Income Tax Appellate Tribunal - Delhi
Acit Cc-6, New Delhi vs Assessee on 12 June, 2000
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `H': NEW DELHIA
BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND
SHRI K.D. RANJAN, ACCOUNTANT MEMBER
I.T. A. No.1650/Del/2008
Assessment Year : 1995-96
Asstt. Commissioner of I.Tax, M/s. Sahara India Finance &
Central Circle-6, New Delhi. Vs. Investment Corpn. Ltd.
(Formerly known as Sahara
India Housing Corpn. Ltd.),
1, Kapoorthala Complex,
Aliganj, Lucknow.
C.O. No.74/Del/2009
Assessment Year : 1995-96
M/s. Sahara India Finance & Asstt. Commissioner of I.Tax,
Investment Ltd. (Formerly Vs. Central Circle-6, New Delhi.
known as Sahara
India Housing Corpn. Ltd.),
1, Kapoorthala Complex,
Aliganj, Lucknow.
PAN/GIR No.110-S.
(Appellants) (Respondents)
Department by : Ms. Reena S. Puri, CIT-DR.
Assessee by : Shri J.J. Mehrotra, CA.
ORDER
PER K.D. RANJAN, ACCOUNTAT MEMBER:
The appeal by the Revenue and cross objection by the assessee for Assessment Year 1995-96 arise out of the order of the Commissioner of 2 Income-tax (Appeals)-I, New Delhi. These were heard together and for the sake of convenience, are disposed of by this common order.
2. The grounds of appeal raised by the Revenue are reproduced as under:-
"1. The order of the CIT(A) is not correct in law and facts.
2. The Ld. CIT(A) has erred in deleting the disallowance of Rs.17,96,839/- made by the AO on account of employees remuneration and benefits.
3. The Ld. CIT(A) has erred in deleting the depreciation of Rs.1,30,678/-.
4. The Ld. CIT(A) erred in directing the AO to allow rent of the buildings which were used for business purposes."
3. The first issue for consideration relates to deleting the disallowance of Rs.17,96,839/- made by the Assessing Officer on account of employees remuneration and benefits. The brief facts of the case are that the original assessment under sec. 143(3) was made on 12.03.1998 wherein an amount of Rs.17,96,839/- was disallowed under the head "Expenditure on employees remuneration and benefits". The learned CIT(A) vide order dated 12.06.2000 restored the matter back to the Assessing Officer with the direction that a copy of Memorandum of Understanding entered into between the assessee with M/s. Sahara India Housing Corporation Ltd. should be obtained and thereafter the matter should be decided afresh. The 3 Revenue preferred appeal before Income-tax Appellate Tribunal against restoring of matter to the file of the AO by the learned CIT(A). On appeal, ITAT, Lucknow Bench vide their order dated 22nd March, 2005 restored the matter back to the file of the CIT(A).
4. Meanwhile the AO completed set aside assessment on 23rd January, 2002. The learned CIT(A) passed the order dated 14th February, 2008 as directed by ITAT. The learned CIT(A) however, while deciding the set aside appeal by the Tribunal, has taken into account the facts arising from Memorandum of Understanding between the assessee and Sahara India Housing Ltd.
5. The Assessing Officer in the set aside assessment proceedings obtained the copy of Memorandum of Understanding entered into between the assessee and Sahara India Housing Ltd. As per Memorandum of Understanding dated 21st March, 1994 the assessee agreed to transfer the entire development project to Sahara India Housing Ltd. including the work done, in progress and also to be executed subsequently in respect of which advances have been made by the assessee and which are not in final stage in phased manner by 31st March, 1996. It was mutually agreed between the parties that all the administrative expenses viz. salaries, rent, repairs & maintenance, travelling and conveyance, legal and professional charges, 4 expenses etc. incurred upto date by the assessee shall not be borne by the second party i.e. Sahara India Housing Ltd. but only the expenses directly related towards the development of land and also various advance transactions made in cash therewith shall be transferred by the first party to the second party i.e. by the assessee to Sahara India Housing Ltd. After the date of agreement no part of expenses incurred in connection with remaining development work on the project by the first party has to be charged on actual basis from the second party. The expenses incurred by the assessee do not relate to the business of the assessee after the date of said Memorandum of Understanding. Therefore, the AO required the assessee to explain as to why the claim for expenditure made by the assessee should not be disallowed. The assessee in response to the reply submitted that they had to carry on development work and hand over to M/s. Sahara India Housing Ltd. by 31st March, 1996. As a result, the assessee had to keep employees to get the work executed and therefore, salary paid to these employees was fully allowable as business deduction in the hands of the assessee. It was also submitted that expenditure incurred for the purpose of trade of assessee had been incurred for commercial expediency. Since as per the terms of MOU the assessee was to hand over the entire project to Sahara India Housing Ltd. by 31st March, 1996, the expenditure incurred upto that period 5 by the assessee was an expenditure which was benefited by the assessee inasmuch as the assessee has to save and realize the cost of development which it had incurred upto the date of entering the MOU otherwise the same could not have been realized by the assessee.
