ITO 5(1)(3), MUMBAI vs. DEVYANG REALTY HOLDINGS P.LTD, MUMBAI

The Assessing Officer disallowed the rent expenditure of ` 72 lakhs claimed by the assessee in respect of a flat located at Altamount Road and also disallowed depreciation and other expenses claimed in respect of the above said flats in both the years under consideration. The learned CIT(A) restricted the disallowance to 50% in both the years. The assessee has filed these appeals challenging the decision of learned CIT(A) in not granting full relief in both the years under consideration. The Revenue has filed the appeal challenging the relief granted by the learned CIT(A) in A.Y.2009-10. Details of appeal, if any, filed by the Revenue for A.Y. 2010-11 could not be furnished by both parties and the Registry also could not find any such appeal filed by the revenue. Hence we are disposing these appeals by this order.

Facts relating to the case are stated in brief. The assessee-company was formed with the objective to carry out the business of estate developers, promoters, builders, constructors, to undertake construction activities etc. The Assessing Officer noticed that the assessee has claimed a sum of ` 72 lakhs towards rent paid by it for a flat located at A-1-21, Prithvi Apartments, Altamount Road, Mumbai. The AO noticed that the rent agreement was entered with Shri Viswajit Rane, one of the specified persons listed in sec. 40A(2)(b) of the Act. The AO noticed that the assessee company does not have any employees and its directors were residing in Goa. Hence the AO asked the assessee to furnish the details of business activities carried on by it. He also asked the assessee to justify the payment in terms of sec. 40A(2)(a) of the Act. In response thereto, the assessee submitted that it has given the details of rent payment to the AO in the proceedings relating to AY 2008-09. The assessee did not give any explanation with regard to applicability of sec. 40A(2)(a) of the Act.

The Assessing Officer noticed that the identical claim towards payment of rent made by the assessee in A.Y. 2008-09 was disallowed on the reasoning that the assessee has not used the above said premises for the purpose of its business. The Assessing Officer has further stated that the assessee has

In the appellate proceedings, the assessee contended before learned CIT(A) that the directors of the assessee company, who are residing in Goa, are using the flat whenever they come to Mumbai; that the business meetings are held in the flat; that all the compliances with various Government departments have been carried out from the flat; that board meetings are conducted therein at regular intervals; that the assessee company does not have any other place of business; that the assessee has been negotiating with some developers to carry out its objects etc. The assessee also placed reliance on the decision rendered by ITAT (Special Bench)(Delhi) in the case of Century Iron & Steel Ltd. Vs. ITO (1990) 31 ITD 117(Del)(SB) to submit that the assessee therein had been using a premises as registered office as well as its guest house. At

The Ld CIT(A), by following the decision rendered by the Special bench in the case of Century Iron & Steel Ltd (supra), restricted the disallowance to 50% of rent expenditure. In similar manner, the learned CIT(A) restricted the disallowance of depreciation, electricity and repairs expenses also to 50%. Identical view was taken by the learned CIT(A) in A.Y. 2010-11 also. With regard to the alternative ground of disallowing the rent expenditure u/s 40A(2)(a) of the Act, the Ld CIT(A) analysed the rental value levels quoted by the AO and came to the conclusion that the rent expenditure is excessive by 50%.

Learned counsel appearing for the assessee submitted that the registered office of the company is located in the above said flat only. The address in the return of income filed by the assessee, the address in the bank account mentions the address of the flat only. The directors are residing in Goa and the company also does not have any other address. All the board meetings and business meetings are held in this address only. Accordingly he submitted that flat was fully used for the purposes of business of the assessee company only. He submitted that the AO was not correct in observing that the flat was not used for the purposes of business of the assessee company. He submitted that the assessee has raised capital and has also availed unsecured loans. During the year under consideration, assessee has given advances to Sumer Builders in respect of two properties. The assessee has also incurred administrative expenses which are required to be incurred in respect of limited companies and has also incurred other expenses in connection with the business activities carried on by the assessee. Learned AR also referred to the agreement placed at page No. 72 of the paper book and also Board resolution

