Income Tax Appellate Tribunal - Mumbai
Bhupesh J. Govani , Mumbai vs Assessee on 22 February, 2012
IN THE INCOME TAX APPELLAT E TRIBUNAL
MUMBAI BENCHES, 'B', MUMBAI
BEFORE HON'BLE PRESIDENT SHRI G.E.VEERABHADRAPPA
AND SHRI D.K.AGARW AL (JM)
ITA No.969/Mum/2009
(Assessment Year: 2005-06)
Shri Bhupesh J.Govani, Assistant Commissioner
401, Sanjay Apartment, of Income Tax
S.V.P. Road, 25(1),
Borivali (W ), V/s Mumbai.
Mumbai-400092
PAN: AABPG8944Q
APPELLANT RESPONDENT
Date of Hearing : 22.2.2012
Date of Pronouncement : 27.3.2012
Appellant by : Shri D.V.Lakhani
Respondent by : Shri P.C.Maurya
ORDER
PER D.K.AGARWAL (JM) This appeal preferred by the assessee is directed against the order dated 2.12.2008 passed by the ld. CIT(A) for the Assessment Year 2005-06.
2. Briefly stated facts of the case are that the assessee is an individual. He derives income from various firms in which he is a partner, income from long term capital gain and income of minors clubbed u/s 64 of the Income Tax Act, 1961, (the Act). The return was filed declaring total income at Rs.21,07,590/-. However, the assessment was completed after ITA No.969/Mum/2009 2 (Assessment Year: 2005-06) making various disallowances and addition at an income of Rs.23,55,580/- vide order dated 28.12.2007 passed u/s 143(3) of the Act. On appeal while agreeing with the views of the AO dismissed the appeal.
3. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
4. Ground Nos.1 and 2 taken by the assessee read as under:
"1. The appellant submits that the order passed by the learned Assessing Officer u/s. 143(3) is bad in law as the order is passed without giving proper opportunity of hearing and without giving any show cause notice of his intention to make additions under various sections of Income Tax Act, 1961. The appellant submits that the Ld. CIT(A) has erred in rejecting the ground of the appellant that the order passed is bad in law and is without giving proper opportunity of hearing. The order passed by the learned Assessing Officer is against the principle of natural justice.
2. On the facts and circumstances of the case the appellant submits that the order passed by the learned Assessing Officer may be annulled."
5. At the time of hearing, the ld. Counsel for the assessee submits that he does not want to press the above grounds which was not objected to by the ld. DR.
ITA No.969/Mum/2009
3 (Assessment Year: 2005-06)
6. That being so and in the absence of any other supporting materials placed on record by the learned counsel for the assessee, the grounds taken by the assessee are, therefore, rejected being not pressed.
7. Ground Nos.3 to 7 taken by the assessee read as under :
"3. The Ld.CIT(A) has erred in confirming the stand of the Learned Assessing Officer that the sum of Rs.16,000/- is chargeable to tax under the heads income from house property in respect of property situated at Rajkot. On the facts and circumstances of the case the appellant submits that the addition made of Rs.16,000/- is not justified and be deleted.
4. The Ld.CIT(A) has erred in confirming the stand of the Learned Assessing Officer that the sum of Rs.72,000/- is chargeable to tax under the heads income from house property in respect of property situated at Sarovar Building, Borivili (W), Mumbai. On the facts and circumstances of the case the appellant submits that the addition made of the total income of Rs.72,000/- is not justified and be deleted.
5. The Ld.CIT(A) has erred in confirming the estimation of annual letting value in respect of Sarovar Building, Borivili, Mumbai at Rs.72,000/-. On the facts and circumstances of the case the appellant submits that estimate made by the learned Assessing Officer and confirmed by the Ld.CIT(A) is not correct and is not justified.
6. The Ld.CIT(A) has erred in confirming that the appellant is not entitled to the deduction u/s. 24(1) at 30% of the annual ratable value for computing the income from house property.
7. On the facts and circumstances of the case the appellant submits that the learned Assessing Officer has erred in concluding that the property situated at Sarovar Building, Borivili, Mumbai is not used for the business ITA No.969/Mum/2009 4 (Assessment Year: 2005-06) purpose. The appellant denies having made any such statement before the Assessing Officer. The conc1usion which made the learned Assessing Officer is erroneous."
8. Brief facts of the above issues are that the assessee owns three premises. The flat in Sanjay Apartment is used for assessee's residential purposes. He is co-owner of premises at Gujarat Housing Board's Society in Rajkot having share of 30%. It was claimed that the said property has been used as office premises by M/s. Shraddha Builders and M/s. Mars Force Pvt.Ltd. in which the assessee has interest as partner/director, the said office premises cannot be treated as residential house and the provisions of deemed House Property income is not applicable. As regards the third premises, it was submitted that the assessee is owner of residential flat at Sarowar and the same has been used by partnership firm M/s. Shubh Nand for the purpose of storing of records. Since the firm in which the assessee is partner is using the flat for business purposes, the deemed provisions of house property income are also not applicable to the flat at Sarowar. However, the AO held that partnership firm/company in which the assessee has interest are separate entity for the purpose of income tax and the business and profession carried out by them, cannot be said to be a business or profession carried on by the assessee. He, ITA No.969/Mum/2009 5 (Assessment Year: 2005-06) therefore, assessed the income from these properties ie. Rajkot and Sarowar, Borivali as per the provisions of Chapter IV C of the Act. The AO estimated the ALV of the Rajkot property at Rs.48,000/ and without allowing any deduction has assessed 1/3rd share Rs.16,000/- to the income of the assessee. Likewise the AO estimated the net ALV of Sarowar, Borivali house at Rs.72,000/-. Thus the AO has added the income from house property to the total income of the assessee at Rs.88,000/-. On appeal, the ld. CIT(A) while agreeing with the views of the AO confirmed the additions made by the AO.
9. At the time of hearing, the ld. Counsel for the assessee submits that the assessee has not carried on any business in his individual name since inception. He is a partner of 7 partnership firms and also Director of Shubhjivan Builders Pvt.Ltd, Suvidha Developers Pvt. Ltd. and M/s Mars Forge Pvt.Ltd. He further submits that Shubhjivan Builders Pvt.Ltd. and Suvidha Developers Pvt.Ltd. are located in Mumbai and engaged in property development and Shri Bhupesh Govani is the main Director who is handling the affairs. M/s Mars Forge Pvt.Ltd. is located at Rajkot and is engaged in the business of forging. He further submits that the assessee's house ITA No.969/Mum/2009 6 (Assessment Year: 2005-06) properties are used by the respective firms and companies for their business purpose and the said properties are not being used by the assessee for his personal use. He further submits that the assessee has not received any rent from the partnership firm/company, therefore, there is no income from house properties to the assessee and, therefore, no income from house property should be assessed in the hands of the assessee. He, therefore, submits that the addition on account of ALV of Rajkot property Rs.16,000/- and Sarowar, Borivali house at Rs.72,000/- aggregating to Rs.88,000/- made by the AO and upheld by the ld. CIT(A) be deleted. The reliance also placed on the decision of the Hon'ble Orissa High Court in the case of CIT V/s Rabindranath Bhol ( 1995) 211 ITR 799 (Ori) and the decision of the Hon'ble Madras High Court in the case of CIT V/s K.M.Jagannathan (1989) 180 ITR 191 (Mad).
10. On the other hand, the ld. DR relied on the order of the AO and the ld. CIT(A).
11. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that the assessee has given properties of Rajkot and Borivili to its business concerns in which either he is a partner or director. Thus, the above properties are used ITA No.969/Mum/2009 7 (Assessment Year: 2005-06) by the above concerns for the business purposes. It is also not in dispute that the said concerns have not given any rent to the assessee for using the house properties of the assessee as the same are used for the purpose of business
12. In Rabindranath Bhol (supra), it has been held (headnote):
"When a firm carries on business, it is business carried on by the partners of that firm. Every partner is the agent of the other in carrying out that business. Consequently, when a partnership carries on business, each partner thereof must be said to be carrying on that business. Income from house property owned by an assessee and used in business carried on by the partnership firm in which the assessee is a partner would qualify for the exemption provided in section 22 of the Income-tax Act, 1961."
13. In K.M.Jagannathan (supra) it has been held (head note):
"The underlying idea in section 4 of the Indian Partnership Act, 1932, is that when a person enters into a partnership with another or others for carrying on business, such that when the partnership, after its birth, carries on business, it only reflects the constituent partners' way of carrying on their business according to their joint resolve and this principle is also reflected in section 67(2) of the Income-tax Act, 1961. The scheme of the Act envisages an assessment of the firm's total income under its various heads of income and a partner would be subjected to assessment, inter alia, on his share income from the firm. Section 67(2) of the Income-tax Act also recognizes the basic underlying concept of partnership law, according to which, partnership business is nothing but the business carried on by every partner acting on behalf of all. Therefore, as per the legal as well as fiscal theory, a partner may be appropriately regarded as carrying on business even if the other partners look after the business of the firm and the user and occupation by the firm, in which the assessee is a partner, of portions of the property belonging to the assessee, has to be regarded as occupation of the property owned by the assessee for the purposes of a business carried on by him. For ITA No.969/Mum/2009 8 (Assessment Year: 2005-06) purposes of section 22, the business carried on by the firm should be regarded as being carried on by all the partners and, therefore, no income from the property should be computed in respect of the portion of the property occupied by the firm, of which the assessee is a partner."
14. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the above decisions hold that the income from house property owned by the assessee and used in the business carried on by the partnership firm/company in which the assessee is a partner/director cannot be assessed in the hands of the assessee under the head income from house property and accordingly the addition of Rs.88,000/- made by the AO and sustained by the ld. CIT(A) is deleted. Grounds taken by the assessee are, therefore, allowed and consequently the alternative grounds taken by the assessee are rejected.
15. Ground No.8 taken by the assessee reads as under :
"8. On the facts and circumstances of the case the Ld.CIT(A) has erred in confirming the disallowance of Rs.37,069/- being the expenditure incurred on insurance and depreciation on the car while computing income from business. The appellant prays that he is entitled to deduction of Rs.37,069/- while computing an income under the head business."
16. Brief facts of the above issue are that the AO noted that the assessee has claimed car depreciation of Rs.29,491/- and car insurance Rs.7,578/- while calculating the income from ITA No.969/Mum/2009 9 (Assessment Year: 2005-06) business. The AO observed that the assessee has received total amount of Rs.14,78,357/- as interest, salary, remuneration and share profit from 7 firms in which he is a partner. Out of this amount, the amount of Rs.11,16,099/- is exempt u/s 10(2A) of the Act. It was submitted by the assessee that for attending affairs of the firm M/s Shubh Nand, the assessee used his personal car and claimed the depreciation and insurance expenses from the income from partnership firm. It was further submitted that that the above expenses including the depreciation has been incurred wholly and exclusively for the purpose of the business, therefore, the same be allowed. However, the AO held that since the assessee did not carry out any business in individual capacity, therefore, the expenditure on account of car depreciation and insurance is not allowable and accordingly he disallowed car depreciation and car insurance totaling to Rs.37,069/- and added the same to the total income of the assessee. On appeal, the ld. CIT(A) while agreeing with the views of the AO confirmed the disallowance made by the AO.
17. At the time of hearing, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the AO and the ld. CIT(A) also placed reliance on the decision of ITA No.969/Mum/2009 10 (Assessment Year: 2005-06) the Hon'ble Supreme Court in CIT V/s Delhi Safe Deposit Co. Ltd. (1982) 133 ITR 756(Del).
18. On the other hand, the ld. DR supports the order of the AO and the ld. CIT(A).
19. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the assessee has claimed car depreciation and insurance for attending the business affairs of the firm M/s Shubh Nand, in which he is a working partner. According to the assessee since the income from the partnership firm i.e. interest, salary/remuneration and share is assessed under the head income from business or profession, therefore, the claim of the assessee be allowed as the said expenses have been incurred wholly and exclusively for the purpose of business or profession. Per contra, the claim of the Revenue is that the business of the firm M/s Shubh Nand, is the business of partnership firm and not the assessee individual, therefore, the claim made by the assessee is not allowable.
20. The two requisites for depreciation allowance are (i) that the depreciable asset is owned by the assessee and (ii) that it is used for the purposes of assessee's business or ITA No.969/Mum/2009 11 (Assessment Year: 2005-06) profession. In the case before us there is no dispute that the car is owned by the assessee, therefore, the assessee has fulfilled the first condition. With regard to the second condition that it should be used for the purpose of assessee's business or profession. The assessee placed no material on record to show that the assessee has used his car for the purpose of assessee's business. We further find that before the AO the assessee has claimed that the car was used for attending the affairs of the firm M/s Shubh Nand. Since the car was used to look after the affairs of the firm M/s Shubh Nand which is a separate entity and not for the purpose to look after the assessee's business interest i.e. share of profit, interest and remuneration from the said firm and in the absence of any supporting material to show that the car was used for assessee's business, we are of the view that the AO and the ld. CIT(A) were fully justified in disallowing the claim of car depreciation and insurance of the assessee.
21. In Delhi Safe Deposit Co. Ltd. (supra), it has been held (headnote):
"Held, (i) on the facts, that the managing agency agreement with the managed company was a profitable source of income.ITA No.969/Mum/2009
12 (Assessment Year: 2005-06) The assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency, which was an income earning apparatus, and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. Therefore, the expenditure was laid out on purely business considerations and wholly for the purpose of the assessee's business.
(ii) That the fact that the firm had not claimed the expenditure in its return did not affect the right of the assessee to claim deduction in respect of the amount paid by it.
The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader.
The expenditure incurred on the preservation of a profit- earning asset of a business is always a deductible expenditure."
22. Whereas in the case before us the facts are entirely different inasmuch as the assessee has failed to show as to how the car was used for assessee's business, therefore, the decision relied on by the ld. Counsel for the assessee is distinguishable and not applicable to the facts of the assessee's case.
23. Accordingly the ground taken by the assessee is, rejected.
24. Ground Nos. 9 and 10 taken by the assessee read as under :
"9. The Ld.CIT(A) has erred in concluding that the sum of Rs.14,52,105/- be taxed as business income as against ITA No.969/Mum/2009 13 (Assessment Year: 2005-06) the claim of the appellant that the same may be taxed as long term capital gains. The conclusion reached by the Ld.CIT(A) that the long term capital gain is assessable as business income is erroneous.
10. The appellant prays that the sum of Rs. 14,97,179/- may be taxed under the head Capital gains and not as Business income."
25. Brief facts of the above issue are that the AO observed that the assessee has claimed Long Term Capital Gain at Rs.14,52,105/-. The assessee alongwith three others had purchased 1 acre 30 guntha of agricultural land in village Munjka Thaluka & District Rajkot, Gujarat in April 1999. Similarly, another piece of land was purchased by these three persons on 5.4.1999. This land admeasuring 4 acres 9 gunthas was in the same village. Thereafter, both the plots of land were converted into a single plot of land vide order dated 27.5.2003 of the Tehsildar of Tehsil Rajkot. The land was also converted into non-agricultural land vide order 22.3.2004 passed by the District Development Officer of Rajkot Zila Panchayat. A layout was also got sanctioned and the land was converted into a lay- out consisting of 113 plots. The assessee alongwith the other co-owners sold the entire lay-out during the previous year for the amount of Rs.55,10,281/-. The assessee claimed proportionate capital gains from the sale of the said land taking index cost of proportionate cost of Rs.26,888/- considering the ITA No.969/Mum/2009 14 (Assessment Year: 2005-06) date of purchase of 6.2.1991 and Rs.4,520/- as expenses of Stamp duty etc. incurred on 7.4.1999. The assessee has not claimed any other amount of expenditure incurred in connection with the said property. The AO further observed that the activities of the assessee in purchase of the lands, joining the two plots thereby creating a single plot of land, getting the plot converted for non agricultural use and getting the lay-out plan of plots sanctioned from the competent authority lead to only conclusion that the association of the four persons including the assessee had carried out the activities for profit. Therefore, the income arising out of such activity is assessable under the head income from business and not income from capital gains as all such activities are in the nature of business activities only and accordingly the AO included the proportionate income in the hands of the assessee as business income on protective basis as under :
Proportionate sale value Rs.15,28,595
(After deducting the expenses of
sale)
Less: Proportionate cost
Rs.26,888
Proportionate expenses Rs. 4,528 Rs.31,416
Rs.14,97,179
26. On appeal, the ld. CIT(A) after considering various decisions while agreeing with the views of the AO upheld the ITA No.969/Mum/2009 15 (Assessment Year: 2005-06) action of the AO in taxing the income as income from business.
27. At the time of hearing, the ld. Counsel for the assessee submits that the assessee purchased agriculture land on 6.2.1991 and a small portion on 7.4.1999. The assessee was the co-owner having 30% share. The details of the other co- owners are as under:
Name Location Share
a.Shri Girish Govani Mumbai 30%
b. Shri K.D,Govani Rajkot 20%
c. Mrs.Dimple Govani Rajkot 20%
He further submits that all the 4 co-owners are the family
members and after purchasing the land in 1991, except the
disposal of the land, no activity whatsoever was carried out in respect of this land. There is no agreement of co-ownership defining their objective as all the co-owners are family members and the purpose of acquiring the land was investments. The total cost of the land was Rs.1,04,690/- inclusive of the stamp duty and the registration charges of Rs.15,065/-. The contribution of the assessee was 31,407/-. The assessee has not sold any piece of land till A.Y.2005-06. The land sold in AY 2005-06 was purchased in A.Y. 1991-92 ITA No.969/Mum/2009 16 (Assessment Year: 2005-06) and 2000-01. The land is held for a period of 14 years without doing anything. He further submits that the assessee has filed the balance sheets with the return of income and has disclosed this land in the balance sheet under the head fixed assets since 31.3.2000 to 31.3.2004 and the AO has accepted the same as disclosed by the assessee even in the scrutiny assessment. He also placed on record the copy of assessment orders for the assessment years 2001-02 and 2003-04 passed under section 143(3) of the Act. In both these assessments the status of the land, as disclosed by the assessee was accepted. He further submits that the assessee and other co-owners have not undertaken any activity on the above land. The reason being that the assessee and Shri Girish Govani are located in Mumbal and Shri K.D.Govani is aged about 70 years and Smt. D. S. Govani is a housewife. Thus, there is no scope for carrying out any business activity on such land. He further submits that the assessee has converted agricultural land into non-agricultural land and has paid fees and tax to the revenue authorities. This is a normal process where the agricultural land is converted into non-agricultural land. This process was taken place in A.Y.2005-06 and immediately thereafter on receiving the good offer the property was sold as a single piece of land to the purchaser. He further submits that if the assessee ITA No.969/Mum/2009 17 (Assessment Year: 2005-06) takes some steps for improvement of the agricultural land it does not mean the business activities were carried on by the assessee. He further submits that the assessee is full time involved in his business in Mumbai. He further submits that in the case of other co-owners the AO has accepted the gain as long term capital gain as shown by the co-owners. He further submits that the assessee has not sub-divided the piece of land into 113 plots but the authorities gave numbers on notional sub-division as the land was converted into non- agricultural land. The assessee has not spent a single paisa and if large plot of land of 5 acres (approximately) is divided into 113 plots, then substantial expenditure needs to be incurred which is not the case of the assessee. He, therefore, submits that the long term capital gain shown by the assessee be accepted.
28. On the other hand, the ld. DR supports the order of the AO and the ld. CIT(A).
29. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that according to the AO the land was converted into layout consisting 113 plots whereas according to the assessee the numbers of 113 plots was given by the authorities on a ITA No.969/Mum/2009 18 (Assessment Year: 2005-06) notional sub-divisions basis as the land was converted into non-agricultural land and no expenditure was incurred by the assessee on the division of said plots. We further find that in the sale agreement dated 21.8.2004 the said land was described as under:
"(1).....And the above said Non-Agricultural land is used for construction of Building on the approved land under Plot No. 1 to 113 the total land use admeasuring about in square meter 14056-84 equivalent to 16812-15 is under use and occupy and owned by us."
We further find that in clause 3, it has been mentioned as under :
"(3) The above said land under Survey No.26, out of the land comes Acres 5-39 Guntas the approved land with its plan lay-outs under Plot No.1 to 113 the public use plot, with including Road area the total land admeasuring about square meter 24180.00 and the above said land having its four side boundaries...."
From the reading of the above it is clear that the land was sold in square meter and not in acres. There is no material on record to show as to whether the AO, has examined the sale deed of the property, the copy of which has been filed before us showing the lay-out of 113 plots on the said land and whether any expenditure on said lay out of 113 plots has been incurred by the assessee. There is also no material on record to show as to whether any substantive assessment has been made in status of association of persons as observed by the ITA No.969/Mum/2009 19 (Assessment Year: 2005-06) AO in paragraph 4.3 of the impugned assessment order as in the present case the addition was made on protective basis. In this view of the matter and in the interests of justice we consider it fair and reasonable that the matter should go back to the file of the AO and accordingly we set aside the orders passed by the revenue authorities on this account and restore the matter to the file of the AO to decide the same afresh in the light of our observations hereinabove and according to law after providing the reasonable opportunity of being heard to the assessee. The grounds taken by the assessee are, therefore, partly allowed for statistical purposes.
30. Ground No.11 taken by the assessee reads as under :
"11. The Ld.CIT(A) has erred in confirming that appellant is liable to pay interest u/s. 234B at Rs.90,790/-.The appellant denies the liability for payment of interest u/s. 234B. On the facts and circumstances of the case the appellant submits that the interest levied u/s. 234B may be deleted."
31. At the time of hearing, the ld. Counsel for the assessee submits that consequential relief be allowed to the assessee which was not objected to by the ld.DR.
32. That being so, we direct the AO that while giving effect of this order, the consequential relief in respect of levy of ITA No.969/Mum/2009 20 (Assessment Year: 2005-06) interest u/s 234B be allowed to the assessee according to law. Ground taken by the assessee is, therefore, partly allowed.
33. In the result, the assessee's appeal is partly allowed for statistical purposes.
Order pronounced in the open court on 27th March,2012.
Sd sd
(G.E.VEERABHADRAPPA) (D.K.AGARWAL)
PRESIDENT JUDICIAL MEMBER
Mumbai, Dated 27th March, 2012.
SRL:
Copy to:
1. Appellant
2. Respondent
3. CIT Concerned
4. CIT(A) concerned
5. DR concerned Bench
6. Guard file.
BY ORDER
True copy
ASSTT. REGISTRAR,
ITAT, MUMBAI