ACIT 25(3), MUMBAI V. MILESTONE REAL ESTATE FUND, MUMBAI

ITA 3142/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8085 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 04-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R P MEENA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI N.K. PRADHAN, ACCOUNTANT MEMBER ITA N O. 3142/MUM/2016 ( ASSESSMENT YEAR : 2011 12) ACIT 25(3) 6 TH FLOOR, C 10, PRATYASHKAR BHAVAN BKC, BANDRA (E) MUMBAI 400 051 . APPELLANT V/S M/S. MILESTONE REAL ESTATE FUND 602, HALLMARK BUSINESS PLAZA SANT DHYANESHWAR MARG OPP. GURUNANAK HOSPITAL MUMBAI PAN: AAAT15880L . RESPONDENT APPELLANT BY : SHR I R.P. MEENA RESPONDENT BY : S HRI HITESH TRIVEDI DATE OF HEARING 14/12/2017 DATE OF ORDER 15.12.2017 O R D E R PER SAKTIJIT DEY, J.M. THIS IS AN APPEAL BY THE DEPARTMENT AGAINST THE ORDER DATED 21/02/2016 OF LD. COMMISSIONER OF INCOME TAX (APPEALS) 37, MUMBAI FOR THE A.Y.2011 12. 2 2. THE EFFECTIVE GROUNDS RAISED BY THE DEPARTMENT ARE AS UNDER: (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 41,82,60,231/ CLAIMED UNDER SECTION.57(III) OF THE I.T. ACT. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN NOT CONSIDERING THAT THE ASSESSEE DID NOT SATISFY THE TEST OF PURPOSE AND NEXUS OF SUCH EXPENDITURE TO THE INTENTION OF EARNING SUCH INCOME. 3. BRIEFLY THE FACTS ARE , THE ASSESSEE IS A TRUST CREATED UNDER THE INDIAN TRUST ACT , 1 9 82 AND REGISTERED WITH SEC URITIES AND EXCHANGE BOARD OF INDIA (SEBI) AS A VENTURE CAPITAL FUND. THE MAIN ACTIVITY OF THE ASSESSEE IS TO FLOAT VARIOUS SCHEMES WITH FOCUS ON INVESTING PRIMARILY IN ENTITIES ENGAGED IN REAL ESTATE SECTOR. THE FUND IS FOR A DURATION OF 20 YEARS OR UNTIL THE EXPIRY OF THE LAST SCHEME OF THE FUND , WHICHEVER IS LATER. FOR THE IMPUGNED ASSESSMENT YEAR, ASSESSEE FILED ITS RETURN OF INCOME ON 31/07/2011 DECLARING TOTAL INCOME OF RS. 97,88,20,376/ . DURING THE ASSESSMENT PROCEEDING, THE ASSESSING OFFICER AFTER E XAMINING THE NATURE OF ACTIVITY CARRIED ON BY THE ASSESSEE WAS OF THE VIEW THAT THE ASSESSEE BEING A VENTURE CAPITAL FUND HAS TO BE ASSESSED AS PER THE PROVISIONS OF SECTION 115U OF THE ACT. HE FOUND THAT AS PER THE SAID PROVISION, THE VENTURE CAPITAL FUND DOES NOT HAVE ITS OWN INCOME BUT THE INCOME IS TAXABLE AT THE HANDS 3 OF THE INVESTORS/ CONTRIBUTORS TO THE FUND. HOWEVER, HE OBSERVED THE ASSESSEE HAS CHOSEN TO PAY TAX ITSELF AND HAS CLAIMED THAT THE DISTRIBUTED INCOME IN THE HANDS OF THE CONTRIBUTORS WILL BE TAX FREE. THOUGH , THE ASSESSING OFFICER FOUND THE AFORESAID CLAIM OF THE ASSESSEE TO BE CONTRARY TO THE STATUTORY PROVISION, HOWEVER, SINCE THE ASSESSEE HAS VO LUNTARILY SUBJECTED ITSELF TO TAX , THE ASSESSING OFFICER ACCEPTED THE DECISION OF THE ASSESSE E. FROM THE FINANCIAL STATEMENT OF THE ASSESSEE, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED HUGE EXPENSES WHILE COMPUTING ITS TAXABLE INCOME. THE ASSESSING OFFICER OBSERVED , THE ASSESSEE AS SUCH HAD NO BUSINESS I NCOME BUT IS MERELY AN INVE STOR, H ENCE, ONLY THE EXPENSES RELATED TO THE INVESTMENT ACTIVITIES CAN BE ALLOWED. THE ASSESSING OFFICER FOUND THAT THE NET TAXABLE INCOME OFFERED BY THE ASSESSEE WAS