KASHMITA PROPERTIES PVT. LTD.,MUMBAI vs. ITO 12(3)(2), MUMBAI

O R D E R Per Shri Shamim Yahya (AM) :-

This appeal by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals)-21 dated 24.06.2019 and pertains to assessment year 2013-14.

“ I have considered the facts of the case and submissions made by the appellant. Crux of the objections in this ground NO.3 is that, all the persons are required to maintain their accounts with the banks and all the surplus funds invested in fixed deposits were earned out of business activities only and hence income by way of interest on fixed deposits with the banks were chargeable to tax under the head “income from other sources”. First of all the assessee was engaged in the business of running a brokerage arid commission agency in real estate and rental markets in Mumbai and was not engaged in any other business activity, moreover, there was no necessity of investing surplus funds in banks, but these could have invested in company deposits or shares/securities, etc and even then it would not have become a business of the assessee unless assessee had gone into a money lending business. Prima facie it appears that, assessee deposited all its surplus funds, lie its associates, in fixed deposits with banks to earn a steady income by way of interest from a secured party like a bank. Moreover, source of funds for depositing in a bank has nothing to do with the nature of interest or any other income earned and the income/receipt has to be taxed under the relevant head of income irrespective of source of funds, unless linked to the inherent business activity carried on. Prima facie the interest of Rs.39,63,204/- earned on fixed deposits was taxable as ' income from other sources' under the IT. Act, 1961 in light of the facts of the case and the action of the AO is upheld.

So far as the rejection of books of accounts is concerned, we find that Ld.AO has not disturbed the revenue earned by the assessee and he has only disallowed expenditure of Rs.22.28 Lacs which is the main grievance of the assessee. The other grievance is that interest income has been assessed as ‘income from other sources’. The Ld. AR has placed before us a chart to controvert the findings and conclusions drawn by lower authorities which we have duly considered. We have also gone through written submissions filed by the assessee before us. The perusal of financial statements would show that the assessee has reserves of more than Rs.418.94 Lacs which is the main source of funding for the assessee. The fixed deposits have primarily been funded out of accumulated reserves and surplus. As noted in the assessment order for AY 2010-11, the assessee was engaged in the business of estate development and estate booking. The earning of interest was not the main objective of the assessee. The assessee has submitted that interest on FDR was assessed as business income in assessment order for AY 2010-11. However, the principle of res- judicata is not applicable to Income Tax proceedings. Another argument is that the assessee has not made any investment but the assessee has simply selected one of the products offered by the Bank. Further, the fixed deposits were shown under the head current assets. However, in the backdrop of the fact that deposits were funded out of reserves and earning of interest was not the main objective of the assessee, all these arguments do not convince us to accept the plea that the interest on fixed deposits was to be assessed as ‘Business Income’. The same, in our considered opinion, has rightly been assessed as ‘Income from other sources’ and the ratio of case laws as relied upon by Ld. CIT(A) in the impugned order were applicable to the fact of the case. Further, this interest income is net of interest debited by the bank and therefore, no further deduction would be available to the assessee against the same. In nutshell, interest on FDR has rightly been assessed on net basis under the head ‘Income from Other sources’.

I have considered the facts of the case and submissions made by the appellant. Basic issue in ground no.2 refers to the disallowance of expenses of Rs.. 24,61, 260/- out of total expenses of Rs.30,10,670/- incurred and reflected in the books of account of the assesses. It appears from the records that the AO examined the nature of the total expenses of Rs. 30.10,670/- reflected in the P & L Account of the assessee and called for specific details of these expenses vis-a-vis the business needs of the assessee and reasonableness of such expenses. Assessee furnished part of the details but appears to have failed in filing justification and prove reasonableness of expenses vis-a-vis the total receipts of Rs.6.83,194/- on account of brokerage income after excluding interest income, and hence rejected the assessee's claim since the total expenses of Rs.30,10,670/- were almost five times the brokerage and other receipts of Rs.6,83,194/-. Assessee is in appeal and has furnished 14 pages of submissions in this regard and these are reproduced in earlier paragraphs. Crux of the assessee's submissions is that these expenses totaling Rs,.30,1 0.670/- were incurred for the business purposes and hence these are allowable as revenue deduction under section 28 to 44 of the l.T. Act, 1961. Assessee has furnished details of rent expenses and justification for motor car expenses and general comparison of expenses vis-a-vis the receipts/income of other three associate concerns, however the moot question is whether the incurrence of these expenses was justified in light of the facts of the case, namely business needs and reasonableness of such expenses. AO has restricted the allowance of the expenses to the extent of the receipts from the business of brokerage of Rs.6,83,194/- out of the total expenses of Rs.30,10,670/- and disallowed the balance expenses of Rs.24.61.260A, however, the disallowance is not nature and/or expenses head/subhead specific and therefore the entire ground no.2 is vis-a-vis the incurrence of expenses and business needs and reasonableness of such expenses. The AO has observed that incurrence of expenses of Rs.30.10.67Q/- vis-a-vis the business receipts/income of Rs.6,83,194/- was highly abnormal and the balance expenses of Rs.24,61,260/- cannot be allowed as a revenue deduction against income by way of interest on fixed deposits since these receipts/income were assessable as income from other sources and even otherwise, the incurrence of such balance expenses of Rs,24,61,260/- had nothing to do with the earning of interest of Rs,39,63,204/- on fixed deposits with banks. There are two sub issues in this ground no.2 , one is the allowability of balance expenses of Rs.24,61,260/- in general and other one that of allowing it against the interest receipts of Rs-39,62,204/- on fixed deposits. First basic issue is whether the expenses totaling Rs.30,10.670/- incurred by the assessee were reasonable or not vis- a-vis the business needs for AY 2013-14 or not irrespective of the other three associate concerns or not and if so to what extent and why? It appears from the records that the form of nature of business changed from AY 2012-13 onwards and was more Of the less for AY 2013-14 like AY 2012-13. Assessee was a builder cum developer till AY 2011-12 but that business stopped from AY 2012-13 and the nature of business with effect from AY 2012-13 was that of brokerage and commission from sale of fiats and letting premises on hire. Thus, essentially, the nature of business changed that the assessee turning from a builder cum developer to a broker and commission agent for brokering properties available for sale and on hire in Mumbai. However it appears from the perusal of accounts reveals that ' the level of expenses for AY 2012-13 as well as for AY 2013-14 continued to be at the same level as that for AY 2011-12 and earlier AYs when the nature of business was that of' builder and developer' as is evident from the P & L Accounts for AY 2009-10 to AY 2013-14. It has been submitted that ' assessee continued with the same set up at Knar Mumbai for carrying on the business of brokerage even when the earlier business of developer and builder had stopped during AY 2012-13 since the same could not have been dismantled suddenly. There is another sub issue and that is the associate companies had given the assessee's Khar Mumbai for their business needs and this was also one of the reasons for disallowance. In this connection, has been submitted that associate concern Kids Concept which was a playgroup and had its own premises and Ex eel I on was an event management company, the user of the address of the assesses by them can not be dented from the fact that it had a full fledged business set up and Kashmita Corporation and Excelcon had given assessee's address at Vijayraj Buidling Knar West Mumbai in their income tax returns. However the basic issue is why did the assessee company incur so much of expenditure when the nature of its business activity had changed substantially during AY 2012-13 and remained the same that of a broker during AY 2013-14? Assessee has not been able to satisfactorily justify this aspect and therefore, even though the assessee may have incurred the expenses, it has failed to justify the same to the extent of Rs.24,62,160/- and hence its claim for deduction of Rs.24,62,160/- was correctly not tenable in facts of the case vis-a-vis the business needs and reasonableness of the expenses and hence the disallowance of these expenses hereby confirmed. In this connection it is worth mentioning here that Kashmita Corporation, a proprietary concern of one of the directors of the company carried on a similar business, that of brokering in immoveable properties in Mumbai from the same business premises, even though it was slightly different, and had brokerage and commission receipts of Rs.18,23,300/- during the year and had incurred an expenditure of Rs. 15,61,545/- during the year and had shown net profits of Rs.2,61.754/- thus showing net profit percentage of 15% on Its brokerage and commission receipts/income. Now if the director's proprietary concern could show 15% net profits on its brokerage and commission business after incurring 85% as expenses in the same line of business, why could the assessee not earn the same percentage of net profit of 15% despite the closure of its original business of builder and developer? After all when every businessman wants to maximize profits by increasing revenue and reducing the expenses, then why not the assessee as well? Incurrence of the expenses by the assessee may be a fact, but whether the expenditure resulted in any benefit to the assessee and whether it was incidental to the carrying of the business by the assessee is another issue where the assessee has failed to justify and hence disallowance of expenditure of Rs.24,62,160/- out of the total expenditure of Rs.31,45,575/- is upheld. In short, ground no.2 is hereby rejected.

Regarding deduction of business expenditure, we are of the considered opinion that deduction would be available to the assessee as per the provisions of the Act irrespective of the fact whether any revenues were generated during the year or not. The only requirement is that the expenditure should have been laid down wholly and exclusively for the business purposes. It could be seen that the assessee has claimed business expenditure of Rs.40.77 Lacs during the year. As per comparative table on record, these expenditure are in line with the expenditure claimed in earlier years. Further, one of the entities i.e. M/s Exceleon Private Limited has not carried out any business during the year. M/s Kids Concept was operating from other address and it has claimed separate expenditure on account of salaries, labour, securities etc. and thus maintaining separate books of accounts. Similarly, the third entity i.e. M/s Kashmita Corporation has claimed separate salaries, telephone, electricity and other expenditure in its financial statements which would show that this entity was also maintaining separate books and booking its own expenditure. Therefore, the conclusion of Ld. AO is not based on sound reasoning. So far as the repair and renovation expenditure of Rs.9.96 Lacs is concerned, the same is in the nature of payment for carpentry work, labour charges, painting charges, POP work charges, electrical fittings, tiling flooring etc. which are of routine in nature. The benefit may be enduring in nature but the nature of expenditure was revenue since no new asset came into existence. Therefore, we are inclined to hold that business expenditure of Rs.40.77 Lacs as claimed by the assessee would be allowable business expenditure. We order so. The Ld. AO is directed to re-compute the income in terms of our above order.

Resultantly, Ground Nos.1 & 3 stand allowed. Ground No.2 has not been pressed. Ground No.4 stand dismissed.