With regard to the disallowance made u/s. 40A(2)(a) of the Act, learned AR submitted that provisions of section 40A(2)(a) shall apply only to the persons specified in section 40A(2)(b) of the Act. He submitted that Shri Vishwajeet Rane is not a specified person falling in the list provided under section 40A(2)(b), i.e., he is neither a director nor a shareholder in the assessee-company. He is only a beneficiary as well as trustee of a trust named A&A Family Trust, which held 98.04% of shares in the assessee-company. He submitted that trustee/beneficiary of the trust holding shares of the assessee- company shall not fall in the category of specified person under section 40A(2)(b) of the Act. In the alternative, learned AR submitted that a recipient of the rent Shri Narayan Rane is also subjected to tax at the highest slab of 30% in respect of rent received from the company and hence there is no tax avoidance. By placing reliance on the decision rendered by Hon'ble Jurisdictional Bombay High Court in the case of CIT Vs. V.S. Dempo & Co. Pvt. Ltd. (336 ITR 209), learned AR submitted that provisions of section 40A(2)(a) of the Act was held to be not attracted when there is no tax evasion. Accordingly, he submitted that provisions of section 40A(2)(a) has been wrongly invoked by the tax authorities in the instant case.

On the contrary, learned Departmental Representative submitted that the assessee has not employed any staff for carrying out its activities and there is no evidence available to show that the assessee has purchased any asset in

We have heard rival contentions and perused the record. We notice that the Assessing officer has disallowed the rental payments and the expenses incurred on the flat on the reasoning that the said flat was not used for the purposes of business. Alternatively, the AO has taken the view that the rental payment is in excess of the fair market value in terms of sec. 40A(2)(a) of the Act.

Before us, the Ld A.R demonstrated before us that the registered office of the company is located at the same flat only. Further the very same address has been used for filing income tax returns as well as for opening the bank accounts. It is an admitted fact neither the directors of the assessee company nor the assessee itself does not have any other flat in the city of Mumbai, i.e., neither they have purchased or rented any other premises. Hence, there is merit in the submission of the assessee that for all practical purposes, the flat has been used for the purpose of business. It cannot be disputed that the assessee, being a private limited company, has to hold its board meetings and the annual general meeting throughout the year at fixed intervals. The assessee has submitted that those meetings have been held at the registered office only. It was further submitted that other business meetings have also been held in the registered office only. The Ld A.R submitted, by bringing our attention to the financial statements, that the assessee has borrowed loans, raised capital, made investments in mutual funds and also engaged a

We find merit in the contentions of the assessee. From the details furnished by the assessee, in our view, the assessee has sufficiently demonstrated that it has already set up the business. Once the business is set up, it is a settled proposition that all the expenses incurred for the purposes of business have to be allowed. The AO has taken the view that the flat, for which rent was paid, cannot be considered as having used for the purposes of business. But the facts available on record show otherwise. The directors of the assessee as well as the assessee does not have any other premises or address in Mumbai. The impugned flat has been used as registered office of the assessee company and all meetings including business meetings have been claimed to have taken place at this address only. Another important point is that the AO has not brought on record any material to show that the impugned flat was used for any other purposes. On the contrary, the assessee has shown that the flat was used for the purposes of business. We notice that the AO has drawn adverse inference mainly on the fact that the assessee has not carry out its business activities in a full-fledged manner.

With regard to the application of provisions of sec. 40A(2)(a), the Ld A.R has demonstrated that the recipient of rent is also paying tax at maximum marginal rate. Hence, the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of V.S. Dempo and Co. P Ltd (supra) shall directly apply to the facts of the present case. Accordingly we set aside the order passed by Ld CIT(A) and AO on this issue in both the years under consideration.

In the result, both the appeals of the assessee and CO are allowed and the appeal of the revenue is dismissed.