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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI C.N. PRASAD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
The captioned appeals filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-3, Mumbai [in short ‘CIT(A)’] and arise out of the assessment completed u/s 143 r.w.s. 147 of the Income Tax Act 1961 (the ‘Act’) for A.Ys2009-10 & 2011-12
2 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 and u/s 143(3) for A.Y.2010-11. As common issues are involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience.
We begin with the 1st ground raised by the assessee against the reopening done by the Assessing Officer (AO) u/s 148 of the Act.
Briefly stated, the facts are that as per the AO, the assessee had not filed its return of income for the AY 2009-10, whereas the return of income for AY 2010-11 showed that the assessee had claimed carry forward of business loss of Rs.8,77,159/-. The AO re-opened the assessment by issuing notice u/s 148 dated 12.06.2013 which was served on the assessee.
In appeal, the Ld. CIT(A) upheld the reopening done by the AO u/s 148 of the Act on the reason that as per the return of income, the assessee had earned only rental income and interest income and thus incorrectly claimed several expenses which were not prima facie allowable under the head ‘income from other sources’. The Ld. CIT(A) further observed that the date of service of notice u/s 148 of the Act by the AO on the assessee is within a period of four years and therefore, the first proviso to section 147 of the Act is not applicable.
Before us, the Ld. counsel of the assessee submits that the reason for reopening in AY 2009-10 is an observation made by the AO during the course of assessment proceedings of AY 2010-11 that the assessee had not commenced its business as income from lending and sub-letting
3 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 to other companies in aviation sector is allegedly not business income. It is stated that the reopening has been done on the basis of incorrect facts in AY 2009-10. It is stated that that the return of income for AY 2009-10 was also filed by the assessee on 29.09.2009, the acknowledgement number being 94651090290909 and the IP address being 58.68.34.137. Thus it is stated by him that the reopening done by the AO is based on incorrect facts and therefore, the reassessment proceedings deserves to be quashed. It is submitted by him that in Oriental Insurance Co. v. CIT 378 ITR 421 (Delhi), it has been held that where the very assumptions on basis of which the AO formed a belief that assessee’s income had escaped assessments were found to be erroneous, the impugned reassessment proceedings were liable to be quashed as being without jurisdiction.
On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record.
In the present case, the assessee has filed its return of income for AY 2009-10 on 29.09.2009, the acknowledgement number being 94651090290909 and the IP address being 58.68.34.137. In the assessment order dated 29.11.2013, the AO has mentioned at para 1 that “the assessee has not filed its return of income for AY 2009-10”.
In the case of Baba Kartar Singh Dukki Education Trust v. ITO (158 ITD 965), the AO reopened the assessments on the basis that the assessee had not filed returns for assessment years 2001-02 to 2003-04
4 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 and therefore, the assessee’s income has escaped assessment. Thereafter, the AO passed the assessment order on assessee where he himself had admitted in assessment orders that returns for all three years were filed by the assessee. In view of those facts, it was held by the Tribunal that the AO had reopened the assessment of assessee on basis of suspicion and non-existent and incorrect facts and did not verify assessment records/returns filed by the assessee prior to recording of reasons, rendering the reopening invalid.
We find that the facts in the above case are identical to the facts of the present assessee wherein one of the reasons for reopening is not filing of return by the assessee.
Facts being identical, we follow the above order of the Tribunal and hold the reopening invalid.
In the result, the appeal filed by the assessee is allowed. Assessment Year: 2010-11
In a nutshell, the facts are that the assessee filed its return of income for the AY 2010-11 on 14.10.2010 declaring total loss of Rs.43,51,992/-. During the course of assessment proceedings, the AO observed that the assessee derived rental income from premises which were sub-let and also interest income. These incomes were offered as business income, against which various expenses were claimed. In response to a query raised by the AO to explain (i) why the rental income and interest income shall not be taxed as income from other sources and (ii) how the expenses debited to the profit and loss account
5 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 are allowable in absence of business activity, the assessee submitted that it had filed a revised computation of income which is as under:
Administrative Expenses Total as per Profit and Loss account (Rs.) 7,941,353 Less : Considered in earning Other Income Brokerage 656,670 Electricity Charges 379,110 Insurance 227,042 Rent, Rates and Taxes 3,622,277 Security Charges 100,568 Stamp Duty 50,500 Net chargeable against Business Income 2,905,186 However, the AO was not convinced with the above explanation of the assessee for the reason that no details or evidences were filed in respect of facility management fees by the assessee. Further it is held by him that the assessee had not carried out any facility management business during the year it had taken premises on a monthly rent of Rs.6,56,670/- and 90% portion of the said premises was let out to its associate concern M/s Global Projects and Aviation Ltd. on a monthly rent of Rs.5,35,811/-. Thus the AO held that the property was taken on rent and 90% portion of the same was sub-let to the other party, which cannot be treated as business income but is to be charged to tax under the head ‘income from other sources’.
Finally, the AO held that the expenses which are directly incidental to earn the income like rent paid is being allowed as per provisions of section57(iii) of the Act; further out of expenses like deprecation brokerage, insurance, electricity, security and stamp duty claim of 6 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 Rs.18,71,024/- only 10% of expenses are allowable which comes to Rs.1,87,102/- because the assessee has used only 10% of the premises; the balance 90% portion was sub-let but only 90% rent was recovered without recovering the proportionate expenses related to property from the said party. Therefore, the AO came to a finding that 90% of expenses pertaining to sub-let out portion of property, which was not recovered from party, are not incidental to assessee’s income and cannot be allowed u/s 57(iii) of the Act.
Further, the AO held that since the income is being assessed under the head ‘income from other sources’ the returned loss of the current year of Rs.43,51,992/- is not allowed to be carried forward in absence of business activity and further the brought forward business losses are also not allowable to set off against the current years income.
In appeal, the Ld. CIT(A) observed that out of several expenses debited to profit and loss account, Director’s remuneration alone is Rs.31,92,322/-; as per the tax audit report in Form No. 3CD, the Director is shown as a related party u/s 40A(2)(b) of the Act and therefore, the entire arrangement is benefitting a related party. Further, holding that the reasons recorded by the AO as correct, the Ld. CIT(A) confirmed the order of the AO in assessing the sub-letting income and interest income under the head ‘other sources’. Also the Ld. CIT(A) justified the order of the AO in disallowing various claims of expenditure and allowing the expenditure to the extent of rent, rates and taxes and further restricting the allowability of other items of expenditure to the extent of 10% thereon.
7 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 Observing that the AO has arrived at a positive figure of total income which is Rs.60,95,791/-, the Ld. CIT(A) confirmed the order of the AO in not allowing the carry forward of losses.
Before us, the Ld. counsel of the assessee submits that the facility management fees and interest income are to be treated as business income, as the same are covered under the objects of the company and therefore, all the expenses incurred towards the premises ought to be allowed against business income. Further, it is submitted by him that the AO has not questioned anywhere the legitimacy of the expenses incurred towards the premises, therefore, it cannot be denied that the expenses were incurred towards the premises. Thus it is stated by him that the expenses which are incurred wholly and exclusively towards the property has to be allowed, whether the said income is treated as business income or income from other sources.
The Ld. counsel further submits that if at all the said facility management fees is treated as income from other sources, the remaining 90% of the expenses are to be allowed u/s 57(iii), since 90% of the premises has been sub-let by the assessee and as the AO himself has held that 10% of the premises has been utilized by the assessee- company for its business, then there is no reason why the 10% of the expenses towards the property should not be allowed u/s 37(1).
Reliance is placed by him on the decision in the case of CIT v. Khandelwal Mining & Ores (P.) Ltd. (1981) 7 Taxman 42 (Bom), where the assessee had leased out the land owned by it and had incurred stamp duty expenses and brokerage. The said expenses were disallowed
8 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 by the AO but the same were held to be allowable by the Hon’ble High Court on the ground that the expenditure was necessary to be incurred for the purposes of lease, there is no reason why impugned expenditure cannot be said to be laid out or expended wholly and exclusively for the purpose of earning income from lease rent and therefore, the said expenditure was deductible u/s 57(iii) of the Act.
Referring to the proposition that when expenditure is incurred on account of commercial expediency, the same should be allowed and the related case-laws, the Ld. counsel submits that if at all the facility management fees is treated as business income then accordingly 100% of the expenses should also be allowed u/s 37(1) and without prejudice to the above if the same is treated as income from other sources, then the remaining 90% of the expenses should be allowed u/s 57(iii) and 10% of the expenses be allowed u/s 37(1) of the Act.
On the other hand, the Ld. DR submits that the assessee in the present case has earned income from sub-letting of the property and interest income; it is clear from the facts of the case that a property has been taken on lease by the assessee and the same has been sub-let to the extent of 90% and only the balance 10% is retained by the assessee; it is seen that income from sub-letting of the property is equivalent to 90% of the lease rent paid to the owner of the property and accordingly it has to be inferred that the lease and sub-lease agreement has not resulted in any income in the hands of the assessee. The Ld. DR refers to the order of the Ld. CIT(A) and submits that out of several expenses debited to the P&L account, Director’s remuneration alone is Rs.31,92,322/- and as per
9 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 the tax audit report, the Director is shown as a related party u/s 40A(2)(b) of the Act. The Ld. DR further submits that on the facts and in circumstances of the case, the Ld. CIT(A) has rightly confirmed the action of the AO in assessing the sub-letting income and interest income under the head ‘other sources’. Finally, it is stated by him that the Ld. CIT(A) has rightly confirmed the order of the AO, disallowing the various claim of expenses and allowing the expenditure to the extent of rent, rates and taxes and further restricting the allowability of other items of expenditure to the extent of 10% thereof.
We have heard the rival submissions and perused the relevant materials on record. We find that the assessee-company has entered into a leave and license agreement dated 11.08.2009 with Mr. Kishore S. Jadhwani (HUF) and vide the said agreement, the premises consisting of Unit No. 111, 112, 114 and 115 admeasuring 4061 sq. ft. carpet area in Building No. 215 situated at Andheri-Kurla Road, Andheri (East) has been taken on leave and license basis for a monthly rent of Rs.6,56,607/- . As per clause 13 (s) of the said agreement, the licensee i.e. the assessee- company is permitted to sub-let the said premises. The assessee- company sub-let 90% of the said premises to M/s Global Projects and Aviation Ltd. by an agreement dated 12.08.2009 on a monthly rent of Rs.5,91,000/- for a term of 60 months commencing from 16.08.2009 to 14.08.2014. During the impugned assessment year, the assessee- company has earned facility management fees of Rs.40,18,582/- from sub-letting the said premises and the same is disclosed in the P&L account as income from operations. In the return of income, the said income is offered as profits and gains from the business and profession.
10 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 We find that the main object of the company as per the Memorandum of Association (‘MoA’) is as follows:
To engage in the business of (i) providing consultancy and advisory services in relation to aviation, aviation infrastructure, aviation academy and acting as procurement service providers by way of trading in goods and services on a retail/wholesale basis for entities engaged in aviation, aviation infrastructure, and aviation academy directly or otherwise Thus it is evident that the assessee-company is permitted to act as a service provider to the entities which are in the aviation sector. In the impugned assessment year, the assessee has sublet the premises to M/s Global Projects and Aviation Ltd., which is also engaged in the business in aviation sector.
We are of the considered view that the facility management fees and interest income are to be treated as business income, as the same are covered under the objects of the company. We also find that the AO has nowhere questioned the legitimacy of the expenses incurred towards the premises and therefore, it cannot be denied that the expenses were incurred towards the premises. There is merit in the contentions of the Ld. counsel that the expenses which were incurred wholly and exclusively towards the property are to be allowed, whether the said income is treated as business income or income from other sources. Also there is merit in the contention of the Ld. counsel that if at all the facility management fees is treated as business income, then accordingly 100% of the expenses should be allowed u/s 37(1) and it at all it is treated as income from other sources, then the remaining 90% of 11 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 the expenses should be allowed u/s 57(iii) and 10% of the expenses be allowed u/s 37(1).
Regarding, the preliminary expenses of earlier years of Rs.4000/-, the Ld. CIT(A) has confirmed the order of the AO on the reason that “given the nature of income earned during the relevant previous year, there is no scope for allowing such preliminary expenses of earlier years”.
We find that without any reason based on any facts, the Ld. CIT(A) has confirmed the above disallowance of Rs.4000/- by the AO. As it is not based on any reason, we allow the claim of the assessee amounting to Rs.4000/-.
Regarding the grounds of appeal relating to allowing the brought forward business losses and set off, we direct the AO to allow it after due verification of records and as per the provisions of the Act.
Thus, the grounds of appeal No. 1 to 9 are allowed, whereas grounds of appeal No. 10 to 12 are allowed for statistical purposes.
In the result, the appeal is partly allowed. Assessment Year: 2011-12
Briefly stated, the facts are that the assessee filed its return of income for the AY 2011-12 on 29.09.2011 declaring total loss of Rs.27,44,107/-. The AO reopened the assessment by issuing notice u/s 148 after recording the following reasons:
12 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 “The assessee company was incorporated to carry out business in aviation sector like repair service, training etc. During the assessment proceedings for AY 2010-11 in the case of assessee it was seen that the assessee has not started the business and has not carried out any business activity and was having only interest and rent income (on Tenanted Premises) which is assessable as income from Other Sources. The return of income for AY 2011- 12, the assessee had claimed carry forward business loss of Rs.27,44,107/-. The interest & rent income is assessable as income from Other Sources because the assessee is not in the business of money lending and rent income was received from tenanted property, as discussed in the assessment order for AY 2010-11. The assessee had claimed expenses like salary, administrative, travelling, depreciation etc. against rent and interest & rent income, which are not allowable u/s 57(iii) of I.T. Act, against income from other sources. These facts shows that the interest income of Rs.14,49,197/- is taxable as ‘Income from Other Sources’ and the expenses claimed are not allowable against it. By way of claiming unallowable expenses, the assessee had reduced the taxable income. Hence, the taxable income has escaped the assessment.”
In appeal before the Ld. CIT(A), the assessee had challenged the action of the AO in reopening the assessment u/s 147 of the Act. However, the Ld. CIT(A) observed that there was no assessment made u/s 143(3) of the Act in the impugned assessment year. The return of income filed by the assessee, declaring a total loss of Rs.27,44,107/- was processed u/s 143(1) of the Act. The date of service of the notice on the assessee in the impugned assessment year is within a period of four years and therefore, the Ld. CIT(A) held that the first proviso to section 147 is not applicable. Thus the Ld. CIT(A) after considering the facts of 13 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 the case and reasons recorded by the AO for reopening the assessment, dismissed the ground of appeal on reopening filed by the assessee.
Before us, the Ld. counsel of the assessee submits that the reason for reopening in AY 2011-12 is an observation made by the AO during the assessment proceedings of AY 2010-11 that the assessee has not commenced its business as its income from lending and sub-letting to other companies in aviation sector is not business income. It is submitted by him that where the reasons do not quantify the income escaping assessment, reopening is bad in law and “reason to believe” must be based on fresh tangible material having live link with the “reasons recorded” even when original assessment was made u/s 143(1) of the Act.
On the other hand, the Ld. DR relies on the order of the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. In the instant case, the return of income filed by the assessee declaring a total loss of Rs.27,44,107/- was processed u/s 143(1). There was no assessment made u/s 143(3) of the Act. In the case of ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd. 291 ITR 500 (SC), it is held by the Hon’ble Supreme Court that intimation u/s 143(1)(a) is not an assessment and the notice u/s 148 was validly issued. In the case of Kone Elevator India P. Ltd. v. ITO 340 ITR 454 (Mad), CIT v. Ideal Garden Complex P. Ltd. 340 ITR 609 (Mad), it is held that in case of return processed u/s 143(1), the only condition to be satisfied for reopening is taxable income has escaped assessment and assessee’s plea that no 14 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 fresh material was there before the AO warranting the reopening is not relevant.
Therefore, we uphold the order of the Ld. CIT(A) confirming the reopening done by the AO u/s 148 for the AY 2011-12.
16.1 We find that the grounds of appeal (No. 2 to 10) for the AY 2011- 12 are similar to the grounds of appeal (No. 1 to 12) for AY 2010-11. The facts being identical, our decision for the AY 2010-11 applies mutatis mutandis to AY 2011-12. To summarize it (i) the facility management service income earned by providing services by the assessee are to be treated as income from business and profession, (ii) accordingly, 100% expenses should be allowed u/s 37(1).
Thus we direct the AO to treat the facility management service income earned by the assessee by providing services as income from business and profession and accordingly allowed 100% of the expenses.
Regarding the grounds of appeal relating to allowing the brought forward business losses and set off, we direct the AO to allow it after due verification of records and as per the provisions of the Act.
Thus, the 1st ground of appeal is dismissed. The grounds of appeal No. 2 to 8 are allowed whereas the grounds of appeal No. 9 and 10 are allowed for statistical purposes.
In the result, the appeal for AY 2011-12 is partly allowed.
To sum up, the appeal filed by the assessee for AY 2009-10 is allowed where as the appeals for the AYs 2010-11 & 2011-12 are partly allowed.
15 European Aviation Holding 6910/Mum/2014 & 7565/Mum/2016 Order pronounced in the open Court on 26/06/2019.