EMCO DYESTUFF PVT. LTD.,MUMBAI vs. DCIT - 12(2)(1), MUMBAI

Per Rajesh Kumar, Accountant Member:

by the assessee are as under: “1. The learned Commissioner of Income Tax – A(20) [hereinafter referred to as DCIT] grossly erred in disallowing the Appellants claim U/s 35, amounting to Rs.1,05,00,000/-.

2. The learned CIT(A) erred in completely ignoring the submissions made by the appellants in this regard.

2 M/s. Emco Dyestuff Pvt. Ltd. 3. On facts & circumstances of the case the learned Dy. Commissioner of Income Tax A(20) (hereinafter referred to as DCIT] was not justified in making addition of Rs. 8,81,137/- being depreciation on let out property. 4. That the appellant craves leave to add, to alter, amend, modify, substitute, delete & for rescind all or any of the ground of appeal on or before the final hearing if necessity so arises.”

3. The issue raised in ground No.1 & 2 is against the order of Ld. CIT(A) confirming the order of AO in disallowing the assessee’s claim under section 35 of the Act of Rs.1,05,00,000/-.

3 M/s. Emco Dyestuff Pvt. Ltd. A.R. submitted before the AO that donation paid of Rs.60 lakhs to the said institute is a genuine as the same is paid by cheque vide cheque No.000378 dated 06.03.2014 and the assessee has checked the registration and approval given to the said trust under section 35(1)(ii) of the Act and on the date of giving donation the said institution was having and holding the exemption to receive the donation and it was only after by a subsequent order dated 24.08.2016 the said registration has been withdrawn w.e.f. 21.08.2007. The AO on the basis of statement recorded under section 131 of two directors namely Shri Bipin K Shah and Shri Ravinath K. Shah who gave the statement that they never heard of this trust namely Matravaini Institute of Experimental Research Education and on the basis of CBDT withdrawing the notification issued under section 35(1)(ii), 1961 w.e.f. 21.08.2007 held the said donation as non genuine and consequently disallowed the claim of Rs.1,05,00,000/-.

4 M/s. Emco Dyestuff Pvt. Ltd. 4.4.2 In her submissions which is reproduced above, the AR of the appellant submitted that the appellant was not aware of any wrongdoing on the part of the donee. The AR of the appellant contended that the donation is evidenced by a valid receipt. On going through the receipt (copy enclosed as Annexure - 1), I find that the receipt has been doctored. I find that the digit '2' has been inserted in the serial number of the receipt and the serial number has been changed. Therefore, the receipt is not valid. In absence of a valid receipt and in view of the facts mentioned herein above, I uphold the disallowance made by the AO. In the result, grounds of appeal No. 1 & 1.1 are dismissed.”

6. After hearing both the parties and perusing the material on record, we observe that in this case the assessee has given donation of Rs.60 lakhs during the year to Kolkata based research institute named Matravaini Institute of Experimental Research Education. The said institute was registered as eligible institute to receive donation to carry out the research work but when the same was found to be engaged in accepting the bogus donations, the CBDT vide letter No.203/11/2015/ITA.ii DATED 24.08.2016 ordered the withdrawal of Notification under section 35(1)(ii) of the Act granted to the said institute w.e.f. 21.08.2007. Now the issue before us is whether the donation given by the assessee of Rs.60 lakhs is to be allowed to the assessee under section 35 or not. In this case, admittedly the two directors of the company have denied to have any knowledge of the said research institute to whom the donation was given whereas the assessee’s contention is that only the working director was having this knowledge and he has not denied the said fact. We have carefully examined the facts of the case in the light of the various decisions relied upon by the assessee and observed that the assessee is entitled to deduction of section 35(1)(ii) of the Act as the said research institute was eligible to accept donation and on the date of giving donation by the assessee and that Notification was valid and it is 5 M/s. Emco Dyestuff Pvt. Ltd. only by way of subsequent letter it was cancelled from back date. The case of the assessee is squarely covered by a series of decisions as referred to and relied by the Ld. A.R. In the case of Borsad Tobacco Company Pvt. Ltd. vs. DCIT in ITA No.2040/M/2018 A.Y. 2014-15 order dated 17.06.2019, the co- ordinate bench of the Tribunal has held that donor is not affected due to subsequent withdrawal of recognition with retrospective effect. The operative part is reproduced as under: “6. After having gone through the facts of the present case as well as considering the orders passed by revenue authorities and orders of the Coordinate Benches of ITAT as mentioned above, we find that as per the facts of the present case, admittedly, the assessee had given donation to SHGPH, which was after the date of recognition of SHGPH u/s 35(1)(ii) of the Act, but before the date of withdrawal of said approval by CBDT in the case of SHGPH. Now, the short point for consideration before us is as to whether the assessee /donar could be denied weighted deduction u/s 35(1)(ii) of the Act due to the subsequent withdrawal of recognition by CBDT with retrospective effect. We find that the issue under consideration has already been addressed /considered by the Coordinate Bench of Kolkata Tribunal in the case of DCIT vrs. Maco Corporation (I) Pvt. Ltd. in ITA No. 16/Kol/2017 dated 14.03.18 for AY 2013-14.

7. Similarly, the Hon’ble Bombay High Court in the case of Ram Das Maniklal Gandhi vs. UOI (2000) 108 Taxman 590 (Bom) has held that the donation to an institution whose approval was withdrawn by the prescribed authority with 6 M/s. Emco Dyestuff Pvt. Ltd. retrospective effect would not affect the assessee who gave the donation. The assessee is entitled to rely upon the certificate granted to an institution under section 35CCA of the Act for claiming deduction under section 35CCA of the Act for claiming deduction under that section which was valid and subsisting when donation was made to it. We, therefore, respectfully following the ratio laid down in the above decisions, set aside the order of Ld. CIT(A) and direct the AO to allow the deduction as claimed under section 35 of the Act by the assessee.

“6. We have considered rival contentions and perused the material on record including cited case laws. We have observed that assessee is engaged in the business of trading in chemicals & dyes, intermediate & commission agents. We have observed that assessee, inter-alia, has assets being immovable properties in its “Block of Assets‟ viz. Building, as defined u/s. 2(11) of the 1961 Act which consisted at the beginning of the previous year, six immovable properties owned by assessee. The assessee during the previous year under consideration purchased two new immovable properties while one immovable property was sold during the previous year under consideration. Thus, undisputedly, assessee owns in all seven immovable properties as at the end of the previous year under consideration before us, out of which four properties were let out by assessee income from which was offered to taxation by assessee under the head „Income from House Property‟, while rest of the three properties were used for the purposes of business of the assessee. All these seven immovable properties owned by assessee company are separate and distinct properties identifiable individually. Out of these four immovable properties which were let out by assessee during the previous year under consideration, two immovable properties let out were new immovable properties acquired during the year under consideration while two immovable properties were acquired in earlier years. It is also observed that three remaining

8 M/s. Emco Dyestuff Pvt. Ltd. immovable properties which were not let out by assessee but were forming part of Block of Asset viz. Building were used by assessee for its business purposes. The dispute has arisen between rival parties as to claim of deduction of depreciation on four immovable properties which were let out by assessee on rent and income thereof was offered for taxation by assessee under the head „Income from House Property‟. The assessee on its part had claimed depreciation on all seven immovable properties held by it , viz. three immovable properties which were used for business purposes as well for four properties which were let out on rent by the assessee during the year under consideration, on the ground that all these seven immovable properties entered „Block of Asset‟ viz. Building and once an item of asset entered into „Block of Asset‟ as defined u/s 2(11) read with clause (ii) to Section 32(1), then it loses its individual identity and hence depreciation is to be allowed on entire „Block of Asset‟ irrespective of the fact that some of these separately identifiable properties falling within Block of Assets are not put to use for business purposes during the year under consideration . There is dispute between rival parties with respect to three immovable properties falling within Block of Assets which were undisputedly been used by assessee for business purposes on which depreciation was claimed by the assessee. Thus, we will be confining our discussions to only four immovable properties which were let out on rent during the year under consideration income thereof which was offered by assessee under the head „Income from House Property‟ , on which the assessee has set up claim for allowability of depreciation u/s 32 citing justification that since they form part of Block of Assets viz. Building as defined u/s 2(11) and hence depreciation u/s 32 ought to be allowed irrespective of fact that these properties were never used for purposes of business of the assessee for the entire year under consideraion . With respect to two immovable properties acquired during the year under consideration and which were let out on rent, a fresh plea is now raised before the Bench for the first time by learned counsel for the assessee by making statement before the Bench that these two new immovable properties acquired during the previous year under consideration were in-fact used for business purposes initially by the assessee as godowns for its business purposes before being let out by assessee on rent in previous year under consideration itself. These two newly acquired immovable properties are now claimed by assessee of being put to use as business assets for godwon of the assessee for the purposes of business of the assessee before it was let out on rent and now Prayers are made to set aside and restore this matter to the file of the AO for verification of this fresh plea and accordingly then the AO can re- adjudicate/decide the issue on merits in accordance with law. It is pertinent to mention that if properties were acquired with an objective of letting on rent and were never used for purposes of business of the assessee , of which rental income thereof is offered for taxation under the head „Income from House Property, the said property will never enter into Block of Asset and no depreciation can be allowed. Reference is drawn to co-ordinate Bench decision in the case of Sonu Nigam v. ACIT reported in (2019) 105 taxmann.com 331(Mum-trib.), wherein co-ordinate Bench of Mumbai-tribunal held as under:-

"11. In the present case we find that the flats which never entered into the block of depreciable assets as income from the same were being offered under the head income from house property can by no stretch of imagination be said to be entitled for automatic entry into the block of 9 M/s. Emco Dyestuff Pvt. Ltd. depreciable asset. In this view of the matter, the reference to section 2(11), 43(6) & 50 by learned CIT(A) is germane and support the case of the Revenue. Section 2(11) defines block of asset as a group of asset falling within the class of asset........ in respect of which the same percentage of depreciation is permissible. The income from 'Namah' building and the premises in 'Lakhani Centrium' was falling under the head 'income from house property' and hence these premises cannot be said to be falling under any asset group on which any rate of depreciation is prescribed as on such asset no depreciation is permissible."

It is pertinent to mention here that counsels who represents assessee‟s before Hon‟ble Courts/Tribunal are officers of the Court/tribunal and it is expected of them that they will make responsible, true and correct statements before the Hon‟ble Courts/tribunal to provide proper assistance to the Hon‟ble Courts/tribunal as there statements are normally taken cognizance to arrive at decisions and any untrue , false, irresponsible and/or reckless statements made before Hon‟ble Courts/tribunal by these counsels have its own repercussions as to penal consequences which may follow in consequence of making reckless, irresponsible , untrue and/or false statements before Hon‟ble Courts/tribunal. Thus after hearing both the parties and keeping in view statement made by learned counsel of the assessee, we are of the considered view that this plea of the assessee of business user of these two newly acquired immovable properties for business purposes as godown for assessee‟s business during the previous year under consideration before being let out on rent need verification by AO and the matter need to be set aside and restored to the file of the AO for framing of fresh de-novo assessment after considering explanations/evidences filed by the assessee during said de-novo proceedings before the AO. This is now important for assessee to demonstrate with credible, cogent and clinching evidences before the AO to prove that newly acquired immovable properties were used for business purposes of the assessee as godown during the year under consideration before being let out on rent. This is a fact finding exercise which could only be done after necessary verifications of the facts by the AO. We have also observed that Section 38(2) of the 1961 Act clearly stipulates that even in case of Block of Assets depreciation shall be restricted to a fair proportionate basis on assets having regard to the user of such asset for purposes of business or profession of the tax-payer, which are not exclusively being put to use for business and profession purposes. Income-tax statute is a self contained code in itself. Heads of Incomes are stipulated within 1961 Act and if an income falls under a particular head , computation of income has thereof to be made only in accordance with computation provisions relating to that head of income only. The assessee has declared its income from rent from letting out of house properties under the head „Income from House Property‟ which falls under Chapter IV-C of the 1961 Act containing Section 22 to 27. The assessee will be entitled for deductions as are stipulated u/s 22 to 27 under Chapter IV-C of the 1961 Act while computing Income from House Property chargeable to tax. This chapter IV-C of the 1961 Act does not provide for depreciation on immovable properties as one of deductions from income earned by assessee from letting out of such house property. Section 32 of the 1961 Act provides for depreciation and falls under Chapter IV-D which concerns itself with computation of income from Profits or Gains from Business or Profession. Thus, there is no question of allowing any 10 M/s. Emco Dyestuff Pvt. Ltd. deduction as depreciation u/s 32 from rental income on letting out of these house properties for the period for which these house properties were let out and income thereof was offered for tax under the head „Income from House Properties‟. Reference is drawn to decision of Mumbai-tribunal in the case of DCIT v. Godrej Properties & Investments Limited (2005) 93 ITD 308(Mumbai) to support above proposition . Coming back to two newly acquired properties, the assessee has raised fresh claim before the tribunal for the first time that these two newly acquired properties which were let out during the part of the previous year on rent were prior to they being let out were used by assessee as godown for assessee‟s own business after its acquisition by the assessee during the previous year itself , the genuineness of such assessee‟s claim as to its bonafide of business user of these properties for godown purposes requires verification by the AO. The assessee has also to demonstrate pith and substance of objectives of acquisition of these two new immovable properties , which also requires verification by AO which could also , inter-alia, be gathered by conduct of the assessee with respect to dealing with these two newly acquired properties over succeeding years. The assessee is also required to demonstrate whether these properties continued to be let out on rent in succeeding years or were used for own business purposes in later year. The AO is to consider totality of the surrounding circumstances to arrive at conclusion as to whether fresh claim set up by assessee as to user of these two immovable properties for godown purposes in previous year under consideration before being let out on rent was a genuine and bonafide claim or is a frivolous claim set up in an act of desperation . Thus, under these circumstances and in the interest of justice, we are inclined to restore the matter back to the file of the AO for framing of denovo determination of the issue on merits in accordance with law keeping in view our aforesaid directions/discussions. The assessee shall be allowed by AO to file evidences/explanations in its defence in set aside proceedings which shall be admitted by AO in the interest of justice and then adjudicated on merits in accordance with law. We clarify that all the contentions are kept open . Needless to say that proper and adequate opportunity of being heard shall be provided by AO to the assessee in set aside de-novo assessment proceedings in accordance with principles of natural justice in accordance with law. We order accordingly.

Coming to two immovable properties which were acquired in earlier years and were let out during the entire year under consideration income of which was offered for taxation by assessee under the head „Income from House Property‟ , these two properties were never used for the purposes of business of the assessee during the entire previous year relevant to impugned assessment year and one of the condition stipulated u/s 32 for grant of Depreciation on assets is its user for business purposes, which test these two house properties had failed.The claim set up by assessee is that since these two properties fall within Block of Asset viz. Building for which same percentage rate of depreciation is provided, the depreciation has to be allowed u/s 32 of the 1961 Act. It is not the contention of the assessee that these properties were let out temporarily during the year under consideration but were ready/available for being used for the purposes of business of the assessee. Moreover , once rental income from these house properties is brought to tax under the head „Income from other sources‟ and undisputedly there is no usage of these house properties by assessee for its business, then there is no scope of claiming Depreciation on these house properties by invoking provisions

11 M/s. Emco Dyestuff Pvt. Ltd. of Section 32 of the 1961 Act which falls under Chapter IV- D dealing with income from Profit and Gains of Business or Profession because of factual matrix of the case before us. These are altogether different and distinct properties which are separately identifiable. These two house properties were let out by assessee even in preceding year(s) and were let out throughout the year under consideration. As we have seen earlier that the 1961 Act is a self contained code in itself and incomes are to be brought to tax under different heads of income which are mutually exclusive . There is a residuary head of income also provided additionally in the 1961 Act in case the income does not fall under any of the four specified head of income. Once income falls under a particular head of income, then it is to be brought to tax under that head only and consequently income is to be computed after claiming deductions as provided under that head only. The assessee has declared its income from rent from letting out of these two house properties which were acquired in earlier years under the head „Income from House Property‟ which falls under Chapter IV-C of the 1961 Act containing Section 22 to 27. The assessee will be entitled for deductions as are stipulated u/s 22 to 27 under Chapter IV-C of the 1961 Act while computing Income from House Property chargeable to tax. This chapter IV-C of the 1961 Act does not provide for depreciation on immovable properties as one of deductions from income earned by assessee from letting out of such house property. Section 32 of the 1961 Act provides for depreciation and falls under Chapter IV-D which concerns itself with computation of income from Profits or Gains from Business or Profession. Reference is drawn to decision of Mumbai- tribunal in the case of DCIT v. Godrej Properties & Investments Limited (2005) 93 ITD 308(Mumbai) and Rolta Holding & Finance Corporation Limited v. DCIT reported in (2015) 153 ITD 6 (Mum-trib.), to support above proposition . Thus, there is no question of allowing any deduction as depreciation u/s 32 from rental income on letting out of these house properties for the period for which these house properties were let out and income thereof was offered for tax under the head „Income from House Properties‟ , keeping also in view firstly that admittedly there was no business user of these properties by assessee during the entire year under consideration and secondly there was no possibility of these two properties being available/ready to be used for the purposes of the business of the assessee. The concept of Block of Assets as defined u/s 2(11) of the 1961 Act cannot be stretched to an extent wherein separate and distinct properties acquired by assessee were let out on rent for years and there is no usage of these properties for purposes of business or profession of the assessee nor there is any possibility of these properties being ready /available to be used for the purposes of business of the assessee, merely on the grounds that these properties continued to form part of Block of Asset as defined u/s 2(11). User of the asset for the purposes of business or profession of the assessee is a pre-condition for grant of depreciation u/s 32 of 1961 Act and these two properties were in fact let out on rent for lengthy period of time from earlier years as emanating from records and as submitted before us by learned counsel for the assessee, income of which was offered for taxation by assessee under the head „Income from House Properties‟. It is altogether different that some of the assets which form part of the Block of Assets may not be temporarily used for business but since they form part of the Block of Asset on which same rate of depreciation is prescribed , the depreciation stood allowed on concept of passive user but where business usage is hit by doctrine of impossibility

12 M/s. Emco Dyestuff Pvt. Ltd. as these properties over years continued to be let out on rent , income thereof being offered to tax under the head „income from house property‟ , the depreciation u/s 32 cannot be allowed merely because these properties continued to be part of block of assets despite being never used for business purposes uninterruptedly spread over several years. Merely because depreciation was allowed by Revenue in earlier years on these two properties despite been let out on rent for uninterruptedly for several years merely on ground that these properties fall within Block of Assets cannot be a ground to allow the same in the year under consideration unless statute permits the same. It is well settled that every year is an independent unit and merely because depreciation was allowed earlier by Revenue erroneously does not mean that the same will continued to be allowed in this year also. Allowing depreciation u/s 32 of the 1961 Act on these two let out properties which are distinct, independent and separately identifiable properties, on the grounds that they form part of Block of Asset , will lead to taking concept of Block of Asset to limits of absurdity , keeping in view peculiar factual matrix prevailing in the instant appeal and doctrine of supervening impossibility of business usage of these properties . There is admittedly no business user of these two properties by assessee for its business for the entire year under consideration as well for earlier years. The concept of Block of Asset cannot be stretched to an extent where it leads to an absurdity.

Reference is drawn to observation of Lordships in the case of Oswal Agro Mills Limited(supra) wherein Lordships observed in para 21 observed in context of passive user of the assets as under:

"21. We feel that counsel for the Revenue is right in their submission. In the instant case, the entire Bhopal Unit came to a standstill and there was a complete halt in its functioning from the assessment year 1997-98. In that year, the Assessing Officer still allowed the depreciation treating it to be a 'passive user'. However, when it was found that even in subsequent year, the Bhopal Unit remained non-functional, Assessing Officer(s) disallowed the depreciation. Present appeals relate to the assessment years from 1998- 99. In the process six years passed till the last assessment year before us, but there was no sign of this unit becoming functional. The 'passive user', in these circumstances, cannot be extended to absurd limits. Other- wise, the words "used for the purpose of business" will lose their total sanctity. It cannot be the intention of the Legislature that the words 'used' when it is to be interpreted in a wider sense to mean, 'ready to use', the same is stretched to the limits of non-user for number of years." (Emphasis supplied by us) The case laws relied upon by assessee are distinguishable. In the case of Oswal Agro(supra), the tax-payer was in business and its Bhopal unit was lying closed for several years but since the asset formed part of Block of Asset, Hon‟ble Delhi High Court held deprecation u/s 32 shall be allowed keeping in view new scheme of taxation wherein concept of Block of Assets as defined u/s 2(11) is introduced by Finance(No. 2) Act, 1998 w.e.f. 01.04.1999. In the case of Oswal Agro(supra), the question before the Court was not that the user of the said asset changed from being for the purposes of the business of tax- payer to that of letting out on rent , income of which is chargeable to tax under the head „Income from House Property‟. The 13 M/s. Emco Dyestuff Pvt. Ltd. Bhopal unit albeit was lying closed for several years was infact continued to be business asset of the assessee. Similar, is the case of G.R.Shipping Limited (supra) relied upon by assessee. In this case of G.R.Shipping Limited (supra) , one Barge named Jay-II could not be used by tax- payer for its business owing to accident nor it was sent for repairs, the tribunal allowed depreciation as it form part of Block of Asset. The said Barge was later sold by the tax-payer. The said order of tribunal was upheld by Hon‟ble Bombay high Court in the case of CIT v. G.R.Shipping Limited in ITA no. 598 of 2009 vide judgment dated 28.07.2009. The fact remains that said Barge Jay II never ceased to be business asset of the tax-payer. In the instant case before us, the two house properties may at some point of time several years ago was used for business of the assessee but for last several years , these properties were let out income thereof offered for tax under the head „Income from House Properties‟. The assessee manifested its intention of change of user from business to that of giving these properties on rent for longer period of time wherein doctrine of supervening impossibility had set in preventing business user of these properties for the purposes of business of the assessee. Similar is the case of Ansal Properties(supra), wherein the Hon‟ble Delhi High Court was not seized of the matter concerning change of user of the assets by the taxpayer. Thus, so far as these two house properties which were acquired in earlier years and were let out on rent from years including year under consideration , income thereof was offered for taxation by assessee under the head „Income from House Property‟ , no depreciation can be allowed u/s 32 as there is no business user of these two properties by assessee for the entire year as well for earlier years. These two properties are not even available or ready to be used for business purposes as these are let out on rent for years and doctrine of supervening impossibility of business user has set in keeping in view long period of these properties being let out . The assessee has manifested its intentions by letting out these properties on rent for last several years that it intends not to use these properties for the purposes of its business which is writ large from the facts as emanating from records and as stated by learned counsel of the assessee before us. Under these circumstances , we hold that no deprecation u/s 32 of the 1961 Act can be allowed on these two properties which were acquired in earlier years and were let out throughout the year under consideration income thereof being offered for tax under the head income from house properties, as doctrine of supervening impossibility has set in as neither these properties were used for business purposes, nor ready to be used for business nor available for business user for the purposes of business of the assessee, for the entire year under consideration. Thus, deprecation u/s 32 of the 1961 Act under these circumstances can not be allowed on these two properties merely on the grounds that once these properties entered Block of Assets viz. Building many years back and continues to be part of Block of Asset viz. Building despite the fact that factual matrix surrounding these two properties had undergone substantial change over years which cannot be given complete go bye. We order accordingly.”

14 M/s. Emco Dyestuff Pvt. Ltd. 12. Since the issue involved in the current year is also identical, we direct the AO to decide the same by following the decision of co-ordinate bench of the Tribunal in A.Y. 2013-14 as stated above. Accordingly, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 18.02.2020.