NANDINI S. SONTHALIA, MUMBAI V. ITO WD 19(1)(1), MUMBAI

ITA 2604/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7937 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 05-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HARIGOVIND SINGH
• Keywords: Business income; Business expenditure; Opportunity of being heard; Earning of tax free income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI BEFORE SHRIR.S.SYAL, AM AND SMT.ASHAVIJAYARAGHAVAN, JM ITA NOS.2603 & 2604/MUM/2010 :ASST.YEARS 2005-2006 & 2006-2007 MRS.NANDINI SONTHALIA FLAT NO.1, 1 ST FLOOR, VASANT VILLA 3-B, PEDDAR ROAD, MUMBAI 400 026. PAN : AAVPS0763K. VS. THE INCOME TAX OFFICER WARD 19(1)(1) MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAKESH JOSHI RESPONDENT BY :SHRI HARI GOVIND SINGH O R D E R PER R.S.SYAL, AM : THESE TWO APPEALS BY THE ASSESSEE RELATING TO ASSES SMENT YEARS 2005-2006 AND 2006-2007 INVOLVE CERTAIN COMMON ISSUES. WE ARE , THEREFORE, DISPOSING THEM OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONV ENIENCE. ASSESSMENT YEAR 2005-2006 2. FIRST GROUND IS AGAINST THE CONFIRMATION OF ADDI TION OF RS.3,64,000 ON ACCOUNT OF UNACCOUNTED RENT. BRIEFLY STATED THE FAC TS OF THE CASE ARE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING IN BUTTONS. DURING THE YEAR RENT OF RS.98,000 WAS CREDITED TO THE PROFIT AND LOSS ACCOU NT AS LEASE RENT. ON BEING CALLED UPON TO PRODUCE RELEVANT AGREEMENT, THE ASSESSEE FU RNISHED A COPY OF THE LEASE AGREEMENT DATED 30.03.1999 FROM WHICH IT WAS SEEN T HAT THE ASSESSEE HAD GIVEN HER LAND AND BUILDING ALONG WITH MACHINERY AND PLANT IN CLUDING FURNITURE AND FIXTURES FOR A TOTAL LEASE OF RS.35,000 PER MONTH. THE LEASE OF RS.12,000 WAS TOWARDS LAND AND BUILDING WHEREAS RS.23,000 WAS TOWARDS PLANT, M ACHINERY, FURNITURE AND FIXTURES. THIS AGREEMENT WAS FOR THREE YEARS. THERE WAS ALSO A RENEWAL CLAUSE IN THE SAID AGREEMENT AS PER WHICH THE LEASE COULD BE EXT ENDED FOR FURTHER PERIOD OF THREE YEARS ON INCREASE IN RENTAL BY 10%. THE ASSESSING O FFICER REQUIRED THE ASSESSEE TO ITA NOS.2603 & 2604/MUM/2010 MRS.NANDINI S.SONTHALIA. 2 SHOW CAUSE AS TO WHY ONLY A SUM OF RS.98,000 WAS SH OWN AS LEASE RENT WHEREAS IT SHOULD HAVE BEEN AT RS.38,500 PER MONTH I.E. RS.4,6 2,000 PER ANNUM BY CONSIDERING THE ESCALATION CLAUSE. THE ASSESSEE FIL ED A LETTER ISSUED BY THE LESSEE STATING THAT THEY WERE READY TO RENEW THEIR LEASE A GREEMENT AT THE REVISED RATE OF RS.8,167 PLUS TAXES BIFURCATED INTO RS.5,000 FOR LA ND AND BUILDING AND RS.3,167 FOR ALL MACHINES ETC. THE REASON FOR LOWERING OF THE RE NTAL WAS GIVEN AS HIGH REPAIR COST TO BE BORNE BY THE LESSEE. THE ASSESSING OFFICER OB SERVED THAT THE ORIGINAL LEASE AGREEMENT PROVIDES FOR THE BEARING OF REPAIR COST B Y THE LESSOR. IN THIS BACKDROP OF FACTS THE ASSESSING OFFICER OPINED THAT THE ENTIRE AMOUNT OF RS.4,62,000 WAS TO BE CONSIDERED AS ASSESSEES INCOME WITH THE FOLLOWING OBSERVATIONS:- THEREFORE, ALL THE REPAIRS THAT THE BUILDING NEEDS ARE TO DONE AT THE EXPENSE OF THE ASSESSEE AND IF THE EXPENSES ARE INC URRED BY THE LESSEE THEN THE AMOUNT SHALL BE DEDUCTED FROM THE LEASE RE NT. IN EFFECT, THE LEASE RENT WAS RECEIVABLE BY THE ASSESSEE AS PER TH E OLD AGREEMENT ALONG WITH ESCALATION BUT THE AMOUNT EXPENDED ON RE PAIRS HAS BEEN DEDUCTED BY THE LESSEE. THEREFORE, THE LEASE RENT S HOWN BY THE ASSESSEE IN HER P & L ACCOUNT IS NOT WHAT WAS RECEI VABLE BY THE ASSESSEE BUT IT IS A NET FIGURE OF AMOUNT DEDUCTED BY THE LESSEE. NO RELIEF WAS ALLOWED IN THE FIRST APPEAL. 3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS NOTICED THAT THE ASSESSING OFFICER HAS HELD THE ASSESSEE TO BE ENTITLED TO RENT OF RS.4,62,000, AS AGAINST RS.98,000 SHOWN B Y THE ASSESSEE BY RELYING ON THE LEASE AGREEMENT DATED 30.03.1999 ALONG WITH RENEWAL CLAUSE. THE VIEW POINT OF THE ASSESSING OFFICER IS THAT THE ACTUAL RENT SHOWN BY THE ASSESSEE AT RS.98,000 DID NOT REPRESENT THE ACTUAL RENT BUT WAS NET OF REPAIR EXP ENSES BORNE BY THE LESSEE, AS CAN BE SEEN FROM THE PORTION OF THE ASSESSMENT ORDER EX TRACTED ABOVE. HERE IT IS RELEVANT TO NOTE FROM THE LAST PAGE OF THE ASSESSME NT ORDER THAT THE RENTAL INCOME WAS OFFERED AND ASSESSED UNDER THE HEAD `PROFITS AN D GAINS OF BUSINESS OR PROFESSION. THIS CAN BE SEEN FROM THE COMPUTATIO N OF INCOME MADE BY THE AO AT ITA NOS.2603 & 2604/MUM/2010 MRS.NANDINI S.SONTHALIA. 3 THE END OF THE ASSESSMENT ORDER BY WHICH THE SAID ADDITION HAS BEEN MADE UNDER THE HEAD `BUSINESS INCOME AND THEREAFTER INCOME U NDER THE HEAD `CAPITAL GAIN AS WELL AS INCOME FROM OTHER SOURCES. IT, THEREFOR E, TRANSPIRES THAT THE RENTAL INCOME OF THE ASSESSEE WAS ASSESSED UNDER THE `BUSI NESS INCOME. IF WE ACCEPT THE VIEW POINT OF THE ASSESSING OFFICER THAT THE ACTUAL RENT OF RS.4,62,000 WAS RECEIVABLE AND THE REPAIR COST REPRESENTED THE DIFF ERENCE BETWEEN RS.4,62,000 AND 98,000 BORNE BY THE LESSEE. AS THE BUILDING IS THA T OF THE ASSESSEE WHICH HAS BEEN GIVEN ON RENT AND INCOME FROM WHICH IS TAXABLE AS ` BUSINESS INCOME, OBVIOUSLY THE REPAIR WOULD BE DEDUCTIBLE AS REVENUE EXPENDITU RE AND THE NET INCOME, AFTER DEDUCTION OF REPAIR COST, WILL COME TO THE SAME FIG URE OF RS.98,000. IF WE VIEW THE CASE FROM THE OTHER ANGLE THAT THE ASSESSEE ONLY R ECEIVED A SUM OF RS.98,000 AS BUSINESS INCOME TOWARDS LEASE RENTAL, WHICH FACT H AS BEEN CONFIRMED BY THE LESSEE AS WELL, THEN AGAIN THERE IS NO LOGIC IN TAXING ANY HYPOTHETICAL INCOME BY CONSIDERING THAT THE ASSESSEE OUGHT TO HAVE RECEIVE D A SUM OF RS.4,62,000 INSTEAD OF RS.98,000. IN BOTH THE SITUATIONS THE VIEW TAKEN BY THE AUTHORITIES BELOW IS NOT SUSTAINABLE. WE, THEREFORE, ORDER FOR THE DELETION OF ADDITION OF RS.3,64,000. 4. SECOND GROUND IS AGAINST THE SUSTENANCE OF DISAL LOWANCE OF INTEREST OF RS.1,58,924 PAID ON UNSECURED LOANS. THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE DEBITED THIS AMOUNT AS INTEREST IN THE PROFIT AND L OSS ACCOUNT OF HER PROPRIETORSHIP CONCERN, M/S. N.S.ENGINEERING. INTEREST WAS PAID O N UNSECURED LOANS. THE ASSESSING OFFICER NOTED FROM THE BALANCE SHEET THAT THE ASSESSEE HAD OVERDRAWN HER CURRENT CAPITAL BY RS.13,52,955 WHEREAS UNSECURED LOANS ON WHICH THE INTEREST WAS PAID STOOD AT RS.10,99,449 AS ON 31.03.2005. IT WA S, THEREFORE, CONCLUDED THAT THE INTEREST FREE LOANS WERE TAKEN AWAY BY THE ASSESSEE FOR BUSINESS PURPOSE, WERE WITHDRAWN FOR HER PERSONAL USE AND HENCE INTEREST P AID ON SUCH LOANS WAS NOT DEDUCTIBLE AS BUSINESS EXPENDITURE. NO RELIEF WAS A LLOWED IN THE FIRST APPEAL. ITA NOS.2603 & 2604/MUM/2010 MRS.NANDINI S.SONTHALIA. 4 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE BALANCE SHEET OF THE ASSESS EE IN PROPRIETORSHIP CONCERN IS AVAILABLE ON PAGE 6 OF THE PAPER BOOK. IT CAN BE SE EN THAT ON THE ASSETS SIDE THERE IS DEBIT BALANCE OF PROPRIETORS CAPITAL ACCOUNT AT RS .13,52,955 AND ON THE LIABILITY SIDE THERE IS SHARE CAPITAL OF PROPRIETOR AT RS.8,3 3,000. IT SHOWS THAT THERE IS NET DEBIT OF RS.5.19 LACS AND ODD ONLY. AS AGAINST THA T THERE ARE UNSECURED LOANS OF RS.10,99,449 ON WHICH THE ASSESSEE HAS PAID INTERES T. GOING BY THESE FIGURES ALONE IT BECOMES EVIDENT, AT THE OUTSET, THAT THE DISAL LOWANCE OF INTEREST IS WARRANTED IN THE PROPORTION OF OVERDRAWN CAPITAL OF RS. 5.19 LAC S AND ODD TO THE OUTSTANDING LOANS. IT IS FURTHER NOTICED FROM THE CAPITAL ACCOU NT THAT AN ADDITION OF RS.7,50,000 HAS BEEN SHOWN TO THE CAPITAL. THE LD. AR COULD NO T POINT OUT THE DATE OF SUCH ADDITION TO THE CAPITAL ACCOUNT. IN SUCH A SITUATI ON IT NEEDS TO BE ASCERTAINED AS TO WHEN THE ADDITION TO THE CAPITAL ACCOUNT WAS MADE AND PROPORTIONATE OF DISALLOWANCE OF INTEREST WILL BE CALLED FOR ACCORDI NGLY. TO FURTHER CLARIFY IF THE TRANSFER TO CAPITAL ACCOUNT AT RS.7,50,000 IS MADE AT THE END OF THE YEAR, THEN THE ENTIRE INTEREST WOULD BE NOT ALLOWABLE AS THE AMOUN T OF DEBIT BALANCE OF CAPITAL EXCLUDING THE ADDITION OF RS.7.50 LACS WOULD BE FAR IN EXCESS OF THE AMOUNT OF UNSECURED LOAN. SINCE THE DATE OF CREDIT TO THE CAP ITAL ACCOUNT IS NOT KNOWN, WE SET ASIDE THE IMPUGNED ORDER AND RESTORE THE MATTER TO THE FILE OF A.O. FOR EXAMINING THE DISALLOWANCE OF INTEREST FROM THIS ANGLE AND MA KE DISALLOWANCE IN PROPORTION TO THE EXTENT OF OVERDRAWN CAPITAL. 6. LAST GROUND IS AGAINST THE CONFIRMATION OF DISAL LOWANCE OF INTEREST OF RS.1,32,368. THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE RECEIVED AN AMOUNT OF RS.1,41,299 AS INTEREST AND DEDUCTION WAS CLAIMED F OR INTEREST PAID AMOUNTING TO RS.2,29,677. INTEREST INCOME WAS SHOWN UNDER THE H EAD `INCOME FROM OTHER SOURCES AND DEDUCTION FOR INTEREST PAID WAS CLAIME D U/S.57(III). ON BEING CALLED UPON TO FURNISH CONFIRMATIONS AND ADDRESSES ETC. OF THE PARTIES FROM WHOM ASSESSEE HAD BORROWED FUNDS, IT WAS STATED THAT THERE WAS 16 PARTIES TO WHOM INTEREST WAS ITA NOS.2603 & 2604/MUM/2010 MRS.NANDINI S.SONTHALIA. 5 PAID. THE ASSESSEE ALSO FILED PERMANENT ACCOUNT NUM BER / ADDRESSES IN RESPECT OF 14 OF THESE PARTIES. REGARDING REMAINING TWO PARTIES, NO ADDRESS / PERMANENT ACCOUNT NUMBERS / CONFIRMATIONS WERE FILED. THESE TWO PARTI ES WERE SHRI KANSHAL DEVA TO WHOM INTEREST AMOUNTING TO RS.1,151 WAS PAID AND SH RUTI S.SONTHALIA TO WHOM A SUM OF RS.6,621 WAS CLAIMED AS PAID. THE ASSESSING OFFICER MADE DISALLOWANCE FOR THESE TWO SUMS. NO RELIEF WAS ALLOWED IN THE FI RST APPEAL. 7. THE LEARNED A.R. ADMITTED THAT NO CONFIRMATION WAS AVAILABLE IN RESPECT OF KANSHAL DEVA TO WHOM INTEREST TO THE TUNE OF RS.1, 151 WAS CLAIMED TO HAVE BEEN PAID. IN SUCH A SITUATION, WE UPHOLD THE IMPUGNED O RDER TO THIS EXTENT. REGARDING INTEREST PAID TO SHRUTI S.SONTHALIA, IT IS SEEN THA T SHE IS DAUGHTER OF THE ASSESSEE AND CONFIRMATION IN RESPECT THEREOF WAS FILED BEFORE TH E LEARNED CIT(A), WHICH HE REFUSED TO ACCEPT. IN OUR CONSIDERED OPINION IT WO ULD BE JUST AND FAIR IF THE SAID CONFIRMATION IS PLACED BEFORE THE ASSESSING OFFICER FOR VERIFICATION AND CONSIDERING THE DEDUCTIBILITY OR OTHERWISE OF THIS INTEREST. TH E LAST SEGMENT OF THIS INTEREST IS SUM OF RS.1,24,596 WHICH WAS PAID TO MS.KIRTI M.SHA H. IT WAS STATED ON BEHALF OF THE ASSESSEE THAT THE ASSESSEE CREATED PROVISION FO R INTEREST IN RESPECT OF THIS PARTY FROM ASSESSMENT YEAR 2001-2002 ONWARDS AT A SPECIFI ED RATE. BUT DUE TO DISPUTE ON THE RATE OF INTEREST, THE AMOUNT WAS NOT RECEIVED IN THOSE YEARS AND EVENTUALLY IN THE YEAR IN QUESTION THIS AMOUNT WAS CLAIMED AS DED UCTION. NOT CONVINCED, THE ASSESSING OFFICER DID NOT ALLOW DEDUCTION, WHICH AC TION WAS UPHELD IN THE FIRST APPEAL. 8. WE HAVE PERUSED PAGE NOS.32 ONWARDS OF THE PAPER BOOK WHICH ARE COPY OF ACCOUNT OF MS.KIRTI M.SHAH IN THE BOOKS OF THE ASSE SSEE FROM ASSESSMENT YEAR 2001-2002. EVERY YEAR PROVISION FOR INTEREST HAS BE EN CREDITED TO HIS ACCOUNT AND AS ON 31.3.2004 A SUM OF RS.1,24,596 HAS BEEN DEBIT ED. IT IS CLAIMED THAT THE EARLIER PROVISION TOWARDS INTEREST COULD NOT MATURE AND THA T IS WHY THE INTEREST WAS DEBITED IN THIS YEAR. THE LEARNED A.R. HAS TRIED TO SHOW TH AT IN EARLIER YEARS THIS INTEREST WAS ITA NOS.2603 & 2604/MUM/2010 MRS.NANDINI S.SONTHALIA. 6 SHOWN AS INCOME WHICH HAS BEEN CLAIMED AS DEDUCTION IN THIS YEAR. IF IT IS A FACT THAT IN THE EARLIER YEARS THIS INTEREST WAS SHOWN A S INCOME BUT IT COULD NOT BE RECOVERED AND IN THIS YEAR THE AMOUNT HAS BEEN REVE RSED THEN THE CASE IS REQUIRED TO BE EXAMINED FROM THAT ANGLE. AS THE NECESSARY DETAI LS WERE NOT BEFORE THE AUTHORITIES BELOW, IN OUR CONSIDERED OPINION, IT WO ULD BE JUST AND FAIR IF THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTO RED TO THE FILE OF A.O. FOR DECISION AFRESH IN ACCORDANCE WITH LAW. WE ORDER AC CORDINGLY. 9. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ASSESSMENT YEAR 2006-2007 10. FIRST GROUND IS AGAINST THE CONFIRMATION OF ADD ITION OF RS.3,64,000 ON ACCOUNT OF UNACCOUNTED LEASE RENT. BOTH THE SIDES A RE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE SIMILAR TO THO SE OF GROUND NO.1 FOR ASSESSMENT YEAR 2005-2006. FOLLOWING THE VIEW TAKEN HEREINABOV E, WE ALLOW THIS GROUND OF APPEAL. 11. GROUND NO.2 IS AGAINST THE CONFIRMATION OF DISA LLOWANCE OF INTEREST OF RS.98,284 PAID TO UNSECURED LOANS. HERE ALSO BOTH T HE PARTIES ADMITTED THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE SIMILAR TO GROUND NO.2 OF ASSESSMENT YEAR 2005-2006. WE, THEREFORE, SET ASIDE THE IMPUGN ED ORDER ON THIS ISSUE AND RESTORE THE MATTER TO THE A.O. FOR DECISION AFRESH IN ACCORDANCE WITH OUR DIRECTIONS FOR ASSESSMENT YEAR 2005-2006 ABOVE. 12. THE ONLY OTHER GROUND, WHICH SURVIVES FOR CONSI DERATION IS AGAINST THE DISALLOWANCE OF INTEREST OF RS.50,692. THE ASSESSEE DECLARED INCOME FROM OTHER SOURCES AT RS.57,999 AGAINST WHICH INTEREST EXPENDI TURE OF RS.50,692 WAS CLAIMED TO HAVE BEEN PAID ON UNSECURED LOANS. THE A.O. NOTE D THAT THE ASSESSEE HAD INVESTED RS.11.78 LAKHS IN INSTRUMENTS GENERATING T AX-FREE / EXEMPT INCOME. IN HIS ITA NOS.2603 & 2604/MUM/2010 MRS.NANDINI S.SONTHALIA. 7 OPINION DEDUCTION U/S.57(III) WAS PERMISSIBLE ONLY IF INTEREST ON LOANS WAS FOR THE FUNDS WHICH WERE UTILIZED FOR GENERATING INTEREST I NCOME. IN THE ABSENCE OF ASSESSEE PROVING ANY NEXUS, THE A.O. MADE DISALLOWANCE OF I NTEREST. NO RELIEF WAS ALLOWED IN THE FIRST APPEAL. 13. THE LEARNED A.R. CONTENDED THAT THE ASSESSEE WA S NOT ALLOWED ADEQUATE OPPORTUNITY OF PROVING THE NEXUS OF FUNDS ON WHICH IT PAID INTEREST VIS--VIS THOSE ON WHICH INTEREST INCOME WAS EARNED. NO SERIOUS OBJ ECTION WAS TAKEN BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THIS ARGUMEN T. IN SUCH A SITUATION, WE SET ASIDE THE IMPUGNED ORDER AND RESTORE THE MATTER TO THE FILE OF A.O. FOR DECISION AFRESH IN ACCORDANCE WITH LAW AFTER ALLOWING A REAS ONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 14. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 25 TH DAY OF MARCH, 2011 . SD/- SD/- (ASHAVIJAYARAGHAVAN) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 25 TH MARCH, 2011. DEVDAS* COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) XXX, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.