TaxTMI 
TaxTMI 
2026 (8) TMI 615
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....004-05) "Grounds I: 1. On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) - 17, Mumbai ("the CIT(A)") erred in confirming the action of the Dy. Commissioner of Income-tax-8(2), Mumbai ("the AO") in bringing to tax an amount of Rs. 475.73 lacs as rent for the alleged consideration for premises usage charges payable by Procter & gamble Hygiene and Health Care Ltd ("PGHH"). 2. The CIT(A) furred erred in holding that: i. the rental income to the Appellant has started accruing as soon as the agreement was executed; ii. the property has been given on rent to PGHH and there exist a relationship of owner and tenant between the Appellant and PGHH; the primary object of the Appellant is to exploit the property by letting out a portion of it to its sister concern; and iv. there is no commercial activity carried on by the Appellant other than the collection of service charges which is based on the turnover affected by each party occupying the premises; 3. He failed to appreciate and ought to have held that the purpose of entering into an agreement with PGHH was sharing of certai....
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.... iii. the expenditure incurred by the Appellant were in relation to its own use of the building. 4. The Appellant prays that the disallowance of Rs. 1047.75 lacs be deleted, Without Prejudice to the Above: Ground V: 1. If the alleged rental income from PGHH and rental income from Nortel Network Private Limited is taxed under the head "Income from House Property", in such case, only the expenditure related to building ought to be considered for disallowance rather than all the shared expenses. 2. The Appellant prays that for the purpose of disallowance, the AO be directed to consider only building related expenses. Ground VI: 1. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming action of the AO of charging interest u/s. 234 of the Act. 2. The Appellant prays that the AO be directed to delete / appropriately reduce the interest u/s. 234. Ground VII: The Appellant craves leave to add to, alter or amend all or any of the above grounds of appeal at the time of hearing." ITA No. 4977/Mum/2017 (A.Y.: 2005-06) "GROUND Ι 1. On facts and ....
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....and in the law, the Ld CIT(A) has erred in directing that the AO should treat the rental income as taxable under the head "Income from other sources" instead of "Income from house Property", without appreciating the decision of the Apex court in the case of CIT Vs. National Storage Pvt Ltd and Shambhu Investments Pvt Ltd Vs. CIT [263 ITR 143]". 4. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the A.O. be restored. 5. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary. 2. Briefly, the facts of the case are that the assessee is a company, engaged in marketing, selling & distribution of several consumer products. The assessee has filed its return of income showing income of Rs. 17,05,23,600/- which was selected for scrutiny and an order u/s. 143(3) was passed by the Deputy Commissioner of Income Tax, Circle 7(1), Mumbai ("the DCIT") dated 29.12.2006 assessing total income of Rs. 66,00,96,491/-. Thereafter, the ld. Commissioner of Income Tax-8, Mumbai passed an order u/s. 263 of the Act directing the DCIT to re-compute the income chargeable under the head "Income from H....
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....ster concern will not supersede the specific provision of the agreement entered into. 3. As regards to the contention of the assessee that the first and second floor of the office building remained vacant during the year under consideration as the architect had to carry out internal renovation work on the first floor of the building was not found correct by the AO. The AO observed that it was not disclosed by the assessee which and on how much space the work was to be carried out for DSP Merrill Lynch. No agreement with DSP Merrill Lynch has been furnished. It was not known if DSP Merrill Lynch was tenants of the assessee. Further the approval letter dated 15.12.2006 did not clarify as to when exactly the floor had to be vacated for renovation work and when the work was actually started. It was also not disclosed by the assessee that if the entire floor had to be vacated further work carried out for DSP Merrill Lynch or part of it. Therefore, the AO did not find letter of approval from BMC an authenticate documents to substantiate assessee's claim that the first floor was actually remained vacant for the entire year under consideration. The AO found that the letter furnished by ....
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.... reimbursement of various expenses such as depreciation, fire and marine insurance, water electricity, generator charges, administrative services for the building, telephone, telecommunication etc. and various general supplies on a proportionate basis. The AO accordingly treated the usage charges received by the assessee from its sister concern as rental income of the assessee for the year under consideration. It was further observed by the Ld.AO that the assessee has not specified in the agreement the extra area given for occupation/usage by its sister concern. In the absence of any such information about the exact square feet of area given by the assessee to its sister concern, the AO presumed that the property was shared in 50-50 ratio between the assessee and its sister concern namely PGHH. The total area of the building was 99,603 square feet and out of this, the assessee had given the ground floor bearing 1150 square feet area on rent to Nortel Network India Private Limited from whom, the assessee had received a rent of Rs. 1,58, 72,912/- during the year under consideration. Therefore, the remaining area of 88,099 square feet is jointly occupied by the assessee and it sister ....
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.... property. Income-tax chargeable under this head is thus on notional income when the property is in self-occupation. The ld. CIT(A) held that the liability of an assessee arises from the fact that he is owner of the property, irrespective of the fact that property in question was let out or vacant or occupied by gratuitous tenant or even by the owner himself, if he occupies more than one house in the previous year. It is also immaterial whether the owner received any income or not. The law has laid down artificial rules by which the monetary value of annual income determined is to be considered as the income of the assessee from house property and he is liable to be taxed for such artificial income i.e. annual letting value which is the notional income as opposed to real income. The mere ownership of the property is sufficient to make a person liable under section 22 and actual realisation of income is not necessary, as this section charges not actual income but the notional income, i.e., annual value of the property. Once the person is identified as owner, no other factor can be considered in determining his liability to be assessed under section 22 of the Act. In fact, the owners....
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....nt order for assessment year 2004- 05 u/s 263 of the Act, with the direction to find out the actual area given on rent or occupied by others(tenants) and recomputed the income from rent under the head income from house property and disallow all expenses in the nature of depreciation, maintenance, repair, insurance etc. pertaining to rented portion of the office and recompute the common expenses on the basis of space occupied or on the basis of actual use, after giving further opportunity to the assessee for being heard on this issue. The ld. CIT(A) noted that the entire exercise of the AO is in this direction only. It is also a fact that assessee contested the order of the ld. Commissioner of Income Tax -8 before the Hon'ble ITAT, which declined to interfere and thus upheld the finding of the ld CIT-8. Further, it is not the case of the assessee that the property in question is not given on rent but modus operandi of collecting the rent is different. Therefore, from the facts on record, it is quite abundantly clear that primary object of the assessee is to exploit the property by letting out a portion of it to its sister concern. There is no commercial activities carried on by ....
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....expenses were also to be shared by the Assessee and PGHH in the ratio of respective net sales. Accordingly, the assessee paid Rs. 7.63 crores to the said sister concern such amount being net of the recoveries from such sister concern in respect of its share of common expenses, full break-up of which was furnished by the assessee during the assessment proceedings. The assessee submitted that these expenses were business expenses having no nexus with income from house property and hence were not covered within the ambit of Section 24 of the Act i.e. standard deduction @ 30%. It was further argued by the assessee that these expenses were actually incurred by the Assessee & PGHH and were shared by them in the ratio of their respective net sales which were carried out on the accordance to the agreement dated August 29, 2003 for sharing of certain common facilities, the various administrative expenses. Further, the assessee submitted that for any expenditure to be allowed u/s. 37 the twin conditions to be fulfilled are that the expenditure should not be of a capital nature, and that, it should have been expended wholly for the purposes of business. The expression 'for the purpose of ....
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....cation made by the AO was perfectly in order. The assessee himself has claimed that the area occupied by M/s. Nortel Net Work India Pvt. Ltd. is 27% of the total area of the building. Therefore the remaining 73% of the building is jointly occupied by the assessee and its sister concern i.e. M/s. PGH. 50% of the area occupied by sister concern therefore comes to 36.5%. Therefore, the total area which has been let out by the assessee, to its sister concern as well as M/s. Nortel Net Work Pvt. Ltd. comes to 63.5%. Therefore, the AO was absolutely right in disallowing the expenses of 63.5% claimed by the assessee. The ld. CIT(A) accordingly didn't find any infirmity in the order of the AO and ground of appeal were dismissed. 9. The assessee thereafter carried the matter in appeal before the Tribunal and the matter was disposed off by the Coordinate Bench vide its order dated 06.06.2016, in ITA No. 3531/Mum/2014, wherein it was held that the income from PGHH was assessable under the head "Income from Other Sources" and the AO was directed to treat so received as income from other sources and to allow the claim of deduction in respect of expenditure incurred for earning the same. Ther....
