M & M Estates (P) Ltd, New Delhi v. ITO, New Delhi

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E DELHI BEFORE SHRI K.G. BANSAL AND SHRI GEORGE MATHAN ITA NO. 1122(DEL)/2009 ASSESSMENT YEAR : 2005-06 M & M ESTATE (P) LTD. IN COME-TAX OFFICER 74 HEMKUNT COLONY VS. WARD 6(1) NEW DELHI. NEW DELHI. PAN-AAACM 1543P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AMARJEET SINGH AR RESPONDENT BY: SHRI G.S. SAHOTA SR. DR ORDER PER K.G. BANSAL ; AM THIS APPEAL OF THE ASSESSEE EMANATES FROM TH E ORDER OF THE CIT(APPEALS)-IX NEW DELHI PASSED ON 21.11.2 008 IN APPEAL NO. 103/07-08 AND IT PERTAINS TO ASSESSMENT YEAR 200 5-06. THE CORRESPONDING ORDER OF ASSESSMENT WAS FRAMED B Y THE INCOME-TAX OFFICER WARD 6(1) NEW DELHI ON 31.12.2007 UND ER THE PROVISIONS OF SECTION 143(3) OF THE INCOME-TAX ACT 1961. THE ONLY SUBSTANTIVE GROUND TAKEN BY THE ASSESSEE IN THE APPEAL IS TO THE EFFECT THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW T HE LD. CIT(A) ERRED WHILE CONFIRMING DISALLOWANCE OF EXPENSES ON ACCOUN T OF SALARY STAFF ITA NO. 1122(DEL)/2009 2 WELFARE BANK CHARGES MISCELLANEOUS TRAVELING A ND CONVEYANCE REPAIR AND MAINTENANCE PRINTING AND STATIONERY AND DE PRECIATION ON FURNITURE AND FIXTURES. 2. ON PERUSAL OF THE ASSESSMENT ORDER IT IS FO UND THAT THE ASSESSEE EARNED INCOME ONLY UNDER THE HEAD HOUSE PROPE RTY. THEREFORE THE ASSESSEE WAS REQUIRED TO SHOW CAUSE AS T O WHY THE EXPENSES MENTIONED UNDER ABOVE HEADS SHOULD NOT BE DISA LLOWED AS NO INCOME WAS EARNED UNDER THE BUSINESS HEAD. IT W AS SUBMITTED THAT THE COMPANY HAD TO INCUR SOME EXPENSES FOR ITS RU NNING. THE AO DID NOT ACCEPT THE AFORESAID SUBMISSION AND MENTIONED THAT ONLY STATUTORY DEDUCTIONS IN COMPUTING INCOME UNDER THE HEAD HOUSE PROPERTY WILL BE ADMISSIBLE TO THE ASSESSEE. THUS THE EXP ENDITURE OF RS. 1 67 688/- WAS DISALLOWED. 2.1 IT WAS REITERATED BEFORE THE LD. CIT(APPEALS ) THAT ALTHOUGH NO INCOME ACCRUED TO THE ASSESSEE IN THIS YEAR UNDER THE HEAD PROFITS AND GAINS OF BUSINESS STILL IT HAD TO MAKE SOME EXPENDITURE ON SALARIES AND OTHER ITEMS. THE ASSESSEE OWNS A NUMBE R OF PROPERTIES WHICH WERE SHOWN AS FIXED ASSETS OR INVENTORIES. THE STAFF WAS EMPLOYED TO TAKE CARE OF THE PROPERTIES. IT WAS ARGU ED EVEN WHEN A COMPANY DERIVES INCOME UNDER THE HEAD HOUSE PROPERTY AND THE RESIDUARY ITA NO. 1122(DEL)/2009 3 HEAD IT HAD TO COMPLY WITH STATUTORY OBLIGAT IONS TO ENSURE THAT ITS NAME WAS NOT STRUCK OFF FROM THE REGISTER OF COMPANIES. THEREFORE THE EXPENDITURE INCURRED BY IT UNDER THE AFORESAID HEADS WAS DEDUCTIBLE IN COMPUTING THE TOTAL INCOME. THE LD. CIT(APPEAL S) MENTIONED THAT THE INCOME EARNED COULD NOT BE TERMED AS BUSINE SS INCOME AND THE SAME WAS RIGHTLY TAXED AS PROPERTY INCOME AGAINST WHICH DEDUCTIONS U/S 24 HAVE BEEN ALLOWED. NO FURTHER DEDUCTION WAS ADMISSIBLE. THUS THE FINDINGS OF THE AO WERE UPHELD. 3. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD KEPT ONE ACCOUNTANT AND ONE MANAGER TO WHOM SALARIES WERE PAID. STAFF WELFARE EXPENDITURE WAS IN RESPECT OF TEA ETC. SERVED TO THESE PERSONS. EXPENDIT URE ON TRAVELING AND CONVEYANCE WAS FOR THE PURPOSE OF THE STAFF MEM BERS FOR TAKING CARE OF THE PROPERTIES. PRINTING AND STATIONERY WAS A NORMAL EXPENDITURE. A REFERENCE WAS ALSO MADE TO THE ACCOUNTS FOR ASSESSMENT YEAR 2007- 08 IN WHICH INCOME WAS ALSO SHOWN IN RESP ECT OF SALE OF AGRICULTURAL LAND. THIS INCOME ALONG WITH THE RENTAL INCOM E WAS SHOWN AS BUSINESS INCOME IN THE ACCOUNTS. THEREFORE IT WAS CONTENDED THAT THE ITA NO. 1122(DEL)/2009 4 ASSESSEE HAD BEEN CARRYING ON BUSINESS AND T HE EXPENSES INCURRED BY IT WERE DEDUCTIBLE IN COMPUTING THE TOTAL INCOME. 3.1 IN REPLY THE LD. DR SUBMITTED THAT THE ONLY PURPOSE OF FORMATION OF THE COMPANY WAS TO EARN THE RENTAL INCOME AND NO OTHER INCOME WAS EARNED IN THE PAST. THEREFORE TH E INCOME OF THE ASSESSEE HAD TO BE COMPUTED UNDER THE HEAD HOUSE PROPE RTY WHICH DOES NOT PERMIT DEDUCTION OF EXPENSES BUT PERMITS TH E DEDUCTIONS MENTIONED IN SECTION 24. IN ORDER TO SUPPORT HIS CASE HE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF JUGGILAL KAMLAPAT VS. CIT (1969) 73 ITR 702 IN WHICH IT WAS HELD THAT THE REVENUE AUTHORITIES WILL BE JUSTIFIED IN PIERCING THE CORPORATION VEIL WHIL E HAVING REGARD TO TRANSACTIONS FOR TAXATION PURPOSES. RELIANCE W AS ALSO PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F CIT VS. PANIPAT WOOLLEN & GENERAL MILLS CO. LTD. (1976) 103 ITR 66 IN WHICH IT WAS HELD THAT IN ORDER TO CONSTRUE AN AGREEMENT BE ING IN THAT CASE ONE OF SHARING PROFITS AND LOSSES BETWEEN THE ASSES SEE AND ITS AGENT THE COURT HAS TO LOOK TO THE SUBSTANCE OR ESSENCE OF TH E AGREEMENT RATHER THAN TO ITS FORM. A PARTY CANNOT ESCAPE THE CONS EQUENCE OF LOSS BY ITA NO. 1122(DEL)/2009 5 DESCRIBING AN AGREEMENT IN A PARTICULAR FORM THOUGH IN SUBSTANCE AND IN ESSENCE IT MAY BE A TOTALLY DIFFERENT TRANSA CTION. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. THE FACTS OF THE CASE ARE THA T THE ASSESSEE DERIVED INCOME ONLY UNDER THE HEAD HOUSE PROPERTY IN THIS YEA R. THERE IS NO EVIDENCE ON RECORD OF DERIVING BUSINESS INCOME IN AN Y EARLIER YEAR. THE ANNUAL ACCOUNTS FOR ASSESSMENT YEAR 2007-08 ALSO SHO WED RENTAL INCOME AND INCOME BY WAY OF SALE OF AGRICULTURAL LAND. NONE OF THESE ITEMS CAN BE SAID TO BE THE INCOME OF BUSINESS NATURE . THEREFORE ON FACTS IT HAS TO BE CONCLUDED THAT THE ONLY SOURCE OF IN COME OF THE ASSESSEE COMPANY IS THE RENTAL INCOME WHICH IS CHARGEABLE TO TAX AS PROPERTY INCOME. 4.1 IN SO FAR AS CASES RELIED UPON BY THE LD. DR ARE CONCERNED WE ARE OF THE VIEW THAT THOSE DO NOT ADVANCE THE CASE OF THE REVENUE. THE REASON IS THAT THE DECISIONS DEAL WI TH THE CONTROVERSY OF FORM VERSUS SUBSTANCE WHICH DOES NOT EXIST HERE AS THE ADMITTED FACT IS THAT ONLY RENTAL INCOME HAS BEEN EARNED WHICH IS TAXABLE UNDER THE HEAD HOUSE PROPERTY. THE ASSESSEE HAD ALSO RELIED UPON CERTAIN CASES BEFORE THE LD. CIT(APPEALS). THE MAIN FIN DING IN THE CASE OF ITO VS. MOKUL FINANCE PVT. LTD.(1007) 110 TTJ 445 ( DEL) WAS THAT THE ITA NO. 1122(DEL)/2009 6 ABSENCE OF BUSINESS ACTIVITY IN A PARTICULA R PERIOD CANNOT BE EQUATED WITH CLOSURE OF BUSINESS AS SUCH A CONCLUSIO N IS A NARROW VIEW OF THE SCOPE OF CESSATION OF BUSINESS. HOWEVER TH E FACTS OF OUR CASE ARE DISTINGUISHABLE AS THE CASE OF THE AO IS THAT THE ASSESSEE HAD NEVER CARRIED ON ANY BUSINESS. IN THE CASE OF C IT VS. GANGA PROPERTIES LTD. (1993) 199 ITR 94 (CAL.) IT WAS INTER-ALIA HELD THAT A LIMITED COMPANY EVEN IF IT DOES NOT CARRY ON BUSI NESS BUT IT DERIVES INCOME FROM OTHER SOURCES HAS TO MAINTAIN TH E ESTABLISHMENT FOR COMPLYING WITH STATUTORY OBLIGATIONS SO LONG AS ITS NAME IS NOT STRUCK OFF THE REGISTER OR UNLESS THE COMPANY IS DI SSOLVED WHICH MEANS CESSATION OF ALL CORPORATE ACTIVITIES. DURIN G ITS CONTINUANCE IT HAS TO DISCHARGE CERTAIN LEGAL OBLIGATION FOR WHICH IT HAS TO APPOINT CLERICAL STAFF SECRETARY OR AN ACCOUNTANT AND INCUR I NCIDENTAL EXPENSES. THEREFORE IT WAS HELD THAT THE CONCLUSION OF T HE TRIBUNAL THAT THE EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR ACTIVITIES TO EARN INCOME IS PRE-EMINENTLY A REASONABLE CONCLUS ION. WE FIND THAT THE FACTS OF THAT CASE ARE ALSO DISTINGUISHABLE IN AS MUCH AS IT WAS HELD THAT IT WAS NECESSARY TO EMPLOY CLERICAL ST AFF ETC. AND THE EXPENDITURE INCURRED WAS FOR EARNING THE INCOME UNDER THE HEAD OTHER SOURCES. IN THE CASE AT HAND THE INCOME IS EARNED UNDE R THE HEAD HOUSE ITA NO. 1122(DEL)/2009 7 PROPERTY WHERE CERTAIN STATUTORY ALLOWANCE S ARE GRANTED BUT THERE IS NO RESIDUARY HEAD ALLOWING THE EXPENDITURE I NCURRED FOR EARNING THE INCOME. THE DECISION IN THE CASE OF NAKODA R BUS SERVICE PVT. LTD. VS. CIT (1989) 179 ITR 506 ( P&H) IS SIMILAR TO THE DECISION IN THE CASE OF GANGA PROPERTIES LTD. (SUPRA). THE DECISION IN THE CASE OF CIT VS. RAMPUR TIMBER & TURNERY CO. LTD. (1981) 1 29 ITR 58 (ALLD.) WAS ALSO SIMILAR TO THE DECISION IN THE CA SE OF GANGA PROPERTIES LTD. IN WHICH IT WAS HELD THAT FOR AN EXPENDITU RE TO COME WITHIN THE AMBIT OF SECTION 57(III) IT MUST BE INCIDENTAL TO MAKE OR EARNING THE INCOME AND THERE MUST BE NEXUS BETWEEN CHA RACTER OF THE EXPENDITURE AND MAKING OR EARNING OF THE INCOME . THEREFORE THE FINDING OF THE TRIBUNAL THAT THE EXPENDITURE WAS INCURRED FOR KEEPING THE COMPANY ALIVE WAS HELD TO BE CORRECT ON THE FACTS OF THE CASE. 4.2 COMING TO THE FACTS OF THE CASE AS MENTION ED EARLIER THE ONLY INCOME EARNED BY THE ASSESSEE IS TAXED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. UNDER THIS HEAD CERTAIN ST ATUTORY DEDUCTIONS ARE ALLOWED IRRESPECTIVE OF THE FACT WHETHER IN THE YEAR UNDER CONSIDERATION ANY EXPENDITURE HAS BEEN INCURRED OR NOT. HOWEV ER NO EXPENDITURE OF ANY OTHER KIND IS ALLOWED. LOOKING TO THE DECISI ON IN THE CASE OF GANGA PROPERTIES LTD. NAKODAR BUS SERVICE PVT. LTD. AN D RAMPUR TIMBER & ITA NO. 1122(DEL)/2009 8 TURNERY CO. LTD. (SUPRA) IT IS CLEAR THAT SOM E EXPENDITURE WILL HAVE TO BE INCURRED FOR KEEPING THE COMPANY AFLOAT AS OT HERWISE ITS NAME WILL BE STRUCK OFF FROM THE REGISTER OF COMPANIES MAINTAI NED BY THE REGISTRAR. IN THIS VIEW OF THE MATTER SOME EXPENSES WILL HA VE TO BE ALLOWED WHICH WERE INCURRED FOR COMPLYING WITH THE PROVISIONS OF THE COMPANIES ACT. WE FIND THAT NO DISCUSSION HAS BEEN MADE IN T HE ORDERS OF THE LOWER AUTHORITIES AS TO WHICH EXPENDITURE WAS INC URRED FOR MAINTAINING THE COMPANY. THEREFORE WE ARE NOT IN A POSITION TO DECIDE AS TO HOW MUCH EXPENDITURE WOULD BECOME ALLOWABLE ON THE AFORESAID BASIS. IN THIS VIEW OF THE MATTER WE THINK IT FIT TO RESTORE THIS ISSUE TO THE FILE OF THE AO WITH A VIEW TO EXAMINE THE EXPE NSES AND ALLOW THAT PART OF THE EXPENDITURE WHICH HAS BEEN INCURRE D FOR COMPLIANCE OF VARIOUS STATUTORY REGULATIONS. 5. IN THE RESULT THE APPEAL IS TREATED AS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 8 JANUARY 2010. SD/- SD/- (GEORGE MATHAN) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 8TH JANUARY 2010. SP SATIA ITA NO. 1122(DEL)/2009 9 COPY OF THE ORDER FORWARDED TO:- 1. M&M ESTATES PVT. LTD. NEW DELHI. 2. ITO WARD 6(1) NEW DELHI. 3. CIT 4. CIT(A) NEW DELHI. 5. THE DR ITAT NEW DELHI. ASSISTANT REGISTRAR.