ITO 7(3)(4), MUMBAI vs. PRABHADEVI PROPERTIES & TRADING COMPANY LTD., MUMBAI

O R D E R PER S. RIFAUR RAHMAN (AM)

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., 2. Brief facts of the case are, assessee filed its return of income on 26.09.2012 declaring total income of ₹. Nil. The return was processed u/s. 143(1) of Income-tax Act, 1961 (in short “Act”). The case was selected for scrutiny under CASS for verification of genuineness of large amount of sundry creditors. Accordingly, notice u/s. 143(2) and 142(1) of the Act were issued and served on the assessee along with questionnaire. In response AR of the assessee attended and submitted the relevant information as called for.

3. The Assessing Officer observed that assessee is engaged in the business of being Builders under Code 0401 as reported in ITR-6 dated 25.09.2012. However, the assessee company vide their submissions dated 07.10.2014 in Point No.1, have reiterated that assessee is akin to a Mutual Society and as such it is not carried out any business. Assessee owns a building, wherein residents live and each member contributes towards payment made on account of maintenance of building, property taxes, repair funds etc., under principle of mutuality. The company recovers maintenance and other charges in respect of use of property by its members and incurred the same. Further, in response to questionnaire, it was submitted that there is no business discontinued by the assessee company and there are no business segments.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., 4. Assessing Officer after examining the memorandum and Article of Association observed that the main object clause as embodied as to pursued by the company on its incorporation was to acquire by purchase, lease, exchange, or otherwise, land, building and hereditaments of the building together with erection, including flats, shops godown garages, etc., He observed from the balance sheet that assessee company has shown a sum of ₹.24,45,11,266/- as “contribution from shareholders” under the head “Non-Current liabilities”. Accordingly, assessee was asked to submit details of the same alongwith the Name, Address, PAN, amount outstanding as of the year end, Financial Year wise receipts and mode of payment etc., Since there was no compliance from the assessee side, by observing from the submissions of the AR of the assessee that the amount represents the contribution made by the shareholders in the earlier years to the company to construct the building and as agreed by both, these amounts are non-refundable for which the members will be entitled to use and occupy the premises. Thus, the entire liability shown are not sundry creditors, but, are the members contribution which represents the non-refundable deposits received from its shareholders. He also observed that there is no maturity date on these amounts. Further, he observed from the submissions of the AR that the above said amounts was collected

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., before the Financial Year 1998-99 for construction of the building and the balance outstanding since then. It was submitted that the contribution from members was collected before Financial Year 1998-99 and just like the cooperative society when a flat is sold, the shares are transferred and new purchaser becomes the new shareholder.

5. Assessing Officer rejected the submissions of the assessee and he observed that the company failed to furnish the specific data by way of chart as called by him in the questionnaire, which was the party wise details of shareholders with their addresses etc., The very fact that the said amounts was non-refundable till life go to prove that the said amount would represents assessee’s income. Since assessee failed to comply with the directions contained in the questionnaire in Point No. 15(i), 15(ii), 15(iii), 15(iv) and 15(v) etc., accordingly, Assessing Officer has not convinced with the submissions of the assessee and treated the above said non-refundable outstanding creditors as income of the assessee u/s.68 of the Act.

7. Further, Assessing Officer observed that assessee has claimed a sum of ₹.27,56,987/- as Municipal Taxes, Water Cess and Land Revenue expenses taken together. The assessee was asked to submit the detailed ledger account with the photo copy of all the invoices and receipts in the questionnaire issued to the assessee. In response assessee has submitted a detailed ledger account only. Since assessee has not filed any details (physical evidences) on claiming of above said expenditure, Assessing Officer, rejected the claim of the assessee that these expenditure is part of the expenditure which is claimed under mutuality concept. Accordingly, he proceeded to make the disallowance of above said expenditure.

8. Further, Assessing Officer observed that assessee has earned a dividend income of ₹.1,87,765/- and made suomoto disallowance of (A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., ₹.5,000/- only, as expenses relating to earning of such above income. He rejected the claim of the assessee on the submission that assessee is akin to mutual benefit society and assessee is not carrying on any business. Therefore, such disallowance will not have any bearing on the ultimate assessed income which will be Nil. He rejected above submissions and proceeded to apply Rule 8D(2)(iii) of I.T. Rules and determined disallowance of ₹.40,733/-.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., income and if so, whether it can be charged to tax under section 68 of the Act. 3.3.1 As has been explained in detail by the AR, the accounting treatment of the said sum of 24.25 crores was such that it never passed through the profit and loss of the appellant, it always stayed in the appellant's balance sheet. Balance sheets of various financial years have been filed before me by the AR by way of a compilation. While the said sum of 24.45 crores has always appeared as a liability by way of shareholders' contributions right since FY 1995-96, on the asset side it was initially 'construction in progress' for two financial years after which it became 'fixed assets' by way of land, building, plant and machinery as also furniture and fixtures. The AR is quite correct when she describes the said sum of 24.45 crores as a non- refundable deposit by way of share-holders' contributions. But the non-refundable nature of the deposit does not make it income of the appellant. This non-refundable deposit shall always be physically represented by the building viz. the Peregrine, which the appellant owns. In these circumstances, the said sum of 24.45 crores cannot become the income of the appellant. Coming to the issue of charging the said sum of 24.45 crores under section 68 of the Act, this provision is seen to begin in the following fashion, "Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory....". It would thus become apparent that the sine qua non of a sum capable of being assessed under section 68 of the Act is that 'it be found credited in the books maintained for the relevant previous year. However, it is by now clear that the said sum appeared for the first time in the books of the appellant maintained for FY 1995-96 and not during the relevant previous year. The Hon'ble Mumbai Tribunal had occasion to deal with a similar issue while deciding the matter of ITO v. Nasir Khan J. Mahadik (supra). In that case, the AO had roped in the provision of section 68 of the Act to assess as income of the assessee a loan taken in the preceding previous year. Deleting this addition, the Hon'ble Tribunal had in fact awarded costs to the assessee. The Hon'ble Jurisdictional Tribunal had similarly held in the case of Rita Stephen Pinto v. ITO (supra), ruling out of the purview of section 68 of the Act a loan taken in an earlier previous year. It would hence become clear that the AO has no case for assessing the said sum of 24.45 crores as the appellant's income of AY 2012-13. The addition of 24,45,11,266/- so made is hereby deleted. Ground no. 1 is accordingly allowed.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., 11. With regard to denial of the benefits of mutuality, Ld.CIT(A) held as under: - “4. Ground no. 2- Denial of the benefits of mutuality to the appellant - While the appellant had sought to rely on the decision of the Hon'ble Apex Court in the case of CIT v. Bankipur Club Ltd. (226 ITR 97), the AO had denied it that benefit. He had done so by distinguishing the said decision, stating that unlike the case of the assessee in the cited decision, the appellant was not a club. The fact that the appellant has no other income (save certain dividend) but for the subscriptions collected from its members and that the entire expenditure of the relevant previous year has been incurred solely for managing the affairs of the Peregrine would without any doubt demonstrate the applicability of the principle of mutuality to the appellant's case. In fact this very same issue had come for consideration before the then CIT(A) [Commissioner of Income Tax (Appeals)] for AY 2007-08. He had then allowed the appeal (no. CIT(A)20/ITO-7(1)(4)/IT-202/09-10/11-12 dated 12th December 2011) by observing. "The appellant- company being a mutual benefit society governed by the principle of mutuality is not liable to tax and (ado, taking into account all the facts and circumstances, the addition made is deleted and this ground of appeal is allowed. In the result, the appeal is allowed." After careful consideration of the matter at hand, I find myself in complete agreement with my predecessor's observations reproduced earlier. Ground no. 2 is accordingly allowed.

12. With regard to disallowance of expenditure incurred on municipal taxes, water cess, etc, Ld.CIT(A) held as under: - “5. Ground no. 3- Disallowance of expenditure of 25.56 lakhs incurred on municipal taxes, water cess, etc. This ground arises from the AO's denial of the benefits of mutuality, which issue has already been held in favour of the appellant, while deciding ground no. 2. As a matter of fact, the AO has admitted in his order that the details of this expenditure of 25.56 lakhs had been filed before him. But he has still gone ahead with this addition by simply disputing the appellant's claim that the resultant surplus shall not be chargeable to tax on (A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., account of applicability of the doctrine of mutuality. I am unable to countenance this addition, which appears to lack any reasoning. The addition of 27,56,987/- is hence deleted. Ground no. 3 is accordingly allowed.

13. With regard to disallowance of expenditure u/s. 14A of the Act, Ld.CIT(A) held as under: - “Ground no. 4- Disallowance of expenditure of 0.35 lakh under section 14A of the Act - The AO appears to have invoked the provisions of section 14A of the Act, read with rule 8D of Income Tax Rules, 1962 (hereinafter referred to as the 'Rules') simply because he had objected to the appellant's statement that such a disallowance would have no bearing on the ultimate assessed income which has to be 'nil' in view of the applicability of the doctrine of mutuality. Curiously, the AO has objected to the suo motu disallowance of 0.05 lakh made by the appellant under section 14A of the Act, questioning the need for doing so. According to him, by offering a voluntary disallowance of 0.05 lakh, the appellant has conceded that it was subject to provisions of section 14A of the Act. Accordingly, the AO has proceeded to so himself. Firstly, the sole continuing investment made by the appellant is of 27.99 lakhs which was in the units of Tata Mutual Fund on which dividend of 1.87 lakh had been earned during the relevant previous year. According to the AR, the appellant had not incurred any direct expenditure for earning this exempt income. Nevertheless the appellant has offered a suo motu disallowance of 0.05 lakh to cover any administrative expenditure. The AO has not indicated his dissatisfaction with this. disallowance, but has instead straightaway applied the provisions of section 14A of the Act read with rule 8D of the Rules, holding the applicability of these provisions to be almost automatic. Such an action has been repeatedly struck down by various superior judicial authorities. For instance, in its decision in the case of Auchtel Products Ltd. v. ACIT (52 SOT 39), the Hon'ble Jurisdictional Tribunal had held that before invoking provisions of section 14A of the Act read with rule 8D of the Rules, the AO is obliged the examine the non-disallowance / voluntary disallowance made by the appellant. In the instant case, no expenditure has been linked to the earning of the exempt income by either the appellant or the AO. The investment

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., in question is a single and continuing investment in a mutual fund. It is accordingly held that the voluntary disallowance of 0.05 lakh as made by the appellant is (adequate and that invoking of provisions of section 14A of the Act read with rule 8D of the Rules was not necessary. The addition of 35,733/- is hence deleted. Ground No. 4 is accordingly allowed.”

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., relating to the deposits outstanding and further, he submitted that Ld.CIT(A) has not considered the applicability of the Hon'ble Apex Court decision in the case of M/s. G S Homes & Hotels Pvt. Ltd v. DCIT (supra). With regard to mutuality, he submitted that Ld.CIT(A) has allowed the grounds raised by the assessee without examining the legal and factual matrix of the case. With regard to expenditure claimed by the assessee under the principle of mutuality he relied on the findings of the Assessing Officer. Finally, with regard to disallowance u/s. 14A of the Act he submitted that assessee itself suomoto disallowed expenditure which may be sustained.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., 3. The Assessee was originally a 100% subsidiary of M/s. Tata Housing Development Company Limited ("THDC"). M/s. THDC is a Public Limited Company carrying on the business of developing residential and commercial areas. When THDC was the shareholder of the Assessee, THDC contributed to the Assessee for the development of the property. The same was reflected as "contribution from members" in the balance sheet of the Assessee.

10. The Assessing Officer passed the assessment order for the assessment year 2012-13 on 24th March, 2015 inter alia holding as under 10.1 Addition of Rs. 24,45,11,266/- under section 68 of Income-tax Act, 1961 ("the Act") the Assessing officer made an addition of Rs. 24,45,11,266/- which was appearing as 'Contribution from shareholders - Members Contribution' on the liability side of the Balance Sheet under section 68 of the Act. This was the non-refundable deposits received from members before 1997-98 for construction of the building. The Assessing Officer allegedly invoked the provision of section 68 on the ground that on some points raised, the Assessee has not given any answer and on certain other points, the answer of the Assessee is not satisfactory. ……… Submission of the Respondent - Assessee Ground No. 1: Addition of Rs. 24,45,11,266/- under section 68 of the Act 1. The Assessee submits that the provisions of section 68 applies where any sum is found credited in the books of an Assessee maintained for any previous year and where the Assessee offers no explanation about the nature and source thereof or if the explanation offered by the Assessee is not found, by the Assessing Officer, to be satisfactory, the sum so credited may be charged to income tax as the income of the Assessee of that previous year.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., 2. The Assessee submits that the CIT(A) has correctly held that the provision of section 68 of the Act is applicable in the year in which the sum is credited in the books of the assessee and, as the sum of Rs. 24, 45, 11,266/- was credited in the books of the Assessee in the earlier year and not in the assessment year 2012-13, the provision of section 68 is not attracted. The issue is settled by the decision of the Jurisdictional High Court in the case of CIT v Bhaichand N Gandhi 141 ITR 67 (Bom), wherein the High Court has categorically held that the provision of section 68 can be attracted only in the year in which the amount is credited and not in a later year. Similar view has been taken by the Tribunal in the cases of ITO VS. Nasir Khan j. Mahadik (143 ITD 166) and Rita Stephen Pinto Vs. ITO (ITA no. 1219/Mum/2013). Therefore, the Assessee submits that the ground of Revenue is liable to be rejected on this issue alone.

3. Without prejudice, the Assessee submits that the provision of section 68 is also not applicable as the Assessee has clearly offered explanation about the nature and the source of the credit and the said explanation cannot be said to be unsatisfactory. The Assessee submits that when THDC was the shareholder of the Assessee, THDC contributed the said sum over the period of time to the Assessee for the development of the property. the Assessing Officer had already enquired about the same in the year in which the contribution was made. i.e. 1994-95 and being satisfied with the submission of the Assessee, no addition was made to the income of the Assessee. Therefore, the Assessee submits that the question of the Assessing Officer not being satisfied in the assessment year 2012-13 for a credit in the books of the Assessee in the assessment year 1994-95 cannot arise. Ground No. 2 & 3: Benefit of Mutuality to the Assessee 1. The Assessee submits that the Assessee has been accepted as a mutual concern for last so many years by the Department. The Assessee submits that even for the assessment year 2007-08 when the CIT(A) held that the Assessee is eligible for the benefit of mutuality, the Revenue has not challenged the same before the Tribunal. Therefore, the Assessee submits that in view of the decision of the Supreme Court in the case of Radhasoami Satsang v CIT 193 IT 321 (SC) and Bharat Sanchar Nigam Limited v UOI 282 ITR 273 (SC), it (A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., is not open to the revenue to argue contrary to the accepted position of the earlier years.

4. The Assessee further submits that the reliance by the Departmental on decision of Supreme Court (SC) in case of G. S. Homes & Hotels Pvt. Ltd is completely unjustified as the said decision is clearly distinguishable on facts as under:- a. The assessee in the case before the Supreme Court was engaged in the real estate business and had received deposits from the shareholder for the allotment of rights in the building constructed by the assessee (pg. 18 of the HC decision). Accordingly, the Court held that the activity of the Assessee therein was clearly a business activity as the assessee has sold the built-up area for a consideration. Whereas in the present case, the Respondent-Assessee is merely engaged in the activity of maintenance of the building from the contribution received by the members. The (A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., shares of the Respondent-assessee were originally held by THDC and THDC has already paid tax on the sale of the shares of the Assessee to the present shareholders. Therefore, the question of taxation of business income in the hands of Respondent-Assessee does not arise in the present case. b. In so far as the receipt of the alleged maintenance by the Assessee, the High Court, records a finding of fact that at Page 32-33 of its decision, that the assessee has admitted that the maintenance was in the nature of business income i.e. same nature as the other receipts which were received along with the other amounts. Therefore, the High Court and the Supreme Court had no occasion to consider the issue of whether the receipt of subsequent maintenance and utilization of the same for the benefit of the members. would come within the ambit of mutuality. Hence, the Assessee submits that the said decision has no relevant to the facts in hand. In the present case, undisputedly, the Respondent Assessee has received maintenance and utilized the same for the benefit of the members. Hence, the Assessee's case is clearly covered by the decision of Bangalore Club v CIT (supra). Ground No. 4: Allowability of expenditure of Rs. 27,56,987/ The Assessee submits that if it succeeds in its ground of mutuality, then the question of claim of expenditure would not arise as being a mutual concern, the income of the Assessee is not chargeable to tax. Without prejudice, even if it is held that the Assessee is not a mutual concern, then also Assessee is eligible for deduction of Rs. 27,56,987/- as the same has been incurred by the Assessee towards municipal taxes, water cess and land revenue with respect to the building under maintenance. The Assessee submits that if the income of the Assessee is to be computed under the normal provision, then the aforesaid expenditure is clearly allowable. The CIT(A) has recorded the finding that the Assessing Officer has not given any reason for not allowability of the deduction. Hence, the Assessee submits that this ground needs to be dismissed.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., Ground No. 5: Disallowance of Rs. 35.733/- under section 14A The Assessee submits that if it succeeds in its ground of mutuality, then the question of disallowance under section 14A would not arise. Without prejudice, the CIT(A) has given a finding that the Assessing Officer has not recorded his satisfaction on the incorrectness of the disallowance of Rs. 0.05 Lakhs which was offered by the Assessee. Therefore, in view of the provision of section 14A(2) of the Act, Assessing Officer was not empowered to make a disallowance. The Assessee submits that as no satisfaction has been recorded by the Assessing Officer, the disallowance under section 14A(2) is not justified.”

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., 21. We observe from the record that these facts were appreciated by previous Assessing Officers and the present Assessing Officer has not understood the nature of the transaction and how the housing cooperative society are constituted and administered. In the given case instead of trust or cooperative society, the THDC has formed the company with the same motive of running and maintaining the building for the benefit of members occupying the building. Therefore, the Assessing Officer has not appreciated the facts on record. Hence, we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, Ground No. 1 raised by the revenue is dismissed.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., engaged in the activity of maintenance of the building from the contribution received by the members. The shares of the assessee were originally held by THDC and THDC has already paid tax on the sale of the shares of the Assessee to the present shareholders. Therefore, the question of taxation of business income in the hands of Assessee does not arise in the present case. Since the facts are distinguishable to the present case, we dismiss the Ground No. 2 as well.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., 24. From the information disclosed in Note 24, the books maintained and the activities carried on by the assessee clearly indicate that assessee is following the principle of mutuality. Therefore Ld.CIT(A) has clearly brought on record the above facts in his findings. Therefore, we are inclined to accept the submissions of the assessee and not intend to disturb the findings of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed.

(A.Y. 2012-13) Prabhadevi Properties & Trading Company Ltd., 26. With regard to Ground No. 5, we noticed that the activities carried on by the assessee are for the mutual benefit of the members and any income earned by the assessee also not taxable. Therefore, even the exempt income earned by the assessee are also exempt. Since there is no taxable income earned by the assessee hence, there won’t be any impact on disallowance of the expenses. It is important to note that the provisions of section 14A was introduced to curb the claim the expenditure incurred on earning the exempt income alongwith the expenditure claimed for the earning of the taxable income. In the given case assessee has not earned any taxable income. There is no question of making any disallowance in this case. Accordingly, ground raised by the revenue is accordingly, dismissed.

Order pronounced in the open court on 8th August, 2022.