SYNTHOFINE CHEMICALS OF INDIA LTD, MUMBAI V. ITO 9(3)(2), MUMBAI

ITA 4681/MUM/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62292 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 07-03-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 04-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D K SUTARIA
• Keywords: Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F, MUMBAI BEFORE SHRI B. RAMAKOTAIAH, A.M. AND SHRI V. DURGA RAO, J.M. ITA NO. 4681 & 4682/MUM/2010 ASSESSMENT YEARS: 2004-05 & 2006-07 M/S SYNTHOFINE CHEMICALS OF INDIA LTD., AP PELLANT B-200, SYNTHOFONE ESTATE, OFF AAREY ROAD, GOREGAON EAST, MUMBAI 400 063. (PAN - AAECS5875N) VS. INCOME TAX OFFICER-9(3)-2, RESPONDENT AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. APPELLANT BY : MR. VIJAY MEHTA RESPONDENT BY : MR. D.K. SUTARIA DATE OF HEARING : 07/03/2012 DATE OF PRONOUNCEMENT : 13/04/2012 ORDER PER V. DURGA RAO, J.M.: THESE TWO APPEALS ARE FILED BY THE ASSESSEE AGAIN ST THE ORDERS OF CIT(A)-20, MUMBAI DATED 26/03/2010 FOR ASSESSMENT Y EARS 2004-05 & 2006-07. 2. THE ASSESSEE HAS RAISED COMMON GROUNDS IN BOTH T HE YEARS AND THE ISSUES ARE SIMILAR. FOR THE SAKE OF CLARITY, GR OUNDS OF APPEAL FROM AY 2004-05 ARE REPRODUCED BELOW:- ITA NO. 4681 & 4682/MUM/2010 M/S SYNTHOFINE CHEMICALS OF INDIA LTD. 2 1. ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF TH E AO IN DETERMINING INCOME AT RS. 5,09,460/- AS AGAINST THE RETURNED BUSINESS LOSS OF RS. 1,33,364/- DECLARED BY THE APP ELLANT. DISALLOWANCE BEING BAD IN LAW THE SAME NEEDS TO BE DELETED. 2. ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LA W THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN TREATING THE BUSINESS INCOME SHOWN IN THE RETURN OF INCOME ON AC COUNT OF COMPENSATION RECEIVED FROM SHAREHOLDERS AS INCOME F ROM OTHER SOURCES. ACTION OF TREATING INCOME AS INCOME FROM O THER SOURCES BEING BAD IN LAW, BUSINESS INCOME AS SHOWN BY THE A SSESSEE IN THE RETURN NEEDS TO BE ACCEPTED. 3. ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LA W THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 6,83,079/- BEING PART OF THE TOTAL INTEREST OF RS. 8,04,309/- PAID TO SHAREHOLDERS WHO WERE OCCUPYING GALAS AND GIVEN DEP OSITS. DISALLOWANCE OF INTEREST BEING BAD IN LAW, THE SAME NEEDS TO BE DELETED. 3. GROUND NO. 1 IS GENERAL IN NATURE AND GROUND NO. 2, HAS NOT BEEN PRESSEED DURING THE COURSE OF ARGUMENTS, THERE FORE, THE SAME IS DISMISSED AS NOT PRESSED. THUS, THE GROUND NO. 3 SU RVIVES FOR CONSIDERATION IN BOTH THE ASSESSMENT YEARS. 4. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE C OMPANY CONSTRUCTED BUILDINGS COMPRISING GALAS FOR THE USE AND OCCUPATION OF MEMBERS, WHO ARE SHAREHOLDERS IN THE ASSESSEE COMPA NY. AS PER THE TERMS OF THE AGREEMENT FOR ALLOTMENT OF THE RESPECT IVE GALAS, THE ASSESSEE ENTERED INTO AGREEMENT WITH VARIOUS PERSON S AND ALLOTTED FOR USE AND OCCUPATION OF UNITS BY THE SHAREHOLDERS OF THE COMPANY AS PER THE PROVISIONS OF ARTICLES OF ASSOCIATION. AS P ER THE RESOLUTION PASSED BY THE COMPANY DATED 8 TH AUGUST, 1992, THE BOARD OF DIRECTORS ITA NO. 4681 & 4682/MUM/2010 M/S SYNTHOFINE CHEMICALS OF INDIA LTD. 3 HAS RESOLVED THAT ANY PERSON WHO AGREES TO HOLD (BY HIMSELF OR THROUGH POOLING ARRANGEMENTS BETWEEN SHAREHOLDERS) 3400 FULLY PAID UP EQUITY SHARES OF RS. 100/-EACH IN THE CAPITAL OF THE COMPANY, AS ALSO TO MAINTAIN WITH THE COMPANY INTEREST FREE SEC URITY DEPOSIT OF RS. 60,000/- AS PER CLAUSE NO. 22 OF THE AGREEMENT, THE SAID PERSONS SHALL BE ENTITLED TO OCCUPY AND USE ONE UNIT OF TH E PREMISES ADMEASURING APPROXIMATELY 170 SQ. MTRS. CARPET AREA (AND 184 SQ. MTRS. SUPER BUILT UP AREA). ACCORDINGLY, THE ASSESS EE COMPANY ALLOTTED VARIOUS UNITS TO SHAREHOLDERS, WHO HAVE TA KEN SHAREHOLDING AS WELL AS MADE DEPOSITS WITH THE COMPANY. AS PER T HE MINUTES DATED 16/03/96, THE COMPANY AGREED TO PAY INTEREST @12% P ER ANNUM SUBJECTED TO DEDUCTION OF TAX AT SOURCE ON THE DEPO SITS MADE BY THE SHAREHOLDERS. ACCORDINGLY, DURING THE YEARS UNDER C ONSIDERATION, THE COMPANY PAID INTEREST ON THE DEPOSITS TO THE SHAREH OLDERS OF RS. 8,04,079/- IN AY 2004-05 AND RS. 6,73,384/- IN AY 2 006-07, AFTER DEDUCTING TAX AT SOURCE. THE ASSESSEE ALSO RECEIVE D MAINTENANCE CHARGES AS COMPENSATION FROM THE SHAREHOLDERS, WHIC H WAS OFFERED AS INCOME UNDER THE HEAD 'BUSINESS'. THE AO WAS OF TH E VIEW THAT THE ASSESSEE WAS NOT DOING ANY BUSINESS AND SO THE SO CALLED RENT RECEIVED AS COMPENSATION SHOULD BE TREATED AS 'INCO ME FROM OTHER SOURCES'. EVEN THOUGH THE AO HAD SHIFTED THE HEAD O F INCOME FROM BUSINESS TO OTHER SOURCES, HE ALLOWED THE OTHER EXP ENDITURE EXCEPT THE CLAIM OF INTEREST ON THE GROUND THAT THE PAYMEN T OF INTEREST IS NOWHERE CONNECTED TO THE EARNING OF INCOME AND SINC E THE ASSESSEE HAS EARNED ONLY INTEREST INCOME TO THE EXTENT OF RS . 1,61,485/-, THE AO DISALLOWED THE BALANCE AMOUNT OF RS. 6,83,079/- WHILE COMPUTING THE TOTAL INCOME. SIMILARLY IN AY 2006-07, THE ASSE SSEE HAD INTEREST INCOME OF ONLY RS. 1,02,018/-, THE AO RESTRICTED TH E CLAIM TO THAT EXTENT AND BALANCE AMOUNT OF RS. 5,71,366/- WAS DIS ALLOWED. EVEN THOUGH THE ASSESSEE WAS AGGRIEVED ON THE SHIFTING O F HEAD OF INCOME ITA NO. 4681 & 4682/MUM/2010 M/S SYNTHOFINE CHEMICALS OF INDIA LTD. 4 GROUND NOS. 1 & 2 ARE NOT PRESSED. WITH REFERENCE T O CLAIM OF ALLOWANCE OF INTEREST, THE CIT(A), EVEN THOUGH, OB SERVED THAT U/S 57(III) DEDUCTION OF EXPENDITURE LAID OUT OR EXPEND ED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING OF SUCH INCOME WAS ALLOWABLE, HE DID NOT ALLOW THE AMOUNT AND CONFIRME D THE ACTION OF THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A), THE A SSESSEE IS IN APPEALS BEFORE US. 5. WE HAVE HEARD THE LEARNED COUNSEL FOR THE ASSESS EE AND THE LEARNED DR AND PERUSED THE ORDERS OF THE AUTHORITIE S BELOW AS WELL AS THE RECORD. THERE IS NO DISPUTE OF THE FACT THAT TH E ASSESSEE HAD ACCEPTED THE DEPOSITS AS PART OF ALLOCATING UNITS T O VARIOUS SHAREHOLDERS AND PAID INTEREST THEREON. IT IS ALSO ON RECORD THAT COMPENSATION RECEIVED FROM THE SHAREHOLDERS WAS OFF ERED AS INCOME AND EVEN THOUGH BROUGHT TO TAX UNDER THE HEAD 'OTHE R SOURCES'. THE AGREEMENT THROUGH WHICH THE GALAS WERE ALLOTTED, IT IS SEEN THAT COMPENSATION/RENT WAS TO BE PAID BY SHAREHOLDERS FO R USE AND OCCUPATION OF THE GALAS. THE DEPOSITS WERE ALSO MAD E A PART OF THE ALLOTTMENT OF GALAS, THEREFORE, THERE IS DIRECT NEX US OF THE PAYMENT OF INTEREST ON THE DEPOSIT WITH THE ACTIVITY OF THE AS SESSEE COMPANY. THE OBSERVATION OF THE AO AND THE CIT(A) THAT INTEREST INCOME IS EARNED ONLY TO THE EXTENT OF RS. 1,61,485/- AND RS. 1,02,0 18/- IN THE RESPECTIVE YEARS, THEREFORE, THE INTEREST CAN BE CL AIMED TO THAT EXTENT CANNOT BE ACCEPTED AS THERE IS A DIRECT NEXUS BETWE EN THE PAYMENT OF INTEREST ON DEPOSITS AND THE ACTIVITY OF THE ASSESS EE COMPANY. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. RAJEND RA PRASAD MOODY, 115 ITR 519 HELD THAT INTEREST PAID ON MONIES BORR OWED FOR INVESTMENT IN SHARES, EVEN THOUGH, HAS NOT YIELDED ANY DIVIDEND WAS ADMISSIBLE AS DEDUCTION U/S 57(III) OF THE ACT IN C OMPUTING ITS INCOME UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. THE PRI NCIPLES LAID DOWN ITA NO. 4681 & 4682/MUM/2010 M/S SYNTHOFINE CHEMICALS OF INDIA LTD. 5 BY THE HON'BLE SUPREME COURT SQUARELY APPLIES TO TH E FACTS ON RECORD. WE DO NOT SEE ANY REASON AS TO WHY THE TOTAL INTERE ST CANNOT BE ALLOWED TO THE ASSESSEE ON INTEREST PAID ON THE DE POSITS ACCEPTED BY THE ASSESSEE, WHICH WERE UTILISED IN THE BUSINESS A ND THE INCOME OFFERED FOR TAXATION. WE, THEREFORE, DIRECT THE AO TO ALLOW THE INTEREST AS CLAIMED IN THE RESPECTIVE ASSESSMENT YEARS. ACCO RDINGLY, GROUND NO. 3 IN BOTH THE ASSESSMENT YEARS IS ALLOWED. 6. IN THE COURSE OF PRESENT APPEALS, THE ASSESSEE F ILED ADDITIONAL GROUND, WHICH IS AS UNDER:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW THE LEARNED AO AND LEARNED CIT(A) ERRED IN TAXING THE I NCOME OF THE COMPANY IGNORING THE FACT THAT THE COMPANY IS FOR T HE MUTUAL BENEFIT OF THE SHAREHOLDERS ONLY. ON MUTUALITY CONC EPT NO PART OF THE INCOME IS LIABLE TO TAX. THE LD. CIT(A) OUGHT T O HAVE HELD THAT THE INCOME ARISING OUT OF TRANSACTION WITH THE MEMB ERS IS NOT LIABLE TO TAX ON THE GROUNDS OF MUTUALITY. 7. IT WAS THE CONTENTION OF THE ASSESSEE COMPANY TH AT THE COMPANY IS FORMED FOR THE BENEFIT OF SHAREHOLDERS, THEREFOR E, PRINCIPLES OF MUTUALITY WILL APPLY AND THE INCOME IS NOT LIABLE TO TAX. 8. AFTER CONSIDERING THE ARGUMENTS OF THE LEARNED C OUNSEL AND THE LEARNED DR, WE ARE OF THE OPINION THAT THIS ADDITIO NAL GROUND CANNOT BE ADMITTED AND ADJUDICATED AS THE ISSUE WAS NOT AG ITATED BEFORE THE AUTHORITIES BELOW AND FURTHER THE FACTS REGARDING C ONSTITUTION OF THE COMPANY AND ACTIVITIES OF THE COMPANY, WHICH WERE T HERE FOR SO MANY YEARS, REQUIRE DETAILED EXAMINATION AND THE SAID FA CTS ARE NOT ON RECORD. IN VIEW OF THE ABOVE, THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS DISMISSED. ITA NO. 4681 & 4682/MUM/2010 M/S SYNTHOFINE CHEMICALS OF INDIA LTD. 6 9. IN THE RESULT, APPEALS OF ASSESSEE ARE PARTLY AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 13 TH APRIL, 2012. SD/- SD/- (B. RAMAKOTAIAH) (V. DURGA RAO) ACCOUNTANT MEMBER JUD ICIAL MEMBER MUMBAI, DATED: 13 TH APRIL, 2012 KV COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, F BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 10/04/12 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 12/04/12 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER