ITO, WD-12(2), KOLKATA, KOLKATA vs. SUDHIR SATNALIWALA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘B’, KOLKATA [Before Shri P.M. Jagtap, AM and Shri S.S. Viswanethra Ravi, JM] I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 ITO Ward 12(2), Kolkata..............................…………………………………………Appellant Aayakar Bhawan, P-7, Chowringhee Square, Kolkata - 700069 Sudhir Satnaniwala……………………………………………….............................Respondent 10, Raja Santosh Road, Alipore, Kolkata – 700 027 [PAN : AJVPS2252C] Appearances by: Shri Saurabh Kumar, Addl. CIT (DR), appearing on behalf of the Revenue. Shri M. Satnaliwala, FCA appearing on behalf of the Assessee. Date of concluding the hearing : October 10, 2017 Date of pronouncing the order : November 30 , 2017 ORDER Per P.M. Jagtap, AM This appeal is preferred by the revenue against the order of Ld. CIT (Appeals) – 12, Kolkata dated 04.12.2013. 2. In ground no 1, the revenue has challenged the action of the Ld. CIT(A) in deleting the disallowance of Rs. 25,74,066/- made by the A.O. on account of demand for outstanding municipal taxes. 3. The assessee in the present case is an individual who inter alia is engaged in the business of running guest house in the name of his proprietary concern, M/s. Check-in Check-out. The return of income for the year under consideration was filed by him on 23.09.2009 declaring a total income of Rs. 32,18,292/-. In the profit and loss filed

2 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala along with the said return, a sum of Rs. 19,20,000/- was credited by the assessee on account of rent received from office space at 308, Central Plaza, Sarat Bose Road, Kolkata which was let-out to M/s. Japan Power Service Pvt. Ltd. The said office space was jointly owned by M/s. Equus Commotrade Pvt. Ltd., M/s. Kanistha Pvt. Ltd. and M/s. Panchavati Vincome Pvt. Ltd. and after taking the same on lease on an annual rent of Rs. 1,80,000/-, the same was let-out by the assessee to M/s. Japan Power Service Pvt. Ltd. from 01.04.2007. Since the assessee was not the owner of the said office space, the rental income received from the same was declared by him as his business income. According to the A.O., the said income however constituted income of the assessee from other sources. In the profit and loss account, a sum of Rs. 25,74,066/- was debited by the assessee on account of municipal taxes and penalties in respect of the said office space let- out to M/s. Japan Power Service Pvt. Ltd. From the relevant municipal demand, the Assessing Officer noted that the municipal taxes were in respect of earlier period from 1988 to 2004 and the person liable to pay the said arrears was the then owner, M/s. Janapriya Finance & Industrial Investment (I) Ltd. and M/s. Lansdowne Properties Ltd. and not the assessee or the 3 companies who were the present owner of the property. He held that the expenditure on payment of municipal tax arrears thus was not laid-out or expended wholly and exclusively for the purpose of making or earning the rental income of Rs. 19,20,000/- by the assessee from M/s. Japan Power Service Pvt. Ltd. and in the absence of any agreement or understanding furnished by the assessee to prove that he was liable to pay the said arrears, the expenditure of Rs. 25,74,066/- claimed by the assessee on account of

3 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala municipal tax demand for the earlier years was disallowed by the A.O. holding that it was not qualified for the deduction under section 57(iii) of the Act. 4. The disallowance made by the A.O. on account of municipal tax arrears was challenged by the assessee in the appeal filed before the Ld. CIT(A) and a detailed submission was made by the assessee in support of his case on this issue. The said submission was forwarded by the Ld. CIT(A) to the A.O. for his verification and comment. In the remand report submitted to the Ld. CIT(A), the A.O. offered his comments on the written submission filed by the assessee and when the same were confronted by the Ld. CIT(A) to the assessee, the later also filed his submissions thereon. After considering the entire material available on record, the Ld. CIT(A) held that the rental income received by the assessee from sub-letting of the office space constituted his business income and the assesses was entitled for deduction in respect of municipal tax arrears amounting to Rs. 25,74,066/- He accordingly deleted the disallowance made by the A.O. on this issue after recording his findings/observations in paragraph no 5.1.7 of his impugned order which read as under: “I have carefully considered the facts and the submissions on behalf of the appellant. Regarding disallowance of Rs. 25,00,000/- out of Municipal Tax paid in respect of flat no. 308 at 2/6, Sarat Bose Road, Kolkata & Rs. 74,066/- out of Municipal Tax in respect of premises no. 14A, Burdwan Road, Kolkata, the Assessing Officer has stated that as the income from subletting can only be assessed as income from other source, so deduction u/s 43B cannot be allowed. It is a fact that the appellant had income from subletting from the assessment year 2005- 06 and it was also always shown as business income and being assessed to tax as business income except in the assessment year 2007-08. The appellant has given a reasonable explanation for not contesting the

4 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala assessment to A.Y. 2007-08. The appellant has also filed copies of assessment order for earlier years and as well as for subsequent year i.e. for assessment year 2010-11 in support of the contention that the appellant had taken many flats on rent at 14/1, Burdwan Road, Kolkata and earned income of Rs. 1,64,54,896.85 by subletting to different persons and the same was also assessed as income from business. Rental income is assessable as income from other sources, when there is ancillary services and where service agreement is dependent of rental agreement as also where there is inseparable letting income. In CIT vs A.V.K. Constructions (P) Ltd. (2007), 292 ITR 512 (Mad), it was held that since lessee was not owned of the property, the rental income received by lessee from transaction of sub-letting would not be assessable as income from house property, but was assessable in the circumstances of the case as business income. Considering the facts of the case, I did not find any justification from departing from the past and subsequent action in assessing the income from sub-letting of the flat as the appellant’s income from profits and gains of business or profession. For this reasons, I am of the view, that the appellant is entitled for deduction in respect of the municipal taxes aggregating to Rs. 25,74,066/-. The Assessing Officer is directed to assess the rental income received from sub-letting of the flats as income from profits and gains of business or profession and allow the deduction on account of municipal taxes etc. aggregating to Rsj. 25,74,066/- therefrom on the basis of actual payment under section 43B of the IT Act. 5. The learned DR strongly relied on the order of the Assessing Officer in support of the revenue’s case on this issue. He contended that the demand for property tax pertaining to the earlier years was not raised in the name of the assessee and there was nothing to show that the same was actually payable by the assessee. He contended that the Ld. CIT(A) however allowed the claim of the assessee for deduction on account of payment of municipal tax arrears mainly on the ground that the rental income received by the assessee from the sub-letting of the property was chargeable to tax as his business income. He contended that the Ld. CIT(A) however, overlooked the

5 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala vital fact that the municipal taxes pertained to the earlier years and the assessee was not liable to pay the same. 6. The learned counsel for the assessee, on the other hand, submitted that the demand for municipal tax arrears was not raised in the name of the assessee because he was not the owner of the property. He contended that the assessee however was lessee of the said property and was liable to pay all the property taxes including arrears as per the lease agreement. He invited our attention to the copy of the lease agreement placed at page 1 to 3 of his Paper Book to show that the assessee as per the said lease agreement effective from 1st April, 2002 was liable to pay, inter alia, property tax and other outgoings and burdens whatsoever payable to local or other authority upon the demised premises. He also invited our attention to the demand notice issued by the concerned municipal authority (copy placed at page no 4 of the Paper Book) to point out that out of the total demand of Rs. 46936/-, the assessee had paid the arrears only for the period from 1st April, 2002 including interest thereon. He contended that the said payment was made by the assessee on 13.12.2008 and the corresponding rental income being assessed in his hands as business income, the assessee was entitled for deduction on account of property tax arrear in the year under consideration on payment basis under section 43B of the Act. 7. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the deduction claimed by the assessee on payment of municipal tax

6 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala arrears was disallowed by the A.O. on the ground that the said expenditure pertained to the earlier years and the assessee was not liable to pay the same. Since the corresponding rental income received by the assessee from sub-letting of the property was held by the A.O. as chargeable to tax in the hands of the assessee under the head ‘income from other sources’, he held that the expenditure incurred by the assessee on payment of municipal tax arrears was not wholly and exclusively laid out or expended for earning the rental income and the same, therefore, was not eligible for deduction under section 57(iii) of the Act. The Ld. CIT(A), however, allowed the claim of the assessee for deduction on payment of municipal tax arrear, inter alia, on the basis that the corresponding rental income earned by the assessee from the sub-letting of the property was chargeable to tax as his business income. In the ground raised on this issue, the revenue has not challenged the said treatment given by the Ld. CIT(A) and the relief given by the Ld. CIT(A) on this issue, is challenged only on the ground that the assessee was not liable to pay the demand raised by the Municipal Corporations on account of tax arrears. In this regard, the learned counsel for the assessee has established on the basis of the relevant lease agreement that the property was occupied by the assessee as lessee from 1st April, 2002 and he was liable to pay all the property taxes out-goings and other burdens whatsoever payable to local or other authority upon the demised premises. He has also established on the basis of the demand notice issued by the municipal authority that the amount in question was paid by the assessee on account of municipal taxes for the period from 1st April, 2002 along with the interest thereto. Moreover, the said payment, as

7 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala pointed out by the learned counsel for the assessee, was made on 13.12.2008 i.e. during the year under consideration and the assessee, therefore, was entitled to claim deduction for the same on payment basis as per section 43B of the Act. Having regard to all these facts of the case, we are of the view that the disallowance made by the A.O. on account of municipal tax arrears paid by the assessee was not sustainable and the Ld. CIT(A) is fully justified in deleting the same. In that view of the matter, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 1 of the revenue’s appeal. 8. In ground no 2, the revenue has challenged the action of the Ld. CIT(A) in restricting the disallowance of Rs. 8,40,113/- made by the A.O. on account of business promotion expenses to 84,011/-. 9. In the profit and loss account of his guest house business, the sum of Rs. 8,40,113/- was debited by the assessee on account of business promotion expenditure. Since the said expenditure basically comprised of credit card payments and club expenses and the assessee could not produce any evidence to show that the same was incurred for the purpose of his business, the A.O. disallowed entirely the claim of the assessee for deduction on account of business promotion expenditure. 10. The disallowance made by the A.O. on account of business promotion expenditure was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submission made

8 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala by the assessee as well as the material available on record, the Ld. CIT(A) restricted the disallowance of Rs. 8,40,113/- to Rs. 84,011/- thereby giving relief of Rs. 7,56,102/- to the assessee on this issue for the following reasons given in paragraph no. 5.6.3 of his impugned order: “There is no denying the fact that the expenses were incurred by payments through credit card and club payments. Apparently, the Assessing Officer has not made any effort to ascertain the veracity of the payments before making 100% disallowance. The appellant is in the hospitality business and in order to attract customers, it is obliged to incur expenses for development of business. The mere fact that vouchers are not kept for such expenditure itself will not render whole of the expenditure as disallowable. However, the appellant being an individual entity, the possibility of incurrence of expenses for personal use cannot be over ruled. Therefore, in my view, a disallowance of 10% of the expenses for un-vouched and unverifiable nature of expenditure will meet the ends of justice. The disallowance would work out to Rs. 84,011/-. The appellant gets a relief of Rs. 7,56,102/-.” 11. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the entire claim of the assessee for business promotion expenditure comprising mainly on credit card payments and club expenses was disallowed by the A.O. for the failure of the assessee to establish on evidence, the business expediency of the said expenditure. Although the fact that there was no evidence maintained by the assessee to support and substantiate his claim for business promotion expenditure was accepted by the Ld. CIT(A), he held that this fact itself would not render whole of the expenditure as disallowance. After having considered the nature of business of the assessee which warrants the incurring of expenditure on business promotion, the Ld. CIT(A) allowed the claim of the assessee for

9 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala business promotion expenditure to the extent of 90% and sustained the disallowance only to the extent of 10% on account of personal and unverifiable element involved in the said expenditure. As rightly contended by the learned DR, the relief given to the Ld. CIT(A) to the assessee on this issue to the extent of 90% is quite excessive and unreasonable keeping in view the case made out by the A.O. showing the involvement of personal and unverifiable element, which has remained uncontroverted even before the Ld. CIT(A). Having regard to all the facts and circumstances of the case, we are of the view that it would be fair and reasonable to allow the expenses claimed by the assessee on business promotion to the extent of 75% and disallow the balance 25%. We accordingly modify the impugned order of the Ld. CIT(A) on this issue and sustain the disallowance made by the A.O. on account of business promotion expenditure to the extent of 25%. Ground no 2 of the revenue’s appeal is thus partly allowed. 12. In ground no 3, the revenue has challenged the action of the Ld. CIT(A) in sustaining the disallowance of Rs. 4,23,745/- made by the A.O. under section 14A only to the extent of Rs. 1,09,861/-. 13. During the year under consideration, the assessee had received dividend income of Rs. 5,25,293/- which was claimed to be exempt. No disallowance on account of expenditure incurred in relation to the said exempt income however was offered by the assessee as required by the provisions of section 14A. The A.O., therefore, worked out such expenditure at Rs. 4,23,745/- by applying Rule 8D and made a disallowance to that extent under section 14A of the Act. On appeal,

10 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala the Ld. CIT(A) restricted the said disallowance to Rs. 1,09,861/- for the following reasons given in paragraph no 5.8.3 of his impugned order: “I have considered the facts, the finding of the Assessing Officer and the mate placed on record. Since the appellant had not made any investment in shares out of the borrowed capital during the year to earn the exempted income, no part of interest expenses could be disallowed under section 14A of the Act. As regards disallowance u/s 14A out of administrative expenses i.e. 0.5% of the average investment in quoted share I find the working as made by the appellant at Rs. 1,09,861/- reasonable. Having regard to the facts, the disallowance under section 14A is restricted to Rs. 1,09,861/-, the appellant gets relief of Rs. 3,13,893/- on this ground.” 14. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the disallowance made by the A.O. under section 14A r.w.r. 8D on account of interest expenditure has been deleted by the Ld. CIT(A) after having found that corresponding investment in shares was not made by the assessee from the borrowed capital. At the time of hearing before us, the learned DR has not been able to rebut or controvert this finding of fact recorded by the Ld. CIT(A). Moreover, as submitted by the learned counsel for the assessee, there being net interest income earned by the assessee during the year under consideration, there was no question of making any disallowance on account of interest under section 14A of the Act. As regards the remaining disallowance made under section 14A r.w.r. 8D on account of administrative expenses, it is observed that the same was worked out by the A.O. at Rs. 2,29,022/- being 0.5% of the average investment. The Ld. CIT(A) however has restricted the same

11 I.T.A. No. 452/Kol/2014 Assessment Year: 2009-10 Sudhir Satnaliwala to Rs. 1,09,861/- purportedly on the basis of some working filed by the assessee. At the time of hearing before us, the said working is not furnished by the assessee. Even the learned counsel for the assessee has not able to explain the basis on which the disallowance of Rs. 2,29,022/- is restricted by the Ld. CIT(A) to Rs. 1,09,861/-. We, therefore, confirm the disallowance made by the A.O. under section 14A r.w.r. 8D to the extent of Rs. 2,29,022/- and allow partly ground no 3 of the revenue’s appeal. 15. In the result, the appeal of the revenue is partly allowed. Order Pronounced in the Open Court on 30th November, 2017. Sd/- Sd/- (S.S. Viswanethra Ravi) (P.M. Jagtap) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 30/11/2017 Biswajit, Sr. PS Copy of order forwarded to: 1. Sudhir Satnaliwala, 10, Raja Santosh Road, Kolkata – 700027. 2. ITO, Ward 12(2), Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata – 700069. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order, Sr. P.S. / H.O.O. ITAT, Kolkata