IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH BEFORE SHRI B.R.MITTAL, JUDICIAL MEMBER & BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER I.T.A.NO.4597/MUM/2010 A.Y 2004-05 M/S. SEALAND CRANES PVT. LTD., 5 TH FLOOR, DIAMOND SQUARE, CST ROAD, KALINA, SANTACRUZ (E), MUMBAI 400 098. PAN: AAACS 7176 E VS. ASST. COMMISSIONER OF I.T.-9(3), MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI B.V.JHAVERI. RESPONDENT BY : SHRI G.P.TRIVEDI. DATE OF HEARING: 17-11-2011 DATE OF PRONOUNCEMENT: 30-11-2011 O R D E R PER T.R.SOOD, AM: IN THIS APPEAL VARIOUS GROUNDS HAVE BEEN RAISED BUT AT THE TIME OF HEARING LD. COUNSEL OF THE ASSESSEE SUBMITTED TH AT THE FOLLOWING DISPUTES ARE INVOLVED: 1. CONFIRMATION OF DISALLOWANCE OF BUSINESS LOSS AMOUN TING TO RS.1,63,720/-. 2. CONFIRMATION OF DISALLOWANCE OF INTEREST AMOUNTING TO RS.10,59,397/-. 2. GROUND NO.1 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURI NG THE ASSESSMENT PROCEEDINGS AO NOTICED THAT THE ASSE SSEE COMPANY WAS IN THE BUSINESS OF OPERATING CRAWLER CRANE. HOW EVER, DURING THE YEAR THE COMPANY HAS NOT CARRIED OUT ANY BUSINESS O F HIRING OF CRANE. IT WAS FURTHER NOTICED THAT ASSESSEE HAD ACQUIRED A PROPERTY AT KALINA, ITA NO.4597 OF 2010 2 SANTACRUZ (EAST), WHICH WAS LET OUT TO M/S. ALL CAR GO MOVERS INDIA PVT. LTD. THE AO OBSERVED THAT SINCE ASSESSEE COMPANY HA S NOT CARRIED OUT BUSINESS, THEREFORE, BUSINESS LOSS DECLARED AT RS.1 2,10,505/- COULD NOT BE ALLOWED AND, ACCORDINGLY, SAME WAS DISALLOWED. 3. IT SEEMS BEFORE THE LD. CIT(A) A REVISED COMPUTA TION WAS FILED THROUGH WHICH BUSINESS LOSS AMOUNTING TO ONLY RS.1, 63,720/- HAS BEEN CLAIMED. IT WAS SUBMITTED BEFORE THE LD. CIT(A) THA T ASSESSEE HAS AGAIN STARTED THE BUSINESS OF HIRING OF CRANE FROM A.Y 2009-10 WHICH SHOWS THAT BUSINESS HAS BEEN REVIVED AND, THEREFORE , LOSS COULD HAVE BEEN ALLOWED. THE LD. CIT(A) REJECTED THE SUBMISSIO N AND UPHELD THE DISALLOWANCE OF RS.1,63,720/-. 4. BEFORE US, IT WAS MAINLY SUBMITTED THAT ASSESSEE WAS IN THE BUSINESS OF HIRING OF CRANE. THE SAME HAS GOT DAMAG ED AND REQUIRED HEAVY REPAIRS. THE REPAIRS WERE CARRIED OUT AND ASS ESSEE AGAIN STARTED RECEIVING HIRING CHARGES FROM A.Y 2009-10 AND IN TH IS REGARD REFERENCE WAS MADE TO PAGE 125 OF THE PAPER BOOK WHICH IS A C OPY OF PROFIT & LOSS ACCOUNT WHICH SHOWS THAT HIRE CHARGES OF RS.2, 18,412/- WERE RECEIVED. IN THE MEAN TIME, ASSESSEE WAS REQUIRED T O MAINTAIN MINIMUM BUSINESS SET UP WHICH INVOLVED CERTAIN MINI MUM EXPENSES IN THE FORM OF AUDIT FEE, LEGAL CHARGES, FILING OF APP EAL ETC., DETAILS OF WHICH ARE AVAILABLE AT PAGE-7 OF THE PAPER BOOK. IT WAS ARGUED THAT SUCH MINIMUM EXPENSES ARE REQUIRED TO BE ALLOWED. T HE LD. COUNSEL FURTHER RELIED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF VAZIR GLASS WORKS LTD. VS. ACIT, I.T.A. NO.494/M/2005 ITA NO.4597 OF 2010 3 [COPY FILED] AND THE DECISION OF THE CALCUTTA BENCH OF THE TRIBUNAL IN THE CASE OF GOJER BROS. (P) LTD. VS. ITO [142 TAXMA N 29]. 5. ON THE OTHER HAND, LD. DR STRONGLY SUPPORTED THE ORDER OF THE CIT(A) AND SUBMITTED THAT WHEN NO BUSINESS INCOME W AS THERE DURING THE YEAR, NO EXPENDITURE COULD BE ALLOWED BECAUSE T HE ONLY INCOME AVAILABLE TO THE ASSESSEE WAS INCOME FROM HOUSE PRO PERTY AND UNDER THAT HEAD ONLY EXPENDITURE MENTIONED IN SEC.24 COUL D BE ALLOWED. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. IT HAS NOT BEEN DENIED BY THE AO OR EVEN LD. DR THAT THE CRANE WAS STILL WITH THE ASSESSEE AND REQUIRED SOME REPAIRS. FURTHER, FROM P ROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31-3-2010 PLACED AT PAG E 125 OF THE PAPER BOOK, CLEARLY SHOWS THAT ASSESSEE HAS AGAIN STARTED RECEIVING HIRE CHARGES. THEREFORE, IT IS A CASE OF LULL IN THE BUS INESS FOR SOME TIME. DURING SUCH TIME ASSESSEE MAY BE REQUIRED TO MAINTA IN INFRASTRUCTURE AND EXPENSES FOR SUCH INFRASTRUCTURE HAD TO BE ALLO WED. THE CALCUTTA BENCH OF THE TRIBUNAL IN THE CASE OF GOJAR BROS. PV T. LTD. VS ITO [SUPRA], HAS HELD AS UNDER: THE RENTAL INCOME DERIVED BY THE ASSESSEE WAS ASSES SED UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND AS SUCH EXPEN SES ON ACCOUNT OF REPAIR AND MAINTENANCE, CORPORATION TAX, AND LEG AL CHARGES IN CONNECTION WITH THE PROPERTY FROM WHICH THE ASSESSE E WAS DERIVING THE RENTAL INCOME COULD NOT BE ALLOWED AS BUSINESS EXPENDITURE. THEREFORE, THE SAME HAD RIGHTLY BEEN DISALLOWED BY THE COMMISSIONER (APPEALS). HOWEVER, THE BALANCE AMOUNT OF EXPENDITURE WAS INCU RRED BY THE ASSESSEE WHICH WAS NECESSARY FOR THE PURPOSE OF MAINTAINING A REGISTERED OFFICE TO CONTINUE ITS EXI STENCE AND ALSO TO COMPLY WITH THE STATUTORY OBLIGATIONS. THE SAID EXPENDITURE WAS INCIDENTAL TO THE BUSINESS ACTIVITY OF THE ASSESSEE-COMPANY THOUGH THE- ASSESSEE DID NOT CARRY OUT ANY BUSINESS IN THE ASSESSMENT YEAR UNDER APPEAL. THERE FORE, THE ITA NO.4597 OF 2010 4 ASSESSEE WAS ENTITLED TO CLAIM THE SAID EXPENDITURE AS BUSINESS EXPENDITURE. THEREFORE, EVEN IF ASSESSEE WAS DERIVING INCOME ONL Y FROM HOUSE PROPERTY, THE MINIMUM EXPENDITURE REQUIRED FOR THE PURPOSE OF MAINTAINING REGISTERED OFFICE AND ITS EXISTENCE AND ALSO TO COMPLY WITH THE SALUTATORY OBLIGATION HAS TO BE ALLOWED. ACCORD INGLY, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND DIRECT THE AO TO AL LOW EXPENDITURE OF RS.1,63,720/- AFTER VERIFICATION OF THE SAME WHETHE R SAME HAS BEEN INCURRED FOR MAINTAINING THE MINIMUM INFRASTRUCTURE . 7. GROUND NO.2 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT ASSESSEE HAD CLAIMED SOME INTEREST AGAINST HOUSE PR OPERTY INCOME WHICH WAS NOT ALLOWED BY THE AO BECAUSE, ACCORDING TO HIM, ASSESSEE WAS REQUIRED TO FURNISH A CERTIFICATE TO WHOM SUCH INTEREST WAS PAYABLE. SINCE NO CERTIFICATE WAS FURNISHED, INTERE ST WAS HELD TO BE NOT ALLOWABLE. 8. BEFORE THE CIT(A) IT WAS SUBMITTED THAT ACTUAL C LAIM FOR INTEREST WAS FOR RS.10,59,397/-. SINCE BEFORE THE AO THE CLA IM WAS FOR RS.7,54,009/-THE COMMENT OF THE AO WAS SOUGHT. AO G AVE A REPORT DATED 10-11-2009 WHICH WAS GIVEN TO THE ASSESSEE FO R ITS RESPONSE. THE AO MENTIONED IN THE REPORT THAT LOANS IN QUESTI ON WERE NOT TAKEN FOR THE PURPOSE OF ACQUIRING ANY PROPERTY. HOWEVER, THE ASSESSEE CLAIMED THAT IT HAD ACQUIRED THE SANTACRUZ PREMISES FROM M/S BLUE DIAMOND CONSTRUCTION CO. FOR A TOTAL CONSIDERATION OF RS.1.71 CRORES VIDE SALE AGREEMENT DATED 12-7-2002. IT WAS FURTHER CLAIMED THAT A ITA NO.4597 OF 2010 5 LOAN OF RS.60,60,000/- WAS TAKEN FROM JUPITER MACHI NE PVT. LTD. DURING THE PERIOD FROM 9-11-2002 TO 24-3-2003. FURTHER LOA N OF RS.35 LAKHS WAS TAKEN FROM SHASHIKIRAN SHETTY ON 18-6-2003 AND RS.25 LAKHS FROM M/S IDEAL APPLIANCE ON 18-6-2003. THE LD. CIT(A) DI D NOT AGREE WITH THE SUBMISSIONS AND DECIDED THE ISSUE VIDE PARA 4.2 WHICH IS AS UNDER: 4.2 I HAVE CONSIDERED THE ISSUE. SECTION 24 (B) AL LOWS DEDUCTION OF THE AMOUNT OF INTEREST PAYABLE WHERE T HE PROPERTY HAS BEEN ACQUIRED WITH BORROWED CAPITAL. THUS THE P RECONDITION IS THAT THE CAPITAL SHOULD BE BORROWED AND THEN THE PROPERTY SHOULD BE ACQUIRED OUT OF THE BORROWED CAPITAL IN O RDER TO CLAIM DEDUCTION OF INTEREST PAID ON SUCH BORROWED CAPITAL . IN THE INSTANT CASE, PROPERTY HAS BEEN ACQUIRED AS PER AGR EEMENT OF SALE DT.12.07.2002, WHEREAS THE FIRST BORROWING OF RS.10,00,000 OUT OF AGGREGATE LOAN OF RS.66,60,000 TAKEN FROM M/ S. JUPITER MACHINE P. LTD WAS MADE ONLY ON 09.11.2002 I.E. SUB SEQUENT TO THE ACQUISITION OF THE PROPERTY. THIS SHOWS THAT TH E BORROWED FUND ON WHICH INTEREST PAID HAS BEEN CLAIMED AS DED UCTION UNDER SECTION 24 WAS OBTAINED ONLY AFTER THE PROPER TY IN QUESTION WAS ACQUIRED. AS THE RELEVANT PROPERTY HAS NOT BEEN ACQUIRED OUT OF BORROWED CAPITAL QUESTION DOES ARIS E TO ALLOW DEDUCTION U/S 24(B) OF INTEREST OF RS.1O,59,397 PAI D ON SUCH BORROWED CAPITAL. THE AC HAS RIGHTLY DECLINED THE D EDUCTION. 9. BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE FINDINGS GIVEN BY THE LD. CIT(A) ARE NOT CORRECT. H E REFERRED TO VARIOUS DOCUMENTS IN THE PAPER BOOK AND POINTED OUT THAT TH OUGH THE PROPERTY WAS ACQUIRED VIDE AN AGREEMENT DATED 12-7-2002 BUT PAYMENTS WERE MADE LATER ON VARIOUS DATES. SUCH PAYMENTS WERE MAD E TO M/S BLUE DIAMOND CONSTRUCTION CO. FROM THE LOANS TAKEN FROM VARIOUS PARTIES AND IN THIS REGARD HE REFERRED TO THE COPIES OF ACC OUNTS OF THESE PARTIES AS WELL AS BANK STATEMENTS TO SHOW THAT PAYMENTS HA VE BEEN MADE TO M/S. BLUE DIAMOND CONSTRUCTION CO. AFTER OBTAINING LOANS. HE ALSO REFERRED TO PAGES 19 & 20 OF THE PAPER BOOK, WHICH ARE DETAILS OF ITA NO.4597 OF 2010 6 INTEREST AND ADMITTED THAT AS FAR AS INTEREST AMOUN TING TO RS.22.795/-. RS.62.611/- AND RS.41,425/- PAID TO SEALAND HOLDING S P. LTD., INDPORT MARITIME AGENCY P. LTD. AND CONTECH TRANSPORT SERVI CES, RESPECTIVELY, WAS NOT PAID FOR ACQUISITION OF THE PROPERTY AND, T HEREFORE, NO CLAIM WAS BEING MADE FOR THE SAME. 10. ON THE OTHER HAND, LD. DR STRONGLY SUPPORTED TH E ORDER OF THE CIT(A). 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND FORCE IN THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE. THE INTEREST HAS BEEN MAINLY DISALLOWED BECAUSE, ACCORD ING TO THE LD. CIT(A), NO FUNDS HAVE BEEN BORROWED AFTER THE ACQUI SITION OF THE PROPERTY. HOWEVER, CLEARLY THE FACTS ARE OTHERWISE. IT IS NOT DISPUTED THAT THE PROPERTY HAS BEEN ACQUIRED FROM M/S BLUE D IAMOND CONSTRUCTION CO. VIDE AN AGREEMENT DATED 12-7-2007, COPY OF WHICH IS AVAILABLE AT PAGE-98 OF THE PAPER BOOK. CLAUSE (1) ITSELF SHOWS THAT THE BUYER WAS REQUIRED TO MAKE THE PAYMENT IN THE FOLLO WING MANNER: A) RS.50,00,000/- PAID ON OR BEFORE EXECUTION HEREOF AS EARNEST MONEY B) RS. 11,00,000/- BY 7TH AUGUST, 2002 C) RS.11,00,000/- BY 7TH SEPTEMBER, 2002 D) RS. 12,00,000/- BY 7TH OCTOBER, 2002 E) RS.12,00,000/-/- BY 7TH NOVEMBER, 2002 K) RS.75,00,000/- ON OBTAINING OCCUPATION CERTIFICA TE FROM RS.1,71,00,000/- MUMBAI MUNICIPAL CORPORATION AND HANDING OVER THE EXCLUSIVE POSSESSION OF THE PREMISES TO THE PURCHASERS RS.1,71,00,000/- (RUPEES: ONE CRORE SEVENTY ONE LA KH ONLY) THUS, IN THE AGREEMENT ITSELF PAYMENTS WERE REQUIRE D TO BE MADE AFTER THE DATE OF PURCHASE. PAGES 70 & 71 OF THE PAPER BO OK, WHICH IS A ITA NO.4597 OF 2010 7 COPY OF THE ACCOUNTS OF M/S BLUE DIAMOND CONSTRUCT CO. SHOWS THE DATE OF PAYMENTS AS UNDER: BLUE DIAMOND CONSTRUCTION CO. FROM 01/04/2002 TO 31 /03/2003 DATE 12/07/2002 12/07/2002 01/11/2002 07/01/2003 20/03/2003 13/6/2003 17/6/2003 27/6/2003 22/7/2003 PARTICULARS OFFICE PREMISES PURCHASE OF OFFICE OF 5TH FLOOR OF DIAMOND SQUARE DEVELOPMENT CREDIT BANK L1 BEING ISSUED OBN A/C DEVELOPMENT CREDIT BANK L1 BEING ISSUED OBN A/C DEVELOPMENT CREDIT BANK L1 BEING ISSUED OBN A/C DEVELOPMENT CREDIT BANK L1 BEING ISSUED OBN A/C DEVELOPMENT CREDIT BANK L1 BEING ISSUED OBN A/C DEVELOPMENT CREDIT BANK L1 BEING ISSUED OBN A/C DEVELOPMENT CREDIT BANK L1 BEING ISSUED OBN A/C CREDIT BANK L1 BEING ISSUED OBN A/C DEBIT AMOUNT 50,00,000.00 10000000.00 1500000.00 1200000.00 3900000.00 2500000.00 1000000.00 1000000.00 CREDIT AMOUNT 17100000.00 17100000 17100000 THE ABOVE CLEARLY SHOWS THAT INITIAL PAYMENT OF RS. 50 LAKHS WAS MADE ON THE DATE OF EXECUTION OF THE AGREEMENT AND THE B ALANCE PAYMENTS HAVE BEEN MADE FROM 1-11-2002 TO 20-7-2003. THESE P AYMENTS ARE FURTHER CORROBORATED FROM THE BANK STATEMENTS, COPY OF WHICH IS AVAILABLE AT PAGES 74 TO 84 OF THE PAPER BOOK, WHIC H CLEARLY SHOWS THAT ITA NO.4597 OF 2010 8 CHEQUES HAVE BEEN ISSUED ON THESE DATES. ON THOSE D ATES TRANSFER OF MONEY FROM THE BORROWER IS CLEARLY INDICATED. FOR E XAMPLE ON 9-11-2002 A SUM OF RS.10 LAKHS HAS COME FROM M/S JU PITER MACHINE P. LTD., AND CHEQUE FOR PAYMENT OF RS.10 LAKHS HAS BEE N ISSUED FROM THE SAME BANK ON 12-11-2002 TO M/S. BLUE DIAMONDS CONST RUCTION CO. THUS, IT BECOMES CLEAR THAT VARIOUS LOANS WHICH HAV E BEEN BORROWED ACCORDING TO THE LD. CIT(A) AFTER 12-7-02 HAVE CLEA RLY BEEN USED FOR THE PURPOSE OF PURCHASING THE PROPERTY AND, THEREFO RE, IN OUR OPINION, SINCE AMOUNTS HAVE BEEN USED FOR THE PURCHASE OF TH E PROPERTY, INTEREST ON SUCH LOANS IS REQUIRED TO BE ALLOWED. H OWEVER, AS ADMITTED BY THE LD. COUNSEL OF THE ASSESSEE THAT OUT OF THE TOTAL INTEREST AMOUNTING TO RS.11,86,228/- ONLY A SUM OF RS.10,59, 397/- HAS BEEN RAISED FOR THE PURCHASE OF THE PROPERTY AND EVEN TH E GROUND TAKEN BEFORE US IS ONLY FOR A SUM OF RS.10,59,397/-. THER EFORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND DIRECT THE AO TO AL LOW INTEREST AMOUNTING TO RS.10,59,397/-. 12. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 3 0-11-2011. SD/- SD/- (B.R.MITTAL) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 30-11-2011. P/-* ITA NO.4597 OF 2010 9