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Facts
The assessee, engaged in construction and real estate, declared total income for AY 2016-17. The AO treated Rs.98,00,000/- as income from other sources, disallowed total expenses of Rs.14,62,736/-, and levied tax under section 115BBE. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the income of Rs.98,00,000/- received from the sale of a piece of land, after negotiation for purchase, rightly offered as business income and should not be reclassified as income from other sources. Indirect expenses are necessary for business operations and cannot be disallowed. Section 115BBE is not applicable for AY 2016-17.
Key Issues
Whether Rs.98,00,000/- is to be treated as business income or income from other sources, and whether disallowance of expenses and applicability of Section 115BBE are justified.
Sections Cited
250, 143(3), 68, 115BBE
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Before: SHRI SANJAY GARG & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R
PER BIJAYANANDA PRUSETH, AM:
This appeal by the assessee emanates from the order passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), dated 29.04.2024 by the Commissioner of Income-tax (Appeals)/Addl.JCIT(A)-12, Mumbai [in short, ‘CIT(A)’] for the Assessment Year (AY) 2016-17, which in turn arises from the assessment order passed by Assessing Officer (in short, ‘AO’) u/s 143(3) of the Act on 09.12.2018. Grounds of appeal raised by the assessee are as under: “1) The ld. CIT(A) has erred in law and on facts in upholding the action of the ld.AO of disallowing the total expenses claimed by the appellant of Rs.14,62,736/-. 2) The ld. CIT(A) has erred in law and on facts in upholding the action of the ld. AO of treating the income of Rs.98,00,000/- as income from other sources.
A.Y.16-17 Monarch Corporation 3) The ld. CIT(A) has erred in law and on facts in upholding the action of the ld. AO of subjecting to tax the business income of Rs,.98,00,000/- under the provisions of sec. 115BBE of the Act. 4) The appellant craves leaves to add, amend, alter, modify, substitute, delete, change or vary as all or any of the ground or grounds of appeal
.”
2. Brief facts of the case are that assessee filed its return of income for A.Y 2016-17 declaring total income at Rs.85,30,940-/- on 05.08.2016. The case was selected for limited scrutiny. The assessee is in the business of construction and real estate. The AO noted that assessee had credited Rs.98,00,000/- as direct income to its profit and loss account. However, in Schedule-9 of tax audit report, it was shown as additional business income. In response to the show cause notice as to why the above income should not be treated as “income from other sources” the assessee submitted that the above amount represents income from real estate. The assessee had negotiated to purchase a piece of land which was sold on the next day by receiving Rs.98,00,000/- more. The new buyer was introduced to the seller and the purchaser paid assessee Rs.98,00,000/- for withdrawing its involvement from the land. The assessee also submitted that it has not claimed any expenditure against the above receipt. Assessee has claimed expenses which are mainly in administrative in nature for the purpose of carrying on the project of construction and sale of commercial units in the complex titled as “Monarch”. The assessee also submitted that provisions of Section 68 are not attracted because assessee had offered the impugned amount for taxation. The assessee relied on the decisions in the following cases: (i) PCIT vs. Swapna Enterprise (2018) 91 taxmann.com 12 (Guj), (ii) CIT vs. Sudhir Jain (2014) 41 taxmann.com 234 (Del), (iii) CIT vs. Sidh Nath Goel (2013) 38 taxmann.com 260 (All), (iv) CIT vs. B. Venkatesam (2013) 31 taxmann.com 224 (AP), (v) ACIT vs. Akashar Developers (2017) 86 taxmann.com 251 (Mum), (vi) CIT vs. Margaret’s Hope Tea Co. Ltd. (1993) 71 taxmann.com 574 (Cal), (vii) Smt. Kaviit Sanghi vs. CIT A.Y.16-17 Monarch Corporation (1982) 133 ITR 48 MPHC and (ix) Daulatram Rawatmull vs. CIT (1967) 64 ITR 593 (Cal). 2.1 The assessee also submitted that provisions of u/s 115BBE is not applicable in case of the assessee. The AO did not accept the contention of the assessee by stating that assessee could not establish identity and genuineness of the transaction of Rs.98,00,000/-. The AO also did not accept the contention of the assessee that no expenditure was claimed against the above amount because total income for the year offered by the assessee was Rs.85,30,940/- instead of Rs.98,00,000/-. The AO added Rs.98,00,000/- as income from other sources and levied tax u/s 115BBE of the Act. The total income was determined at Rs.99,93,672/- as against returned income of Rs.85,30,940/-.
3. Aggrieved by the order of AO, assessee filed appeal before CIT(A). The CIT(A) observed that AO has rightly reclassified the income of Rs.98,00,000/- as income from other sources and correctly taxed the same u/s 68 r.w.s. 115BBE of the Act. He also held that assessee is not eligible for set off of the expenses.
4. Further aggrieved by the order of CIT(A), the appellant filed present appeal before the Tribunal. The Ld. AR submitted a paper book including the written submission report before CIT(A), CBDT Circular No.11/2019 dated 19.06.2019, auditor report etc. He submitted that assessee is engaged business of real estate and construction. The assessee has offered Rs.98,00,000/- as business income which is clear from the audited account at page 11 of the paper book. The additional business income is disclosed under direct income in the Schedule-9 of the Audit Report (page 17 of PB). All direct expenses are debited to the work-in-progress which stood at Rs.17,35,50,845/- for the year under consideration. Only administrative expenses of Rs.13,85,093/- and bank charges of Rs.14,473/- has been claimed by the assessee. The administrative expenses include salary, advertising, computer repairing, conveyance, rent, A.Y.16-17 Monarch Corporation stationery, VAT expenses etc. and the individual expenses under various categories are small amounts. He submitted that since assessee had offered the income, the same cannot be taxed u/s 68 of the Act. Further, provisions of Section 115BBE is not applicable for the subject AY 2016-17, which is supported by CBDT Circular 11/2019 (supra).
On the other hand, Ld.Sr-DR for the Revenue supported the order of lower authorities. He submitted that no expenses should be allowed and the provisions of Section 68 r.w.s. 115BBE of the Act have been rightly applied by the AO.
We have considered the rival submissions of both the partiers and have gone through order of lower authorities carefully. We have deliberated on the decisions relied upon by the Ld.AR. The Ground No.1 pertains to disallowance of expenses of Rs.14,62,736/-. It is seen that assessee is engaged in the business of construction and real estate. The assessee was carrying on its business during the year under consideration. All direct expenses have been debited to the work-in-progress. Only indirect expenses i.e., administrative expenses of Rs.13,85,093/- and financial expenses of Rs.14,473/- have been debited to the profit and loss account. Unlike direct expenses, indirect expenses are those which cannot be linked with specific product or service. These are certain necessary costs which a business entity must bear for its day- to-day business to run smoothly. Rent, rates, taxes, telephone and postage expenses, general expenses, salary, office expenses are a few examples of indirect expenses. These are necessary for smooth running of the office and business of the assessee. Hence, they have been expended wholly and exclusively for the purposes of the business and hence the same cannot be disallowed. Accordingly, the AO is directed to delete the same and the ground is allowed.
A.Y.16-17 Monarch Corporation 7. Next Ground No.2 is treating the income of Rs.98,00,000/- as income from other sources. The appellant had offered the above income under ethe head “profits and gains from business and profession”. There is no dispute that assessee is engaged in the business of construction and real estate. It is seen from the paper book that assessee had received advances from customers amounting to Rs.2,44,06,543/- which is reflected under the head “Current Liabilities” in the balance-sheet. The assessee has also shown work-in-progress of Rs.17,35,50,485/-. As the assessee is also engaged in the business of real estate, the impugned amount of Rs.98,00,000/-received from the purchaser of a piece of land, which had been earlier negotiated by the appellant for purchase has rightly been offered as business income. We do not find any valid reason to reclassify such income as income from other sources. Hence, we allowed the ground No.2 is allowed.
Ground No.3 pertains to tax the income of Rs.98,00,000/- u/s 115BBE of the Act. We have already held that the impugned sum is liable to be taxed under the head “income from business and profession”. Hence, the same is liable for taxation at the normal rate and not at the enhanced rate u/s 115BEE of the Act. Further, the CBDT in its Circular No.11/2019 (supra) has also clarified that provisions of Section 115BBE(2) is applicable from AY 2017-18. Hence, it is not applicable for the subject AY 2016-17. The ground No.3 is allowed accordingly.
The last ground is general in nature and does not require any adjudication.