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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI SHAMIM YAHYA (AM) & SHRI RAM LAL NEGI (JM)
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “E”, MUMBAI BEFORE SHRI SHAMIM YAHYA (AM) AND SHRI RAM LAL NEGI (JM) Assessment Year: 2010-11 Smt. Nisha Suman Jain, The DCIT 24(2), Yash Trading Co., Gr. Floor, C-13, Pratyaksha Kar Bhawan, Jain Estate, Jakharia Road, BKC, Bandra (E), Malad (W), Vs. Mumbai - 400051 Mumbai - 400064 PAN: ABPPJ3004M (Appellant) (Respondent) Assessee by : Shri Bhupendra Shah (AR) Revenue by : Shri D.G. Pansari (DR) Date of Hearing: 01/02/2019 Date of Pronouncement: 25/04/2019
O R D E R PER RAM LAL NEGI, JM This appeal has been filed by the assessee against the order dated 14.10.2014 passed by the Commissioner of Income Tax (Appeals)-34 (for short ‘the CIT(A), Mumbai, for the assessment year 2010-11, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).
Brief facts of the case are that the assessee an individual and proprietor of M/s Yash Trading Company, engaged in the business of manufacturing of solder/solderless tabular cable sockets and crimp termination items and also engaged in the business of trading in shares and securities, filed its return of income for the assessment year under consideration declaring the total income of Rs. 40,54,180/-. The return was processed u/s 143 (1). Subsequently, a revised return was filed on 30.03.2012, revising total income to Rs. Assessment Year: 2010-11
55,08,360/-. The case was selected for scrutiny and the assessment order was passed u/s 143 (3) of the Act determining the total income of the assessee at Rs. 91,11,090/- inter alia making disallowance of Rs. 3,99,267/- u/s 40(a)(ia), addition of Rs. 70,668/- on account of ad hoc telephone expenses, Short Term Capital Gain of Rs. 1,12,96,420/- and addition on account of disallowance of expenses incidental to transfer amounting to Rs. 3,15,000/- and the cost of acquisition of Rs. 4,99,545/-. In the first appeal, the Ld. CIT (A) confirmed the aforesaid additions made by the AO. The assessee is in appeal against the findings of the Ld. CIT (A). 3. The assessee has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- 1. “On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeal) has erred in confirming the addition of an amount of Rs. 3,99,267/- u/s 40(a)(ia) of the Income Tax Act, 1961 without appreciating that section 40(a)(ia) is applicable to the amounts payable and not to the amounts already paid during the year.
On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeal) has erred in confirming the addition of an amount of Rs. 3,99,267/- u/s 40(a)(ia) of the Income Tax Act, 1961 without appreciating that the payee is assessed to tax and already has paid taxes on the said amount and therefore there should not be any disallowance. The aforesaid view is supported by the subsequent amendment made by the Finance Act, 2012 inserting proviso to Section 40(a)(ia) of the Act which is clarificatory in nature and inserted with a view to reationalize the provisions of disallowance, therefore the amendment should be applicable with retrospective effect.
On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeal) has erred in confirming addition of an amount of Rs. 70,668/- on account of adhoc telephone expenses being personal in nature without Assessment Year: 2010-11
appreciating that major part of the expense are for office landlines and not mobile phones. 4. On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeal) has erred in confirming the treatment of Long Term Capital Gain of Rs. 85,36,807/- as short Term Capital Gain of Rs. 1,12,96,420/- without appreciating that the appellant had held the property for more than 36 months, within the meaning of Section 2(29A) r.w.s. 242A of the Income Tax Act, 1961 and without appreciating/considering the CBDT Circular No. 471 dated 15th October, 1986. 5. On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeal) has erred in confirming the disallowance of expenses incidential to transfer amounting to Rs. 3,15,000/- and cost of acquisition Rs. 4,99,545/- as a part of purchase consideration without appreciating that such expenses are non refundable and form a part of the purchase agreement itself. 6. The learned Commissioner of Income Tax (Appeal) failed to appreciate that all the addition/disallowance made as per Ground No. 1 to Ground No. 5 are illegal and invalid and accordingly all the addition deserved to be deleted. 7. Without prejudice to above your appellant feels that the disallowances are too harsh, unjust, illegal and against the records of the case.” 4. Vide Ground No. 1 and 2 the assessee has challenged the addition of Rs. made 3,99,267/- u/s 40(a)(ia) of the Act. The assessee had claimed interest on loan of Rs. 3,99,267/- and professional fees of Rs. 75,000/-. Since the assessee had not deducted the tax at source, the AO asked the assessee to explain as to why the expenditure should not be disallowed. In response thereof the assessee submitted that the provisions of section 40(a)(ia) is not applicable since it has paid the taxes on interest income and filed its return Assessment Year: 2010-11
taking into account the sum received on account of interest. However, the AO rejecting the contention of the assessee made disallowance of Rs.3,99,267/- under section 40(a)(ia) of the Act. In the first appeal the Ld. CIT(A) confirmed the action of the AO. Before us, the Ld. counsel submitted that the amendment made by the Finance Act, 1912 inserting proviso to section 40(a)(ia) of the Act is clarificatory in nature and inserted with the view to rationalize the provisions of disallowance. The Ld. counsel further submitted that u/s 201 of the Act, any person who fails to deduct tax at source shall not be deemed to be an assessee in default if the said person has furnished return u/s 139 of the Act, taking into account such sum for computing income in such return and has paid the tax due on the income declared by him/her in such return. In the present case, since the assessee is not an assessee in default under the provisions of section 201 of the Act, the Ld. CIT(A) ought to have deleted the disallowance made by the AO. The Ld. counsel relied on the judgment of the Hon’ble Delhi High Court rendered in the case of CIT vs. Ansel Landmark Township P. Ltd. ITA 160/2015 and ITA 161/2015, CIT to substantiate the contention of the assessee. 5. On the other hand, the Ld. Departmental Representative (DR) relied on the order passed by the Ld. CIT (A). 6. We have heard the rival submissions and also perused the material on record. As pointed out by the Ld. counsel for the assessee this issue is covered in favour of the assessee by the order of the Hon’ble Delhi High Court in the case of Ansel Landmark Township P Ltd. (supra). The Hon’ble Court has upheld the findings of the Agra Bench of the ITAT in which the Tribunal has held that the proviso to section 40(a)(ia) is declaratory and curative and has retrospective effect form 01.04.2005.. The relevant portion the order of Hon’ble High Court reads as under:- “Relevant to the case in hand, what is common to both the provisions to section 40(a)(ia) of section 201(1) of the Act is that as long as the payee/resident (which in this case is ALIP) has filed its return of income disclosing the payment received by and in Assessment Year: 2010-11
which the incomeearned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. AS FAR AS the present case is concerned, it is not disputed by the Revenue that the payee has filed returnes and offered the sum received to tax. 13.Turning to the decision of the Agra Bench of ITAT in Rajiv Kumar Agarwal v. ACIT (supra), the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40 (a)(ia) of the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under: “On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a “fair, just and equitable” interpretation of law- as is the guidance from Hon’ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an “intended consequence” to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee Assessment Year: 2010-11
in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee’s tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an “intended consequence” to punish the assessees for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.”
The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the Assessment Year: 2010-11
second proviso to section 40(a)(ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance.”
The issue raised by the assessee is covered by the ratio of law laid down by the Hon’ble High Court of Delhi in the case discussed above. Since, the findings of the Ld. CIT(A) are not in accordance with the law laid down by the Hon’ble Delhi High Court, the same is liable to be set aside. We according, set aside the findings of the Ld. CIT(A) and allow ground No 1 and 2 of the appeal.
Vide Ground No. 3, the assessee has challenged the action of the Ld. CIT
(A) in confirming disallowance of Rs. 70,668/- made by the AO out of the total amount of telephone expenses claimed by the assessee. The Ld. counsel submitted before us that the assessee had debited the P&L account of the proprietary concern M/s Yash Trading Co. amounting to Rs. 3,53,339/- towards landline and mobile phone expenses. Holding that use of telephone for personal purposes cannot be ruled out, AO made disallowance of 20% of the total amount u/s 37(1) of the Act. The Ld. counsel further submitted that since, the AO had made disallowance on ad hoc basis the Ld. CIT (A) ought to have deleted the addition. Therefore, the impugned order is liable to be set aside. 9. On the other hand, the Ld. DR relying on the concurrent findings of the authorities below submitted that the action of the Ld. CIT (A) is justified.
We notice that the AO has not given any cogent reason to justify his action of making disallowance of 20% of the total amount of telephone expenses claimed by the assessee. The AO has made adhoc disallowance on the ground that personal use of telephones by the assessee cannot be ruled out. It is not the case of revenue that the expenses were not incurred towards telephone expenses as the assessee has furnished the evidence to substantiate Assessment Year: 2010-11
its claim. In our considered view, even if personal use of telephone cannot be ruled out, disallowance of 20% amount is on the higher side. Hence, we are of the considered view that 10% disallowance of the total amount is justified. Therefore, we modify the order of the Ld. CIT (A) and direct the AO to make disallowance of 10% of the total amount of the telephone expenses claimed by the assessee. 11. Vide Ground No. 4, the assessee has challenged the action of the Ld. CIT (A) in holding the gain arising out of the sale of house as short term capital gain rejecting the contention of the assessee that the gain in question is long term capital gain The assessee purchased a residential flat for a total consideration of Rs. 52,77,634/-. The flat was booked on 11.02.2005, accordingly allotment letter was issued by the seller. Thereafter, the assessee paid different amounts on different dates. The final agreement was executed on 16.04.2008. The assessee sold the said Flat for a total consideration of Rs. 1,57,50,000/- and declared long term capital gain of Rs. 85,36,807/- after reducing the indexed cost of acquisition amounting to Rs. 68,98,193/-. AO treated the gain as short term capital gain considering the date of registration as the date of purchase. The Ld. CIT (A) confirmed the action of the AO.
Before us, the Ld. counsel for the assessee submitted that the assessee purchased a residential flat for a total consideration of Rs. 52,77,634/-. The letter of allotment was issued on 11.02.2005. Thereafter, the assessee made payments on different dates and on 16.04.2008 final agreement was executed. The Ld. counsel further contended that as per the settled law, the Ld. CIT (A) should have considered the date of allotment as the date of purchase for considering the period of holding. Since, the allotment letter was issued on 11.02.2005 and the property was sold on 21.01.2010, the holding period of the property is more than 36 months therefore, the proceeds of sale is long term capital gain. The Ld. counsel relied on the decision of the Hon’ble jurisdictional Assessment Year: 2010-11
High Court rendered in the case of Pr. CIT vs. Vembu Vaidyanathan ITA No. 1459 of 2016 and in the case of CIT vs. Vimal Lalchand Mutha 187 ITR 613, decision of the Mumbai Tribunal in the case of Sh. Umashankar P Mishra vs. DCIT, ITA No. 5653/Mum/2016, Smt. Vandana Mishra vs. DCIT, ITA No. 5652/Mum/2016, Bhagwan J Tahillani HUF vs. ITO, ITA No. 1070/Mum/2015 and the other cases to substantiate the contention of the assessee.
On the other hand, the Ld. DR supporting the order passed by the Ld.CIT (A) submitted that since the Hon’ble Supreme Court has over ruled the findings of the case of Vimal Lalchand Mutha 187 ITR 613, relied upon by the assessee before the Ld. CIT (A), the Ld. CIT (A) has rightly upheld the findings of the AO that the holding period is less than three years.
We have heard the rival submissions and perused the material in the light of the contentions of the parties. We have also gone through the cases relied upon by the authorities below as well as the Ld. counsel for the assessee. In the case of Pr. CIT vs. Vembu Vaidyanathan (supra), the Hon’ble High Court has upheld the findings of the coordinate Bench holding that assessee had acquired the property in question on the date of the allotment letter. The findings of the Hon’ble High Court are as under:-
“4. Having heard learned counsel for the parties, we notice that the CBDT in its circular No. 471 dated 15th October, 1986 had clarified this position by holding that when an assessee purchases a flat to be constructed by Delhi Development Authority (“D.D.A” for short) for which allotment letter is issued, the date of such allotment would be relevant date for the purpose of capital gain tax as a date of acquisition. It was noted that such allotment is final unless it is cancelled or the allottee withdraw from the scheme and such allotment would be cancelled only under exceptional circumstances. It was noted that the allottee gets title to the property on the issue of allotment letter and the payment of Assessment Year: 2010-11
installments was only a follow-up action and taking the delivery of possession is only a formality.”
This aspect was further clarified by the CBDT in its later circular No.672 dated 16th December, 1993. In such circular representations were made to the board that in cases of allotment of flats or houses by cooperative societies or other institutions whose schemes of allotment and consideration are similar to those of D.D.A., similar view should be taken as was done in the board circular dated 15th October, 1986. In the circular dated 16th December, 1993 the board clarified as under:
“2. The Board has considered the matter and has decided that if the terms of the schemes of allotment and construction of flats/ houses by the co-operative societies or other institutions are similar to those mentioned in para 2 of Board’s Circular No. 471, dated 15- 10-1986, , such cases may also be treated as cases of construction for the purposes of section 54 and 54F of the Income Tax Act.”
It can thus be seen that the entire issue was clarified by the CBDT in its above mentioned two circulars dated 15th October, 1986 and 16th December, 1993. In terms of such clarifications, the date of allotment would be the date on which the purchaser of a residential unit can be stated to have acquired the property. There is nothing on record to suggest that the allotment in construction scheme promised by the builder in the present case was materially different from the terms of allotment and construction by D.D.A. In that view of the matter, CIT appeals of the Tribunal correctly held that the assessee had acquired the property in question on 31st December, 2004 on which the allotment letter was issued. Assessment Year: 2010-11
Learned counsel for the revenue has also argued that in any case the assessee was not entitled to exemption under section 54F of the Income Tax Act, 1961 (“the Act” for short). Since the assessee had held multiple residential units which would disqualify the assessee from claiming the exemption on it was held by the Assessing Officer. From the record we notice that before the CIT appeals the assessee had produced additional evidence to suggest that the other units previously held by the assessee were discarded earlier and that at the relevant time the assessee did not hold any other residential unit. Quite apart from it being a pure question of fact, we do not find any indication in the impugned judgment of the Tribunal though the revenue had argued such a contention in its appeal before the Tribunal.”
In the present case, admittedly, the letter of allotment was issued on 11.02.2005 and as per the receipt issued by the seller at page 109 of the Paper Book filed by the assessee, the assessee had paid Rs. 1,25,000/- which is 25% of the consideration amount mentioned in clause 2 of the allotment letter. Thereafter, the assessee made payments on different dates and ultimately the premises ownership agreement dated 16.04.2008 was registered on 06.05.2008 and the sale agreement was registered on 21.01.2010. Hence, in our considered view, the assessee’s case is covered by the ratio of law laid down by the Hon’ble Bombay High Court in the Pr. CIT vs. Vembu Vaidyanathan (supra). So far as the decision of the Hon’ble Supreme Court in the case of Vimal Lalchand Mutha (supra) is concerned, the Hon’ble Supreme Court set aside the appeal and directed the Tribunal to refer the issue in question to the Hon’ble High Court for its opinion, after drawing up statement of case. The coordinate Benches and the other Benches of the ITAT have also dealt with the similar issue and held that holding period has to be computed form the date of issue of allotment letter. In the present case, the allotment letter was issued on 11.02.2005 and the property was sold after the three years from the date of Assessment Year: 2010-11
allotment letter. Hence, respectfully following the ratio of law laid down by the Hon’ble Bombay High Court in the case of Pr. CIT vs. Vembu Vaidyanathan (supra), we allow this ground of appeal and direct the AO to compute the period of holding from the date of allotment letter.
Vide Ground No. 5, the assessee has challenged the action of the Ld. CIT
(A) in confirming the disallowance of expenses incidental to transfer amounting to Rs. 3,15,000/- and cost of acquisition amounting to Rs. 4,99,545/-. The Ld. counsel submitted that under section 48 of the Act, the assessee is entitled to deduct the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement. The Ld. counsel invited our attention to page no. 195 to 205 of the paper book vide which the assessee has furnished the details of amounts paid as brokerage for sale of property amounting to Rs. 3,15,000/- and cost of cost of acquisition of Rs. 4,99,545/- as part of purchase consideration.
On the other hand, the Ld. DR supported the findings of the Ld. CIT (A) and further submitted that since the assessee has failed to substantiate the expenses the Ld. CIT (A) has rightly confirmed the disallowance.
We have heard the rival submissions and also gone through the entire material on record in the light of the contentions of the parties. We notice that the AO has rejected the claim of the assessee regarding payment of brokerage fees amounting to Rs. 3,15,000/- on the ground that the invoice furnished by the assessee is not supported by any evidence. We further notice that the AO has not made any enquiry to ascertain the genuineness of the payment to the party. Hence, the findings of the authorities below are not based on any cogent reason and convincing evidence. Similarly, the AO has rejected the claim of the assessee regarding expenditure of Rs. 4,99,545/- holding that the assessee had held the property only for a period of less than 21 months. Further, the cost of Assessment Year: 2010-11
acquisition consisting of purchase price, stamp duty and registration charges were rejected on the ground that the assessee has failed to adduce evidence to justify the said expenses. We further notice that the AO has rejected the claim of the assessee without making any enquiry to verify the claim. The AO has even not discussed about the details furnished by the assessee and without assigning any reason for rejecting the claim made disallowance of the expenses claimed by the assessee. Since, the findings of the AO are not based on the evidence on record or based on the sound reasoning, the Ld. CIT (A) ought to have examined the issue in the light of the evidence on record. Hence, we are of the considered view that the findings of the Ld. CIT (A) are erroneous and not based on the evidence on record. We accordingly set aside the findings of the Ld. CIT (A) and allow this ground of appeal and direct the AO to allow the incidental expenses amounting to Rs. 3,15,000/- and cost of acquisition amounting to Rs. 4,99,545/- claimed by the assessee.
The Ld. counsel for the assessee submitted that the assessee does not want to press Ground No. 6, and 7, Hence, we dismiss Ground No. 6&7 of the appeal as not pressed.
In the result, appeal filed by the assessee for assessment year 2010-2011 is partly allowed.
Order pronounced in the open court on 25th.April, 2019. (SHAMIM YAHYA) JUDICIAL MEMBER म ुंबई Mumbai; दिन ुंक Dated: 25/04/2019 Assessment Year: 2010-11
Alindra, PS आदेश प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.
आदेशानुसार/ BY ORDER, सत्य दपि प्रदि //// उि/सहायक िंजीकार (Dy./Asstt.