Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “SMC” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)
The appeal filed by the Revenue is directed against the order dated 31.3.2017 passed by the learned CIT(A)-3, Mumbai and it relates to A.Y. 2011- 12. The Revenue is aggrieved by the decision of the learned CIT(A) in allowing the claim of ` 32.70 lakhs, being the amount payable to landlord on account of enhancement of Municipal Taxes. This is second round of proceedings.
Facts relating to the issue are that the assessee had taken Ground Floor, mezzanine floor and first floor of a building on lease from M/s Liberty Cinema. In turn, it leased out the same to M/s. Arab Bangladesh Bank. The assessee declared lease rent received by it as its business income. The Assessing Officer noticed that the assessee has claimed a sum of ` 32.70 lakhs as Municipal taxes payable. Since the assessee did not pay the above said amount, the Assessing Officer proposed to invoke the provisions of section 43B of the Act. The assessee submitted that a sum of ` 9,50,000/- has been paid by it before filing the return of income. Accordingly, the Assessing Officer reduced the amount by ` 9,50,000/- from Rs.32.70 lakhs and added the balance amount of ` 23.20 lakhs u/s. 43B of the Act.
2 M/s. Vulpecula Trading and Investments Co. Pvt. Ltd.
In the first round of appellate proceedings, the learned CIT(A) noticed that the M/s. Liberty Cinema has raised a debit note upon the assessee on account of enhanced municipal taxes only on 13.4.2011. Accordingly he took the view that additional liability in the form of Municipal taxes accrued to the assessee only in the year relevant to A.Y. 2012-13. Accordingly, the learned CIT(A) took the view that disallowance has not to be made u/s. 43B, but on the reasoning that expenditure does not pertain to the year under consideration. He also took the view that reduction of ` 9.50 lakhs made by the Assessing Officer is not correct. Accordingly, he directed him to disallow a sum of ` 32.70 lakhs in the place of ` 23.20 lakhs, which has resulted in enhancement of income by ` 9.50 lakhs.
The assessee carried the matter in appeal before the ITAT and the Tribunal, vide its order dated 19.8.2016 passed in restored the matter back to the file of the learned CIT(A) for examining the issue afresh and it also directed the learned CIT(A) to pass a speaking order. Accordingly, present order came to be passed by the learned CIT(A).
Before the learned CIT(A), assessee contended that it is only a tenant of M/s. Liberty Cinema and as per the Tenancy Agreement, any enhancement of Municipal Tax has to be borne by the assessee. Accordingly, it was submitted that the payment made by the assessee towards Municipal Taxes, in fact, partake character of “rent” only. Accordingly it was submitted that the provisions of section 43B of the Act is not applicable for this payment. The assessee further submitted that it is following mercantile system of accounting and at the time of finalization of account, all known liabilities have to be provided for as per the principles of accounting. It was submitted that though M/s. Liberty Cinema has raised the debit note on 13.4.2011, the same was based on Municipal notice dated 16.3.2011 and hence the same would pertain to the year relevant to A.Y. 2011-12 only. Accordingly, it was submitted that it has provided for the same in the accounts ending on 31.3.2011. Accordingly,
3 M/s. Vulpecula Trading and Investments Co. Pvt. Ltd. the assessee submitted that provisions of ` 32.70 lakhs is allowable as deduction in A.Y. 2011-12.
The learned CIT(A) was convinced with the contentions of the assessee and accordingly held that the amount of ` 32.70 lakhs is allowable as deduction under the head “rent”. The Revenue is aggrieved by the decision of the learned CIT(A).
I have heard the rival contentions and perused the record. In my view the learned CIT(A) has passed this impugned order on proper reasoning by duly considering contentions of assessee. For the sake of convenience, I extract below the operative portion of the order passed by the learned CIT(A) :-
6.3 I have carefully considered the rival submissions and the facts of the case. It is an undisputed fact that the appellant had acquired the premises on lease basis from M/s Liberty Cinema, which was further sub leased to M/s Arab Bangladesh Bank. It was submitted that the rent paid to Liberty Cinema include the enhanced property attributable to the premises as per the agreement between the appellant and the land lord namely Liberty Cinema. Since the liability to pay property tax to Municipal Corporation is statutorily casted on the land lord namely Liberty Cinema being the owner of the land and building. Therefore, any enhanced property tax aid by the land lord is to be recovered from the tenant as rent as per the relevant portion of the agreement as given in Para 2(b), which is reproduced as under -
"(b) To pay to the Lessors on demand such portion of any increase in any taxes, assessments, charges, rates, cesses, dues, duties or impositions that may now or at any time hereafter during the continuance of these presents to levied in respect of or in connection with the said building and or any nex tuxes, assessments, charges, rates, assessments dues, duties or impositions that may from time to time hereafter during the continuance of these presents be levied in respect of the said building either by the Government or the Municipal Corporation or any public body or authority whatsoever and whether the same are payable by the Lessors or the Lessee or the occupiers of the said building as may be proportionate to the reserved rent, PROVIDED THAT that such sums are recoverable from the Lessee by law."
4 M/s. Vulpecula Trading and Investments Co. Pvt. Ltd. 6.4 Therefore, the payment made by th6 appellant to Liberty Cinema is rent which includes increase in the Municipal Tax.. It was further observed that the said increase in the property tax is required to be recovered from the tenant as per Section 12 of the Maharashtra Rent Control Act, 1999 also.
6.5 In view of the provisions of the agreement and as stated earlier is a rent in the books of the appellant. 'However, the appellant has debited the amount of rent which includes enhanced property tax to the tune of Rs. 32,70,358h The AO has observed that out of said amount of Rs. 9,50,000/-, was paid by the appellant before the date of filing of the return and remaining amount of Rs. 23,20,358/- , was disallowed u/s 43B of the IT Act, 1961 as unpaid till the date of filing of return. 6.6 On the other hand, the appellant submitted that section 43B of the Act is not applicable to the payment which is in the nature of rent and not in the nature of Municipal Taxes in the hands of the appellant. I agree with the argument of the appellant that nature of payment in the hands of the appellant is rent, which includes enhanced Municipal Taxes as per their agreement between the appellant and Liberty Cinema. Since the appellant is following the Mercantile Accounting System it has been debited as soon as the liability arises. Therefore, in my opinion the appellant accordingly debited an amount of Rs. 32,70,358/- in the P&L A/c and the remaining unpaid rent has been shown as liability in the balance sheet. Therefore, the appellant has accordingly accounted for its expenditure in its books of accounts and correctly claimed as allowable expenditure. In view of the same, an amount of Rs. 32,70,358/- is allowed as an allowable expenditure towards rent which includes enhanced Municipal Taxes. The limited issue as remanded back by the Hon'ble, ITAT Mumbai has been considered and allowed.”
I noticed that the learned CIT(A) has expressed the view that payment pertaining to enhancement of Municipal taxes borne by the assessee has to be considered as rent in the hands of the assessee. Since the assessee is not the owner of the property and only a tenant; since liability to pay Municipal Tax is the primary responsibility of Liberty Cinema and since the assessee has agreed to bear its share of enhanced municipal taxes, in my view, the learned CIT(A) was justified in holding that enhanced Municipal Tax borne by the assessee partake character of rent and hence provisions of section 43B would not applicable.
5 M/s. Vulpecula Trading and Investments Co. Pvt. Ltd.
As per the mercantile system of accounting, the expenditure is allowable as deduction in the year in which the liability to pay has occurred. It was shown by the assessee that the owner of the building, M/s Liberty Cinema, has received notice from the Municipal Corporation in March, 2011 itself and it only has delayed in raising debit note upon the assessee. Accordingly we are of the view that the liability has accrued the moment the notice was issued by the Municipal Corporation. Accordingly we are of the view that the liability to pay the enhanced municipal taxes has accrued to the assessee in March, 2011 itself. Accordingly the impugned expenditure pertains to the year under consideration and since the assessee is following mercantile system of accounting, in my view, the learned CIT(A) has rightly held that provisions of ` 32.70 lakhs pertaining to enhancement of Municipal tax (rent) is allowable as deduction during the year under consideration. Accordingly I uphold the order passed by the learned CIT(A).
In the result, appeal filed by the Revenue is dismissed. Order has been pronounced in the Court on 10.11.2017.