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Income Tax Appellate Tribunal, “E” Bench, Mumbai
Before: Shri M. Balaganesh & Shri Ravish Sood
PER RAVISH SOOD, JM
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-24, Mumbai, dated 16.08.2016, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 30.03.2015 for A.Y. 2012-13. The assessee has assailed the impugned order by raising before us the following grounds of appeal: “The following are the Grounds of Appeal, which are without prejudice to one and another also on the facts and circumstances of the case; the Ld. CIT (A) has erred and was not justified in confirming following disallowances made by the Assessing officer in the assessment order u/s 143(3)
1. The Lease Rent income from premises was taxed under the head House property instead of Business Income. The main object of the Company is to deal in properties and the Rent income from such properties is consistently offered for tax under the head of Business and the appellant has claimed depreciation u/s 32 on those properties. Also the said view is supported by the Apex court in case P a g e | 2 A.Y. 2012-13 M/s Third Eye Estate (I) Pvt. Ltd. Vs. ACIT, Circle-15(3)(2) of Chennai Properties & Investment Ltd. Vs. CIT 56 Taxmann 456 (2016). Therefore, addition made due to change of Head of Income from Business to House property is to be deleted.
2. Without prejudice to ground No.1 above, for not allowing Interest paid for loan taken for the purpose of properties held as depreciable asset against income assessed under the head House Property.
3. On sale of Properties which are depreciable assets, instead of reducing sale consideration from block of assets u/s 32, the same was taxed under section 45 as Long Term Capital Gain. The addition under the head Long Term Capital Gain is to be deleted.
4. Due to losses in the company the financial institution has granted loan in the name of the director and the car was also purchased in the name of the directors. The car was reflected as an asset in the balance sheet of the Company also the repayment of loan was made by the company. Mere non-registration of a vehicle in the name of the company under the Motor Vehicles Act, cannot disentitle it in regard to its claim of depreciation, when the facts on record are undisputed that the assessee company had, in fact, made the investment in purchase of the vehicle and such vehicle is being used for its business. Therefore disallowance of Depreciation and expenses incurred for motor car is to be deleted.
5. Disallowance of educational expenses incurred for a Director of the company who has obtained management degree in the well known Howard University and the same is utilized for the business and management of the company. Hence, the disallowance is to be deleted.
6. The appellant craves to add, amend, alter or vary all or any of the grounds on or before the date of hearing.”
Briefly stated, the assessee company had e-filed its return of income for A.Y. 2012-13 on 28.09.2012, declaring a loss of Rs.32,98,073/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2) of the Act.
3. During the course of the assessment proceedings the A.O inter alia made the following additions/disallowances to the returned income of the assessee :
Sr. No. Particulars Amount 1. Addition made by the A.O treating the rental Rs.8,20,085/- income as „income from house property‟ as against that claimed by the assessee as its „business income‟.
2. Addition towards long term capital gain (LTCG) Rs.2,30,78,906/- on sale of property (consequent to treating the investments made by the assessee in property as long term investments) 3. Disallowance of depreciation and other Rs.7,39,655/- expenses pertaining to motor car.
Disallowance of educational expenses incurred Rs.14,77,830/- for a director of the assessee company.
Accordingly, the A.O after inter alia making the aforesaid additions/disallowances, therein assessed the income of the assessee company at Rs.2,67,09,950/-,vide his order passed under Sec.143(3), dated 30.03.2015.
P a g e | 3 A.Y. 2012-13 M/s Third Eye Estate (I) Pvt. Ltd. Vs. ACIT, Circle-15(3)(2) 4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) not finding favour with the contentions advanced by the assessee upheld the order passed by the A.O and dismissed the appeal.
The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee, at the very outset submitted that the appeal filed in the present case involved a delay of 4 days. It was submitted by the ld. A.R, that the appeal was to be filed before the Tribunal latest by 29.10.2016. However, as the office of the assessee was closed because of Diwali holidays from 28.10.2016 till 01.11.2016 and the director of the assessee company viz. Mr. Uday Pratap Singh was not available in town at the relevant point of time, therefore, for the aforesaid inadvertent and bonafide reasons there was a delay involved in filing of the present appeal. The aforesaid factual position had been supported by the assessee on the basis of an „affidavit‟, dated 22.11.2018 that has been placed on our record. The ld. Departmental Representative did not object to the application filed by the assessee for condonation of delay of 4 days in filing of the appeal.
We have considered the reasons leading to the aforesaid delay of 4 days in filing of the present appeal by the assessee, which we find is duly supported by an „affidavit‟ of the director of the assessee company, dated 22.11.2018. As there is a justifiable and a bonafide reason leading to the aforesaid inadvertent delay in filing of the present appeal, therefore, in all fairness we condone the same.
Adverting to the merits of the case, it was submitted by the ld. A.R that the issue as regards recharacterizing of the rental receipts shown by the assessee as its „business income‟, as „income from house property‟ by the A.O, had been vacated by the Tribunal in the assesses own case for A.Y. 2010-11, viz. ITO-15(3)(1) Vs. Third Eye State Pvt. ltd., (ITA No.1005/Mum/ 2015, dated -.11.2017) (copy placed on record). It was submitted by the ld. A.R, that the Tribunal while disposing off the aforesaid appeal, wherein identical facts and issue were involved, had therein upheld the order of the CIT(A) and observed that the claim of the assesse that the rental receipts were liable to be assessed as its „business income‟, was in order. Accordingly, it was submitted by the ld. A.R, that the disallowance of expenses by the lower authorities by re-characterising its business income as „income from house property‟ could not P a g e | 4 A.Y. 2012-13 M/s Third Eye Estate (I) Pvt. Ltd. Vs. ACIT, Circle-15(3)(2) be sustained and was liable to be vacated. Also, it was submitted by the ld. A.R, that as a fall out of the aforesaid view, the gain arising on the transfer of the property by the assessee company during the year under consideration had been assessed by the lower authorities as the income of the assessee chargeable to tax under the head LTCG, therefore, the same was also to be vacated. Further, the ld. A.R also assailed the disallowance of the assesses claim of depreciation on „motor car‟ that was made by the A.O, for the reasons, viz. (i). that, the motor car was registered in the name of the director of the assessee company viz. Mr. Uday Singh; and (ii). that, as Mr. Uday Singh was also director in two other companies, therefore, it could not be held that the motor car was being used wholly and exclusively for the business of the assessee company. On a similar footing, it was submitted by the ld. A.R that the claim for deduction of the interest expenditure incurred on the loan raised for purchasing the aforesaid car was also disallowed by the A.O. It ws submitted by the ld. A.R that the depreciation‟ on motor car purchased by a company cannot be disallowed for the reason that it was registered in the name its director. In support of his aforesaid contentions the ld. A.R had placed reliance on certain judicial pronouncements to which our attention was drawn during the course of hearing of the appeal. Also, it was submitted by the ld. A.R, that for the reason that Mr. Uday Singh, director of the assessee company was also a director in two other companies, the claim of the assessee towards depreciation on the car could not have been declined. As regards the disallowance of the vehicle expenses by the A.O, it was submitted by the ld. A.R, that there can be no question of any personal expenses in the case of a company. In order to drive home his aforesaid contention, support was drawn by him from certain judicial pronouncements. Lastly, it was submitted by the ld. A.R, that the lower authorities had wrongly disallowed the assesses claim in respect of the education expenses which were incurred in respect of one of its director viz. Mr. Uday Singh for pursuing of an “Advance Management Programme” from Harvard business school. It was the claim of the ld. A.R, that as the aforesaid expenses were incurred wholly and exclusively for the purpose of the business of the assessee which was to be benefitted by the aforesaid education of the director, therefore, the same was duly allowable under Sec.37 of the Act.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also the judicial pronouncements relied upon by them. As is discernible from the orders of the lower authorities, P a g e | 5 A.Y. 2012-13 M/s Third Eye Estate (I) Pvt. Ltd. Vs. ACIT, Circle-15(3)(2) the A.O not finding favour with the claim of the assessee that its rental receipts were liable to be assessed under the head „business income‟, had thus, brought the same to tax under the head „Income from house property‟. The aforesaid conviction of the A.O was backed by the reason that there was no formal „agreement‟ between the assessee company and its director for rendering of services or providing furniture and fixtures or other services, on the basis of which the rental income could justifiably be compartmentalized under the head „business income‟. On appeal, the CIT(A) not finding favour with the aforesaid claim of the assessee had upheld the view taken by the A.O.
We find that the aforesaid issue is squarely covered by the order of the Tribunal in the assesses own case for A.Y. 2010-11 in ITO-15(3)(1), Mumbai Vs. Third Eye Estate Pvt. Ltd. (ITA No.1005/Mum/2015, dated -.11.2017). In the aforesaid case, the Tribunal finding favour with the claim of the assessee, had concluded, that the rental receipts were rightly claimed by the assessee as its “business income”. The Tribunal while concluding as hereinabove, had observed as under :
We have heard the rival submissions and have carefully considered the same along with the orders of the authorities below. It is not denied that the main objects of the assessee not only includes acquisition and sale of flats, provision of convenience commonly provided in the flats, shops and residential and commercial premises but the assessee can also let out the property. Therefore, in view of the decision of the Hon‟ble Supreme Court in the case of Chennai Properties And Investment Ltd. vs. CIT [2015] 373 ITR 673, we are of the view that this issue is no more res integra. We, therefore, confirm the order of the CIT(A) treating the income as “Income from business” in respect of the rent received.
4. We also do not find any illegality or infirmity in the order of the CIT(A) deleting the disallowance of claim of expenses amounting to Rs.44,33,565/- which has been incurred by the assessee for maintaining the business assets as the assessee is engaged in the business of renting various business activities such as house-keeping, security, telephone, electricity, maintenance etc. No cogent material or evidence was brought to our notice by the learned DR so that the finding given by the learned CIT(A) could be reversed. We, therefore, confirm the order of the CIT(A) on this account.” Accordingly, finding ourselves to be in agreement with the aforesaid view, we respectfully follow the order passed by the Tribunal in the assesses own case for A.Y. 2010-11. As such, the A.O is directed to assess the rental receipts in the hands of the assessee as its “business income”. The Ground of appeal
No. 1 is allowed.
10. As we have concluded that the rental receipts had rightly been shown by the assessee as its business income, therefore, its alternative claim that the A.O had erred in not allowing the P a g e | 6 A.Y. 2012-13 M/s Third Eye Estate (I) Pvt. Ltd. Vs. ACIT, Circle-15(3)(2) interest paid on loan taken for the purpose of properties, while computing its income under the head „income from house property‟, does no more survive and is rendered as infructuous. The Ground of appeal
No. 2 is thus dismissed as having been rendered as infructuous.
11. We shall now advert to the claim of the assessee that the lower authorities had erred in assessing the sale transaction of the properties, which being in the nature of „depreciable assets‟ and formed part of the „block of assets‟ of the assessee, under the head „Long Term Capital Gain‟ (for short „LTCG‟), instead of reducing the sale consideration from the „block of assets‟ under Sec.50 of the Act. A perusal of the orders of the lower authorities reveals that the assessee had during the year under consideration sold two properties viz. (i) Great Easten Housing Property, 2nd Road, Mumbai; and (ii) property at Nayati Enclave, Pune. As the aforesaid properties formed part of the „block of assets‟ of the assesse, therefore, it had in its computation of income worked out the „Short Term Capital Gain‟ (STCG) on the basis of the difference of the sale consideration and the written down value (WDV) value of the said „block of assets‟. Accordingly, on the basis of its aforesaid working the assesse had shown STCG of Rs.12,82,480/- on the sale of the aforesaid properties. However, the A.O did not found favour with the claim of the assessee that it was engaged in the business of purchases and sale of properties. Rather, the A.O held a conviction, that the assessee had carried out investments in properties for the purpose to sell the same at an optimal price, and during such intervening period had let out the same on rent. Accordingly, the A.O treating the assessee as a normal investor, worked out the LTCG on the sale of the aforesaid properties at Rs.20,26,209/-. We have given a thoughtful consideration and are of the considered view, that as we have held that the assessee was engaged in the business of purchase and sale of properties, and was constantly offering the rental receipts as its income from business by treating the assets as business assets, on which depreciation was otherwise allowable, therefore, it had rightly worked out the profit on sale of the aforesaid properties as per the provisions of Sec.50 of the Act. We thus in terms of our aforesaid observations vacate the assessing of the profit on the sale of the aforesaid properties as LTCG by the A.O. Accordingly, the order of the CIT(A) upholding the aforesaid view of the A.O is „set aside‟. The Ground of appeal No. 3 is allowed.
12. We shall now advert to the claim of the assessee that the lower authorities had erred in declining to allow the assesses claim for depreciation on a motor car, despite the fact that the P a g e | 7 A.Y. 2012-13 M/s Third Eye Estate (I) Pvt. Ltd. Vs. ACIT, Circle-15(3)(2) same was reflected as an „asset‟ in its balance sheet. As is discernible from the orders of the lower authorities, the A.O observed that though the purchase price of the motor car was paid by the assessee company, however, it was purchased and thereafter registered in the name of Mr. Uday Singh, director of the assessee company. Also, it was observed by the A.O that the vehicle was not registered in the name of the assessee company under the Motor Vehicles Act. In the backdrop of the aforesaid facts, the A.O decline to allow the assesse‟s claim for depreciation on the motor car. We have given a thoughtful consideration to the issue under consideration and are unable to persuade ourselves to subscribe to the view taken by the lower authorities. Admittedly, the motor car that was reflected as an asset in the „balance sheet‟ of the assessee company was both purchased and registered in the name of its director viz. Shri Uday Singh. Also, it was observed by the A.O, that as the aforesaid director viz. Shri Uday Singh was also director in two other companies, therefore, it could safely be concluded that the aforesaid car which was registered in his name was not being used wholly and exclusively for the purpose of the business of the assessee company. On the basis of his aforesaid observations, the A.O had declined to allow the assesses claim towards depreciation and other expenses, as under:
Rs. Depreciation on the Car : 4,30,779 Interest on car : 1,34,254 Motor Car Expenses (50%0 : 1,74,623 Total 7,39,655 We have given a thoughtful consideration and are unable to persuade ourselves to the aforesaid view of the lower authorities. In our considered view, where a motor car is purchased by a company out of its own sources, in the name of its director, and is resultantly registered in his name under the Motor Vehicles Act, the same would however in no way affect the entitlement of the assessee towards claim of depreciation under the Income-Tax Act. Also, the interest paid on the loan raised for purchasing the vehicle by the assesse company and other related expenses can also not be disallowed, for the reason, that the vehicle is not symbolically registered in the name of the assessee company. Our aforesaid view is fortified by the following judicial pronouncements:
Sr. No. Particulars 1. CIT Vs. Aravali Finlease Ltd. P a g e | 8 A.Y. 2012-13 M/s Third Eye Estate (I) Pvt. Ltd. Vs. ACIT, Circle-15(3)(2) 341 ITR 282 (Guj) 2. CIT Vs. Basti Sugar Mills Co. Ltd. 257 ITR 88 (Del) 3. Edwise Consultants P. Ltd. Vs. DCIT 44 ITR (Trib)236 (Mum) 4. Pan Oleo Enterprises Pvt. Ltd. Vs. ACIT 60 ITR (Trib.) 230 (Mum) We are also unable to persuade ourselves to accept the view taken by the lower authorities, that as Shri Uday Singh, director of the assessee company in whose name the aforesaid motor car was registered also happened to be a director in two other companies, therefore, the aforesaid claim of depreciation, interest expenditure, and vehicle expenses pertaining to the said car were liable to be disallowed on the said count too. In our considered view, the fact that somebody other than the assessee is also benefited by the expenditure incurred by the assessee cannot come in the way of allowability of the said expenditure, if it otherwise satisfies the test of commercial expediency. Our aforesaid view is fortified by the following judicial pronouncements: Sr. No. Particulars 1. CIT Vs. Chandulal Keshavlal & Co. 38 ITR 601 (SC) 2. CIT Vs. Khambhatta Family Trust 215 Taxman 602 (Gujarat) Apart there from, the view taken by the A.O that the personal expenses pertaining to the aforesaid motor car cannot be ruled out, we are afraid cannot be accepted. As the case before us is that of a company, therefore, in our considered view there can be no question of any personal expenses. Our aforesaid view is fortified by the following judicial pronouncements:
Sr. No. Particulars 1 Sayaji Iron & Engg. Co. Vs. CIT 253 ITR 749 (Guj) 2. DCIT Vs. Haryana Oxygen Ltd. 76 ITD 32 (Del) 3 Omkar Textile Mills (P) Ltd. Vs. ITO 115 TTJ 716 (Ahm) 4. KSS Ltd. Vs. DCIT 157 ITD 124 (Mum) We thus, on the basis of our aforesaid observations vacate the disallowance of motor vehicle expenses of Rs. 7,39,655/- made by the A.O.
P a g e | 9 A.Y. 2012-13 M/s Third Eye Estate (I) Pvt. Ltd. Vs. ACIT, Circle-15(3)(2) 13. We shall now advert to the disallowance of education expenses which were incurred by the assessee company on account of sponsoring the education of one of its director i.e. Mr. Uday Singh for pursuing an „Advanced Management Programme‟ from Harward Business School. As is discernible from the orders of the lower authorities, the assessee company had claimed expenses of Rs.14,77,830/-, that was claimed to have been incurred on account of sponsorship of education of one of its director viz. Shri Uday Singh for pursuing a management programme at Harward Business School. It was observed by the authorities below, that as Shri Uday Singh was a director of three different companies (including the assessee company), therefore, it could safely be concluded that the expenditure incurred on his education was not wholly and exclusively for the purpose of the business of the assessee company. Apart there from, it was observed by them, that the assessee had also not been able to support its claim by showing any real connection between the expenditure so incurred and the business of the assessee company. As such, the A.O had disallowed the aforesaid claim of expense raised by the assessee under Sec. 37(1) of the Act. We have given a thoughtful consideration to the aforesaid issue before us, and are unable to subscribe to the view taken by the lower authorities. Admittedly, a perusal of the facts borne from the records reveals that Shri Uday Singh, director of the assessee company had gone for a management programme/course at Harward Business School. The expense therein involved were borne by the assessee company. In our considered view, the expenses incurred by the assessee company on the education of its director viz. Mr. Uday Singh, who was pursuing a management course, can safely be held to have been incurred wholly and exclusively for the purpose of its business. Our aforesaid view is fortified by the following judicial pronouncements: