STALLION INVESTMENT P. LTD, MUMBAI V. ITO 8(3)-2, MUMBAI

ITA 3354/MUM/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2605 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-12-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 19-11-2009
• Assessment Year: 2006-2007
• Appeal Filed On: 21-05-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANKUR GARG SR
• Assessee Lawyers: VIJAY KOTHARI
• Keywords: Business expenditure; Capital Gains

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, MUMBAI. BEFORE SHRI R.V.EASWAR, SENIOR VICE PRESIDENT I.T.A. NO 3354/MUM/2009 (ASSESSMENT YEAR : 2006-07 ) STALLION INVESTMENTS P.LTD. UNION COMMERCIAL HOUSE, 9, WALLACE STREET, BASEMENT, FORT, MUMBAI-400 001. PAN:AABCS8551N VS. THE INCOME TAX OFFICER, WARD-8(3)(2), 2 ND FLOOR, AAYAKAR BHAVAN, MUMBAI-400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. VIJAY KOTHARI RESPONDENT BY : MR. ANKUR GARG, SR.AR O R D E R THIS APPEAL FILED BY THE ASSESSEE RELATES TO THE ASSESSMENT YEAR 2006-07. THE ASSESSEE IS A PRIVATE LIMITED COMPANY DERIVING INCOME MAINLY FROM LETTING OUT ITS PROPERTIES. IN THE RETURN FILED FOR THE YEAR UNDER APPEAL THE A SSESSEE DECLARED NEGATIVE RENTAL INCOME OF RS.4,373/- UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IN ARRIVING AT THE NE GATIVE INCOME, THE ASSESSEE CLAIMED DEDUCTION OF RS.83,242/- AGAIN ST THE ANNUAL RENTAL INCOME OF RS.78,869/-. THE BREAK UP O F THE FIGURE OF RS.83,242/- IS AS BELOW:- DETAILS OF ESTABLISHMENT AND STATUTORY EXPENSES: DIRECTORS REMUNERATION 2,07,640 MEDICAL EXPENSES PAID TO THE DIRECTORS 15,000 2,22,640 30% THEREOF 66,792 PAYMENT TO AUDITORS 10,265 PRINTING & STATIONERY 906 ELECTRICITY CHARGES 10% OF TOTAL RS.52,786/- 5,279 _______ 83,242 ITA NO.3354/MUM/09 2 THE NEGATIVE INCOME OF RS.4,373/- WAS SOUGHT TO BE ADJUSTED AGAINST THE LONG TERM CAPITAL GAINS OF RS.32,188/- WHICH AROSE ON SALE OF THE OFFICE PREMISES DURING THE YEAR AND THE NET INCOME OF RS. 26,815/- WAS SHOWN. 2. WHILE COMPLETING THE ASSESSMENT UNDER SECTION 14 3(3) OF THE INCOME TAX ACT, THE ASSESSING OFFICER DISALLOWE D THE EXPENSES OF RS.83,242/- ON THE GROUND THAT THEY WE RE NOT ALLOWABLE UNDER SECTION 24 AND THE ASSESSEE COULD N OT FURNISH ANY SATISFACTORY EXPLANATION FOR THE CLAIM. ACCORD INGLY THE PROPERTY INCOME WAS TAKEN AT RS.78,869/-, ALONG WIT H THE CAPITAL GAINS OF RS.32,188/-. THE DISALLOWANCE OF THE EXPENSES OF RS.83,242/- WAS QUESTIONED BEFORE THE CIT(A) AND IT WAS POINTED OUT THAT THE EXPENDITURE CONSISTED OF AUDIT FEES, ROC FILING FEES, DIRECTORS REMUNERATION ETC. WHICH WER E EXPENDITURE ESSENTIAL TO RUN THE COMPANY AND HENCE SHOULD BE AL LOWED. A JUDGEMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF GANGA PROPERTIES LTD. 199 ITR 94 WAS CITED IN SUPPORT OF THE CLAIM. THE CIT(A) HOWEVER HELD THAT THE JUDGEMENT WAS NOT APPLICABLE SINCE IN THAT CASE THE EXPENSES WERE CLAIMED AGAINS T THE INCOME ASSESSABLE UNDER THE HEAD OTHER SOURCES AND NOT AGAINST THE PROPERTY INCOME. HE ALSO HELD THAT THERE IS NO PROV ISION IN SECTION 24 TO ALLOW THE EXPENSES CLAIMED BY THE ASS ESSEE. HE FURTHER HELD THAT THE ASSESSEE DID NOT CARRY ON ANY BUSINESS IN THE EARLIER OR LATER YEARS. IN THIS VIEW OF THE MAT TER, HE SUSTAINED THE DISALLOWANCE OF THE EXPENSES OF RS.83,242/- . 3. IN THE FURTHER APPEAL BEFORE THE TRIBUNAL, THE A SSESSEE HAS REITERATED ITS CLAIM AND HAS DRAWN MY ATTENTION TO THE JUDGEMENT OF THE BOMBAY HIGH COURT IN HINDUSTAN CHE MICAL WORKS LTD. VS. CIT (1980) 124 ITR 561. IT HAS ALSO BEEN SUBMITTED THAT THE COMPANY IS IN THE REAL ESTATE BU SINESS AND IN ORDER TO CARRY ON THE BUSINESS, IT HAS TO NECESS ARILY INCUR ITA NO.3354/MUM/09 3 EXPENSES SUCH AS AUDITORS FEE, PRINTING AND STATIO NERY, MINIMUM ELECTRICITY EXPENDITURE ETC. AND AS A PRIVA TE LIMITED COMPANY, IT ALSO NEEDS TO HAVE DIRECTORS WHO REALL Y CONTROL AND DIRECT THE ASSESSEES BUSINESS. IT IS THEREFORE SUB MITTED THAT THE EXPENSES OF RS.83,242/-, IF NOT ALLOWABLE UNDER THE HEAD PROPERTY, SHOULD BE COMPUTED AS A LOSS UNDER THE HE AD BUSINESS WITH THE RESULT THAT THE LOSS WOULD GET ADJUSTED AGAINST THE PROPERTY INCOME UNDER SECTION 71 OF THE ACT. 4. THE AFORESAID CONTENTIONS ARE CONTROVERTED ON B EHALF OF THE DEPARTMENT AND IT HAS BEEN POINTED OUT THAT EVE N IF SOME EXPENDITURE IS TO BE INCURRED NECESSARILY ON THE CO NDUCT OF THE BUSINESS, THAT CAN BE LIMITED ONLY TO BARE MINIMUM EXPENDITURE OF A STATUTORY NATURE SUCH AS AUDIT FE ES, ROC FEES ETC. AND THERE IS NO SCOPE FOR ALLOWING ELECTRICIT Y CHARGES OR DIRECTORS REMUNERATION. IT IS POINTED OUT THAT THE BUSINESS OF A COMPANY CAN BE CARRIED ON EVEN IN THE ABSENCE OF D IRECTORS. IT IS FURTHER SUBMITTED THAT SECTION 24 DOES NOT PERMI T ANY SUCH EXPENDITURE TO BE ALLOWED AGAINST THE ANNUAL LETTIN G VALUE OF THE PROPERTY. MY ATTENTION WAS ALSO DRAWN TO THE JUDGEM ENT OF THE BOMBAY HIGH COURT IN CHINAI AND CO. PVT. LTD. VS. C IT (1994) 206 ITR 616 AND THE JUDGEMENT OF THE ALLAHABAD HIGH COURT IN J K MANUFACTURERS LTD. VS. CIT., (2008) 300 ITR 297 . 5. I HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION S. I AGREE WITH THE DEPARTMENT THAT THERE IS NO PROVISION IN S ECTION 24 TO ALLOW ANY OF THE EXPENSES OUT OF THE AMOUNT OF RS.8 3,242/-. HOWEVER, IT IS TO BE NOTED THAT THE BUSINESS OF THE ASSESSEE COMPANY IS TO LET OUT ITS PROPERTY AND ALSO IN REAL ESTATE. IT HAS SOLD OFFICE PREMISES DURING THE YEAR AND HAS OFFERE D CAPITAL GAINS OF RS.32,188/-. THE INCOME FROM LETTING OUT THE PROPERTIES HELD BY THE COMPANY IS ASSESSABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY ONLY BECAUSE OF THE SP ECIFIC ITA NO.3354/MUM/09 4 PROVISIONS OF THE INCOME TAX ACT, PARTICULARLY SECT ION 22. EVEN IF IT IS THE BUSINESS OF THE COMPANY TO LET OUT PROPER TIES, THE INCOME FROM SUCH ACTIVITY HAS TO BE BROUGHT TO TAX UNDER THE HEAD INCOME FROM HOUSE PROPERTY BECAUSE OF THE P ROVISIONS OF SECTION 22, NOTWITHSTANDING THAT IT IS THE BUSINESS OF THE COMPANY. HOWEVER, THE QUESTION WHETHER THE ASSESSEE CARRIED ON BUSINESS DURING THE YEAR CANNOT BE JUDGED WITH R EFERENCE TO THE HEAD OF INCOME UNDER WHICH THE INCOME EARNED B Y THE COMPANY WAS ASSESSED FOR INCOME TAX PURPOSES. THAT QUESTION HAS TO BE EXAMINED AND DECIDED ON COMMERCIAL PRINCI PLES. APPLYING THESE PRINCIPLES, I AM OF THE VIEW THAT I T MUST BE HELD THAT THE ASSESSEE DID CARRY ON THE BUSINESS FOR WHI CH IT WAS INCORPORATED NAMELY LETTING OUT OF PROPERTIES AND T HE REAL ESTATE BUSINESS. IN CARRYING OUT THESE ACTIVITIES AND IN T HUS CARRYING ON BUSINESS AS UNDERSTOOD BY COMMERCIAL PRINCIPLES, DIVORCED FROM THE HEADS OF INCOME UNDER WHICH THE INCOME IS ASSESSABLE AS PER THE INCOME TAX ACT, THE ASSESSEE NEEDS THE S ERVICES OF ITS DIRECTORS AND ALSO IS REQUIRED TO INCUR CERTAIN MIN IMUM EXPENDITURE AND SOME STATUTORY EXPENDITURE SUCH AS ROC FILING FEES, STATUTORY AUDITORS FEES ETC. IN THIS VIEW OF THE MATTER, IT SEEMS THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE HAS TO BE SEPARATELY COMPUTED UNDER THE HEAD BUSINESS . TH E PAYMENT OF RS.10,265/- TO THE STATUTORY AUDITORS IS ALLOWAB LE AS BUSINESS EXPENDITURE, THE PRINTING AND STATIONERY EXPENSES O F RS.906/- IS ALSO A SMALL AMOUNT WHICH APPARENTLY WAS NECESSARIL Y INCURRED. OUT OF THE ELECTRICITY CHARGES OF RS.52,786/- THE A SSESSEE HAS CLAIMED ONLY 10% THEREOF AS ATTRIBUTABLE TO THE BUS INESS ACTIVITIES WHICH I CONSIDER REASONABLE. AS REGARDS THE DIRECTORS REMUNERATION, I AM UNABLE TO AGREE WITH THE ASSESS EE THAT THE MEDICAL EXPENSES OF RS.15,000/- PAID TO THEM HAS AN YTHING TO DO WITH THE CARRYING ON OF THE BUSINESS. OUT OF THE REMUNERATION OF RS.2,07,640/-, I AM OF THE VIEW TH AT 20% THEREOF MAY BE CLAIMED AND ALLOWED UNDER THE HEAD BUSINESS. ITA NO.3354/MUM/09 5 THUS THE FOLLOWING EXPENSES HAVE TO BE ALLOWED UNDE R THE HEAD BUSINESS:- 1.DIRECTORS REMUNERATION (20% OF 2,07,640/-) R S.41,528/- 2.PAYMENT TO AUDITORS RS.10,265/- 3.PRINTING & STATIONERY RS. 906/- 4.ELECTRICITY EXPENSES RS. 5,279 /- TOTAL RS.57,978/- 6. THE AFORESAID LOSS OF RS.57,978/- COMPUTED UNDER THE HEAD BUSINESS REQUIRES TO BE SET OFF AGAINST THE INCOME OF RS.78,869/- COMPUTED UNDER THE HEAD PROPERTY AS P ER SECTION 71 OF THE ACT AND THE RESULTANT FIGURE, ADDED TO TH E CAPITAL GAINS OF RS.32,188/- WILL CONSTITUTE THE TOTAL INCOME OF THE ASSESSEE. 7. IN CHINAI & CO (SUPRA) CITED BY THE DEPARTMENT, IT WAS HELD THAT AFTER THE MANAGING AGENCY SYSTEM WAS ABOL ISHED, THE MERE HOLDING OF SHARES OF THE MANAGED COMPANY CANNO T AMOUNT TO CARRYING ON OF THE BUSINESS. THE PRESENT CASE ST ANDS ON AN ENTIRELY DIFFERENT FOOTING WHERE THE BUSINESS OF LE TTING OUT PROPERTIES IS CONTINUED. IN THE CASE OF J.K. MANUFA CTURERS (SUPRA) IT WAS SPECIFICALLY FOUND THAT THE ASSESSEE HAD DISCONTINUED ITS BUSINESS FOR A NUMBER OF YEARS AND THE DIRECTORS HAD ALSO STATED IN THEIR REPORT THAT THER E WAS NO POSSIBILITY OF THE SAME BEING REVIVED. THUS IT WAS A CASE OF THE ASSESSEE CARRYING ON NO BUSINESS AT ALL DURING THE RELEVANT PREVIOUS YEAR. THESE CASES CITED BY THE DEPARTMENT ARE THUS DISTINGUISHABLE. 8. THE ASSESSING OFFICER IS DIRECTED TO MODIFY THE ASSESSMENT AS ABOVE. THE APPEAL OF THE ASSESSEE IS THUS PARTL Y ALLOWED. ORDER PRONOUNCED ON THIS 8 TH DAY OF DECEMBER, 2009. SD/- ( R.V.EASWAR ) SENIOR VICE PRESIDENT MUMBAI, DATED 8 TH DECEMBER, 2009. SOMU ITA NO.3354/MUM/09 6 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-8, MUMBAI. 4. THE CIT(A)-XXIX MUMBAI 5. THE DR SMC BENCH /TRUE COPY/ BY ORDE R ASSTT. REGISTRAR, I.T.A.T, MUMBAI