Income Tax Appellate Tribunal - Mumbai
Normandy Developments P. Ltd, ... vs Assessee on 11 October, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHE "F", MUMBAI.
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER.
ITA No. 2951/Mum/2010
Assessment Year 2006-07
M/s Normandy Developments Dy. Commissioner of Income-tax,
Pvt. Ltd., 7(1), Mumbai.
C/o Raffles Solutions P. Ltd.,
8th Floor, "The Estate", Vs.
121, Dickenson Road,
Bangalore - 560042.
PAN AAACN5541N
Appellant Respondent
Appellant by : Shri Parsi Pardiwala,
Shri Niraj Seth.
Respondent by : Shri Sriniwas Reddy.
Date of hearing : 11-10-2011.
Date of pronouncement : 21-10-2011.
ORDER
PER SHRI. P.M.JAGATAP.
This appeal filed by the assessee is directed against the order of learned CIT(Appeals)-13, Mumbai dated 13-01-2010 for A.Y. 2006-07.
2. The relevant facts of the case giving rise to this appeal are as follows. The assessee is a company which filed its return of income for the year under consideration i.e. 2006- 07 on 30.11.2006 declaring total income of Rs. 30,73,493/-. It had taken certain premises on lease from one M/s Printers India, Bangalore as per the agreement dated 24.4.96 for a period of ten years. Security deposit of Rs. 6 crores was also kept by the assessee with M/s Printers India in terms of the said agreement. The said premises was sub-leased by 2 ITA No.2951/Mum/2010 Assessment Year:2006-07 the assessee to its sister concern M/s Raffles Software Pvt. Ltd. and rent amounting to Rs. 43,90,704/-/- was received from the said concern during the year under consideration. As per the agreement, the assessee company was liable to pay monthly rent of Rs. 60,000/- to M/s Printers India. M/s Printers India had assured certain minimum return to the assessee company from the property leased out after adjusting all the expenses incurred on the said property including the interest on investment made by it and had also undertaken to compensate the deficit, if any, in the amount of such minimum return. It was agreed between the assessee company and M/s Printers India that such deficit shall be computed monthly and if the same is not paid by the M/s Printers India, it will be treated as additional deposit kept by the assessee company with them. During the year under consideration, the assessee received rental income of Rs.43,90,704 from M/s Raffles Software Ltd. and after claiming statutory deduction of Rs. 13,17,211/- u/s 24 being 30% of rental income, the balance amount was offered to tax by it under the head "income from house property". The AO held that the rental income earned by the assessee from the property taken on lease and given on sub-lease was chargeable to tax in its hand under the head "income from other sources" and not under the head " income from house property". As regards the alternative claim of the assessee company for allowing various expenses incurred by it in relation to the property, the A.O. found that as per the agreement, property tax and repairs and maintenance expenses were to be borne by the lessor whereas maintenance charges were to be borne by the licensee. He held that the assessee company thus was not entitled to claim any deduction for the same as well as other administrative expenses except the statutory outgoing of Rs. 21,802/- for maintaining its corporate status. Accordingly, the rental income of Rs. 43,68,802/- was brought to tax by him in the hands of the assessee under the head "income from other sources".
3. The A.O. also found that as per the lease agreement between the assessee company and M/s Printers India, minimum return from the lease transaction was assured to the assessee company by the lessor and any deficit was to be paid by the lesser to the 3 ITA No.2951/Mum/2010 Assessment Year:2006-07 assessee company along with interest. He noted in this context that even though such deficit was worked out on year to year basis and the same was also shown as receivable by the assessee company from M/s Printers India in its books of account, interest thereon as stipulated in the agreement was neither shown in the books of account nor the same was offered to tax in the return. According to the A.O., the said interest income receivable to the assessee from M/s Printers India as per the agreement had accrued during the year under consideration and the assessee company following mercantile system of accounting should have offered the same to tax. In this regard, he rejected the contention raised on behalf of the assessee company that the recovery of security deposit given to M/s Printers India as well as the amount receivable on account of deficit itself had become doubtful of recovery and there was thus no income on account of interest that had actually accrued to by it during the year under consideration in the real sense. According to the A.O. interest as and when accrued had to be booked as income since assessee was following mercantile system of accounting and in case of non-recovery or the debt going bad, the same could be written off and claimed as deduction. Accordingly, he worked out the interest receivable by the assessee on the deficit amount at Rs. 71,84,482/- by adopting interest rate of 13% per annum and added the said amount to the total income of the assessee under the head "income from other sources" in the assessment completed u/s 143(3) by an order dated 03.11.2008.
4. Against the order passed by the A.O. u/s 143(3), an appeal was preferred by the assessee before the ld. CIT(A) and after considering the submissions made on behalf of the assessee before him as well as the relevant material on record, the ld. CIT(A) upheld the action of the A.O. in bringing to tax the entire rental income of Rs. 43,68,802/- in the hands of the assessee company under the head "income from other sources". He held that the expenses claimed by the assessee were not allowable as deduction against the rental income in terms of section 57(iii) as rightly held by the A.O. He also confirmed the addition of Rs. 71,84,482/- made by the AO on account interest holding that the said income had accrued to the assessee as per the agreement. Aggrieved by the order of the 4 ITA No.2951/Mum/2010 Assessment Year:2006-07 ld. CIT(A), the assessee has filed this appeal before the Tribunal on the following grounds:
Ground I:
1. On the facts and circumstances of the case and in law, the CIT(Appeals) erred in confirming the action of the AO of treating the income of Rs.43,68,802/-
as income under the head "Income from Other Sources" instead of treating it as "Income from House Property" as returned by the Appellant on the alleged ground that the assessee is not the deemed or legal owner of the property.
2. In doing so, he erred in not applying the provisions of clauses (iiia) and (iiib) of Section 27 which deal with deemed ownership.
3. He failed to appreciate and ought to have held that the Appellant's case does not fall within the exception carved out by clause (iiib) of Section 27 as held by the Hon'ble Bombay High court in the Appellant's own case in the A.Y. 2001-
02.
4. The Appellant, therefore, prays that it be held that the Appellant is the deemed owner of the said property and hence the income should be assessed under the head "Income from House Property" instead of the head "Income from Other Sources".
Without prejudice to Ground I:
Ground II:
1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO of disallowing expenses related to property and administration incurred by the company.
2. He failed to appreciate and ought to have held that these expenses were incurred wholly and exclusively for the purpose of earning lease rentals.
3. Therefore, the Appellant prays that the AO be directed to allow the deduction of all the expenses claimed by the Appellant. Ground III.
1. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO of making addition of the notional interest of Rs71,84,482/- on the alleged ground that the interest has been accrued during the year based on the agreements dated 20-4-1996 and 24-4-1996.5 ITA No.2951/Mum/2010
Assessment Year:2006-07
2. He failed to appreciate and ought to have held that it was not justified to tax notional interest.
3. The Appellant prays that the aforesaid addition on account of notional interest be deleted.
5. We have heard the arguments of both the sides and also perused the relevant material on record. As regards ground no. 1, the ld. Representatives of both the sides have agreed that the issue involved therein relating to the head of income under which rental income is chargeable to tax now stands squarely covered by the decision of Hon'ble Bombay High Court in assessee's own case for A.Y. 2001-02 rendered by a judgment dated 7.1.2010 passed in I.T. Appeal No. 2431 of 2009 wherein it is held that the lease between the assessee company and M/s Prince India being for a period of 10 years, the case of the assessee would not fall within the exception carved out by clause (iiib) of section 27 and the assessee thus was deemed owner of the said property. The Hon'ble jurisdictional High Court accordingly upheld the decision of the Tribunal holding that the rental income received by the assessee from sub-lease of the said property is chargeable to tax under the head "income from house property". Respectfully following the said decision of the Hon'ble jurisdictional High Court in assessee's own case for A.Y. 2001-02, we set aside the impugned order of the ld. CIT(A) on this issue and direct the A.O. to assess the rental income received by the assessee under head "income from house property". Ground no. 1 is accordingly allowed.
6. As regards Ground no. 2, it is observed that the issue raised therein relating to allowability of various expenses against the rental income is consequential in as much as the rental income having been held to be assessable under the had "income from house property", the claim of the assessee for the said expenses need to be considered as per the relevant provisions of the Act applicable in respect of computation of income under the said head. Accordingly, we restore this issue to the file of the A.O. with a direction to 6 ITA No.2951/Mum/2010 Assessment Year:2006-07 allow the claim of the assessee for deduction on account of various expenses as per the relevant provisions of the Act after necessary verification. Ground no. 2 is accordingly treated as allowed for statistical purpose.
7. As regards Ground no. 3, it is observed that the issue raised therein relating to the addition made by the A.O. and confirmed by the learned CIT(A) on account of interest on deficit amount, is squarely covered in favour of the assessee by the order of the Tribunal dated 9th July, 2009 passed in assessee's own case for earlier years i.e. A.Y. 98-99 to 2005-06 where a similar issue was decided as under:
18. We have considered the rival submissions and also perused the relevant material on record. It is no doubt true that the amount of deficit along with interest was receivable by the assessee company from M/s Printers India in terms of the lease agreement entered into between the said two parties. It is also true that such deficit was worked out by the assessee company on year to year basis and the same was also duly accounted for and shown as receivable from M/s Printers India. However, the said liability to pay the deficit amount to the assessee company was never acknowledged and recognized by the M/s Printers India and as stated on behalf of the assessee before the authorities below as well as before us, there was a dispute between these two parties relating to payment of the said liability. There is nothing brought on record by the A.O. to dispute this position.
On the other hand, the settlement finally reached between these two parties in the year 2006 clearly corroborated the stand of the assessee that there was a dispute between the two parties relating to the payment of deficit amount and the recovery of the said amount was doubtful as claimed by the assessee.
19. During the course of appellate proceedings before us, the ld. Counsel for the assessee has filed a copy of the settlement agreement dated 25.3.2006 executed by the parties as per the direction of the Bench and a perusal of the same shows that only the amount of Rs. 6 crores initially kept as security deposit by the assessee company with M/s Printers India as per the lease agreement was finally paid by M/s Printers India and the balance amount of Rs. 5,32,18,385/- receivable by the assessee on account of deficit amount was required to be given up by the assessee company. As stated in the said agreement, there were differences between the assessee company and M/s Printers India as regards the payment of other receivables as a result of which the account between the two parties could not be settled earlier. It was also mentioned that in view of the said differences, M/s 7 ITA No.2951/Mum/2010 Assessment Year:2006-07 Printers India never accounted for the said liability in its books of account being disputed one. It was also agreed that in view of the said settlement agreement, all other agreements entered into between the parties shall stand amended, substituted and modified by this Memorandum, the terms of which shall supersede all previous agreements and/or arrangements whatsoever subsisting between the parties. In terms of the said agreement, the assessee company also agreed to give up, waive/extinguish its rights to claim any amount including the amount of deficit receivable from M/s Printers India. All these terms and conditions of the settlement agreement executed subsequently on 25.3.2006 clearly shows that there was a dispute between the assessee company and M/s Printers India relating to payment of deficit amount as a result of which M/s Printers India never acknowledged and recognized the liability to pay the said deficit amount. Moreover, the said amount on account of deficit has not been finally received by the assessee and the same was required to be given up by it as per the settlement agreement. It clearly supports the case of the assessee that the recovery of deficit amount itself from M/s Printers India was doubtful during the relevant period and there was no accrual of income on account of interest on such deficit amount in real sense.
20. In the case of CIT vs. Goyal M.G. Gases P. Ltd. (supra) cited by the ld. Counsel for the assessee, the assessee had given bill discounting facility to a company "K". That company was unable to pay the debts with a result that the assessee sent winding up notices to it and thereafter filed a winding up petition in the Calcutta High Court. As a result of recovery of the said amount had become doubtful, interest thereon was neither accounted for by the assessee company in its books of account nor the same was offered to tax. According to the A.O., since the assessee was following mercantile system of accounting and efforts were being made by it to recover the amount from "K", interest had accrued to the assessee as its income. He, therefore, made addition to the total income of the assessee on account of such interest income. The said addition was deleted by the Tribunal. On an appeal, it was held by the Hon'ble Delhi High Court that in the facts and circumstances of the case realization of the principal amount was in jeopardy and, therefore, there could not be said to be any real accrual of income by way of interest. To the similar effect is the decision of Hon'ble Delhi High Court in another case namely Eicher Ltd. (supra) cited by the learned counsel for the assessee wherein it was held that the loan itself having become irrecoverable, interest thereon could not be said to have really accrued to the assessee. In these decisions, the Hon'ble Delhi High court followed the principle laid down by the Hon'ble Supreme Court, inter alia, in the case of CIT vs. Birla Gwalior P. Ltd. 89 ITR 266 (SC) that even if the accounts are maintained on mercantile system of accounting what has to be seen is whether income can be said to have really accrued to the assessee. In the case of CIT vs. Laxmi Dal Mills (supra) cited by 8 ITA No.2951/Mum/2010 Assessment Year:2006-07 the learned counsel for the assessee, the Hon'ble Allahabad High Court also had an occasion to consider a similar issue and it was held in this context that where recovery of principal amount itself was in doubt, the assessee as a prudential businessman was rightly deciding not to charge any interest from the debtors and there was no question of adding any estimated amount of interest on loan advanced by the assessee to debtor.
21. Keeping in view the legal position emanating from the judicial pronouncements discussed above and considering all the facts of the case, we are of the view that the recovery of deficit amount receivable by the assessee from M/s Printers India itself being doubtful, no income on account of interest thereon had accrued to the assessee in the real sense and the addition made by the A.O. on account of such interest to the total income of the assessee was not justified. In that view of the matter, we uphold the impugned order of the ld. CIT(A) deleting the said addition made by the A.O. and dismiss this appeal filed by the Revenue.
8. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to the earlier years decided by the Tribunal, we follow the order of the Tribunal and delete the addition made by the A.O. and confirmed by the learned CIT(A) on account of interest on deficit amount. Ground No. 3 is accordingly allowed.
9. In the result, the appeal of the assessee is allowed as indicated above.
Order pronounced on 21st October, 2010.
Sd/- Sd/-
(V. DURGA RAO) (P.M. JAGTAP)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, 21st October, 2010.
Wakode
9
ITA No.2951/Mum/2010
Assessment Year:2006-07
Copy to...
1. The appellant
2. The Respondent
3. The CIT(A) Concerned - Mumbai
4. The CIT, Concerned, Mumbai
5. The DR Bench, B
6. Master File
// Tue copy//
BY ORDER
DY/ASSTT. REGISTRAR
ITAT, MUMBAI