6. This contention of the assessee was rejected by the AO on the ground that the assessee had tried to distinguish the expression "fully and exclusively" does not mean necessarily which leads to the inference that the expenditure was not necessary for the purpose of assessee's business. Secondly, the assessee had also indirectly admitted that the expenses were incurred for the purpose other than the assessee's own business activity after the date of execution of Memorandum of Understanding. By incurring those expenses the assessee's argument that it had saved itself from other losses was totally illogical because the project has been transferred on actual cost basis. In the real estate business the time factor is very important. The cost of the land increases day-to-day and therefore, the theory of loss was found to be baseless. The AO further noted that the expenses under this head had been claimed mainly for the employees at the site of Lonawala which had been working for development of plot of land and housing activities for the benefit of Sahara India Housing Ltd. The AO therefore, disallowed the claim of the assessee.
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7. Before the CIT(A) the assessee made similar arguments. The learned CIT(A) on consideration of the terms of Memorandum of Understanding observed that the AO had relied on clauses (iii), (iv), (v) & (vi) of the MOU to arrive at his conclusion. Rest of other clauses i.e. (i), (ii), (vii), (viii), (ix) & (x) were totally ignored by the AO and had drawn conclusion on the basis of points which he has mentioned in the assessment order. Clause (ii) clearly states that the second party agrees to take the entire development work project including the work done, in progress and also the transactions of advances etc. which are not in a final stage from the first party in a phased manner by 31st March, 1996. Further clause (vii) of MOU also stated that the assessee shall provide all necessary assistance/information to the second party as regards the work done, work in progress and works to be executed in respect of the said project to the second party. Since the project was handed over in phased manner during the period of two years the learned CIT(A) came to the conclusion that the AO was not justified in disallowing the claim. The learned CIT(A) also placed reliance on the decision of Hon'ble Supreme Court in the case of Eastern Investment Ltd. vs. CIT, 20 ITR 1 (SC); J.R. Patel & Sons Pvt. Ltd. vs. CIT, 69 ITR 782; Aluminium Corporation of India Ltd. vs. CIT, 86 ITR 11 and decision of Hon'ble Calcutta High Court in the case of Indian Steel & Wire Products Ltd. vs. 7 CIT, 69 ITR 379. The learned CIT(A) finally concluded that the observation of the AO was not in conformity with the Memorandum of Understanding and the facts of the case. The expenditure made by the assessee was the business exigency and directly related to the transfer of project brought over in two years. Therefore, the addition made by the AO was deleted.
8. Before us the learned CIT-DR submitted that the learned CIT(A) has passed a consolidated order in respect of set aside proceedings to the CIT(A) by ITAT and assessment framed by the AO as per directions of the CIT(A) in setting aside the original assessment. She further submitted that Memorandum of Understanding was entered into between the assessee and Sahara India Housing Ltd. on 21st March, 1994 with effect from 1.04.1994. As per clause (ii) of Memorandum of Understanding M/s. Sahara India Housing Ltd. agreed to take over the entire development work including the work done, in progress and also transactions and advances which were not in final stage from the assessee in a phased manner by 31st March, 1996. However, as per clause (iv) of Memorandum of Understanding, the uncompleted work and transaction in respect to the development work shall be made in the name of the second party (M/s. Sahara India Housing Ltd.) as far as possible for and on behalf of the second party (Sahara India Housing Ltd.) by first party (the assessee) and shall be directly debited to the account 8 of the second party by the first party. As per clause (v) the transfer of entire development project by first party to the second party was to be made on actuals for which detailed statement shall be submitted by the first party to the second party. She therefore, submitted that the expenditure after 1.04.1994 in relation to employees` remuneration etc. was to be borne by M/s. Sahara India Housing Ltd. and not by the assessee. The learned CIT(A) has therefore, wrongly allowed the claim of the assessee on the ground that the project was to be handed over in a phased manner by 31st March, 1996. Moreover, the learned CIT(A) had applied the principle of commercial expediency which does not flow from the Memorandum of Understanding. The expenditure incurred by the assessee should not have been debited in the accounts and as per the Memorandum of Understanding, should have been transferred to the account of Sahara India Housing Ltd. Therefore, she pleaded that the AO had rightly disallowed the claim of the assessee. On the other hand, the learned AR of the assessee submitted that as per the Memorandum of Understanding the project was to be transferred to Sahara India Housing Ltd. in a phased manner from 1.4.1994 to 31st March, 1996. The payment of salary etc. till the project was transferred was the liability of the assessee and accordingly till the project was transferred, the same was to be borne by the assessee and has to be allowed in the hands 9 of the assessee. It was also clarified that the assessee had received Rs.2.5 crores refund from M/s. Sahara India Housing Ltd. Therefore, it cannot be said that the entire expenditure was incurred by the assessee.
9. We have heard both the parties and gone through the material available on record. We have gone through the Memorandum of Understanding carefully. The terms and conditions of Memorandum of Understanding are reproduced as under:-
"(i) That the First Party agrees to transfer the entire development work project to Sahara India Housing Ltd including the work done, in progress and also to be executed subsequently in respect of which advance has been made by the First Party and which are not in a final stage in a phased manner by 31st March, 1996.
(ii) That the Second Party agrees to take the entire development work project including the work done, in progress and also the transactions of advances etc. which are not in a final stage from the First Party in a phased manner by 31st March, 1996.
(iii) That it has been mutually agreed upon that all the administrative expenses, viz. Salaries, Rent, Repairs and Maintenance, Travelling and Conveyance, Legal and Professional Charges, Expenses etc. incurred upto date by first party shall not be borne by the Second Party but only the expenses directly related towards the development of land and also the various advances/transactions made in connection therewith shall be transferred by the First Party to the Second Party.
(iv) That subsequent to the date of this Memorandum of Understanding uncompleted work and transactions in respect to the development project shall be made in the name of the second party as far as possible for and on behalf of the Second 10 Party by First Party and shall be directly debited to the account of the Second Party by the First Party.
(v) That it has been mutually agreed upon that the transfer of the entire development project by the First Party to the second Party shall be made on actuals for which detailed statement shall be submitted by the First Party to the Second Party.
(vi) That the Second Party agrees to pay the total consideration in respect to the development work project to the First Party latest by 31st March, 1996.
(vii) That the First Party shall provide all necessary assistance/information to the Second Party as regards the work done, work in progress and works to be executed in respect of the said project to the Second Party.
(viii) That the First Party hereby transfers all its rights taken from the land owners through revocable Power of Attorney for the purposes of development of Lanawala Project to which necessary consent from all the respective parties shall be taken in due course.
(ix) That both the parties to the Memorandum of Understanding agreed to comply with all the formalities in respect of transfer of project by the end of 31st March, 1996.
(x) That in case of any dispute between the parties the matter shall be referred to Shri Subrata Roy Sahara who shall be the sole arbitrator and whose decision shall be final and binding on both the parties."
10. There is no dispute about the fact that as per clause (i) and clause (ii) of Memorandum of Understanding that the Housing Project at Lonawala was to be transferred in phased manner by 31st March, 1996. Clause (iii) of Memorandum of Understanding states that all the administrative expenses 11 viz. salaries, rent, repairs & maintenance, travelling & conveyance, legal & professional charges etc. incurred upto the date by the first party i.e. assessee upto 31st March, 1994 shall be borne by the second party i.e. Sahara India Housing Ltd. but only the expenses directly related towards the development of land and also the various advances/transactions made in connection therewith shall be transferred by the assessee to Sahara India Housing Ltd. Further as per clause (iv) of MOU, "subsequent to the date of this Memorandum of Understanding uncompleted work and transactions in respect to the development project shall be made in the name of the second party as far as possible for and on behalf of second party by the first party." From plain reading of clause (iv) of MOU it is clear that subsequent to the date of MOU i.e. 21.03.1994 (say with effect from 1.4.1994) uncompleted work and transactions in relation to development project was to be carried out by the first party on behalf of second party and the expenditure relatable thereto was to be debited to the account of second party. Nowhere in the MOU it is stipulated that the expenditure incurred by the assessee during the period of transfer of the project in the phased manner should be borne by the first party. Since there is no ambiguity in the terms and conditions of MOU, in our considered opinion, the expenditure incurred by the assessee in respect of salaries etc. relating to the employees working at the site of 12 Lonawala project was to be recovered from M/s. Sahara India Housing Ltd. It is important to note that none of the clauses of MOU stipulate that the assessee was under obligation to incur such expenditure after the date of MOU particularly with effect from 1.04.1994. Therefore, the principle of commercial expediency does not emanate from the MOU. Merely because project was to be handed over in a phased manner, in our considered opinion the learned CIT(A) was not justified in allowing the claim of the assessee in respect of expenditure on salaries incurred on behalf of Sahara India Housing Ltd. as deduction in the hands of assessee. Since expenditure had been incurred by the assessee on behalf of Sahara India Housing Ltd. and the same was to be debited to the account of second party i.e. Sahara India Housing Ltd., in our considered opinion, the AO was justified in disallowing the claim of the assessee. Since the principle of commercial expediency is not applicable in the case of assessee, we hold that the learned CIT(A) was not justified in allowing the relief to assessee on the principle of commercial expediency. We accordingly set aside the order of the CIT(A) and restore that of the Assessing Officer.
11. Next issue for consideration relates to deleting the depreciation of Rs.1,30,678/-. The facts of the case relating to this ground of appeal are that the assessee claimed depreciation on fixed assets which were not in use in 13 assessee's own business but were used at the site of development of project at Lonawala. Since the assets were not used for the business of the assessee, the Assessing Officer disallowed depreciation of Rs.1,30,678/-.
12. The learned CIT(A) however observed that since the addition under the head "Employees' remuneration" had been deleted by him, he directed the AO to allow depreciation as per provisions of law.
13. Before us the learned CIT-DR submitted that the issue relating to depreciation arising out of original assessment was dismissed by ITAT treating it as infructuous since the learned CIT(A) set aside the matter to the file of the AO. She further submitted that the machinery was utilized by Sahara India Housing Ltd. and therefore, depreciation after the date of MOU, cannot be allowed. On the other hand, the learned AR of the assessee supported the order of the CIT(A).
14. We have heard both the parties and gone through the material available on record. There is no dispute about the fact that the AO had disallowed depreciation in respect of assets which have been used for housing project at Lonawala. As per Memorandum of Understanding the Lonawala project was undertaken by Sahara India Housing Ltd. with effect from 1.4.1994. Therefore, the assets were for the business of Sahara India Housing Ltd. and not for the business of the assessee. Therefore, 14 depreciation in respect of such assets cannot be allowed in the hands of the assessee. Accordingly, we are of the considered opinion that the learned CIT(A) is not justified in allowing the claim for depreciation in the hands of the assessee. We, therefore, set aside the order of the CIT(A) and restore the order of the Assessing Officer in respect of depreciation.
15. Next issue for consideration relates to allowing the rent of the building which was used for the purpose of assessee's business. The facts of the case relating to this ground are that the AO in the original assessment disallowed rent of Rs.4,58,975/- under sec. 40A(2)(b) of the Act. The learned CIT(A) deleted the addition. However, on appeal ITAT vide order dated 22nd March, 2005 restored the issue back to the file of the CIT(A) with the direction to decide the issue afresh after taking into consideration the terms as contained in MOU. For the relevant Assessment Year the assessee paid rent in respect of the following premises:-
Sahara India Bhawan, Lucknow. Rs.1,08,000/-
S.V. Road, Goregaon Rs.1,17,000/-
Ambadeep. New Delhi. Rs.2,40,000/-
Lonawala Rs. 66,225/-
Pune Rs. 28,600/-
Ambavani Rs. 7,150/-
-----------------
Total Rs.5,66,975/-
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The assessee made payment of Rs.2,40,000/- in respect of Ambadeep Building, New Delhi, to Sahara India, owner of the property. The amount of Rs.1,17,000/- was made to Sahara India Housing Ltd. The AO in the original assessment observed that payment of rent by the assessee for the building used by Sahara India Housing Corporation Ltd. could not be said to be for its own business purpose. Moreover, payment in respect of building at 7th Floor, Sahara India Bhawan at S.V. Road, Goregaon and Ambadeep, New Delhi, Lonawala, Pune & Ambavani, fell in the category of persons under sec. 40A(2)(b) of the Act. Since the assessee had his registered office at Lonawala and was showing income from interest. Therefore, rent charges in respect of building at 7th floor, Sahara India Bhawan would be allowable and the balance of Rs.4,58,975/- out of expenses under the head "rent" would be disallowed. It was submitted by the assessee before the AO that entire project at Lonawala was transferred to Sahara India Housing Ltd. which has thereafter taken a project of development of land, the assessee company had not provided any service to Sahara India Housing Ltd. The AO did not accept the contention of the assessee.
16. The learned CIT(A) however, observed that the AO should have made assessment as per terms and conditions of Memorandum of Understanding. Addition made by the AO was contradictory to his own observations made 16 in the assessment order. The learned CIT(A) therefore, directed to allow the rent of the buildings which were used for business purpose on the basis of Memorandum of Understanding.
17. Before us, the learned CIT-DR submitted that provision of rent does not flow from the MO and the learned CIT(A) has decided the issue contradictory to the directions of ITAT. The learned CIT(A) has not called for any remand report from the Assessing Officer. Therefore, directions given by him are vague. On the other hand, the learned AR of the assessee has submitted that buildings have been used for the purpose of business and therefore, the learned CIT(A) is justified in allowing rent paid by the assessee.
18. We have heard both the parties and gone through the material available on record. From the order of the CIT(A) the facts are not clear. At the same time, the learned AR of the assessee also could not establish the correct facts in relation to the premises used by the assessee for the purpose of business. There is no doubt that the rent relating to the property used for the Lonawala project is to be borne by Sahara India Housing Ltd. Since the full facts of the building used for which rent is paid by the assessee, is not coming out of the order of the CIT(A) or the AO, we feel it proper to set aside the issue to the file of the Assessing Officer with the direction to 17 examine as to whether the properties in respect of which rent has been paid by the assessee, have been utilized for the purpose of business. The AO will allow the rent paid by the assessee in respect of the premises used wholly and exclusively for the purpose of assessee's own business. No rent will be allowed in case the premises are not used by the assessee during the Assessment Year under consideration wholly and exclusively for the purpose of its own business. The AO will decide the issue after affording the assessee a reasonable opportunity of being heard. He will call for necessary details in respect of the properties and their use for the purpose of assessee's business. We order accordingly.
19. In the result, the appeal filed by the Revenue is partly allowed for statistical purposes.
20. Now coming to the cross objection filed by the assessee, the grounds of CO are reproduced as under:-
"1.That the Learned CIT(A) is fully justified in allowing employee's remuneration and benefits on the facts and circumstances of the case as well as in law.
2. That the Learned CIT(A) is fully justified in allowing depreciation on assets of Rs.1,30,678/- to the Respondent on the facts and circumstances of the case as well as in law.
3. That the Learned CIT(A) is fully justified in allowing expenditure under the head rent as claimed by the Respondent on the facts and circumstances of the case as well as in law.18
4. That the Learned CIT(A) has erred in law and on facts in rejecting the claim of Rs.41,147/- made by the Respondent on account of expenditure under the head repairs which was disallowed by the Assessing Officer relying on his disallowances made under the head employee's remuneration."
21. The first issue relates to allowing depreciation of Rs.1,30,678/-. This ground of appeal is in support of order of the CIT(A). Since we have held that depreciation will not be allowable in respect of assets which have been used by Sahara India Housing Ltd. at Lonawala Project, this ground of cross objection is to be dismissed. We dismiss this ground accordingly.
22. The next issue for consideration relates to rent claimed by the assessee. We have set aside this issue to the file of the AO. Since the issue has been set aside to the file of the AO, no other direction is necessary on this issue.
23. The last issue for consideration relates to confirming the addition of Rs.41,147/- on account of expenditure under the head "Repairs". The AO has disallowed the claim of the assessee on the ground that the expenses were incurred at Project site of Lonawala. The learned CIT(A) confirmed the disallowance on the ground that the assessee could not file any satisfactory evidence for incurring of such expenditure. The learned CIT(A) upheld the disallowance of Rs.41,147/-.
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24. Before us, the learned AR of the assessee could not file any details in respect of the expenditure incurred at Rs.41,147/-. Since the assessee had not filed any details either before the CIT(A) or before us, we do not find any reason to interfere with the findings of the learned CIT(A) confirming the addition. Hence, this ground of cross objection is dismissed.
25. In the result, the cross objection filed by the assessee is partly allowed for statistical purposes.
26. To sum up, the appeal filed by the Revenue and cross objection filed by the assessee are partly allowed for statistical purposes.
27. This decision is pronounced in the Open Court on 30th March, 2012.
Sd/- Sd/-
(U.B.S. BEDI) (K.D. RANJAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 30th March, 2012.
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR By Order
*mg Deputy Registrar, ITAT.