DREAM MOTELS PVT. LTD., MUMBAI V. ITO -WD- 12(2)(1)mumbai, Mumbai

ITA 3140/MUM/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3162 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 11-05-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JYOTHILAKSHMI NAYAKLD
• Assessee Lawyers: MADHUR AGARWALLD
• Keywords: Business income; Business expenditure
• Section: 143(3); 37(1)

Judgement Text

ITA NO.3140/MUM/2018 DREAM MOTELS PVT. LTD. ASSESSMENT YEAR :2012-13 1 IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI , , BEFORE HONBLE SHRI MAHAVIR SINGH, VP AND HONBLE SHRI MANOJ KUMAR AGGARWAL, AM ./ I.T.A. NO 3140/MUM/2018 ( / ASSESSMENT YEAR : 2012-13 ) M/S. DREAM MOTELS PVT. LTD. 301, VIKAS BLDG., 3 RD FLOOR 11, NGN VIDYA ROAD, FORT, MUMBAI 400 001. / VS. I TO 12(2)(1) ROOM NO. 224, AAYKAR BHAVAN 2 ND FLOOR, MAHARSHI KARVE ROAD, MUMBAI 400020 %& ./ ./PAN/GIR NO. AABCD-9776-C ( &( /APPELLANT ) : ( )*&( / RESPONDENT ) ASSESSEE BY : SHRI MADHUR AGARWAL- LD. AR REVENUE BY : MS. JYOTHILAKSHMI NAYAK-LD. DR / DATE OF HEARING : 28/01/2020 / DATE OF PRONOUNCEMENT : 12/03/2020 / O R D E R MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1.1 AFORESAID APPEAL BY ASSESSEE FOR ASSESSMENT YEA R [IN SHORT REFERRED TO AS AY] 2012-13 CONTEST THE ORDER OF L D. COMMISSIONER OF INCOME-TAX (APPEALS)-20, MUMBAI, [IN SHORT REFERRED TO AS CIT(A)], APPEAL NO. CIT(A)-20/ITO-12(2)(1)/IT-10031/15-16 DA TED 28/03/2018 ON FOLLOWING GROUNDS OF APPEAL: - GROUND NO. I: TREATING MUNICIPAL TAXES PAID AMOUNTI NG TO RS.7,99,519/- AS PART OF RENT LIABLE TO BE TAXED U/ S 23 OF THE ACT: ITA NO.3140/MUM/2018 DREAM MOTELS PVT. LTD. ASSESSMENT YEAR :2012-13 2 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT(A) ERRED IN MAKING AN ADDITION OF RS. 7,99,519/- TO THE ANNUAL LETTING VALUE (ALV) BY TREATING THE SAME AS PART OF EFFECTIVE RENT RECEIVED BY THE APPELLANT . GROUND NO. II: ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT(A) ERRED IN NOT ADMITTING AND CONSIDERING THE A DDITIONAL EVIDENCE FILED BY THE APPELLANT. GROUND NO. III: DISALLOWANCE OF ALL EXPENDITURE DEB ITED TO P/L ACCOUNT AMOUNTING TO RS. 44,52,054/- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER (AO ) IN DISALLOWING THE EXPENDITURE DEBITED IN THE P/L ACCOUNT ALLEGING THAT THE BUSINE SS OF THE APPELLANT HAD NOT COMMENCED AND, THEREFORE, THE EXPENDITURE SO INCURR ED COULD NOT BE ALLOWED AS A DEDUCTION. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT(A) ERRED IN NOT APPRECIATING THAT FOR ALLOWING DEDUCTION OF EXP ENSES, SETTING UP OF BUSINESS IS RELEVANT AND NOT COMMENCEMENT OF BUSINESS. 