ZEBA HOME P.LTD,MUMBAI vs. DCIT CIR 7(3), MUMBAI

ITA 3646/Mum/2015

Briefly, facts are assessee – a company, was in the business of manufacturing and exporting of carpet and dhurries. For the assessment year under consideration, the assessee filed its return of income on 30.09.2011, declaring loss of Rs.25,99,955/-. During the assessment proceedings, the AO noticed that, though, in the return of income, assessee has shown rental income of Rs.89,08,860/-, however, as per the AIR data, the actual rental income received by the assessee was Rs.1,22,71,070/- He, therefore, called upon the assessee to explain why the differential amount should not be added to the income of the assessee. In reply, though, it was submitted by the assessee that the rental income declared in the return of income is the actual amount received by the assessee, however, the AO rejecting the explanation of the assessee held that the differential amount of Rs.33,62,157/- between the income declared by the assessee and the amount received as per AIR data is to be treated as income of the assessee.

Before the CIT(A) it was submitted by the assessee that the difference arose due to the fact that service tax on amenities amount became payable subsequently due to court decision. Therefore, service tax amount pertaining to FY 2006-07 to FY 2009-10 were paid in the impugned financial year. It was submitted, since the licensee had not deducted tax at source on the amenities and service tax amounts for the earlier assessment years, they deducted it in the impugned assessment year. As a result, higher amount of rental income was shown in Form 26AS. Thus, it was submitted that the income corresponding to the TDS amount since already has been shown by the assessee in the preceding assessment years, no addition can be made.

The learned AR reiterating the stand taken before the CIT(A) submitted that the licensee did not deduct tax at source on the amenities amount paid in the earlier assessment year, hence, deducted in the impugned assessment year. Therefore, the TDS shown in the Form 26AS was higher compared to the income actually received by the assessee for the year under consideration. He also submitted that the licensee did not deduct tax at source on the service tax amount, which was only deducted in the impugned assessment year, as a result of which the difference arose. To substantiate such fact, the learned AR drew our attention to the reconciliation statement submitted at page 38 of the paper-book as well as copy of Form 26AS at page 36 of the paper book. The learned AR, therefore, submitted the quantum of income corresponding to the TDS having already been declared by the assessee in the earlier assessment year, no further addition can be made in the impugned assessment year on account of difference in rental income.

The learned DR relied upon the observations of the CIT(A).

We have considered the submissions of the parties and perused the materials on record. As could be seen, the addition on account of rental income was because of the TDS amount and corresponding income shown in Form 26AS. On perusal of Form 26AS, a copy of which is also submitted in the paper book, we have noticed that the difference of Rs.33,62,157/- arose on account of following four payments as reflected in Sr. No.1,2,15 and 16 of Form 26AS:

ITA 2518/Mum/2015 The solitary issue raised by the department relates to allowance of assessee’s claim of expenses of Rs.88,40,658/-. Briefly, the facts are during the assessment proceedings, it was noticed by the AO that the assessee has shown sales of Rs.14,81,291/- out of opening stock and Rs.84,52,506/- on account of rental and other miscellaneous income not in the character of business income, whereas, the assessee has claimed various expenditure aggregating to Rs.88,40,658/- against such income. He therefore, called upon the assessee to explain, when the assessee had not carried out any manufacturing and business activity and is only effecting sales for stock clearance, why the expenditure should not be disallowed. In reply, though, assessee objected to the proposed disallowance, however, the AO rejecting the explanation of the assessee held that assessee has failed to furnish supporting evidence to show that it has actually carried out any business activity except clearance of old stock. He further observed, the assessee has failed to demonstrate the claim of bad debt by furnishing evidence that they are created during the ordinary course of business and despite its effort assessee had failed to recover the debt. He also disallowed interest expenditure by stating that since the assessee has stopped its manufacturing activity long back, there is no necessity for the assessee to incur interest expenditure by availing loan. Accordingly, he disallowed the expenditure claimed amounting to Rs.88,40,658/- Aggrieved, the assessee challenged the disallowance before the CIT(A). The learned CIT(A) after considering the submissions of the assessee being convinced that the assessee had carried out its business activities allowed assessee’s claim of expenditure.

The learned DR relying on the observations of the AO submitted, as per assessee’s own admission, it has stopped its manufacturing activity and is selling the stock available with it. Therefore, as such, the assessee is not carrying on its regular business activity. That being the case, there is no need for the assessee to incur any expenditure for its business activities.

The learned AR, on the other hand, submitted that though the assessee might have stopped its manufacturing operation due to compelling circumstances like labour problem, unpaid debtors and lack of working capital however, it is carrying on its trading activities with the hope that manufacturing activity would get revived some time or the other. He submitted, even for carrying out its trading activity the assessee has to maintain necessary infrastructure/establishment which require incurring of expenditure. That being the case, expenditure incurred being for the purpose of business is to be allowed. He submitted the AO has not doubted the genuineness of the expenditure claimed. Therefore, there is no reason to disallow the expenditure.

We have considered the submissions and perused the materials on record. It is evident from the assessment order that the primary reason for which the AO disallowed assessee’s claim of expenditure is, assessee had stopped its manufacturing activity. However, the AO has not denied the fact that the assessee is carrying on its trading activity by disposing of the stock available with it. If that is the case, certainly the assessee requires infrastructure/establishment to carry on its business activity even if it relates to disposing of the stock available with it. For carrying on such activity also assessee has to employ person by incurring salary cost, rent payment and many other ancillary and incidental expenditures like electricity, conveyance etc. Similarly, there can be no dispute that bad debts are in course of its regular business activity. Once it is held so, there is no need for the assessee to demonstrate that it has failed in its attempt to recover the debt from the parties. The only requirement being, the assessee has to write off the debt in its books of account. As far as interest expenditure is concerned, when there is no dispute that the assessee is maintaining its establishment to carry on its trading activity it requires capital to run such activity as it has to incur day to day expenditure as well as other regular business expenditure. It is evident the AO has not raised any doubt with regard to the genuineness of the expenditure apart from making general observations. Thus, considering the overall facts and circumstances of the case, we agree with the CIT(A) that expenditure claimed by the assessee is allowable. Accordingly, we uphold the order of the CIT(A) on this issue. In the result, the grounds raised by the department are dismissed.

In the result, assessee’s appeal is allowed and that of the department is dismissed.