Income from other source should be compute as per the provision of sec 57of the Act

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES “D” MUMBAI

BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER

AND

SHRI RAJENDRA, ACCOUNTANT MEMBER

ITA No. 1599/Mum/2011

Assessment Year 2007-08

M/s. Dolphin Adventure Sports Ltd.,

C/o. Mr. Sharookh Phiroze Balsara, 201,

Helen Haven, 33 ST. Cyril Road,

Bandra (West)

Mumbai – 400 050

PAN: AABCD 4247J

(Appellant)

Vs.

The Income Tax Officer,

10(1)(2)

4th Floor, Aayakar Bhavan Mumbai-20

 (Respondent)

Appellant by: Mrs. Arati Vissanji

Respondent by: Shri S.K. Mohanty (DR)

Date of hearing: 18-04-2012

Date of pronouncement: 25-04-2012

ORDER

PER RAJENDRA, A.M.

Out of the 05 (Five) Grounds of Appeal filed by the appellant against the order of the CIT(A) dt. 01-12-2010, the following 03 (Three) Grounds of Appeal are effective. They are:

“The learned CIT(A) 21 erred in upholding the adding back to the total income fresh loans obtained to the tune of Rs. 30,92,425/- by treating the same as unexplained credit under section 68 of the Income Tax Act, 1961.

The learned CIT(A) erred in upholding taxing of income from business in respect of hut/tents tariffs and food and beverages received from tourists under the head income from other sources. The learned CIT(A) ought to have considered that during the same year the same A.O. has accepted in her order under section 115 WE(3) of I.T. Act, that the Appellant has received rents from seasonal rents/huts which are rented out to tourists, for parties and picnics and that the relevant details were verified and placed on records”.

Later on with the permission of the Bench, appellant filed additional Grounds of Appeal and that reads as under:

“The Assessing Officer eared in arbitrarily disallowing administrative and selling expenditure to the extent of Rs. 4,45,653/- including part of depreciation incurred by the appellant during the A.Y. 2007-08”

2. With regard to addition made u/s. 68 of the Act, facts are found on para 5 and 5.1 of the Assessment Order. AO has narrated the issue in these words:

“Unsecured loan:

Perusal of balance sheet, it is noticed that the assessee company shown unsecured loan as on 31-03-2007 as Rs. 238,23,628/- as against Rs. 2,07,31,203/- as on 31-03-2006. from the Schedule-4 forming part of balance sheet, it is noticed that the loans have been taken from the following persons:

1) Caroline C oelho (Director) Rs. 8,75,000

2) Malcolm Coelho -do- Rs. 2,04,97,153

3) Maldan Eng. Pvt. Ltd., Rs. 21,51,475

4) Renderrous Rs. 2,50,000

5) Jalram Pinto Rs. 50,000

The assessee has been asked vide notice u/s 142(1) dated 03- 12-2009 to submit the loan confirmation from the respective persons and prove the genuineness of the loan. Since the assessee has neither furnished loan confirmation nor filed any deals to establish the genuiness, creditworthiness of the lender in respect of the above said loans, therefore the fresh loan obtained to the tune of Rs.30,92,425/- is added back to the total income of the assessee and the same has been treated as unexplained credit u/s. 68 of the Act”.

3. After considering the submission of the appellant, CIT (A) decided the matter as under:-

 “I have considered the facts of the case. As per facts on record, the A.O. issued first notice on 03-12-2009 and passed the assessment order on 29-12-2009. Thus evidently, the appellant was not provided sufficient opportunity to furnish details during assessment proceedings. This fact of providing inadequate opportunity is relevant in view of the fact that the lenders were located outside Mumbai and may not be easily available on account of Christmas vacation. During appellate proceedings, the appellant had filed copies of confirmations of loan creditors. However, the appellant had not made any request for admission of additional evidences. During appellate proceedings, the appellant has argued that since the loans had been received through account payee cheques, the identity and credit worthiness of creditors stand proved. Appellant’s this argument is not acceptable. First of all, though in confirmations, the loans have been shown as received by cheques, but the bank statement of appellant as well as loan creditors have not been filed. Therefore, this claim of amount received through banking channels has remained unsubstantiated. Secondly, even if the amount had been received by cheque, the appellant was still required to prove the identity and credit worthiness of creditors which the appellant had failed to prove”.

4. Authorised Representative submitted that only two new creditors had advanced loan amounting to Rs. 3 Lakhs (Rs. 2,50,000 + 50,000/-) to the assessee during the year under consideration, that balance amount was increase in lending from the existing lenders, that CIT(A) had held that sufficient opportunity was not provided to the appellant, that after admitting the fact of inadequate opportunity he should not have upheld the additions. Departmental Representative relied upon the orders of the lower authorities and stated that inspite of given chance, appellant had not produced evidence before the AO about the loans in question.

5. We have heard both the parties and perused the available material. From the order of the CIT(A) one thing becomes clear that because of paucity of time evidences could not be produced and appreciated in proper manner. CIT(A) has observed that in absence of bank statements, authenticity of transaction could not be ascertained. We are of the opinion that in the interest of justice, matter should be remitted back to the file of the AO for verification of genuineness and veracity of loans.

6. About the income from business/income from other sources matter has been discussed by the AO in para 4 and 4.1.1 and 4.1.3 in the following words:-

“Major source of income credited by the assessee company in the profit and loss account is “Other Income” of Rs. 3,00,000/- and Rent of Rs. 1,49,000/-. The assessee had not carried out any business activity in the current year nor the assessee has produced any evidences in support of its argument that it has actively pursuing its business activity. The profit and loss account reveals that the assessee credited Rs. 4,49,000/- as above and claimed expenditure of Rs. 5,24,298/- being administrative exp and depreciation. During the year the assessee has not carried out any business activity. From the above facts also, it is clear that the assessee doe not have the where withal to run its business and has conclusively terminated its business activity. It may be mentioned that section 56 of the I.T.Act, has envisaged in sub-section 1 and 2 the kind of income to be taken under the head income from other sources. The said section in unequivocal terms makes it clear that income from rent ought to be charged under the head “Income from other sources” if such income is not chargeable to income tax under head profit and gains of business or profession. Section 57 elaborates the deduction available to the assessee. In the instant case, the assessee has credited rent income and miscellaneous charges.

Moreover, this treatment is in line with the decision of New Savan Sugar & Gur Refining Co. Ltd., Vs. CIT (1969) 74 ITR 7 (SC). In this case, the assessee ceased to be a trader and the factory shed its character as a commercial asset. The factory became merely an asset of the assessee and the lease rent derived was the fruits of ownership simpliciter. The income from leasing was classified under the head income from other sources. Similar issue was affirmed in the case of Universal Plast Ltd., Vs. CIT (1999) 237 ITR 454 by the Supreme Court.

From the above discussion, it is clear that the amounts credited to the P&L account such as rent receipt, other charges received are in the nature of income qualifying under the head “income from other sources”.

The immediate sources of income of the assessee is mainly from rent receipt. It can therefore be classified as “income from other sources” and not income from “business”, since the assessee has not carried out any business during the year. Thus, the income credited to the P&L account is treated as ‘Income from other sources”.

6.1 CIT(A) decided the issue about business income/income from other sources as under:

“I have considered the facts of the case. From the facts, as stated above, it was evident that the appellant’s business was not set up and also the business did not commenced during the year under consideration. Consequently, there was no business activity during the year. Therefore, the receipts received by appellant were not business receipts. The A.O. was, therefore, justified in assessing receipts under the head ‘income from other sources”. During assessment as well as during appellate proceeding, the appellant failed to establish its case that the expenditure were incurred to ear the income from other sources. In the facts and circumstances, the A.O. was justified in disallowing those expenses. These two grounds of appeal are, therefore dismissed.”

6.2 AR submitted that appellant was carrying on business during the year under consideration though licenses for bar could not be obtained, that tents and other equipment were rented out, that income from business in respect of food and beverages was received from the tourists, that in the next Assessment Year on the same facts, income of the assessee was assessed under the head “Income from Business”.

6.3 DR submitted that appellant had no authority to carry on business during the period under consideration. Equipments were given on loan and the appellant was getting hire charges, that income or the assessee was rightly charged under the head ‘income from other sources”.

6.4 After hearing both the parties, we are of the opinion that activities carried out by the appellant during the Assessment Year in question cannot be termed as business. Money received by the appellant falls under the residuary head i.e., “income from other sources”. But while computing the income of the assessee, AO should compute the same as per the provisions of Sec. 57 of the Act.

7. Next Ground - additional ground – is about disallowance of administrative and selling expenditure including partial depreciation. AO on page No.3 of his order discussed the issue as under:

“However, in the interest of natural justice an amount equal to 15% of total receipt claimed by the assessee as ‘other income” and rent i.e., 15% of Rs. 4,49,000/- is allowed as deduction for earning this income. This amount works out to Rs. 67,350/- and the same is allowed as deduction”.

CIT (A) confirmed the order of the AO. In this regard, AR submitted that even if the activities carried out by the appellant were not from business, the appellant should be allowed to benefit of the section 57, that it was improper to restrict the claim to 15% i.e., to Rs. 67,305/-, that administrative and selling  expenses at pg. 13 of the Paper book should be allowed except bad debts and remuneration paid to the directors, that depreciation should be not restricted @ 15%. DR relying upon the orders of the lower authorities submitted that due deduction had been allowed to the appellant.

8. We have heard both the sides and we are of the opinion that expenditure incurred by the appellant (except bad debts and remuneration) should be allowed in computing the income from other sources. Similarly, depreciation should be allowed as per rules and should not be restricted to 15%.

9. As a result, assessee gets part relief.

Order pronounced in the open court on 25th April, 2012.

                                                     Sd/-                                       Sd/-

                                         (D.K. AGARWAL)                (RAJENDRA)

                                       JUDICIAL MEMBER    ACCOUNTANT MEMBER

Mumbai,

Date: 25-04-2012

TNMM

Copy to:

1. Appellant

2. Respondent

3. The concerned CIT (A)

4. The concerned CIT

5. DR “D” Bench, ITAT, Mumbai

6. Guard File

(True copy)

By Order

Asst. Registrar,

Income Tax Appellate Tribunal,

Mumbai Benches, Mumbai