MAINLY DERIVED FROM INTEREST OUT OF INVESTMENT MADE IN OPTIONAL FULLY CONVERTIBLE DEBENTURES OF VARIOUS PRIVATE LIMITED COMPANIES WHICH ARE DIRECTLY CONNECTED TO THE ASSESS EE. FURTHER , THE ASSESSEE HAD EARNED CERTAIN CAPITAL GAIN ON REDEMPTION OF MUTUAL FUNDS, SALE OF SHARES, LONG TERM CAPITAL GAIN ON SALE OF SHARES AND DIVIDEND INCOME. FROM THE DETAILS FURNISHED, THE ASSESSING OFFICER FOUND THAT DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAD SEVEN SCHEMES RUNNING , AND THE ASSESSEE HAS CLAIMED EXPENDITURE OF RS. 50,01,13,881 / TOWARDS INVESTMENT ADVISORY FEES, MOBILIZATION EXPENSES AND OTHER GENERAL 4 EXPENSES. AFTER EXAMINING THE CLAIM OF THE ASSESSEE, THE ASSESSING OFFIC ER ULTIMATELY CONCLUDED THAT THE ASSESSEE IS NOT ENT ITLED TO CLAIM INVESTMENT ADV ISORY FEES AND MOBILIZATION EXPENSES. AS FAR AS OTHER ADMINISTRATIVE AND OPERATIVE EXPENSES ARE CONCERNED , THE ASSESSING OFFICER RESTRICTED IT TO 50% OF THE EXPENDITURE CLAIME D BY THE ASSESSEE. 4. AGAINST THE ABOVE SAID DISALLOWANCE MADE BY THE ASSESSING OFFICER THE ASSESSEE WENT IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 5. LD. COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND VER IFYING THE FACTS AND MATERIALS ON RECORD FOUND THAT WHILE DECIDING IDENTICAL ISSUE IN ASSESSEES OWN CASE, IN A.Y.2009 10 , HE HAD DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. THEREFORE, FOLLOWING THE SAID VIEW LD. FIRST APPELLATE AUTHORITY DELET ED THE DISALLOWANCE MADE ON ACCOUNT OF INVESTMENT ADVISORY FEES AND MOBILIZATION EXPENSES AMOUNTING TO RS. 41,82,60,231/ . 6. AGAINST THE AFORESAID DECISION OF THE FIRST APPELLATE AUTHORITY THE DEPARTMENT IS BEFORE US. 5 7. WE HAVE HEARD THE PARTIES. AT THE VERY OUTSET, THE LD. AUTHORISED REPRESENTATIVE SUBMITTED BEFORE US , WHILE DECIDING THE DEPARTMENTS APPEAL IN ASSESSEES OWN CASE FOR A.Y.2009 10 IN ITA NO.2587/MUM/2015 DATED 15/09/2017, THE TRIBUNA L HAS UPHELD THE DECISION OF COMMISSIONER (A PPEALS ) WHILE DISMISSING THE APPEAL OF THE DEPARTMENT. 8. THE LD. DEPARTMENTAL REPRESENTATIVE AGREED TO THE AFORESAID SUBMISSIONS OF THE ASSESSEE. 9. ON PERUSAL OF THE GROUNDS RAISED AND FACTS INVOLVED, IT IS EVIDENT THAT THE ISSUE RAISED IN THIS APPEAL IS IDENTICAL TO THE ISSUE RAISED IN THE APPEAL PREFERRED BY THE DEPARTMENT BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y.2009 10. THE TRIBUNAL WHILE DECIDING THE ISSUE IN ITS ORDER REFERRED TO ABOVE, HAS HELD AS UNDER: 7. WE HAVE HEARD RIVAL CONTENTION S AND PERUSED THE MATERIAL ' AVAILABLE ON RECORD. UNDISPUTEDLY, THE ASSESSEE IS A VENTURE CAPITAL FOUND AND AS PER SECTION 115U OF THE ACT, THE INCOME GENERATED FROM SUCH FUND IS TAXABLE AT THE HANDS OF THE INVESTOR / CONTRIBUTORS AND NOT AT THE HA NDS OF THE ASSESSEE. HOWEVER, THE ASSESSEE HAS CHOSEN TO SUBJECT ITSELF TO TAX IN RESPECT OF THE INTEREST EARNED ON DEBENTURE. IN FACT, THE ASSESSING OFFICER HAS ALSO ACCEPTED THE AFORESAID FACTUAL POSITION.. AS COULD BE SEEN IN THE RELEVANT PREVIOUS Y EAR, THE ASSESSEE WAS HAVING FOUR SCHEMES AS UNDER: - I) IL&FS MILE STONE FUND - 1; II) MILE STONE DOMESTIC SCHEME - I III) IL&FS MILE STONE FUND - II; AND IV) MILE STONE DOMESTIC SCHEME - II. 8. THERE IS NO DISPUTE THAT DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS NEITHER EARNED ANY INCOME NOR CLAIMED ANY EXPENDITURE IN RESPECT OF THE SCHEMES AT SERIAL NO.