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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
आदेश ORDER �ी अिमत शु�ला,�या.स :- PER AMIT SHUKLA, J. M.: The aforesaid appeal has filed by the assessee against impugned order dated 19.11.2013, passed by CIT(Appeals) -17, Mumbai for the quantum of assessment passed under section 143(3) for the assessment year 2008-09. In the grounds of appeal, the assessee has raised following grounds:-
Ground No :01 “1. That on the facts and circumstances of the case the order of the Commissioner of Income Tax (CIT)(Appeals) is bad in law. And CIT Appeal was not justified in confirming disallowance made by the Assessing Officer regarding claim of expenses on the ground there is no business activity all expenses mentioned hereunder must be allowed as business expenses 2 M/s Kalati Construction P Ltd S. Administration Expenses Amount (Rs.) No. 1 Bank Charges 842.86 2 Brihan Mumbai Mahanagar Palika (BMC Tax) 10,24,028.00 3 Cleaning Expense 8,000.00 4 Donation 11,000.00 5 Directors Remuneration 18,67,012.00 6 Electricity Expenses 79,260.00 7 Electrical Expense 9,120.00 8 Legal Fees 55,000.00 9 Keyman Insurance 2,40,000.00 10 Membership Fees 1,26,462.00 11 Refreshment Exps. 76,972.00 12 Service Tax 6,28,962.00 13 Professional Fees 22,472.00 14 Repairs & Maint. Buildg 99,351.67 15 Roc Fees 8,500.00 16 Salary A/c 2,08,000.00 17 Security Expense 1,17,182.00 18 Sundry Expense 3,100.00 19 TDS on Salary 1,73,544.00 20 Transport charges 33,716.00 21 Travelling Exp. 3,24,325.00 22 Water Charges 35,975.00 Ground No.:02 Commissioner of Income Tax Appeal has erred both in facts & in laws and loss under the head profits or gains from business or profession must be allowed to be set-off against income from House Property to determine true income of assessee.
Ground No.:03 Commissioner of Income Tax Appeal has erred in treating advances given during the business as deemed dividend under section 2(22)(e) of the I.T. Act”.
The brief facts as culled out from the order of the AO as well as CIT(A) are that, the assessee had declared loss from business at Rs.35,52,768/-. The loss was mainly on account of claim of various expenses. The assessee had stated to have engaged in the business activity of construction and letting out of immovable properties. In the return of income, the assessee had shown “income from house property at Rs.1,48,87,067/- and ‘business loss’ of Rs.35,52,768/-. Apart from that, the assessee has also shown long-term-capital-gains on sale of property at Saki Naka of Rs.4,98,071/-. The AO, so far as capital-gain shown from the sale of property is concerned, treated the said gain as business income 3 M/s Kalati Construction P Ltd Rs.15,03,900/- from the said transaction as business income. On perusal of the accounts, the AO further noted that assessee had shown loss from business at Rs.35,52,768/- whereas, the assessee had not carried out any business activity. In the questionnaire/ query raised, the AO asked for supporting documents with regard to various expenses debited to the profit and loss account and the purpose for the business. In response, the assessee gave its explanation/submissions; however, the Ld. AO noted that the assessee has only given general arguments and no evidences and justification for business with regard work done by the Directors, electricity expenses and other expenses like payment to security guards, travelling expenses, etc. was given by the assessee. He noted the travelling expenses by the directors have been taken for personal trips to Goa and Dubai and there was no nexus at all for business purpose. The water charges, electricity expenses are also not related to the business as assessee has merely let out the property. After detailed discussion and analysis the AO disallowed the claim of business loss of Rs.35,52,768/- by the assessee.
Before the CIT(A), the assessee’s case was that the main object of the company includes carrying on the business of construction and other incidental activities. Other main object was investment in property and sale of property. During the year, the assessee has affected the purchase of raw material and incurred expenses on ‘lifts’ which was capitalized in the fixed assets. The cost of construction was included in the fixed assets, which was transferred to profit and loss account. Since premises are given on let out basis, therefore, company find it advantageous on commercial ground to sell to the customers with the tenants. Subsequently, before the CIT(A), the assessee took another stand that it was not a case of cessation of business activity rather there was a temporary ‘lull’ in the business, therefore, the expenses claimed could not have been disallowed and consequently leading 4 M/s Kalati Construction P Ltd to disallowance of claim of loss. The Ld. CIT(A) noted that the assessee in real sense has not done any business activity for last 2-3 years as well as much after the AY 2008-09 also. There was no temporary ‘lull’ in the business of the construction rather the assessee has changed its business model and is only deriving income from renting of the property which is shown and assessable as “income from house property” or as income from other sources. The major expenses debited are directors’ remuneration which is Rs.18,67,012/- and travelling expenses of directors of Rs.3,24,325/-. The relevant observations and finding of the ld. CIT(A) for dismissing the assessee’s contention are reproduced hereunder for the sake of ready reference:
“I have carefully considered the submissions and contention of Ld. AR of the appellant and also carefully gone through the facts and explanation given by the Ld. AR of the appellant as well as the Ld. AO. I find that the appellant is in the business of construction activity and letting out of the immovable property. It is a matter of fact that the appellant during the course of the assessment proceedings before the Ld. AO stated that it sold the property at Saki Naka on 25.08.1990 from one vendor name Hema Chandu Jani for a consideration of Rs.4,51,000/- and paid a stamp duty of Rs.45,100/-. This property was sold on 30.05.2007 and the appellant offered a Long Term Capital Gain of Rs.4,98,071/-. The Ld. AO without assigning any reasons treated this Capital Gain of Rs.4,98,071/-. The Ld. AO without assigning any reasons treated this Capital Gain as income from business and the Ld. AR of the appellant during the course of the assessment proceedings has also agreed to the said addition and did not raise any grounds of appeal in this context. Further the fact of the matter remained that the said property was held as investment by the appellant and there is nothing on the record to suggest that the property was held as stock in trade. xxx 5 M/s Kalati Construction P Ltd However, in real sense of term the appellant has not done any business activity for the last 2 to 3 years proper to the assessment y ears as well after this. As such there appears no temporary lull in the business of the construction or the building thereof, but it seems that the appellant has changed its business model and is deriving income from rentals of the property which is shown as income from house property and Other Sources. The short point which arises for consideration in the instant case is the claim of various expenditures made by the appellant in respect of so called its business operation. The major expenses are directors remuneration which is Rs.18,67,012/- and the travelling expenses Rs.3,24,325/-. The expenditure are stated to be incurred as the directors of the company had gone abroad namely to Dubai and to other places to expand the business of the appellant. It stated that proposal of buying and selling are very complex and since there was a temporary lull in the Indian market the directors have gone abroad to explore the possibility of extending the business abroad. Therefore, the appellant stated that the business expenditure claimed should be allowed to be set off against the income from the house property as the appellant had to maintain its corporate identity. I find that the argument of the ld. AR of the appellant are not only misleading but also devoid of any merit. It is a matter of fact that the appellant is not dong any business for the last 2 years and the same situation continues in the future also. The fact that the appellant is earning a sizeable amount of income from the rents is apparent on the face of the record. The appellant is therefore, trying to claim the personal expenditure in the guise of income from business knowing fully well that no business activity is being undertaken nor is there any intention to start one. The various expenditure such as the expenditure on directors remuneration, travelling of directors are expenditure incurred on self alone and has no connection with the 6 M/s Kalati Construction P Ltd business . In the guise of business expenses, the appellant is trying to claim the same against the income from House Property. The entire expenditure is not wholly and exclusively for the purposes of business or for maintaining the corporate identity as it’s not the bare minimum expenses. But on a lavish side. The expenditure on electricity water charges are of the accommodation which the appellant had given on rent and earning income there from. The expenditure on gymkhana is shown as administrative expenses which in no way related to business as in fact there is no business activity and the argument of the Ld. AR of the appellant that the said expenditure are for the purposes of maintaining a corporate identity is also a argument for the sake of argument in the sense that the purpose of expenditure is personal and for not business. Therefore, I do not find any infirmity in the order of the Ld. AO that the expenditure in questions are not for business purposes and the loss there from cannot be allowed to be set off against the income from House Property. The appellant is resorting to colourable devices to reduce its taxable income and is trying to claim personal expenses or claiming expenses which are not allowable against the income from House Property. Therefore, the Ld. AO is directed to treat the income from long term capital gain as long term capital gain only and disallow the expenditure. These grounds of appeal are thus dismissed”.
4. Before us, the Ld. Counsel submitted that, once the AO himself has assessed business income of Rs.15,03,900/-, then there was no occasion to disallow the various expenses which was claimed in the profit and loss account on the ground that no business activity has been carried out. So far as travelling expenses are concerned, the same were duly authorized by a resolution and completely related to business purpose only. The Directors of the company were also managing finance, 7 M/s Kalati Construction P Ltd administration, supervisory work and other activities. Since assessee was a corporate entity formed as a company, therefore, these expenses were incurred in normal course and are essential for maintaining corporate entity. He further submitted that in the AY 2010-11, the AO has assessed business income and has also allowed most of the expenses debited to profit & loss account in the order passed under section 143(3). In the said order, AO has disallowed certain expenses by allocating the same for earning of rental income which is assessable as income from house property. Further, in AY 2007-08, the Tribunal has accepted the fact that there was a temporary lull in the business and claim of certain expenditure necessary for the continuance of the business has to be allowed. However, the matter was set aside by the Tribunal to the file of the AO for verification of the genuineness of the expenses vide order dated 27.02.2015 in ITA No.7748/Mum/2011. In line with the assessment order for AY 2010-11, the Ld. Counsel also filed bifurcation of expenses which aggregated to Rs. 37,87,907/- and expenses relating to income from House Property at Rs.13,64,917/-.
5. On the other hand, Ld. DR strongly relied upon the order of the Ld. CIT(A) and stated that once, it is a fact that no business activity has been carried out by the assessee, then no expenses debited in the garb of business can be allowed under section 37. Not only that, specific instances have been pointed out by the AO & CIT(A) where the expenses incurred by the assessee were not for the business purpose. Thus, no expenses should be allowed and consequently the claim of business loss.
We have heard the rival contentions and also perused the relevant findings given in the impugned orders as well as material placed before us. The assessee’s main source of income has been “income from house property” which has been separately assessed under section 22. The business loss of Rs.35,52,768/- has been 8 M/s Kalati Construction P Ltd AO as well as by the CIT(A) mainly on the ground that, no business activities have been carried out by the assessee. Further there is no factual finding by CIT(A) which has not been rebutted by any material on record to show that either in the immediate earlier years or in the subsequent years the assessee has continued or carried on any business activity, therefore, the theory of ‘temporary lull’ in the business cannot be accepted. Before us ld. Counsel has much harped upon that, firstly, the Tribunal in AY 2007-08 has accepted that there was a temporary lull in the business and, therefore, expenditure needs to be allowed; secondly, in subsequent years, (especially in AY 2010-11) the AO in the order passed under 143(3) has accepted the business income and also allowed some of the expenses except that he has disallowed certain expenses which according to him was attributable for earning of income from house property like, maintenance for ‘lift’, BMC charges, repair and maintenance of building, security expenses etc.; lastly, for maintaining the corporate entity, certain expenses have to be allowed. So far as ld counsel’s first contention that there is a temporary lull in the business, that is, during the intervening period, there was no business activity and in subsequent year certain business activities relating to construction have started has not been established or shown before us. The assessee’s income all throughout has been mostly derived from leasing/renting out the properties. In AY 2010-11 also in which year assessment order has been passed under section 143(3). The AO has merely reduced the claim of business loss from Rs.58.80 lakhs to Rs.31.26 lakhs after disallowing expenses attributable to renting of the properties. There is no observation or finding of fact based on any material that the assessee has carried out any sort of business activity. In AY 2007-08 also the Tribunal has restored the matter to the file of the AO to examine the genuineness of the expenses claimed vis-à- vis the maintenance or sustenance of the business for carrying on 9 M/s Kalati Construction P Ltd the business activities. The relevant observation of the Tribunal is as under: 4.1 After perusal of the record, we find that the claim of the assessee of carrying out business activity has been accepted in subsequent assessment years. Even, if we presume that no business activity was carried out during the year, even in that stage, because of the temporary lull due to certain circumstances, the claim of expenditure which was necessary for the continuity of the business, cannot be disallowed. However, we find that the AO has not applied his mind as to the genuineness of the expenses. Hence, we restore this issue to the AO for the limited purposes of the verification of the incurring of expenses for the maintenance/sustenance of the business or for carrying out business activity and thereafter to allow the expenses found actually incurred by the assessee for the said purpose”.
From the above it is clear that the Tribunal has directed the AO to examine the genuineness of expenses carried out for the business purpose. For claiming an expense under the head ‘business and the profession, the onus is wholly on the assessee to show that the expenses debited in the profit and loss account were wholly and exclusively for the purpose of the business or for commercial expediency. Such an onus has to be discharged by producing relevant evidences and material on record vis-à-vis business carried out by the assessee. Here in this case, huge expenses have been claimed by the assessee under various heads without showing any co-relation with the nature of business carried out and also its relevance or justification for the purpose of business. Some of the expenses apparently are of personal in nature which has been debited under the head “business and profession”, as pointed out by the Ld. AO as well as CIT(A) which has not been 10 M/s Kalati Construction P Ltd rebutted by any cogent material before us. Though we accept the other contention of the ld. Counsel that for maintaining a corporate status certain expenses are required, however, most of the expenses which has been debited by the assessee needs to be decided on the ground of commercial expediency and whether they have been expended wholly and exclusively for the purposes of business or not. Hence, we are of the opinion that, this matter should be restored back to the file of the AO to examine the nature of expenses claimed by the assessee and its genuineness thereof from the point of view of commercial expediency or has been incurred/expended wholly and exclusively for the business purposes. AO should on some reasonable basis allow some expenses essential for maintaining corporate status. Thus, ground no. 1 is treated as allowed for statistical purposes.
So far as the issue relating to ground No.2, it appears that, there is adjudication or finding by the AO and CIT(A) and it is also not borne out form from the impugned orders that such a ground has been taken before the both the lower authorities. Thus, the issue raised in ground No.2 is also set aside to the file of the AO for fresh adjudication.
The issue raised in ground No.3 has not been pressed before us, because the Ld. CIT(A) has only given direction to the AO to consider the deemed dividend in the hands of the Directors. Accordingly, ground No.3 is treated as dismissed as not pressed.
In the result, appeal of the assessee is treated as partly allowed for statistical purposes.
11 M/s Kalati Construction P Ltd Order pronounced in the open court on 20th May, 2016 Sd/- Sd/- (राजेश कुमार) (अिमत शु�ला) लेखा सद�य �याईक सद�य (RAJESH KUMAR) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 20th May, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT -17, Mumbai. 4) The Commissioner of Income Tax-8, Mumbai. 5) ” �ितिनिध िवभागीयए“, अिधकरण अपीलीय आयकर, मुंबई/ The D.R. “A” Bench, Mumbai. 6) गाड�फाईल\ Copy to Guard File. आदेशानुसारBy Order / / True Copy / /