Income Tax Appellate Tribunal - Ahmedabad
Gujarat Ginning And Mfg. Co. Ltd. vs Inspecting Assistant Commissioner on 6 January, 1992
Equivalent citations: [1992]41ITD119(AHD)
ORDER
B.M. Kothari, Accountant Member
1. All these appeals involve common or interconnected points. Hence these are being disposed of by this common order.
2. We will first consider assessee's appeals for assessment years 1976-77 to 1978-79. The first common ground in all these three appeals is that the reopening of the completed assessment under Section 147(a) is without jurisdiction, barred by limitation of time and is invalid and unjustified. The appellant derives income by way of rent from various properties. In the course of original assessment proceedings it was contended on behalf of the assessee that godown rent income falls under the head "business income" and it had furnished return of income accordingly. The department considered the said income under the head "income from house property" and also allowed, inter alia, deduction of l/6th for repairs as per Section 24 of the IT Act, 1961 (the Act). During the course of assessment proceedings for assessment year 1979-80, the assessing authority held that the assessee was not entitled to grant of l/6th deduction for repairs in respect of the premises in the occupation of various tenants as such repair expenses were to be borne by the tenants as per tenancy agreements. The assessing authority thereafter issued notices under Section 148 on 5-2-1985 for assessment years 1976-77 to 1978-79. It has been observed in the reassessment order that at no point of time during the course of original assessment proceedings it was disclosed by the assessee that as per the tenancy agreement, the cost of repairs was to be met by the tenants. It was a fact within the special and exclusive knowledge of the assessee and it was duty bound to disclose the same before the assessing authority. On account of such omission and failure on the part of the assessee the said proceedings were initiated under Section 147(a) of the Act. In the reassessments, the deduction of l/6th for repairs was not allowed in respect of part of the ALV of the portion occupied by the tenants who had undertaken to bear the cost of repairs as per the tenancy agreements executed with them. The point relating to denial of l/6th for repairs is based on the findings given by the assessing authority in the assessment orders for assessment years 1979-80 and 1980-81.
3. The CIT(Appeals) held that the action taken by the assessing authority under Section 147 is valid. He also agreed with the findings given by the assessing authority regarding denial of deduction of 1/6th for repairs on the ALV of the said portion of the property occupied by such tenants.
4. In the present appeals before us, the learned counsel for the assessee submitted that there was no omission or failure on the part of the assessee in disclosing fully and truly all the material facts necessary for assessment of the said income. The original assessments had been completed under Section 143(3) after taking into consideration the entire relevant facts and circumstances. The assessee asked for copy of reasons recorded under Section 147(a) soon after receiving notices under Section 148 vide its letter dated 27th February, 1985 but the same was not entertained by the assessing authority. Our attention was drawn towards the original assessment orders for these three years to point out that the assessing authority had examined all aspects relating to the income from property. In fact the assessee had claimed that such income should be assessed under the head 'income from business' but the department treated it as 'income from house property' and allowed necessary deductions as provided in Section 24 after being satisfied about the eligibility for grant of such deductions under Sections 23 and 24 of the Act. It is submitted that it is true that the tenants had initially agreed to carry out the repairs of the premises under their respective occupation but that clause was never acted upon by them and they did not carry out any repairs of the said portions. The assessee, therefore, had no alternative but to come to an oral understanding with those tenants and had to undertake the repairs of the tenanted portion out of its own funds. This oral understanding resulted in variation and alteration in the relevant clause in the tenancy agreement. As a result of such modification of the original agreement, the assessee was liable for carrying out repairs which in fact had been done by the assessee itself. The confirmation of the tenants in this regard was submitted during the course of assessment, proceedings for assessment years 1979-80 and 1980-81 when this issue was raised by the Assessing Officer for the first time. It was submitted that the proceedings under Section 147(a) have been initiated merely on account of a change of opinion on the part of the successor Assessing Officer, who had taken a view in the subsequent years that the cost of repairs are not deductible under Section 24. The assessee had given the entire material facts and it was under no obligation to suggest to the ITO the possible inference which he should take while making the assessment. Reliance was placed on the decisions in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), CIT v. Burlop Dealers Ltd. [1971] 79 ITR 609 (SC), Union of India v. Rai Singh Deb Singh Bist [1973] 88 ITR 200 (SC) and Gujarat Ginning & Mfg. Co. Ltd. v. CIT 11977] 107 ITR 590 (Guj.). He also relied on some more judgments mentioned at page 6 of the compilation submitted by him. He, therefore, urged that the CIT(Appeals) ought to have quashed the proceedings initiated under Section 147(a).
4.1. The learned counsel for the assessee submitted that even on merits the disallowance of 1/6th for repairs made by the assessing authority in the reassessment orders and confirmed by the CIT(Appeals) is not justified. While making the said disallowance the assessing authority had relied on the findings given in the assessment order for assessment year 1979-80. The assessee, therefore, also relies on the entire submissions and evidence filed in the course of assessment proceedings for assessment years 1979-80 and 1980-81. It was pointed out that as per the original agreement of tenancy executed with the tenants the cost of repairs were to be borne by them. However, the tenants carried out no repairs and, therefore, the assessee (land-lord) had to undertake the repairs to protect and keep its properties in good condition. The clause relating to repairs mentioned in the agreement of tenancy was accordingly modified by the subsequent oral agreements as a result of which the assessee in fact carried out such repairs. The said oral agreement was also subsequently reduced to writing. Confirmations from various tenants were submitted. For instance confirmation dated 16-12-1983 from one of the tenants Shah Jagdishkumar Narpatlal & Co. was shown which shows that the term relating to repairs to be borne by the tenants was not implemented and that clause did not survive on account of subsequent oral understanding as a result of which repairs were carried out by the owners. Affidavit of Shri Gijabhai P. Patel, Accountant of the appellant-company was also filed confirming this fact. Affidavit of Shri M.R. Pandya, Manager of the appellant-company was also submitted in which these facts have been confirmed saying that on account of oral/mutual understanding between the company and the tenants, the repairs were carried out and borne by the company. Affidavit of Shri R.M. Sheth, Director of the company was also furnished. It was contended that the said oral agreement or subsequent mutual understanding proves that the clause relating to repairs contained in the original agreements did not survive and the same was substituted by the aforesaid subsequent oral agreement/mutual understanding. The ITO has wrongly placed reliance on the judgment of Hon'ble Delhi High Court in Gulab Singh & Sons (P.) Ltd. v. CIT [1974] 94 ITR 537. The facts of that case are completely distinguishable. In the present case, the tenants had abstained from carrying out the repairs and, therefore, it became necessary for the appellant company to conduct such repairs in order to properly maintain and protect its properties and the original agreement was modified by the subsequent oral agreement. Such facts were totally absent in the case decided by the Hon'ble Delhi High Court. He, therefore, urged that even on merits the assessee deserves to succeed.
4.2. The various other grounds taken in the grounds of appeal were not pressed by the learned counsel for the assessee for these three years under consideration.
5. The learned Sr. D.R. contended that the rent agreements executed with the tenants were not produced before the assessing authority, which ought to have been brought to the notice of the ITO during the course of original assessment proceedings. The case thus clearly falls under Section 147(a) as there was an omission and failure on the part of the assessee in truly and fully disclosing the material facts relating to grant of deduction of l/6th for repairs. He placed reliance on judgments reported in Indo-Aden Salt Mfg. & Trading Co. (P.) Ltd. v. CIT [1986] 159 ITR 624 (SO, Aditya Mills Ltd. v. Union of India [1985J156 ITR 113 (Raj.) and Elgin Mills Co. Ltd. v. CIT [1990] 184 ITR 326 (All.). He supported the order of the CIT(Appeals) upholding the validity of initiation of proceedings under Section 147(a).
5.1. On merits, the Sr. D.R. submitted that Section 24(1)(6) applies in the case of the assessee because it is a case where the property is in the occupation of a tenant who has undertaken to bear the cost of repairs. Such deduction under this clause is allowable only in respect of the excess of the annual value over the amount of rent payable for a year by the tenant or l/6th of ALV, whichever is less. The assessee has not brought any material to show that there was any excess of the annual value over the amount of rent payable for a year by the tenant in respect of the portion in the occupation of the tenants in question. The subsequent confirmations and affidavits submitted by the assessee is not at all relevant for deciding the issue in question, as it is not material as to who really incurred the expenditure for repairs. What is relevant is that whether the tenant had undertaken the liability to carry out the repairs in the tenancy agreement. The subsequent modification of the original tenancy agreement by the so called oral agreement or mutual understanding is void as it lacks any consideration whatsoever. He, therefore, urged that the order of the CIT(Appeals) should be confirmed in relation to both the aforesaid points. It was further submitted that since the assessee's representative has not pressed the other grounds raised in the appeal, it is presumed that he has not pressed any other ground except these two points.
6. We have carefully considered the rival submissions and have also gone through the entire relevant material to which our attention was drawn during the course of hearing. We have also carefully gone through all the decisions cited by the representatives. On perusal of the original assessment orders for assessment years 1976-77 to 1978-79, it is revealed that the assessee had declared its rental income under the head 'income from business'. The assessing authority came to the conclusion that such rental income cannot be treated as business income and he proceeded to assess the same as income from property assessable under Section 22. The returns of income were also accompanied by the audited accounts which, inter alia, reveals that expenses for repairs to buildings were in fact incurred by the appellant. The ITO, while computing the rental income under the head 'income from property' granted deductions under Section 24 in respect of l/6th for repairs in addition to other deductions granted for land revenue, land rent, education cess, collection charges etc. The Hon'ble Gujarat High Court in the case of Gujarat Ginning & Mfg. Co, Ltd. (supra) has considered a case relating to reassessment under Section 147(a) almost under similar facts and circumstances. In that case the amount of municipal tax recovered from the tenants were mentioned in the profit and loss account. But the assessee prepared and filed a separate statement for computation of income from house property and in that the assessee did not mention or treat as income the amount of municipal tax collected from the tenants and those amounts were not included in the income of the assessee in the assessment orders. Later, the ITO took action under Section 147(a) of the Act and included that amount in the total income. The Hon'ble High Court in that case held that the assessee had not suppressed material facts. The primary fact was before the ITO at the time of original assessment proceedings. Relying on the judgment of Hon'ble Supreme Court in the case of CIT v. Burlop Traders Ltd. (supra) it was held that it was for the ITO to raise the possible inferences. If the ITO did not draw the necessary inference from those primary facts, the assessee could not be blamed and it could not be said that the tax had escaped assessment because of the omission or failure on the part of the assessee to disclose fully and truly all material facts so as to bring the case within the scope of Section 147(a) of the Act. The reassessment proceedings under Section 147(a) were held to be invalid and unjustified. In the present case, the assessee disclosed the income under the head income from business. It was accompanied with audited P & L A/c. The ITO was of the view that such income is chargeable under the head income from house property. It was his duty to examine the allowability of various deductions allowable under Section 24 of the Act after examining all the relevant facts and evidence. The lapse on the part of the ITO cannot amount to omission or failure on the part of the assessee, as the primary and basic fact relating to rental income and actual repair expenses incurred for repairs were available in the audited statements annexed with the income-tax returns. Respectfully following the said judgment of Hon'ble Gujarat High Court, we are of the considered view that the proceedings initiated in the present case under Section 147(a) are not valid as it cannot be said that tax had escaped assessment because of any omission or failure on the part of the assessee to disclose fully and truly the relevant material facts.