(III) AND (IV) ABOVE. HOWEVER, IN RESPECT OF SCHEMES AT 6 SERIAL NO.(I) AND (II), ASSESSEE EARNED TAXABLE INCOME OF RS.46,23,38,925 AND AFTER CLAIMING EXPENDITURE OF RS.18,62,63,876, HAS SHOWN NET TAXABLE INCOME OF RS.26,77,22,386. WHILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFICER HAS DISALLOWED THE ENTIRE EXPENDITURE CLAIMED ON THE REASONING THAT SUCH EXPENDITURE NOT BEING RELATED TO EARNING OF INTEREST INCOME I S NOT ALLOWABLE UNDER SECTION 57(III) OF THE ACT. FROM THE DETAILED BREAK - UP OF EXPENDITURE SUBMITTED BEFORE THE DEPARTMENTAL AUTHORITIES IT IS TO BE NOTED THAT THEY ARE UNDER FOLLOWING HEADS: - I) INVESTMENT ADVISORY FEES II) MOBILIZATION AND PROMOTION EXPENSES; AND III) OTHER ADMINISTRATIVE AND OPERATING EXPENSES; 9. AS EVIDENT ON RECORD, ON THE BASIS OF SUBMISSIONS MADE BY THE ASSESSEE LEARNED COMMISSIONER (APPEALS) CALLED FOR A REMAND REPORT FROM THE ASSESSING OFFICE R. IN THE COURSE OF REMAND PROCEEDING BEFORE THE ASSESSING OFFICER, THE ASSESSEE JUSTIFIED THE CLAIM OF EXPENDITURE PRODUCING VARIOUS EVIDENCES INCLUDING THE AGREEMENT WITH INVESTMENT ADVISOR. AS COULD BE SEEN, THE ASSESSING OFFICER EXAMINING IN DETAILS TH E SUBMISSIONS OF THE ASSESSEE AND THE MATERIALS ON RECORD ACCEPTED THE INVESTMENT ADVISORY (MANAGEMENT) FEES AND MOBILIZATION AND PROMOTIONAL EXPENSES TO BE IN TERMS WITH THE AGREEMENT, HENCE, ALLOWABLE AS PER THE PROVISIONS OF SECTION 57(III) OF THE ACT. HOWEVER, HE DISPUTED THE CLAIM OF OTHER ADMINISTRATIVE AND OPERATING EXPENSES TO THE TUNE OF RS.2,34,81,823, .THE RELEVANT OBSERVATIONS OF THE ASSESSING OFFICER IN THE REMAND REPORT ARE EXTRACTED HEREUNDER FOR BETTER CLARITY: - . '1. ON DETAI LED VERIFICATION, IT HAS BEEN FOUND THAT THE MANAGEMENT FEE AND MOBILIZATION FEE HAVE BEEN INCURRED BY THE ASSESSEE TO AVAIL THE VARIOUS SERVICES FROM THE SERVICE PROVIDERS AS PER THE INVESTMENT MANAGEMENT AGREEMENTS AND AS DETAILED SUBMITTED BY THE ASSESS EE AND THESE EXPENSES COULD TO BE SAID TO HAVE BEEN INCURRED FOR EARNING INTEREST AND OTHER INCOME. CONSIDERING THE PURPOSE OF THESE EXPENSES THESE EXPENDITURE WOULD BE ALLOWABLE AS PER THE PROVISIONS OF SECTION 57(III) OF THE LT. ACT, 1961. IT IS, HOWEVE R, NOTICED THAT THE ASSESSEE IS CLAIMING HUGE EXPENSES IN THE NATURE PROMOTIONAL EXPENSES AND EXPENSES UNDER THE HEAD OTHER ADMINISTRATIVE EXPENSES ADMINISTRATIVE & OPERATING EXPENSES' TO THE TUNE OF RS.2,34,81,8231/ - .. THE ADMINISTRATIVE & O PERATING EXPENSES ARE IN THE NATURE OF LEGAL EXPENSES, TRAVELLING EXPENSES AND OTHERS. ON VERIFICATION OF BILLS AND VOUCHERS IN RESPECT OF THESE EXPENSES, SOME OF THE BILLS WITH VOUCHERS REGARDING IT ARE NOT IN THE NAME OF ASSESSES OR, ANY OF ITS SCHEME S. BUT ON THE NAME OF OTHER WITH WHICH ASSESSEE HAS ENTERED INTO INVESTMENTS ADVISORY AGREEMENT. THE ASSESSEE S ALREADY PAYING FEES UNDER THE 7 INVESTMENT MANAGEMENT AGREEMENTS, IT IS NOT CLEAR AS TO WHY THESE EXPENSES NEED TO BE INCURRED BY THE ASSESSEE WHILE DETAILED RESPONSIBILITIES HAVE BEEN FIXED ON THE SERVICE PROVIDERS. ' 10, THUS, FROM THE AFORESAID OBSERVATIONS OF THE ASSESSING OFFICER IN THE REMAND REPORT IT IS MANIFEST, OUT OF THE TOTAL EXPENDITURE CLAIMED OF RS.18,62,63,876, THE ASSESSING OFFICER HAS ACCEPTED THAT MAJOR PART OF THE EXPENDITURE HAS BEEN INCURRED FOR EAR NING THE INTEREST AND OTHER INCOME, HENCE, ALLOWABLE UNDER SECTION 57(III) OF THE ACT. HE HAS ONLY DISPUTED THE ALLOWABILITY OF EXPENDITURE TO THE TUNE OF RS. 2,34,81,023/ - INCURRED UNDER THE HEAD OTHER ADMINISTRATIVE AND OPERATING E XPENDITURE. THE REASONING OF THE ASSESSING OFFICER IS, SUCH EXPENDITURES ARE IN THE NATURE OF LEGAL EXPENDITURE, TRAVELLING EXPENSES, ETC., AND ON VERIFICATION OF BILLS AND VOUCHERS IT IS FOUND THAT THEY ARE NOT IN THE NAME OF ASSES SEE OR ANY OF ITS SCHEMES. IN OUR VIEW, THE LEARNED COMMISSIONER (APPEALS) HAS COUNTERED THESE REASONINGS OF THE ASSESSING OFFICER EFFECTIVELY. AS COULD BE SEEN THE LEARNED COMMISSIONER (APPEALS) AFTER EXAMINING THE DETAILS OF EXPENDITURE HAS FOUND THAT TH E ASSESSEE HAS FURNISHED THE DETAILS OF INCURRED SHOWING THE SPECIFIC INSTANCES FOR INCURRING SUCH EXPENDITURE AND WORK FOR WHICH SUCH EXPENDITURE WAS INCURRED. HE FOUND THAT SUCH EXPENDITURE RELATED TO REIMBURSEMENT FOR ROC FILING FEES, LEGAL EXPENDITURE PERTAINING TO SPECIFIC PROJECT, FOR ARRANGEMENT OF LOWER TDS CERTIFICATE, ETC. HE HAS FOUND THAT EXPENDITURE UNDER THE HEAD PRINTING AND STATIONERY FOR PRINTING OF INVESTOR'S NEWS LETTERS WHICH ARE REQUIRED FOR ANY .ENTITY WORKING IN THE VENTURE CAPITAL F IELD. HE HAS ALSO GIVEN A FACTUAL FINDING THAT THE ASSESSEE TRUST DOES NOT HAVE ANY EMPLOYEE TO CARRY OUT THE DAY - TO - DAY ADMINISTRATIVE AND TASK RELATING TO DUE DILIGENCE. NO MATERIAL OR EVIDENCE HAS BEEN BROUGHT BEFORE US BY THE LEARNED DEPARTMENTAL REPRE SENTATIVE TO CONTROVERT THE AFORESAID FACTUAL FINDING OF THE LEARNED COMMISSIONER (APPEALS). LEARNED DEPARTMENTAL REPRESENTATIVE WAS ALSO UNABLE TO FACTUALLY ESTABLISH THAT THE EXPENDITURE INCURRED WERE NOT IN TERMS WITH THE AGREEMENT. IT IS ALSO A FACT TH AT THE ASSESSEE HAS VOLUNTARILY DISALLOWED AND AMOUNT OF F 68,14,151 UNDER SECTION 14A OF THE ACT. ON ACCOUNT OF EXPENDITURE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. THUS, IN VIEW OF THE AFORESAID FACT, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDE R OF THE LEARNED COMMISSIONER (APPEALS). ACCORDINGLY, GROUNDS RAISED ARE DISMISSED. 10. THERE BEING NO DIFFERENCE IN FACTS, RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE CO ORDINATE BENCH, WE UPHOLD THE IMPUGNED ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS) BY DISMISSING THE GROUNDS RAISED. 8 11. IN THE RESULT, DEPARTMENTALS APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15.12.2017 SD/ - SD/ - SD/ - N.K. PRADHAN ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 15.12.2017 COPY OF THE ORDER FORWARDED TO : (1) THE ASSESSEE; (2) THE REVENUE; (3) THE CIT(A); (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, ITAT, MUMBAI; (6) GUARD FILE . TRUE COPY BY ORDER KARUNA SR. PRIVATE SECRETARY (DY./ASSTT. REGISTRAR) ITAT, MUMBAI