Expenses to maintain relationship in business is allowable and rent received by sub-lessor cannot be treated as income of first lessor

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES “E”, MUMBAI

BEFORE SHRI R. S. SYAL, ACCOUNTATN MEMBER

AND SHRI VIVEK VARMA, JUDICIAL MEMBER

ITA No.: 6776/Mum/2010

Assessment Year: 2007-08

Sahney Kirkwood Private Limited

27, Kirol, Vidya Vihar (West),

Mumbai-400 086

PAN NO: AAACS 5304 A

(Appellant)

Vs.

Additional Commissioner of Income Tax,

Range 10(2), Mumbai

 (Respondent)

Appellant by: Shri Ronak G. Doshi

Respondent by: Shri Dinesh Kumar

Date of hearing: 16.05.2012

Date of Pronouncement: 23.05.2012

O R D E R

Per VIVEK VARMA (J.M.):

The appeal is filed by the assessee against the order of CIT(A) 22, Mumbai, dated 14/07/2010.

2. The assessee has taken the following grounds:

Ground 1: Disallowance of Gift Expenses

1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO in disallowing an ad-hoc amount of Rs. 1,25,000/- towards gift expenses on the alleged ground that the gift expenses are not incurred wholly and exclusively for business purpose.

2. The appellant prays that the said disallowance be deleted.

3. In the assessment proceedings, the AO noticed that the assessee had debited Rs. 3,77,617 towards gift expenses. The AO called for the details with regard to the expenses, which the assessee was unable to provide, but the assessee submitted that, “these gift expenses have been incurred by the assessee on various occasions of festivals or marriage of staff or clients. They have been incurred for the purposes and in furtherance of business. It is legitimate business expenditure. This expenditures necessitated in business to maintain relationships”. This explanation was not accepted by the AO and he disallowed Rs. 1,25,000.

4. Aggrieved, the assessee approached the CIT(A), who, relying on the decision of his predecessor in the assessee’s own case in assessment year 2006-07, wherein the part disallowance was upheld by the CIT(A), following that order, he sustained the part disallowance of Rs. 1,25,000, made by the AO.

5. Aggrieved, the assessee is now before the ITAT.

6. Before us, the AR, representing the assessee, pointed out that, as mentioned by the CIT(A) in the preceding year, part disallowance was confirmed by in assessment year, the matter travel before the ITAT. The coordinate Bench of Mumbai ITAT, in assessee’s own case in ITA No. 1500/Mum/2010, the disallowance was reduced to Rs. 50,000, out of the disallowance of Rs. 2,30,027 and part allowed by the CIT(A) at Rs. 1,25,000.

7. The AR, thus pleaded that a reasonable view may be taken by the Bench.

8. The DR pleaded that the disallowance made by the AO was reasonable and in any case, the CIT(A) had reduced the disallowance to a very reasonable figure.

9. We have heard both the sides and have gone through the decision by the coordinate Bench in the assessee’s own case, where, there has been a further reduction of the impugned expenses.

10. Respectfully following the order of the coordinate Bench in assessee’s own case, we shall also reduce the impugned expense son proportionate basis. We find that in the preceding year, the expenses claimed were to the tune of Rs. 2,30,027 and final disallowance sustained by the coordinate Bench was Rs. 50,000, which comes to 21.73 %. Applying the same ratio, we shall sustain the disallowance to Rs. 80,000 (Rs. 82,081, the exact figure) being 21.73 % of Rs. 3,77,617.

11. The appellant gets relief of Rs. 45,000.

12. Ground no. 2 reads as under:

Ground II: Income from House Property is treated as Sham

Transaction

1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO in treating the Leave and License and other agreements entered into by the Appellant with M/s. Minicon Insulated Wires Private Limited (“Minicon”) and the Appellant as a sham transaction.

2. The Appellant prays that it be held that the agreement between Minicon and the Appellant is a genuine transaction.

13. The facts of the case are that the assessee had leased its property at Vidyavihar to Minicon Insulated Wires Pvt. Ltd. (MIWPL) at Rs. 22,56,000, which in turn was leased out by MIWPL to various other parties, from which it was receiving rents of Rs. 1,59,34,618. The AO, relying on the orders of the preceding years, added the rents received by MIWPL at Rs. 1,59,34,618 in the hands of the assessee, holding that the rent agreement between the assessee and MIWPL was a sham, and the entire rent received by the company actually belonged to the assessee, as assessee and MIWPL are related parties.

14. The assessee, being aggrieved, approached the CIT(A), who sustained the addition, following the order of ITAT in the assessee’s own cases, covering assessment years 1998-99 to 2003-04, wherein the coordinate Bench had dismissed the assessee’s appeal on the impugned issue.

15. Aggrieved the assessee is now before the ITAT.

16. Before us, the AR appearing on behalf of the assessee pointed out that the issue in dispute was against the assessee right from assessment years 1998-99 to 2003-04, by the Hon’ble ITAT, but the assessee had approached the Hon’ble Bombay High Court in those years and the Hon’ble Bombay High Court has now decided the appeals filed by the assessee under section 260A in ITAs No. 1501,1509,1515,1516 & 1517 of 2007, through common order, in favour of the assessee by reversing the orders of the ITAT (copy of theorder provided by the assessee).

17. The AR further pointed out that in assessment year, i.e. immediate preceding year, the coordinate Bench of Mumbai ITAT in ITA No. 1500/Mum/2010 has allowed the assessee’s appeal and deleted the addition sustained by the CIT(A), following Hon’ble Bombay High Court in the assessee’s cases (copy of the order provided by the assessee).

18. The AR, thus pleaded that since the controversy in the impugned issue now stands settled in favour of the assessee, addition as made by the AO and sustained by the CIT(A) merits to be deleted.

19. DR relied on the orders of the revenue authorities.

20. We have heard both the parties and have through the orders passed by the Hon’ble Bombay High Court and the coordinate Bench of Mumbai Tribunal in assessee’s own case, wherein, finally the issue has been held to in favour of the assessee. Respectfully following the orders of the Hon’ble High Court and the coordinate Bench, we delete the addition.

21. Ground no. 2 is allowed.

22. The grounds no. 3 & 4 reads as under :

Ground III:

1. The learned CIT(A) erred in upholding the action of the AO in assessing the income amounting Rs. 1,59,34,618/- received by Minicon, as income taxable in the hands of the Appellant.

2. He failed to appreciate and ought to have held that:

a. Minicon and the Appellant are distinct entities assessable to tax;

b. Income assessed in the hands of Minicon cannot be again brought to tax as income assessable in the hands of the Appellant, as it results into double taxation of the same income.

3. The Appellant prays that the AO be directed not to tax the income received by Minicon in the hands of the Appellant.

Ground IV:

If the income received by Minicon is assessed in the hands of the Appellant, then the Appellant should be given credit for the taxes paid by Minicon relatable to the income so assessed.

23. Grounds 3 & 4 are alternative grounds to Ground no. 2. Since we have decided Ground No. 2 in favour of the assessee, these grounds have become infructuous, hence these are dismissed.

24. Ground no. 5 reads as under :

Ground V : Disallowance u/s.14A

1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance made by the learned AO in view of the provisions of Section 14A read with Rule 8D.

2. The Appellant prays that the said disallowance be deleted.

25. Ground no. 5 has not been pressed by the AR because of smallness of the quantum involved, hence we dismiss the ground as not pressed.

26. Ground no. 6 reads as under:

Ground VI:

1. The CIT(A) erred in upholding the interest levied u/s.234B of the Act.

2. The Appellant prays that the said disallowance be deleted.

27. Ground no. 6 is consequential; the AO is directed to give appropriate consequential relief.

28. In the result the appeal filed by the assessee is partly allowed.

Order pronounced on this 23rd day of May, 2012.

                                                           Sd/-                           Sd/-

                                                 (R. S. SYAL)         (VIVEK VARMA)

                                  ACCOUNTANT MEMBER JUDICIAL MEMBER

MUMBAI, Dt: 23.05.2012

Copy forwarded to:

1. The Appellant,

2. The Respondent,

3. The C.I.T.

4. CIT (A)

5. The DR, - Bench, ITAT, Mumbai

//True Copy//

BY ORDER

ASSISTANT REGISTRAR

ITAT, Mumbai Benches, Mumbai

Roshani