6.1. We would also like to consider the assessee's contention on merits, as similar ground relating to denial of deduction of l/6th repairs in respect of portions occupied by the tenants who had originally undertaken to bear the cost of repairs as per the tenancy agreement is involved in all the appeals for various subsequent years, which are also presently under consideration before us. The assessee during the course of assessment proceeding for assessment year 1979-80 submitted an affidavit of Shri R.M. Sheth, one of the Directors of the appellant-company. He confirmed the correctness of the fact explained in the affidavit dated 15-9-1984 given by Shri M.R. Pandya, who was manager of the appellant-company during the relevant period and also confirmed the correctness of the affidavit executed by Shri G.P. Patel, the Accountant of the appellant-company. Shri G.P. Patel in the said affidavit has confirmed that various tenants mentioned in their respective affidavits did not implement the condition relating to repair work. He further confirmed that as per the subsequent oral understanding the appellant carried out the repairing work at its own cost in the said rented portions. Similar facts have been confirmed in the affidavit of Shri M.R. Pandya who was manager of the company. Confirmation of tenant M/s Shah Jagdishkumar Narpatlal & Co. was also submitted confirming this fact. The assessing authority, after submission of such affidavits and evidence before him did not conduct any further investigation. He neither examined the Director, the Accountant and Manager of the company nor he examined any of the tenants. The original contract in the form of original tenancy agreements can always be varied or altered by subsequent agreements whether orally or in writing. Section 62 of the Indian Contract Act, 1872 clearly provides that if the parties to a contract agreed to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Since the facts and material submitted in the form of affidavits have not been controverted by the assessing authority the facts mentioned therein will have to be regarded as true and correct facts resulting in valid alteration of the original tenancy agreement as a result of which the appellant became liable to carry out the repairs at its own cost. The contention of the learned Sr. D.R. that such subsequent oral agreement/mutual understanding is void for want of consideration is not acceptable as the owner of the property would always be interested in ensuring proper maintenance and protecting his properties. If the old tenants did not carry out the repairs, it is quite natural for the owner to undertake the liability of carrying out repairs in order to protect its properties and to ensure the proper maintenance thereof. The reality of the repair expenses incurred by the assessee in relation to the said portion has not been doubted or disputed by the revenue. In view of the aforesaid discussions, we are of the considered opinion that the assessee is entitled to grant of deduction of l/6th for repairs in respect of the portions occupied by said tenants. The assessee, therefore, succeeds on merits also in relation to this ground.
7. Now we will consider assessee's appeals for assessment years 1979-80, 1980-81, 1982-83 and 1983-84. The first common ground in all these appeals is that the rental income derived by the appellant should be taxed under the head business income and not under the head income from house property. This issue was decided against the assessee as per the order of the Tribunal in assessee's own case for assessment years 1976-77 to 1978-79 in ITA Nos. 349 to 351/Ahd/84 passed on 3rd October, 1985. Respectfully following the said earlier order this contention of the assessee is rejected for all the years under consideration.
8. The next common contention relates to denial of deduction in respect of l/6th for repairs. This point has already been dealt with in para 6.1 above. In view of the reasons given therein, this contention of the assessee is allowed.
9. One of the grounds in assessee's appeal for assessment year 1980-81 relates to denial of deduction in respect of municipal tax amounting to Rs. 26,655. It was submitted by the learned counsel that the total irrecoverable rent from various tenants was as under:
Rent Rs. 54,678
Municipal Tax recoverable from
tenants which could not be realised Rs. 26,655
It was submitted that from the point of view of the landlord the entire amount recoverable from the tenants consisting of rent and municipal taxes are part of the rent due by the tenants to the landlord and, therefore, the entire amount fell within the provisions of rule 4 of IT Rules, 1962. Since the ITO has himself allowed deduction in respect of irrecoverable rent of Rs. 54,678 on the same reasoning he should have also allowed deduction in respect of irrecoverable amount of municipal taxes under rule 4 of the IT Rules.
9.1 The learned Sr. D.R. contended that municipal tax is not a deduction which can be allowed under Section 24 of IT Act, 1961. The amount of municipal taxes is to be deducted under Section 23 for determining the annual value. The amount of municipal tax should be deemed to have been allowed while determining the ALV of the property in question. If the municipal taxes were recoverable from the tenants, the ALV has been determined at a lower figure keeping in mind that such municipal taxes were to be recovered from the tenants. The irrecoverable amount of municipal taxes, therefore, cannot be allowed to be separately deducted under Section 24 of the Act. Section 24 enumerates various types of deductions allowable against the income from house property determined as per Sections 22 and 23. It does not contain the expenditure by way of irrecoverable amount of municipal taxes. The provisions of rule 4 are, therefore, clearly inapplicable in relation to irrecoverable amount of municipal taxes.
9.2. After considering the rival submissions, we are of the view that the view taken by the CIT(Appeals) in relation to this ground does not require any interference. The provisions of rule 4 of IT Rules provides that deduction shall be allowed in respect of any unrealised rent under Section 24(1)0c). One of the conditions precedent for grant of this deduction under rule 4 is that the ALV of the property to which the unpaid rent relates has been included in the assessed income of the previous year during which the rent was due and tax has been duly paid on such assessed income. The assessee has not produced any material to show that the irrecoverable amount of municipal taxes claimed as deduction in the year under consideration was in fact included in the annual value of the property in question and was included in the assessed income of the respective previous years and tax was duly paid by the assessee on such amount of municipal taxes recoverable from tenants by including the same in the annual value of the let out portion in question. In the absence of fulfilment of this condition, the assessee is not entitled to grant of any deduction in respect of irrecoverable amount of municipal taxes. Hence this ground is rejected.
10. One of the grounds in assessee's appeal for assessment year 1982-83 is that the learned CIT(Appeals) ought to have held that notional rent cannot be assessed and he has also erred in not allowing deduction in respect of municipal taxes. The learned counsel was fair enough to point out that this issue also stands decided against the assessee in its own case by the Tribunal in assessment years 1976-77 to 1978-79. In view of the reasons recorded by the Tribunal in its earlier order in assessee's own case, this ground is rejected.
11. The next common ground relating to assessee's appeals for assessment years 1982-83 and 1983-84 is that the CIT(Appeals) has erred in not allowing Rs. 39,786 (for assessment year 1982-83) and Rs. 38,413 (for assessment year 1983-84) being cost of collection charges. The appellant had incurred total expense by way of salaries, miscellaneous expenses and other expenses aggregating to Rs. 57,561 and Rs. 66,851 in these two years. It was submitted before the departmental authorities that the majority of the expenses incurred were towards the collection of rent because the employees of the assessee were required to visit the tenants for the purpose of collecting rent. According to the ld. counsel, the deduction granted by the assessing authority only to the extent of Rs. 15,000 each in both these years is inadequate. He, therefore, urged that the total deduction claimed by the assessee should be allowed. In the alternative it was submitted that the disallowance made by the assessing authority and confirmed by the CIT(Appeals) is extremely excessive and the assessee is entitled to a further deduction of a substantial part of the total expenditure incurred in these two years.
11.1 The learned Sr. D.R. contended that the assessing authority has discussed this point at considerable length. The assessee has not furnished any details as to how the various expenses incurred by the company are attributable to the activity of collection of rent. The CIT(Appeals) agreed with the conclusions derived by the assessing authority. He urged that no further relief would be justified on the facts and circumstances of this case.
11.2 We have carefully considered the rival submissions and have also gone through the orders of the departmental authorities. In assessment year 1982-83 this point has been discussed by the CIT(Appeals) in para 2 of his order. The total expenses incurred by the assessee under the head salaries and miscellaneous expenses was Rs. 57,561. Out of this administrative expenses amounting to Rs. 6,387 and further deduction of Rs. 11,378 on account of ground rent have been separately allowed. This leaves a balance of Rs. 39,786, which includes the salary of watchman, accountant and electricity expenses etc. Considering the aforesaid details, the deduction of Rs. 15,000 allowed by the assessing authority towards collection charges appears to be most reasonable and justified.
11.3 In assessment year 1983-84, the CIT(Appeals) after taking into consideration the relevant details of various expenses has directed the ITO to allow the deduction towards collection charges at Rs. 22,500 as against deduction of Rs. 15,000 allowed by the assessing authority. The learned counsel has not submitted any details of the total expenses incurred in these two years before us also and has also not submitted any material or details as to how various other expenses incurred by the assessee can be regarded as collection charges. In view of the detailed reasons given by the assessing authority and by the CIT(Appeals) and in view of the absence of precise and specific details, we are unable to interfere with the findings given by the CIT(Appeals) in relation to this ground pertaining to assessment years 1982-83 and 1983-84.
12. The next ground which is common for assessment years 1982-83 and 1983-84 is that the CIT(Appeals) has erred in not deleting the interest charged under Sections 217 and 139(8). It was submitted by the learned counsel that while charging interest under Sections 217 and 139(8) the amount of advance tax paid by the assessee in these two years has not been taken into consideration on the ground that the assessee had not submitted any estimate/statement of advance tax payable by it. The assessee placed reliance on the definition of assessed tax given in Section 215(5) of the Act and also relied upon the judgment of Hon'ble Supreme Court reported in 88 ITR 192. It was submitted that the amount paid as advance tax without filing any estimate/statement have been adjusted as advance tax while completing the assessments in question. The interest cannot be charged on the gross amount of tax payable without deducting the amount of advance tax so paid within the respective financial years for both these years under consideration.
12.1 The learned Sr. D.R. supported the orders of the departmental authorities and contended that in the absence of estimate or statement of advance tax in the prescribed form, the payments made by the assessee cannot be regarded as advance tax and interest has rightly been charged under Sections 217 and 139(8) after ignoring those payments.
12.2 We have carefully considered the rival submissions and have also gone through the relevant provisions of law. It is an undisputed fact that credit for the taxes paid by the assessee aggregating to Rs. 3,15,000 in assessment year 1982-83 and for first two instalments each of Rs. 1,25,000 and third instalment of Rs. 1,26,033 in assessment year 1983-84 has been given to the assessee in the regular assessments while calculating the net amount of tax payable by the assessee. The advance tax amounting to Rs. 3,15,000 in assessment year 1982-83 and the amount of first two instalments of Rs. 1,25,000 each paid in assessment year 1983-84 have not been considered by the assessing authority for the purpose of levy of interest under Sections 217 and 139(8). Since the third instalment in A.Y. 1983-84 of Rs. 1,26,033 was paid on 23-12-1982 under Section 210, the same was treated as advance tax for the purpose of levy of such interest. It is also an admitted fact that the entire amount of aforesaid tax claimed by the assessee as advance tax was paid during the relevant financial year. The very fact that the assessing authority has given credit of the aforesaid tax payments made by the assessee, makes it necessary that it will have to be treated as advance tax for the purpose of calculating interest under Sections 217 and 139(8). This view is further fortified by Sub-section (2) of Section 215 read with Section 217(2) which, inter alia, provides that where, before the date of completion of a regular assessment, tax is paid by the assessee under Section 140A or otherwise, interest shall be calculated after taking into account such tax paid under Section 140A or otherwise from the date on which the amount was so paid. Interest chargeable under subsections 215 and 217 are compensatory in nature and it cannot be validly charged without taking into consideration the entire amount of pre-paid taxes which were duly deposited in the relevant financial years. It would, therefore, be unreasonable and unjust to charge interest under Sections 217 & 139(8) on the amount of tax, which has already been paid in the respective financial years. The Hon'ble Supreme Court in the case of Ganesh Dass Sreeram v. ITO 119881 169 ITR 221 has held that interest charged for late filing of the return is levied by way of compensation and not by way of penalty. The levy of interest under Section 217 is also compensatory in nature on the same reasonings. As the tax had already been paid in the respective financial years, the credit of which has duly been given under Section 219 of the Act at the time of making the regular assessment, the question of payment of any compensation by way of interest thereon under Sections 139(8) and 217 does not arise. A useful reference can also be made to Section 237 of the Act, which provides that if a taxpayer satisfies the Assessing Officer that the amount of tax paid by him exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of the excess. The credit of prepaid taxes paid within the financial years will also have to be given regardless of the fact that no estimate/statement of advance tax was filed by the assessee. We are, therefore, of the considered view that irrespective of the question whether the tax paid by the assessee in the financial year without furnishing the estimate/statement of advance tax is or is not to be treated as advance tax, it must be taken into account for the purpose of levy of interest under Section 217 as well as under Section 139(8). The assessing authority is, therefore, directed to calculate the interest chargeable under Sections 217 and 139(8), if any, after taking into consideration the entire amount of advance tax paid within the respective financial years.
13. In the result all the appeals are treated as partly allowed.