ITO 10(1)(2), MUMBAI V. MANDAR CHEMICALS P. LTD, MUMBAI

ITA 4971/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88514 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 19-02-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 15-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA YADAV
• Assessee Lawyers: DR P DANIEL; S M MAKHIJA
• Keywords: Business income; Depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI SANJAY ARORA ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 4971/MUM/2010 ASSESSMENT YEAR: 2007-08 ITO - 10(1)(2) MUMBAI VS. MS/. MANDAR CHEMICALS PVT. LTD. 46/2254, SUPRABHAT CVHS LTD. GANDHI NAGAR, BANDRA (EAST) MUMBAI 400 051 PAN:- AAACM 2963 K (APPELLANT) (RESPON DENT) ASSESSEE BY : DR. P. DANIEL & SHRI S.M. MAKHIJA REVENUE BY : SH RI AKHILENDRA YADAV DATE OF HEARING : 19 .02.2015 DATE OF ORDER : 27 .02.2015 O R D E R PER AMIT SHUKLA, JM: THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST ORDER DATED 19.03.2010 PASSED BY CIT(A)-21, MUMBAI FOR THE QUAN TUM OF ASSESSMENT PASSED U/S 143(3) FOR THE A.Y. 2007-08, VIDE WHICH FOLLOWING GROUNDS HAVE BEEN RAISED:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE RE NTAL INCOME EARNED BY THE ASSESSEE ON PROPERTY USED FOR BUSINES S FOR A SHORT DURATION SHOULD BE TREATED AS INCOME FROM HOUSE PR OPERTY AND NOT INCOME FROM OTHER SOURCES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT (A) HAS ERRED IN DIRECTING THE AO TO AL LOW DEDUCTION FOR PAYMENT OF INTEREST ON BORROWED LOANS AMOUNTING TO RS.13,86,216/- IN F.Y. 2006-07 AS AGAINST RELEVANT PERIOD BEING F.Y. 2005-06. ITA NO. 4971/MUM/2010 ASSESSMENT YEAR: 2007-08 2 2. THE BRIEF FACTS OF THE CASE ARE THAT, THE ASSESS EE WAS EARLIER ENGAGED IN THE BUSINESS OF CHEMICAL MANUFACTURING. DURING THE YEAR, THE ASSESSEE HAD LEASED OUT ITS TALOJA PLANT AND HAS EARNED RENTAL INCOME THEREFROM AT RS.64,24,900/-. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS TREATED THE RENTAL INCOME AS BUSINESS INCOME AND HAS ALSO CLAIMED DEPRECIATION ON LEASE HOLD LAND. THE ASSESS EE VIDE LETTER DATED 22.07.2009 AND 27.08.2009, IN RESPONSE TO THE SHOW CAUSE NOTICE SUBMITTED THAT DEPRECIATION ON LEASE HOLD LAND WAS CLAIMED INADVERTENTLY IN THE DEPRECIATION SCHEDULE. HOWEVER , THE RENTAL INCOME RECEIVED FROM LETTING OUT FROM THE FACTORY PREMISES IS A BUSINESS INCOME. IT WAS EXPLAINED THAT DURING THE YEAR THE ASSESSEE COMPANY COULD NOT GENERATE ANY SALE FROM ITS CHEMICAL BUSINESS EVEN T HOUGH IT WAS PURSUING THE BUSINESS ACTIVITY DURING THE YEAR. DUE TO SLACKNESS OF THE DEMAND FOR THE PRODUCT OF THE COMPANY THERE WAS HUG E LOSSES. THE ASSESSEE IN ORDER PREVENT LOSS OF ITS OPERATION HAD DECIDED TO RENT OUT ITS FACTORY PREMISES. IT WAS ALSO SUBMITTED AS AN A LTERNATE CONTENTION THAT THE RENTAL INCOME CAN BE CONSIDERED AS INCOME FROM HOUSE PROPERTY AND THEREFORE, STATUTORY DEDUCTION U/S 24 MAY BE GRANTED. HOWEVER, THE LEARNED ASSESSING OFFICER HELD THAT TH E INCOME DERIVED FROM LEASING OF THE FACTORY PLANT IS TO BE TREATED AS INCOME FROM OTHER SOURCES BECAUSE, IN THE AGREEMENT FOR LEAVE AND LI CENSE, IT WAS STATED THAT THE LICENSEE SHALL HAVE THE BENEFIT AND USE OF ALL THE FIXTURES, INFRASTRUCTURE, WATER, DRAINAGES, SEWERAGES LINES, ELECTRIC METERS, ELECTRIC CABLING ETC. THUS IT WAS A COMPOSITE AGREE MENT AND NOT A SIMPLE LETTING OF THE FACTORY PLANT. ACCORDINGLY, HE TAXED THE RENTAL INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. HE FURTHE R DISALLOWED THE CLAIM OF INTEREST ON BORROWED LOANS AMOUNTING TO RS .13,86,216/- WHICH ITA NO. 4971/MUM/2010 ASSESSMENT YEAR: 2007-08 3 CLAIMED BY THE ASSESSEE AS DEDUCTION U/S 24(B), ON THE GROUND THAT THE SAME WAS EXPENDED ON THE LOAN TAKEN FOR THE CONSTRU CTION OF FACTORY PREMISES AND THERE WAS NO ADDITION TO THE FIXED ASS ETS. HE HELD THAT IF THE CONSTRUCTION IS FOR THE NEW FACTORY PREMISES, T HEN THE SAME SHOULD BE CAPITALIZED. ACCORDINGLY, HE DISALLOWED THE CLAI M OF INTEREST EXPENSES OF RS.13,86,214/-. 3. BEFORE THE LD. CIT(A), THE ASSESSEE SUBMITTED TH AT DURING THE ASSESSMENT PROCEEDING THE ASSESSEE HAS MADE AN ALTE RNATIVE PLEA THAT THE RENTAL INCOME BE CONSIDERED AS INCOME HOUSE PR OPERTY, WHICH HAS BEEN REJECTED BY THE AO WITHOUT ANY VALID GROUND. R EGARDING CLAIM OF INTEREST ALSO, IT WAS SUBMITTED THAT THE LOAN WAS T AKEN FOR THE CONSTRUCTION FOR FACTORY PREMISES WHICH HAS BEEN RE NTED OUT AND INTEREST EARNED THEREFROM HAS TO BE ALLOWED AS DEDUCTION U/S 24(B). THE LD. CIT(A) NOTED ON IMPORTANT FACT THAT, THE APPELLANT WAS HAVING TWO BUILDINGS IN THE FACTORY PREMISES. ONE BUILDING WAS APPEARING/SHOWN IN STATEMENT OF DEPRECATION OF FIXED ASSETS. SINCE, NO BUSINESS ACTIVITY WAS BEING CARRIED OUT, THE APPELLANT LET OUT THE SA ME VIDE AGREEMENT DATED 15.12.2004. THE OTHER BUILDING WAS UNDER CONS TRUCTION. THE CONSTRICTION COMPLETED IN F.Y. 2005-06. THIS BUILDI NG WAS KEPT SEPARATE AS NEW CONSTRUCTION AND WAS NOT FORMING PART OF D EPRECATION CHARGE AS DEPRECIATION COULD NOT BE CLAIMED THEREON IN ABS ENCE OF USE OF SAME. THIS SECOND BUILDING WAS LET OUT BY APPELLANT VIDE AGREEMENT DATED 27.03.2006. THE AO ASSESSED THE RENTAL INCOME EARNE D FROM LETTING OUT THE FACTORY PREMISES UNDER THE HEAD INCOME FROM OT HER SOURCES. HE HAS FURTHER NOTED THAT THERE WAS NO PLANT AND MACHI NERY IN THE FACTORY BUILDING, EXCEPT FOR SOME FURNITURE, FITTINGS, ELEC TRIC METERS, ELECTRIC CABLES ETC. THIS HE HELD WAS ALSO VERIFIABLE FROM T HE DEPRECATION CHART ITA NO. 4971/MUM/2010 ASSESSMENT YEAR: 2007-08 4 WHERE PLANT AND MACHINERY HAS BEEN SHOWN AT VALUE O F RS.30,868/-. FURTHER ON THE PERUSAL OF LEASE AND LICENSE AGREEME NT, HE HELD THAT IT IS ABDUNTLY CLEAR THAT FACTORY PREMISES WAS RENTED OUT FOR WARE HOUSE PURPOSES AND THERE IS NO MENTION OF ANY PLANT AND M ACHINERY IN THE AGREEMENT. THEREFORE, IT CANNOT BE HELD THAT INCOME IS TO BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES ALBEIT C AN BE ASSESSED ONLY UNDER THE HEAD INCOME FROM HOUSE PROPERTY. ACCORDIN GLY, HE DIRECTED THE AO TO ASSESS THE RECEIPTS AS THE RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND ALLOW THE STATUTORY DEDUCTION U/S 24. 3.1 REGARDING CLAIM OF INTEREST OF RS.13,86,000/-, HE NOTED THE FOLLOWING FACTS:- 3.1 THE FACTS OF THE CASE WERE THAT THE APPELLANT CLAIMED INTEREST EXPENDITURE OF RS.13,86,215/- AS PAID TO T HE BANK ON LOAN USED FOR CONSTRUCTION OF BUILDING IN FACTORY P REMISES. DURING OF THE ASSESSMENT PROCEEDINGS THE APPELLANT EXPLAIN ED TO THE AO THAT THE SAID INTEREST WAS PAID ON CONSTRUCTION LOA N TO JANAKALYAN SAHAKARI BANK. THE MONIES WERE BORROWED FROM THE SA ID BANK FOR CONSTRUCTION OF FACTORY BUILDING / SHED WHICH WAS L ET OUT' AND INCOME EARNED, THEREFROM. THIS WAS CLEAR FROM THE F ACT THAT BEFORE THE BORROWING OF THE LOAN FROM THE SAID BANK , THERE WAS NO 'NEW CONSTRUCTION ACCOUNT' AND THE CONSTRUCTION WAS DONE FULLY OUT OF THE BORROWED FUNDS. THE APPELLANT FURT HER EXPLAINED THAT THE SAID FACT COULD BE VERIFIED FROM THE BALAN CE SHEET AS ON.31-3-2005 AND 31-3-2006. THE APPELLANT CLAIMED T HAT THE INTEREST ON THE LOAN FROM THE BANK WAS RIGHTLY CLAI MED AS EXPENDITURE. 3.2. DURING APPELLATE PROCEEDINGS THE APPELLANT REI TERATED ITS ARGUMENT-TAKEN BEFORE AO DURING ASSESSMENT PROCEEDI NGS. THE APPELLANT FURTHER ARGUED/EXPLAINED THAT IT ENTERED INTO AN AGREEMENT WITH THE M/S LEE AND MUIRHEAD LTD ON 15-1 2-2004 AND WITH M/S ARCH PHARMA LTD ON 27-3-2006 WHICH CLE ARLY INDICATES THAT THE CONSTRUCTION ACTIVITY OF THE BUI LDING WHICH HAD BEEN LET OUT' WAS COMPLETED IN FINANCIAL YEAR 2005- 06 RELEVANT TO' .THE AY 2006-07. THE APPELLANT COMPANY STARTED CONS TRUCTION IN FINANCIAL YEAR 2004-05 AND THE AMOUNT PAID TO THE C ONTRACTOR 'WAS SHOWN AS ADVANCE GIVEN, WHICH FIGURE WAS APPEA RING IN' ITS ITA NO. 4971/MUM/2010 ASSESSMENT YEAR: 2007-08 5 BALANCE SHEET AS ON 31ST MARCH, 2005 AT RS. 1,28,01 ,337/- UNDER THE MAIN HEAD 'LOANS AND ADVANCES' AS DURECON CONST RUCTION - ADVANCE. HOWEVER, IN FINANCIAL YEAR 2005 06 RELEV ANT TO THE A Y 2006-07, SINCE THE CONSTRUCTION ACTIVITY OF THE MAI N BUILDING WHICH 'HAD BEEN LET OUT WAS OVER AS ON 31.3.2006. T HE EXPENDITURE INCURRED WAS REFLECTED IN THE BALANCE S HEET UNDER. THE HEAD 'LOANS ADVANCES' 'NEW CONSTRUCTION' AT RS 1,63,53,387/-. APPELLANT FURTHER STATED AT THE WHOL E BUILDING WHICH WAS CONSTRUCTED BY BORROWED-FUNDS FROM JAN KA LYAN CO- OP. BANK WAS SEPARATELY SHOWN IN THE BALANCE SHEET ON WHICH NO DEPRECIATION WAS CLAIMED AND IT WAS NOT INCLUDED IN THE SCHEDULE OF BLOCK 'OF ASSETS AND IT WAS BECAUSE OF THIS ONLY THAT WHEN THE A.O DID NOT FIND ANY ADDITION TO ASSET IN DEPRECATI ON SCHEDULE, THE A.O CAME TO THE CONCLUSION THAT NO BUILDING HAD BEEN CONSTRUCTED. APPELLANT FURTHER ARGUED THAT THE FACT REMAINED THAT THE CONSTRUCTION AS ON 31.3.2006, WAS PRACTICALLY 6 VE~ WHEN IT WAS LET OUT ON LEAVE AND LICENCE BASIS. THE APPELLA NT FURTHER ARGUED THAT THE ASSET WHICH HAD BEEN LET OUT WAS CO NSTRUCTED WITH BORROWED FUNDS' AND WAS. DULY REFLECTED IN THE BALANCE SHEET AND THEREFORE, THE ACTION OF A.O IN DISALLOWING THE CLAIM OF INTEREST PAID OUT OF RENT RECEIVED HAD BEEN BASED O N AN ERRONEOUS UNDERSTANDING. THE APPELLANT FURTHER SUBM ITTED THAT, WITHOUT PREJUDICE EVEN IF THE A.O'S STAND OF DECLIN ING TO GIVE DEDUCTION OF INTEREST EXPENDITURE UNDER SECTION 36( 1)(III), IS FOUND TO BE CORRECT, IN THAT. CASE, THE DEDUCTION O F INTEREST EXPENDITURE SHOULD BE ALLOWED U/S. 24 OF THE ACT, S INCE THE LOAN ON WHICH INTEREST HAD BEEN PAID WAS UTILIZED IN ACQ UIRING 'THE PROPERTY FROM WHICH RENT HAD BEEN' RECEIVED AND WHI CH FACT WAS CLEARLY BROUGHT ON RECORD DURING THE COURSE OF ASSE SSMENT PROCEEDINGS ITSELF BEFORE THE A.O. THE APPELLANT RE QUESTED THAT THE DISALLOWANCE MADE BY A.O SHOULD BE DELETED. AFTER NOTING DOWN THE FACTS AND THE SUBMISSIONS MAD E ON BEHALF OF THE ASSESSEE AND ALSO ON THE BASIS OF MATERIAL ON RECOR D, HE DIRECTED THE AO TO ALLOW THE DEDUCTION OF SUCH INTEREST EXPENDITURE AFTER GIVING CATEGORICAL FINDING THAT THE LOAN TAKEN FROM THE BA NK HAS NOT BEEN UTILIZED FOR ANY OTHER INVESTMENT EXCEPT CONSTRUCTI ON OF FACTORY BUILDING WHICH WAS LET OUT AND RENTAL INCOME HAS BEEN EARNED THEREFROM. THIS FACTORY BUILDING WAS CONSTRUCTED FROM THE LOAN AMOU NT WHICH WAS KEPT SEPARATE FROM THE DEPRECATION SCHEDULE AND SHOWN SE PARATELY UNDER THE ITA NO. 4971/MUM/2010 ASSESSMENT YEAR: 2007-08 6 HEAD NEW CONSTRUCTION ACCOUNT. ACCORDINGLY, HE HELD THAT INTEREST PAID IS WHOLLY RELATABLE TO CONSTRUCTION OF A HOUSE PROPERT Y FROM BORROWED FUNDS AND THEREFORE, ASSESSEE IS ELIGIBLE FOR DEDUC TION U/S 24. 4. AFTER HEARING BOTH THE PARTIES AND ON PERUSAL OF THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER, WE FIND THAT T HE ONLY ISSUE BEFORE US IS, WHETHER THE RENTAL INCOME FROM THE FACTORY P REMISES IS TO BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY OR INCOME FROM OTHER SOURCES AS ASSESSEE HAS NOT RAISED THE ISSU E OF BUSINESS INCOME. THE AOS MAIN PREMISE FOR HOLDING IT TO BE INCOME F ROM OTHER SOURCES IS THAT, IN THE LEASE AND LICENSE AGREEMENT IT HAS BEE N STATED AS UNDER:- DURING THE SUBSISTENCE OF THE LICENCE, THE LICENSE E SHALL HAVE THE USE AND BENEFIT OF ALL FITTING, FIXTURES, INFRASTRUCTURE, WATER, DRAINAGE, AND SEWERAGE LINES, ELECTRIC METER S AND ELECTRIC CABLING AND OTHER INFRASTRUCTURE, AMENITIE S AND CONVENIENCES INSTALLED IN RESPECT OF LICENSED PREMI SES. FROM THIS CLAUSE HE INFERRED THAT IT IS A COMPOSITE AGREEMENT BY WAY OF WHICH, THE ASSESSEE HAS LET OUT PREMISES AND ALSO T HE ENTIRE SET UP INCLUDING INFRASTRUCTURE, FITTING, FIXTURES ETC. HO WEVER, WE ARE UNABLE TO APPRECIATE THE DEPARTMENTS STAND FOR THE REASON TH AT IF A PREMISES HAS BEEN RENTED OUT WITH FACILITY OF WATER, DRAINAGE, S EWER LINES, ELECTRIC CABLING AND OTHER INFRASTRUCTURE AMENITIES, IT CANN OT BE HELD THAT IT IS NOT LETTING OUT OF PREMISES. SUCH A BASIC FIXTURES AND FITTING ARE ESSENTIAL FOR LETTING OUT ANY PREMISES, THEREFORE, THE REASON GIV EN BY THE AO FOR TREATING THE RENTAL INCOME SOLELY BASED ON THIS CLA USE THAT IT IS INCOME FROM OTHER SOURCES IS NOT CORRECT. THE FACTS WHICH HAVE BEEN NOTED BY THE LD. CIT(A) FOR ARRIVING TO THE CONCLUSION THAT IT IS A LETTING OF FACTORY PREMISES AND NOT ANY PLANT & MACHINERY HAS NOT BEEN REBUTTED BEFORE US AND, THEREFORE, THE CONCLUSION DRAWN BY HIM ARE FACTUALLY AND LEGALLY ITA NO. 4971/MUM/2010 ASSESSMENT YEAR: 2007-08 7 CORRECT, AND WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH A FINDING. MOREOVER, THE RATIO LAID DOWN IN THE DECISION BY TH E HONBLE SUPREME COURT IN THE CASE OF SHAMBU INVESTMENT PVT. LTD. ON REPORTED IN 263 ITR 143 IS ALSO APPLICABLE, ON THE FACTS OF THE ASS ESSEES CASE. ACCORDINGLY THE ORDER OF THE LD. CIT(A) ON THIS SCO RE IS AFFIRMED. SIMILARLY ON THE ISSUE OF INTEREST ALSO THERE IS CA TEGORICAL FINDING OF THE LD. CIT(A) THAT THE LOAN ON WHICH INTEREST HAS BEEN PAID HAS BEEN UTILIZED FOR CONSTRUCTION OF FACTORY PREMISES, WHIC H HAS BEEN LET OUT DURING THE YEAR AND ACCORDINGLY HIS DIRECTION TO AL LOW INTEREST U/S 24(B) IS LEGALLY CORRECT. THUS, WE AFFIRM THE FINDING OF THE LD. CIT(A) ON THIS POINT ALSO AND THE GROUNDS RAISED BY THE REVENUE IS DISMISSED. 5. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF FEBRUARY, 2015. SD/- SD/- (SANJAY ARORA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 27.02.2015 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR B BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.