M/S. J.M.FINANCIAL LTD.(FORMERLY KNOWN AS J.M.SHARE & STOCK BROKERS LTD.), MUMBAI V. THE INCOME-TAX OFFICER 4(3)(4), MUMBAI

ITA 5918/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48520 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-04-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Next Hearing Date: 22-02-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 26-09-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHIMA GUPTA
• Assessee Lawyers: K SHIVRAM; SANJAY PARIKH
• Keywords: Business income

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL (JM) AND SHRI RAJENDRA SI NGH(AM) ITA NO.5918/M/2008 ASSESSMENT YEAR 2002-03 M/S.J.M.FINANCIAL LTD. THE INCOME-TAX OFFICER 4( 3)(4) (FORMERLY J.M.SHARE & STOCK BROKERS LTD.) AAYAKAR BHAVAN, M.K. MARG 141, MAKER CHAMBER III MUMBAI 400 020. MUMBAI 400 021. PAN : AAACJ2590B APPELLANT RESPONDENT ASSESSEE BY : S/SHRI K.SHIVRAM & SANJAY PARIKH REVENUE BY : MS. ASHIMA GUPTA O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 7.7.2008 OF CIT(A) FOR THE ASSESSMENT YEAR 2002-03. THE DISP UTE RAISED IN THIS APPEAL IS REGARDING NATURE OF INCOME EARNED BY THE ASSESSEE F ROM LETTING OUT THE PROPERTIES AND ALLOWABILITY OF INTEREST AND ADMINIS TRATIVE EXPENSES. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE COMPANY WHICH WAS ENGAGED IN THE BUSINESS OF SHARE AND STOCK BROK ING AND OTHER RELATED CAPITAL MARKET ACTIVITIES WAS MEMBER OF NATIONAL ST OCK EXCHANGE, BOMBAY STOCK EXCHANGE AND MEMBER OF OVER THE COUNTER TRADI NG (OTC) EXCHANGE OF INDIA. THE ASSESSEE ENTERED INTO THE JOINT VENTURE AGREEMENT WITH M/S. MORGAN STANLEY, A LEADING BANKER FROM USA AND A JOI NT VENTURE COMPANY 2 INCORPORATED IN THE NAME OF JM MORGAN STANLEY SECUR ITIES P. LTD. (JMMSSPL) WAS FORMED IN WHICH THE ASSESSEE HAD 49% STAKE AND THE BALANCE 51% WAS HELD BY M/S. MORGAN STANLEY. THE ASSESSEE DURING TH E YEAR HAD ALSO DERIVED RENTAL INCOME FROM FOUR PROPERTIES AS PER DETAILS G IVEN BELOW : (I) OFFICE PREMISES AT P.M.ROAD RS.11,01,600 (II) OFFICE PREMISES AT BORIVALI RS. 1,83,774 (III) OFFICE PREMISES AT AHMEDABAD RS. 2,70,960 (IV) OFFICE PREMISES AT PUNE RS. 3,33,000 --------------- TOTAL RS.18,89,334/- ========= 3. THE ASSESSEE HAD SHOWN RENTAL INCOME AS BUSINESS INCOME. THE ASSESSEE HAD ALSO DECLARED DIVIDEND INCOME OF RS.4, 36,76,674/- WHICH HAD BEEN CLAIMED EXEMPT UNDER SECTION 10(33). IN ADDITI ON THE ASSESSEE HAD ALSO DECLARED SHORT TERM AND LONG TERM CAPITAL LOSS ON S ALE OF SHARES. UNDER THE HEAD BUSINESS INCOME, THE ASSESSEE HAD CLAIMED EXPE NDITURE OF RS.24,37,715/- AS ADMINISTRATIVE EXPENSES AND A SUM OF RS.64,01,38 5/- HAD BEEN CLAIMED AS INTEREST EXPENDITURE. OUT OF THE INTEREST EXPENDITU RE, A SUM OF RS.22,53,930/- WAS ON ACCOUNT OF PAYMENT TO JM FINANCIAL AND INVES TMENT CONSULTANCY SERVICES PVT. LTD AND RS.38,12,659/- ON ACCOUNT OF PAYMENT TO HPCL. THE AO NOTED THAT THE ASSESSEE HAD TRANSFERRED ALL THE MEM BERSHIP OF STOCK EXCHANGES TO JMMSSPL, THE JOINT VENTURE COMPANY AND, WITH THA T, THE ASSESSEE HAD TRANSFERRED THE ENTIRE INCOME EARNING APPARATUS TO THE JOINT VENTURE. THERE WERE NO BUSINESS RECEIPTS EXCEPT THE RENTAL INCOME WHICH WAS CLAIMED AS BUSINESS INCOME. THE ASSESSEE HAD ONLY DIVIDEND INC OME AND CAPITAL GAIN/ LOSS. 3 THE AO ALSO NOTED THAT THE RENTAL INCOME HAD BEEN R ECEIVED FROM LETTING OUT OF THE FOUR PREMISES TO JM MORGAN STANLEY RETAIL SERVI CES PVT. LTD. THE AO OBSERVED THAT THERE WERE NO BUSINESS ACTIVITIES IN LETTING OUT THE PREMISES. HE THEREFORE ASSESSED THE RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. AS THERE WERE NO BUSINESS ACTIVITIES AND THE ASSESSEE HAD ONLY DIVIDEND INCOME FROM THE JOINT VENTURE COMPANY, THE AO DISALLOWED THE CLAIM OF ADMINISTRATIVE AND INTEREST EXPENSES. THE INCOME FROM BUSINESS WAS COMPUTED AT RS.(-) 47,250/-. 4. IN APPEAL CIT(A) AGREED WITH THE FINDING OF THE AO THAT THE ASSESSEE WAS NOT IN THE BUSINESS OF LETTING OUT PREMISES. IT WAS OBSERVED BY HIM THAT IT WAS A CASE OF RENT RECEIVED IN SIMPLICITER AND NOT AS B USINESS RECEIPT. HE FURTHER OBSERVED THAT THE PROPERTIES WERE NOT OWNED BY THE ASSESSEE. CIT(A) THEREFORE DID NOT ACCEPT THE ASSESSMENT MADE BY THE AO AS HOU SE PROPERTY INCOME AND ASSESSED THE RENTAL INCOME AS INCOME FROM OTHER SOU RCES. AS REGARDS THE OTHER BUSINESS ACTIVITIES, THE ASSESSEE SUBMITTED THAT TH E ASSESSEE HAD NOT STOPPED THE BUSINESS IN STOCK MARKET AND THAT, WITH THE FOR MATION OF JOINT VENTURE, THE ASSESSEE HAD ONLY ADOPTED A DIFFERENT BUSINESS STRA TEGY TO DO BUSINESS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE WAS INVOLVED IN OT HER BUSINESS ACTIVITIES RELATING TO PORTFOLIO MANAGEMENT. CIT(A) HOWEVER NO TED THAT THE CLAIM OF THE ASSESSEE THAT IT WAS INVOLVED IN OTHER PORTFOLIO MA NAGEMENT SERVICES WAS NOT SUBSTANTIATED BY ANY EVIDENCE. THE ASSESSEE WAS DOI NG BUSINESS AS MEMBER OF DIFFERENT STOCK EXCHANGES WHICH HAD ALSO BEEN TRANS FERRED TO THE JOINT VENTURE COMPANY. THUS THE ENTIRE PROFIT EARNING APPARATUS H AD BEEN TRANSFERRED. THE ASSESSEE COULD EARN ONLY THE DIVIDEND INCOME FROM T HE JOINT VENTURE WHICH WAS EXEMPT. HE THEREFORE DID NOT ALLOW THE ADMINISTRATI VE EXPENSES CLAIMED. AS REGARDS THE INTEREST EXPENDITURE, THE ASSESSEE HAD ARGUED THAT THE FUNDS 4 BORROWED HAD BEEN UTILIZED FOR REPAYMENT OF 16% RED EEMABLE DEBENTURE ISSUED DURING THE PERIOD 1994-95 AND PART OF THE BO RROWINGS WAS USED FOR INVESTMENT IN HPCL. CIT(A) NOTED THAT THE INTEREST PAID TO JMFICSPL WAS FOR MONEY BORROWED IN MARCH 1999 WHICH WAS UTILIZED FOR REPAYMENT OF 16% SECURED REDEEMABLE DEBENTURE ISSUED DURING 1994-95. SINCE THE BUSINESS ITSELF WAS NOT SUBSISTING THE EXPENDITURE COULD NOT BE ALL OWED. SIMILARLY THE INTEREST ON HPCL CALL MONEY WAS RELATABLE TO CAPITAL FIELD A ND HAD THEREFORE TO BE CAPITALIZED AND COULD NOT BE ALLOWED AS A DEDUCTION UNDER SECTION 36(1)(III). CIT(A) THEREFORE CONFIRMED THE DISALLOWANCE. AGGRI EVED BY THE DECISION OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNA L. 5. BEFORE US, THE LEARNED AR FOR THE ASSESSEE SUBMI TTED THAT FINDING OF THE CIT(A) THAT THE ASSESSEE WAS NOT THE OWNER OF THE P ROPERTY WAS NOT CORRECT. THE ASSESSEE WAS NOT THE OWNER ONLY IN RESPECT OF B ORIVALI OFFICE PREMISES BUT ALL OTHER THREE PROPERTIES WERE OWNED BY THE ASSESS EE. IT WAS ALSO SUBMITTED THAT INCOME FROM THE PROPERTIES HAD BEEN ASSESSED I N THE SUBSEQUENT YEARS AS INCOME FROM HOUSE PROPERTY EXCEPT IN A.Y.2003-04 IN WHICH THE CASE WAS COVERED UNDER THE SUMMARY SCHEME AND INCOME FROM TH E PROPERTIES DECLARED BY THE ASSESSEE AS BUSINESS INCOME HAD BEEN ACCEPTE D. AS REGARDS THE BUSINESS ACTIVITIES, THE LEARNED AR REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES THAT THE ASSESSEE WAS STILL CARRY ING ON THE BUSINESS THOUGH THROUGH THE MEDIUM OF JOINT VENTURE. IT WAS ALSO SU BMITTED THAT THE EXPENSES INCURRED BOTH ADMINISTRATIVE EXPENSES AND INTEREST EXPENSES SHOULD BE ALLOWED. ALTERNATIVELY IT WAS ALSO SUBMITTED THAT T HE EXPENDITURE TO THE TUNE OF RS.9,92,495/- WHICH WERE THE STATUTORY EXPENSES FOR MAINTAINING THE CORPORATE ENTITY SHOULD BE ALLOWED AND NOT JUST RS.47,250/- A LLOWED BY THE AO. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDERS O F AUTHORITIES BELOW. 5 6. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING NATURE OF RENTA L INCOME AND ALLOWABILITY OF EXPENSES CLAIMED ON ACCOUNT OF INTEREST AND ADMINIS TRATIVE EXPENSES. THE ASSESSEE HAD RECEIVED THE RENTAL INCOME OF RS.18,89 ,334/- FROM THE LETTING OUT OF THE FOUR PROPERTIES AS MENTIONED IN PARA 2 EARLI ER. THE ASSESSEE HAD DECLARED THE RENTAL INCOME AS BUSINESS INCOME. THE AO HOWEVER ASSESSED THE RENTAL INCOME AS INCOME FROM HOUSE PROPERTY ON THE GROUND THE ASSESSEE WAS NOT IN THE BUSINESS OF LETTING OUT THE PROPERTIES. CIT(A) PROCEEDED WITH THE ASSUMPTION THAT THE PROPERTIES WERE NOT OWNED BY TH E ASSESSEE AND THEREFORE HE ASSESSED THE RENTAL INCOME AS INCOME FROM OTHER SOURCES. THE LEARNED AR HAS SUBMITTED THAT THE ASSESSEE WAS NOT THE OWNER O NLY IN RESPECT OF BORIVALI PROPERTY AND OTHER PROPERTIES WERE OWNED BY THE ASS ESSEE. WE ALSO FIND THAT THE ACTION OF CIT(A) IS CONTRARY TO THE FINDING OF THE AO THAT ASSESSEE WAS OWNER OF ALL THE PROPERTIES. THE FINDING OF CIT(A) ARE NOT BASED ON ANY MATERIAL PLACED ON RECORD. THEREFORE IN OUR VIEW THE ENTIRE MATTER IN RELATION TO THE ASSESSMENT OF RENTAL INCOME HAS TO BE EXAMINED AFRE SH AFTER CAREFULLY ASCERTAINING THE OWNERSHIP OR OTHERWISE OF THE PROP ERTIES INCLUDING THE DEEMED OWNERSHIP UNDER SECTION 27(IIIB). WE THEREFORE SET ASIDE THE ORDER OF CIT(A) ON THIS POINT AND RESTORE THE MATTER BACK TO HIM FOR F RESH DECISION AFTER NECESSARY EXAMINATION AND AFTER ALLOWING OPPORTUNITY OF HEARI NG TO THE ASSESSEE. 7. AS REGARDS THE ALLOWABILITY OF INTEREST AND OTHE R EXPENSES, WE FIND THAT THE ASSESSEE WAS EARLIER ENGAGED IN THE BUSINESS OF STOCK RELATING ACTIVITIES. THE ASSESSEE WAS MEMBERS OF BSE, NSE AND OTC BUT AL L THESE ASSETS WERE TRANSFERRED TO A JOINT VENTURE COMPANY, NAMELY, JMM SSPL IN WHICH THE ASSESSEE WAS HOLDING 49% EQUITY. THERE IS NO MATERI AL PLACED ON RECORD TO 6 SHOW THAT EVEN AFTER FORMULATION OF THE JOINT VENTU RE COMPANY, THE ASSESSEE WAS ENGAGED IN STOCK RELATED ACTIVITIES. NEITHER AN Y MATERIAL HAS BEEN PLACED ON RECORD TO SUPPORT THIS NOR ANY INCOME HAS BEEN S HOWN FROM SUCH ACTIVITIES. THEREFORE WE AGREE WITH THE FINDINGS OF THE AUTHORI TIES BELOW THAT THERE IS NO EVIDENCE OF ANY BUSINESS ACTIVITIES. THE JOINT VENT URE IS AN INDEPENDENT COMPANY WHICH HAS TO BE ASSESSED SEPARATELY AND FRO M WHICH THE ASSESSEE HAS RECEIVED ONLY DIVIDEND INCOME WHICH IS EXEMPT FROM TAX. THE INTEREST EXPENDITURE HAD BEEN INCURRED ON ACCOUNT OF BORROWI NGS MADE EARLIER WHEN THE ASSESSEE WAS DOING THE BUSINESS. IT APPEARS ALL THE RESOURCES INCLUDING THE BORROWED FUNDS WERE LATER POOLED TOGETHER AND PLACE D IN JOINT VENTURE AS THERE IS NO MATERIAL PLACED ON RECORD TO SHOW THAT THE BO RROWED FUNDS WERE REDEPLOYED IN ANY INCOME EARNING ACTIVITIES. SINCE THE INCOME FROM JOINT VENTURE IS EXEMPT, NO EXPENDITURE EITHER IN THE FOR M OF INTEREST OR ADMINISTRATIVE EXPENDITURE CAN BE ALLOWED AS DEDUCT ION. IN CASE SOME BORROWED FUNDS HAVE GONE INTO THE ACQUISITION OF PR OPERTIES THE INTEREST EXPENDITURE COULD BE CONSIDERED AGAINST THE RENTAL INCOME BUT THE FACTS ARE NOT CLEAR. HOWEVER, THE ASSESSEE AS A COMPANY HAS TO MA INTAIN ITS CORPORATE STATUS AND SOME STATUTORY AND BASIC EXPENSES NECESSARY FOR MAINTAINING THE CORPORATE ENTITY HAVE TO BE ALLOWED. THE AO HAS ALL OWED SUCH EXPENSES AT RS.47,250/- WHEREAS THE ASSESSEE HAS NOW CLAIMED TH E SAME AT RS.9,92,495/-. THIS IS REQUIRED TO BE EXAMINED. WE THEREFORE RESTO RE THESE ASPECTS ALSO TO CIT(A) FOR FRESH DECISION AFTER NECESSARY EXAMINATI ON AND OPPORTUNITY OF HEARING TO THE ASSESSEE. 7 8. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 9. ORDER WAS PRONOUNCED IN THE OPEN COURT 20.04.2 011. SD/- SD/- ( D. K. AGARWAL ) (RAJEND RA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 20.04.2011 AT :MUMBAI COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), MUMBAI CONCERNED 4. THE CIT, MUMBAI CITY CONCERNED 5. THE DR J BENCH, ITAT, MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ALK