3. THE LD. CIT(A) FAILED TO APPRECIATE THAT IN THE EARLIER THREE ASSESSMENT YEARS IT HAS BEEN ACCEPTED THAT THE APPELLANTS BUSINESS HAS BEEN SET UP AND, THEREFORE, IN THE FOURTH YEAR IT COULD NOT BE ALLEGED THAT THE BU SINESS HAS NOT BEEN SET UP. WITHOUT PREJUDICE TO GROUND NO. III ABOVE GROUND NO. IV: DEDUCTION U/S 57(III) OF THE ACT 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) OUGHT TO HAVE ALLOWED THE EXPENSES OF RS. 44,52,054 /- DEBITED TO P&L A/C U/S 57(III) OF THE ACT AS BEING NECESSARY TO MAINTAIN CORPORATE STATUS OF THE APPELLANT. 1.2 WE HAVE CAREFULLY HEARD RIVAL SUBMISSIONS AND P ERUSED RELEVANT MATERIAL ON RECORD INCLUDING DOCUMENTS PLACED IN TH E PAPER-BOOK. WE HAVE ALSO DELIBERATED ON VARIOUS JUDICIAL PRONOUNCE MENTS AS CITED BEFORE US DURING HEARING OF THE APPEAL. OUR ADJUDICATION T O THE SUBJECT MATTER OF APPEAL WOULD BE AS GIVEN IN SUCCEEDING PARAGRAPHS. 2.1 BRIEFLY STATED, THE ASSESSEE BEING RESIDENT COR PORATE ASSESSEE EARNING RENTAL INCOME WAS ASSESSED FOR YEAR UNDER C ONSIDERATION U/S 143(3) ON 30/01/2014 WHEREIN THE INCOME OF THE ASSE SSEE WAS DETERMINED AT RS.53.20 LACS AFTER CERTAIN ADJUSTMEN TS / ADDITIONS AS AGAINST RETURNED INCOME OF RS.11.07 LACS E-FILED BY THE ASSESSEE ON 20/09/2012. ITA NO.3140/MUM/2018 DREAM MOTELS PVT. LTD. ASSESSMENT YEAR :2012-13 3 2.2 IT TRANSPIRED THAT THE MAIN OBJECT OF ASSESSEE COMPANY WAS TO RUN HOTELS, RESTAURANTS AND GUEST HOUSES ETC. THE ASSES SEE EARNED RENTAL INCOME OF RS.76 LACS WHICH WAS OFFERED UNDER THE HE AD INCOME FROM HOUSE PROPERTY. AFTER DEDUCTING MUNICIPAL TAXES FOR RS.7.99 LACS AN D AFTER CLAIMING STATUTORY DEDUCTION OF 30%, THE RENT AL INCOME THUS OFFERED TO TAX AMOUNTED TO RS.47.60 LACS. ALTHOUGH THE ASSE SSEE CLAIMED BUSINESS EXPENDITURE OF RS.44.52 LACS BUT DID NOT R EFLECT ANY BUSINESS INCOME. THE BROAD BREAK-UP OF BUSINESS EXPENDITURE, EXCEPT BMC TAXES, AS CLAIMED BY THE ASSESSEE WAS AS FOLLOWS: - NO. PARTICULARS AMOUNT (RS. ) (R/O) 1. DIRECTORS REMUNERATION 30.00 LACS 2. SALARIES 1.20 LACS 3. AUDIT FEES 3.37 LACS 4. PRELIMINARY EXPENSES WRITTEN OFF 0.43 LACS 5. PROFESSIONAL FEES 0.61 LACS 6. FILING FEES, OFFICE EXPENSES AND BANK CHARGES ETC. 0.90 LACS TOTAL 36.51 LACS THE PERUSAL OF FINANCIAL STATEMENTS, AS PLACED ON R ECORD, WOULD REVEAL THAT THE ASSESSEE HAS NOT PRACTICALLY CARRIED OUT A NY OTHER ACTIVITY EXCEPT EARNING RENTAL INCOME. THE MAJORITY OF THE OPERATIO NS HAVE BEEN FUNDED OUT OF SECURITY DEPOSITS OF RS.60 LACS RECEIVED BY THE ASSESSEE AGAINST LEAVE AND LICENSE AGREEMENT, THE INCOME FROM WHICH HAS BEEN OFFERED TO TAX AS INCOME FROM HOUSE PROPERTY . IN FIXED ASSET, THE ASSESSEE DO NOT HOLD ANY FIXED ASSET EXCEPT BUILDING AND THE ASSESS EE HAS DERIVED RENTAL INCOME BY RENTING OUT GROUND FLOOR OF A CERTAIN BUI LDING TO AN INDIVIDUAL NAMELY SHRI MAHENDRA SHIVJI UDESHI VIDE LEASE AND LICENSE AGREEMENT DATED 02/12/2011. ITA NO.3140/MUM/2018 DREAM MOTELS PVT. LTD. ASSESSMENT YEAR :2012-13 4 2.3 SINCE THE ASSESSEE DID NOT CARRY OUT ANY BUSINE SS ACTIVITY, LD. AO OPINED THAT EXPENSES WERE NOT IN RELATION TO ANY BU SINESS ACTIVITY AND THEREFORE, SAME WERE TO BE DISALLOWED AS BUSINESS E XPENDITURE. THESE EXPENSES WOULD BE RESTRICTED / ALLOWED WITHIN THE M EANING OF PROVISIONS OF SEC.24(A) OF THE ACT WHILE COMPUTING PROPERTY IN COME. 2.4 UPON PERUSAL OF LEAVE AND LICENSE AGREEMENT, IT TRANSPIRED THAT THE MUNICIPAL TAXES & OTHER OUTGOINGS WERE TO BE BORNE BY THE LICENSEE. THEREFORE, THE ASSESSEE COULD NOT UNDERTAKE TO PAY THE LIABILITY OF A THIRD PARTY. THEREFORE, THE DEDUCTION OF THE SAME, WHILE COMPUTING INCOME FROM HOUSE PROPERTY, WAS DENIED AND THE INCOME OF THE ASSESSEE WAS DETERMINED AT RS.53.20 LACS. 3.1 BEFORE LD. CIT(A), THE ASSESSEE FILED ADDITIONA L EVIDENCES WHICH WERE IN THE SHAPE OF LICENSE ISSUED BY HEALTH DEPAR TMENT OF MUNICIPAL CORPORATION OF GREATER MUMBAI IN SUPPORT OF THE FAC T THAT THE BUSINESS WAS ALREADY SET-UP. AGAINST THE SAME, A REMAND REPO RT WAS CALLED FROM LD. AO WHICH WAS DULY CONSIDERED. 3.2 UPON DUE CONSIDERATION, LD. CIT(A) OPINED THAT THE LICENSEE WAS REQUIRED TO PAY THE RENT AS WELL AS MUNICIPAL TAXES . THUS, THE TOTAL LIABILITY OF THE LICENSEE WOULD WORK OUT TO RS.83.9 9 LACS WHICH WOULD BE THE EFFECTIVE RENT. THEREFORE, ANNUAL LET-OUT VALUE OF THE PROPERTY WAS TO BE CONSIDERED AS RS.83.99 LACS AND CONSEQUENTLY, TH E DEDUCTION OF MUNICIPAL TAXES WOULD BE ALLOWABLE TO THE ASSESSEE. THE INCOME FROM HOUSE PROPERTY, COMPUTED IN THIS MANNER, WORKED OUT TO BE RS.53.20 LACS. 3.3 REGARDING DISALLOWANCE OF BUSINESS EXPENDITURE, IT WAS SUBMITTED THAT BUSINESS WAS SET UP THOUGH IT HAD NOT COMMENCE D AND THEREFORE, ITA NO.3140/MUM/2018 DREAM MOTELS PVT. LTD. ASSESSMENT YEAR :2012-13 5 THE EXPENDITURE WOULD BE ALLOWABLE IN TERMS OF DECI SION OF HONBLE BOMBAY HIGH COURT RENDERED IN WESTERN INDIA VEGETABLE PRODUCT LTD. V/S CIT (24 ITR 151) & CIT V/S AXIS PRIVATE EQUITY LTD. (ITA NO.1204 OF 2014). IN THE ALTERNATIVE, IT WAS SUBMITTED THAT THE EXPEN DITURE MAY BE ALLOWED U/S 57(III) OF THE ACT UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER, THE SAID PLEAS COULD NOT FIND FAVOR WITH L D. CIT(A), WHO OPINED THAT THE ASSESSEE COULD NOT FURNISH EVIDENCE OF HAV ING CARRIED OUT ANY BUSINESS ACTIVITY DURING THE YEAR. THEREFORE, IF AN Y EXPENDITURE WAS INCURRED IN RESPECT OF THE BUSINESS TO BE COMMENCED , THE SAME WAS TO BE AMORTIZED AND CLAIMED AS DEDUCTION AS PREOPERATI VE EXPENSES AFTER THE COMMENCEMENT OF BUSINESS. FINALLY, THE GROUNDS RAISED BY THE ASSESSEE WERE DISMISSED. IT WAS ALSO HELD THAT THE AFORESAID EXPENDITURE WOULD NOT BE ALLOWABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. AGGRIEVED, THE ASSESSEE IS UNDER FURTHER APPEAL BEF ORE US. 4.1 FIRST, WE TAKE UP THE ISSUE OF DEDUCTION OF BMC TAXES. THE PERUSAL OF LEAVE AND LICENSE AGREEMENT DATED 02/12/2011 AS PLACED ON RECORD WOULD REVEAL THAT THE ASSESSEE HAS LEASED OUT CERTA IN AREA ON THE GROUND FLOOR (REFERRED TO AS LICENSED PREMISES) OF THE BUILDING PREVIOUSLY KNOWN AS SAIL SAGAR (NOW KNOWN AS DREAM HOUSE) A WING STANDING ON PLOT NO. 5, DADAR MATUNGA DIVISION, NEAR DADAR R AILWAY STATION TO ONE SHRI MAHENDRA SHIVJI UDESHI FOR A SUM OF RS.9.50 LACS PER MONTH FOR THE FIRST 12 MONTHS STARTING FROM 01/08/2011. A CCORDINGLY, THE ASSESSEE HAS EARNED RENTAL INCOME FOR 8 MONTHS AMOU NTING TO RS.76 LACS DURING THE YEAR UNDER CONSIDERATION. AS PER CL AUSE-4, THE LICENSEE ALONE WAS LIABLE TO PAY ALL TAXES, LEVIES, OUTGOING S ETC. PERTAINING TO THE ITA NO.3140/MUM/2018 DREAM MOTELS PVT. LTD. ASSESSMENT YEAR :2012-13 6 LICENSED PREMISES. IN CASE OF FAILURE, THE LICENSOR MAY, AT ITS DISCR ETION, COULD MAKE SUCH PAYMENT AND THE SAME WAS REIMBURSAB LE BY LICENSEE. 4.2 AS PER ASSESSEES SUBMISSIONS DATED 23/01/2015 FILED BEFORE LD. AO, THE SAID PREMISES DREAM HOUSE WAS PURCHASED BY THE ASSESSEE ALONG WITH EXISTING OLD TENANTS FROM M/S SHAIL SAGAR INVESTMENTS PRIVATE LIMITED TO CARRY OUT ITS BUSINESS ACTIVITIES. THE GROUND FL OOR OF THE SAID PROPERTY WAS STATED TO BE OCCUPIED BY SOME BANK WHI CH WAS VACATED AND GIVEN ON RENT TO SHRI MAHENDRA SHIVJI UDESHI FOR A PERIOD OF 5 YEARS. THE RENT WAS STATED TO BE RECEIVABLE FROM 01/08/201 1. THE ASSESSEE ALSO SUBMITTED THAT SINCE NECESSARY CHANGES IN THE MUNICIPAL RECORDS WERE NOT AFFECTED, THE BMC RECEIPTS WERE ISSUED IN THE NAME OF LANDLORD I.E. M/S SHAIL SAGAR INVESTMENTS PVT. LTD. THE ASSESSEE ALSO SUBMITTED THAT THE TAXES WERE PAID BY THE ASSESSEE AND CLAIME D AS DEDUCTION. IT WAS FURTHER STATED THAT THE SAME SHALL BE OFFERED F OR TAX UPON RECEIPT OF THE SAME FROM THE LICENSEE. IN ANOTHER SUBMISSION D ATED 27/01/2015, THE ATTENTION WAS DRAWN TO THE FACT THAT THE MUNICI PAL TAXES WERE PAID FOR FULL BUILDING HAVING TOTAL AREA OF APPROX. 1247 SQU ARE METERS AND OUT OF THE SAME, AREA ONLY TO THE EXTENT OF 232 SQUARE MET ERS ON GROUND FLOOR WAS GIVEN ON RENT. IN OTHER WORDS, BMC TAXES OF RS. 7.99 LACS WERE STATED TO BE PAID FOR FULL PROPERTY AND NOT FOR GRO UND FLOOR ONLY. 4.3 UPON DUE CONSIDERATION OF FACTUAL MATRIX AS ENU MERATED HEREINABOVE, THE CRYSTAL-CLEAR POSITION THAT EMERGE S IS THE FACT THAT AS PER THE TERMS OF LEASE AND LICENSE AGREEMENT, THE L ICENSEE ALONE WAS LIABLE TO PAY ALL TAXES / OUTGOINGS WITH RESPECT OF LEASED PREMISES. HOWEVER, THE SAME COULD BE PAID BY THE ASSESSEE AND THE SAME WERE REIMBURSABLE BY LICENSEE. THIS POSITION HAS ALSO BE EN REITERATED BY THE ITA NO.3140/MUM/2018 DREAM MOTELS PVT. LTD. ASSESSMENT YEAR :2012-13 7 ASSESSEE IN ITS SUBMISSIONS. HOWEVER, THE LIABILITY TO PAY THE TAXES WAS WITH RESPECT OF LICENSED PREMISES ONLY WHICH WAS AP PROX. 19% (232 SQ.METERS OUT OF 1246.66 SQ. METERS) OF TOTAL AREA OF THE BUILDING. THEREFORE, 19% OF BMC TAXES AMOUNTING TO RS.7,99,51 9/- COULD BE ATTRIBUTED TO LICENSED PREMISES. THE PROPORTIONATE AMOUNT COMES TO RS.1,51,900/-. IN OUR OPINION, THIS AMOUNT SHALL BE ADDED BACK TO THE RENTAL INCOME OF RS.76 LACS EARNED BY THE ASSESSEE. CONSEQUENTLY, THE DEDUCTION OF RS.1,51,900/- SHALL BE ALLOWABLE TO TH E ASSESSEE. THE RENTAL INCOME, AFTER STATUTORY DEDUCTION OF 30%, WOULD WOR K OUT TO RS.53.20 LACS. WE HOLD SO. GROUND NO.1 & 2 STAND PARTLY ALLO WED. 5. SO FAR AS THE ISSUE OF ALLOWABILITY OF BUSINESS EXPENDITURE IS CONCERNED, AS NOTED BY US EARLIER IN PARA-2.2, THE ASSESSEE HAS NOT PRACTICALLY CARRIED OUT ANY OTHER ACTIVITY EXCEPT E ARNING RENTAL INCOME. THE MAJORITY OF THE OPERATIONS HAVE BEEN FUNDED OUT OF SECURITY DEPOSITS OF RS.60 LACS RECEIVED BY THE ASSESSEE AGAINST LEAV E AND LICENSE AGREEMENT, THE INCOME FROM WHICH HAS BEEN OFFERED T O TAX AS INCOME FROM HOUSE PROPERTY . IN FIXED ASSET, THE ASSESSEE DO NOT HOLD ANY FIXE D ASSET EXCEPT BUILDING, A PART OF WHICH HAVE BEEN GI VEN ON RENT. THE RELEVANT QUESTION WOULD NOT BE WHETHER THE BUSINESS WAS ACTUALLY SET UP OR NOT BUT THE RELEVANT QUESTION WOULD BE WHETHER T HE EXPENDITURE AS CLAIMED BY THE ASSESSEE WOULD PASS THE TEST LAID DO WN IN SECTION 37(1) WHICH MANDATE THAT THE EXPENDITURE SHOULD HAVE BEEN LAID AND EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. IN THE GIVEN FACTUAL MATRIX, WE FIND THAT THE ASSESSEE HAS NOT PRACTICALLY CARRIED OUT ANY BUSINESS ACTIVITY DURING THE YEAR. THEREFOR E, THE EXPENDITURE ON ACCOUNT OF DIRECTORS REMUNERATION WOULD NOT BE ALL OWABLE TO THE ITA NO.3140/MUM/2018 DREAM MOTELS PVT. LTD. ASSESSMENT YEAR :2012-13 8 ASSESSEE. HOWEVER, THE EXPENDITURE AS TABULATED AT SERIAL NOS. 2 TO 6 OF TABLE EXTRACTED IN PARA-2.2 ABOVE, COULD BE CONSIDE RED AS EXPENDITURE INCURRED TO MAINTAIN THE CORPORATE PERSONALITY OF T HE ASSESSEE AND THEREFORE, THE SAME WOULD BE ALLOWABLE BUSINESS EXP ENDITURE. THE QUESTION OF DEDUCTION OF THE EXPENDITURE UNDER THE HEAD INCOME FROM OTHER SOURCES DO NOT ARISE. GROUND NO.3 STAND PARTLY ALLOWED. THE ALTERNATIVE GROUND TO GROUND NO.3 STAND DISMISSED. 6. RESULTANTLY, THE APPEAL STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH MARCH, 2020. SD/- SD/- (MAHAVIR SINGH) (MANOJ KUM AR AGGARWAL) / VICE PRESIDENT / ACCOUNTANT MEMBER MUMBAI; DATED : 12/03/2020 SR.PS- JAISY VARGHESE !'#' / COPY OF THE ORDER FORWARDED TO : 1. &( / THE APPELLANT 2. )*&( / THE RESPONDENT 3. 1 ( ) / THE CIT(A) 4. 1 / CIT CONCERNED 5. 23),4 , 4 , / DR, ITAT, MUMBAI 6. 3567 / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI.