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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI R. C. SHARMA, AM & SHRI AMARJIT SINGH, JM
O R D E R
PER AMARJIT SINGH, JM:
The assessee has filed the present appeal against the order dated 13.08.2015 passed by the Commissioner of Income Tax (Appeals)-12, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the AY. 2010-11.
The assessee has raised the following grounds: - “1. On the facts and in the circumstances of the case, Ld. ClT (Appeals) erred in confirming the conclusion of the Assessing Officer that the flat purchased for providing
ITA. No. 5325/M/2015 A.Y. 2010-11 residential accommodation to its Managing Director is a "Non-Business Transaction" of the appellant. 2 On the facts and in the circumstances of the case, Ld. CIT(Appeals) erred m confirming the conclusion of the Assessing Officer that the cost of the flat that was provided as residential accommodation To the Managing Director is a deemed dividend within the meaning of Section 2(22)(e) of The Act.
3. On the facts and in The circumstances of the case, Ld. CIT(Appeals) erred in confirming the disallowance of Rs 22,72,715/- being the repayment of loan installment during the year in respect of the loan availed for the purchase of the flat That was provided as residential accommodation to the Managing Director. 4 On the facts and in the circumstances of The case, the Ld. CIT(Appeals) erred in confirming the disallowance Rs 24,62,285/- being the interest payment on The Bank loan for purchase of The flat that was provided as residential accommodation to the Managing Director. 5 On the facts and in the circumstances of the case, the Ld CIT(Appeals) erred in confirming the disallowance of depreciation of Rs 34,72,037/- on the flat that was provided as residential accommodation to the Managing Director.
On the facts and in the circumstances of the case, the Ld CIT(Appeals) erred in confirming the disallowance of electricity charges of Rs.40,772/- relating to the flat occupied by the Managing Director.
On the facts and in the circumstances of the case, the Ld CIT(Appeals) erred in confirming the disallowance of Rs.1,77,746/- u/s 40A(3) of the Act.,"
The brief facts of the case are that the assessee filed its return of income on 28.09.2010 declaring total income to the tune of Rs.17,85,050/- for the A.Y. 2010-11. The return was processed u/s 143(1) of the Act by CPC Bangalore on 02.06.2011 determining a refund of Rs.18,85,450/-. Thereafter, the case was selected for scrutiny under CASS. Notices u/s 143(2) & 142(1) of the Act were ITA. No. 5325/M/2015 A.Y. 2010-11 issued and served upon the assessee. The assessee was a Private Limited Company in which the public were not substantially interested, engaged in the business of ‘specialty eye care hospital’ and there was no change in assessee’s business of the assessee during the year under consideration. The assessee purchased the residential flat at Dadar for which the total value was capitalized in the books to the tune of Rs.3,47,20,373/-. The assessee claim the depreciation claim @ 10% to the tune of Rs.34,72,037/- as against the allowable claim to the extent of 5% as per the Income Tax Act. The notice was given and after the reply of the assessee, the depreciation was reduced @ 5% of the cost of flat to the tune of Rs.17,36,019/-. The assessee purchased the residential property bearing flat no.602 in the building namely Ornate Galaxy, located at L.T. Road, Dadar (E), Mumbai. The total value was capitalized in balance-sheet. The assessee was engaged in the business of providing specialized eye care services under one roof through its hospital popularly known as Aditya Jyot Eye Hospital, located at Wadala, Mumbai. The assessee was asked about the business nexus of buying residential property at Dadar. The notice u/s 133(6) of the Act was issued and the Ward Inspector reported on 31.10.2012 setting therein that Dr. S. Natarajan, CMD was utilizing the property for his own residence. The builder/developer also confirmed this information in its report dated 03.12.2012, thereafter, the notice was given to Dr. S. Natarajan CMD who also filed the reply, thereafter, considering all the facts and circumstances
ITA. No. 5325/M/2015 A.Y. 2010-11 specifically considering this fact that Dr. S. Natarajan was holding 99% share of the company and was not utilized the funds for the business purpose, therefore, AO was of the view that the transaction of the purchasing the flat in sum of Rs.3,47,20,373/- was hit by provision 2(22)(e) of the Act, therefore, the said purchase was declined and added to the income of the assessee. The depreciation was also disallowed u/s 38(2) r.w.s. 32(1) of the Act. The assessee also took the loan of Rs.300 lacs for the purchase to the said property. An amount of Rs.47,35,000/- being the finance cost debited to the profit and loss account comprising of Rs.24,62,285/- being the interest paid and an amount of Rs.22,72,715/- being the principal repaid during the year under consideration. The total in sum of Rs.47,35,000/- which was disallowed u/s 37(1) of the Act. The claim regarding the electricity in connection with the flat in question to the tune of Rs.40,772/- and foreign travel expenses to the tune of Rs.1,77,746/- was also disallowed and added to the income of the assessee. The total income of the assessee was assessed to the tune of Rs.1,04,07,420/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who confirmed the order of the AO, therefore, assessee has filed the present appeal before us. ISSUE Nos. 1 to 6:- 4. Issue nos. 1 to 6 are inter-connected, therefore, are being taken up together for adjudication. Basically, the AO declined the claim of ITA. No. 5325/M/2015 A.Y. 2010-11 the assessee regarding purchase of the flat in sum of Rs.3,47,20,373/- along with ancillary claim. The assessee is a private company and purchased the flat at Dadar bearing no.602 in the building namely Ornate Galaxy, located at L.T. Road, Dadar (E), Mumbai. The assessee took the loan in sum of Rs.300 lacs and paying the installment along with interest. The assessee purchased the said residential premises for the residence of CMD of the assessee company. The AO declined the claim of the assessee in view of provision u/s 2(22)(e) of the I.T. Act, 1961. The AO declined the claim of the assessee on the ground of that there was no business nexus between the residential premises and the assessee company. Dr. S. Natarajan was having 99% share in the company who also having owned the flat at Wadala. The AO also stated that the assessee company was running a eye care center in which there was no emergency, therefore, there was no need to purchase the flat for CMD. There was not employer and employee relationship with the CMD and the assessee company. The claim of the assessee was accordingly declined. In appeal, the CIT(A) has confirmed the order of the AO. The Ld. Representative of the assessee has argued that the assessee nowhere transferred the fund/amount to any other person, therefore, the application of provision u/s 2(22)(e) of the Act is totally wrong ,hence, the finding of the CIT(A) is liable to be set aside. It is also argued that the assessee can purchase the flat for his CMD where he can treat the patient of the hospital very conveniently when the ITA. No. 5325/M/2015 A.Y. 2010-11 residence is near to hospital, therefore, it is a business necessity, accordingly the finding of the CIT(A) is not justifiable. It is also argued that the loan was taken by assessee company and the claim in connection with the loan was also denied wrongly and illegally, therefore, the finding of the CIT(A) is not justifiable. It is also argued that the AO cannot dictate his term and is not entitled the interfere in the business decision of the assessee company, therefore, the finding of the CIT(A) is not justifiable. It is also argued that the transaction if any can be considered as tax planning which is not against the law and facts, therefore, the finding of the CIT(A) is not justifiable in view of the law settled in Union of India Vs. Azadi Bachao Andolan 263 ITR 706 (SC), Madras High Court in M.V. Vallipan Vs. CIT 170 ITR 238 & Bhoruka Engg. Ltd. Vs. DCIT 356 ITR 25. However, on the other hand, the Ld. Representative of the Department has strongly relied upon the order passed by the CIT(A) in question. The factual position is not in dispute. The assessee purchased the flat bearing flat no.602, in the building namely Ornate Galaxy, located at L.T. Road, Dadar (E), Mumbai. No doubt, the assessee Dr. Natarajan is the CMD of hospital and is having 99% share of the assessee company. The flat is near to the hospital which facilitate the treatment of eye patient at any time. Even in the case of emergency the CMD can approach to the hospital promptly. In the instant case, the assessee did not transfer the fund to its director. The assessee took the bank loan to the tune of Rs.300 lacs and by adding some more funds,
ITA. No. 5325/M/2015 A.Y. 2010-11 purchased the flat bearing no.602, in the building namely Ornate Galaxy, located at L.T. Road, Dadar (E), Mumbai. It is purely the wish of the AO in which he desired that the Dr. S. Natarajan was having the flat at Wadala, therefore, the assessee company should not purchase the flat for CMD of the assessee company. The transaction is nowhere in contravention of the provision of any income tax act. The provision of Section 2(22)(e) of the Act is not applicable to the facts of the case. Moreover, there may be tax planning on the part of the assessee company but there is no violation of any provision of the Income Tax Act. The claim of the assessee is not liable to be declined. In this regard, we also find support of law settled in case titled as Union of India Vs. Azadi Bachao Andolan 263 ITR 706 (SC), Madras High Court in M.V. Vallipan Vs. CIT 170 ITR 238 & Bhoruka Engg. Ltd. Vs. DCIT 356 ITR 25. The assessee company neither transferred the funds outside the company nor to the director, therefore, the provision of Section 2(22)(e) of the Act is not applicable to the facts of the case. Accordingly, we set aside the finding of the CIT(A) in this regard. Since the finding given by lower authorities attracting the provision of Section 2(22) (e) of the Act is not justifiable, therefore, ancillary claim is also not liable to be declined. So far as disallowance of repayment of loan installment is concerned the CIT(A) has deleted the disallowance subject to verification by the AO, we do not find any infirmity in the direction of CIT(A) for allowing verification. However, the claim of interest to the tune of ITA. No. 5325/M/2015 A.Y. 2010-11 Rs.24,62,285/- is revenue in nature, therefore, is liable to be allowed. Accordingly, we allow the claim of the assessee company for such interest expenditure on bank loan taken for the purpose of the assessee business. So far as the claim of depreciation is concerned, we are of the view that the assessee is entitled to claim the depreciation @ 5% of the total value of the purchase of Rs.34,72,037/-. The claim of the electricity charges has not been pressed by Ld. AR, therefore, the same is hereby dismissed being not pressed. Accordingly, the issues nos. 1, 2, 4 & 5 are hereby decided in favour of the assessee and against the revenue. ISSUE NO. 7 5. The assessee also claimed the foreign travel expenses to the tune of Rs.1,77,746/-. The assessee purchased the air ticket of jet airways from Mumbai –Newark- Mumbai on 20.10.2009. The assessee purchased the ticket in cash. A mail was found in which it was stated that the Jet airways detailed about the cash payment on 09 October. The contents speaks about the cash payment, therefore, the claim of the assessee was declined u/s 40A(3) of the Act. The facts are not distinguishable at this stage. Moreover, no business expediency is on record in connection with the said transaction/travelling. Therefore, keeping in view of the facts and circumstances of the case, we are of the view that the CIT(A) has rightly confirmed the addition and in this ITA. No. 5325/M/2015 A.Y. 2010-11 regard the finding is not liable to be disturbed. Accordingly, this issue is decided in favour of the revenue against the assessee.