TaxTMI 
TaxTMI 
2015 (6) TMI 722
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....usiness of ship management. It is also involved in the activity of horse breeding and owning and maintaining Race Horses. In the return of income for A.Y. 2007-08, the assessee claimed agricultural income of Rs. 8,01,175/- and lease rent on agricultural land at Rs. 26,59,140/-. During the course of assessment proceedings, A.O. has examined the agricultural income of Rs. 8,01,175/-, stated to have been earned from the land taken on lease from three directors of the assessee company to whom lease rents aggregating to Rs. 26,59,1401- was paid. The A.O has stated that 7/12 extracts of the revenue records pertaining to agricultural operations did not give any details of agriculture activities on the lands taken on lease. It is further stated that the details of agricultural income and expenditure were also not furnished. Therefore, A.O issued a show cause notice dated 24.12.2009 to the assessee wherein it was stated that 7/12 extracts did not indicate any agriculture activities that were carried on and the yield of grass disclosed in the 7/12 records is attributable to the natural activity. It was further stated that since the details of agricultural income and expenditure along with th....
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....n to earning such income cannot be allowed in view of the provisions of Section 14 A of the Act. Therefore, A.O has not only disallowed the entire expenditure claimed towards agricultural operations amounting to Rs. 26,59,1401- but has also brought to tax an amount of Rs. 8,O 1, 175/- under the head Other sources. 6. Before the ld. CIT(A), the assessee filed written submission along with evidences pertaining to the agricultural activities. The ld. CITA) sent all these documents to the A.O. for his remand report. The ld. CIT(A) after considering the assessee's submission as well as the remand report held that the expenditure incurred for earning agricultural income has to be set off against the income from agricultural operations. Consequently, the expenditure amounting to Rs. 26.59 lakhs was set off against the income of Rs. 8.01 lakhs and the resultant loss from agricultural operations amounting to Rs. 18.57 lakhs was treated as the net disallowance u/s 14A of the Act. The precise observation of the ld. CIT(A) as under:- "10. I have carefully examined the facts of the case, the additional evidences and the written submissions of the appellant, the remand report submitted by ....
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....s the allowability of lease rents paid to the Directors of the appellant company for leasing the lands to the appellant. In terms of Section 14A of the Act, expenditure incurred in relation to earning any exempted income is liable to be disallowed. In this case, earning of agricultural income involved expenditure of lease rents amounting to Rs. 26,59,1401- and the same is rightly disallowed. Therefore, the said disallowance is upheld in terms of Section 14A of the Act. The expenditure incurred for earning agricultural income has to be set off against the income from agricultural operations. Consequently, the expenditure amounting to Rs. 26,59,1401- has to be set off against the income of Rs. 8,01,175/- and the resultant loss from agricultural operations amounting to Rs.l8,57,965/- has to be treated as the net disallowance u/s. 14A of the Act." 7. Against the above order of the ld. CIT(A), both the assessee and Revenue are in further appeal before us. 8. Rival contentions have been considered and record perused. We found that during the course of appellate proceedings, the ld. CIT(A) found that the assessee has not given due opportunity to produce the evidence, insofar as the ....
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.... income of Rs. 8,01,175/-. With regard to lease rent expenditure of Rs. 26,59,140/- incurred by the assessee, the ld. CIT(A) has disallowed the same on the plea that the expenditure was incurred for earning exempt income. We also find that the lease rent was paid to the directors of the assessee company for leasing the lands to the assessee which deserves to be disallowed u/s 14A of the Act to the extend attributable to earning of exempt income. 9. The Revenue has also taken a ground with regard to additional evidence accepted by the ld. CIT(A) without giving opportunity to the A.O. In this regard, we found that the A.O. has not given sufficient opportunity to the assessee, insofar as the documents were asked at the fag end of the assessment proceedings, therefore, the assessee could not furnish the same before the A.O. These documents were filed before the ld. CIT(A) who has sent all these documents to the A.O. for his remand report. The A.O. has examined all these documents and sends his remand report. Accordingly, there is no violation of Rule 46A insofar as the A.O. has been given due opportunity by the ld. CIT(A) by examining the documents and give his report. After conside....
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....31,46,275/- on behalf of M/s. Five Star Bulk Carrier Limited was submitted in response to the show cause notice dtd.24.12.2009. However, A.O disagreed with the explanations and written submissions filed during the assessment proceedings and disallowed an amount of Rs. 60,42,28,258/-. In addition, A.O also has taken a stand in the assessment order that the assessee did not comply with the TDS provisions and, therefore, the said expenditure is also disallowed u/s 40(a)(ia) of the Act. 12. The written submissions and the paper book dated 05.02.2010, submitted during the appeal proceedings, was forwarded to the A.O and a remand report was called for. A.O in the remand report dated 07.05.2010 has firstly objected to the additional evidences submitted by the appellant during the appeal proceedings on the ground that such details and evidences were not submitted during the assessment proceedings. On the issue of admission of additional evidences, the appellant in its rejoinder dated 23rd August, 2010 has taken a strong objection. It is submitted that A.O had not cared to look into the issues till the fag end of the assessment year and out of the 21 months available at his disposal, A.O....
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.... compliance with the TDS provisions of the similar expenditure incurred in the relevant previous year for the A .. Y.2008-09. On that basis, it was submitted that since the A. a had denied a proper opportunity to the assessee during the assessment proceedings for A.Y.2007-08, the required details and explanations could not be furnished, which resulted in a huge disallowance of Rs. 60.42 crores in the assessment order for A.Y.2007-08. Therefore, it was submitted that the matter may be remanded back to the A.O, once again, for verification of the details and for submission of the report. A copy of the assessment order for A.Y.2008-09 was also filed in support of the contention. Considering the largeness of the disallowance made by the' A.O on an identical issue in the A.Y.2007-08, but not made in the A.Y.2008-09 (entire expenditure was allowed) and the inconclusiveness of the first remand report, A.O was, once again, directed by letter dated 14.02.2011 to verify the written submissions and the evidences filed by the appellant in support of the allowability of the expenses of Rs. 60.42 crores and submit a remand report. A.O, in the remand report, has once again raised same objecti....
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....he Assessing Officer examined and has categorically certified that the appellant company has complied with the applicable TDS provisions in respect of the expenditure amounting to Rs. 60,42,28,258/-. While examining the details and evidences furnished by the appellant during the remand proceedings, A.O has neither raised any issues nor brought any other material on record to doubt the genuineness of the expenses incurred towards the ship management activities. The explanation of the appellant that the ship management fee credited to the P&L a/c was arrived at, after netting off the expenses, is not found to be incorrect or inconsistent with the accounting policies of the appellant company. The appellant has cited the decision of the Hon'ble ITAT in the appellant's own case for the A.Y.1989-90 vide order in Appeal No.ITAJ3577/MumJ93 dated 01.09.2003, in support of its stand. Therefore, having regard to the materials placed on record and the final remand report of the A.O, the entire disallowance of Rs. 60,42 crores made in the assessment order is found to be unwarranted. Accordingly, the entire disallowance of Rs. 60,42,28,258/- is hereby deleted." 13. Revenue is in appea....
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....ssee has deducted and paid TDS wherever applicable and accordingly, the ld. CIT(A) has allowed the relief. We also found that A.O. himself in all the other assts. including A.Y. 2008-09 has not made such disallowance and has accepted that the assessee has made TDS payments. The ld. CIT(A) also recorded a categorical finding after considering the remand report that the A.O. has neither raised any issues nor brought any other material on record to doubt the genuineness of the expenses incurred towards the ship management activities. The ld. CIT(A) has also observed that the ship management fees has arrived at after netting off the expenses is not found to be incorrect or inconsistent with the accounting policies of the assessee company. We found that the ITAT in assessee's own case for A.Y. 1989-90 vide order dated 01-09-2003 has approved the accounting policy followed by the assessee company. 15. In view of the above discussion and considering the remand report wherein A.O. has himself certified that the assessee company has complied with the applicable TDS provisions in respect of the expenditure amounting to Rs. 60.42 crores which were genuine and there was no contravention of ....
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....essee is involved in the activity of livestock breeding and the said activity is not hit by Section 74A(3) of the Act; the said provisions are applicable only to a case of an assessee who is the owner of horses maintained for running in horse races; there was no iota of material evidence which can lead to the inference that the assessee was maintaining horses for participating in races. The assessee has also explained the nature of the business. It is submitted that in the year 1994, the appellant entered into the business of livestock breeding constituting thoroughbred horses at the company's farm established at village Nanoli District, Pune. For the purpose of this business, the company has constructed stables and other necessary structures at the company's farm, It is explained that the horse breeding is reproduction in horses which is a human-directed process involving selective breeding of animals and aided by planned mating for achieving the desired characteristics in the progeny. The horse breeding activity involved horse breeding / reproduction in the horses by selective breeding, employment of skilled workers, management of stables, engaging supervisors and manager....
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.... better price for the progenies produced in the stud farm of the assessee. It is further stated that the breeders do not participate in the horse races but their horses run when there is a prospective buyer who wants to see the potential of the horse before buying. Therefore, it is necessary to participate in various races conducted by the Turf Clubs at various racing centres and expenses are incurred on entry fee, registration etc. which necessarily have to be incurred through Turf Clubs. It is also stated by the assessee in the reply that the stake money won by the horses also constitutes an income of this business. Thus, the business is only of horse breeding and placing some of the horses occasionally for races is incidental to the core business. It is further stated that the horses put to racing constituted a small percentage as compared to the total number of horses sold; out of approximately 300 horses, about 15% of the horses participated in the races; there are stallions and broodmares which only participate in breeding activities and do not participate in races. It was further submitted that much more details could be furnished; however, only a concise particulars were ma....
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....e for the business relating to advertisement of shipping business and breeding business. Most of the professionals are associated with the shipping business of the company and are associated with breeding business of the company. All breeding expenses are not related to only maintaining of the race horses. During the year under consideration, the company had on an average 300 horses owned by it at the farm and horses of the clients at the farms and only 40, say 15% participated in the races. There are stallions and broodmares which never participated in the races but they only participated in the breeding activities. Apart from the above, the company incurred various expenses under the head Sponsorship Expenses, Legal and Professional Fees etc. which are common expenses relating to the ship management business and breeding business of the company and such expenses had benefited the company in getting shipping business and breeding business. These expenses are directly related to the promotion of its business of ship management and breeding of livestock and hence these are legitimate expenses incurred exclusively for promotion and marketing of the company's business. Without pre....
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....d the same were identifiable in the books of accounts under different accounting codes. As stated by the A.O in the Remand Report, the income & expenditure breakup provided specifically for stud farm and racing was verified vis-avis the P & L Account during the remand proceedings. As stated in the remand report, the breakup submitted by the appellant for the stud farm and racing income is in consonance with the P & L Account submitted before the A.O. Therefore, the bifurcation as submitted by the appellant was verifiable with reference to the books of accounts maintained and the same has been carried out by the A.O during the remand proceedings. 19.10 On a careful examination of the contentions of the A.O in the assessment order, it is seen that A.O has not considered the horse breeding activity as a distinct business activity from horse racing activity. Instead A.O has treated these two distinct activities as a single activity of owning & maintaining the race horses and accordingly the loss as computed by the A.O in the assessment order is allowed to be carried forward u/s.74A(3) of the Act. The factual information and the accounting data do. not support the conclusions as arri....
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.... hand, the loss as computed by the appellant in terms of the racing segment, and verified by the A.O during the remand proceedings, has to be carried forward u/s. 74 A(3) of the Act. The stand taken by the A.O in the assessment order is not legally tenable since it is not intended as per the scheme of computation of income under Income Tax Act to set off business loss, arising on account of horse breeding activity, against the profits earned in the segment of owning & maintaining race horses - in an event there is a loss in the horse breeding activity and there is a profit in the segment of owning & maintaining race horses. Therefore, A.O is hereby directed. to allow the set off of only the business loss arrived at in respect of horse breeding activity amounting to Rs. 1,89,92,554/- against the other business income and carry forward the loss arrived at in the racing segment amounting to Rs.l,18,63,894/- in terms of section 74A(3) of the Act." Against the above order of ld. CIT(A), both assessee and Revenue are in appeal before us. 20. The grievance of the assessee and Revenue relates to the disallowance of losses from activity of owning and maintaining race horse....
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....e bifurcation of its receipts from stud farm and it is to be noted that out of the total receipts of Rs. 4,75,70,112/- from this activity, stakes won in the races are amounting to Rs. 69,51,746/- only and hence, this indicates that racing income is just 15% of total income and breeding is the main activity. The assessee has given its object in the Memorandum of Association which is the breeding activity. As per turf club regulations racing and breeding are two branches and administration of these branches come from separate bodies. Thus, A.O. was not justified in holding that the entire activity is of maintaining horses for running in races. The CIT(A) has correctly appreciated that the loss from racing activity should be bifurcated from the breeding activity and that loss should only be disallowed for set off against business income. Accordingly, on the basis of facts and figures, he has correctly held the loss of Rs. 1,18,63,894/- pertains to racing activity and the same is to be disallowed for set off while the balance loss of Rs. 1,89,92,554/- is from breeding activity and it is allowed to be set off against the income from ship management business as section 74A cannot be appl....