Asst.C.I.T., Bangalore V. M/s Prestige Estate Projects Ltd., Bangalore

ITA 850/BANG/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0393 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 27-01-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 04-06-2015
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Earning of tax free income; Proportionate interest; Question of law
• Section: 43B; 143(3); 14A

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ITA NO.845(BANG.)/2015 (ASSESSMENT YEAR : 2011-11) M/S PRESTIGE ESTATES PROJECTS LTD. THE FALCON HOUSE, NO.1, MAIN GUARD CROSS ROAD, BANGALORE-560 001 PAN NO.AABCP8096K APPELLANT VS THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1(1) BANGALORE RE SPONDENT AND ITA NO.850(BANG)/2015 (ASSESSMENT YEAR : 2010-11) (BY REVENUE) DATE OF HEARING : 09-05-2016 DATE OF PRONOUNCEMENT : 13-0 5-2016 APPELLANT BY : SHRI PADAMCHAND KH INCHA, CA RESPONDENT BY : DR. SIBICHAN K MATHEW, CIT O R D E R PER SHRI G. MANJUNATHA, AM; THESE ARE CROSS APPEALS FOILED BY THE ASSESEE AND REVENUE DIRECTED AGAINST THE COMMON ORDER OF CIT(A)-11, DAT ED 03-05-3013 AND PERTAINS TO ASSESSMENT YEAR : 2010-11. SINCE T HE FACTS ARE IDENTICAL AND ISSUES ARE COMMON THEY ARE HEARD TOGE THER AND DISPOSED BY WAY OF COMMON ORDER FOR THE SAKE OF CON VENIENCE. ITA NOS.845 & 850(B)15 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF REAL ESTATE AND AS BUILDERS AND DEVELOPERS FILED ITS RETURN OF INCOME FOR THE ASSES SMENT YEAR 2010- 11 ON 14-10-2010 DECLARING TOTAL INCOME OF RS.70,64 ,77,400/-. THE RETURN OF INCOME WAS PROCESSED U/S 143(3) OF TH E IT ACT AND SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AN D ACCORDINGLY, NOTICE U/S142(1) & 143(2) OF THE IT ACT, WAS ISSUED . IN RESPONSE TO THE NOTICE, THE LD. AR OF THE ASSESSEE APPEARED FRO M TIME TO TIME AND FURNISHED THE DETAILS CALLED FOR. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICE THAT THE ASSESSEE HAS RECEIVED RENTAL INCOME FROM FORUM, EVA MALL AND UB CITY AND TREATED THE SAME UNDER THE HEAD INCOME FROM BUSINESS, AGAINST WHICH VARIOUS EXPENDITURES HAVE BEEN CLAIMED. THEREFORE, ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE ASKING WHY THE RENTAL INCOME FROM PROPERTIES SHALL NOT BE TREATED AS INCOME FROM HOUSE PROPERTY. IN RESPONSE TO THE NOTICE, THE ASS ESSEE SUBMITTED THAT IT IS IN THE BUSINESS OF LETTING OUT OF PROPER TIES AND EARNING RENTAL INCOME AND THE SAME HAS BEEN CONSIDERED AS B USINESS RECEIPTS FOR ALL THESE ASSESSMENT YEARS. THE ASSESS EE FURTHER SUBMITTED THE JURISDICTIONAL ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005-06 TO 209-10 HAS HELD RENTAL I NCOME FROM ITA NOS.845 & 850(B)15 3 MALLS IS CHARGEABLE TO TAX UNDER THE HEAD PROFITS OF BUSINESS AND NOT UNDER THE HEAD INCOME FROM HOUSE PROPERTY. T HEREFORE, REQUESTED TO ALLOW THE INCOME AS CLAIMED BY THE ASS ESSEE UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION. THE AO A FTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD TH AT THE INCOME DERIVED BY THE ASSESSEE BY LETTING OUT PROPERTIES T O TENANTS IS AKIN TO ANY LANDLORD TENANT RELATIONSHIP THEREFORE, THE RENTAL INCOME FROM PROPERTIES SHOULD BE TREATED AS INCOME FROM HOUSE P ROPERTY AND NOT UNDER THE HEAD INCOME FROM BUSINESS AS CLAIMED BY THE ASSESSEE. WHILE DOING SO, THE AO RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF M/S SHAMBU INVESTMEN T PVT. LTD VS CIT (2003) 263 ITR 143, WHEREIN IT HAS BEEN HELD TH AT INCOME DERIVED BY THE ASSESSEE BY LETTING OUT THE FURNISHE D PREMISES ON MONTHLY RENTAL BASIS TO VARIOUS PARTIES ALONG WITH FURNITURE, FIXTURES, LIGHTS, AIR-CONDITIONERS ETC., FOR BEING USED AS PAYABLE SPACE AND ALSO PROVIDED THEM COMMON SERVICES LIKE W ATCH AND WARD, ELECTRICITY AND WATER WAS ASSESSABLE AS INCOM E FROM HOUSE PROPERTY. 4. SIMILARLY, THE AO NOTICED THAT THE ASSESSEE HAS RECEIVED HIRE CHARGES OF FIT-OUTS FITTED TO THE PROPERTIES LET OU T TO THE TENANTS AND CONSIDERED UNDER THE HEAD INCOME FROM OTHER SOURCE S, AFTER CLAIMING RELATED EXPENDITURE BEING DEPRECIATION AND OTHER ITA NOS.845 & 850(B)15 4 EXPENDITURE. THEREFORE, ISSUED SHOW CAUSE NOTICE AN D ASKED TO EXPLAIN WHY THE HIRE CHARGES RECEIVED TOWARDS FIT-O UTS SHALL NOT BE TREATED AS INCOME FROM HOUSE PROPERTY. IN RESPON SE TO SHOW CAUSE NOTICE, ASSESSEE SUBMITTED THAT THE HIRE CHARGES RE CEIVED TOWARDS FIT-OUTS FITTED TO THE BUILDING IN RESPECT OF FIT-O UTS LET OUT INDEPENDENTLY LET OUT AND A SEPARATE AGREEMENT WAS ENTERED WITH THE TENANTS THEREFORE, IT CANNOT BE CONSIDERED AS C OMPOSITE LETTING OUT OF PREMISES ALONGWITH BUILDING AND OTHER FIT-OU TS. THE ASSESSEE FURTHER SUBMITTED THAT THE JURISDICTIONAL ITAT IN A SSESSEES OWN CASE FOR ASSESSMENT YEAR 20005-06 TO 2009-10 HAS HELD TH AT RENTAL INCOME FROM LETTING OUT OF FIT-OUTS IS TAXABLE UNDE R THE HEAD INCOME FROM OTHER SOURCES. THEREFORE, REQUESTED TO CONSID ER INCOME AS CLAIMED BY THE ASSESSEE. 5. THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT THE FIT-OUTS WHICH FORMS PART OF INTEGRAL PART OF THE STRUCTURES WHICH WAS LET OUT BY THE ASSESSEE AND OWNED AND LET OUT BY THE ASSESSEE THEY SHOULD CONSTITUTE PART OF THE RENT AN D IS TO BE TREATED AS INCOME FROM HOUSE PROPERTY. WITH THESE OBSERVA TIONS RE- COMPUTED THE INCOME AFTER ALLOWING DEDUCTION U/S 24 (A) AS AGAINST THE INCOME DECLARED BY THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES. ITA NOS.845 & 850(B)15 5 6. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CT(A), BEFORE THE LD. CIT(A) THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AO. THE ASSESSEE FURTHER SUBMITTED THAT MERELY BECAUSE, INCOME IS AT TACHED TO IMMOVABLE PROPERTY IT CANNOT BE THE FACTOR FOR ASSE SSING SUCH INCOME AS INCOME FROM HOUSE PROPERTY. IT WAS FURTH ER SUBMITTED THAT THE INCOME FROM LETTING OUT OF THE PROPERTY BY WAY OF COMMERCIAL EXPLOITATION AND AS AN ORGANIZED COMMERC IAL ACTIVITY ACCOMPANIED BY PROFESSIONAL SERVICES AMENITIES OR F ACILITIES IS CHARGEABLE TO TAX AS BUSINESS INCOME AND NOT AS IN COME FROM HOUSE PROPERTY. THE ASSESSEE FURTHER SUBMITTED THA T THE JURISDICTIONAL ITAT IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05 HAS HELD THAT RENTAL INCOME FROM MALLS IS C HARGEABLE TO TAX UNDER THE HEAD PROFIT AND GAINS OF BUSINESS AND NO T UNDER THE HEAD INCOME FROM HOUSE PROPERTY. 7. AS REGARDS THE RENTAL INCOME FROM THE FIT-OUTS, IT IS SUBMITTED THAT THE ASSESSEE HAS EARNED RENTAL INCOME FROM FIT -OUTS WHICH ARE INDEPENDENTLY PROVIDED TO THE TENANTS AND A SEPARAT E AGREEMENT HAS BEEN ENTERED WITH THE TENANTS. THE ACTIVITY OF LETTING OUT OF FIT- OUTS IS A COMMERCIAL EXPLOITATION OF PROPERTY. THE REFORE, IT CANNOT BE CONSIDERED AS COMPOSITE LETTING OUT OF LAND AND BUILDING ALONGWITH THE FIT-OUTS. THE ASSESSEE FURTHER SUBMIT TED THAT THE ITA NOS.845 & 850(B)15 6 JURISDICTIONAL ITAT IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 TO 2009-10 HELD THAT THE HIRE CHARGES FROM FIT-OUTS ARE TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. THEREFORE, THE AO ERRED IN NOT APPRECIATING THE FACT THAT THE ISSU E HAD BEEN ALREADY DECIDED IN FAVOUR OF THE ASSESSEE BY THE JU RISDICTIONAL ITAT. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT THE INCOME RECEIVED BY THE ASSESSEE FROM LETTI NG OUT OF MALLS IS ASSESSABLE UNDER THE HEAD INCOME FROM PROFITS AND GAINS OF BUSINESS AND NOT UNDER THE HEAD INCOME FROM HOUSE PROPERTY. SIMILARLY, A RENTAL RECEIPT FROM LETTING OUT OF FIT -OUTS IS ASSESSABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. AGGRI EVED BY THE CIT(A)S ORDER, REVENUE IS IN APPEAL BEFORE US. 8. THE LD. DR SUBMITTED THAT THE LD. CIT(A) IS NOT JUSTIFIED IN HOLDING THAT THE RENTAL INCOME RECEIVED BY THE ASSE SSEE FROM MALLS IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION AND NOT AS INCOME FROM HOUSE PROPERTY, DESPITE A S PECIFIC AGREEMENT BETWEEN THE LANDLORD AND THE TENANT, CONT EMPLATING A LANDLORD RELATIONSHIP AND RENTAL INCOME BEING PAID EVERY MONTH AS HELD BY THE HONBLE APEX COURT IN THE CASE OF SHAMB HU INVESTMENT (P)LTD VS CIT (2003) 263 ITR 143(SC). THE LD. DR FU RTHER SUBMITTED THAT THE PREDOMINANT OBJECT OF THE ASSESSEE IS TO L ET OUT THE PROPERTIES AND EARN RENTAL INCOME AND THEREFORE, TH E RENTAL INCOME ITA NOS.845 & 850(B)15 7 EARNED BY THE ASSESSEE FROM LETTING OUT THE PROPERT IES CANNOT CHANGE THE CHARACTER OF INCOME MERELY BECAUSE, IT I S IN THE ACTIVITY OF LETTING OUT PROPERTIES. IT IS FURTHER ARGUED TH AT THE THOUGH THE JURISDICTIONAL ITAT, IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 HELD THAT THE RENTAL RECEIPTS FROM LET TING OUT THE MALLS IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS , THE FACT EMANATE FROM THE AGREEMENT CLEARLY SUGGESTS THAT IT IS MERE LETTING OUT OF PROPERTIES AND THE RESULTANT INCOME SHOULD B E ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. 9. ON THE OTHER HAND, LD. AR OF THE ASSESSEE SUBMIT TED THAT THE ISSUE INVOLVED IN THIS APPEAL IS SQUARELY COVERED B Y THE DECISION OF THE HONBLE ITAT IN ASSESSEES OWN CASE FOR THE ASS ESSMENT YEAR 2005-06 TO 2009-10 AND THE ITAT HELD THAT THE INCOM E RECEIVED BY THE ASSESSEE FROM LETTING OUT OF MALLS IS ASSESSABL E UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION. THE L D. AR FURTHER SUBMITTED THAT THE HONBLE HIGH COURT OF KARNATAKA IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 HAS HELD T HE ISSUE IN FAVOUR OF ASSESSEE. THEREFORE, THE ORDER OF THE LD .CIT(A) SHOULD BE UPHELD. 10. WE HAVE HEARD BOTH PARTIES AND HAVE GONE THROUG H THE MATERIAL AVAILABLE ON RECORD. THE FIRST ISSUE THAT CAME UP FOR OUR ITA NOS.845 & 850(B)15 8 CONSIDERATION IS WHETHER THE INCOME RECEIVED FROM L ETTING OUT OF MALLS IS ASSESSABLE UNDER THE HEAD INCOME FROM BU SINESS OR PROFESSION OR UNDER THE HEAD INCOME FROM HOUSE P ROPERTY. A SIMILAR ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR T HE ASSESSMENT YEAR 2005-06 AND THE CO-ORDINATE BENCH OF THE TRIBU NAL, UNDER SIMILAR CIRCUMSTANCES HELD THAT THE INCOME RECEIVED FROM LETTING G OUT OF MALL IS ASSESSABLE UNDER THE HEAD PROFITS A ND GAINS OF BUSINESS OR PROFESSION. THE RELEVANT PORTION IS RE PRODUCED HEREUNDER; 2. ASSESSING OF THE RENTALS FROM FORUM MAL AND EVA MALL AS INCOME FROM PROFITS AND GAINS FROM BUSINESS/PROFESSION. I) THE REVENUES SUBMISSIONS WAS VERY BLUNT TO THE EFFECT THAT THE CIT(A) ERRED IN DIRECTING THE AO TO ASSESS THE RENTAL RECEIPT FROM FORUM MALL AND EVA MALL AS INCOME FROM PROFITS AND GAINS FROM BUSINESS AND T HE CIT(A) GROSSLY ERRED BY IGNORING THE FACT THAT THE SAMPLE AGREEMENT IN RESPECT OF THE RENTAL RECEIPT CLEARLY ESTABLISHES A TYPICAL LANDLORD TENANT RELATIONSHIP BETWEEN THE ASSESSEE AND TENANTS AND, THEREFORE, THE INCOME RECEIVED AS RENTAL RECEIPTS S HOULD HAVE BEEN ORDERED TO BE TREATED AS INCOME FROM HOU SE PROPERTY. II) AT THE OUTSET, WE WOULD LIKE TO POINT THAT AN IDENTICAL ISSUE HAD CROPPED UP BEFORE THE HONBLE ITA NOS.845 & 850(B)15 9 TRIBUNAL FOR THE AY: 2005-06 IN THE ASSESSEES OWN CASE WHEREIN THE HONBLE TRIBUNAL HAD, AFTER HEARIN G THE ARGUMENTS OF RIVAL PARTIES, ANALYZING THE ISSUE AT LENGTH, EXTENSIVELY QUOTING, CHIEFLY, THE RULINGS O F THE HONBLE APEX COURT AS WELL AS THE JURISDICTIONAL HONBLE HIGH COURT IN A NUMBER OF CASES ON A SIMILA R ISSUE, OBSERVED THUS- 5.1 WE HAD DISCUSSED THIS ISSUE WHILE CONSIDERING THE RATIO OF LAW AS LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF SULTAN BROTHERS (SUPRA). THE HONBLE APEX COURT HAD HELD THAT THERE SHOULD BE NO CONSIDERATION OF PRIMARY AND SECONDARY LETTINGS IN CONSTRUING THE SECTION 12(4) OF 1922, WHICH HAS ANALOGY TO 56(III) OF IT ACT OF 1961. IN THIS CASE, THE LETTING OF BUILDING IS ALONG WITH LETTING MACHINERY, PLANT OR FURNITURE REQUIRED FOR ANCILLARIES SERVICES AND THEREFORE, WE HOLD THAT THE ALTERNATIVE PLEA OF THE APPELLANT THAT IN CASE THE INCOME IS NOT TO BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY THEN IT IS REQUIRED TO BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES THIS IS WITHOUT PREJUDICE TO OUR BASIC FINDING THAT IN THE INSTANT CASE, THE INCOME FROM MALL IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS. III) IN CONFORMITY WITH THE FINDING OF THE HONBLE TRIBUNAL REFERRED ABOVE, WE DIRECT THE AO TO ASSESS THE INCOME FROM MALL UNDER THE HEAD INCOME FROM BUSINESS. IT IS ORDERED ACCORDINGLY. 11. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DECISI ON, WE ARE OF THE VIEW THAT THE INCOME RECEIVED BY THE ASSESSEE FOR L ETTING OUT OF MALLS ITA NOS.845 & 850(B)15 10 IS ASSESSABLE UNDER THE HEAD INCOME FROM PROFITS A ND GAINS OF BUSINESS OR PROFESSION. THE CIT(A), BY FOLLOWING ITAT, DECISION IN ASSESSEE OWN CASE FOR THE EARLIER ASSESSMENT YEAR A LLOWED THE CLAIM OF THE ASSESSEE. WE DO NOT SEE ANY ERROR IN THE OR DER OF THE CIT(A). THEREFORE, WE INCLINED TO UPHELD THE CIT(A) ORDER A ND REJECT THE GROUND OF REVENUE. 12. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S WHETHER THE INCOME RECEIVED FROM LETTING OUT OF FIT-OUTS IN DEPENDENTLY IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCE S OR INCOME FROM HOUSE PROPERTY. THE LD. AR OF THE ASSESSEE AT THE TIME OF HEARING SUBMITTED THAT THE ISSUE IS COVERED BY ASSE SSEES OWN CASE FOR THE ASSESSMENT YEAR : 2006-07 AND THE ITAT, UND ER SIMILAR CIRCUMSTANCES HELD THAT THE INCOME RECEIVED FROM LE TTING GOUT OF FIT- OUT IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHE R SOURCES. WE HAVE GONE THROUGH THE CASE LAWS RELIED UPON BY THE ASSESSEE AND IN THE LIGHT OF THE FACTS OF THE PRESENT CASE AND FIND THAT THE CO- ORDINATE BENCH OF THIS TRIBUNAL UNDER SIMILAR CIRCU MSTANCES HELD THAT THE ISSUE IS IN FAVOUR OF THE ASSESSEE. THE RE LEVANT PORTION OF THE ORDER IS RE-PRODUCED HEREUNDER; 3) DIRECTION OF CIT(A) TO AO TO ASSESS THE HIRE CHARGES IN RESPECT OF FIT-OUTS AS INCOME FROM OTHER SOURCES. ITA NOS.845 & 850(B)15 11 I) NEVERTHELESS, THE REVENUES BRIEF SUBMISSION WAS THAT THE CIT(A) HAD GROSSLY ERRED IN DIRECTING THE AO TO ASSESS THE HIRE CHARGES IN RESPECT OF FIT-OUT S WHICH WERE LAID OUT TO TENANTS AS INCOME FROM OTHER SOURCES. I) YET AGAIN, WE FIND A SOLACE FROM FINDING OF THE HONBLE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 ON SIMILAR ISSUE WHEREIN THE HONBLE TRIBUNAL WAS PLEASED TO OBSERVE THAT- 6.1 THIS ISSUE HAS BEEN DECIDED BY THIS TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2004-05. THE TRIBUNAL VIDE ORDER DATED 29 TH MAY, 2009 IN ITA NO.851/BANG/2008 VIDE PARA-14 OF THE ORDER HELD THAT THE FACTS AND CIRCUMSTANCES BROUGHT ON RECORD BY THE ASSESSING AUTHORITIES AND THE LD. COUNSEL INDICATE THAT THE INTENTION OF THE ASSESSEE FOR RENDERING THE SAME AS INCOME FROM OTHER SOURCES OUGHT NOT TO HAVE BEEN DISTURBED AS IN EALIER YEARS . HENCE, THE RECEIPTS ON LETTING OF IT IS TO BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES ON THE BASIS O F THE DECISION OF THE TRIBUNAL IN THE EARLIER YEAR AN D ALSO ON THE BASIS OF THE PRINCIPAL OF CONSISTENCY. ONCE THE RENTAL INCOME ON LETTING OUT I TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES, THEN THE ASSESSEE WILL BE ENTITLED FOR DEPRECIATION. III) AS THE ISSUE BEFORE US IS SIMILAR WHICH HAS BEEN DECIDED BY THE HONBLE TRIBUNAL REFERRED SUPRA IN THE ASSESSEES OWN CASED FOR THE PRECEDING ASSESSMENT YEAR, WE HAVE NO HESITATION IN DIRECTING ITA NOS.845 & 850(B)15 12 THE AO TO TREAT THE HIRE CHARGES IN RESPECT OF FIT- OUTS LET OUT TO THE TENANTS AS INCOME FROM OTHER SOURCE S. IT IS ORDERED ACCORDINGLY. 13. THE LD. AR FURTHER SUBMITTED THAT THE ISSUE HAS BEEN TRAVELLED TO THE HONBLE HIGH COURT OF KARNATAKA, IN THE CASE OF CIT VS M/S PRESTIGE ESTATE PROJECTS LTD., IN ITA NO.119/2014 U NDER SIMILAR CIRCUMSTANCES HELD THAT THE RENTAL INCOME RECEIVED BY THE ASSESSEE FROM LETTING OUT OF MALLS AND FIT-OUTS IS ASSESSABL E UNDER THE HEAD INCOME FROM BUSINESS AND INCOME FROM OTHER SOURCES . THE RELEVANT PORTION OF THE ORDER IS RE-PRODUCED HEREUNDER; .2. SIMILAR QUESTION AROSE FOR CONSIDERATION BEF ORE THIS COURT IN ITA NO.73/2014 WHICH WAS DECIDED ON 01-04-2014 FOLLOWING THE JUDGMENT OF THIS COURT IN THE CASE OF CIT-III VS VELANKANI INFORMATION SYSTEMS (P)LTD., REPORTED IN (2013) 218 TAXMAN 88 (KAR.). IN THE AFORESAID DECISION THIS COURT HAS OBSERVED AS UNDER; 26.IF THE INTENTION S TO EXPLOIT COMMERCIAL PROPERTY BY PUTTING UP CONSTRUCTION AND LETTING OUT FOR THE PURPOSE OF GETTING RENTAL INCOME, THEN NOTWITHSTANDING THE FACT THAT THE FURNITURE AND FIT TINGS ARE PROVIDED TO THE LESSEE, THE INCOME FROM THE BUI LDING FALL UNDER THE HEAD INCOME FROM HOUSE PROPERTY. BUT IF THE ASSESSEE IS IN THE BUSINESS OF TAKING LAND, PUTTING UP COMMERCIAL BUILDINGS THEREON AND LETTING OUT SUCH BUILDINGS WITH ALL FURNITURE AS HIS PROFESSION OR ITA NOS.845 & 850(B)15 13 BUSINESS, THEN NOTWITHSTANDING THE FACT THAT HE HAS CONSTRUCTED A BUILDING AND HE HAS ALSO PROVIDED OT HER FACILITIES AND EVEN IF THERE ARE TWO SEPARATE RENTA L DEEDS, IT DOES NOT FALL WITHIN THE HEADING OF INCOM E FROM HOUSE PROPERTY. THEREFORE, FIRSTLY WHAT IS TH E INTENTION BEHIND THE LEASE AND SECONDLY WHAT ARE TH E FACILITIES GIVEN ALONG WITH THE BUILDINGS AND DOCUM ENTS EXECUTED IN RESPECT OF EACH OF THEM IS TO BE SEEN. THIRDLY, IT IS TO BE FOUND OUT WHETHER IT IS INSEPA RABLE OR NOT. IF THEY ARE INSEPARABLE AND THE INTENTION IS TO CARRY ON THE BUSINESS OF LETTING OUT THE COMMERCIAL PROPERTY AND CARRYING AT COMPLEX COMMERCIAL ACTIVIT Y AND GETTING RENTAL INCOME THEREFROM, THEN SUCH A RE NTAL INCOME FALLS UNDER THE HEADING OF PROFITS AND GAINS OF BUSINESS OR PROFESSION. 3. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY ME RIT IN THIS APPEAL. AS THE SUBSTANTIAL QUESTIONS OF LAW R AISED IN THIS APPEAL ARE ALREADY ANSWERED IN THE AFORESAI D DECISION, THIS APPEAL IS DISMISSED. 14. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DECISI ON, WE ARE OF THE VIEW, THAT THE INCOME RECEIVED FROM LETTING OUT OF FIT-OUTS IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCE S. THE CIT(A) BY RELIED UPON ITAT DECISION IN ASSESEES OWN CASE DIRECTED THE AO TO ASSESS THE RENTAL RECEIPTS FROM FIT OUT UNDER THE HEAD INCOME FROM OTHER SOURCES. WE DO NOT SEE ANY ERROR OR INF IRMITY IN THE ORDER ITA NOS.845 & 850(B)15 14 OF CIT(A). THEREFORE, WE INCLINED TO UPHELD THE CI T(A) ORDER AND REJECT THE GROUNDS RAISED BY THE REVENUE. 15. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ITA NO.845(BANG.)/2015 16. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERAT ION FROM ASSESSEE APPEAL IN ITA NO.845/B/2015 IS DISALLOWANC E OF COMPOUNDING FEE. DURING THE COURSE OF ASSESSMENT P ROCEEDINGS, THE A.O. DISALLOWED COMPOUNDING FEES OF RS.56,48,800/-. THE AO WAS OF THE OPINION THAT THE EXPENDITURE INCURRED BY THE AS SESSEE IS IN THE NATURE OF PENALTY WHICH IS NOT ALLOWABLE U/S 37(I) OF THE IT ACT, 1961. IT IS THE CONTENTION OF THE ASSESSEE THAT THE EXPEN DITURE INCURRED BY WAY OF COMPOUNDING FEES IS PAID TO THE LOCAL AUTHOR ITIES FOR REGULARIZING THE VIOLATIONS IN THE SANCTIONED PLAN. THE ASSESSEE FURTHER CONTENDED THAT IT HAD PAID COMPOUNDING FEES TO BBMP ON VARIOUS PROJECTS TO COMPOUND THE IRREGULARITIES IN SANCTION OF PLAN AND PAID THE FEES FOR REGULARIZING THE CONSTRUCTION . THE ASSESSEE FURTHER SUBMITTED THAT IT IS NOT A FINE OR PENALTY PAID IN RESPECT OF AN OFFENCE PROHIBITED UNDER ANY LAW IN FORCE, BUT IT I S ONLY PAYMENT OF FEES TO COMPOUND THE IRREGULARITIES FOR VIOLATION O F SANCTION PLAN UNDER THE MUNICIPAL ACTS. THEREFORE, COMPOUNDING F EES PAID CANNOT BE CONSIDERED AS FINE OR PENALTY. ITA NOS.845 & 850(B)15 15 17. THE AO AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE HELD THAT THE ASSESSEE HAS INCURRED COMPOUNDING FEE TO R EGULARIZE UNAUTHORIZED CONSTRUCTION WHICH NOTHING BUT A FINE OR PENALTY FOR VIOLATION OF THE MUNICIPAL ACT. THEREFORE, THE SAM E CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME UND ER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. AGGR IEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED APPEAL BEF ORE THE LD.CIT(A), WHO AFTER CONSIDERING THE ASSESSEES OWN CASE FOR T HE ASSESSMENT YEAR 2006-07, UPHELD THE DISALLOWANCE MADE BY THE A O. 18. THE LD.AR, AT THE TIME OF HEARING FAIRLY ACCEPT ED THAT THE ISSUE IS DECIDED AGAINST THE ASSESSEE IN ASSESSEES OWN C ASE FOR THE ASSESSMENT YEAR 2006-07. HOWEVER, SUBMITTED THAT T HE LOWER AUTHORITIES HAVE ERRED IN NOT APPRECIATING THE IMPU GNED EXPENDITURE INCURRED TOWARDS REGULARIZATION OF CONSTRUCTION MAD E IN EXCESS OF SANCTION PLAN AND WHICH WAS WITHIN CURABLE LIMITS T HEREFORE, THE COMPOUNDING FEES PAID TO REGULARIZE THE DEVIATIONS FROM SANCTIONED PLAN CANNOT BE CONSIDERED AS FINE OR PENALTY FOR VI OLATION OF ANY LAW IN FORCE. THE LD. AR FURTHER SUBMITTED THAT THE PA YMENT OF COMPOUNDING FEES IS NEITHER PROHIBITED BY LAW OR AN OFFENCE. THE BBMP HAS RECEIVED OCCUPANCY CERTIFICATE IN RE SPECT OF CONSTRUCTION AFTER REGULARIZING THE SAID DEVIATIONS AND ONCE THE ITA NOS.845 & 850(B)15 16 OCCUPANCY CERTIFICATE IS ISSUED THE OFFENCE NO LONG ER REMAINS. THEREFORE, REQUESTED TO DELETE THE ADDITION MADE BY THE AO. ON THE OTHER HAND, LD. DR STRONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). THE LD. DR FURTHER ARGUED THAT THE ISSUE IN QUESTION IS COVERED AGAINST THE ASSESSEE BY ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2006- 07. THE ITAT, IN ASSESSEES OWN CASE FOR THE ASSES SMENT YEAR 2006- 07 HAS HELD THAT THE COMPOUNDING FEES IS IN THE NAT URE OF FINE OR PENALTY CANNOT BE ALLOWED AS DEDUCTION. 19. WE HAVE HEARD BOTH PARTIES AND HAVE GONE THROUG H THE MATERIAL ON RECORD. THE AO DISALLOWED THE COMPOUND ING FEES FOR THE REASON THAT THE EXPENDITURE INCURRED BY THE ASSESSE E IS IN THE NATURE OF FINE OR PENALTY FOR VIOLATION OF ANY LAW IN FORC E. IT IS THE CONTENTION OF THE ASSESEE THAT THE COMPOUNDING FEE PAID TO BBM P TO REGULARIZE THE DEVIATIONS FROM THE SANCTIONED PLAN IS NOT A FI NE OR PENALTY FOR VIOLATION OF ANY LAW. THE ASSESSEE FURTHER CONTEND ED THAT IT HAS PAID THE COMPOUNDING FEE WHICH IS WITHIN THE PERMISSIBLE LIMITS ALLOWED UNDER THE PROVISIONS OF MUNICIPAL ACT. THE BBMP HA S REGULARIZED THE DEVIATION BY COLLECTING PRESCRIBED FEES AS PER THE PROVISIONS OF MUNICIPAL ACT AND ISSUED OCCUPANCY CERTIFICATE TO T HE PROJECTS. THEREFORE, IT CANNOT BE CONSIDERED AS FINE OR PENAL TY. WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND ORDE RS OF THE ITA NOS.845 & 850(B)15 17 AUTHORITIES BELOW. AT THE TIME OF HEARING, THE LD. DR SUBMITTED THAT THE VERY SAME ISSUE HAS BEEN DECIDED AGAINST THE AS SESSEE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 . THE ITAT, IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 IN ITA NO.78/B/2013 UPHELD THE DISALLOWANCE OF COMPOUNDING FEES. THE RELEVANT PORTION IS REPRODUCED HEREUNDER; 3. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE VERY SAME ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE C BENCH OF THIS T RIBUNAL FOR ASSESSMENT YEAR 2007-08 IN ITA NO.962/BANG/2011 AND VIDE ORDERS DATED 14/9/2012, THE TRIBUNAL HAD D ECIDED THE ISSUE AGAINST THE ASSESSEE BY FOLLOWING THE DEC ISION OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AS SESSMENT YEAR 2001-02 AND 2003-04. THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL IS AT PARA 5 TO 6 OF THE ASSE SSMENT ORDER. THE SAME IS REPRODUCED HEREUNDER FOR EASY REFERENCE: 5. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND THE RELEVANT MATERIALS ON RECORD, WE FIND THAT THE TRIBUNAL AT P ARA 3.16 TO 3.18 HAS HELD AS UNDER : 3.16 THE ISSUE BEFORE US HAS BEEN CONSIDERED BY T HE KARNATAKA HIGH COURT IN THE CASE OF MAMTA ENTERPRIS ES (SUPRA). THE QUESTION OF LAW REFERRED TO THE JURIS DICTIONAL HIGH COURT WAS AS UNDER:- ITA NOS.845 & 850(B)15 18 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE APPELLATE TRIBUNAL IS RIGHT IN LAW IN HOLDING THAT THE PAYMENT OF THE COMPOUNDING FEES IS NOT A PENALT Y FOR INFRACTION OF LAW AND HENCE ALLOWABLE. AT PAGE 361, THE HONBLE HIGH COURT HAS REFERRED TO THE ORDER ISSUED IN THE CASE OF MAMTA ENTERPRISES. IN THE INSTANT CASE ALSO, THE ORDER WHICH HAS BEEN ISSUED BY THE COMMISSIONER WHILE GRANTING OCCUPANCY CERTIFICATE, IS THAT THE ASSESSEE HAS PAID THE COMPOUNDING FINE. BEFORE THE HONBLE HIGH COURT IT WAS CONTENDED BY THE APPELLAN TS COUNSEL THAT CONSTRUCTION OF A BUILDING IN VIOLATIO N OF THE SANCTIONED PLAN CANNOT BE TREATED AS A VIOLATION OF A SERIOUS NATURE, WHICH IS PROHIBITED BY LAW OR AMOUN TING TO COMMISSION OF AN OFFENCE. THE HONBLE JURISDICTION AL HIGH COURT AFTER OBSERVING AS UNDER HELD THAT BYELAWS EM POWER THE COMMISSIONER TO COMPOUND THE VIOLATION OR DEVI ATION OF THE SANCTIONED PLAN BY A PERSON WHO CONSTRUCTS A BUILDING:- HAVING ELABORATELY HEARD LEARNED COUNSEL APPEARING FOR THE PARTIES, WHILE WE FIND CONSIDERABLE FORCE IN TH E SUBMISSION OF SRI SESHACHALA, WE ARE UNABLE TO ACCE DE TO THE SUBMISSION OF SRI KULKARNI. WE ARE UNABLE TO A GREE WITH THE SUBMISSION OF SRI KULKARNI THAT SINCE THE PROVISION IN CLAUSE (B) OF SECTION 483 OF THE CORPO RATION ACT PERMITS COMPOUNDING OF THE OFFENCE, ONCE THE VIOLATION IS COMPOUNDED, THERE WAS NO OFFENCE COMMI TTED ITA NOS.845 & 850(B)15 19 IN THE EYE OF LAW; AND THE OFFENCE COMMITTED IS WIP ED OUT. SECTION 300 OF THE CORPORATION ACT PROHIBITS COMMENCEMENT OF THE CONSTRUCTION OR RECONSTRUCTION OF A BUILDING, WITHOUT THERE BEING A PERMISSION GRANTED BY THE CORPORATION FOR THE EXECUTION OF THE WORK. SECTION 303 OF THE SAID ACT SETS OUT THE GROUNDS ON WHICH APPRO VAL OF A SITE FOR CONSTRUCTION OR RECONSTRUCTION OF A BUIL DING MAY BE REFUSED BY THE COMMISSIONER. SINCE 308 OF THE A CT CONFERS POWER ON THE COMMISSIONER TO DIRECT ALTERAT ION OF CONSTRUCTION WORK COMMENCED BY THE OWNER OF A SITE. SECTION 321 OF THE ACT CONFERS POWER ON THE COMMISSIONER TO MAKE AN ORDER FOR DEMOLITION OF THE BUILDING AFTER COMPLYING WITH THE PROCEDURE SET OUT IN THE SAID PROVISION, IF HE IS SATISFIED THAT THE CONSTRU CTION OR RECONSTRUCTION OF A BUILDING HAS BEEN COMMENCED WIT HOUT OBTAINING THE PERMISSION OR BEING CARRIED ON OR HAS BEEN COMPLETED OTHERWISE THAN IN ACCORDANCE WITH THE PLA NS OR PARTICULARS ON WHICH SUCH PERMISSION OR ORDER WAS B ASED. SECTION 436 OF THE ACT, AMONG OTHER THINGS, PROVIDE S THAT IF THE CONSTRUCTION OR RECONSTRUCTION OF ANY BUILDI NG IS COMMENCED WITHOUT THE PERMISSION OF THE COMMISSIONE R; OR IS CARRIED ON OR COMPLETED OTHERWISE THAN IN ACCORDANCE WITH THE PARTICULARS ON WHICH SUCH PERMI SSION WAS BASED ; OR IS CARRIED ON OR COMPLETED IN CONTRA VENTION OF ANY LAWFUL ORDER OR BREACH OF ANY PROVISION OF T HE ACT OR ANY RULE OR BYELAW MADE UNDER IT, OR OF ANY DIRE CTION OR REQUISITION LAWFULLY GIVEN OR MADE, THE OWNER OF TH E BUILDING WHO PUTS UP SUCH CONSTRUCTION SHALL BE LIA BLE ON CONVICTION TO PAY A FINE PRESCRIBED UNDER THE SAID PROVISION. HOWEVER, CLAUSE (B) OF SECTION 483 OF T HE CORPORATION ACT EMPOWERS THE COMMISSIONER TO COMPOU ND ANY OFFENCE COMMITTED IN BREACH OF THE PROVISIONS O F THE ACT, RULES, BYELAWS OR REGULATIONS WHICH MAY BY RUL ES MADE BY THE GOVERNMENT BE DECLARED COMPOUNDABLE. THEREFORE, FROM THE SCHEME OF THE SEVERAL PROVISION S IN THE ACT REFERRED TO ABOVE, IT IS CLEAR THAT NOBODY CAN PUT UP ANY NEW CONSTRUCTION OR PROCEED TO RECONSTRUCT T HE EXISTING BUILDING WITHOUT THERE BEING A SANCTIONED PLAN OR PERMISSION GRANTED BY THE COMMISSIONER ON THAT BEHA LF, ITA NOS.845 & 850(B)15 20 THE PUTTING UP ANY CONSTRUCTION WITHOUT THERE BEING A SANCTIONED PLAN IS MADE AN OFFENCE UNDER THE ACT AN D IT IS TREATED AS AN ACT PROHIBITED BY LAW. NO DOUBT, AS NOTICED BY US EARLIER, CLAUSE (B) OF SECTION 483 OF THE COR PORATION ACT EMPOWERS THE COMMISSIONER TO COMPOUND THE OFFEN CE. BYELAW 5.6 FRAMED BY THE CORPORATION IN EXERCISE OF THE POWER CONFERRED UNDER IT UNDER SECTION 428 OF THE A CT ENABLES THE COMMISSIONER TO SET OUT THE CIRCUMSTANC ES UNDER WHICH HE COULD COMPOUND AN OFFENCE. IT IS US EFUL TO REFER TO THE SAID BYELAW WHICH READS AS HEREUNDER: 5.6.1 WHETHER ANY CONSTRUCTION IS IN VIOLATION/DEVIATION OF THE SANCTIONED PLAN, THE COMMISSIONER MAY, IF HE CONSIDERS THAT THE VIOLATION/DEVIATIONS ARE MINOR VIZ., ONLY WHEN THE DEVIATIONS/VIOLATIONS IS WITHIN 5% OF (1) THE MINIM UM SET BACK TO BE LEFT AROUND THE BUILDING (2) THE MAXIMUM PLOT COVERAGE (3) PERMISSIBLE FLOOR AREA RATIO AND MAXIM UM HEIGHT OF THE BUILDING AND THAT THE DEMOLITION UNDE R CHAPTER XV OF THE ACT IS NOT FEASIBLE WITHOUT AFFEC TING THE STRUCTURAL STABILITY, THEN HE MAY REGULARIZE SU CH VIOLATIONS/DEVIATIONS BY SANCTIONING OF A MODIFIED PLAN WITH A LEVY OF A SUITABLE FEE TO BE PRESCRIBED. TH E COMMISSIONER SHALL COME TO SUCH CONCLUSION ONLY AFT ER RECORDING DETAILED REASONS FOR THE SAME. VIOLATION S/ DEVIATIONS UNDER THE PROVISION SHALL NOT INCLUDE TH E BUILDINGS WHICH ARE CONSTRUCTED WITHOUT OBTAINING A NY SANCTIONED PLAN WHATSOEVER AND ALSO THE VIOLATIONS/ DEVIATIONS WHICH ARE MADE INSPITE OF THE SAME BEING SPECIFICALLY DELETED OR REJECTED IN THE SANCTIONED PLAN. THE BYELAWS REFERRED TO ABOVE, READ ALONG WITH CLAU SE (B) OF SECTION 483, EMPOWERS THE COMMISSIONER TO COMPOU ND THE VIOLATION OR DEVIATION OF THE SANCTIONED PLAN D ONE BY A PERSON WHO CONSTRUCTS A BUILDING. AFTER HOLDING THAT THE AMOUNT PAID IS COMPOUNDING O F AN OFFENCE, THE HONBLE JURISDICTIONAL HIGH COURT HELD THAT SUCH AN EXPENDITURE IS NOT TO BE DEEMED TO HAVE BEE N ITA NOS.845 & 850(B)15 21 INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE CAN BE MADE IN RESPECT OF SU CH AN EXPENDITURE. THUS, THE DECISION OF JURISDICTIONAL HIGH COURT IS SQUARELY APPLICABLE IN THE INSTANT CASE. 3.17 THE HONBLE M.P. HIGH COURT IN THE CASE OF NAT IONAL TEXTILE CORPORATION LTD. V CIT 286 ITR 496 HAD AN OCCASION TO CONSIDER AS TO WHETHER THE TRIBUNAL COU LD COMMENT ON THE DECISION OF THE HIGH COURT AND HAVIN G DONE SO, WHETHER JUDICIAL PROPRIETARY PERMITTED THE TRIBUNAL TO IGNORE THE DECISION AND TAKE ITS OWN VI EW ARE QUESTION OF LAW WHICH HAVE TO BE REFERRED TO THE HI GH COURT. WHILE ALLOWING THE MATTER TO BE REFERRED, T HE HONBLE MP HIGH COURT OBSERVED AT PAGE 498 AS UNDER :- IN OUR CONSIDERED OPINION THE MANNER IN WHICH THE TRIBUNAL HAS DEALT WITH THE ISSUE SO FAR AS PRECEDE NTS OF JUDICIAL PROPRIETY IN FOLLOWING DECISIONS OF THE HI GH COURT ARE CONCERNED, THE SAME SHOULD HAVE BEEN REFERRED T O THIS COURT FOR EXAMINATION. IT IS, IN OUR HUMBLE O PINION, ON ISSUE WHICH THE HIGH COURT ALONE HAS TO DECIDE AND NOT FOR THE TRIBUNAL TO DECIDE. WE HAVE OUR OWN RESERVATIO NS AS TO WHETHER THE TRIBUNAL COULD MAKE A COMMENT ON THE DECISION OF THE HIGH COURT AND HAVING DONE SO, WHET HER JUDICIAL PROPRIETY PERMITTED THE TRIBUNAL TO IGNORE THE DECISION AND TAKE ITS OWN VIEW. ALL THESE ISSUES N EED TO BE DECIDED BY THE HIGH COURT IN A REFERENCE UNDER SECT ION 256(1) IBID. 3.18 HENCE, WHEN A SIMILAR ISSUE HAS BEEN DECIDED B Y THE JURISDICTIONAL HIGH COURT, THEN THAT DECISION I S BINDING ON US AND THAT IS TO BE FOLLOWED IN ORDER TO ABIDE WITH THE JUDICIAL DISCIPLINE. HENCE, WE HOLD THAT THE AMOUN TS PAID AS COMPOUNDING FINE FOR REGULARIZATION OF VIOLATION / DEVIATION ARE NOT ALLOWABLE EXPENDITURE. WE ALSO U PHOLD THE FINDING OF THE LEARNED CIT(A) THAT IN CASE THE COMPOUNDING FINE/PENALTY PAID FOR REGULARIZATION OF VIOLATION/DEVIATION IS ULTIMATELY HELD AS FEES THEN PROVISION OF SECTION 43B WILL BE APPLICABLE AND THE AMOUNT ITA NOS.845 & 850(B)15 22 WILL BE DEDUCTIBLE AS PER THE PROVISIONS OF SECTION 43B. THIS DISPOSES OF APPEAL FOR THE ASSESSMENT YEAR 200 1-02. 4. RESPECTFULLY FOLLOWING THE DECISION OF THE CO- ORDINATE BENCH WHICH IS IN THE CONSONANCE WITH THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, THIS APPEAL OF THE ASSESSEE IS DISMISSED. 20. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO KEEPING IN VIEW THE JUDICIAL DISCIPLINE, BY FOLLOWI NG THE COORDINATE BENCH DECISION, IN ASSESSEES OWN CASE FOR ASSESSME NT YEAR 2009-10 WE UPHELD THE DISALLOWANCE OF COMPOUNDING FEES. 21. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS DEDUCTION U/S 80-10B OF IT ACT, 1961. THE ASSESSEE HAS RAISED ALTERNATIVE PLEA THAT IF THE COMPOUNDING FEES IS NOT ALLOWED AS DEDU CTION, THE SAME HAS TO BE CONSIDERED FOR DEDUCTION U/S 80-IB(10) OF THE IT ACT, 1961. THE LD. AR SUBMITTED THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 80-IB(10) OF THE ACT, THEREFORE, ANY DISALLOWANCE O F EXPENDITURE WHICH RESULTS IN ENHANCEMENT OF ELIGIBLE PROFIT WHI CH IS ALLOWED AS DEDUCTION U/S 80-IB(10) OF THE ACT, 1961. IN SUPPOR T OF HIS ARGUMENTS RELIED UPON THE DECISION OF THE ITAT OF D ELHI BENCH IN THE ITA NOS.845 & 850(B)15 23 CASE OF DCIT VS SHREE GANESH DEVELOPERS & BUILDERS 6C, CROSS ROAD, DEHRADUN IN ITA NO.3763/DEL/2011. 22. ON THE OTHER HAND, LD. DR SUBMITTED THAT ANY EX PENDITURE WHICH IS INCURRED IN THE NATURE OF FINE OR PENALTY WHICH IS ALLOWABLE AS DEDUCTION U/S 37(I) OF THE ACT IS NOT ELIGIBLE F OR DEDUCTION U/S 80- IB(10) OF THE IT ACT, 1961. THE LD. DR INVITED OUR ATTENTION TO THE EXPLANATION PROVIDED TO SEC.37 OF THE IT ACT AND SU BMITTED THAT ANY EXPENDITURE INCURRED BY THE ASSESSEE FOR ANY PURPOS E WHICH IS AN OFFENCE AND WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFES SION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE FOR THE PURPOS E OF SUCH EXPENDITURE. THEREFORE, HE SUBMITTED THE ENHANCED P ROFIT SHALL NOT BE TREATED AS ELIGIBLE PROFIT FOR THE PURPOSE OF DE DUCTION U/S 80IB(10) OF THE IT ACT, 1961. THE LD. D.R FURTHER SUBMITTED THAT THE ASSESSEE HAS RAISED THIS GROUND FOR THE FIRST TIME BEFORE TH E ITAT AND THE FACTS OF WHICH WERE BEFORE THE LOWER AUTHORITIES THEREFOR E, THE ISSUE MAY BE SET ASIDE TO THE FILE OF THE AO. FOR RE-EXAMINAT ION. 23. WE HAVE HEARD BOTH PARTIES AND PERUSED THE MATE RIAL ON RECORD. THE ASSESSEE HAD MADE AN ALTERNATIVE PLEA I N CASE, THE COMPOUNDING FEE IS NOT ALLOWABLE AS DEDUCTION, THE SAME MAY BE CONSIDERED FOR DEDUCTION U/S 80-IB(10) OF THE IT AC T, 1961. IT IS ITA NOS.845 & 850(B)15 24 FURTHER CONTENDED THAT THE ASSESSEE IS CARRYING OUT ELIGIBLE BUSINESS AND CLAIMING DEDUCTION U/S 80-IB(10) OF THE IT ACT, 1961 THEREFORE, ANY DISALLOWANCE OF EXPENDITURE WOULD RESULT IN ENH ANCEMENT OF ELIGIBLE PROFIT. SINCE, THE ASSESSEE IS ELIGIBLE F OR DEDUCTION U/S 80- IB(10) OF THE IT ACT AND THE ENHANCED PROFIT SHOULD BE ALLOWED AS DEDUCTION U/S 80-IB(10) OF THE IT ACT, 1961. WE FI ND FORCE IN THE ARGUMENT OF THE ASSESSEE FOR THE REASON THAT ANY DI SALLOWANCE OF EXPENDITURE WOULD CERTAINLY ENHANCE THE PROFITS OF ELIGIBLE BUSINESS. IF ASSESSEE IS CARRYING ON ELIGIBLE BUSINESS, THEN, THE TOTAL PROFITS OF THE BUSINESS SHALL BE ELIGIBLE FOR DEDUCTION UNDER THE PROVISIONS OF ACT. IN THE PRESENT CASE, THERE IS DISPUTE ABOUT TH E ACTIVITY OF THE ASSESSEE WHICH IS ELIGIBLE FOR DEDUCTION UNDER SEC. 80-IB(10) OF THE IT THE ACT, 1961. HOWEVER, THE ASSESSEE HAS RAISED TH E ISSUE BEFORE THE TRIBUNAL FOR THE FIRST TIME. THE LOWER AUTHORITIES HAVE NOT HAD AN OCCASION TO CONSIDER THE PLEA OF THE ASSESSEE IN TH E LIGHT OF THE PROVISIONS OF SEC.80-IB(10) OF THE ACT. THEREFORE, WE DEEM IT APPROPRIATE TO REMIT THE ISSUE TO THE FILE OF THE A O AND DIRECT THE AO TO EXAMINE THE CLAIM OF ASSESEE IN THE LIGHT OF THE PROVISIONS OF SEC.80-IB(10) OF THE IT ACT, 1961. ACCORDINGLY, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO AND DIRECT THE AO TO RE-COMPU TE THE DEDUCTION AVAILABLE U/S 80-IB(10) OF THE ACT, IN ACCORDANCE W ITH THE PROVISIONS OF THE ACT. ITA NOS.845 & 850(B)15 25 24. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS THE DISALLOWANCE U/S 14A OF THE IT ACT, 1961. THE AO DI SALLOWED PROPORTIONATE INTEREST EXPENDITURE AND INDIRECT EXP ENDITURE U/S 14A OF THE IT ACT R.W. RULE 8D(2)(II) AND 8D(2)(III). T HE AO WAS OF THE OPINION THAT THE ASSESSEE HAS EARNED DIVIDEND INCOM E AND CLAIMED EXEMPT U/S 10(34), BUT FAILED TO DISALLOW EXPENDITU RE RELATABLE TO EXEMPT INCOME. THE AO FURTHER HELD THAT IN VIEW OF THE AMENDED PROVISIONS OF SEC.14A READ WIT RULE 8D, DISALLOWANC E OF PROPORTIONATE EXPENDITURE IN RESPECT OF INTEREST AND OTHER EXPEND ITURE IS MANDATORY, WHERE THE ASSESSEE HAS EARNED EXEMPT INC OME. IT IS FURTHER OBSERVED THAT IN THE CASE OF DIRECT EXPENDI TURE, ANY EXPENDITURE INCURRED DIRECTLY TO EARN EXEMPT INCOME SHOULD BE DISALLOWED IN FULL. IN CASE OF OTHER EXPENDITURE W HERE THE DIRECT NEXUS IS NOT ESTABLISHED TO EARN THE EXEMPT INCOME, THE PROPORTIONATE EXPENDITURE AS PRESCRIBED UNDER RULE 8D SHOULD BE DISALLOWED. IT IS THE CONTENTION OF THE ASSESSEE T HAT IT HAS UTILIZED THE BORROWED FUNDS FOR THE PURPOSE OF INVESTMENTS I N SHARES TO EARN EXEMPT INCOME. THEREFORE, NO DISALLOWANCE CAN BE M ADE U/S 14A OF THE IT ACT, 1961. IT IS FURTHER SUBMITTED THAT TO I NVOKE THE PROVISIONS OF SEC.14A OF THE IT ACT, THE AO HAS TO PROVE THAT THE ASSESSEE HAS INVESTED THE INTEREST BEARING FUNDS TO EARN EXEMPT INCOME. THE ITA NOS.845 & 850(B)15 26 ASSESSEE HAD OWN FUNDS TO COVER UP THE INVESTMENTS, THEREFORE, NO DISALLOWANCE CAN BE MADE TOWARDS INTEREST EXPENDITU RE. 25. WE HAVE HEARD BOTH PARTIES AND HAVE PERUSED TH E MATERIAL ON RECORD. THE AO DISALLOWED THE INTEREST EXPENDITURE BY INVOKING PROVISIONS OF SEC.14A OF THE IT ACT R.W. RULE 6D. THE AO DISALLOWED THE AMOUNT FOR THE REASON THAT THE ASSESSEE HAS EAR NED EXEMPT INCOME, BUT FAILED TO ALLOCATE THE RELATABLE INTERE ST AND OTHER INDIRECT EXPENDITURES ON PRO-RATA BASIS. THE AO WAS OF THE OPINION THAT THE ASSESSEE HAS NOT PROVED TO THE SATISFACTION OF THE AO THAT IT HAS NOT UTILIZED THE BORROWED FUNDS FOR THE PURPOSE OF INVE STMENTS IN SHARES. THE AO FURTHER OPINED THAT AS PER THE AMENDED PROVI SIONS OF SEC.14A OF THE ACT, THERE IS NO DISTINCTION BETWEEN THE DIR ECT AND INDIRECT EXPENDITURE. IN CASE, WHERE THERE IS EXEMPT INCOME , THE RELATABLE EXPENDITURE IN RESPECT OF INTEREST AND OTHER INDIRE CT EXPENDITURE SHOULD BE DISALLOWED. IT IS THE CONTENTION OF THE ASSESSEE THAT THE AO WAS NOT CORRECT IN DISALLOWING THE INTEREST AS I T HAS NOT UTILIZED THE BORROWED FUNDS FOR THE PURPOSE OF INVESTMENTS O F SHARES OF COMPANIES. THE ASSESSEE FURTHER CONTENDED THAT IT H AS ENOUGH SURPLUS FUNDS IN THE FORM OF SHARE CAPITAL AND RESE RVES TO COVER THE INVESTMENTS MADE IN SHARES TO EARN THE EXEMPT INCOM E. ITA NOS.845 & 850(B)15 27 26. THE QUESTION BEFORE US IS WHETHER THE INTEREST AND OTHER INDIRECT EXPENDITURE RELATABLE TO EARNING EXEMPT IN COME IS DISALLOWABLE U/S 14A OF THE IT ACT, 1961. THE FACT IN RESPECT OF EARNING EXEMPT INCOME IS NOT IN DISPUTE. THE ONLY D ISPUTE IS WHETHER IS THERE ANY DIRECT NEXUS BETWEEN EARNING EXEMPT IN COME AND UTILIZATION OF INTEREST BEARING FUNDS IN SHARES. T HE ASSESSEE HAS FILED A PAPER BOOK CONTAINING FINANCIAL STATEMENTS FOR TH E RELEVANT FINANCIAL YEAR. ON VERIFICATION OF THE FINANCIAL ST ATEMENT, WE FIND THAT THE ASSESSEE SHARE CAPITAL AND RESERVES WHICH IS IN EXCESS OF INVESTMENTS MADE IN SHARES. THEREFORE, WE ARE OF T HE VIEW THAT THE AO WAS NOT CORRECT IN DISALLOWING THE PROPORTIONATE INTEREST BY INVOKING PROVISIONS OF RULE 8D OF IT RULES, 1962. AS REGARDS THE DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE, THE AO HAS DISALLOWED PROPORTIONATE ADMINISTRATIVE EXPENDITURE BY INVOKIN G THE PROVISIONS OF RULE 8D (2)(III). ALTHOUGH, THE ASSESSEE CONTEN DED THAT IT HAS NOT INVESTED BORROWED FUNDS FOR THE PURPOSE OF INVESTME NTS IN EARNING EXEMPT INCOME, THE ASSESSEE CANNOT GET AWAY WITH TH E PLEA IT DID NOT INCUR ANY ADMINISTRATIVE EXPENDITURE FOR DAY TODAY MANAGEMENT AND MONITORING SUCH INVESTMENT PORTFOLIOS. THEREFORE, WE ARE OF THE VIEW THAT ONCE THERE IS EXEMPT INCOME RELATABLE ADMINIST RATIVE EXPENDITURE SHOULD BE DISALLOWED IN PROPORTION TO T HE EXEMPT INCOME. THE AO AFTER CONSIDERING THE RELEVAN T FACTS, ITA NOS.845 & 850(B)15 28 DISALLOWED THE ADMINISTRATIVE EXPENDITURE BY INVOKI NG PROVISIONS OF RULE 8D(2)(III) OF IT RULES, 1962. THEREFORE, WE UP HELD THE DISALLOWANCE MADE BY THE AO IN RESPECT OF ADMINISTR ATIVE EXPENDITURE. 27. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 13 TH MAY, 2016. SD/- SD/- (VIJAY PAL RAO) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE DATED: 13-05-2016 AM* COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR BY ORDER AR, ITAT, BANGALORE