D.K. PATEL & COMPANY, MUMBAI V. ITO-22(1)(1), NAVI MUMBAI

ITA 4928/MUM/2011

• Counselvise Citation: 492819914 RSA 2011
• Duration Of Justice: 3 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 21-05-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 21-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: DR K SHIVARAM
• Keywords: Business income; Opportunity of being heard
• Section: 234B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D, MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND DR. S.T.M. PAVALAN, JUDICIAL MEMBER ITA NO. 4928/MUM/2011 ASSESSMENT YEAR: 2007-08 SHRI D.K. PATEL & COMPANY 23, KAILAS NAGAR, M.G. ROAD GHATKOPAR (E) MUMBAI-400 077 VS. ITO-22(1)(1) NAVI MUMBAI (APPELLANT) (RESPONDENT) PERMANENT ACCOUNT NO. : - AAAFD 0803 E ASSESSEE BY : DR. K. SHIVARAM & SHRI RAHUL HAKANI REVENUE BY : SHRI P.K. SINGH DATE OF HEARING : 21.05.2014 DATE OF PRONOUNCEMENT : 16.07.2014 O R D E R PER DR. S.T.M. PAVALAN, JM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE LD.CIT(A)-33, MUMBAI DATED 31.03.2011 FOR THE ASSES SMENT YEAR 2007-08. 2. IN GROUNDS NO. 1 AND 2, THE ASSESSEE HAS AGITATE D THE DECISION OF THE LD.CIT(A) CONFIRMING THE DISALLOWANCE OF RS.40,02,9 49/- MADE BY THE AO IN RESPECT OF THE EXPENSES INCURRED FOR THE REPAIRS CARRIED OU T AT KAILASH TOWER CO-OPERATIVE HOUSING SOCIETY AND FURTHER CONFIRMING THE DISALLOW ANCE OF RS.12,00,000/- PAID TO THE SOCIETY AS COMPENSATION. 2.1 BRIEFLY STATED, THE ASSESSEE IS A PARTNERSHIP F IRM CARRYING CONSTRUCTION BUSINESS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. ON ONE PORTION OF FLAT NO. 355, THE ASSESSEE CONSTRUCTED AND SOLD FLATS IN A RESIDE NTIAL BUILDING LATTER KNOWN AS KAILASH TOWER CO-OPERATIVE HOUSING SOCIETY AND ON THE OTHER PORTION OF THE LAND ITA NO. 4928/MUM/2011 SHRI D.K. PATEL & COMPANY ASSESSMENT YEAR: 2007-08 2 THE ASSESSEE CONSTRUCTED VARIOUS OFFICES IN A COMME RCIAL COMPLEX KAILASH PLAZA WHICH WERE SOLD IN VARIOUS YEARS. DURING THE ASSESS MENT YEAR 2006-07, THE ASSESSEE UNDERTOOK FURTHER CONSTRUCTION WORK OF KAILASH PLA ZA AS WELL AS KAILASH TOWER CO- OPERATIVE SOCIETY. THE ASSESSEE INCURRED AN EXPEND ITURE ON ACCOUNT OF REPAIR WORK IN RESPECT OF KAILASH POWER CO-OPERATIVE SOCIETY CA RRIED DURING THE ASSESSMENT YEARS 2006-07 AND 2007-08 TOTALLY AMOUNTING TO RS.40,02,9 49/- AND THE SAME WERE PAID DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. IN THE ASSESSMENT FRAMED, THE AO DISALLOWED THE EXPENDITURE PAID OF RS.40,02,949/- D URING THE ASSESSMENT YEAR UNDER CONSIDERATION AND FURTHER MADE A DISALLOWANCE OF RS .12,000/- PAID TO THE SOCIETY AS AGAINST THE ASSESSEE CLAIMING IT AS PAYMENT OF COMP ENSATION TO THE SOCIETY. ON APPEAL, THE LD.CIT(A) HAD CONFIRMED THE SAID DISALL OWANCES MADE BY THE AO. AGGRIEVED BY THE IMPUGNED DECISION, THE ASSESSEE HA S RAISED THESE GROUNDS IN THE APPEAL BEFORE US. 2.2 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD IT IS PERTINENT TO MENTION THAT OUT OF THE TOTAL EXPENSES OF RS.40, 02,949/-, THE ASSESSEE HAS CLAIMED AN EXPENSES OF RS.39,11,816/- DURING THE AS SESSMENT YEAR 2006-07 AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE SAI D ASSESSMENT YEAR. THE ASSESSEE HAS NOT CLAIMED THE EXPENDITURE OF RS. RS. 39,11,816/- DURING THE ASSESSMENT YEAR UNDER CONSIDERATION AND THE MERE FA CT THAT THE SAID PAYMENT HAS BEEN MADE DURING THE ASSESSMENT YEAR UNDER CONSIDER ATION CANNOT BE THE BASIS FOR DISALLOWING THE SAME. WHEN THE FACT IS BEING SO, IT IS NOT JUST AND PROPER TO DISALLOW THE SAID AMOUNT WHICH IS NOT CLAIMED AS EXPENDITURE DURING THE YEAR UNDER CONSIDERATION. IN VIEW OF THAT MATTER, THE AO IS DI RECTED TO DELETE THE EXPENDITURE ALREADY ALLOWED IN THE EARLIER ASSESSMENT YEAR AND FURTHER VERIFY THE QUANTUM OF EXPENDITURE INCURRED DURING THE YEAR UNDER CONSIDER ATION. ACCORDINGLY, THE AO IS DIRECTED TO DECIDE, IN ACCORDANCE WITH LAW, THE ALL OWABILITY OF THE EXPENDITURE INCURRED DURING THE YEAR UNDER CONSIDERATION AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE DIRECT AND ORDER ACCORDINGLY. GROUND NO 1 IS PARTLY ALLOWED. 2.2.1 AS REGARDS THE DISALLOWANCE OF RS.12,00,000/- , IT IS RELEVANT TO STATE THAT OVER AND ABOVE THE REPAIRS CARRIED OUT BY THE ASSES SEE, RS.12 LAKHS WAS PAID AS ITA NO. 4928/MUM/2011 SHRI D.K. PATEL & COMPANY ASSESSMENT YEAR: 2007-08 3 SETTLEMENT AMOUNTS WHICH THE SOCIETY CLAIMED ON ACC OUNT OF REPAIRS CARRIED OUT BY THEM. THE ASSESSEE CLAIMED THE DEDUCTION OF RS.12 L AKHS AS DIRECT COST DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. THE SAID CLAIM OF DEDUCTION WAS DISALLOWED BY THE AO AS TDS WAS NOT DEDUCTED U/S 194(C) AND ALSO THE SAME WAS NOT ALLOWABLE U/S 37 OF THE INCOME TAX ACT. THE LD.CIT(A) CONFIRM ED THE DISALLOWANCE MADE BY THE AO. IN THIS CONNECTION, IT IS RELEVANT TO STATE THAT THE ASSESSEE HAS PAID RS.12,00,000/- AS COMPENSATION IN RESPECT OF THE RE PAIR WORK CLAIMED TO HAVE BEEN CARRIED BY THE SOCIETY AND THE SAME WAS PAID AS FIN AL SETTLEMENT AMOUNT AS PER THE TERMS OF THE MOU AND THE PAYMENTS HAVE NOT BEEN MAD E TO THE CONTRACTORS. THIS INDICATES THAT THE SAID EXPENDITURE IS A REIMBURSEM ENT OF COST INCURRED BY THE SOCIETY AND THERE IS NO INCOME ELEMENT WHICH REQUIR ES DEDUCTION OF TAX AT SOURCE. ALSO, THE PAYMENT OF RS.12 LAKHS HAS NOT BEEN PAID AS DAMAGES FOR BREACH OF ANY AGREEMENT/INFRACTION OF LAW WHICH IS CLEAR FROM THE READING MOU. MOREOVER, THE PAYMENT MADE BY THE ASSESSEE TO THE SOCIETY IS IN A CCORDANCE WITH THE TERMS OF MOU AND HENCE THE SAME IS ALLOWABLE IN TERMS OF SEC TION 37 OF THE ACT. EVEN IN THE BREACH OF CONTRACT, DAMAGES PAID FOR SUCH AN ACT IS ALLOWABLE U/S 37. IN THE CASE OF TREATING THE SAID PAYMENTS AS REIMBURSEMENT, THEN A LSO THE ASSESSEE NEED NOT REQUIRE DEDUCTING TDS FOR SUCH PAYMENT. CONSIDERING THE ENTIRETY OF THE FACTS, WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BEL OW ARE NOT JUSTIFIED IN MAKING/CONFIRMING THE SAID DISALLOWANCE. THEREFORE, WE DIRECT THE AO TO ALLOW THE IMPUGNED CLAIM OF EXPENDITURE. GROUND NO 2 IS ALLOWED. 3. IN GROUND NO. 3, THE ASSESSEE HAS AGITATED THE D ECISION OF THE LD.CIT(A) CONFIRMING THE AOS ORDER TREATING LICENSE FEES OF RS.17,31,240/- RECEIVED FROM RELIANCE LIFE INSURANCE LTD. AS BUSINESS INCOME. 3.1 BRIEFLY STATED, THE ASSESSEE ENTERED INTO A LEA SE AND LICENSE AGREEMENT WITH RELIANCE LIFE INSURANCE LTD. ON 03.01.2006 FOR FIVE YEARS I.E. UP TO 30.05.2011. ACCORDING TO THE LEASE AND LICENSE AGREEMENT, THE L EASE WAS TO COMMENCE FROM 1 ST JUNE, 2006 FALLING WITHIN THE ASSESSMENT YEAR UNDER CONSIDERATION. THE AMOUNT OF LEASE RENT OF RS.17,31,240/- WAS OFFERED AS INCOME FROM HOUSE PROPERTY BY THE ASSESSEE AND THEREBY CLAIMED A STATUTORY DEDUCTION U/S 24A OF THE INCOME-TAX ACT. HOWEVER, THE AO TREATED THE SAID LEASE RENT AS BUSI NESS INCOME ON THE GROUND THAT ITA NO. 4928/MUM/2011 SHRI D.K. PATEL & COMPANY ASSESSMENT YEAR: 2007-08 4 THE PROPERTY WAS HELD AS STOCK IN TRADE, RENT WAS R ECEIVED DURING BUSINESS HOURS AND EARLIER YEARS, THE ASSESSEE WAS OFFERING RENTAL INC OME AS BUSINESS INCOME FOR THE OTHER PROPERTIES. ON APPEAL, THE LD.CIT(A), BY RELY ING ON THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2005-06, HAD CONFIRMED THE SAID TREATMENT GIVEN TO THE RECEIPT. AGGRIEVED BY THE IMPUGNED DECISION, THE AS SESSEE HAS RAISED THIS GROUND IN THE APPEAL BEFORE US. 3.2 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, IT IS PERTINENT TO MENTION THAT THE RENT HAS BEEN RECEIVE D FOR THE OFFICE PREMISES WHICH ARE OWNED BY THE ASSESSEE AND THE SAME HAS NOT BEEN USED BY THE OWNER FOR THE PURPOSE OF ANY BUSINESS OR PROFESSION CARRIED BY TH E ASSESSEE. THE PERUSAL OF THE LEASE AND LICENSE AGREEMENT INDICATES THAT THE ARRA NGEMENT IS A LONG TERM OF PURELY RENTING OF THE PROPERTY WITHOUT ANY VALUE ADDITION TO THE TENANT. AS REGARDS THE TRIBUNAL DECISION IN THE THE ASSESSEES OWN CASE FO R THE ASSESSMENT YEAR 2005-06, THE ISSUE BEFORE THE TRIBUNAL IN THE SAID CASE HAS BEEN WITH REGARD TO THE SALE CONSIDERATION OF THE PROPERTY I.E., THE BUSINESS CE NTRE, WHETHER IT IS BUSINESS INCOME OR CAPITAL GAIN AND THE ISSUE IS NOT PERTAINING TO RENTAL INCOME. FURTHER, THE ISSUE OF CHARACTER OF THE RENTAL INCOME OF THE SAID PROPERTY SOUGHT TO BE TAXED BY THE DEPARTMENT AS INCOME FROM HOUSE PROPERTY WAS SET AS IDE BY THE TRIBUNAL. HOWEVER, AS REGARDS THE CASE IN HAND, THE PROPERTY LET OUT T O RELIANCE LIFE INSURANCE LTD IS NOT A BUSINESS SERVICE CENTRE. EVEN IF HOUSE PROPERTY I S HELD AS STOCK IN TRADE, THE RENTAL INCOME HAS TO BE ASSESSED AS INCOME FROM HOUSE PROP ERTY AS THE ASSESSEE IS OWNER OF THE HOUSE PROPERTY AND THE HOUSE PROPERTY IS NOT USED BY THE ASSESSEE FOR HIS OWN PURPOSE. IN VIEW OF THE AFOREMENTIONED DISCUSSI ON, THE AO IS DIRECTED TO VERIFY WHETHER THE PREMISES RENTED OUT TO RELIANCE LIFE IN SURANCE LTD IS DIFFERENT FROM THE PREMISES INVOLVED IN THE ASSESSMENT YEAR 2005-06 AN D THE SAME IS NOT FORMING PART OF THE BUSINESS CENTRE AND ACCORDINGLY TAX THE RENT AS INCOME FROM HOUSE PROPERTY. ON SUCH TREATMENT, THE AO IS DIRECTED TO ALLOW THE CONSEQUENTIAL DEDUCTION PERMISSIBLE U/S 24A OF THE INCOME-TAX ACT. GROUND NO. 3 IS ALLOWED FOR STATISTICAL PURPOSE. 4. IN GROUND NO. 4, THE ASSESSEE HAS AGITATED THE A CTION OF THE LD.CIT(A) IN CONFIRMING THE ADDITION OF RS.5,75,964/- AS NOTIONA L INTEREST @ 12% PER ANNUM ON ITA NO. 4928/MUM/2011 SHRI D.K. PATEL & COMPANY ASSESSMENT YEAR: 2007-08 5 DEBIT BALANCE OF RS.47,99,721/- OF ONE OF THE PARTN ERS SHIR KISHOR D. PATEL ON THE BASIS THAT THE ASSESSEE FIRMS FUND HAD BEEN DIVERTE D FOR PERSONAL USE OF THE PARTNER AND NO FUND FLOW STATEMENT TO SUPPORT THE CLAIM. 4.1 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, WE FIND THAT THE LD.CIT(A) HAS WRONGLY RECORDED THAT THE ASSESSE E HAS NOT FILED FUND FLOW STATEMENT WHEREAS THE ASSESSEE FILED THE SAME VIDE ITS STATEMENT DATED 17.01.2011 WHICH IS AVAILABLE AT PAGE 337 OF THE PAPER BOOK, P ROVIDING SOURCE OF WITHDRAWALS SUPPORTED BY BANK STATEMENTS FOR THE CLAIM OF THE A SSESSEE THAT NO INTEREST BEARING FUNDS ARE USED FOR MAKING PAYMENTS TO PARTNERS. ALS O, THE PARTNERSHIP DEED DOES NOT PROVIDE FOR CHARGING INTEREST ON DEBIT BALANCE OR PAYING INTEREST ON CREDIT BALANCE AND IN FACT, THERE IS A TOTAL CREDIT BALANC E DURING THE YEAR. IN VIEW OF THE FACT THAT THE LD.CIT(A) HAS NOT CONSIDERED THESE AS PECTS, WE ARE OF THE CONSIDERED OPINION THAT IT IS JUST AND PROPER TO SET ASIDE THE ENTIRE ISSUE TO THE FILE OF THE AO TO GO THROUGH THE RECORDS AND ACCORDINGLY DECIDE THE I SSUE AFRESH AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. WE DIRECT AND ORDER ACCORDINGLY. GROUND NO. 4 IS ALLOWED FOR STATISTICAL PURPOSE. 5. IN GROUND NO. 5, THE ASSESSEE HAS AGITATED THE D ECISION OF THE LD.CIT(A) IN UPHOLDING THE DISALLOWANCE OF (I) RS.5000/- OUT OF OFFICE EXPENSES OF RS.21,608/-, (II) RS.5000/- OUT OF STAFF WELFARE EXPENSES OF RS.21,95 6/- AND (III) RS.40,000/- OUT OF MAINTENANCE EXPENSES ON RS.3,78,888/- AGGREGATE TO RS.50,000/- ON THE GROUND THAT THESE EXPENSES WERE MAINLY INCURRED BY CASH AN D SUPPORTED WITH SELF MADE VOUCHERS. SINCE THE QUANTUM CANNOT BE ASCERTAINED W ITH 100% AUTHENTICITY DUE TO THE FACT THAT THAT THE EXPENDITURE INCURRED IS PAID BY CASH SUPPORTED BY SELF MADE VOUCHERS, WE DO NOT ANY JUSTIFIABLE REASON TO INTER FERE WITH THE DECISION OF THE LD.CIT(A) AND THEREFORE, THE DISALLOWANCE CONFIRMED BY THE LD.CIT(A) IS UPHELD. GROUND NO. 5 IS DISMISSED. 6. IN GROUND NO. 6, THE ASSESSEE HAS AGITATED THE D ECISION OF THE LD.CIT(A) CONFIRMING THE ACTION OF THE AO LEVYING INTEREST U/ SS 234B AND 234D WITHOUT GIVING ANY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE FIND THAT THE LD.CIT(A) CONFIRMED THE LEVYING OF INTEREST U/S 234B AND 234D WITHOUT GIVING ANY OPPORTUNITY ITA NO. 4928/MUM/2011 SHRI D.K. PATEL & COMPANY ASSESSMENT YEAR: 2007-08 6 OF BEING HEARD TO THE ASSESSEE. THEREFORE, IT IS JU ST AND PROPER TO SET ASIDE THIS ISSUE BACK TO THE FILE OF THE AO TO DECIDE THE MATTER AFR ESH IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 6 IS ALLOWED FOR STATISTICAL PURPOSE. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF JULY, 2014. [ SD/- SD/- (P.M. JAGTAP) (DR. S.T.M. PAVALAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 16.07.2014 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR D BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.