SUNIL HINGORANI, MUMBAI V. ITO 16(1)(4), MUMBAI

ITA 5951/MUM/2018

• Counselvise Citation: [2019] 111 COUNSELVISE.COM (IT) 9908 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2014-2015
• Appeal Filed On: 16-10-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AKHTAR HANSARI
• Assessee Lawyers: AJAY SEKHRI
• Keywords: Business income; Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 64; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH SMC, MUMBAI BEFORE SHRI SHAMIM YAHYA (AM) & SHRI PAWAN SINGH (JM) ITA NO. 5951/MUM/2018(ASSESSMENT YEAR: 2014-15) SHRI SUNIL HINGORANI 104, NIBHANA ANNEX, PALI HILL, BANDRA (W), MUMBAI-400 050 PAN : AAAPH1482P VS ITO-16(1)(4), ROOM NO. 438, AAYAKAR BHAWAN, NEW MARINE LINES, MUMBAI -400020 APPELLANT RESPONDEDNT APPELLANT BY SHRI AJAY SEKHRI AR RESPONDENT BY SHRI AKHTAR H ANSARI SR DR DATE OF HEARING 27-11-2019 DATE OF PRONOUNCEMENT 20-12-2019 O R D E R PER PAWAN SINGH, JM : 1. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LEARNED CIT(A)-4, MUMBAI DATED 27-09-2018, WHICH AR ISES FROM ASSESSMENT ORDER PASSED UNDER SECTION (U/S) 143(3) DATED 20.10.2016. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, AN INDIVIDUAL IS A FILM DIRECTOR BY PROFESSION. THE ASSESSEE IS ALSO ENGAGE D IN TRADING BUSINESS OF OPTICAL AND LENSES IN THE NAME & STYLE OF HIS PR OPRIETARY CONCERN, M/S SAVVY DESIGNS. IN THE COMPUTATION OF INCOME THE ASSESSEE HAS SHOWN EXEMPT INCOME OF RS. 91,967/- AND INCOME FROM HOUSE PROPERTY OF RS. 18,20,002/-, BESIDES INCOME FROM OTHER SOURC ES. THE ASSESSING OFFICER (AO) WHILE PASSING THE ASSESSMENT ORDER MAD E DISALLOWANCE UNDER SECTION14A OF RS. 7,25,600/- AND TREATED THE INCOME FROM HOUSE 2 ITA 5951/MUM/2018-SUNIL HINGORANI PROPERTY AS BUSINESS INCOME. ON APPEAL BEFORE THE L D CIT(A), THE DISALLOWANCES UNDER SECTION 14A WAS RESTRICTED TO R S.202,329/- , SUBJECT TO VERIFICATION BY AO AND THE TREATMENT OF INCOME FROM HOUSE PROPERTY AS BUSINESS INCOME WAS UPHELD. THUS, FURTH ER AGGRIEVED BY THE ORDER OF LD CIT(A) THE ASSESSEE HAS FILED PRESE NT APPEAL BEFORE THIS TRIBUNAL. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL. 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS-4) MUMBAI [HERE INAFTER REFERRED TO AS LD CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE O F A SUM OF RS 202,329/- /- U/S 14A R.W.R RULE 8D OF THE INCOME TAX RULE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD CIT(A) -4 ERRED IN CONFIRMING THE TREATMENT OF INCOME FROM M/ S. PALKIT IMPEX PRIVATE LIMITED AS INCOME FROM BUSINESS & PROFESSION AND NO T AS INCOME FROM HOUSE PROPERTY. 3. THAT THE ORDER OF LD AO IS BAD IN LAW AND ON F ACTS. 3. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED AUTHOR ISED REPRESENTATIVE (LD AR) FOR THE ASSESSEE AND THE LEARNED DEPARTMENT AL REPRESENTATIVE (LD DR) FOR THE REVENUE AND PERUSED THE RECORD CAREFULL Y. GROUND NO. 1 RELATES THE DISALLOWANCES UNDER SECTION 14A. THE LD . AR FOR THE ASSESSEE SUBMITS THAT DURING THE FINANCIAL YEAR REL EVANT FOR ASSESSMENT YEAR UNDER CONSIDERATION THE ASSESSEE HAS EARNED EX EMPT INCOME OF RS. 91,967/-. THE AO INVOKED THE PROVISIONS OF RULE 8D AND DISALLOWED RS. 725,600/-. THE LD AR FOR THE ASSESSEE FURTHER S UBMITS THAT HAS VERY LIMITED SUBMISSIONS THAT THE DISALLOWANCE OF S ECTION 14A SHOULD 3 ITA 5951/MUM/2018-SUNIL HINGORANI NOT EXCEED THE EXEMPT INCOME EARNED DURING THE PERI OD UNDER CONSIDERATION. IN BUTTRESS HIS SUBMISSIONS THE LD. AR RELIED ON THE DECISION OF DELHI HIGH COURT IN CHEMINVEST LIMITED [2015] 378 ITR 33 (DELHI). 4. ON THE OTHER HAND THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDER OF THE LOWER AUTHORITIES. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PART IED AND GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. THERE IS NOT DISPUTE THAT DURING THE RELEVANT PERIOD THE ASSESSEE EARNED THE EXEMPT INCOME OF RS. 91,967/-. THE AO INVOKED THE PROVISIONS OF RULE 8D AND DISALLOWED RS. 725,600/-. HOWEVER, ON APPEAL BEFORE LD CIT(A), THE DISALLOWANCES WAS RESTRICTED TO RS. 202329/-.THE H ONBLE DELHI HIGH COURT IN PCIT VS CARAF BUILDER AND CONSTRUCTION (P) LTD (2019) 101 TAXMANN.COM 107 DELHI WHILE RELYING ON ITS EARLIER DECISIONS CHEMINVEST LIMITED (SUPRA) AND IN PR. CIT V. MCDONALDS INDIA (P.) LTD. ITA 725/2018 DECIDED ON 22ND OCTOBER, 2018 AND IN CIT VS HOLCIM (P.) LTD. [2015] 57 TAXMANN.COM 28 (DELHI) AND HELD THAT DISALLOWANCES UNDER SECTION 14A CANNOT EXCEED THE EXEMPT INCOME O F THAT YEAR. THIS DECISION FOLLOWS THE RATIO AND JUDGMENT OF THE SUPR EME COURT IN THE CASE OF MAXOPP INVESTMENTS LTD. V. CI T[2018] 402 ITR 64 0/254 TAXMAN 325/91 TAXMANN.COM 154. CONSIDERING THE AFORESAID D ECISIONS OF THE 4 ITA 5951/MUM/2018-SUNIL HINGORANI SUPERIOR COURTS, WE DIRECT THE AO TO RESTRICT THE D ISALLOWANCES UNDER SECTION 14A TO THE EXTENT OF EXEMPT INCOME. IN THE RESULT THE GROUND NO.1 OF THE APPEAL IS ALLOWED. 6. GROUND NO.2 RELATES TO TREATING THE INCOME FROM PAL KIT IMPEX PVT LTD AS INCOME FROM BUSINESS AND PROFESSION IN PLACE OF I NCOME FROM HOUSE PROPERTY. THE LD. AR FOR THE ASSESSEE SUBMITS THAT THE ASSESSEE HAS 1/3 SHARE IN THE PROPERTY. THE ASSESSEE HAS LET-OUT THE PROPERTY TO TENANT ALONG WITH OTHER CO-OWNER TO THE TENANT FOR RUNNING RESTA URANT. THE INCOME EARNED FROM LETTING IN INCOME FROM THE HOUSE PROPE RTY. IN SUPPORT OF HIS SUBMISSIONS THE LD. AR FOR THE ASSESSEE RELIED ON THE DECISION OF HONBLE APEX COURT IN SHAMBHU INVESTMENT VS CIT9 [2 003] 129 TAXMAN 70 (SC). 7. ON THE OTHER HAND THE LD. DR FOR THE REVENUE SUPPOR TED THE ORDER OF THE AUTHORITIES BELOW. THE LD. DR FURTHER SUBMITS THAT THE LOWER AUTHORITIES HAVE EXAMINED THE RENT/ BUSINESS AGREEMENT AND CAME TO THE RIGHT CONCLUSION THAT THE INCOME OFFERED BY THE ASSESSEE FROM PALKIT IMPEX PVT LTD IN NOTHING BUT INCOME FROM BUSINESS. THE C ASE LAW RELIED BY THE LD. AR FOR THE ASSESSEE IS NOT APPLICABLE ON THE FA CTS OF THE PRESENT CASE. 8. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE PART IES AND PERUSED THE ORDERS OF LOWER AUTHORITIES CAREFULLY. DURING THE A SSESSMENT, THE ASSESSING OFFICER NOTED THAT ASSESSEE HAS OFFERED I NCOME OF RS. 5 ITA 5951/MUM/2018-SUNIL HINGORANI 18,20,002/- AFTER CLAIMING DEDUCTION UNDER SECTION 24(A) OF THE ACT. THE ASSESSEE WAS ASKED TO FILE THE DETAILS LIKE COP Y OF RENTAL AGREEMENT, PAYMENT PROOF OF MUNICIPAL TAXES, ETC. THE ASSESSEE FILED ITS REPLY DATED 11.07.2016 AND FURNISHED THE COPY OF RENT AGR EEMENT DATED 16.06.2012 WITH COPY OF LEDGER ACCOUNT. THE ASSESSI NG OFFICER EXAMINED THE RENT AGREEMENT AND IN PARA-6 OF THE AS SESSMENT ORDER EXTRACTED THE RELEVANT PORTION OF THE AGREEMENT, WH ICH IS AS UNDER:- 6.A.THE CONDUCTOR WILL BE LIABLE TO PAY THE FULL M INIMUM MONTHLY GUARANTEE FEE FOR THE PERIODS OF THIS AGREEMENT THA T IS FOR 5 YEARS IN ADVANCE ON THE SIGNING OF THIS AGREEMENT. FOR THE INITIAL PERIOD OF THREE YEARS COMMENCING FROM 1 ST AUGUST, 2012, WILL PAY TO THE OWNERS BY WAY OF ROYALTY THE SUM OF RS.6,50,000/- ( RUPEES SIX LAX FIFTY THOUSAND ONLY) AS MINIMUM MONTHLY GUARANTEE F EE OR ROYALTY PER MONTH OR 18% OF THE NET MONTHLY SALES, WHICHEVER IS HIGHER. AS A FACILITY THE OWNER AGREES TO RECEIVE FROM THE CONDUCTOR THE ABOVE SAID PAYMENT IS FORM OF 60 POST DATED CHE QUES, AS PER ANNEXED-A. IF THE CONDUCTOR WANTS TO TERMINATE THI S AGREEMENT AFTER 36 MONTHS THEN THE BALANCE CHEQUES WILL BE RETURNED BACK TO THE OWNER AFTER DEDUCTING ANY AMOUNTS RECEIVABLE UNDER THIS AGREEMENT............ 9. THE REPLY OF ASSESSEE WAS NOT ACCEPTED BY ASSESSING OFFICER AND THE ASSESSEE WAS ASKED TO SHOW-CAUSE WHY THE INCOME REC EIVED FROM PALKIT IMPEX P. LTD. SHOULD NOT BE TREATED AS BUSINESS INC OME. THE ASSESSEE AGAIN FILED ITS REPLY VIDE REPLY DATED 07.10.2016. THE ASSESSING OFFICER 6 ITA 5951/MUM/2018-SUNIL HINGORANI HAS EXTRACTED THE RELEVANT PORTION OF REPLY IN PARA -6.1 OF HIS ORDER, WHICH IS EXTRACTED BELOW: '...,..,....S,22 PROVIDES FOR TAXATION OF INCOME FR OM HOUSE PROPERTY. NOW ASSESSEE HAS LET OUT THE WHOLE OF THE PROPERTY ALONG WITH THE RELEVANT, LICENSES THE PRIMARY REVENUE IS FROM LETT ING OF PROPERTY AND NOT FROM USE OF LICENSES FOR MIMING THE RESTAUR ANT. IN FACT LICENSES BELONG TO ANOTHER COMPANY NAMELY TRISTAR H OSPITALITY PVT. LTD. AND NOT ASSESSEE WHICH HAVE BEEN ALLOWED TO BE USED BY THE ASSESSEE. ASSESSEE ALONG WITH 2 CO-OWNERS HAS ENTER ED INTO A CONDUCTING AGREEMENT WITH M/S. PALKIT IMPEX (P) LTD . ASSESSEE ALONG WITH 2 PARTIES OWN PREMISES NO.1,2,3,4,12, 13 AND 14 O 2 ND I FLOOR OF BUILDING KNOWN AS 'KENILWORTH SHOPPING CEN TRE' LINKING ROAD, BANDRA (W), MUMBAI 50 ON WHICH A. COMPANY NAM ELY 'TRISTAR HOSPITALITY PVT. LTD. (TRISTAR)WAS OPERATING A REST AURANT 'BARBEQUE FACTORY RESTAURANT', DUE TO VARIOUS REASONS SAID RE STAURANT WAS CLOSED AND PREMISES WERE VACANT. THEREAFTER M/S. PA LKIT IMPEX (P) LTD. HAVE SHOWN INTEREST TO OPERATE A RESTAURANT ON SAID PREMISES. HOWEVER, TO SAFEGUARD INTEREST AND LIQUOR LICENSE B EING ALREADY OBTAINED FROM THE OWNERS OF THE PREMISES. M/S. PALK IT HAS ENTERED INTO CONDUCTING AGREEMENT INSTEAD OF PURE LEAVE & LICENSE AGREEMENT. COPY OF RENT AGREEMENT HAS ALREADY BEEN SUBMITTED VIDE OUR LETTER DATED 11-07-2016. IT IS HEREBY SUBMITTED THAT THE VERY NATURE OF THE AGREEMENT AND DEFINITION OF CONSIDERATION DOES NOT CHANGE THE CHA RACTERISTICS OF INCOME. DIFFERENT TERMINOLOGY IS USED TO SHOW THAT PALKIT DOES NOT CLAIM TO BE STATUTORY TENANCY. ' , THE RESTAURANT BUSINESS IS BEING EARNED ON B Y M/.S. PALKIT IMPEX (P) LTD. THUS IT CANNOT BE SAID THAT ASSESSEE IS CARRYING OUT ANY BUSINESS AND THAT AMOUNT, RECEIVED FROM M/S. PA LKIT IMPEX (P) 7 ITA 5951/MUM/2018-SUNIL HINGORANI LTD. BE TAXED AS INCOME HOUSE PROPERTY. CONSIDERING THE FACTS OF THE CASE TENANT IS DEDUCTING TAX U/S. 1941 @ 10% OF THE RENT' 10. THE ABOVE EXPLANATION OF ASSESSEE WAS NOT ACCEPTED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER TOOK HIS VIEW THAT UNDER THE RENT AGREEMENT, THE ASSESSEE WAS GETTING ROYALTY OF RS. 6,50,000/- FOR INITIAL PERIOD OF THREE YEARS FROM 01.08.2012 OR 18% OF THE NET MONTHLY SALES, WHICHEVER IS HIGHER. ACCORDINGLY, THE ASSESSING OFF ICER WORKED OUT THE TOTAL ROYALTY RECEIVED FROM 01.04.2013 TO 31.03 .2014 @ RS. 6,50,000/- FOR TWELVE MONTH, WHICH COMES TO RS. 78, 00,000/-. THE SHARE OF ASSESSEE BEING 1/3 RD I.E. RS. 26,00,000/- AND ACCORDINGLY TREATED THE SAME AS BUSINESS INCOME. THE ASSESSEE O FFERED RENTAL INCOME AT RS. 18,20,002/-, THUS, THE INCOME FROM HO USE PROPERTY WAS REDUCED TO RS. 18,00,000/-. ON APPEAL BEFORE THE LD . CIT(A), THE ASSESSEE FILED DETAILED WRITTEN SUBMISSION WHICH IS RECORDED IN PARA-8.2 OF THE ORDER OF LD. CIT(A). THE LD. CIT(A) AFTER CO NSIDERING THE SUBMISSION OF ASSESSEE CONCLUDED THAT THE ASSESSEE HAS LEASED OUT RUNNING RESTAURANT BUSINESS OWNED BY ASSESSEE FOR A CONSIDERATION, WHICH CANNOT FALL UNDER THE PROVISION OF SECTION 22 OF THE INCOME-TAX ACT AND UPHELD THE ACTION OF ASSESSING OFFICER. 11. BEFORE US, THE LD. AR FOR THE ASSESSEE MADE LIMITE D SUBMISSION THAT HE IS THE OWNER OF 1/3 RD OF THE PROPERTY AND THE INCOME FROM LETTING OUT IS 8 ITA 5951/MUM/2018-SUNIL HINGORANI INCOME FROM HOUSE PROPERTY AND IN SUPPORT OF HIS SU BMISSION RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN SHAMB HU INVESTMENT (P.) LTD. VS. CIT (SUPRA). WE HAVE NOTED THAT NO WR ITTEN AGREEMENT FOR LETTING OUT THE UNITS, WHEREIN THE TENANT OF ASSESS EE IS RUNNING RESTAURANT, OR RENT AGREEMENT OR AGREEMENT FOR COND UCTING EXISTING BUSINESS OF THE RESTAURANT WITH THE TENANT IS FILED BEFORE US BY ASSESSEE FOR THE REASONS BEST KNOWN TO THE ASSESSEE. THERE I S NO DISPUTE THAT ASSESSEE WITH HIS HAS NOT ONLY MERELY LET OUT PROP ERTY FOR RUNNING THE RESTAURANT BUT CERTAIN FACILITY IS ALSO PROVIDED TO THE TENANT, WHO IS RUNNING RESTAURANT BUSINESS. 12. THE ASSESSING OFFICER DURING THE ASSESSMENT WHILE C ONSIDERING THE EXPLANATION OF THE ASSESSEE AND THE RENT AGREEMENT HAS BROUGHT OUT ON RECORD THAT ASSESSEE ALONG WITH TWO CO-OWNER ENTERE D INTO A CONDUCTING AGREEMENT WITH PALKIT IMPEX P. LTD. FO R OPERATING A RESTAURANT IN THE PREMISES I.E UNIT NO. 1,2,3,4, 12 , 13 & 14 ON 2 ND FLOOR OF BUILDING KNOWN AS KENILWORTH SHOPPING CENTRE, LI NKING ROAD, BANDRA (WEST). THE ASSESSING OFFICER FROM THE REPLY OF ASSESSEE ALSO NOTED THAT OWNER OF THE PREMISES ALREADY OBTAINED A LIQUOR LICENCE. M/S PALKIT ENTERED INTO AGREEMENT FOR CONDUCTING AGREEM ENT INSTEAD OF PURE LEAVE AND LICENCE. WE HAVE NOTED THAT THE ASSESSING OFFICER AFTER EXAMINING THE MATERIAL PLACED BEFORE HIM NOTED THAT THE ASSESSEE WITH 9 ITA 5951/MUM/2018-SUNIL HINGORANI HIS CO-OWNERS NOT ONLY ENTITLED FOR MINIMUM 18% OF SALE OR RS. 6,50,000/- AS A ROYALTY, WHICHEVER IS HIGHER FOR IN ITIAL PERIOD OF THREE YEARS. THE LD. AR OF THE ASSESSEE FAILED TO COUNTER THESE FINDING OF ASSESSING OFFICER. THE AFORESAID FINDING OF ASSESSI NG OFFICER IS CLEARLY ESTABLISHES THAT THE ACTIVITIES OF THE ASSESSEE ARE IN THE NATURE OF ADVENTURE OF BUSINESS AND THE INCOME ARISING FROM S UCH ARRANGEMENT WHICH INCLUDES THE LETTING OF PROPERTY IS NOTHING B UT A BUSINESS INCOME. THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN SHAMBHU INVESTMENT (P.) LTD. VS. C IT (SUPRA), IN OUR HUMBLE VIEW, THE RATIO OF DECISION IS NOT HELPFUL T O THE ASSESSEE. IN THE SAID CASE, ASSESSEE LET OUT FURNISHED PREMISES TO V ARIOUS PERSONS AND AGREED TO PROVIDE SERVICE LIKE WATCH & WARD STAFF, ELECTRICITY AND OTHER COMMON AMENITIES, WHICH WERE OFFERED FOR TAXATION A S BUSINESS INCOME. HOWEVER, IN THE PRESENT CASE, THE ASSESSEE ALONG WITH HIS CO- OWNER AUTHORIZED THE OTHER PARTY TO CONDUCT AND RU N THE EXISTING BUSINESS OF RESTAURANT BARBEQUE FACTORY RESTAURANT , WHEREIN THE OTHER PARTY HAS AGREED TO PAY THE MINIMUM ROYALTY O R ROYALTY FOR THREE YEAR OF RS. 6,50,000/- OR 18% OF THE NET MONTHLY SA LES, WHICHEVER IS HIGHER. THUS, THE FACTS OF THE PRESENT CASE ARE DIF FERENT. NO OTHER CONTRARY FACTS OR ANY OTHER EVIDENCE IS BROUGHT TO OUR NOTICE TO TAKE 10 ITA 5951/MUM/2018-SUNIL HINGORANI OTHER VIEW. IN THE RESULT, THE GROUND NO.2 OF APPEA L RAISED BY ASSESSEE IS DISMISSED 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20-12-2 019. SD/- SD/- (SHAMIM YAHYA) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIALMEMBER MUMBAI, DT : 20 TH DECEMBER, 2019 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI