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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI RAMIT KOCHAR
आदेश / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER:
These two appeals filed by the assessee company and the Revenue and also Cross objection filed by the assessee company arising out of the Revenue appeal are directed against the orders of the learned Commissioner of Income Tax(Appeals)-6, Mumbai (Hereinafter called “the CIT(A)”) dated 05-02-2013 pertaining to the assessment year 2009-10. These two appeals and the C.O. were heard together and are disposed of by this common order for the sake of convenience and brevity.
First, we shall take up assessee company’s appeal in Tribunal:-
“Being aggrieved by the order dated 05.02.2013 passed by the learned Commissioner of Income Tax (Appeals)-6, Mumbai [CIT (A)] u/s. 250 of the Income-tax Act, 1961 [" Act"], your appellant prefers this appeal, among others, on the following grounds of appeal, each of which is without prejudice to, and independent of, the other:
1. Disallowance of Business Expenditure: 1.1 On the facts and in the circumstances of the case, and also in law, the learned CIT(A) ) erred in partially confirming the disallowance ITA 2543/M/13 & 3 & C.O. 156/Mum/2014 made by the learned AO of 74.82% of all the expenses (including depreciation) debited to the profit & loss account in the ratio of non- business receipts to the total receipts credited to the profit & loss account of the appellant.
1.2 On the facts and in the circumstances of the case, and also in law, the learned CIT(A) failed to appreciate and ought to have held that the AO having accepted that the appellant carried on the business during the year, there was no merit in disallowing the expenses on proportionate basis merely because the activity was negligible.
1.3 On the facts and in the circumstances of the case, and also in law, the learned CIT(A) failed to appreciate that the appellant indirectly carried on the training business in a different mode through its subsidiary company and, therefore, the disallowance of expenses was not justified.
1.4 On the facts and in the circumstances of the case, and also in law, the learned CIT(A) failed to appreciate that even otherwise the expenses required to maintain corporate status of the appellant ought to have been allowed.
In view of above, your appellant prays that the disallowance sustained by the learned CIT(A) be deleted.
The Revenue has raised the following grounds in the memo of appeal 3. filed with the Tribunal:-
“On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:
The order of the CIT (A) is opposed to law and facts of the case.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition of notional rental income of Rs.50, 10,563/- holding that the property has not been actually let out without appreciating the fact that the assessee had allowed its subsidiary company to use the premises.
(a) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition rental income of Rs. 1,08,08,885/- received from Ms. Walchand & Co. Pvt Ltd., holding that the said company has further let out the property to various parties and the rental income has been assessed in the hands of Ms. Walchand & Co Pvt. Ltd., thereby ignoring the provision of sec 23(1)(a) of the I.T. Act.
ITA 2543/M/13 & 4 & C.O. 156/Mum/2014
4. For these and other grounds that may be urged at the time of hearing, the decision of the CIT (A) may be set aside and that of the AO restored.”
The Brief facts of the case are that the assessee company’s activities during the year are to invest, acquire, hold and exchange shares, debentures, mutual funds and bonds. The assessee company also earns income from rental properties. The learned Assessing Officer(Hereinafter called “the AO” ) observed that the assessee company has earned the following incomes during the financial year under consideration:-
i) Dividend Rs. 9,00,919/- ii) Interest income Rs. 19,47,436/- iii) Profit from sale of investment Rs. 34,356/- iv) Income from property Rs. 68,41,067/- v) Misc. income Rs. 3,30,741/- vi) Interest on I.T. refund Rs. 19,94,073/- vii) Prior period income Rs. 9,49,219/- viii) Provision for expenses w/back Rs. 1,26,199/- ix) Profit on sale of assets Rs. 1,84,852/- In the profit and loss account, the assessee company has shown net profit of Rs. 29,20,531/- after claiming the following expenses against the income earned:- i) Employee’s remuneration & Other expenses Rs. 76,19,053/- ii) Loss on sale of investments Rs. 3,59,065/- iii) Interest Rs. 4,49,207/- iv) Depreciation, amortization and impairment Rs. 19,60,006/- As per the computation of total income filed by the assessee company with the return of income, the assessee company has claimed business loss of Rs. 41,07,788/- and depreciation loss of Rs. 20,30,368/- and set off the losses against the income from house property of Rs. 46,78,892/-. The A.O. asked the assessee company to furnish the activity-wise profit and loss account. In reply, the assessee company submitted that it is not practical to allocate expenses to all the three types of income/activities(investment, rental and other income) and hence it is difficult to prepare activity wise profit and loss ITA 2543/M/13 & 5 & C.O. 156/Mum/2014 account. The assessee company submitted that most of the expenses are common in nature and the direct expenses attributable to property income are identified and disallowed in the computation of income filed by the assessee company with return of income filed with the Revenue. Similarly, disallowance of the expenditure was offered u/s 14A of the Act which takes care of indirect expenses attributable to exempt income as per the statutory Rule. The assessee company submitted that the assessee company was the holding company of the then unified ‘Walchand Group’ of companies, with thrust on investment and financing activity. With the split of Walchand group over the years, the assessee company focused mainly on financing business, including leasing , hire purchase, inter-corporate financing and investment activity. The assessee company in October, 2003 diversified into Dale Carnegie training business(in short “ DC-Business” )as a major segment and the financing business took back seat , due to the then prevailing difficult market conditions and the assessee company gave up its NBFC status in October 2006. The assessee company also submitted that up to the assessment year 2008-09, the assessee’s company business consisted of training business and financing business. The training business was transferred to the subsidiary company in the financial year 2007-08, however, that did not have any impact on the financing business. The assessee company having appointed Ms. Pallavi Jha as Managing Director and Mr. Sanjay Jha as the Executive Director of the assessee company for a term of three years w.e.f. 27th July, 2007 on a monthly salary of Rs.2,00,000 and Rs.1,80,000/- respectively which was duly approved by the Board of Directors and the shareholders of the assessee company. When the afore-stated appointments were made , the assessee company was itself carrying on the business of DC-Business. After obtaining the shareholder’s approval, the assessee company transferred the DC-Business to a newly formed subsidiary company viz. Walchand TalentFirst Ltd.(in short “WTFL”) on a going concern basis w.e.f 24.10.2007 and post transfer of the assesseee company business, ITA 2543/M/13 & 6 & C.O. 156/Mum/2014 the assessee company became the holding company of WTFL. The assessee company submitted that both these afore-stated Directors were the Promoters of the DC-Business which was initially established by the assessee company and later transferred to WTFL, a 100% subsidiary company for certain strategic business objectives. At that time, the assessee company had a very ambitious business plan of setting up Finishing School in Bangalore as part of its training business which needed substantial funds and in order to procure investments for this venture, private equity was considered as the most favoured source of finance. For this purposes, the assessee company took strategic decision to transfer the DC-Business to WTFL. However, the promoters continued to support this DC-Business which is now carried by WTFL. However, due to certain unforeseen circumstances, the finishing school’s ambitious project in Bangalore could not materialize and the entire purpose of transferring the DC-Business to the subsidiary did not yield the expected results. Accordingly the assessee company reversed its earlier decision and merged WTFL with itself w.e.f. 1-4-2009 and thus brought back the DC-Business into its own fold as was being carried on prior to its transfer to WTFL from 24/10/2007 to 31/03/2009 while during this intervening period the business was indirectly carried on by the assessee company through the subsidiary company WTFL for the compelling business reasons. The assessee company submitted that in the previous year 2008-09 relevant to the assessment year 2009-10, the DC-Business was carried on by the WTFL and consequent to this business restructuring, the Directors’ remuneration was substantially reduced in April, 2008 and aforesaid two Directors were also appointed as the working Directors in WTFL, from where also they drew remuneration, apart from some remuneration from the assessee company. The remuneration paid to these Directors during the financial year 2008-09 from both these companies was as under:-
ITA 2543/M/13 & 7 & C.O. 156/Mum/2014 Name of the Director Designation Amount(Rs. Amount(Rs. Total (Rs in In lacs) In lacs) WTFL lacs) assessee company Ms. Pallavi Jha Managing 14.59 21.58 36.12 Director Mr. Sanjay Jha Executive 14.46 21.53 35.99 Director 29.05 43.06 72.11 The assessee company submitted that the aggregate remuneration drawn by these two Directors from the assessee company and from WTFL was almost the same as it was drawn during the preceding year. The assessee company submitted that during the year under consideration, the assessee company carried on the financing activity besides acting as the group holding company. The assessee company has earned interest income of Rs. 19,47,436/- on the inter-corporate deposits and other loans, which has always been assessed as business income in the past several years. It was submitted that the remuneration paid to these Directors was for the purpose of business, the expenses should be allowed despite the fact that the DC-Business was transferred to the subsidiary company WTFL. The assessee company submitted that the assessee company has deep interest in its subsidiary company. In support, the assessee company relied on the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC). It was further submitted that the assessee company is a public limited company listed on the Bombay Stock Exchange, the directors had to perform certain management functions under various statutes/regulations, listing regulations under the SEBI Act and the mandatory corporate governance provisions etc, even though the DC-Business was transferred to the subsidiary company. The assessee company submitted that the expenditure were incurred for the purposes of the business that is carried on by the assessee company. The assessee company relied upon the decision of Hon’ble Supreme Court in the case of Rajendra Prasad Moody 115 ITR 519(SC).
ITA 2543/M/13 & 8 & C.O. 156/Mum/2014 Without prejudice, the assessee company submitted that despite lull in the business or no business activity, still the expenses that are necessarily to be incurred in order to maintain corporate entity are to be allowed as business expenditure The A.O. after considering the submissions of the assessee company held that the assessee company despite the fact that the DC- Business was transferred to the subsidiary company WTFL has not correlated and provided the breakup of expenses incurred against income taxable under various heads and the assessee company has justified the claim of expenses incurred to earn income taxable under various heads. on perusal of the audited annual accounts of the assessee company , the A.O. observed that the assessee company has earned income taxable under various heads of income as under:- Sr No. Particulars of income Amount of Percentage income Business income 1 Interest on loan and inter-corporate 19,47,437/- deposits Misc. income 3,30,741 2 3 Prior period income 9,49,219/- 4 Provision for expenses written back 1,26,199/- TOTAL 33,53,596/- 25.18% Income from property 68,41,067/- 1 68,41,067/- INCOME FROM HOUSE 51.40% PROPERTY 1 Profit from sale of investment 34,356/- 2 Profit from sale of assets 1,84,851/- CAPITAL GAIN 2,19,207 1.65% 1 Dividends 9,00,919/- Interest on Income tax refund 19,94,073 2 28,94,992 INCOME FROM OTHER 21.75% SOURCES The A.O. held that the rental income is to be taxed under the head ‘income from house property’ and deduction as per section 24 of the Act is allowable. Similarly, the dividend incomes, interest on income tax refund are to be taxed under the head income from other sources while the profit on sale of assets ITA 2543/M/13 & ITA No. 3527/M/13 9 & C.O. 156/Mum/2014 and profit from sale of investment are in the nature of capital gain taxable under the head capital gain. Only the interest on loan and inter-corporate deposit, miscellaneous income, prior period income and provision for expenses written back are to be taxed under the head “Business Income” which shows that the assessee company is not actively engaged in any business activity. It was also observed by the A.O. that from the assessee company’s premises, WTFL (a related party) is carrying on its business and have shown gross receipts of nearly about Rs. 12 crores. The A.O. further observed that the assessee company has claimed almost all expenses under the head business income except disallowing expenses related to property of Rs. 1,18,422/- and disallowance of expenses of Rs. 1,15,621/- in relation to the exempt income. The assessee company has claimed expenses of Rs. 1,01,53,268/- under the head business , out of total expenses of Rs. 1,03,87,331/- and the same works out to 97.74% of expenses. Similarly, the assessee company has earned gross business income of Rs. 33,53,596/- which works out to 25.18% of total receipts. The A.O. held that the assessee company has opted to claim all expenses in relation to various heads of income under the head business only which has resulted into huge and disproportionate claim of expenses under the head business. The assessee company has disallowed a sum of Rs. 1,18,422/- towards property expenses and claimed a sum of Rs. 20,05,239/- as deduction u/s 24 of the Act. Accordingly, the A.O. concluded that the assessee company’s claim of expenses under the head business is exorbitant, excessive and unjustifiable and the expenses were allowed amounting to Rs. 26,15,530/- (25.18%) against the business income of Rs. 33,53,596/- (25.18%) and the remaining expenses amounting to Rs. 77,71,800/- were disallowed and added back to the total income of the assessee company vide assessment order dated 29.12.2011 passed by the AO u/s 143(3) of the Act.
ITA 2543/M/13 & 10 & C.O. 156/Mum/2014 5.Aggrieved by the assessment orders u/s 143(3) of the Act dated 29.12.2011 passed by the A.O., the assessee company preferred an appeal before the CIT(A).
Before the CIT(A), the assessee company submitted that the A.O. has accepted that during the relevant year the assessee company has carried on business though the activity was not substantial and similar issue had come up in the case of the associate company of the assessee company M/s Walchand & Co. Pvt. Ltd. for the assessment year 2004-05 whereby the A.O. has made similar disallowance of expenses proportionately and the CIT(A) vide his order dated 22-12-2008 rejected the A.O.’s stand and allowed the expenses except disallowances u/s 14A of the Act and the Revenue did not file the second appeal and thus accepted the decision of the CIT(A). The assessee company submitted that it gave the details of the business being carried out by it and the remuneration paid to the directors was for the purpose of business. In support, the assessee relied upon the decision of Hon’ble Apex Court in the case of S.A. Builders vs. CIT, 288 ITR 1 (SC). The assessee company further submitted that the assessee company is continuing doing the business activity and has not ceased to do business upon transfer of DC business to WTFL by referring to various judgments. The assessee company submitted that the assessee company had already disallowed Rs. 40,01,283/- and 74.82% of the same i.e. Rs. 29,93,759/- is a double disallowance. The CIT(A) after considering the submissions made by the assessee company observed that the assessee company has transferred its DC-Business to WTFL , its subsidiary in October, 2007 and the business activity of the assessee company during the year was practically negligible and was limited to earning of interest income on inter-corporate deposit which has been assessed by the A.O. as the business income of the assessee company. For computing the business income, the expenditure wholly and exclusively incurred for the purpose of business is allowable and majority of ITA 2543/M/13 & 11 & C.O. 156/Mum/2014 the expenses of the assessee company cannot be treated as incurred wholly and exclusively for the purpose of the business. Accordingly, the CIT(A) held that the assessment order passed u/s 143(3) of the Act by the A.O. is found to be extremely reasonable and valid and the action of the AO was confirmed by the CIT(A) vide orders dated 05.02.2013. Regarding the assessee company’s contention that it has itself disallowed Rs. 40,01,283/- and 74.82% of the same i.e. Rs. 29,93,759/- is double disallowance is found to be valid for which the CIT(A) directed the A.O. to verify the assessment record and delete the double disallowance vide orders dated 05.02.2013.
Aggrieved by the order dated 05.02.2013 passed by the CIT(A), the assessee company is in appeal before the Tribunal.
The ld. Counsel for the assessee company submitted that the assessee company is carrying on the business which is continuing , although now the business of financing is meager. The ld. Counsel reiterated the submissions as made before the authorities below which are not repeated for the sake of brevity. The ld. Counsel for the assessee company submitted that the A.O. has allowed business expenses to the extent of 25.18% based upon the proportion of the business income earned by the assessee company in comparison to the total income. The ld. Counsel for the assessee company drew our attention to the orders of the A.O. into the manner in which the AO has apportioned the expenses and the income as under:-
Sr No. Particulars of income Amount of Percentage income Business income 1 Interest on loan and inter-corporate 19,47,437/- deposits Misc. income 3,30,741 2 Prior period income 9,49,219/- 3 4 Provision for expenses written back 1,26,199/- ITA 2543/M/13 & 12 & C.O. 156/Mum/2014
TOTAL 33,53,596/- 25.18% 1 Income from property 68,41,067/- INCOME FROM HOUSE 68,41,067/- 51.40% PROPERTY 1 Profit from sale of investment 34,356/- 2 Profit from sale of assets 1,84,851/- CAPITAL GAIN 2,19,207 1.65% Dividends 9,00,919/- 1 Interest on Income tax refund 19,94,073 2 INCOME FROM OTHER SOURCES 28,94,992 21.75% Sr. Particulars Amount (Rs) Percentage No. 1 Total receipts 1,33,08,862/- - 2 Business receipts 33,53,596/- 25.18% 3 Total expenses 1,03,87,331/- 4 Proportionate allowable business 26,15,530/- 25.18% expenses 5 Disallowance of expenses(4-3) 77,71,800/- 74.82% The ld. Counsel also drew our attention to the fact that the salary expenses during the impugned assessment year was to the tune of Rs. 31.86 lacs while in the immediately preceding year, the same was Rs. 365.88 lacs. The ld. Counsel submitted that the DC-Business was transferred to the new subsidiary company WTFL and hence the employees have been shifted to the said company and salary mainly constituted of two Directors Ms. Pallavi Jha and Mr. Sanjay Jha, who were continued to render their services to the assessee company as the assessee company is a listed company and several functions have to be performed under various statutes/regulations, while they were getting Rs. 72.11 lacs in aggregate , out of which Rs. 43.06 lacs has been paid by WTF while Rs. 29.05 lacs was paid by the assessee company . The total salary paid to Directors is same as in the preceding year but due to transfer of DC-Business, the salary has been transferred to subsidiary company WTFL. Thus, the assessee company contended that these expenses should be allowed as the assessee company is still continuing the business and being a listed company, it has to do several regulatory and corporate ITA 2543/M/13 & 13 & C.O. 156/Mum/2014 compliances and the mandatory corporate governance provisions etc. The ld. Counsel submitted that controlling the subsidiary company’s functions is the most important role for the Directors of the company and though the DC- business was transferred, it has no impact on the assessee’s corporate entity, as a holding company and its existence did continue notwithstanding the transfer of the DC business. There is no dispute by the A.O. that the business is continuing. The assessee company relied upon the decision of Hon’ble Supreme Court in the case of S A Builders Limited(supra) and submitted that the ratio of the said decision is directly applicable to the case of the assessee company as the assessee company has deep interest in the subsidiary company and investments are made based on commercial expediency. Accordingly, the ld. Counsel for the assessee company prayed that the expenses should be allowed as the assessee company is carrying on its business.
The ld. D.R., on the other hand, submitted that the assessee company is not carrying on any business and business is being carried on by the subsidiary company as the premises are same and the employees must also be same. The assessee company has earned meager income of Rs. 33.53 lacs and the A.O. has rightly disallowed the expenses proportionately.
In the rejoinder, the ld. Counsel for the assessee drew our attention to the assessee company’s paper book filed with the Tribunal page 112 & 113 wherein the list of the employees of the assessee company and of WTFL were given , to show that the employees are different for both the assessee company and WTFL.
We have considered the rival contention and also perused the material available on record. We have observed that the assessee company was earlier carrying on the business of training and financing while the business of ITA 2543/M/13 & 14 & C.O. 156/Mum/2014 training was transferred to the subsidiary company namely WTFL w.e.f. 24.10.2007 , which was later re-transferred to the assessee company w.e.f 01- 04-2009 . The employees of the assessee company were also shifted and the business was also shifted to the subsidiary company WTFL but the assessee company continued carrying on the business of financing. The AO has accepted that the assessee company is carrying on business during the previous year relevant to the assessment year 2009-10. The assessee company has voluntarily disallowed the expenses which are directly relatable to income from house property and also exempt income u/s 14A of the Act. The employees have also been shifted to the new company and the salary expenses have also come down to the tune of Rs. 31.86 lacs for the year ending 31-03-2009, against Rs. 365.88 lacs for the year ending 31-3-2008. We have observed that the assessee company is a listed company and the assessee company had to perform certain corporate , regulatory , management and compliance functions under various statutes/regulations like Companies Act, listing regulations under the SEBI Act , stock exchange compliances and the mandatory Corporate Governance provisions etc. for which the services of the staff is retained and for doing other business which is carried on by the assessee company. The assessee company has stated to have invested in the subsidiary company WTFL keeping in view the commercial expediency. Thus, it cannot be said that the assessee company is not engaged in carrying on the business. It has voluntarily disallowed expenses directly relatable to the property income and exempt income u/s 14A of the Act . The AO has disallowed the expenses in proportion to various streams of income earned by the assessee company considering the expenses as common expenses. In our considered view , the expenses cannot be disallowed in the manner as was done by the AO unless the AO bring on record cogent material and evidence to substantiate that the expenses claimed by the assessee company are not attributable to the business carried on by the assessee company and the disallowance carried on by the assessee ITA 2543/M/13 & ITA No. 3527/M/13 15 & C.O. 156/Mum/2014 company are not correct . The appeal of the assessee company to this extent is accepted and allowed and we order deletion of addition of Rs.77,71,800/- as made by the AO and confirmed by the CIT(A). We order accordingly.
In the result, appeal of the assessee company is allowed.
ITA No. 3527/Mum/2013 (Revenue’s appeal)
13 The brief facts relating to the issue involved in this appeal are that the A.O. on perusal of the schedule ‘Ó’ accounting policies and notes forming part of the accounts for the year ended 31-03-2009 observed that Note No. 4(D)(xix) mentioned that the premises was given for use to WTFL without charging rent for next few years. The assessee company was asked to explain as to why no rent was charged from WTFL . The assesse company submitted that WTFL is a wholly owned subsidiary company of the assessee company and the assessee company did not provide an ear marked area to this subsidiary company. The assessee company has allowed the subsidiary company to share common office facilities/infrastructure for which no service charges were charged out of commercial expediency by the assessee company from WTFL as the same was at nascent stage of its operations. It was observed by the A.O. that the assessee company has occupied the area of 4343 sq. ft. for its own business and the subsidiary company in the building namely Construction House at 1st Floor. The A.O. rejected the contention of the assessee company by referring to Section 22 of the Act and held that any portion of the property let out to anyone , then said property is chargeable to tax under The Income Tax Act,1961(hereinafter called “the Act”) In the assessee company 's case, the assessee company has let out the premises to subsidiary company without charging any rent, therefore Section 22 of Act gets attracted in assessee company's case. The A.O. observed that the assessee company is not actively engaged in any business activity and WTFL ITA 2543/M/13 & 16 & C.O. 156/Mum/2014 is actively engaged in the training business. The assessee company submitted that it did not provide any earmarked area to WTFL. The A.O. also referred to section 23(1) of the Act which provides that for the purpose of section 22 of the Act, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year. The assessee company has not furnished the details of area allotted to WTFL for its business activity by stating that no ear marked area has been provided. The A.O. observed that the subsidiary company is actively engaged in business activity of providing training whereas the assessee company is not actively engaged in any business activity other than investment activity and earning miscellaneous income. The summary of the financial activity of the assessee company and the subsidiary company as per their financial is as under:- Sr. No. Name of the company Gross Salary Total income (in expenses (In expenses (in lacs) lacs) lacs) 1 M/s Walchand PeopleFirst 133.08 31.86 103.87 Ltd. M/s Walchand TalentFirst 1213.51 602.06 1540.84 2 Ltd. 3 Total 1346.59 633.92 1644.71 Since the assessee company has not provided the information about the area provided and available to WTFL, the A.O. has taken the area occupied based on the average of percentage of gross income, salary expenses and total expenses as below: Sr.No. Name of the company Gross Salary Total Average% income in expenses in expenses % % % 1 M/s Walchand PeopleFirst 9.88 5.02 6.31 7.07 Ltd. 2 M/s Walchand TalentFirst 90.12 94.98 93.69 92.93 Ltd. Based upon the above, 7,07% of area for 4343.40 square feet works out to 307.07 square feet and 92.93% works out to 4036.33 square feet whereby the ITA 2543/M/13 & 17 & C.O. 156/Mum/2014 A.O. held that WTFL has occupied 4036.33 sq. ft. of Construction Building, 1st floor. The A.O. accordingly worked out the deemed rental income under the head income from house property amounting to Rs. 71,57,947/- based on the average rental rates on which similar premises were given on rent in the Building ‘Construction House’ and added the same to the total income of the assessee company. The A.O. has allowed standard deduction of 30% u/s 24 of the Act and the total addition of Rs. 50,10,563/- was made vide assessment orders dated 29.12.2011 passed u/s 143(3) of the Act.
Aggrieved by the assessment orders dated 29.12.2011 passed by the AO u/s 143(3) of the Act, the assessee company carried the matter in appeal before the CIT(A).
Before the CIT(A), the assessee company submitted that it occupies first floor premises at ‘Construction House’ for its business since many decades and the area occupied by the assessee company is 4343 sq.ft. where its registered office is situated. The assessee company submitted that WTFL was not provided with any earmarked area within the office premises occupied by the assessee company, but was only allowed to use common office/infrastructure facility and there was thus no letting out of any premises per-se by the assessee company and the entire premises were always in the occupation and possession of the assessee company. The assessee company further submitted that "the annual value" of a house property u/s 23 of the Act is determined on the basis of the sum for which the property might reasonably be expected to let from year to year and the AO erred in not appreciating this vital and fundamental difference between letting of premises per-se and sharing of common office facilities by two or more persons. The assessee company further submitted that the AO also erred in taking the average rent received by the assessee company from other premises in the same building without appreciating that those premises were let out to the ITA 2543/M/13 & 18 & C.O. 156/Mum/2014 concerned parties enjoying exclusive possession. It was submitted that assessment of notional rent of Rs. 50,10,563/- u/s 22 of the Act is wholly illegal and requires to be deleted. The assessee company further submitted that no consideration was charged to WTFL for use of the office premises, because it was at the nascent stage of its business. It is the cardinal principle of income-tax that tax is to be levied on income that has been actually earned by the taxpayer and not on what the taxpayer could have earned. There is no provision in law nor is it permissible for the department to tax notional/alleged income, which admittedly has not been earned by a taxpayer, on the ground that the taxpayer could have, although in fact it has not, earned such income. The assessee company relied on the decision of Hon’ble Supreme Court in the cases of CIT v. A Raman & Co. [1968) 67 ITR 11 and CIT v. Calcutta Discount Co. Ltd. [1973) 91 ITR 8. The assessee company particularly referred to the decision of Hon’ble Supreme Court in the case of A. Raman & Co. (supra) wherein it has been held that “but the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him” therefore, the assessee company contended that the AO was not justified in assessing notional income, i.e. rent in the hands of the assessee company. The CIT(A) after considering the submission of the assessee company and the assessment order observed that the assessee company has not let out the property to its wholly own subsidiary company but has allowed its premises to be used by the subsidiary company. When the property has not been let out, the question of notional rent, does not arise. Further, the assessee company should have charged certain amount for allowing its infrastructure to be used by the subsidiary company as both the companies are separate and distinct entities. But as the assessee company has not charged any amount from its subsidiary company the notional income cannot be assessed as there is no concept of notional income under ITA 2543/M/13 & 19 & C.O. 156/Mum/2014 any other head of income barring income from house property. The CIT(A) held that the subsidiary company merged with the assessee company on 1st April 2009 i.e. immediately after the end of the previous year. The CIT(A) held that it is for the assessee company to decide how it would conduct its business and A.O can question the manner of conducting its business only where there are specific provisions empowering him to do so, like as per section 40A(2) of the Act relating to claim of expenditure to the related parties or non-arm’s length international transaction etc. The CIT(A) accordingly held the A.O.’s action to estimate the notional rent as invalid and deleted the additions of Rs.50,10,563/- made by the CIT(A) vide orders dated 05.02.2013.
16.Aggrieved by the orders dated 05.02.2013 of the CIT(A), the Revenue is in appeal before the Tribunal.
The ld. D.R. submitted that there is a complex called ‘Construction House’ in which the assessee company is having its own office. The ld. D.R. submitted that the assessee company has allowed its subsidiary company to utilize its office and the annual letting value has to be brought to tax u/s 22 & 23 of the Act. The ld. D.R. relied upon the orders of the A.O.. The ld. D.R. submitted that the assessee company’s subsidiary company WTFL is carrying on the business of training and substantial turnover is achieved by WTFL. The assessee company has transferred its training business to the said subsidiary company WTFL and major portion of the office is being used by the said subsidiary company and the employees were also shifted (as per details of which are placed in paper book page No. 112 & 113). The Ld. DR also submitted that the A.O. has rightly brought to tax the annual letting value of the said property. The Ld. DR submitted that the AO has calculated rent based on the prevailing rental in the same building given on rent by the associates of the assessee company.
ITA 2543/M/13 & 20 & C.O. 156/Mum/2014
The ld. Counsel for the assessee company submitted that there is no let out of the area to the subsidiary company. The assessee company has only allowed the subsidiary company to use the office space for which no service charges have been charged from the subsidiary company, thence, the same cannot be brought to tax as there is no provision under the Act to bring the same to chargeability to tax under the Act. The Ld. Counsel of the assessee company reiterated its submissions as made before the authorities below which are not repeated for the sake of brevity.
We have heard the rival contentions and also perused the material available on record. We have observed that the assessee company was carrying on the business of financing during the impugned assessment year, apart from having income from house property, dividend income, income from sale of investment and miscellaneous income. The assessee company has transferred its business of training to the subsidiary company WTFL w.e.f. 24.10.2007. The assessee company is stated to have deep interest in the subsidiary company. The assessee company has transferred its employees along with the business of training etc. to the subsidiary company and has allowed the subsidiary company to use its office. As per the facts as emerging from the records, no tenancy rights or lease is created by the assessee company in respect of the office premises owned by it in favour of the said subsidiary company. Section 22 & 23 of the Act stipulates that the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year. Thus section 22 and 23 of the Act warrants that the income from house property under the head ‘income from house property’ which shall be the annual letting value from year to year for any part of the property which is let , then sum for which the property might reasonably be expected to be let from year to year in the hands of the owner u/s 22 and 23 of the Act shall be brought to tax but in the instant case the assessee company has merely allowed the usage of the ITA 2543/M/13 & 21 & C.O. 156/Mum/2014 area/space to WTFL without earmarking any specific area , hence, the same cannot be charged to tax under the head income from house property as it could not be said that the said premises are let or is available for letting as in- fact the said premises is occupied by the assessee company for its business usage while at the same time the premises is allowed to be used by the subsidiary company only without granting any benefits of tenancy such as right of possession and enjoyment of the property as tenant . No tenancy rights has been created in favour of the subsidiary company, the addition of Rs. 50,10,563/- being notional rent on account of allowing subsidiary company to use its office space added in the manner by the ld. AO cannot be sustained in the hands of the assessee company which is ordered to be deleted and the order of CIT(A) is confirmed/sustained in which we have found no infirmity. We order accordingly.
In the result, the appeal of the Revenue is dismissed.
Now coming to the next issue, it was observed by the A.O. that the assessee company has let out the property to M/s Walchand & Co. Pvt. Ltd. (related party) and received nominal rent, the details of which are as under:- Sr.No. Name of the party Area in sq. ft. Period Rent (Amt. in Rs.) 1 M/s Walchand & Company Pvt. 4,343.40 01/04/2008 to 17,725/- Ltd. 31/03/2009 2 M/s Walchand & Company Pvt. 4,343.40 01/04/2008 to 17,725/- Ltd. 31/03/2009 3 M/s Walchand & Company Pvt. 3,690.00 01/04/2008 to 15,055/- Ltd. 31/03/2009 TOTAL 50,505/- It was also seen by the A.O. that the related party of the assessee company i.e. Walchand & Company Pvt. Ltd. has further let out these premises on exorbitant rent to third parties, the details of which are as under:-
ITA 2543/M/13 & 22 & C.O. 156/Mum/2014 Sr.No. Name of the party Area in sq. ft. Period Rent (Amt. in Rs.) 1 M/s Canara Robeco Asset 4,343.40 01/04/2008 to 90,22,510/- Management Co. Ltd. 31/03/2009 4,343.40 2 M/s Khaitan and Co. 4,343.40 01/04/2008 to 64,18,755/- 31/03/2009 TOTAL 1,54,41,265/- Thus , it was observed by the A.O. that the assessee company has received nominal rent from M/s Walchand & Company Pvt. Ltd. of Rs. 35,450/- and the said premises have been let out by M/s Walchand & Company Pvt. Ltd. to M/s Canara Robeco Asset Management for rent of Rs. 90,22,510/-. Similarly, the assessee company has received rent from M/s Walchand & Company Pvt. Ltd. of Rs. 15,055/- and the said premises was let out by M/s Walchand & Company Pvt. Ltd. to M/s Khaitan and Co. and received rent of Rs. 64,18,755/-. The assessee company was asked to furnish the copies of rent agreement entered into with M/s Walchand & Company Pvt. Ltd. In response, the assessee company submitted the details in Tapal. The A.O. observed that the assessee company has not furnished the copies of rent agreement but submitted a letter dated 15/01/2009 addressed to M/s Walchand & Company Pvt. Ltd. whereby the assessee company has agreed to renew the lease agreements for a period of 11 years and 11 months. The assessee company submitted that the rent received from M/s Walchand & Co. Pvt. Ltd. ought to be assessed as income from other sources u/s 56 of the Act and not as income from house property u/s 22 of the Act in the hands of the assessee company. The assessee company submitted that income from house property can be charged to tax in the hands of the owner and once the annual value of house property has been assessed in the hands of one taxpayer as the owner, the same cannot be assessed in the hands of another taxpayer again as the owner because there cannot be two owners in respect of the same property at the same time , otherwise it would amount to assessment of the same income twice, which is not permissible in law. The assessee company submitted that ITA 2543/M/13 & ITA No. 3527/M/13 23 & C.O. 156/Mum/2014 the rental income earned by M/s Walchand & Co. Pvt. Ltd. from the portions leased to them has been assessed as income from house property u/s 22 of the Act in their assessment consistently from the assessment year 2004-05 and onwards and the same has attained finality. The assessee company relied on the judgment of Hon’ble Supreme Court in the case of R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570 (SC) and CIT v. Podar Cement (P) Ltd. (1997) 226 ITR 625 (SC) whereby the Hon’ble Apex Court has held that the “owner” for the purpose of Section 22 of the Act is the persons who is the beneficial owner of the property, who earns the income from the house property in his own right. The assessee company refers to clause 2(d) of the Agreement to Lease executed with M/s Walchand & Co. Pvt. Ltd. which reads as under:- "(d) The Lessee shall have the right and shall be entitled to further sub- let, or give on leave and licence basis or on such other basis as the Lessee may in its absolute discretion think fit and proper to any person or party of its choice at such compensation and on such terms and conditions as the Lessee may in its absolute discretion think fit and proper.” In the light of above, the assessee company submitted that the assessee company is the legal owner of these premises leased to M/s Walchand & Co. Pvt. Ltd. but for the purposes of section 22 of the Act, it is M/s Walchand & Co. Pvt. Ltd. who is the owner of the property leased to them and the rental income earned by M/s Walchand & Co. Private Limited from these premises was offered to tax by them under the head ‘income from house property’ which is assessed accordingly by the Revenue consistently year after year, hence, the rent received by the assessee company from M/s Walchand & Co. Pvt. Ltd. aggregating to Rs. 50,505/- should be assessed u/s 56 of the Act as income from other sources and Section 56 of the Act stipulate charging of actual income that is earned by the assessee company to be assessed to tax and there is no scope of any notional or hypothetical income being assessed on the ground of alleged fair market rent etc.. The A.O. held that the ITA 2543/M/13 & 24 & C.O. 156/Mum/2014 assessee company, itself mentioned in its submission that they are the legal owner of the premises leased to Walchand & Company Private Limited. Section 23 of the Act provides that for the purpose of Section 22 of the Act, annual value of any property shall be deemed to be: a. the sum for which the property might reasonably be expected to let from year to year. b. Where the property or any part of the property is let out and the actual rent received or receivable by the owner in respect thereof is in excess of sum referred to in Clause(a), the amount so received or receivable shall be the Annual Value for the purpose of determination of income from House Property.
The AO held that the word used in Section 23 of the Act is the property might reasonably be expected to let from year to year. In the assessee company's case, the assessee company's property was let out on exorbitant higher yearly rent i.e. Rs.1.54 crores by its related party who are tenants but the assessee company has let out the same properties to related party and shown year rental income of meager sum of only Rs.50,505/-. It seems that the expected rent in this case is Rs. 1.54 crores and not Rs.50,505/- as shown by the assessee company. It may be noted that the assessee company itself has offered rental income of Rs.50,505/- earned from Walchand & Co. Pvt. Ltd. under the head ‘income from house property’. As the assessee company is the owner of the ‘Construction House’ and entitled to receive rent on its own right, income from letting out the same is taxable under the head ‘income from house property’ as provided u/s.22 of Act. It may be noted that the assessee company has placed reliance on Podar Cement Ltd.(supra) that rental income may be taxed under the head ‘income from other sources’. The assessee company's contention is not acceptable as the Hon'ble Supreme Court in the case of Podar Cement Ltd.(supra) was dealing with the question that whether there is any requirement of a registered deed of conveyance for a person to be treated as an owner for the purpose of section 22 of the Act. The ITA 2543/M/13 & 25 & C.O. 156/Mum/2014 A.O. held that in this case, there is no such question of registered deed of conveyance. And there is no dispute that the assessee company is the owner of the premises and is entitled to receive income from property in its own right. The A.O. relied upon the decision of The Hon'ble Bombay High Court in the case of Pallonji M. Mistry v. CIT (2009) 178taxmann 341(Bom.) whereby it was held that owner is a person who is entitled to receive income from the property in his own right and in view of the above legal position the rental income earned from the letting out of the ‘Construction House’ to M/s Walchand and Company Private Limited is taxed under the head ‘income from house property’ and the assessee company himself has offered the said rental income correctly under the head ‘income from house property’ which is accepted by the Revenue. The A.O. accordingly held that the property had been sub-let by tenant who is a related party for Rs. 1,54,41,265/- and the assessee company has not charged rent which the property is reasonably expected to let from year to year and the same is treated as annual value for the assessee company and the same is brought to tax as the amount of Rs.1,54,41,265/- is adopted as market rent of the premises let out to related party M/s Walchand and Company Private Limited without renewal of agreements , vide assessment orders passed u/s 143(3) of the Act dated 29.12.2011.
Aggrieved by the assessment orders dated 29.12.2011 passed by the AO u/s 143(3) of the Act, the assessee company has preferred an appeal before the CIT(A).
Before the CIT(A) , the assessee company submitted that M/s Walchand & Company Pvt. Ltd. has already been assessed to tax under the head ‘Income from House Property’ in respect of the rent received by it u/s 22 of the Act , since the assessment year 2004-05. The assessee company relied upon the decision of Hon’ble jurisdictional High Court in the case of M/s ITA 2543/M/13 & 26 & C.O. 156/Mum/2014 Sahney Kirkwood Private Limited v. Addl. CIT in ITA no. 1501,1509,1515,1516 and 1517 of 2007, wherein it was held by Hon’ble Bombay High Court that the rent received by the tenant by letting out the premises has been taxed , then taxing the very same amount once again in the hands of the owner would amount to taxing an income twice which is not permissible in law. The assessee company also relied upon the decision of Hon’ble jurisdictional High Court in the case of CIT v. Akshay Textiles & Agencies P. Ltd. (2008) 304 ITR 401(Bom.) wherein the Hon’ble Court held that in the absence of any cogent evidence to show that transaction was not genuine, the amount received by an intermediary cannot be assessed in the hands of the taxpayer. The assessee company contended that the A.O. has not challenged or doubted the genuineness of the lease agreements between the assessee company and M/s Walchand & Company Pvt. Ltd. that the agreement was either sham or bogus. The assessee company contended that the lease agreement with M/s Walchand & Company Pvt. Ltd. has been there for the past several years and the rent received by M/s Walchand & Co. Pvt. Ltd. has been assessed to tax in its hands in the past without any doubt or question by the Revenue. The CIT(A) after considering the submission of the assessee company and the A.O. held that assessee company’s contention that it is a case of taxing the same income in the hand of the assessee company and also in the hands of M/s Walchand & Co. Pvt. Ltd. and the same income cannot be taxed twice is found to be valid. Accordingly the CIT(A) directed the A.O. to delete the income taxed for the second time in the hands of the assessee company after verification, vide orders dated 05.02.2013.
Aggrieved by the orders dated 05.02.2013 of the CIT(A), the Revenue is in appeal before the Tribunal.
The ld. D.R. relied upon the order of A.O. and submitted that the assessee company has charged nominal rent from M/s Walchand and ITA 2543/M/13 & 27 & C.O. 156/Mum/2014 Company Private Limited of Rs.50,505/- while the said M/s Walchand and Company Private Limited has charged rent of Rs.1,54,41,265/- from sub- letting of the same premises. The AO has rightly brought to tax in the hands of the assessee company, the same rental value as sub-let by M/s Walchand and Company Private Limited as the same represented the market rental value of the said premise’s which need to be brought to tax in the hands of the assessee company as per provisions of Section 22 and 23 of the Act. Whereas the ld. Counsel for the assessee company submitted that this building was constructed in the year 1930 by the Walchand Group. It is six storey building. Portion of this building is occupied by the Central Excise Department, Department of Revenue, Government of India since 1939 and they are also paying nominal rent of Rs.10,452/- per annum for area of 2979 square feet occupied by them which should be taken as bench mark for computing rental income in the hands of the assessee company. The assessee company has given portion of this premises on fourth floor to M/s Walchand & Co. Pvt. Limited vide agreement dated 12-10-1994 for a period of 11 years 11 months . This lease agreement had expired on 11-09-2006 and a letter was issued by the assessee company on 15-01-2009 agreeing to renew the lease for a further period of 11 years and 11 months in response to letter of the lessee dated 05-01-2009 that the renewal shall be executed in due course. The ld. Counsel also submitted that portion of the fourth floor area was also leased to Vikhroli Metal Fabricators Ltd. vide agreement dated 12-10-1994 for a period of 11 years and 11 months and subsequently Vikhroli Metal Fabricators Ltd. was merged with M/s Walchand & Co. Pvt. Ltd. and similar intention was expressed by the assessee company to renew the lease further for a period of 11 years and 11 months. Similarly, there was another agreement dated 09-10-1997 which expired on 31-07-2006 for portion on ground floor of construction house which is to be renewed. The tenant is subletting the same to outside parties and charging higher rent while the assessee company is getting nominal rent as per agreement which is not a ITA 2543/M/13 & ITA No. 3527/M/13 28 & C.O. 156/Mum/2014 sham transaction as the AO has not doubted the genuineness of the lease agreements with Walchand and Company Private Limited. The ld. Counsel submitted that the Revenue has treated the lessee as owner of the property and the assessed the rental income in the hands of the lessee as ‘income from house property’ and again charged to tax the income as ‘ income from house property’ in the hands of the assessee company as owner of the property which is not permissible in law. The ld. Counsel contended that the taxing the amount once again in the hands of the assessee company would amount to taxing the same income twice which is not permissible under the Act. The ld. Counsel submitted that the assessment order for the assessment year 2008- 09 in respect of M/s Walchand & Co. Pvt. Ltd., copy of which is enclosed vide paper book page 74-77, whereby the Revenue has brought to tax in the hands of M/s Walchand & Co. P. Ltd , the rental income as ‘income from house property’. The ld. Counsel submitted that the CIT(A) has rightly deleted the addition by relying upon the decision of Hon’ble jurisdictional High Court in the cases of M/s Sahney Kirkwood Private Limited & Akshay Textiles & Agencies P. Ltd. (supra)
We have considered the rival contention and also perused the material on record. We have observed that the assessee company has given on rent the property ‘Construction House’ 4th floor to M/s Walchand & Co. Pvt. Ltd. whereby the total rent received is Rs. 50,505/- and the said M/s Walchand & Co. Pvt. Ltd. has given the said property on rent to M/s Canara Robeco Asset Management Co. Ltd. and M/s Khaitan and Co. , whereby total rent received from these parties were aggregating to Rs. 1,54,41,265/-. The property was given on rent since 1994 and the period as per lease agreement was 11 years 11 months and the same was not renewed, although the assessee company has expressed the intention to renew the said agreement vide letter dated 15- 01-2009 in response to the lessee letter dated 05-01-2009. M/s Walchand & Co. Pvt. Ltd. has duly paid the tax on the actual rent of Rs. 1,54,41,265/- ITA 2543/M/13 & 29 & C.O. 156/Mum/2014 received under the head ‘income from house property’ for which necessary supporting material was brought on record (paper book page 74 to 84) and the same has been accepted by the Revenue in the case of Walchand & Company Private Limited and accordingly framed the assessment order u/s 143(3) of the Act, further income tax return of the assessment year 2009-10 along with the intimation u/s 143(1) of the Act in the case of M/s Walchand and Company Private Limited has also been placed on record in paper book at page 78-86 . As could be seen from the documents filed, the rent received by M/s Walchand & Co. Pvt. Ltd. has been duly subjected to tax and that too under the head ‘Income from house property’ while the assessee company has received nominal rent from M/s Walchand & Co. Pvt. Ltd. which is offered to tax under the head ‘income from house property’ in the return of income filed with the Revenue.
Section 27(iii)(b) of the Act reads as under:-
Owner of house property", "annual charge", etc., defined. Section 27 For the purposes of sections 22 to 26— (iiib) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner of that building or part thereof;] See More about this Section ! Section 269UA(f) reads as under:-
269UA. Definitions. In this Chapter, unless the context otherwise requires, -- (a) agreement for transfer means an agreement, whether registered under the Registration Act, 1908 (16 of 1908), or not, for the transfer of any immovable property; ITA 2543/M/13 & 30 & C.O. 156/Mum/2014 ...... ......
(f) transfer , -- (i) in relation to any immovable property referred to in sub-clause (i) of clause (d), means transfer of such property by way of sale or exchange or lease for a term of not less than twelve years, and includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882).
Explanation : For the purposes of this sub-clause, a lease which provides for the extension of the term thereof by a further term or terms shall be deemed to be a lease for a term of not less than twelve years, if the aggregate of the term for which such lease is to be granted and the further term or terms for which it can be so extended is not less than twelve years; Section 269UA(f) stipulates that transfer of property by way of sale or exchange or lease for a term of not less than twelve years and includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 and shall be deemed to be the owner of the property u/s 27(iii)(b) of the Act for the purposes of computing under the head ‘Income from House Property’ . We have observed that the assessee company has been granted lease w.e.f. 12th October, 1994 for a period of 11 years 11 months, however, it is stipulated in the agreement that the lessee is occupying the same since last several years. Further the right of sub-letting has also been provided to the lessee. The assessee company has expressed its desire to renew the same for further period of 11 years and 11 months n response to the request of the lessee. M/s Walchand & Co. Pvt. Ltd. sub- letted the said premises which has been offered to tax the actual rent of Rs. ITA 2543/M/13 & 31 & C.O. 156/Mum/2014 1,54,41,265/- under the head ‘income from house property’ which has been accepted by the Revenue. The rental received of Rs. 1,54,41,265/- by Walchand and Company Private Limited, the lessee is assessed to tax and revenue has got the due taxes and now to again tax the same rental on notional basis in the hands of the assessee company will lead to double taxation of the same income , which is not permitted under the Act. We do not find any infirmity in the order of the CIT(A) and we uphold the same and confirm the deletion of the addition made by the AO of the notional rent in the hand of the assessee company which is subject to verification by the AO that the same rent has suffered taxation in the hands of the Walchand and Company Private Limited which was also stipulated by the CIT(A) in his orders dated 05.02.2013 which we confirm.We order accordingly.
In the result, appeal filed by the Revenue is dismissed
With respect to the C.O. filed by the assessee company, we have dismissed the appeal filed by the Revenue and, hence, the C.O. filed by the assessee company has become academic and is dismissed.
In the result, appeal filed by the assessee company in is allowed whereas appeal filed by the Revenue in ITA No. 3527/Mum/13 is dismissed. The C.O. No. 156/Mum/2014 filed by the assessee is dismissed due to reasons as stated above.
Order pronounced in the open court on 4th February, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः …………… को क� गई ।