MOHD SHAFI MOHD YUSUF PATEL,,RAIGAD vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - PANVEL,, PANVEL

PER R.S.SYAL, VP :

This appeal by the assessee is directed against the order passed

by the CIT(A)-2, Pune on 13-11-2017 in relation to the assessment

year 2014-15.

disallowance of Rs.8,00,587/- on account of salary to watchman and

salary to staff.

that the assessee declared gross rent received at Rs.51,20,160/- from

the letting out of his ancestral property to M/s Balaji Warehousing and

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Pest Control Services Pvt. Ltd. After claiming standard deduction at

30% u/s.24 of the Income-tax Act, 1961 (hereinafter also called ‘the

Act.), the assessee declared income under the head `Income from

house property’ at Rs.35,84,112/- There is no dispute on this aspect

of the matter. In addition to the above rental income, the assessee also

received a sum of Rs.36.00 lakh (at the rate of Rs.3.00 lakh per

month) from M/s Balaji Warehousing and Pest Control Services Pvt.

Ltd., for rendering assistance to M/s Balaji in conducting the

warehousing business by shouldering responsibility of contacting the

Revenue officials and other semi-Government officials pertaining to

any matter and further agreeing to give permanent support for smooth

functioning of the working of warehouse business. Such amount was

shown as Commission/brokerage in the Profit and loss account. The

assessee claimed certain expenses against such income which, inter

alia, included a sum of Rs.16,01,175/-, being, “Employees cost”. The

AO held that the sum of Rs.36.00 lakh received by the assessee from

M/s Balaji was in the nature of compensation for loss of goodwill.

Without allowing any deduction, he included the gross amount of

Rs.36 lakh in the total income of the assessee. The assessee carried the

matter before the ld. CIT(A), who held that the assessee gave all sort

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of assistance for the conduct of warehousing business to M/s Balaji

for which he was compensated at the rate of Rs.3.00 lakh per month.

He held such income as chargeable to tax under the head `Income

from other sources’. While considering the grant of deduction

claimed by the assessee against this income, inter alia, of

Rs.16,01,175/- towards Employees cost, the ld. CIT(A) opined that

only 50% of the same should be considered as having been incurred

for running warehousing business and the remaining 50% was

relatable to rental income received by the assessee which was charged

to tax u/s.24 of the Act, subject to standard deduction of 30% of

annual value. Aggrieved thereby, the assessee has come up in appeal

before the Tribunal.

material on record. There is no dispute on the taxability of rental

income under the head `Income from house property’, which was duly

offered by the assessee as such. It is the sum of Rs.36.00 lakh, which

was received by the assessee from M/s Balaji Warehousing for

rendering assistance to them in the conduct of warehousing business,

which is the core of controversy. As against the AO treating such

amount of Rs.36.00 lakh as fully chargeable to tax as compensation

4 ITA No.70/PUN/2018 Mohs. Shafi Mohd Yusuf Patel

for loss of goodwill, the ld. CIT(A) accepted such income to be

chargeable under the head `Income from other sources’. There is no

cross appeal filed by the Revenue assailing the finding of the ld.

CIT(A).

under the head `Income from other sources’. Clause (iii) of section 57

provides for deduction of `any other expenditure (not being in the

nature of capital expenditure) laid out or expended wholly and

exclusively for the purpose of making or earning such income’. Thus

it is manifested that any expenditure incurred by the assessee wholly

and exclusively for the purpose of earning income is deductible.

Instantly, we are concerned with the non-deductibility of

Rs.8,00,587/- against such income from other sources. The assessee

maintained staff for which salary of Rs.16.01 lakh was paid. Such

staff was assisting the assessee in carrying on the operations of

warehousing on behalf of M/s Balaji Warehousing. The ld. CIT(A), in

principle, accepted that such an expenditure was incurred wholly and

exclusively for earning the income, but attributed only 50% of the

same at Rs.8,00,587/- for such business by holding the remaining

amount relatable to `Income from house property’, for which no

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separate deduction was called for. We are unable to appreciate the

logic behind such a decision because salary of staff has no relation

with the earning of rental income from warehouse which has been

given on rent without any provision for maintenance by the staff.

Once the ld. CIT(A) accepted that the assessee received Rs.36.00 lakh

from M/s Balaji Warehousing for rendering assistance in the conduct

of warehousing business and also that the assessee incurred expenses

on maintaining staff for that purpose, then there could have been no

question of holding that only fifty percent of the staff helped in

rendering income of Rs.3 lakh per month from M/s Balaji and the

remaining 50% was for maintaining the premises yielding income

chargeable under the head `Income from house property, for which,

in fact, there is no such provision in the rent agreement.

CIT(A) is that 50% of employee cost is in the nature of deductions

contemplated against income from house property, for which

composite deduction at the rate of 30% has been allowed. At this

juncture, it is relevant to note that prior to the substitution of section

24 by the Finance Act, 2001 w.e.f., 01-04-2002, clauses (i) to (x) of

section 24(1) of the Act [except clause (vi) dealing with interest on

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capital borrowed for construction, repairs, renewal or reconstruction

of house property] provided for deductions of Expenses on repairs and

collection of rent; Insurance premium; amount of annual charge;

ground rent; land revenue; and vacancy allowance. Only clause (i) of

section 24, dealing with expenses on repairs and collection of rent,

provided for deduction at 25% of annual value. The substituted

section 24, w.e.f. 01-04-2002, provides for a lump sum deduction at

30% of annual value in addition to separate deduction towards interest

on capital borrowed for acquiring, constructing, renewing or re-

constructing the property etc. On a comparative analysis of the

section - before and as substituted - it transpires that the composite

deduction of 30% of annual value is in lieu of expenses on repairs and

collection of rent; Insurance premium; amount of annual charge;

ground rent; land revenue; and vacancy allowance, which were

separately incorporated in various clauses of section 24(1) of the Act

except interest on borrowings. The legislature dispensed with the

requirement of furnishing separate evidence for all such expenses and

provided a composite deduction at 30% of annual value. The nature

of expenses covered by the deductions, before and after substitution,

ergo, remains the same.

7 ITA No.70/PUN/2018 Mohs. Shafi Mohd Yusuf Patel

Employee costs, it is seen that the same was not included in any of the

clauses of section 24 prior to substitution, which could have been

replaced by inclusion in the composite deduction on substitution.

When such an expenditure was not a part of pre-amended section 24,

it could not have been made a part of the substituted provision by the

ld. CIT(A) by necessary implication.

assessee as chargeable under the head `Income from house property’,

in the facts of the extant case, does not admit of incurring any

Employees cost. It is, therefore, held that the full amount of salary at

Rs.16,01,175/- be allowed as deduction under the head `Income from

other sources’ as against Rs.8,00,587/- allowed by the ld. CIT(A).

disallowance of 50% of certain expenses by the ld. CIT(A) against

`Income from other sources’. The facts apropos this issue are that the

assessee incurred Travelling expenses at Rs.2,78,990; Vehicle

Expenses at Rs.5,14,568/-; Printing and Stationery at Rs.6,818/-; and

Miscellaneous expenses at Rs.46,151/-. The assessee claimed

deduction for such total sum of Rs.8,46,527/- against the Commission

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income received from M/s Balaji Warehousing at Rs.36.00 lakh. The

AO denied deduction for the same reasons as discussed earlier. The ld.

CIT(A), following his view qua Employees cost, restricted the

deduction to 50% at Rs.4,23,263/-. The assessee is aggrieved by the

sustenance of disallowance at 50%.

mutatis mutandis similar to those of Employees Cost as discussed

hereinabove. Following the same view, we hold that the full amount

of Rs.8,46,527/- be allowed against the `Income from other sources’.

2021.

Sd/- Sd/- (C.M. GARG) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 12th November, 2021 Satish

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आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The Respondent; 2. 3. The CIT(A)-2, Pune 4. The Pr.CIT-2, Pune 5. DR, ITAT, ‘B’ Bench, Pune गाड� फाईल / Guard file. 6.

आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 12-11-2021 Sr.PS 2. Draft placed before author 12-11-2021 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *