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Income Tax Appellate Tribunal, “C” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Ramlal Negi (JM)
O R D E R Per B.R. Baskaran (AM) :
The assessee has filed appeal for AY 2010-11. The revenue has filed appeal and the assessee has filed cross objection for AY 2012-13. Since the issues urged in all these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.
The assessee is engaged in the business of real estate management and debts recovery business. It acquires right over the debts (which have become
2 M/s. Genuine Commercial Services Pvt. Ltd. stressed or non-performing) from financial institutions and banks like IFCI, IDBI etc., by paying money to them. In this process, the assessee gets possession of certain assets also. It is stated that the assessee does not get ownership rights, but only possession rights. For acquiring rights debts from banks, the assessee has borrowed funds and has also paid interest therein. Besides the above, it has also incurred other expenses in respect of activities carried on by it. The assessee has let out certain assets, which were taken possession from the debtors and earned rental income thereon. The assessee treated the rental income as part of its business operations and accordingly offered the same under the head “Income from business” in both the years under consideration. It also claimed interest and other expenses against the above said income in both the years under consideration.
We shall first take up the appeal filed by the assessee for AY 2010-11. The issue contested by the assessee relate to the head under which the rental income is assessable and also disallowance of interest and other expenses claimed by the assessee. During the course of assessment proceedings for AY 2010-11, the assessing officer took a statement u/s 131(1) of the Act from the director of the assessee company named Shri Sunil Choraria. In the statement, he admitted that the rental income is basically from letting out property obtained from bank. He also admitted in the Statement that the expenses claimed by it except labour charges, repairs & maintenance and security charges are not directly related to rental income. Since the assessee has not obtained ownership right over the asset, the AO proposed to assess rental income as income under the “Income from other sources”. The assessee agreed to the same and requested the AO to allow expenses relating to labour charges, repairs & Maintenance and security charges against the rental income.
The expenses claimed by the assessee in its return of income consisted of interest expenditure and other expenses narrated above. Since the rental income was proposed to be assessed under the head Income from other
3 M/s. Genuine Commercial Services Pvt. Ltd. sources, the AO did not allow interest expenses. With regard to other expenses, the AO noticed that they are supported mainly by self made vouchers. Accordingly the AO took the view that the authenticity of vouchers could not be verified. Accordingly he did not allow expenses claimed by the assessee also. Accordingly the AO assessed Gross rental income as income of the assessee under the head Income from other sources in both the years.
Before Ld CIT(A), the assessee made detailed submissions and hence the Ld CIT(A) called for a remand report from the AO. After considering the remand report, the Ld CIT(A) held as under:-
“4.5 From the statement recorded, it is clear that the Director of the company categorically agreed income of Rs.19.15 lacs was from letting of property which is acquired as a right on securities from banks and institutions and is not an ownership property. It is therefore clear that exploitation of property by way of letting is not the business of the appellant. The rental income from Plot is not regular mode of business. It is, therefore, nothing but ‘Income from other sources’. The case laws cited do not support the case of the appellant in view of different fact situation. The appellant himself admitted the income to be in the nature of ‘income from other sources’. The action of the AO, therefore cannot be faulted……
4.6 The director of the appellant company u/s 131(1) further admitted that impugned operating expenses Rs.1,52,58,590/- claimed as incidental to such income are not directly relatable to the rental income of the appellant.
4.7 In the light of statement of director himself, it is evident that the expenses are not attributable to the earning of rental income from Plot. Hence, the expenses incurred have been rightly disallowed by the AO as not attributable to the earning of income u/s 57(iii).”
We notice that the Ld CIT(A) has mainly placed reliance on the statement given by the director of the assessee company and accordingly upheld the assessment of rental income under the head Income from other sources and also confirmed disallowance of interest and other expenses. Aggrieved, the assessee has filed this appeal.
4 M/s. Genuine Commercial Services Pvt. Ltd.
We heard the parties and perused the record. There is no dispute with regard to the fact that the assessee is engaged in debt recovery business and real estate management, i.e., the assessee is undertaking the job of recovering the debts due to financial institutions and banks like IFCI, IDBI etc. The assessee shall acquire rights of collection of debts from the financial institutions/banks by paying money to them and thereafter recover the debts from the concerned debtors. When the money due to the financial institution/bank is paid by the assessee to it, according to the assessee, the possession of primary/collateral security in the form of plot/building is given to the assessee. It is also clarified that the ownership rights are not transferred, but only possession of properties is given to the assessee. In that case, the assessee shall be handing over the possession back to the concerned owner, only after the recovery of concerned debts. Till the time, the debts are recovered, the assessee shall be keeping the property under its control and possession.
It is the case of the assessee that it has let it out and has earned rental income, since the property was lying vacant. It was contended that the letting out property is not its main intention, but it is only an integral part of its debt recovery business, as the assessee is, inter alia, required to commercially exploit the assets in order to recover its money given to the banks. Accordingly it was contended that the rental income should form part of its business income, since it also forms part of its core business of debt recovery. Accordingly it was submitted that the intention of the assessee in letting out the property was only to exploit the property in furtherance of its business objectives. The Ld A.R also submitted that the assessing officer has accepted it as the business activities of the assessee in AY 2009-10. Accordingly he contended that the rental income forms part of its business income. The Ld A.R also relied upon certain case laws in support of his contentions. He further submitted that the assessee has taken loans in order to acquire debt recovery rights and hence the interest expenditure is directly related to the business activities of the assessee. He further submitted that all other
5 M/s. Genuine Commercial Services Pvt. Ltd. expenses are also related to the business activities of the assessee. He submitted that most of the expenses are supported by proper vouchers and wherever labourers were involved, the assessee has incurred expenses by paying money to them by duly obtaining the signature in the vouchers. Accordingly he submitted that the expenses should be allowed.
On the contrary, the Ld D.R submitted that the assessee is not the owner of the property and hence the rental income was rightly assessed under the head income from other sources. The assessee itself has admitted that the interest expenditure is not directly related to the rental income and hence the same was disallowed. All other expenses were mainly supported by self made vouchers and hence the AO has rightly disallowed those expenses also.
Having heard rival submissions, we find merit in the contentions of the assessee. The assessee, during the course of carrying on debt recovery business, has also taken possession of certain properties. The assessee has acquired the right to recover the debts by acquiring those rights over the debts from the financial institutions. Since the property was lying vacant, it has let out the property with the objective of exploiting it to its advantage by earning rental income. It is an undisputed fact that the assessee is not owner of the property and hence the rental income is assessable either as business income or under the head income from other sources. We notice that the assessee has obtained the possession of the property along with the right to recover debt and hence the possession right of the property, in our view, should be considered as part of its commercial rights over the debts. Hence we are of the view that there is merit in the contention of the assessee that the letting out of the property was with the intention of exploiting it for its commercial advantage and hence it cannot be considered as a case of mere letting out with the objective to earn rental income.
In the case of M.S. Luvish Projects (P) Ltd (175 TTJ 153), the co-ordinate bench of Tribunal has held that the lease income earned by the assessee on 6 M/s. Genuine Commercial Services Pvt. Ltd. letting of property is business income of the assessee, if the letting was done in an organised manner with the intention to exploit it as commercial asset. In this regard, the Tribunal has taken support of the decision rendered by Hon’ble Supreme Court in the case of Chennai Properties & Investment Ltd (373 ITR 673). The Ld A.R also placed reliance on the decision rendered by Hon’ble Supreme court in the case of Rayala Corporation P Ltd (386 ITR 500), wherein also identical view has been expressed.
In the above cited cases, the respective assessees were owner of certain properties and have derived rental income therefrom. The AO assessed the same under the head Income from House property. Considering the objective of the assessee, its intention and the manner of conducting its activities, it was held that the rental income should be assessed as business income of the assessee. In the instant case, the assessee stands in a better footing, i.e., it is not the owner of the property and further the property has come into the possession of the property along with the debts acquired by the assessee for the purpose of recovering the same. Hence the objective of the assessee is to make profit out of the investment made by it, by recovering debts as well as by commercially exploiting the assets by letting it out. Accordingly, it is seen that the objective behind letting out the property was only to commecially exploit it. Hence we are of the view that the lease rental income earned by the assessee shall form part of its business receipts and hence the same is assessable as business income of the assessee. The case laws referred above, in our view, support the case of the assessee.
We have earlier noticed that the Ld CIT(A) has taken support of the statement given by the one of the directors of the assessee company, wherein he has stated that the assessee has only earned rental income, the interest expenses are not directly related to the earning of rental income. He has also agreed for assessment of rental income under the head income from other sources. In this regard, we have to say that it is the well settled proposition of 7 M/s. Genuine Commercial Services Pvt. Ltd. law that there is no estoppel against the law and hence the deposition made by the assessee would not militate against application of correct principles of law.
Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess the lease rental income, referred above, as business income of the assessee.
Since the interest expenditure has been incurred by the assessee on the funds borrowed by it for acquiring debt recovery rights. Since we have held that the rental income is assessable as business income, the interest expenditure allowable as business expenditure u/s 36(1)(iii) of the Act. Accordingly we direct the AO to allow the interest expenditure.
There is no dispute with the fact that other expenses claimed by the assessee are also related to debt recovery business. In fact, the assessing officer has accepted those expenses as related to the rental income earned by the assessee. However, the AO has disallowed the same only for the reason that most of the vouchers are self made. The Ld A.R, during the course of his arguments, submitted that the payments are made to labourers by obtaining signature on the vouchers, since the labourers do not issue printed receipts. We notice that the AO has disallowed the claim of other expenses by making general statement without pointing out any specific item of expenditure. The expenses, which are supported by self made vouchers, have been claimed mainly from labourers, on which possibility of obtaining third party vouchers was not there. Hence we are of the view that the AO has not cited proper reasons for disallowing the claim of the assessee. We also notice that the ld CIT(A) also sustained the disallowance on the reasoning that the director has admitted that the expenses are not related to earning of rental income. On the contrary, the director has specifically requested for deduction of expenses and the AO has also accepted the same. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the expenses claimed by the assessee.
8 M/s. Genuine Commercial Services Pvt. Ltd.
We shall now take up the appeal filed by the revenue for AY 2012-13. The revenue is aggrieved by the decision of Ld CIT(A) in deleting the addition of Rs.66.92 lakhs made by the AO u/s 68 of the Act. During the year under consideration, the assessee had taken loans from following parties:- M/s Akshit Exports 20,00,000 M/s Shubh Jewellery 6,57,148 M/s Tanman Jewels P Ltd 40,35,000 ------------- 66,92,148 ========= From the documents filed by the assessee to prove the cash credits, the AO noticed that the PAN number given for M/s Akshit Exports belonged to some other person. Further, the bank statement did not contain the name of the party. Further it was noticed by the AO that the assessee has not filed financial statements of the party to prove credit worthiness. In the case of M/s Shubh Jewellery and M/s Tanman Jewels, the assessee did not file financial statements. Hence the AO assessed the above said amounts as unexplained cash credit u/s 68 of the Act.
16. Before Ld CIT(A), the assessee made detailed arguments and also placed reliance on various case laws to contend that the assessee has discharged the onus placed upon it u/s 68 of the Act. The Ld CIT(A), after considering the explanations and contentions of the assessee was convinced with the contentions of the assessee and accordingly deleted the addition with the following observations:- 5.3. I have considered the stand of the AO as well as written submissions filed by the appellant. In assessment order, AO made the addition of cash credits u/s. 68 on treating the entire loans received from 3 parties of Rs. 66,92,148/- as non-genuine mainly for the reason that credit-worthiness of the lenders had not been proved by the appellant. The basis of finding of AO is that the appellant has failed to file the balance sheet, P & L account and bank statement of the lenders as a result of which the genuineness and credit worthiness of loan transactions are not established. On the other hand, the AR submitted that the appellant had proved the complete identity and creditworthiness of the lenders and genuineness of loan transactions and in support had relied documentary evidences stated as under :-
9 M/s. Genuine Commercial Services Pvt. Ltd. M/s. Akshit Exports - Rs.20,00,000/- a) Name, address and PAN of the lender; b) Ledger account of the lender; c) Confirmation of account; b) Bank statement of lender; d) PAN card of the lender; e) I.T. acknowledgement receipt of the lender; f) TDS certificate of interest deducted and paid; g) Own Bank statement.
M/s Shubh Jewellery - Rs.6,57,1487- a) Name, address and PAN of the lender; b) Ledger account of the lender; c) Confirmation of account; d) Bank statement of the lender; e) PAN card of the lender; f) I.T. acknowledgement receipt of the lender; g) Balance sheet of the lender; h) TDS certificate of interest deducted and paid; i) Own Bank statement.
M/s. Tanman Jewels Pvt Ltd - Rs.40,35,000/- a) Name, address and PAN of the lender; b) Ledger account of the lender; c) Confirmation of account; d) Bank statement of the lender; e) CIN master data (ROC) of the lender; f) I.T. acknowledgement receipt of the lender; g) TDS certificate of interest deducted and paid; h) Own Bank statement.
On perusal of the above stated documents, it is observed that all lenders are assessed to Income tax and holding valid PAN numbers and copies of I.T. returns had been filed on record. The confirmation of loan accounts containing the address and PAN of the lenders has been filed on assessment record. It is not in dispute that appellant received the entire loans through banking channel since corresponding entries are reflected in appellant's bank statements. The appellant had deducted the TDS u/s 194A in respect of interest paid to the lenders and copies of TDS certificates had been filed on record. Such Certificates contains the complete name, address and PAN of the lenders and even interest payment had been made by the appellant through banking channel. The appellant had produced, before me, the bank statements of all lenders and it is observed that there is no cash deposit corresponding to loans given to the appellant. The balance sheet of M/s. Shubh Jewellery and M/s. Tanman Jewels Pvt Ltd filed before Registrar of Companies discloses the loan given by the lenders to the appellant company. The appellant had 10 M/s. Genuine Commercial Services Pvt. Ltd. reasonably discharged the primary onus cast upon it to prove the genuineness of the loans received during the year. The AO had not disputed the correctness of any such documents nor had pointed any fault in the documents filed by the appellant on assessment record. It is observed that AO had not issued the notice u/s 133(6) to the lenders or to banker of the lenders to cross verify the loan transactions. The AO had not brought any contrary material on record to disprove the loans received by the appellant during the year. It is noted that Ld. CIT(A)-9 vide order dated 20/03/2015 at para 3.18 of page 20 of the appeal order had deleted the similar addition made during A.Y.2010-ll which also include the loan received from same lender. The various case laws relied by Ld. AR also support the case of the appellant.
The Hon'ble Rajasthan High Court in the case of Labh Chand Bohra vs. ITO reported in 219 CTR 571 decided that -
"If the explanation is not supported by any documentary or other evidence, then the deeming fiction created by s. 68 can be invoked. In the present case, so far as this requirement is concerned, it is very much there in existence, inasmuch as the amount has been advanced by account payee cheques, through bank, and is duly supported by documentary evidence, as well as the evidence of the two lenders, and that also satisfies the requirement about the discharge of burden on the part of the assesses, to prove identity and genuineness of the transaction. So far as capacity of the lender is concerned, capacity of the lender to advance money to the assessee, was not a matter which could be required of the assessee to be established, as that would amount to calling upon him to establish source of the source. The additions with respect to the entries of V and D, for the amounts of Rs. 50,000 each, respectively made in the income of assessee, are ordered to be deleted. "
The Hon'ble Madhya Pradesh High Court in the case of CIT vs. Mehrotra Brothers reported in 270 ITR 157 decided that -
“The assessee furnished GIR/PAN, addresses and confirmation from the creditors - Department has not brought any material to disprove the genuineness of the parties, capacity of the lenders and the transactions on the basis of cogent facts on record-Accordingly, Tribunal accepted the genuineness of the cash credits - No substantial question of law involved - Appeal dismissed."
The Hon'bleAllahbad High Court in the case of CIT vs. Kamaljeet Singh reported in 147 Taxmann.com 18 decided that -
"Whether since assessee discharged onus by placing (i) confirmation letters of cash creditors; (ii) their affidavits; (Hi) their full addresses
11 M/s. Genuine Commercial Services Pvt. Ltd. and GIR numbers and permanent account numbers it could be said that assessee had discharged its burden and, no addition to his income on account of cash credits was called for - Held, yes."
The Hon'ble Delhi High Court in the case of CIT vs. Diamond Products Ltd reported in 21 DTK 9 decided that -
"The AO is not permitted to examine the source of the source once the assessee has been able to establish that the transaction with his creditors is genuine and that the creditors' identities and creditworthiness have been established."
The Hon'ble Bombay High Court in the case of CIT vs. S.D. Investment & Trading Co. reported in 306 ITR 31 decided that -
"Tribunal having found that the explanation of assessee that cash deposit in bank account represented advance against sale of air- conditioners was satisfactory as the parties had confirmed ledger entries; hence, no addition on account of cash credits was called for."
It will be also worthwhile to refer to the decision of Hon'ble Apex Court in the case of CIT v Orissa Corporation P. Ltd reported in 159 ITR 78 (SC), wherein Hon'ble Supreme Court decided that -
"The assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index number was in the file of the Revenue. The Revenue, apart from issuing notices under s. 131 at the instance of the assessee, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were credit-worthy or were such who could advance the allowed loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do any further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises. It therefore, be said that any question of law arose in these cases. The High Court was, therefore was right in refusing to refer the questions sought for."
Thus, respectfully following the judicial decisions of Hon'ble Apex Court and Hon'ble High Courts and considering the fact that entire loans has 12 M/s. Genuine Commercial Services Pvt. Ltd. been received through banking channel and supported with confirmation of account, bank statement, I.T. ack. receipts, TDS certificates and also considering the fact that AO had not brought any contrary evidence on record to disprove the loans, I hold that AO is not justified in treating such loans as non-genuine and thus the addition made u/s. 68 cannot be sustained and is hereby deleted. I direct AO to delete the addition of Rs.66,92,148/-.
We notice from the paper book that Shri Mukesh Kumar Jain is the proprietor of M/s Akshit Exports. It is in the common knowledge of everyone that the PAN number is allotted in the name of the proprietor only in the case of proprietary concerns. Hence there is no merit in the observations of the AO that the PAN number given for M/s Akshit Export belongs to some other person. The bank statement of M/s Akshit Export is placed in page 5 of paper book and we notice that the name of the concern and the payment made to the assessee concern are reflected therein. Hence we do not find merit in the observations made by the AO in respect of this creditor.
In respect of two other creditors, the Ld CIT(A) has observed that the financial statements filed with the Registrar of Companies have been furnished and the name of the assessee is finding place in their financial statements. This observation of Ld CIT(A) also disproves the observation made by the AO in respect of these two creditors. We notice that the Ld CIT(A) has listed out the documents furnished by the assessee before the tax authorities and after examining the same, the Ld CIT(A) has taken the view that the primary responsibility to prove the cash credits has been discharged by the assessee. On perusal of the order passed by Ld CIT(A), we notice that the first appellate authority has examined the issue in proper perspective and applied the law laid down by the Courts while examining the issue. Accordingly we do not find any infirmity in the decision taken by Ld CIT(A) on this issue.
We shall now take up the Cross objection filed by the assessee. The first issue relate to the action of the AO in assessing the rental income received by the assessee from assets taken possession of, as income from other sources. Identical issue was considered by us in the earlier paragraphs while dealing
13 M/s. Genuine Commercial Services Pvt. Ltd. with the appeal of the assessee filed for AY 2010-11 and we have held that the rental income has been received by the assessee while carrying on the debt recovery business. Accordingly we have held that the same is assessable as business income of the assessee. Following the same, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess the rental income as business income of the assessee.
The next two issues contested by the assessee relates to the deduction of interest expenditure and other expenses claimed by the assessee against rental income. In this year, the Ld CIT(A) has directed the AO to verify as to whether the interest and other expenses could be allowed u/s 57(iii) of the Act against rental income. We have considered an identical issue in AY 2010-11 in the earlier paragraphs and have taken the view that the interest and other expenses are allowable as deduction while computing business income of the assessee. Accordingly we modify the order passed by Ld CIT(A) on these two issues and direct the AO to allow the same as deduction while computing business income of the assessee.
In the result, the appeal and cross objection filed by the assessee are allowed. The appeal of the revenue is dismissed.
Order has been pronounced in the Court on 24.10.2018.