SANJAY GUPTA,MUMBAI vs. DCIT CEN CIR 47, MUMBAI

PER RAMIT KOCHAR, Accountant Member

This appeal, filed by the assessee, being ITA No. 1027/Mum/2014, is directed against the appellate order dated 16th December, 2013 passed by learned Commissioner of Income Tax (Appeals)- 38, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2009-10, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 9th December, 2011 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 144 of the Income Tax Act,1961 (Hereinafter called “the Act”).

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“1. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in confirming that disallowance of business & profession of Rs.7,46,495/-, electricity expenses of Rs.l,04,044/-, car repairs expenses of Rs.l,72,630/-, repairs & maintenance of Rs.2,89,550/-, society maintenance of Rs.l,03,608/- & travelling expenses of Rs.77,799/-.

the Act and best judgment assessment was framed by the Revenue u/s 144 of the Act vide assessment order dated 9th December, 2011. It was observed by the A.O. that in the immediately preceding year, the assessee has paid for various expenses from his company namely White Weather Films Pvt. Ltd. (WFFL) and debited the same from his books of accounts terming that it was essential to pay the actors and technicians etc. . The A.O. deliberated in the previous year as to how such expenses could be allowed when the assessee’s main income is from professional receipts from his company WFFL in which assessee is the director and on this account the business promotion expenses of Rs. 20,47,811/- was disallowed by the AO in the absence of any details.

The AO observed that the assessee has mainly earned professional receipts from his company WFFPL and this year also the expenses on account of electricity expenses totaled Rs. 2,94,954/- which were claimed by the assessee as deduction from his professional income out of which 50% works out to Rs. 1,47,477/- which was disallowed by the AO and added to the income of the assessee keeping in view that the personal usage element cannot be ruled out.

Similarly, the AO observed that the assessee has mainly earned professional receipts from his company WFFPL and car repair charges totaled Rs. 3,45,260/- which was claimed by the assessee as deduction from his professional income out of which 50% works out to Rs. 1,72,630/- which was disallowed by the AO and added to the income of the assessee keeping in view that personal usage element cannot be ruled out.

Similarly, the AO observed that the assessee has mainly earned professional receipts from his company WFFPL and total travelling expenses of Rs.

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1,55,599/- were claimed as deduction from professional income, 50% of which works out to Rs. 77,799/- which was disallowed by the AO and added to the income of the assessee keeping in view that the personal usage element cannot be ruled out.

It was also observed by the AO from the perusal of the Balance Sheet that the assessee is owner of the following house property:-

The A.O. observed that the assessee has not credited any income from the above bungalows and as per section 23 of the Act the assessee is liable to tax on the deemed income from the vacant properties. The A.O. estimated the fair/reasonable rent out of these properties at 1% income per month on the cost of the property , which works out to Rs. 45,84,000/- for the whole year against which the AO allowed the deduction u/s 24 of the Act at the rate of 30% of the annual lettable value and the total income from house property worked out to Rs. 32,08,800/- after allowing deduction u/s 24 of the Act and the same was brought to tax by the AO vide assessment order dated 09-12- 2011 passed u/s 144 of the Act.

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The AO in remand report observed that the assessee has submitted that the assessee being a film writer and director and keeping in view nature of his profession with respect to claim for deduction of Business Promotion Expenses , the gifts are given to the producers , distributors , actors , writers and cinematographs to keep them in good humor. The AO observed that the assessee has paid Rs.2,96,000/- for the purchase of Rolex watches but he could not establish the nexus of the same with his business activities. It was observed that other miscellaneous expenditure of Rs.2,37,000/- were also not established as business expenditure based on the supportings. It was observed by the AO that other various expenditure for example Kirti Care Hospital Rs.74,272/- , Hospital Bills Rs 14,311/- , Medicine Rs 13,760/- , Rajdhani Thali Palace Private Limited Rs.49,977/- , Oliver Bar Rs.10395/- , Juben Wines about Rs.80,000/- , Deepak Wines Shop Rs 81,932/- were not established by the assessee that these are business expenditure and not personal in nature . The copy of remand report was made available to the assessee and the assessee submitted that the purchase of Rolex Watches are for giving gifts and the expenses for Rajdhani Thali Palace Private Limited, Olive Bar and Liquor Bills are expenditure during meetings.

The learned CIT(A) rejected the contentions of the assessee and disallowed expenses of Rs.2,96,000/- incurred for the purchase of Rolex watches as the assessee failed to establish nexus between the people involved in three movies and the gift of Rolex watches to them . Similarly the learned CIT(A) disallowed a sum of Rs.1,02,343/- towards medical expenses(Kirti Care Hospital Rs.74,272/- , Hospital Bills Rs 14,311/- , Medicine Rs 13,760/- ) incurred by ITA 1027/Mum/2014 6

the assessee as the very nature of expenses cannot be for promotion of business and the expenses being personal in nature , the disallowance was confirmed by learned CIT(A) vide his appellate orders dated 16.12.2013 . The learned CIT(A) confirmed the disallowance to the tune of 50% of expenses towards Rajdhani Thali Palace Private Limited Rs.49,977/- , Oliver Bar Rs.10395/- , Juben Wines about Rs.80,000/- , Deepak Wines Shop Rs 81,932/- being entertainment expenses, on the grounds as the assessee is in entertainment industry incurring of such expenditure cannot be ruled out but at the same time personal usage element cannot be ruled out, vide appellate orders dated 16.12.2013 . Similarly, a sum of Rs.2,37,000/- was shown as miscellaneous expenditure which the assessee could not prove to be business expenditure and hence the disallowance was confirmed by the learned CIT(A). While the rest of the disallowance apart from what is discussed above out of the Business Promotion expenses of Rs.20,47,811/- as made by the AO was deleted by the learned CIT(A) vide appellate order dated 16.12.2013 passed by learned CIT(A).

For the other disallowance of expenses on account of electricity expenses, car repair expenses and travelling expenses, the assessee filed written submissions and copies of ledger account which were forwarded by learned CIT(A) to the A.O. for his remand report. The remand report was submitted by the A.O. , wherein the AO observed that the assessee provided details of electricity expenses incurred along with ledger of electricity expenses and the bills for various locations. It was observed by the A.O. from the details and ledgers that the assessee has provided the bills only for Rs. 1,90,910/- whereas the assessee claimed the electricity expenses of Rs. 2,94,954/- and apart from this, these bills payments were made for the assessee’s residential house and not for any office premises. Hence, 50% disallowance of electricity expenses as proposed by the A.O. in the assessment order was considered as reasonable by the AO in the remand report submitted to learned CIT(A).

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It was observed by the AO in remand report that the assessee also provided the details of car repairs along with ledger. The assessee has distributed the total amount between Aparna Motors Rs. 3,28,551/-, Jeffsom Battery Rs.3200/- and Shine Service Rs.13509/-. No other documents or supporting bills were provided by the assessee even in remand report proceedings, from which it is clear that the assessee could not establish that these are expenditure for business purpose and the AO in remand report proceedings proposed to disallow the entire expenditure in the remand report submitted to learned CIT(A). With respect to the travelling expenses, no details were provided by the assessee before the AO in remand report proceedings, hence, this disallowance should be sustained being reasonable was the recommendation of the AO in the remand report submitted before the learned CIT(A).

The copy of the remand report was made available to the assessee. The assessee did not give any submission with respect to the electricity expenses. With respect to the car repair charges, the assessee submitted that the bills were submitted before the ld. CIT(A) which were not submitted before the A.O. With respect to the travelling expenses, no receipts were submitted before the learned CIT(A).

The ld. CIT(A) considered the submissions of the assessee. With respect to the electricity charges, the ld. CIT(A) held that the A.O. stated in the remand report that the 50% disallowance is reasonable. As per the ld. CIT(A) since the assessee produced bills for only Rs. 1,90,910/- as against the claim of Rs.2,94,954/- and also the assessee did not offer any comments against the remand report, therefore, A.O. was directed to allow the electricity expenses to the extent of the bills produced of Rs. 1,90,910/- and the disallowance of balance claim of Rs.1,04,044/- was confirmed by the learned CIT(A) as no ITA 1027/Mum/2014 8

proof was submitted. With respect to the car repair charges, the assessee did not produce any evidence before the A.O. during assessment proceedings, however the bills for incurring such expenditure were furnished by the assessee during the appellate proceedings. Keeping in view that the personal use cannot be ruled out, the ld. CIT(A) held that the disallowance made by the A.O. of Rs. 1,72,630/- being 50% out of the total expenses claimed of Rs.3,45,260/- was considered reasonable and the same was confirmed by the learned CIT(A) vide appellate orders dated 16.12.2013 passed by the learned CIT(A).

With respect to the travelling expenses, no details were provided by the assessee even during appellate proceedings, hence the addition made of Rs. 77,799/- being 50% of the total claim of Rs. 1,55,599/- was confirmed by the learned CIT(A) vide appellate order dated 16.12.2013 passed by the learned CIT(A).

With respect to the other addition on account of income from house property, the ld. CIT(A) observed that the assessee is owner of the following properties:-

Before the ld. CIT(A) , the assessee filed written submissions wherein it was submitted that in the preceding assessment year, the AO has brought to tax actual rent with respect to Pune Office, Goa Property and Mumbai office and no notional rent was brought to tax . It was submitted that Villa Woodstock,

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Andheri, Mumbai is self occupied residential house and annual value shall be Nil as per provisions of the Act . It was further submitted that Bungalow at 91, SVP, Mhada was used as office by the assessee and the ALV shall be Nil. For Bungalow at Lonavala it was submitted that the same was used for story- sittings and in the preceding year, the AO accepted the contention of the assessee. It was also submitted that the properties at Goa and Pune had been used for story-sitting and hence ALV shall be Nil. The assessee submitted that keeping in view his profession of story writing and film direction which requires creative thinking and the assessee has multiple teams working for different projects and hence these premises are used for creative work in serene environment at different locations such as story writing and instead of going to hotels which are very expensive , owned premises are used and hence it was prayed that no additions be made on deemed ALV of these properties. Without prejudice , it was submitted that the rental of residential properties are around 3-4% annually and the additions made @12% per annum on account of ALV is very high. It was also submitted that no enquiries were made by the AO before making additions. The submissions were forwarded to the A.O. for his remand report and the remand report was submitted by the A.O. wherein the AO submitted that in the preceding year the assessee received rent from Pune office, Goa Property and Mumbai office amounting to Rs 7 lacs , while in this year , no rent was received and the claim of the assessee is not genuine.

The Remand Report was made available to the assessee for his comments whereby the assessee submitted his comments that Woodstock Bungalow was used for residential house, while it was also submitted that with respect to the Pune, Goa and Bombay offices, earlier the assessee has arrangement with WFFL for payment of rent but with effect from 01-04-2008 , the arrangement was changed and now WFFL shall not pay any rent for the use of the said premises owned by the assessee for story sitting etc. and the remuneration for ITA 1027/Mum/2014 10

the projects from WFFL shall include the value of use of the premises for story sitting etc and the said WFFL shall pay for creative work only , which is a commercial arrangement between the assessee and WFFL.With respect to Bungalow No. 91 it was submitted that in the assessment year 2008-09, there was a survey conducted against the assessee in the same premises and hence there is no question that the said property was not used for the purpose of office of the assessee.

The ld. CIT(A) after considering the material on record directed the A.O. to verify and hold one of the five properties owned by the assessee as self occupied property of which annual value shall be taken to be NIL as per the provisions of the Act, and while for the rest of four properties owned by the assessee the directions were issued to adopt 8.5% of the total value of the properties as the annual value and to allow the deduction u/s 23 and 24 of the Act, vide appellate order dated 16.12.2013 passed by learned CIT(A).

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shall include rental for these properties which is embedded in the professional fee. There were five properties held by the assessee in Mumbai, Goa,Lonavala and Pune. The ld. Counsel submitted that the assessee is a film director and for doing creative work, these four properties have been used by the assessee for story writing and related creative work. The ld. Counsel submitted that the Bungalow at Andheri,Mumbai is used as self occupied residence of the assessee, hence, the annual value of this property should be treated as Nil. With respect to the other four properties, the annual value should be taken at Nil as the same were used for business purposes by the assessee. The annual value should be treated as per the Scheme of Section 22 & 23 of the Act. The ld. Counsel submitted that for every film, there is an element of continued deep thinking and working on concepts, visualizations, story, scripting and dialogues etc. for a number of days continuously which cannot be done in either home or one's normal office because of disturbances at home/office. Hence, the creative persons and their respective teams go out of Mumbai, stay at quiet hotels and do the basic creative work in serene environment undisturbed. The same is the trend in Hollywood i.e. they go out of normal places of their stay and offices to do creative work. The assessee works on 8-10 scripts at a time and hence hotels prove very expensive and plus there is no privacy. Accordingly for his own creative thinking, the assessee goes to Goa and works in solitude. However whenever there are team of writers then in that case either the team or he along with the teams goes to these locations. The ld. Counsel submitted that the A.O. erred in adding the annual value based upon the cost of the property @12% which was then confirmed /sustained to the tune of 8.5% of the value of property as reasonable expected market rent by learned CIT(A). The ld. Counsel submitted that the A.O. has accepted the actual rent received in the earlier years and in this year the additions have been made although there is no receipt of rent during the instant year under appeal. All the properties are self occupied either for residential purposes or for business purposes and ITA 1027/Mum/2014 12

hence ALV shall be Nil for all the properties was the submissions of learned counsel for the assessee before the Tribunal. He submitted that the authorities below have not examined the claim of the assessee in proper perspective. Without having verified that the property was used for the purpose of business or not, the A.O. proceeded to made the additions. The assessee relied on the decision of the Tribunal in the case of Mr. Vishwanath Acharaya v. ACIT, which was authored by one of us namely Accountant Member, in ITA No. 7976/Mum/2011 for the assessment year 2007-08 vide orders dated 16th December, 2015 and submitted that the assessee’s case is similar to the case of Mr. Vishwanath Acharaya (supra) and the same directions may be given in this case also. The assessee also relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Tip Top Typography (2014) 48 taxmann.com 191 (Bom). The ld. Counsel submitted that the matter may be set aside to the file of the A.O. and the decision of Hon’ble Bombay High Court in the case of CIT v. Tip Top Typography (2014) 48 taxmann.com 191(Bom.) should be followed.

We have observed that the assessee has incurred certain expenses , the deduction of which from the business income earned by the assessee have not been allowed by the authorities below. With respect to disallowance of Business promotion expenses, detailed findings have been given by the authorities below for not accepting the claim of the assessee with respect to ITA 1027/Mum/2014 13

certain components of the Business Promotion expenses. We find that learned CIT(A) has given detailed reasoning for upholding / sustaining the disallowance of gifting of Rolex watches of Rs.2,96,000/- wherein no details were submitted by the assesssee about the persons to whom the same were gifted and its nexus with business of the assessee to have been incurred wholly and exclusively for the purposes of business could not be established by the assessee, similarly for misc expenditure of Rs.2,37,000/- no details were submitted by the assessee and its nexus being wholly and exclusively for the purposes of business could not be established by the assessee. We concur with the finding of learned CIT(A) as we donot find any infirmity in the orders of learned CIT(A) which we uphold as no new evidence/material has been brought on record by the assessee before us to substantiate and justify the claim of the said expenses as business expenses by the assessee, and we confirm the disallowance of expenses to the tune of Rs.2,96,000/- towards purchase of Rolex watches and also for misc expenditure of Rs.2,37,000/- which stood disallowed by us also keeping in view facts and circumstances of the case. We order accordingly.

With respect to medical expenses of Rs.1,02,343/-, the assessee did not submit any details with respect of incurring of the said medical expenses wholly and exclusively for the purposes of business and the disallowance stood confirmed by us also as we donot find any infirmity in the orders of learned CIT(A) and no new evidence/material has been brought on record by the assessee before us to substantiate and justify the claim of the said expenses as business expenses by the assessee .

With respect to the entertainment expenses of Rs.222304/-, we have observed that the authorities below have disallowed 50% of the said expenses on the grounds that personal usage element cannot be ruled out , keeping in view that the same was an ad-hoc disallowance we give relief to the assessee by ITA 1027/Mum/2014 14

upholding / confirming disallowance to the tune of 25% of the total expenditure towards entertainment expenses of Rs.222304/- which in our considered view is reasonable disallowance keeping in view facts and circumstances of the case and balance 25% of the entertainment expenditure of Rs.222304 stood disallowed as in our considered view disallowance of 50% of the entertainment expenses is excessive. We order accordingly.

With respect to the electricity expenses, the assessee has produced bills for only Rs. 1,90,910/- as against the claim of Rs.2,94,954/- and the ld. CIT(A) allowed the electricity expenses to the tune of Rs.1,90,910/- and confirmed the disallowance of the balance amount of Rs.1,04,044/- . We do not find any infirmity in the order of the ld. CIT(A) which we affirm and uphold. We order accordingly.

With respect to the car repair charges, we have observed that the assessee did not produce any evidence before the A.O. during assessment proceedings, however the bills for incurring such expenditure were furnished by the assessee during appellate proceedings before learned CIT(A). Keeping in view that the personal usage cannot be ruled out, the ld. CIT(A) upheld disallowance of 50% of the car repair charges whereby Rs. 1,72,630/- stood disallowed . We have observed that the assessee is an individual and engaged in business as film director and also story writing. The assessee has not produced any log book of the car in relation with the business activities to substantiate usage of car for business purposes . Personal usage element of the car in-fact cannot be ruled out. However, keeping in view the overall facts and circumstances of the case, the disallowance is reduced to 25% of the total expenses towards car repairs incurred by the assessee vis-à-vis disallowance to the tune of 50% of car repair charges upheld by the learned CIT(A), which in our considered view is a reasonable disallowance keeping in view facts and circumstances of the case.We order accordingly.

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With respect to the travelling expenses, no details were provided by the assessee before the authorities below and the addition made of Rs. 77,799/- being 50% of the total claim of Rs. 1,55,599/- by the A.O. was confirmed by the ld. CIT(A). in our considered view, keeping in view facts and circumstances of the case , we donot find any infirmity in the orders of the learned CIT(A) which is quite justified and reasonable which we uphold/sustain .We order accordingly.

With respect to the addition on account of income from house property, we have observed that the assessee owns five properties spread over Mumbai, Pune & Goa. There was no receipt of rent vis-à-vis preceding assessment year wherein there was arrangement with WFFL which stood changed w.e.f. 01-04- 2008 and it is the contention of the assessee that now rental income is embedded in the professional receipt of which no evidence to substantiate the contention is brought on record by the assessee except making an bald statement nor any evidence to substantiate business usage of four premises as contended by the assessee has been brought on record . The assessee claimed that one property at Woodstock Villa, Andheri, Mumbai was a self occupied residential property while the rest of four properties were used for business purposes . We find that the AO has brought to tax income from house property @ 12% of the cost of the property of all the five properties , which was sustained by the learned CIT(A) to the tune of 8.5% of the value of the property with respect to four properties and the learned CIT(A) allowed relief for one property which is being used by the assessee as self occupied residential property for which relevant directions were given to the AO to identify and deem ALV as NIL for the said residential property . The AO did not made any enquiry to identify and estimate prevailing market rental of the properties in the relevant period and the assessee on his part has also not brought on record any material to prove the business usage of four properties

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contended to be used for business purposes except making bald statement. In our considered view, the additions cannot be made based upon the notional rent based on the value of the properties however ALV of the properties is to be brought to tax as per the Scheme of the Act . The A.O. has not conducted any enquiry with respect to these properties to compute income from house properties being ALV in accordance with Section 22 & 23 of the Act and the principles laid down by Hon’ble Bombay High Court in the case of Tip Top Typography(supra) . The assessee on his part has also not brought on record any cogent material / evidences to substantiate its submissions about usage of the properties for business purposes except for making a statement in this regard. The facts in this case are similar to the facts in the case of Vishwanath Acharaya v. ACIT in ITA no 7976/Mum/2011 vide orders dated 16-12-2015 which was authored by one of us(accountant member). Keeping in view the facts and circumstances of the case , we are inclined to set aside and restore the matter back to the file of the A.O. with a direction to decide the issue de novo in accordance with the provisions of Section 22 and 23 of the Act and the principles laid down by the Hon’ble Bombay High Court in the case of Tip Top Typography (supra). Needless to say that the A.O. shall afford proper and sufficient opportunity of being heard to the assessee in accordance with the principles of natural justice in accordance with law. The assessee will be allowed to submit relevant evidences and explanations in his defense which will be admitted by the AO before adjudicating the issue. The assessee is directed to co-operate with the Revenue in set aside proceedings. We order accordingly.

Order pronounced in the open court on 6th October, 2016. ITA 1027/Mum/2014 17

आदेश क" घोषणा खुले "यायालय म" "दनांकः 06-10-2016 को क" गई । (C.N. PRASAD) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER मुंबई Mumbai; "दनांक Dated 06-10-2016 [ व."न.स./ R.K. R.K., Ex. Sr. PS R.K. R.K.

आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant