRA). RESPECTFULLY, FOLLOWING THE SAME PRINCIPLE, I AM OF THE VIEW THAT NOTIONAL RENT U/S 22 OF THE ACT CANNOT BE CHARGED IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. ACCORDINGLY, I DELETE THE ADDITION AND ALLOW THE APPEAL OF THE ASSESSEE. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 16 - 08 - 2016 . COPY OF THE ORDER FORWARDED TO : BY ORDER, ASSISTANT REGISTRAR ITAT, MUMBAI SR.NO. PARTICULARS DATE INITIALS PERSON CONCERNED 1 DICTATION GIVEN ON 16 /8/16 LK DEKA 2 DRAFT PLACED BEFORE AUTHOR 16 /8/16 3 DRAFT PROPOSED/PLACED BEFORE THE SECOND MEMBER 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 5 APPROVED DRAFT COMES TO THE SR.PS 6 KEPT FOR PRONOUNCEMENT ON 7 FILE SENT TO THE BE NCH CLERK 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER - MUMBAI, DATED:16 - 08 - 2016 LAKSHMIKANTA DEKA/SR.PS SD/ - MAHAVIR SINGH JUDICIAL MEMBER 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT (A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//