ADDL CIT RG 4(3), MUMBAI V. THE SONAWALA CO. P. LTD, MUMBAI

ITA 4645/MUM/2010

• Counselvise Citation: 464519914 RSA 2010
• Duration Of Justice: 4 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 16-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 04-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJN EESH K ARVIND
• Assessee Lawyers: JITENDRA JAIN
• Keywords: Capital asset; Business income; Depreciation; Capital expenditure
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE HONBLE S/SHRI H.L. KARWA, PRESIDENT AND B. R.BASKARAN (AM) . . , . . , ./I.T.A. NO. 4004/MUM/2010 ( / ASSESSMENT YEAR :2007-08) M/S THE SONAWALA COMPANY PVT. LTD., 135, SHEIKH MEMON STREET, ZHAVERI BAZAR, MUMBAI-400002 / VS. A DDL. COMMISSIONER OF INCOME TAX - RANGE-4(3), AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( ! / APPELLANT) .. ( '# ! / RESPONDENT) ./I.T.A. NO. 4645/MUM/2010 ( / ASSESSMENT YEAR :2007-08) ASSTT. COMMISSIONER OF INCOME TAX- 4(3), ROOM NO.649, 6 TH FLOOR, AAYAKAR BHAVAN,M.K.ROAD, MUMBAI-400020 / VS. M/S THE SONAWALA COMPANY PVT. LTD., 135, SHEIKH MEMON STREET, ZHAVERI BAZAR, MUMBAI-400002. ( ! / APPELLANT) .. ( '# ! / RESPONDENT) ./ $% ./PAN/GIR NO. : AAACT2087P ! & / REVENUE BY : SHRI RAJN EESH K ARVIND '# ! ' & /ASSESSEE BY : SHRI JITENDRA JAIN ( ) ' * + / DATE OF HEARING : 26.8.2014 ,- ' * + /DATE OF PRONOUNCEMENT : 27.8.2014 / O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 30.03.2010 PASSED BY LD CIT(A)-8, MUMBAI AND THEY RELATE TO TH E ASSESSMENT YEAR 2007-08. I.T.A. NO. 4004/MUM/2010 I.T.A. NO. 4645/MUM/2010 2 2. THE REVENUE IS ASSAILING THE DECISION OF LD CIT( A) IN GRANTING RELIEF IN RESPECT OF THE FOLLOWING ISSUES:- (A) DISALLOWANCE OF EXPENSES RS.34,85,822/- (B) INCOME FROM SALE OF LAND & DEDUCTION ALLOWED U/S 54EC. 3. THE ASSESSEE IS IN APPEAL IN RESPECT OF THE FOLL OWING ISSUES:- (A) DISALLOWANCE OF DEPRECIATION, INTEREST ON CAR LOAN AND CAR EXPENSES AGGREGATING TO RS.85,940/- IN RESPECT OF T HE CAR OWNED BY THE DIRECTOR. (B) DISALLOWANCE MADE U/S 14A OF THE ACT. 4. THE FACTS RELATING TO THE CASE ARE STATED IN BRI EF. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION D ECLARING A TOTAL INCOME OF RS.1,73,02,965/-. IT HAD DECLARED BUSINESS INCOME F ROM HOARDING CHARGES/COMPENSATION AND ALSO FROM TRADING IN SILVE R. THE AO NOTICED THAT THE HOARDING CHARGES/COMPENSATION WERE RECEIVED FROM VA RIOUS COMPANIES FOR LEASING OUT OPEN SPACES. THE GROSS INCOME OF RS.37 ,88,010/- RECEIVED AS HOARDING CHARGES/COMPENSATION CONSISTED OF HOARDING CHARGES, LEASE RENT, PARKING CHARGES ETC. THE AO NOTICED THAT THE LEASE PERIOD FOR HOARDINGS WERE FROM 3 YEARS TO 15 YEARS. ACCORDINGLY THE AO TOOK THE VIEW THAT THE ASSESSEE HAS EARNED ONLY RENTAL INCOME AND ACCORDINGLY ASSES SED THE ABOVE SAID RECEIPTS UNDER THE HEAD INCOME FROM OTHER SOURCES. 5. THE AO NOTICED THAT THE ASSESSEE HAS CARRIED OUT ONLY ONE TRANSACTION OF PURCHASE AND SALE OF SILVER DURING THE INSTANT YEAR . THE SAID TRANSACTIONS WERE ALSO SEEN ENTERED WITH SISTER CONCERNS ONLY. THE ASSESSEE HAD DECLARED A PROFIT OF RS.5,11,225/- FROM THE SAID TRANSACTION. THE AO TOOK THE VIEW THAT THE SINGLE TRANSACTION OF PURCHASE AND SALE WAS A COLOURABLE D EVICE TO MAKE BELIEVE THE I.T.A. NO. 4004/MUM/2010 I.T.A. NO. 4645/MUM/2010 3 BUSINESS TRANSACTION. BY PLACING RELIANCE ON THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF MCDOWELL & CO. LTD VS. CTO (19 85)(154 ITR 148), THE AO FELT THAT THE ASSESSEE HAS ADOPTED DUBIOUS METHOD. ACCORDINGLY HE HELD THAT THE ASSESSEE HAS NOT CARRIED ON ANY BUSINESS. ACCORDIN GLY, HE ASSESSED THE PROFIT DERIVED FROM SILVER BUSINESS ALSO UNDER THE HEAD IN COME FROM OTHER SOURCES. 6. THE ASSESSEE HAD CLAIMED EXPENSES AGGREGATING T O RS.37,71,762/- UNDER VARIOUS HEADS. THE AO ALLOWED ONLY 10% OF THE SAME AGAINST THE INCOME DISCUSSED IN THE PRECEDING PARAGRAPHS AND ACCORDING LY DISALLOWED REMAINING 90% OF THE CLAIM. 7. THE ASSESSEE HAD SOLD A PLOT ADMEASURING 5561.7 4 SQ. MTS., LOCATED IN PUNE FOR A CONSIDERATION OF RS.2.23 CRORES. THE AS SESSEE HAD ACQUIRED THE LEASE HOLD RIGHTS ON IT THROUGH AN AGREEMENT DATED 11.12. 1941. THE ASSESSEE DECLARED THE PROFIT ARISING ON SALE OF ABOVE SAID P LOT AS LONG TERM CAPITAL GAIN AND CLAIMED DEDUCTION U/S 54EC OF THE ACT. THE AO NOTICED THAT THE ASSESSEE HAD PROPOSED TO CONSTRUCT FLAT ON THE ABOVE SAID LA ND ABOUT 20 YEARS BACK AND HAD ALSO OBTAINED ADVANCES FROM THE PARTIES. THE AS SESSEE HAD ALSO PREPARED PLANS FOR CONSTRUCTION OF RESIDENTIAL PREMISES AND ALSO OBTAINED SANCTION FROM PUNE MUNICIPAL CORPORATION. HOWEVER, THE PROJECT W AS ABANDONED AND THE ADVANCES RECEIVED FROM PARTIES EXCEPTING A SUM OF R S.73,200/- WERE RETURNED BACK. THE AO TOOK THE VIEW THAT THE ASSESSEE HAD C ONVERTED THE ABOVE SAID PLOT AS BUSINESS ASSET AND ACCORDINGLY ASSESSED THE GA IN ARISING ON SALE OF LAND AS BUSINESS INCOME. CONSEQUENTLY HE REJECTED THE CLAI M FOR DEDUCTION U/S 54EC OF THE ACT. I.T.A. NO. 4004/MUM/2010 I.T.A. NO. 4645/MUM/2010 4 8. THE AO ALSO COMPUTED DISALLOWANCE U/S 14A OF TH E ACT AT RS.1,30,332/- AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSES SEE. 9. THE ASSESSEE CHALLENGED THE ASSESSMENT ORDER B Y FILING APPEAL BEFORE LD CIT(A). THE FIRST APPELLATE AUTHORITY HELD THAT TH E INCOME ARISING FROM HOARDING CHARGES/COMPENSATION AND ALSO FROM TRADING IN SILVE R SHOULD BE ASSESSED AS INCOME FROM BUSINESS ONLY. WITH REGARD TO THE EX PENSES, THE LD CIT(A) CONFIRMED THE DISALLOWANCE OF TRANSFER FEE OF RS.2 .00 LAKHS (TREATED AS CAPITAL EXPENDITURE) AND CAR EXPENSES OF RS.85,940/- (INCUR RED ON CAR OWNED BY THE DIRECTOR). THE LD CIT(A) DIRECTED THE ASSESSING OF FICER TO DELETE THE DISALLOWANCE OF REMAINING AMOUNT. 10. WITH REGARD TO THE PUNE LAND, THE LD CIT(A) NOTICED THAT THE DEVELOPMENT ACTIVITY UNDERTAKEN BY THE ASSESSEE DURING THE FY 1 984-85 HAD FAILED AND THE PROPOSED BUSINESS ACTIVITY WAS NIPPED IN BUD. ACCO RDINGLY HE HELD THAT THE ASSESSEE CANNOT BE HELD TO HAVE CARRIED BUSINESS AC TIVITY. SINCE THE ASSESSEE DID NOT HOLD THE LAND AS STOCK IN TRADE, THE LD C IT(A) HELD THAT THE GAIN ARISING ON ITS SALE SHOULD BE ASSESSED AS LONG TERM CAPITA L GAIN ONLY. ACCORDINGLY HE DIRECTED THE AO TO ALLOW THE DEDUCTION U/S 54EC AFT ER VERIFYING WITH THE FULFILLMENT OF THE CONDITIONS PRESCRIBED UNDER THAT SECTION. 11. THE LD CIT(A) CONFIRMED THE DISALLOWANCE MADE U/S 14A OF THE ACT. 12. WE SHALL FIRST TAKE UP THE APPEAL FILED BY TH E REVENUE. THE FIRST ISSUE RELATES TO THE DISALLOWANCE OF EXPENSES. THE LD D. R PLACED STRONG RELIANCE ON THE ASSESSMENT ORDER. ON THE CONTRARY, THE LD A.R SUBMITTED THAT THE ASSESSING OFFICER HAS MADE SUCH KIND OF DISALLOWANCE ONLY DUR ING THE YEAR UNDER I.T.A. NO. 4004/MUM/2010 I.T.A. NO. 4645/MUM/2010 5 CONSIDERATION. REFERRING TO THE ASSESSMENT ORDER P ASSED FOR AY 2004-05, WHICH IS PLACED AT PAGE 42 OF THE PAPER BOOK, THE LD A.R SUBMITTED THAT THE ASSESSING OFFICER HAS ALL ALONG ACCEPTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING IN BULLION. HE SUBMITTED THAT THE ASSESSEE HAS BEEN DECLARING THE INCOME FROM HOARDING CHARGES AND TRADING IN BULLION SINCE PAST SEVERAL YEARS. HE SUBMITTED THAT THE ASSESSEE COMPANY WAS INCORPOR ATED IN BRITISH ERA. HE SUBMITTED THAT THE ASSESSING OFFICER HAS TAKEN A DI FFERENT VIEW ONLY DURING THE YEAR UNDER CONSIDERATION. HE SUBMITTED THAT THE BU SINESS INCOME DECLARED BY THE ASSESSEE IN THE SUBSEQUENT YEARS WERE NOT DISTU RBED, THOUGH THEY WERE ASSESSED U/S 143(1) OF THE ACT. ACCORDINGLY HE SUB MITTED THAT THERE WAS NO REASON FOR THE ASSESSING OFFICER TO TAKE A DIFFEREN T VIEW AND TO MAKE DISALLOWANCE. 13. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS IS SUE. AS SUBMITTED BY THE LD A.R, THE ASSESSING OFFICER HAS ACCEPTED THAT THE AS SESSEE IS ENGAGED IN THE BUSINESS OF TRADING IN BULLION IN THE ASSESSMENT OR DER PASSED U/S 143(3) OF THE ACT FOR AY 2003-04. IT SEEMS THAT THE AO DID NOT DISTURB THE SAID POSITION IN ANY OTHER YEARS EXCEPT IN THE YEAR UNDER CONSIDERAT ION. FROM THE ORDER PASSED BY LD CIT(A), WE NOTICE THAT THE LD CIT(A) HAS APPR ECIATED THE FACT THAT THE ASSESSEE IS METICULOUSLY COMPUTING ITS TOTAL INCOME UNDER DIFFERENT HEADS. THE LD CIT(A) HAS ALSO OBSERVED THAT THE SINGLE TRANSAC TION OF PURCHASE AND SALE SHALL ALSO CONSTITUTE BUSINESS. ACCORDINGLY HE HAS HELD THAT THE ACTIVITY OF THE ASSESSEE RELATING TO INCOME FROM HOARDING, CABLE VI DEO CHARGES, PARKING CHARGES ETC. INVOLVE EXPENSES LIKE PUTTING UP LIGHTING AND MAINTAINING THE SAME, CLEANING THE HOARDING, TOWER PROVIDING SECURITY, MAINTAINING SUCH TOWERS ETC. IN OUR VIEW, THE LD CIT(A) HAS ANALYZED THIS ISSUE IN PROP ER PERSPECTIVE AND ACCORDINGLY I.T.A. NO. 4004/MUM/2010 I.T.A. NO. 4645/MUM/2010 6 HE HAS GIVEN HIS DECISION THAT THE ABOVE SAID INCOM E IS ASSESSABLE AS BUSINESS INCOME ONLY. BEFORE US, THE LD D.R COULD NOT CONTR OVERT THE FINDINGS GIVEN BY LD CIT(A). WITH REGARD TO THE EXPENSES, WE NOTICE THA T THE LD CIT(A) HAS ANALYSED EACH EXPENSE AND HAS GIVEN PROPER REASONING TO ALLO W THE SAME. AS NOTICED EARLIER, THE LD CIT(A) HAS CONFIRMED DISALLOWANCE O F TRANSFER CHARGES AND CAR EXPENSES. SINCE WE HAVE CONFIRMED THE DECISION OF T HE LD CIT(A) THAT THE HOARDING CHARGES AND TRADING IN SILVER ARE REQUIRED TO BE ASSESSED AS BUSINESS INCOME, WE DO NOT FIND ANY INFIRMITY IN THE DECISIO N OF LD CIT(A) IN DIRECTING THE AO TO ALLOW THE EXPENSES CLAIMED. ACCORDINGLY WE U PHOLD HIS ORDER ON THIS ISSUE. 14. THE NEXT ISSUE PERTAINS TO THE ASSESSMENT OF GAIN ARISING ON SALE OF PUNE LAND. WE HAVE HEARD THE PARTIES ON THIS ISSUE. WE HAVE ALREADY NOTICED THAT THE ASSESSEE HAS ACQUIRED THE LEASEHOLD RIGHT OF THE IM PUGNED LAND IN THE YEAR 1941. THE ONLY ACTIVITY, WHICH WAS CONSIDERED BY THE AO T O TREAT THE LAND AS BUSINESS ASSET, WAS ABOUT THE ATTEMPT MADE TO CONSTRUCT THE FLATS ON THE LAND. AS NOTICED BY THE LD CIT(A), THE ASSESSEE HAS ABANDONED THE PR OJECT AFTER OBTAINING THE APPROVAL OF THE BUILDING PLAN, MEANING THEREBY, THE ASSESSEE HAS NOT STARTED THE PROJECT AT ALL. FROM THE ASSESSMENT ORDER ALSO, WE NOTICE THAT THE ASSESSING OFFICER DID NOT BRING ANY MATERIAL TO SHOW THAT THE ASSESSEE INDEED STARTED THE EXECUTION OF THE PROJECT. THE LD CIT(A) HAS ALSO N OTICED THAT THE ASSESSEE HAS BEEN CONTINUOUSLY SHOWING THE LAND AS ITS FIXED ASS ET ONLY. WE FURTHER NOTICE THAT THE COMMENCEMENT CERTIFICATE GIVEN BY THE PUNE MUNICIPAL CORPORATION WAS FOR CONSTRUCTION OF ONE RESIDENTIAL PREMISES ONLY A LONG WITH OUT HOUSES. THE INITIAL ATTEMPT TO DEVELOP THE LAND HAS FAILED DUE TO THE DECISION RENDERED BY I.T.A. NO. 4004/MUM/2010 I.T.A. NO. 4645/MUM/2010 7 BOMBAY HIGH COURT. ACCORDINGLY THE LD CIT(A) HAS C OME TO THE CONCLUSION THAT THE ASSESSEE HAS THROUGHOUT HELD THE IMPUGNED LAND AS CAPITAL ASSET AND THE ASSESSEE HAS NOT CONVERTED THE SAME INTO BUSINESS A SSET. ACCORDINGLY, THE LD CIT(A) HAS HELD THAT THE GAIN ARISING ON SALE OF LA ND IS ASSESSABLE AS LONG TERM CAPITAL GAIN. WITH REGARD TO THE CLAIM FOR DEDUCTI ON U/S 54EC OF THE ACT, AS NOTICED EARLIER, THE LD CIT(A) HAS RESTORED THE MAT TER TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THE FULFILLMENT OF CONDITI ONS PRESCRIBED U/S 54EC OF THE ACT. 15. WE NOTICE THAT THE HONBLE PUNJAB & HARYANA HIGH COURT HAD CONSIDERED AN IDENTICAL ISSUE IN THE CASE OF CIT VS. RAJ BRICK S INDUSTRY (2010)(322 ITR 625). THE ASSESSEE THEREIN WAS A PARTNERSHIP FIRM AND CAR RIED ON THE BUSINESS OF RUNNING BRICK-KILN. IT SOLD A LAND, WHICH IT HAD P URCHASED EARLIER, AND DECLARED LONG TERM CAPITAL GAIN. THE AO ASSESSED THE GAIN A RISING ON SALE OF LAND AS BUSINESS INCOME. THE HONBLE HIGH COURT HELD THAT THE GAIN ARISING ON SALE OF LAND CANNOT BE ASSESSED AS BUSINESS INCOME, THE ASS ESSEE IS NOT ENGAGED IN THE BUSINESS OF DEALING IN LAND. SINCE THE ASSESSEE WA S USING THE LAND FOR BRICK-KILN BUSINESS, THE PROFIT ARISING ON ITS SALE IS ASSESSA BLE AS CAPITAL GAIN ONLY. THE HIGH COURT FURTHER HELD THAT THE SAID INCOME CANNOT ALSO BE CONSIDERED AS DERIVED FROM ADVENTURE IN THE NATURE OF TRADE. IN THE INSTANT CASE ALSO, THE ASSESSEE HAS BEEN HOLDING THE LEASEHOLD RIGHT IN TH E LAND SINCE 1941. IT HAS SOLD THE SOLD THE SAME AFTER HOLDING IT FOR ABOUT 65 YEA RS. ABOUT 20 YEARS BACK, THE ASSESSEE HAD ATTEMPTED TO DEVELOP THE SAME, BUT IT WAS PREVENTED BY THE ORDER OF HONBLE BOMBAY HIGH COURT. HENCE, THE ASSESSEE COULD NOT DEVELOP THE SAME. SUBSEQUENTLY, THE ASSESSEE HAS OBTAINED PERM ISSION TO CONSTRUCT A RESIDENTIAL PREMISES. ALL THESE SEQUENCES WOULD SH OW THAT THE ASSESSEE HAS I.T.A. NO. 4004/MUM/2010 I.T.A. NO. 4645/MUM/2010 8 CONTINUED TO HOLD THE LAND AS ITS CAPITAL ASSET. U NDER THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT THE GAIN ARISING ON SALE OF LAND SHOULD BE ASSESSED AS LONG TERM CA PITAL GAIN ONLY. CONSEQUENTLY THE LD CIT(A) WAS ALSO JUSTIFIED IN HO LDING THAT THE ASSESSEE CAN CLAIM DEDUCTION U/S 54EC OF THE ACT, SUBJECT TO THE FULFILLMENT OF CONDITIONS PRESCRIBED IN THAT SECTION. 16. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE ASSESSEE. AT THE TIME OF HEARING, THE LD A.R DID NOT PRESS THE GROUNDS RELAT ING TO THE DISALLOWANCE MADE U/S 14A OF THE ACT. ACCORDINGLY, THE GROUNDS RELAT ING TO THE SAID ISSUE ARE DISMISSED. 17. THE OTHER ISSUE IN THE APPEAL OF THE ASSESSEE PERTAINS TO THE DISALLOWANCE OF CAR EXPENSES IN RESPECT OF THE CAR OWNED BY A DI RECTOR. THE LD A.R ADMITTED THAT THE CAR IS OWNED BY THE DIRECTOR. HOWEVER, HE SUBMITTED THAT THE DIRECTOR HAS USED THE SAID CAR ONLY FOR THE PURPOSE OF THE B USINESS OF THE ASSESSEE COMPANY ONLY. ACCORDINGLY HE SUBMITTED THAT THE DI SALLOWANCE RELATING TO THE CAR MAY BE ALLOWED. ON THE CONTRARY, THE LD D.R SU PPORTED THE ORDER OF LD CIT(A) ON THIS ISSUE. 18. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS I SSUE. WHEN IT WAS ASKED AS TO WHETHER THE COMPANY HAS PASSED ANY RESOLUTION IN RESPECT OF THE CAR EXPENSES OF THE DIRECTOR OR WAS THERE ANY AGREEMENT BETWEEN THE ASSESSEE COMPANY AND THE DIRECTOR WITH REGARD TO THE USAGE O F CAR, THE LD A.R FAIRLY ADMITTED THAT THE ASSESSEE DID NOT POSSESS SUCH KIN D OF DOCUMENTS. IN THE ABSENCE OF ANY AGREEMENT OR ANY OTHER DOCUMENT TO S UPPORT THE CLAIM OF THE I.T.A. NO. 4004/MUM/2010 I.T.A. NO. 4645/MUM/2010 9 ASSESSEE, WE HAVE NO OTHER OPTION, BUT TO CONFIRM T HE ORDER PASSED BY LD CIT(A) ON THIS ISSUE. 19. IN THE RESULT, THE APPEAL FILED BY THE REVENU E AS WELL AS THE ASSESSEE ARE DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 27TH AUGUST, 2014 . ,- ( . /0 1 2 27TH AUGUST, 2014 - ' 3) 4 SD SD ( . . / H.L. KARWA) ( . . , / B.R. BASKARAN ) / PRESIDENT / ACCOUNTANT MEMBER / ( ) MUMBAI: 27TH AUGUST,2014. . . ./ SRL , SR. PS ! ' / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '# ! / THE RESPONDENT. 3. ( 6* ( ) / THE CIT(A)- CONCERNED 4. ( 6* / CIT CONCERNED 5. 78 3 '*9 , + 9 , / ( ) / DR, ITAT, MUMBAI CONCERNED 6. 3 : ) / GUARD FILE. ; ( / BY ORDER, TRUE COPY < $ (ASSTT. REGISTRAR) + 9 , / ( ) /ITAT, MUMBAI