TaxTMI 
TaxTMI 
TaxTMI 
2016 (2) TMI 837
X X X X Extracts X X X X
X X X X Extracts X X X X
....T (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 made by the learned AO of 74.82% of all the expenses (including depreciation) debited to the profit & loss account in the ratio of nonbusiness 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, ther....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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:- 1 Employee's remuneration & Other expenses Rs.76,19,053/- 2 Loss on sale of investments Rs.3,59,065/- 3 Interest Rs.4,49,207/- 4 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 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 disal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the case of Rajendra Prasad Moody 115 ITR 519(SC). 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 DCBusiness 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 income Percentage Business income 1 Interest on loan and inter-corporate deposits 19,47,437/- 2 Misc. income 3,30,74....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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. 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). 6. 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty. 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 income Percentage Business income 1 Interest on loan and inter-corporate deposits 19,47,437/- 2 Misc. income 3,30,741 3 Prior period income 9,49,219/- 4 Provision for expenses written back 1,26,199/- TOTAL 33,53,596/- 25.18% 1 Income from property 68,41,067/- INCOME FROM HOUSE PROPERTY 68,41,067/- 51.40% 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/- 2 Interest on Income tax refund ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....diency. Accordingly, the ld. Counsel for the assessee company prayed that the expenses should be allowed as the assessee company is carrying on its business. 9. 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. 10. 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. 11. 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 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- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....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. 14. 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). 15. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsferred 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rly, 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he A.O. held that the 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 cr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rders 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). 23. 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 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 asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de 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 sham transaction as the AO has not doubted the genuineness of the lease agreements with Walchand and Company Privat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 27. 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 m....