Income Tax Appellate Tribunal - Mumbai
Five Star Shipping Co. P. Ltd, Mumbai vs Department Of Income Tax on 11 June, 2015
आयकर अपील
य अ धकरण "F" यायपीठ मब
ंु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER
AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBEWR
आयकर अपील सं./I.T.A. Nos. 2151 /Mum/2012
( नधा रण वष / Assessment Year: 2007-08
Five Stars Shipping Co. बनाम/ Dy. Commissioner of
Pvt. Ltd., Income Tax- Central
Vs.
Unit No. 3, Circ le - 47,
Brady Gladys Plaza, Aayakar Bhavan,
1/447 Senapati Bapat Mumbai 400 020.
Marg,
Lower Parel,
Mumbai - 400 013.
थायी ले खा सं . /PAN : AAACF0530B
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. Nos. 2767 /Mum/2012
( नधा रण वष / Assessment Year : 2007-08
Dy. Commissioner of बनाम/ Five Stars Shipping Co.
Income Tax- Central Circ Pvt. Ltd.,
Vs.
le - 47, Unit No. 3,
Aayakar Bhavan, Brady Gladys Plaza,
Mumbai 400 020. 1/447 Senapati Bapat
Marg,
Lower Parel,
Mumbai - 400 013.
थायी ले खा सं . /PAN : AAACF0530B
(अपीलाथ /Appellant) .. ( यथ / Respondent)
2 ITA 2151/M/12, 2767/M/12
ITA 2766/M/12 & 2152/M/12
आयकर अपील सं./I.T.A. Nos. 2152 /Mum/2012
( नधा रण वष / Assessment Year: 2008-09
Five Stars Shipping Co. बनाम/ Dy. Commissioner of
Pvt. Ltd., Income Tax- Central
Vs.
Unit No. 3, Circ le - 47,
Brady Gladys Plaza, Aayakar Bhavan,
1/447 Senapati Bapat Mumbai 400 020.
Marg,
Lower Parel,
Mumbai - 400 013.
थायी ले खा सं . /PAN : AAACF0530B
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. Nos. 2766 /Mum/2012
( नधा रण वष / Assessment Year : 2008-09
Dy. Commissioner of बनाम/ Five Stars Shipping Co.
Income Tax- Central Circ Vs. Pvt. Ltd.,
le - 47, Unit No. 3,
Aayakar Bhavan, Brady Gladys Plaza,
Mumbai 400 020. 1/447 Senapati Bapat
Marg,
Lower Parel,
Mumbai - 400 013.
थायी ले खा सं . /PAN : AAACF0530B
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Assessee by Shri S.U. Pathak
Revenue by : Ms. Madhu Vani &
Shri Manoj Sharma
ु वाई क तार ख / Date of Hearing
सन : 03-06-2015
घोषणा क तार ख /Date of Pronouncement : 11-06-2015
[
3 ITA 2151/M/12, 2767/M/12
ITA 2766/M/12 & 2152/M/12
आदे श / O R D E R
PER R.C. SHARMA, A.M. :
These are the cross appeals filed by the assessee and Revenue against the order passed by the ld. CIT(A) - 38, Mumbai for the assessment years 2007-08 & 2008-09 in the matter of order passed u/s 143(3) of the Income Tax Act, 1961.
2. Common grounds have been taken in both the assessment years under consideration, therefore, both the appeals were heard together and disposed of by this single consolidated order for the sake of convenience.
3. First, we shall take up the appeal for A.Y. 2007-08.
4. Rival contentions have been heard and record perused. Facts of the case in brief are that the assessee company is engaged in the business 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 4 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 agricultural income and expenditure along with the vouchers were not furnished to substantiate the claim of agricultural income, the income stated to have been earned from agricultural income amounting to Rs.8,01,175/-was proposed to be disallowed and the same was proposed to be treated as income from Other Sources. Further, the assessee was asked to show cause as to why the lease rents of Rs.26,59,1401- paid to the directors of the company towards the lands taken on lease should not be disallowed. In response to the show cause notice dated 24.12.2009, the assessee company vide-the submission dated 29.12.2009 has stated that the assessee company owns a large extent of land and has always used the lands to raise agricultural products, which are suitable for consumption by the horses and by the staff. Any surpluses were sold to persons in the nearby localities not with an intention of earning income but to avoid wastage of perishable goods. During the year under consideration, the company took agricultural land on lease from the directors and paid lease rentals as per the lease deeds. It is further stated that paddock grass, oats, grams and vegetables etc. were grown by using unskilled personnel and casual workers. It was further stated that the details of agricultural produce, which was sold in the market were also being furnished. It was contended that it was incorrect to state that the details called for were not filed.
5. The A.O did not agree with the contentions of the assessee for the reason that 7/12 extracts belonged to the Financial Year 2004-05 and F.Y.2007-08 but not the period F.Y.2006-07. The A.O. has taken a view in the assessment that since the grass grows naturally, it is not an agricultural produce, According to the AO, the claim of the assessee that certain grams, vegetables etc. produced are not supported by any evidence in the form of 7/12 extracts. The A.O took the view that there was no agricultural activity carried on the lands taken on lease and, therefore, the income claimed to have been earned from agricultural activities has to be treated as Income 5 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 under 'Other Sources'. Further, it was held that the expenditure incurred towards the lease rent paid to the directors as disallowable. A.O has also taken an alternative stand to the effect that since the lease rent paid to the directors pertains to earning income, which is exempted from taxation, the expenditure in relation 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 the A.O and the rejoinder filed by the appellant. It is a fact that the 7/12 extracts are not so meticulously maintained by the State Revenue authorities to accurately reflects the agricultural operations and the details of crops grown. Therefore, it evidences furnished by the appellant also cannot be rejected on the ground that cannot be treated as a clinching evidence to decide the issue. The corroborative evidences furnished by the appellant also cannot be rejected on the ground that the same are not fully in agreement with the 7/12 extracts.
11. On a perusal of the paper book submitted by the appellant, it is seen that page nos. 2 to 24 pertain to 7/12 extracts of the farm. In the enclosure with the latter dated 19.03.2010, the Ld. A.R. of the 6 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 appellant has submitted that the 7/12 extracts reflect that mango trees, coconut trees, guava, jamun, rice, cashew nut etc. are being grown. It is further submitted that the page nos.25 to 37 of the paper book provided the details of the sale of agricultural produce which were part of the books of accounts maintained. It is seen from the details made available in the paper book that French Beans, Cabbage, Cauliflowers, Carrot, Cucumber, Ladies Finger, Mango are sold during the relevant previous year which constituted the agricultural income that was credited to the Profit & Loss Account under the head Other Income. The lease agreements entered into with the directors/ land owners of the agricultural land, the written submissions filed and corroborative evidences furnished provide a reasonable basis for the appellant to claim that the agricultural activities were carried out at the leased lands. According to the appellant, A.O was requested to visit the farm and see the factual position. In such circumstances, the only option available before the A.O was to establish that neither the special grass nor the fruit bearing trees and vegetable crops existed in the lands taken on lease. But no such factual verification was carried out by the A.O. Therefore, on the basis of the available materials, it has to be concluded that agricultural operations were carried out on the lands taken on lease. Accordingly, the income stated to have been earned from agriculture cannot be brought to tax as the Income under the head Other Sources. A.O is hereby directed to delete the addition of Rs.8,01,175/-. The other connected issue is 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 A.O. had given notice for producing the evidence only at the fag end of the 7 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 assessment proceedings i.e. 10 to 15 days time. Under these circumstances, the ld. CIT(A) admitted the additional evidence filed before him and sent the same to the A.O. for his remand report. From the record we found that the assessee has a business of maintaining a stud farm at Nanoli near Talegaon, Pune. It has its own land and it has also taken about 133 acres of land on rent from Dhunjibhoy Family. The assessee uses the land for stud farm and also for agricultural operations. It has about 4 lakhs trees of Gauva, Jambhun, Mango, Coconut, etc. etc. on the land and it also grows paddock (dhoop) grass for the horses, rice, vegetables on this land. It sells some agricultural produce like vegetables and fruits in the market while part of this produce is utilised by the assessee for its employees on the farm. It has earned receipt ofRs.801,175/- from sale of such agricultural produce and which the A.O. treated as non agricultural income. After considering the remand report, the ld. CIT(A) has recorded a categorical finding to the effect that the assessee had carried on agricultural operations and earned income of Rs. 8,01,175/-. The grass is paddock grass (dhoop grass) which is specially planted as it is a feed for the horses. It does not have spontaneous growth and hence, it is an agricultural activity. In the following cases, it has been held that if the grass is planted, it is an agricultural activity.
a) ITO vs. Kanchanlal Mancha Ram (1988) 32 TTJ (Ahd.)(TM) 38
b) ACIT vs. PZ Estates (P) Ltd. (2005) 2 SOT 563 (Del).
The ld. CIT(A) after considering the corroborative evidence filed on record, observed that the assessee had sold French Beans, Cabbage, Cauliflowers, Carrot, Cucumber, Ladies Finger, Mango during the relevant previous year which constituted the agricultural income which was credited to the P&L account under the head "other income". The ld. CIT(A) also recorded a finding to the effect that 7/12 extracts reflected that mango trees, coconut trees, guava, jamun, rice, cashew nut etc. are being grown. The finding recorded by the ld. CIT(A) has not been controverted by the ld. D.R. by bringing any 8 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 positive material on record, we, therefore, find no reason to interfere with the findings recorded by the ld. CIT(A) holding that the assessee had earned agricultural 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 considering the remand report sent by the A.O., the ld. CIT(A) has decided the issue. Thus there is no contravention of Rule 46A, we, therefore, do not find any merit in the ground taken by the Revenue.
10. In view of the above, we dismiss the grounds taken by the Revenue with respect to the agricultural income and uphold the disallowance of expenditure incurred in the form of lease rentals for earning exempt income u/s 14A of the Act.
9 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12
11. The A.O. has also disallowed an expenditure of Rs. 60,42,28,258/- by observing that the assessee disclosed only ship management fees of Rs.7,53,06,251/-, while total receipts pertaining to ship management segment of the business amounted to Rs.71,03,08,157/-. It was further pointed out by the A.O. that the assessee had not proved the expenditure amounting to Rs.60,42,28,258/-as laid out for the purpose of earning the ship management business income. Further, it was stated in the show cause notice dated 24.12.2009 that the expenditure of Rs.60,42,28,258/- is liable to be disallowed U/S 40(a)(ia) since the TDS provisions were not complied with. In response to the show cause notice, the assessee furnished a reply wherein it was stated that it had been consistently following the accounting practice of excluding the reimbursement amounts received from M/s. Great Eastern Shipping Company Limited and M/s Five Star Bulk Carrier Limited, which have engaged the appellant for ship management. It was further stated that the accounting treatment was approved by the ITAT in its own' case for the A.Y. l989-90 vide order in Appeal No.ITAl3577/Mum/93 dated 01.09.2003. No disallowance U/S 40(a)(ia) of the Act was called for since the TDS provisions under the applicable Sections, such as 192 - Salary, 194 - Interest, 194C-Contracts, 194 H - Commission I Brokerage, 194 I - Rent and 194J - Professional or Technical services have been complied with and the TDS returns have also been filed. It was further submitted that copies of certificates issued by M/s Bansi S. Mehta & Co., Chartered Accountants, certifying that the company spent I incurred operating expenses relating to 15 ships amounting to Rs.37,67,12,168/- during April, 2006 to March, 2007 on behalf of M/s. Great Eastern Shipping Company Limited was being furnished for the perusal of the A.O. A similar certificate certifying the expenses relating to six ships amounting to Rs.10,31,46,275/- 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 10 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 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 chose to issue a show cause notice as late as on 14.12.2009 and further on 24.12.2009. According to the appellant, despite very few days of time given by the A.O., the available details were furnished. Therefore, the appellant contended that the objections raised by the A.O for admitting the details/additional evidences required with reference to the huge disallowances made are not in accordance with the principles of natural justice. By the impugned order, the ld. CIT(A) deleted the disallowance after observing as under:-
"15. On a careful examination of the facts of the case, the stand of the A.O and the contentions of the appellant, it is seen that A. a has, in fact, taken up the scrutiny of the issues resulting in substantial additions only towards the fag end of the limitation period, which is evident from the show cause notice dated 24.12.2009. The time made available to the appellant was not adequate to provide the information and all the details and evidences with regard to the issues raised by the A.O in the show cause notice. However, the appellant is stated to have furnished the information available at its disposal. Since adequate opportunity was not provided to the appellant, it is only fair and just that the additional evidences and relevant details submitted during the appeal proceedings are admitted in terms of Rule 46A of the LT. Rules, 1962. Therefore, the objections raised by the A.O in the remand report were liable to be overruled and the additional evidences and the relevant details 11 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 furnished by the appellant during the appeal proceedings were required to be taken on record and decided on merits.
16. As regards the merits of the issues, even during the remand proceedings, A.O did not give any further opportunity to the appellant and did not fully examine the issue of genuineness of the expenses incurred and the compliance of the TDS provisions so as to quantify and substantiate the disallowances, if any. A.O merely raised certain general observations to disregard the additional evidences and submissions furnished by the appellant in support of the allowability of the expenses amounting to Rs.60.42 crores.
17. Thereafter, the appellant by letter dated 04th January, 2011 submitted that the assessment proceedings for the A.Y.2008-09 were concluded and the Assessing Officer has examined the genuineness of expenses incurred and the 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 objections against the admission of the details and additional evidences, but not established any non-compliance on the part of the assessee in furnishing any specific information that was called for during the assessment proceedings. Merely issuing a show cause notice as late as 24th December, 2009 and concluding the assessment on 29th December, 2009, wherein disallowance of almost the entire expenditure for earning the ship management fee is resorted to cannot be considered as giving any worthwhile opportunity to a taxpayer. Assessing Officer has completely disregarded the principles of natural justice while adopting such a course of action, which has resulted in a huge tax demand. Instead of conceding the fact of inadequate opportunities given to the assessee during the assessment proceedings, the Assessing Officer has repeated his objections against the admission of the basic information that is required to decide the issues on merits. The requirement of giving proper opportunity by the Assessing Officer to the assessee is emphasized by the Hon'ble Supreme Court in the case of Tin 12 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 Box Company v. CIT [249 ITR 216 (SC)]. It is also relevant to refer to the fact that A.O has examined the allowability of the expenditure incurred for earning the ship management fee and the compliance with the TDS provisions on the said expenditure during the assessment proceedings for A.Y.2008-09 and allowed the entire expenditure in the assessment order dated 25th December, 2010. However, with regard to the similar disallowance made in the A.Y.2007-08, A.O, in the remand report dated 21.02.2011 has, once again, objected to the admission of the required information / evidences. Such an approach is found to be inconsistent with the A.O's own findings since on an identical issue entire expenditure has been allowed in the assessment order for the A.Y.2008-09. Therefore, the objections raised by the A.O are found to be in contravention of Rule 46A of the Income Tax Rules and, therefore, unwarranted. In the light of the above and since it is a case where the appellant was not provided with adequate opportunity during the, assessment proceedings, the said objections are hereby overruled.
18. As regards the merits, A.O in the second remand report dated 21.02.2011hasexamined the details with regard to the expenditure of Rs.60.42 crores incurred and the TDS compliances thereof. The 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 ofRs.60,42,28,258/- is hereby deleted."
13. Revenue is in appeal before us against the above disallowance.
14. We have considered the rival contentions and found from record that the A.O. has disallowed an expenditure of Rs. 60.42 crores incurred on ship management fees of Rs. 71.03 crores earned by it. The assessee is in the business of managing the ships. It has agreements for management of the 13 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 ships with Great Eastern Shipping Co. and Five Star Bulk Carrier Ltd. (agreements on page 28 to 58). In the course of this business, the assessee incurs various expenses which are reimbursed by the shipping companies. The A.O. held that the assessee has not deducted TDS on the various expenses incurred and that is why he disallows the above amount of Rs.60.42 Crores u/s 40(a)(ia)]. As the assessee was not given due opportunity to produce the evidence, the ld. CIT(A) allowed the additional evidence which was forwarded to the A.O. for remand report. During remand proceedings, the A.O. examined with regard to the expenditure of Rs. 60.42 crores incurred on earning the ship management business income and also the TDS compliance thereon. In the remand report, the A.O. categorically mentioned that the assessee had deducted and paid TDS and complied with the TDS provisions in respect of expenditure amounting to Rs. 60.42crores. Before the CIT(A), the assessee submitted the entire details of the expenses, the details of TDS deducted on various expenses and the challans for TDS payments, etc. etc. The assessee further submitted that the A.O. did not give sufficient opportunity at the time of asst. and that is why, he wrongly made the disallowance. The CIT(A) remanded the matter back to the A.O. for verification and the A.O. in the remand report find place in the paper book has accepted that the assessee has deducted and paid the TDS wherever deductible. He has given a detailed remand report on this issue and thus, the A.O. accepted that the assessee has deducted the TDS wherever applicable. It is to be noted that the disallowance u/s 40(a)(ia) can be made only when tax is deductible as per law on the payment and it is not deducted. Reliance is placed on 116 ITD 328] ITAT Gauhati Bench decision in the case of George Williamson Ltd. and Delhi H.C. decision in [323 ITR 130] in the case of Van Oord ACZ India Ltd. Thus, the A.O. on full verification did not find any discrepancy and he has clearly stated in the remand report that the assessee 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. 14 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 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 TDS provisions while making payment for such expenses, we do not find any infirmity in the order of ld. CIT(A). We accordingly do not find any reason to interfere with the finding of ld. CIT(A) deleting the disallowance of expenses incurred on ship management.
16. The A.O. has also disallowed losses from activity of horse breeding and owning and maintaining race horses amounting to Rs. 3,08,56,448/-. In this respect, the A.O has examined the activities undertaken by the assessee. It was observed that the assessee has been carrying on the business of (i) Ship Management and (ii) Owning and maintaining horse breeding farm cum-race horses. It is stated by the A.O, in the assessment order, that the total receipts from the activities of owning and maintaining horse breeding farm cum race horses were shown at Rs. 4,75,70,114/- and the expenditure incurred on the said activity was shown at Rs.5,44,43,044/- and thereby a net loss of Rs.68,72,9301- was disclosed. A.O also has pointed out that some of the 15 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 expenditure, even though directly attributable to the said activity of owning and maintaining the race horses, the same was claimed separately under various heads thereby understating the expenditure. The aggregate of the expenditure was arrived at Rs.2,05,82,087/-. Accordingly, in the show cause notice, the total expenditure was arrived at Rs.7,50,25,131/- (5,44,43,044 + 2,05,82,087). Further, the A.O examined the common expenditure debited in the P&L a/c, which included Directors' remuneration of Rs.1,12,20,0001- and pointed out that the said expenditure has to be bifurcated between the activities of ship management and owning & maintaining race horses. By considering all the above expenses, the Assessing Officer arrived at the loss attributable to the horse breeding activities and owning & maintaining race horses at Rs.3,08,56,448/~. In the said show cause notice, A.O proposed to disallow the set-off of the above expenditure of Rs.3,08,56,448/- against the business income i.e., the income earned from ship management fee and proposed to allow carry forward of the said expenditure, in terms of sub- section (3) of Section 74A of the Act.
17. In response to the show cause notice, the assessee submitted a detailed reply and the same is fully reproduced in para 5.3 of the assessment order. The salient features of the reply of the assessee are that the assessee 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 16 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 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 managers to run the stud farm operations. etc. Further modem breeding management & technologies increase the rate of conception, a healthy pregnancy and successful foaling. It was further submitted that the business mainly involved the sale of two year old horses which are bred at the farm; the company owned broodmares (a female horse used for breeding), which are covered by stallions; stallions and broodmares never participate in races, but they only participate in breeding activities. Appellant has further explained the nature of the industry and emphasized that it is a specialized industry which has to be understood as such. Once a foal is borne, it is maintained at the farm for two years and is sold by a private sale or through auctions conducted by the Turf Club Authorities; the horse breeding business requires services of expert paternity doctors, expert trainers at the breeding farm; at the farm the broodmares belonging to other owners are also maintained for which the assessee charges a fixed monthly amount, which is a business income of the Farm.
18. The assessee has taken a stand that horse breeding is an industry not only in India but various parts of the world which involves raising, marketing and management of valuable livestock. Horse breeding involves multifarious activities; one such activity is to identify stallions and mares and source the same for import; the formalities of import involves coordination at various levels such as obtaining a licence for import in accordance with the procedures laid down by the Director General of Foreign Trade, based on the recommendations of the sponsoring authority namely Director Animal Husbandary and Vaternary Services of State Government. It was also 17 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 submitted that the appellant's farm was first India's ISO certified farm. It is further submitted that the objective of identification of high quality horses can only be achieved if selected horses are put to real ground test by way of races. Accordingly, some of the two year olds are selected and retained for running them in races and those who perform are utilized in breeding business because its progeny fetches a good price. For this purpose, the horses are trained at the farm and products have to be showcased to the potential purchasers. For this reason, a few horses are entered into the races so as to earn good reputation as a breeder and to ensure 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 made available and in the event the A.O is not satisfied; it was requested that technical persons would make further submissions and submit further evidences to explain the horse breeding activity.
18 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12
19. By the impugned order, the ld. CIT(A) partly allowed the assessee's claim after observing as under:-
"The facts of the case, the stand taken by the A.O in the assessment order and the contentions of the appellant during the assessment proceedings as well as during the appeal proceedings have been carefully considered. Further, the contentions of the A.O raised in the remand report and the written submissions of the appellant wherein the stand of the A.O has been contested are carefully examined. A.O has examined the accounting information submitted by the appellant during the remand proceedings and has stated that the bifurcation in terms of horse breeding activity and racing activity is in consonance with the profit & loss account submitted by the assessee before the Assessing Officer. However, it is stated by the A.O in the remand report that the assessee has not provided the 'racing' and 'breeding' business incomes separately in the return of income or during the scrutiny proceedings. On a perusal of the assessment order, it is seen that appellant's written submission filed before the A.O which is made a part of the assessment order itself (also reproduced in page nos.24 to 31 supra) indicates that these issues were also raised by the appellant during the assessment proceedings itself. In para 2.7 of the written submissions of the assessee, some of these contentions were raised.
"2. 7 Without prejudice, in case you are not agreeing to our submission of this business activity, income / loss from owning and maintaining race horse has to be determined as per the provisions of Explanation (a)(ii) to sub-section 3 of Section 74A of the Act. Loss per this provision mean stake money less expenditure incurred "wholly and exclusively for the purpose of maintaining race horses". Thus, there is no warrant for considering other expenses on proportionate basis etc. and only expenditure incurred "wholly and exclusively for the purpose of maintaining race horses" can be considered. The other expenses are for breeding and covering and have not been incurred for races. For example, Sponsorship expenses and Legal & Professional Fees as stated in are 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 19 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 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 prejudice to what has been stated above, we are submitting herewith working of the profit and loss account on 46 horses who participated in the races and won the stakes money and expenses directly attributable to them (Annexure D.") 19.8 Therefore, the assessee had implicitly raised an alternative contention during the assessment proceedings itself. However, A. a has not considered the contentions of the assessee so as to determine breakup of the incomes and expenditure pertaining to breeding activities and racing activities as two distinct activities. Instead A.O has treated both the activities as falling under section 74A(3) of the Act which deals with only the losses arising on account of owning & maintaining race horses. The remand report on this issue is a common remand report in respect of the A.Y.2007-08 and 2008-09. As verified and reported by the A.O in the remand report, the incomes & expenditure pertaining to breeding activity and racing activity were found to be captured under two different accounting codes in respect of both the assessment years. Therefore, as far as the factual matrix is concerned, the appellant has only brought to the notice of the A.O the accounting data pertaining to the income & expenditure of breeding activity and racing activity, which was verifiable from the books of accounts.
19.9 On a careful examination of the factual matrix and accounting information, it is apparent that the appellant has been carrying on the business of a stud farm which was commenced several years ago. There are certain distinct streams of income which are attributable to only horse breeding activities I stud farm. They are training fees, covering fees, livery expenses, sale of livestock etc. These streams of income cannot be considered as income derived from owning & maintaining the race horses. For instance, an amount of Rs.l,94,64,9201- is recovered on account of livery expenses from other horse owners, who have utilized the stables and other services of the stud farm of the appellant. Appellant has submitted that the nature of the receipt and the quantum of the receipt were reflected in the books of accounts and identifiable with distinct accounting codes. Similarly other receipts attributable to the horse breeding activities of the stud farm and the receipts attributable to the racing activities such as stake 20 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 money are distinct in nature and 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-a- vis 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 arrived at in the assessment order. For instance, the appellant has also highlighted the fact that only a small percentage of the total number of horses have participated in the races. It is also emphasized that horses such as Stallions and Broodmares are completely dedicated to the horse breeding activity in the stud farm and are not engaged in racing activities. Similarly the expenses pertaining to the breeding and covering cannot be attributed to the racing segment. Attention has been drawn to the provisions of sub-section (3) of section 74A of the Act so as to, emphasize that loss has to be computed under these provisions by taking into account the income by way of stake money and the amount by which such income falls short of the amount of expenditure which is laid out by the assessee wholly and exclusively for the purpose of maintaining race horses.
19.11 On a careful examination of the above contentions of the appellant, it is seen that the stand taken by the A.O in the assessment order is erroneous. On the other hand, the main grounds of appeal of the appellant that the entire activity has to be treated as horse breeding activity and racing activity being only incidental to the main activity of horse breeding activity, the same ought to be considered as a part of the business activity of maintaining a horse breeding farm is also not fully justified. As observed in the foregoing paragraphs, horse breeding activity and racing activity are two distinct activities, which are distinguishable on the basis of the factual information and accounting data.
21 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 19.12 The issue of horse breeding activity as a distinct business activity is considered in the light of decision of Hon 'ble Madras High Court in the case of Mrs.Kamala Muthia vs. CIT (259 ITR
184) (Madras). As held, carrying on an activity in an organized manner not only in the year in question but also in the prior years and also in the subsequent years with a profit motive is a commercial activity. Any such commercially organised activity carried on by an assessee, with a profit motive, has to be viewed as a business activity. In the case of the appellant, the horse breeding activity is nothing but a business activity. Therefore, the profits or losses arising from such an activity have to be treated as business profits or losses and the same have to be computed under the head Business. On the other 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 horses amounting to Rs. 3,08,56,448/-, we found that livestock breeding industry wherein the assessee has incurred expenditure and also earned revenue. The assessee is maintaining a stud farm. Its business is that of breeding and only 15% of its horses take part in the racing activity. Over all, it incurred a loss of Rs. 3,08,56,448/-. It has set off of this loss against the income from shipping business as per the P&L account. The A.O. held that breeding and racing activities constitute one activity u/s 74A the loss from the activity of owning 22 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 and maintaining race horses cannot be set off against any other income and it can be carried forward and set off only against the income from the activity of owning and maintaining the race horses in the future years. Accordingly, the A.O. disallowed the set off of loss from the stud farm against the profits from the ship management activity. The CIT(A) observed that 15% of the assessee's horses take part in racing. The breeding and racing activities are separate. The major activity is that of breeding. The assessee has on an average around 300 horses and only 40 horses run in the races. He did not accept the assessee's contention that entire loss is from breeding activity as racing activity is only incidental to the breeding activity. It was also observed that assessee submitted a columner profit and loss account of the race horses owning and maintenance activity and breeding horses owning and maintenance activity for the year ended 31st March 2007. This bifurcation was done on the basis of separate cost code and ledger accounts maintained in the books of accounts to record the receipts and expenditure in respect of race horses and breeding horses. In the remand report, the A.O. has agreed that the bifurcation is in consonance with the P & L Account. Accordingly, the CIT(A) has held that the loss of Rs. l,18,63,894/- is from racing activity and he did not allow the set off of this loss against the business income from ship management activity. While he held that the loss of Rs. l,89,92,554/- is from breeding activity and he allowed the set off of this loss against the income. The Revenue's ground is that the entire loss should be disallowed for set off as it is from the racing activity while the assessee's appeal is on the issue that the entire loss should be allowed for set off. The assessee has also shown the 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 23 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 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 applied to the loss from breeding business. The ld. CIT(A) has recorded a categorical finding to the effect that the company had on an average 300 horses owned by it at the farm and horses of the clients at the farms out of which only 15% participated in the races, therefore, the loss incurred to the activities attributable to race horses cannot be allowed to be set of against other income in view of provisions of section 74A of the Act. The details filed by the assessee was sent by the ld. CIT(A) to the A.O. for remand report. The A.O. has verified the income and expenditure of composite livestock business as well as racing activity with books of account and found the same in consonance with the books of account submitted by the assessee company. After considering the remand report and corroborative evidences, the ld. CIT(A) recorded a categorical finding to the effect that it constitutes only around 15% of the gross receipt, therefore, only loss incurred thereon is liable to be disallowed u/s 74A to be set off against other income. Section 74A is not applicable for the activity of breeding of horses since these horses are maintained for breeding and selling and not for running horse races. The activity of breeding of horses is similar to that of poultry or piggeries etc. where the animals are bred for the purpose of selling. Section 74A is not applicable for such breeding activity. The ld. CIT(A) also found that during the remand proceedings, the A.O. reported that income and expenditure pertaining to 24 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12 breeding activity and racing activity were found to be captured under two different accounting codes in respect of both the assessment years. The ld. CIT (A) also found that an amount of Rs. 1.94 crores is recovered on account of livery expenses from other horse owners, who have utilized the stables and other services of the stud farm of the assessee. After considering the remand report and corroborative evidences filed before him, the ld. CIT(A) reached to the conclusion that only the business loss in respect of horse breeding activity amounting to Rs. 1,89,92,554/- was liable to be set off against business income whereas loss of Rs. 1,18,63,894/- is from horse racing activity not eligible for set off against business income in view of provisions of section 74A of the Act. The findings recorded by the ld. CIT(A) are as per material on record, thus we do not find any reason to interfere in the findings of ld. CIT(A) and accordingly we confirm the same.
21. The assessee has taken additional ground with regard to disallowance of lease rent of Rs. 26,59,140/- paid to the directors of the company. The contention of the ld. Counsel for the assessee was that the additional ground is purely a legal ground as all the facts are on record and the same may be admitted in view of SC decision in the case of NTPC [229 ITR 383]. Secondly, on merits, the assessee submits ~hat it is totally wrong to consider that the entire land is used for agricultural purposes. Assessee grows paddock grass on portion of the land but the same portion is also used for horses who eat this grass. The assessee uses all these lands for stud farm purposes wherein the horses are kept. The boundary portion of the land is for the trees to give the shadow and which bear the fruits and which result in agricultural income. Thus, a substantial portion of the land is used for the stud farm and not as an agricultural land and therefore, the entire lease rental for 133 acres of land cannot be disallowed. If a small portion of around 5% of the lease rental is disallowed U/S 14A the assessee has no objection. Accordingly, the assessee requests for allowing of the additional ground of appeal.
25 ITA 2151/M/12, 2767/M/12 ITA 2766/M/12 & 2152/M/12
22. We have considered the rival contentions and we do not find any merit in the additional ground so raised by the assessee. We find that the assessee company paid lease rent to the directors. The lease rent was paid in respect of land used for agricultural income which is exempt. Since the expenditure was incurred for earning exempt income, the ld. CIT(A) has correctly disallowed the claim u/s 14A of the Act. Accordingly, the additional ground raised by the assessee is dismissed.
23. As the grounds raised by assessee and Revenue in A.Y. 2008-09 are similar to the grounds taken in A.Y. 2007-08, following the reasoning given in A.Y. 2007-08, we confirm the action of ld. CIT(A) in A.Y. 2008-09.
24. In the result, appeals of assessee and Revenue are dismissed in both the years.
Order pronounced in the open court on 11th June, 2015.
आदे श क घोषणा खल ु े #यायालय म% &दनांकः 11-06-2015 को क गई ।
Sd/- sd/-
(SUSHMA CHOWLA) (R.C. SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
मुंबई Mumbai; &दनांक Dated 11-06-2015
व.6न.स./ RK , Sr. PS
26 ITA 2151/M/12, 2767/M/12
ITA 2766/M/12 & 2152/M/12
आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु7त(अपील) / The CIT(A) -43, Mumbai
4. आयकर आयु7त / CIT --Central -IV, Mumbai
5. :वभागीय 6त6न<ध, आयकर अपील य अ<धकरण, मुंबई / DR, ITAT, Mumbai F Bench
6. गाड@ फाईल / Guard file.
ु ार/ BY ORDER, आदे शानस स या:पत 6त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai