J. KIMATRAI & CO., MUMBAI V. ITO 14(1)(3), MUMBAI

ITA 3883/MUM/2013

• Counselvise Citation: 388319914 RSA 2013
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Assessment Year: 2007-2008
• Appeal Filed On: 16-05-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SONIA KUMAR
• Assessee Lawyers: MUKESH B ADVANI
• Keywords: Business income; Depreciation; Business expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'SMC' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT ITA NO. 3883/MUM/2013 (ASSESSMENT YEAR: 2007-08) M/S. J. KIMATRAI & COMPANY INCOME TAX OFFICER - 14( 1)-3 GR. FLOOR, 5, NOOR MOHAMMED 2ND FLOOR, EARNEST HOUS E KASAM BLDG, SORAJI SANTUK LANE VS. ROOM NO. 203, NARIMANPOINT MUMBAI 400002 MUMBAI 400021 PAN - AACFJ9636R APPELLANT RESPONDENT APPELLANT BY: SHRI MUKESH B. ADVANI RESPONDENT BY: MS. SONIA KUMAR DATE OF HEARING: 28.01.2014 DATE OF PRONOUNCEMENT: 12.03.2014 O R D E R PER D. MANMOHAN, V.P. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 12.03.2013 PASSED BY THE CIT(A)-25, MUMBAI AND IT P ERTAINS TO A.Y. 2007-08. 2. ASSESSEE IS A PARTNERSHIP FIRM COMPRISING OF FOUR P ARTNERS. PRIOR TO 1995 IT WAS MANUFACTURING YARN AND ENGAGED IN THE B USINESS OF TEXTILES. IT APPEARS THAT DUE TO DISPUTE AMONGST THE PARTNERS THE BUSINESS WAS CLOSED. THE FIRM CONSTRUCTED A BUILDING CALLED KIMA TRAI BUILDING ON MAHARASHI KARVE ROAD COMPRISING OF FIVE FLOORS, OUT OF WHICH ONE OF THE PARTNERS, I.E. NARI KIMATRAI PURCHASED FIRST FLOOR, THIRD FLOOR WAS PURCHASED BY RAM KIMATRAI, AND THE FOURTH FLOOR AND HALF OF THE FIFTH FLOOR APPEARS TO HAVE BEEN PURCHASED BY MOHINI AND KAILASH KIMATRAI. THUS, THE SECOND FLOOR AND PART OF FIFTH FLOOR APPE ARS TO HAVE BEEN RETAINED BY THE FIRM, OUT OF WHICH THE SECOND FLOOR WAS STATED TO HAVE BEEN SOLD TO VARIOUS PARTIES INCLUDING SARASWAT CO- OPERATIVE BANK. THE PLOT ON WHICH THE KIMATRAI BUILDING IS CONSTRUCTED BELONGS TO THE FIRM WHICH IN TURN WAS MORTGAGED TO THE BANK OF INDIA WH ILE TAKING LOAN. THE ITA NO. 3883/MUM/2013 M/S. J. KIMATRAI & COMPANY 2 BANK LOAN WAS, HOWEVER, PAID OFF BY THE FIRM FROM T HE SALE PROCEEDS OF THE BUILDING. FROM THE REMAINING PROPERTY, THE ASSESSEE APPEARS TO HAVE EARNED INCOME FROM HOUSE PROPERTY AND A MEAGRE SUM OF ` 826/- FROM OTHER SOURCES IN THE FORM OF BANK INTEREST. THE ASS ESSEE TREATED THE ANNUAL RENTAL INCOME RECEIVED FROM UNIVERSAL AS BUS INESS INCOME AND CLAIMED VARIOUS DEDUCTIONS WHEREBY THE NET INCOME R EPRESENTS A NEGATIVE FIGURE. THE RETURN WAS FILED ACCORDINGLY. THOUGH TH E SAME WAS PROCESSED UNDER SECTION 143(1) OF THE ACT, SUBSEQUENTLY THE C ASE WAS TAKEN UP FOR SCRUTINY. NOTICE UNDER SECTION 143(2) WAS ISSUED ON 25.09.2008 FOR A.Y. 2007-08 AND UPON CALLING FOR THE DETAILS THE AO NOT ICED THAT THE ASSESSEE FIRM HAD NOT CARRIED ON ANY BUSINESS ACTIVITY FOR T HE PAST SEVERAL YEARS AND IT HAD EARNED INCOME FROM HOUSE PROPERTY ONLY. SINCE NO BUSINESS ACTIVITY WAS CARRIED ON, THE AO WAS OF THE VIEW THA T THE ASSESSEE IS NOT ENTITLED TO CLAIM DEDUCTION TOWARDS ANY EXPENDITURE OTHER THAN THE STATUTORY DEDUCTION PROVIDED UNDER SECTION 23 & 24 OF THE ACT AGAINST THE INCOME FROM HOUSE PROPERTY. HE ACCORDINGLY COMPUTED THE TOTAL INCOME AT ` 3,06,332/-. 3. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE CIT(A) THA T THOUGH THE MAIN BUSINESS OF TEXTILES WAS CLOSED IN 1995 DUE TO THE DISPUTE AMONGST THE PARTNERS, THE FIRM WAS NOT DISSOLVED AND THE PROPER TY IN THE NAME OF THE FIRM CONTINUED TO BE MAINTAINED BY THE FIRM IN VIEW OF THE DISPUTE BETWEEN THE FIRM AND THE BANK. IN OTHER WORDS, ON ACCOUNT O F CERTAIN DISPUTES THE FIRM COULD NOT CONVEY THE PROPERTY TO THE OCCUPANTS AND HENCE TILL DATE THE FIRM LEGALLY OWNS THE BUILDING AND THE BILLS PERTAI NING TO ELECTRICITY, WATER AND MUNICIPAL TAX ARE RECEIVED IN THE NAME OF THE F IRM. THE FIRM COLLECTS THE MAINTENANCE CHARGES FROM THE OCCUPANTS AND PAYS TO VARIOUS AUTHORITIES. DUE TO THE DISPUTE AMONGST THE PARTNERS AND ALSO WI TH THE OCCUPANTS THE FIRM WAS UNABLE TO RECOVER THE DUES FROM THE OCCUPA NTS THOUGH THE FIRM HAD TO PAY THE CHARGES TO VARIOUS AUTHORITIES. UNDER TH ESE CIRCUMSTANCES IT CAN BE SAID THAT THE FIRM HAS BEEN DOING THESE BUSINESS ACTIVITIES AND THE CHARGES COLLECTED FROM THE OCCUPANTS HAVE BEEN SHOW N IN THE CREDIT SIDE OF THE P & L ACCOUNT AND THE EXPENDITURE CLAIMED BY TH E ASSESSEE OUGHT TO HAVE BEEN ALLOWED AS DEDUCTION. ITA NO. 3883/MUM/2013 M/S. J. KIMATRAI & COMPANY 3 4. DURING THE COURSE OF APPELLATE PROCEEDINGS THE LEAR NED A.R. OF THE ASSESSEE BROUGHT TO THE NOTICE OF THE LEARNED CIT(A ) THAT THE ASSESSEE FIRM RECEIVED A SUM OF ` 15,000/- ON ACCOUNT OF MAINTENANCE CHARGES, FROM VARIOUS TENANTS OF THE BUILDING, AND THE SAME WAS S HOWN UNDER THE HEAD BUSINESS INCOME WHEREAS THE ASSESSEE HAD INCURRED VARIOUS EXPENSES AMOUNTING TO ` 3,39,313/- TO EARN MAINTENANCE CHARGES AND THE SAME WAS CLAIMED AS DEDUCTION. BIFURCATION OF THE TOTAL EXPE NDITURE IS AS UNDER: - 1. LEGAL & PROFESSIONAL FEES ` 31,000 2. ISHWAR BHAWAN MAINTENANCE CHARGES ` 3,767/- 3. SALARY ` 98,200/- 4. BANK CHARGES ` 393/- 5. ELECTRICITY CHARGES `1,04,319/- 6. DEPRECIATION ON FURNITURE ` 3,825/- 7. ACCOUNTING CHARGES ` 4,500/- 8. WATER CHARGES ` 81,889/- 9 LEGAL CHARGES ` 11,420/- TOTAL `3,39,313/- LESS: MAINTENANCE CHARGES RECEIVED ` 15,000/- `3,24,313/ `3,24,313/ `3,24,313/ `3,24,313/- -- - IT WAS ALSO CONTENDED THAT THE AO ERRED IN HOLDING THAT THE APPELLANT FIRM WAS NOT CARRYING ON ANY BUSINESS OVERLOOKING THE FA CT THAT IN THE PECULIAR CIRCUMSTANCES OF THE CASE THE INCOME EARNED BY THE ASSESSEE WOULD FALL WITHIN THE MEANING OF THE EXPRESSION BUSINESS, PR OVIDED UNDER SECTION 2(13) OF THE I.T. ACT WHEREIN IT STATES THAT BUSINE SS INCLUDED ANY TRADE, COMMERCE OR MANUFACTURE OR ANY ADVENTURE OR CONCERN IN NATURE OF TRADE, COMMERCE OR MANUFACTURE. EXPLAINING FURTHER IT WAS SUBMITTED THAT THOUGH THE FIRM WAS INCORPORATED TO CARRY ON TEXTILE BUSIN ESS THE SAME WAS STOPPED DUE TO DIFFERENCES AMONGST THE PARTNERS AND THEREAF TER THE FIRM CONTINUED THE ACTIVITY OF CONSTRUCTION OF KIMATRAI BUILDING W HICH HAS TO BE CONSIDERED AS BUSINESS OF BUILDERS AND DEVELOPERS AND THE SAME WAS SOLD SUBSEQUENTLY TO PARTNERS AS WELL AS OUTSIDERS. THE PROFIT ON SAL E OF THE PREMISES WAS OFFERED UNDER THE HEAD BUSINESS INCOME. INCIDENTA L TO THE MAIN BUSINESS OF ITA NO. 3883/MUM/2013 M/S. J. KIMATRAI & COMPANY 4 CONSTRUCTION THE ASSESSEE FIRM COLLECTED MAINTENANC E CHARGES AND IT WAS DONE WITH AN INTENTION TO EARN PROFIT. IN FACT PROF IT WAS EARNED IN THE EARLIER YEARS, WHICH WAS ACCEPTED BY THE AO. A COPY OF THE ASSESSMENT ORDER FOR A.Y. 1997-98 WAS PLACED BEFORE LEARNED CIT(A) TO SU BMIT THAT SIMILAR INCOME WAS ASSESSED UNDER THE HEAD BUSINESS INCOME IN 14 3(3) PROCEEDINGS AND HENCE THE AO WAS NOT JUSTIFIED IN CHANGING THE HEAD OF INCOME MERELY BECAUSE IT WAS A LOSS IN THE YEAR UNDER CONSIDERATI ON. 5. THE LEARNED CIT(A) NOTICED THAT THOUGH THE INITIAL INTENTION OF THE ASSESSEE WAS TO CARRY ON TEXTILE BUSINESS AND THERE AFTER CONSTRUCTION AND SELLING OF PROPERTY BUT FOR THE LAST FEW YEARS NO S UCH BUSINESS WAS RUN BY THE ASSESSEE FIRM EXCEPT EARNING RENTAL INCOME WHIC H WAS, IN FACT, DECLARED UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND CLA IMED STANDARD DEDUCTION UNDER SECTION 24(1) OF THE ACT ON NOTIONA L BASIS AMOUNTING TO ` 1,30,931/-. ALTHOUGH THE SAID RENTAL INCOME WAS SHO WN IN THE P & L ACCOUNT PREPARED BY THE FIRM THE RENTAL IS NOT SHOW N UNDER THE HEAD BUSINESS INCOME. IN FACT, IN THE P & L ACCOUNT, T HE ASSESSEE HAS CLAIMED RECEIPT OF A SUM OF ` 15,000/- ONLY TOWARDS MAINTENANCE CHARGES RECEIVED FROM VARIOUS TENANTS AS AGAINST WHICH IT CLAIMED DE DUCTION OF ` 3,39,313/- WHICH RESULTED IN BUSINESS LOSS OF ` 3,24,313/- AND ONLY ON ACCOUNT OF ADJUSTMENT OF RENTAL INCOME ASSESSEE FILED LOSS RET URN OF ` 17,980/- IN SPITE OF RENTAL INCOME OF ` 4,92,000/-. IN OTHER WORDS, ASSESSEE CLAIMED ALL TH E EXPENSES UNDER THE HEAD BUSINESS EXPENDITURE WHER EAS IT HAD SHOWN A MEAGER AND ILLUSORY BUSINESS INCOME OF ` 15,000/- ON ACCOUNT OF MAINTENANCE CHARGES RECEIVED FROM TENANTS WHICH DEP ICTS THAT THE ASSESSEE HAS ADOPTED COLOURABLE DEVICE TO CLAIM EXPENSES REL ATING TO PROPERTY IN THE GUISE OF BUSINESS ACTIVITY. IN THE OPINION OF THE L EARNED CIT(A) THERE IS NO MEANINGFUL AND GENUINE BUSINESS ACTIVITY SO AS TO C LASSIFY INCOME AND EXPENDITURE UNDER THE HEAD BUSINESS OR PROFESSION . WITH REGARD TO THE CONTENTION OF THE ASSESSEE THAT IT HAD DECLARED BUS INESS INCOME IN 1997-98 AND THE SAME WAS ACCEPTED BY THE AO, THE LEARNED CI T(A) OBSERVED THAT THERE WAS BUSINESS OF BUYING AND SELLING OF FABRICS EVEN IN THAT YEAR; MOREOVER RENTAL INCOME WAS SHOWN UNDER THE HEAD HO USE PROPERTY WITH RELATED EXPENDITURE IN THAT YEAR. IN FACT, MAINTENA NCE CHARGES RECEIVED FROM ITA NO. 3883/MUM/2013 M/S. J. KIMATRAI & COMPANY 5 THE TENANTS ARE ELIGIBLE TO BE INCLUDED IN ALV OF T HE PROPERTY AND CANNOT BE CONSIDERED AS BUSINESS INCOME. AT ANY RATE, EVEN IF A PARTICULAR CLAIM IS ACCEPTED WHICH IS CONTRARY TO LAW IT CANNOT FETTER THE AUTHORITY TO PERPETUATE THE SAME. HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) UPHELD THE ACTION OF THE AO. 6. FURTHER AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS NOT DISPUTED BY THE TAX AUTHORITIES THAT THE ASSESSEE WAS ALSO ENGAGED IN T HE BUSINESS OF CONSTRUCTION OF COMMERCIAL BUILDING WHICH WAS SOLD TO PARTNERS AS WELL AS OUTSIDERS AND THE SAME WAS OFFERED AS BUSINESS INCO ME. HOWEVER THE LAND HAVING MORTGAGED TO THE BANK OF INDIA THE CONVEYANC E DEED COULD NOT BE REGISTERED AND HENCE THE MUNICIPAL CHARGES, ELECTRI CITY BILLS, ETC. CONTINUED TO BE RECEIVED IN THE NAME OF THE SOCIETY. SINCE TH E ASSESSEE IS INTERESTED IN MAKING PROFIT OUT OF SALE AS WELL AS LETTING OUT OF THE PROPERTY IT HAD TAKEN THE DECISION TO PAY THE ELECTRICITY BILLS, ETC. AND LATER ON COLLECTED IT FROM THE PARTIES. IT HAD FOLLOWED CASH SYSTEM OF ACCOUNTING AND WHATEVER AMOUNT WAS ACTUALLY RECEIVED IN THE FORM OF MAINTENANCE CH ARGES WAS SHOWN AS BUSINESS INCOME AND ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE WAS CLAIMED AS BUSINESS EXPENSES BUT THESE FACTS WERE N EITHER APPRECIATED BY THE AO (WHO PASSED CRYPTIC ORDER) NOR THE CIT(A). I T MAY BE NOTICED HERE THAT THE AO RECORDED IN THE ASSESSMENT ORDER THAT THE AS SESSEE HAS BEEN FOLLOWING MERCANTILE SYSTEM BUT ACCORDING TO THE AS SESSEE IT WAS FOLLOWING CASH SYSTEM OF ACCOUNTING. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO ADVERTED OUR ATTENTION TO PAGE 46 OF THE PAPER BOOK , I.E. RETIREMENT-CUM- PARTNERSHIP DEED DATED 01.04.1989 TO SUBMIT THAT TH E ASSESSEE IS ENTITLED TO NOT ONLY CARRY ON BUSINESS OF BUYING AND SELLING OF YARN AND TEXTILES BUT IT IS ALSO ENTITLED TO CARRY ON ANY OTHER BUSINESS AS MAY BE DESIRED BY THE PARTNERS FROM TIME TO TIME. IN THIS PROCESS THE ASS ESSEE IS ENGAGED IN THE BUSINESS OF LETTING OUT SOME PROPERTY ON LEAVE AND LICENCE BASIS. AS PER THE AGREEMENT BETWEEN THE FIRM AND UNIVERSAL LEGAL WHIC H HAS POSSESSED OFFICE PREMISES ADMEASURING TO 730 SQ.FT. OF COVERED AREA ON 5 TH FLOOR OF KIMATRAI BUILDING, THE ASSESSEE FIRM LET OUT THE PREMISES SU BJECT TO CERTAIN CONDITIONS AND IN RETURN, APART FROM RENTAL INCOME, IT HAS REC EIVED MAINTENANCE ITA NO. 3883/MUM/2013 M/S. J. KIMATRAI & COMPANY 6 CHARGES FROM THE PARTY. THE LEARNED COUNSEL, THUS, SUPPORTED THE STAND OF THE ASSESSEE THAT THE ACTIVITY AS SUCH SHOULD BE TR EATED AS BUSINESS ACTIVITY. 7. ON THE OTHER HAND, THE LEARNED D.R. STRONGLY SUPPOR TED THE ORDERS PASSED BY THE TAX AUTHORITIES. IT MAY BE NOTICED TH AT THE ASSESSEE REFERRED TO PAGE 4 OF THE PAPER BOOK TO SUBMIT THAT THE ASSESSE E RECEIVED INCOME OF ` 15,000/- ONLY IN THIS YEAR WHICH WAS CREDITED TO TH E P & L ACCOUNT BUT THE LEARNED D.R. SUBMITTED THAT UNIVERSAL LEGAL IS A LI CENSEE, I.E. ASSESSEES TENANT AND OTHER PROPERTIES WERE ALREADY SOLD. IT I S NOWHERE SHOWN THAT THE ASSESSEE IS OBLIGED TO MAINTAIN WATCH AND WARD, ETC . IN FACT THE EXPENDITURE INCURRED BY THE ASSESSEE CLEARLY SHOWS THAT A MAJOR CHUNK OF THE EXPENDITURE IS ONLY TOWARDS PROPERTY TAX AND ELECTR ICITY EXPENSES APART FROM REGULAR MAINTENANCE OF WATCH AND WARD. THE LEARNED D.R. ALSO SUBMITTED THAT MERE PAYMENT OF WATER CHARGES, MUNICIPAL TAXES , ETC. TO VARIOUS AUTHORITIES WOULD NOT CONVERT THE NATURE OF INCOME; IN FACT THE SAME OUGHT TO HAVE BEEN TREATED AS PART OF THE RENTAL INCOME. 8. I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE RECORD. THE ASSESSEE LET OUT SOME SPACE TO UNIVERSA L LEGAL, A PARTNERSHIP FIRM. MAJOR PORTION OF THE BUILDING WAS SOLD TO THE PARTNERS AND A PORTION OF IT WAS ALSO SOLD TO OUTSIDERS. THE ASSESSEE HAD NOT TAKEN UP ANY NEW VENTURE FOR THE PAST SEVERAL YEARS AND IT WAS NEVER ENGAGED IN ANY OTHER BUSINESS OF CONSTRUCTION. AT A NY RATE, NOTHING WAS BROUGHT TO THE NOTICE OF THE BENCH THAT THE ASSESSE E WAS CARRYING ON BUSINESS OF CONSTRUCTION AND DEVELOPMENT OF PLOTS. IN SHORT, THE ASSESSEE HAD NOW LET OUT THE PROPERTY. WHEN IT IS L EASE SIMPLICITOR THE OBLIGATION IS UPON THE LESSEE/LICENCE TO PAY THE EL ECTRICITY CHARGES, MUNICIPAL TAXES, ETC. AT ANY RATE, PAYMENT OF ELECT RICITY CHARGES, MUNICIPAL CHARGES, ETC. CANNOT BE TREATED AS SEPARA TE ACTIVITY IN ITSELF SINCE IT IS ONLY A PART OF LETTING OF PROPERTY. HAV ING REGARD TO THE CIRCUMSTANCES OF THE CASE AND FOR THE DETAILED REAS ONS GIVEN BY THE CIT(A) I AM OF THE VIEW THAT THE ASSESSEE IS NOT JU STIFIED IN CLAIMING EXPENDITURE UNDER THE HEAD PROFITS AND GAINS OF BU SINESS. THEREFORE, THE ORDER PASSED BY THE CIT(A) IS CONFIRMED. ITA NO. 3883/MUM/2013 M/S. J. KIMATRAI & COMPANY 7 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE FIRM IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH MARCH, 2014. SD/- (D. MANMOHAN) VICE PRESIDENT MUMBAI, DATED: 12 TH MARCH, 2014 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 25, MUMBAI 4. THE CIT 15, MUMBAI CITY 5. THE DR, SMC BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.