M/S. JMP INVESTMENTS PVT. LTD, MUMBAI V. THE ITO 2(2)(1), MUMBAI

ITA 3877/MUM/2007

• Counselvise Citation: 387719914 RSA 2007
• Duration Of Justice: 4 year(s) 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 20-10-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 17-05-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: D S SUNDER
• Assessee Lawyers: A V SONDE
• Keywords: Business income; Business expenditure
• Section: 131

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J : MUMBAI BEFORE SHRI R.S. PADVEKAR, ( JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.3877/MUM/2007 ASSESSMENT YEAR : 2003-04 M/S. JMP INVESTMENTS PVT. LTD. ROHIT CHAMBERS JANMABHOOMI MARG FORT MUMBAI-400 001. ..( APPELLANT ) P.A. NO. (AAACV 1320 R) VS. INCOME TAX OFFICER WARD 2(2)(1) ROOM NO.549, 5 TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400020. ..( RESPONDENT ) APPELLANT BY : SHRI A.V. SONDE RESPONDENT BY : SHRI D. S. SUNDER DATE OF HEARING : 20.10.2011 DATE OF PRONOUNCEMENT : 28 TH OCTOBER, 2011 O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 16.1.2007 OF CIT(A) FOR THE ASSESSMENT YEAR 2003-04 . THE ASSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON THREE DIFFERENT GROUN DS WHICH HAVE BEEN DEALT WITH IN THE SUBSEQUENT PARAS. ITA NO.3877/M/07 A.Y:03-04 2 2. THE FIRST DISPUTE IS REGARDING TREATMENT OF INTE REST INCOME AS INCOME FROM OTHER SOURCES BY THE AO AND DISALLOWANCE OF E XPENSES. THE AO NOTED THAT THE ASSESSEE DURING THE YEAR HAD DECLARED INTE REST INCOME OF RS.55,85,606/- WHICH WAS ONLY FROM THE TWO PARTIES I.E. HDFC BANK LIMITED AND GROUP CONCERN VFC INDUSTRIES PVT. LTD. AGAINS T THE SAID INCOME, ASSESSEE HAD CLAIMED HUGE EXPENSES UNDER DIFFERENT HEADS TOTALING TO RS.41,78,892/- DETAILS OF WHICH HAVE BEEN GIVEN IN PARA-5 OF THE ASSESSMENT ORDER. THE ASSESSEE EXPLAINED THAT THE ASSESSEE COMPANY HAD BEEN INCORPORATED AS M/S. VIJAY FLEXIBLE CONTAINERS COMPANY LTD. ON 12.6.1969 AND THE NAME WAS CHANGED TO VFC LTD. ON 1 6.3.1993 AND AGAIN TO JMP INVESTMENT LTD. WHICH IS THE PRESENT NAME, FROM 3.1.1996 THE BUSINESS OF THE ASSESSEE WAS MANUFACTURING OF PRINTED COTTO NS AND INVESTMENT IN SHARES OF GROUP COMPANIES AS WELL AS INVESTMENT IN PROPERTIES. THE MANUFACTURING ACTIVITIES OF THE ASSESSEE COMPANY WE RE TAKEN OVER BY M/S. RADHIKA PRIVATE LIMITED IN APRIL 94 AND MAJORITY OF THE STAFF WERE ALSO TRANSFERRED. HOWEVER, SOME SENIOR EXECUTIVES WERE RE TAINED WITH A VIEW TO CONSIDER THE PROPOSAL FOR EARNING OTHER INCOME IN F UTURE. SUBSEQUENTLY, THE ASSESSEE HAS EARNED INCOME FROM COMMISSION FOR PROC URING DEPB LICENSES OF CLIENTS. THEREFORE, EXPENSES CLAIMED SHOULD BE ALLO WED. 2.1 THE AO HOWEVER DID NOT ACCEPT THE EXPLANATION. IT WAS OBSERVED BY HIM THAT THOUGH THE NAME OF THE COMPANY WAS CHANGED TO M/S. JMP CO. IN 1996, THE ASSESSEE TILL ASSESSMENT YEAR 2000-01 WA S SHOWING THE BUSINESS OF MANUFACTURING OF PACKAGING MACHINE. IN ASSESSME NT YEARS 2001-02 AND ITA NO.3877/M/07 A.Y:03-04 3 2002-03 THE RELEVANT COLUMN RELATING TO BUSINESS WA S LEFT BLANK. AO, THEREFORE, DID NOT ACCEPT THE CLAIM THAT SUDDENLY I N ASSESSMENT YEAR 2003- 04 THE ASSESSEE BECAME AN INVESTMENT COMPANY. THE AO ALSO OBSERVED IN ASSESSMENT YEAR 1995-96, THE ASSESSEE RECEIVED DIVI DEND INCOME FROM ONLY TWO COMPANIES AND BEFORE AO AS WELL AS CIT(A) IT HA D BEEN CONTENTED THAT DIVIDEND HAD BEEN RECEIVED FROM THE SISTER CONCERNS SITUATED IN THE SAME BUILDING AND THEREFORE, THERE WAS NO EXPENDITURE IN CURRED FOR EARNING DIVIDEND INCOME. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAD CLAIMED SALARY EXPENDITURE OF RS.12,97,060/- OUT OF WHICH RS.5,85,960/- WAS PAID TO SHRI A.S. MEHTA; RS.2,50,150/- TO SHRI M.M. DALAL. T HE STATEMENT OF THESE EMPLOYEES HAD BEEN RECORDED UNDER SECTION 131 ON 4. 1.2005 AND BOTH STATED THAT THEY HAD NO SPECIFIC SERVICES FOR EARNING IN TEREST INCOME AND THAT THE INVESTMENT DECISIONS WERE TAKEN ONLY BY THE CHAIRMAN AND THEY HAD NO ROLE. THE ASSESSEE HAD NOT PAID ANY SALARY IN ASSES SMENT YEAR 2001-02 WHICH ALSO SHOWED THAT EMPLOYEE WERE HIRED ONLY IN AS SESSMENT YEAR 2002- 03. FURTHER THE ASSESSEE HAD CLAIMED LEGAL EXPENSES OF RS.7,28,075/- WHICH INCLUDED A SUM OF RS.5.00 LACS AS PAYMENT TO M/S. KAN GA & CO.. THIS PAYMENT HAD BEEN MADE FOR CONSULTATION IN RESPECT OF DISINVES TMENT OF SHARES AND THEREFORE, THIS COULD NOT BE ALLOWED UNDER SECTION 37. WITH THESE OBSERVATIONS, THE AO ONLY ALLOWED ESTIMATED EXPENSES O F RS.1.00 LACS AND INTEREST INCOME OF RS.1,20,000/- AGAINST THE INTEREST IN COME. 2.2 THE ASSESSEE CHALLENGED THE DECISION OF AO AND S UBMITTED BEFORE CIT(A) THAT INTEREST INCOME HAD BEEN TREATED AS BUSINESS INCOME IN THE EARLIER YEARS. IT WAS ALSO SUBMITTED THAT BUSINESS OF THE ASSESSEE HAD NOT ITA NO.3877/M/07 A.Y:03-04 4 BEEN DISCONTINUED AND HAD ONLY BEEN SUSPENDED. THE BUSINESS THEREFORE DID NOT CEASE TO EXIST. CIT(A) HOWEVER DID NOT ACCEPT THE CON TENTIONS RAISED. IT WAS OBSERVED BY HIM THAT IN THE PRECEDING YEAR, THE ASS ESSEE HAD SHOWN PROFIT ON SALE OF INVESTMENT OF RS.4,04,88,441/- AND TH ERE WAS NO SALE IN THIS YEAR WHICH SHOWED THAT ALL THE INVESTMENTS HAD BEEN SO LD OFF AND ERSTWHILE BUSINESS HAD CLOSED. IT WAS THEREFORE, NOT THE CASE OF SUSPENSION OF BUSINESS. THE ASSESSEE HAD ALSO SHOWN NO BUSINESS INCOME IN ASSESSMENT YEARS 2001-02 AND 2002-03. CIT(A) FURTHER OBSERVED THAT IN EARLIER YEARS INTEREST INCOME HAD BEEN ACCEPTED AS BUSINESS INCOME AS INTEREST INCOME WAS ANCILLARY TO THE BUSINESS ACTIVITIES. SINCE THIS Y EAR THERE WAS NO BUSINESS ACTIVITY THE INTEREST INCOME COULD NOT BE CONSIDERED AS INCIDENTAL TO BUSINESS INCOME. THEREFORE, CIT(A) UPHELD THE ORDER OF AO TRE ATING INTEREST INCOME AS BUSINESS INCOME. CIT(A) ALSO OBSERVED THAT THE AO HAD GIVEN SPECIFIC REASONS FOR DISALLOWANCE OF SALARY AS WELL AS FOR D ISALLOWANCE OF PROFESSIONAL FEES TO M/S. KANGA & CO. BUT NO REASON HAD BEEN GIVE N IN RELATION TO DISALLOWANCE OF OTHER EXPENSES. CIT(A) HELD THAT SOME MINIMUM EXPENSES SUCH AS REMUNERATION TO AUDITORS, RATES AND TAXES, INSUR ANCE, REMUNERATION TO DIRECTORS ETC. HAVE TO BE ALLOWED AGAINST THE INTEREST I NCOME WHICH WERE LISTED AS UNDER :- I) REMUNERATION TO DIRECTORS - RS.2,88,000/- II) INSURANCE - RS.59,236/- III) RATES & TAXES - RS.3,27,726/- IV) INTEREST PAID - RS.1,20,000/- V) RENT - RS.1,44,000/- VI) POSTAGE, TELEPHONE & TELEGRAM - RS.88,225/- VII) CONVEYANCE - RS.45,832/- VIII) ELECTRIC CHARGES - RS.83,281/- IX) SECURITY CHARGES - RS.55,440/- X) SUNDRY BALANCES RETURN OFF - RS.1,301/- ITA NO.3877/M/07 A.Y:03-04 5 XI) REMUNERATION TO AUDITORS - RS.62,800/- CIT(A) THUS ALLOWED ONLY EXPENSES MENTIONED ABOVE AGG RIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3. BEFORE US THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAD ONLY STOPPED THE BUSINESS ACTIVITIES AND THERE WAS NO CLOSURE OF BUSINESS. THE BUSINESS WAS ONLY SUSPENDED AND SUBS EQUENTLY THE ASSESSEE STARTED THE NEW BUSINESS IN DEALING IN DEPB WHICH WAS NOTHING BUT A PART OF THE EXISTING BUSINESS. HE REFERRED TO SEVERAL JUDGMEN TS OF THE HON'BLE SUPREME COURT TO ARGUE THAT THE ISSUE WHETHER TWO BUSINESS ES ARE THE SAME BUSINESS OR DIFFERENT BUSINESSES WOULD NOT DEPEND ON NATURE OF THE BUSINESS BUT ON UNIT OF CONTROL IN RESPECT OF TWO BUSINESSES. IN THIS CASE THE NEW BUSINESS OF DEPB WAS UNDER THE SAME MANAGEMENT AND TH EREFORE, IT WAS PART OF THE SAME BUSINESS. ACCORDINGLY THE EXPENSES W HICH HAD BEEN INCURRED HAD TO BE ALLOWED AS BUSINESS EXPENDITURE. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUPPORTED THE ORDER OF CIT(A) AND PLACED RELIANCE ON THE FINDINGS GIVEN IN HIS ORDER. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATT ER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF HUGE EXPENSES OF RS.41,78,892/- CLAIMED BY THE ASSESSEE UNDER DIFFERENT HEADS AGAINST INTEREST I NCOME OF RS.55,85,606/- WHICH WAS RECEIVED FROM ONLY TWO PARTI ES I.E. HDFC BANK LIMITED AND VFC INDUSTRIES PVT. LTD., A GROUP COMPANY . ASSESSEE COMPANY HAD BEEN INITIALLY INCORPORATED AS M/S. VIJAY FLEXIBLE CONTAINERS COMPANY LTD. ON 12.6.2009. THE NAME WAS CHANGED TO VFC LTD. ON 1 6.6.1993 AND THEN TO ITA NO.3877/M/07 A.Y:03-04 6 M/S. JMP INVESTMENT, ITS CURRENT NAME, ON 3.1.1996. EVEN AFTER THE CHANGE OF NAME AS INVESTMENT COMPANY THE ASSESSEE HAD BEEN DE CLARING BUSINESS INCOME FROM MANUFACTURING ACTIVITY. THE DETAILS OF INC OME AND EXPENDITURE FOR DIFFERENT YEARS FROM ASSESSMENT YEAR 1999-00 TO 20 06-07 PLACED AT PAGE- 1 OF THE PAPER BOOK SHOWS THAT THE ASSESSEE HAD SHOWN S OME INCOME FROM BUSINESS AND CLAIMED MANUFACTURING EXPENSES IN ASSES SMENT YEAR 1999-00 AND IN ASSESSMENT YEAR 2000-01, SOME STOCK WAS ALSO S HOWN. HOWEVER, IN ASSESSMENT YEAR 2001-02 NEITHER THERE WAS ANY OPENING STOCK NOR ANY BUSINESS AND THE SAME POSITION CONTINUED IN ASSESSMENT YEAR 2002-03 AND 2003-04. THE DETAILS ALSO SHOW THAT THE ASSESSEE HAD B EEN SELLING IMMOVABLE PROPERTIES, INCOME FROM WHICH HAD BEEN SH OWN IN ASSESSMENT YEAR 2000-01 AND 2001-02 AND ASSESSEE ALSO SHOWED H UGE INCOME FROM SALE OF OFFICE BUILDING AND SALE OF INVESTMENT FOR ASSESS MENT YEAR 2002-03. THE SALE PROCEEDS HAVE BEEN DEPOSITED WITH THE BANK AND WI TH SISTER CONCERN FROM WHICH INTEREST INCOME HAD BEEN RECEIVED. THERE FORE, IN ASSESSMENT YEAR 2003-04, THERE WAS ONLY INTEREST AND RENTAL INCO ME. IT IS THUS CLEAR THAT BUSINESS OF MANUFACTURING HAD BEEN CLOSED IN ASS ESSMENT YEAR 2000-01 AND INVESTMENTS HAD ALSO BEEN SOLD OFF IN 2002-03. UNDER THESE, CIRCUMSTANCES CONCLUSION OF THE CIT(A) THAT EXISTING B USINESS HAD BEEN CLOSED IN ASSESSMENT YEAR 2003-04 THERE WAS NO BUSIN ESS AT ALL CAN NOT BE FAULTED WITH. ONLY IN ASSESSMENT YEAR 2004-05, THE ASS ESSEE HAD SHOWN COMMISSION INCOME AND IN ASSESSMENT YEAR 2005-06 SAL E AND PURCHASE OF DEPB LICENSES. THERE IS NO MATERIAL PLACED ON RECOR D TO SHOW THAT IN ASSESSMENT YEAR 2003-04 THE ASSESSEE HAD TAKEN ANY ACTI ON FOR SETTING OF THE NEW BUSINESS OF DEPB LICENSES. IN THE EARLIER YE ARS, INTEREST INCOME HAD ITA NO.3877/M/07 A.Y:03-04 7 BEEN ACCEPTED AS BUSINESS INCOME AS THE SAME WERE AN CILLARY TO BUSINESS ACTIVITIES WHICH IS NOT SO IN THE PRESENT YEAR AS THER E WAS NO BUSINESS IN THIS YEAR. THE ARGUMENT RELATING TO THE TWO BUSINESSES BEIN G THE SAME BUSINESS WILL BE RELEVANT WHEN THERE IS SOME BUSINESS IN EXIST ENCE DURING THE YEAR. WE HAVE ALREADY HELD THAT OLD BUSINESS HAD BEEN CLOSE D AND THERE WAS NO BUSINESS CARRIED ON BY THE ASSESSEE DURING THE YEAR. THEREFORE, INTEREST INCOME CAN NOT BE ASSESSED AS BUSINESS INCOME. WE A CCORDINGLY UPHOLD THE ORDER OF CIT(A) TREATING THE INTEREST INCOME HAS INCOME FROM OTHER SOURCES. 4.1 AS REGARDS THE ALLOWABILITY OF EXPENSES, IT IS TO BE NOTED THAT THE ASSESSEE IS A COMPANY, AND THEREFORE SOME MINIMUM E XPENSES SUCH AS STATUTORY EXPENSES, INTEREST, INSURANCE, REMUNERATI ON TO DIRECTORS ETC. HAS TO BE ALLOWED TILL THE COMPANY IS WOUND UP. THESE EXP ENSES HAVE TO BE ALLOWED AGAINST INCOME FROM OTHER SOURCES. CIT(A) HAS ALLO WED SUCH EXPENSES DETAILS OF WHICH HAVE BEEN GIVEN IN PARA 2.2 WHIC H IN OUR VIEW IS REASONABLE AND HAS ALSO NOT BEEN CHALLENGED BY THE REVENUE. THE ORDER OF CIT(A) IS, THEREFORE, ACCORDINGLY UPHELD. 5. THE SECOND DISPUTE IS REGARDING NATURE OF INCOME FROM HOUSE PROPERTY. DURING THE YEAR, THE ASSESSEE HAD RECEIVED RENTAL I NCOME OF RS.60,000/- FROM ANITA FLAT AND RS.3,19,500/- FROM OFFICE PREMI SES ON THE FIRST FLOOR OF ROHIT CHAMBERS. THE RENT FOR THE OFFICE PREMISES HA D BEEN RECEIVED FROM GROUP CONCERNS M/S. FUTUREACH INDIA PVT. LTD. AND V FS INDIA P. LTD. WHICH WERE GROUP COMPANIES. THE ASSESSEE TREATED SUCH RE NTAL INCOME AS BUSINESS ITA NO.3877/M/07 A.Y:03-04 8 INCOME, WHICH WAS NOT ALLOWED BY THE AO AND ORDER O F AO WAS CONFIRMED BY CIT(A). 5.1 WE HAVE HEARD BOTH PARTIES, PERUSED RECORDS AND CONSIDERED TH MATTER CAREFULLY. THE RENTAL INCOME HAS BEEN RECEIVED BY THE ASSESSEE FROM USE OF OFFICE PREMISES OF WHICH THE ASSESSEE IS THE OWNER. THE EARLIER BUSINESS OF THE ASSESSEE HAD BEEN CLOSED AND THE OFFICE PREMISE S HAVE BEEN ALLOWED TO BE USED BY THE GROUP CONCERNS FROM WHICH RENTAL INC OME HAS ARISEN. THIS IS NOT THE CASE OF TEMPORARY EXPLOITATION OF BUSINESS ASSETS. THIS IS A CASE OF PROPERTIES BEING LET OUT AFTER CLOSURE OF BUSINESS. IN FACT THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE COULD NOT ADVANCE A NY SERIOUS ARGUMENTS AS TO HOW RENTAL INCOME SHOULD BE ASSESSED AS BUSINESS INCOME. WE SEE NO INFIRMITY IN THE ORDER OF THE CIT(A) UPHOLDING THE ORDER OF AO TREATING THE RENTAL INCOME AS HOUSE PROPERTY INCOME. THE ORDER IS ACCORDINGLY UPHELD. 6. THE THIRD DISPUTE IS REGARDING DISALLOWANCE OF P ROFESSIONAL FEES OF RS.5.00 LACS PAID TO M/S. KANGA & CO. THE AO HAS G IVEN A FINDING THAT THE FEES HAD BEEN PAID FOR CONSULTATION IN RELATION TO DISINVESTMENT OF SHARES OF ROHIT PULP & PAPER MILLS LTD. THIS FINDING HAS NOT BEEN CONTROVERTED BEFORE US OR BEFORE THE LD. CIT(A). THE LD. AR HAS ALSO NOT ARGUED AS TO HOW THE SAID EXPENDITURE CAN BE ALLOWED AGAINST INCOME FROM OTHER SOURCE. THEREFORE, FEES PAID CAN NOT BE ALLOWED AS DEDUCTIO N WHILE COMPUTING INCOME FROM OTHER SOURCES. THE DISALLOWANCE HAS BEEN RIGH TLY UPHELD BY CIT(A) AND ORDER OF CIT(A) IS UPHELD. ITA NO.3877/M/07 A.Y:03-04 9 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.10.2011. SD/- SD/- (R.S. PADVEKAR) (RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED:28.10.2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.