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....t in which the notional rent at Rs. 90 per sq.ft. was taxed as "income from house property". The petitioner appealed, but this appeal was dismissed by CIT (Appeals) on 20 February 2014. g) The petitioner challenged the order dated 20 February 2014 before the ITAT on 12 May 2014 by raising several grounds. This appeal was disposed of on 6 June 2016 by the ITAT. h) In its order dated 6 June 2016, the ITAT held that the amount receivable by the petitioner from PGHH was taxable as "income from other sources." To arrive at this conclusion, the ITAT relied on an order in the case of PGHH for the assessment years 1995-95 to 2000-01. i) The petitioner filed Miscellaneous Application (MA) No.369/Mum/2016 under Section 254(2) before the ITAT, contending that [1] real income theory was applicable in this matter; [2] Grounds 4 and 5 relating to the allowability of expenses were not adjudicated, and [3] reference was incorrectly made to the petitioner-assessee instead of PGHH while considering the tribunal's order for the earlier years; j) The revenue appealed the ITAT's order dated 6 June 2016 to this Court under Section 260-A of the Act. Simultaneou....
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.... the aforesaid impugned order dated 2 September 2022, has instituted this petition; 5. Mr. Pardiwalla, learned senior counsel for the petitioner, submitted that the issue of whether the income receivable from PGHH amounted to "income from other sources" or "income from house property" had attended finality qua the ITAT, given the ITAT order dated 6 June 2016 and this Court's order dated 9 March 2018 allowing the petitioner's Writ Petition No.2738 of 2017. He submitted that the only issue that had survived before the ITAT was whether the real income theory would apply, given the ITAT's finding that the income receivable to be taxed as "income from other sources". He submitted that the ITAT exceeded its jurisdiction by once again reviewing its earlier order dated 6 June 2016, even though this Court had clarified that the MA under Section 254(2) of the Act is not akin to a substantive review. Mr. Pardiwalla submitted that on this short ground, the impugned order dated 2 September 2022 deserves to be set aside. 6. Mr. Mishra learned counsel for the respondent defended the impugned order by submitting that the MA filed by the revenue had questioned the find....
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....ether the real income theory would apply given the ITAT's finding on the nature of the income from PGHH. While deciding this issue or rather this ground raised by the petitioner-assessee, it was not open to the ITAT to review its judgment and order dated 6 June 2016 and hold that the income receivable by the petitioner-assessee from PGHH was income from house property. On the above ground, we are satisfied that the 2/09/22 impugned order dated 9 February 2022 warrants interference and needs to be quashed and set aside. 13. The ITAT's jurisdiction under Section 254[2] of the IT Act is limited. It is not akin to a substantial review. This Court clarified this position in an earlier round when the ITAT had similarly exceeded its jurisdiction. The issue of whether the income receivable by the petitioner from PGHH was income from house property or income from other sources was writ large before this Court in the Revenue's pending appeal. The ITAT, exercising powers under section 254[2] of the IT Act, could not have reviewed its earlier finding on this issue. The ITAT's impugned order dated 2 September 2022 deserves to be set aside accordingly. 14. Howev....
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....Rs. 90/- per sq. ft. were never implemented between the assessee and its sister concern. Also, the corresponding security deposit was never implemented. Clauses 8 and 9 of the aforesaid agreement read with Annexure Il thereof refers to sharing of common expenses in the ratio of net sales of the companies. These expenses are not necessarily the expenses incurred in respect of the commonly used premises, but several other expenses incurred across various centres all over the country. The ld. AR submitted that the AO has assessed the notional income of Rs. 90/- per sq. ft. as Income from House Property ("HP") in the hands of the assessee and consequently, disallowed building related expenses such as repairs & maintenance of budding, service charges and depreciation on building. The disallowance of said expenses included not only expenses related to the common office building but also the expenses shared by the two companies in accordance with Clauses 8 and 9 read with Annexure II of the agreement mentioned above. 12. It was submitted that in accordance with Clause - 2 which provided for compensation/usage charges of Rs. 90/- per square feet and/ or reimbursement of expenses as may ....
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....submission of Id. AR of the assessee that once the income is assessable as 'OS', notional income cannot be brought to tax under this head. Consequently, the disallowance of building related expenditure such as repairs & maintenance of building, service charges and depreciation on building is not sustainable. We also find merits in the submission of Id AR of the assessee that section 57(ii)&(iii) of the Act expressly permits complete deduction of expenditure laid out wholly and exclusively for earning income chargeable under the head 'OS'. Thus, the assessee is also eligible for all such deduction which are incurred wholly and exclusively for the purpose of income from other sources. So far as taxing of notional income is concerned, it cannot be taxed unless the AO brought any evidence that such income is received or receivable by the assessee. Thus, in view of aforesaid discussion, we do not find any justification for taxing notional rent. In the result, ground No. 3 of the appeal is dismissed. In the result, ground no. 3 and all alternative ground No. 4 & 5 raised by assessee are allowed. Ground related with interest under section 234B is consequential." 14. On ....
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....he head 'Income from other sources". As per the AO, as soon as the agreement has been entered into, the rental income has started accruing to the assessee irrespective of whether the assessee is actually collecting the user's charges or sacrificing on its own volition. As against that, the claim of the assessee is that a reading of the agreement talks about usage charges and/or reimbursement of certain expenses as may be agreed between the parties and it is only the latter which was implemented and the former was never implemented. We therefore find that it is not a case of any subsequent understanding rather it is a case where the agreement has been implemented in terms of reimbursement of expenses. We find that similar factual assertion was made by the assessee before the Hon'ble Bombay High Court wherein it was submitted that the agreement was fully implemented except for the clause relating to the usage charges which was never acted upon by and between the parties instead the common costs were shared and the excess costs incurred were reimbursed. We further find that recently, similar matter came up for consideration before the Coordinate Bench in assessee's own case for su....
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....essing officer to re-compute and restrict the disallowance to the extent of depreciation and building related expenses pertaining to the area occupied by Nortel Network Limited. In the result, the grounds no. 4 and 5 are partly allowed. 18. In the result, the grounds of appeal no. 1, 4 & 5 of the assessee's appeal are disposed off in light of aforesaid directions. 19. Now, we take up the assessee's appeal in ITA No. 4977/Mum/2017 for A.Y. 2005-06. 20. In ground no. 1, the assessee has challenged the disallowance of trade incentive to the extent of Rs. 179.88 lacs being 20% of Rs. 899.41 lacs, following the order of ld. CIT(A) in A.Y. 2007-08, wherein the expenditure was similarly disallowed on ad-hoc basis. 21. In this regard, briefly, the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee being a distributor of the products manufactured by Procter & Gamble Hygiene and Healthcare Limited, was merely a conduit for spending expenditure and that the expenditure has built the brand. Therefore, the Assessing Officer held that the expenditure aimed at promotion of brands generates an enduring benefit and th....
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....ction of the AO by taking the view that observation of AO have not been rebutted by assessee it its submission and thus, he has no reason to deviate from the finding of AO. We find that assessee has incurred/allowed such trade incentive as a part of their business model. Such expenses in respect of promoting of products, is to be considered as revenue expenses. Similar view was taken by jurisdictional High Court in assesses own case reported in CIT vs. Procter & Gamble Homes Products Limited (supra). We further find that Delhi Tribunal in ACIT vs. Intercontinental Hotel Groups India Private Limited (supra) also held that advertisement expenses incurred by the assessee in promotion of brand belonging to its parent company, was to be allowed as business expenditure. Further, the Hon'ble Delhi high Court in PCIT vs. Seagram Manufacturing Private Limited (supra) also held that where assessee incurred expenses for brant popularity merely because overseas of all the brand also gained some benefit, claim of expenditure as a business expenditure should not be denied. Thus, in view of the aforesaid legal position, we do not find any justification in disallowing 20% of trade incentive by....
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.... the very fact that the assessee having purchased the products packed in the plastic containers which were made using such moulds and dies from the parties established the actual use of the moulds and dies by the assessee and therefore, the question of the assessee not substantiating the use of the asset does not arise for consideration. It was further submitted that there are decisions of the Hon'ble Courts and the Tribunals wherein, it has been held that even where the asset is ready for use, the depreciation ought to be allowed to the assessee. It was submitted that in the instant case, the facts are on a stronger footing where the moulds and dies were actually utilized in manufacture of the products packed in the plastic containers which in turn have used the moulds and dies and therefore, the depreciation so claimed by the assessee be directed to be allowed. 30. The ld. DR has been heard, who has relied on the order passed by the lower authorities. 31. We have heard the rival contentions and perused the material available on record. We find merit in the contention advanced by the ld. AR that when the final products so manufactured or packed in the plastic containers ....