M/S P.C.Combines Private Limited, ... vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL "C " BENCH: KOLKATA

[Before Hon'ble Shri Mahavir Singh, JM & Hon'ble Shri B.P.Jain, AM ]

I.T.A No.1631/Kol/2012 Assessment Year: 2006-07

M/s.P.C.Combines Pvt.Ltd. Vs. I.T.O., Ward-8(3), Kolkata Kolkata (PAN:AAACN 8754 H) (Appellant) (Respondent)

ITA No.1710/Kol/2012 Assessment Year : 2006-07 I.T.O., Ward-8(3) Vs M/s.P.C.Combines Pvt. Ltd. Kolkata Kolkata (PAN:AAACN 8754 H) (Appellant) (Respondent)

I.T.A No.1632/Kol/2012 Assessment Year: 2006-07

M/s.P.C.Combines Pvt.Ltd. Vs. I.T.O., Ward-8(3), Kolkata Kolkata (PAN:AAACN 8754 H) (Appellant) (Respondent)

For the Assessee : Shri J.M.Thard, Advocate For the Respondent : Shri K.L.Kanak, JCIT

Date of hearing : 22.04.2015. Date of pronouncement: 30.04.2015. ORDER

Per Shri B.P.Jain, AM :

These two appeals of the assessee arise from two different orders of ld.CIT(A)- VIII, Kolkata for Assessment Year 2006-07 each dated 28.07.2012. The revenue has also filed the cross appeal for the said A.Yr.2006-07.

ITA Nos.1631,1632&1710/Kol/2012 2 M/s.P.C.Combines Private Limited A.Yr.2006-07

2. The assessee has raised the following grounds of appeal in ITA No.1631/Kol/2012 :

"1. For that the Learned CIT(A) in Ground No.1 erred in confirming the disallowance made by the A.O. for foreign tour expenses amounting to Rs.2,52,269/- incurred by the directors of the company by treating the expenditure as non-business expenditure. The expenditure was incurred wholly & necessarily for the purpose of the appellant's business and is an allowable expenditure. The observation of the Ld. CIT(A) in this regard is wrong, misleading and denied.

2. For that the Ld.CIT(A) in Ground No.4 erred in not allowing the claim for Depreciation amounting to Rs.1,33,650/-, electric expenses of rs.22,165/- and repairs to building of Rs.8700/- in respect of the office maintained by the appellant at K-3/27, DLF City, Phas4e-II, Gurgaon-122002. The appellant denies the observation and findings of the Ld. CIT(A) in this respect.

3. For that the Ld.CIT(A) in Ground No.5 erred in confirming the action of the A.O. who has treated Business Centre Charges of Rs.1,80,000/- received from M/s. P.C.Enterprises as income from House Property. The said property was used by M/s.P.C.Enterprises (P) Ltd for their business purposes only. The observation of the Ld. CIT(A) in this regard is not correct and misleading.

5. That the appellant craves leave to alter, amend and modify any of the grounds and/or take additional grounds before or at the time of hearing of this appeal."

2.1. The revenue has raised the following grounds of appeal in ITA No.1710/Kol/2012 :

"1. That on the facts and in the circumstances of the case and in law, the CIT(Appeals) has erred in allowing relief to the assessee company by holding that the profit (Loss) derived from the sale of two flats were capital gain merely on the basis of the Board's resolution, whereas the two flats were held by the assessee company as stock-in-trade and, therefore, profit (Loss) from transfer of it was in nature of business (Loss).

2. That on the facts and in the circumstances of the case and in law, the CIT(Appeals) has erred by treating the profit (Loss) from sale of two flats as capital gain without proper appreciation of the full facts of the case and as such, his decision is perverse and, therefore, liable to be quashed and order of the A.O. be restored."

2.2. The assessee has raised the following grounds of appeal in ITA No.1632/Kol/2012 :

"1. For that on the facts and in the circumstances of the case, the Learned CIT(A) erred in upholding the value of Fringe Benefits at Rs.77,931/- on the expenditure incurred by the appellant without appreciating the fact that provisions of section 115WB of the I.T.Act 1961 were not applicable in the instant case since the appellant had no employees on its payroll.

2. For that on the facts and in the circumstances of the case, the learned CIT(A) failed to appreciate the fact that the re-imbursement paid to the Director for Motor Car expenses which includes the salary of the driver was not an employee of the company, hence provision of section 115WB was not applicable in this case. The applicability of ITA Nos.1631,1632&1710/Kol/2012 3 M/s.P.C.Combines Private Limited A.Yr.2006-07

section 115WB is only applicable where the relation of employer and employee can be established and the employee should be directly on the payroll of the company.

3. For that on the facts and in the circumstances of the case, the upholding of addition made by the AO for Rs.77,931/- on account of FBT by the learned CIT(A) is unjustified and bad in law since the appellant was not liable to be assessed under section 115WB of the I.T.Act, 1961.

4. For that on the facts and in the circumstances of the case, the levy of tax and charging of interest was wrong and unjustified. The appellant was not liable to be assessed under section 115WB of the I.T.Act, 1961.

5. For that the appellant craves leave to file any additional grounds and/or amend the grounds already taken either before or at the time of hearing of the appeal."

3. First of all we take up the appeal of the assessee in ITA No.1631/Kol/2012.

4. Ground No.1 of the assessee is not pressed and the same is dismissed as not pressed.

5. As regards ground no.2 the brief facts of the case are that the Assessing Officer observed that the premises for which depreciation has been claimed consisted of a flat measuring 1600 sq.ft with 200 sq.ft verandah (entire first floor of K-3/27, DLF City, Phase-II, Gurgaon-122 002) and car parking space. The property was purchased by the assessee and was shown originally as stock-in-trade. In the return for Asst.Yr.2004- 2005 the property was converted from stock-in-trade to fixed asset. The AO further observed that from the purchase agreement it is seen that the property is a residential flat consisted of bedrooms with polished teak board cu-board etc. The AO has further observed that the electric bill was also not in the name of the company, it is in the name of another company under the same management and who are the owner of the other parts in the same building. He further observed that there was no employee of the assessee and address of the telephone bills are of Kolkata. He, therefore, observed that the depreciation of Rs.1,33,650/- and the electric expenses of Rs.22,165/- are non- business expenses.

5.1. The ld. CIT(A) confirmed the action of AO.

6. The ld. Counsel of the assessee argued that the observation of the AO that the assessee could not furnish any evidence regarding existence of the office at the ITA Nos.1631,1632&1710/Kol/2012 4 M/s.P.C.Combines Private Limited A.Yr.2006-07

property is absolutely wrong and incorrect. It is submitted that the assessee had earned an income of Rs.1,80,000/- from this property which was shown under the head "Business Centre Charges" on the face of the Profit and Loss A/c. A copy of the ledger a/c. ' Business Centre Charges' has been filed during the course of present proceedings. It is further submitted that this Business Centre Charges were received from M/s. P.C.Enterprises Pvt. Ltd. and is duly accounted for in the accounts of the said company also which is assessed by the same A.O. According to the assessee, the material information placed on record clearly showed that the premises was not used for residence but has been used for the business purposes for which income of Rs.1,80,000/- has been earned during the year. The electric charges of rs.22,165/- have been incurred for the same flat, it was paid to M/s. P.C.Niket Pvt. Ltd. in whose name the electric Meter was initially issued. Regarding reliance of the AO on the judgement reported in 19-ITR-191 (SC) in the case of CIT vs Calcutta Agency Ltd. for disallowing the expenses, it is submitted that the decision in the said case has no relevance in the facts of this case. It is further submitted that the case related to payment of the principal amount of Rs.18,107/- and Rs.4,393/- totaling Rs.22,500/- by the Respondent company in pursuance of an agreement with Basanti Cotton Mills ltd. of which the Respondent Company were the managing Agents. However it was observed by AO that the payment was not for business purposes.

7. The ld. DR,, on the other hand, relied upon the orders of the authorities below.

8. We have heard the rival contentions and perused the facts of the case. It was observed by the ld. CIT(A) that merely letting out of the property and the rental income cannot be the assessed income under the head business or profession but the same has to be assessed under the head "income from house property". The ld. CIT(A) has rightly relied upon the decision of Samrudhi Swastik Trading and Investment Ltd. vs ACIT 15 ITJ 745(Tribunal-Indore) and also the decision of the Hon'ble Madras High Court in the casae of A.R.Complex. vs ITO [2008] 67 Taxman 46 (Mad) wherein it has been held that even in the case of commercial complexes mere letting out the property and deriving income should be assessed only under the head " Income ITA Nos.1631,1632&1710/Kol/2012 5 M/s.P.C.Combines Private Limited A.Yr.2006-07

from house property" and not under " Income from business" wherein it has been held that even in the case of commercial complexes mere letting out the property and deriving income should be assessed only under the head "Income from house property" and not under "income from business". If certain independent services are also covered apart from the letting of premises and a composite rent is received then the authorities should bifurcate the receipts into two different portions and to assess them under income from business or income from other sources and the remaining portion under the head income from house property. The assessee has not produced any evidence to show what was received in lieu of letting out the premises was a composite rent inclusive of other service charges. In the circumstances and facts of the case, we find no infirmity in the order of ld. CIT(A), who has rightly confirmed the action of AO. Consequently the disallowance on account of depreciation, electric charges and repairing charges have rightly been confirmed by the ld. CIT(A). Thus ground no.2 of the assessee is dismissed.

9. As regards ground no.3 the brief facts of the case are that the assessee is in receipt of Rs.1,80,000/- from M/s.P.C.Enterprises Pvt. Ltd. It was stated by the assessee that the said company is engaged in real estate activities and the company was engaged in letting out the flat for carrying on their business. AO after considering the explanations made by the assessee rejected the same and considered Rs.1,80,000/- as income derived from house property. The ld. CIT(A) confirmed the action of AO.

10. We have heard the rival contentions and perused the facts of the case. In view of our decision in ground no.2 hereinabove the income assessable for the rent received amounting to Rs.1,80,000/- from M/s.P.C.Enterprises Pvt. Ltd. is essentially to be assessed as income from house property. We find no infirmity in the order of ld. CIT(A) in this regard and he has rightly directed the AO to allow the statutory deductions as allowable. Thus ground no.3 of the assessee is dismissed.

11. Ground No.4, being general in nature does not require any adjudication.

ITA Nos.1631,1632&1710/Kol/2012 6 M/s.P.C.Combines Private Limited A.Yr.2006-07

12. Now we take up the appeal of the revenue in ITA NO.1710/Kol/20012 as under

:-

12.1. The brief facts of the case are that the assessee purchased these two flats : one on 19.08.1997 at Rs.7,41,274/- and the other on 16.02.1999 at Rs.6,90,892/-. The assessee computed the indexed cost of acquisition at Rs.11,13,031/- and Rs.9,78,272/-

respectively. Both the flats were sold at Rs11 lakhs and Rs.10 lakhs and also the sale price is reduced by the Brokerage paid and TDS also was made on such brokerage paid. The Assessing Officer held that the profit on sale of these assets is a business profit and has assessed same accordingly and has disallowed the loss under the head LTCG in sale of these assets.. The ld. AO further observed that with regard to said two flats at Bhiwadi (Rajasthan) which part of the order is reproduced as under :-

"The two flats as above in para 3 was in the list of Stock-in-trade from the date of acquisition till 31.03.2003 and in the return for the A.Y.2004-05 the properties were converted form Stock-in-trade to Investment. Up to A.Y.2003-04, all the expenses related to the two properties were debited to the P&L A/c. The assessee cannot convert the Stock-in-trade to Investment only to evade taxes by claiming the indexation benefit and special rate of Tax at lower rate. The tax authorities cannot close their eyes when the true nature of the income is disclosed. That under which head the income will be taxed is given in Sec.14 of the Income tax Act, 1961. It does not depend on the nomenclature given/changed by the assessee as it's sweet will to evade/avoid tax. No indexation is allowed. The difference of the sale price of the two flats as reduced by the brokerage paid (TDS made) and the cost price of the flats as appeared at Stock-in-trade, is treated as business income which comes to Rs.20,48,426/- - Rs.14,32,166/- = Rs.6,16,260/-. Hence Rs.6,16,260/- is added to the business income of the assessee and the Long Term Capital gain is also increased by Rs.42,876/- (as in para-3) by disallowing the loss claimed."

12.2. The ld.CIT(A) reversed the order of AO for the reasons that findings as recorded by the AO are not borne out from record and AO has not brought on record any material to remotely suggest that the said action of the assessee company is an after thought. Any legal tax planning cannot be held as an attempt to evade/avoid tax unless and until the malafides are proved. A capital asset can be converted by the assessee as stock-in-trade in the circumstances and vice versa. The ld. CIT(A) accordingly reversed the order of AO in view of the findings in his order at pages 6,7,8 and 9.

ITA Nos.1631,1632&1710/Kol/2012 7 M/s.P.C.Combines Private Limited A.Yr.2006-07

13. We have heard the rival contentions and perused the facts of the case. The findings of the ld.CIT(A) that the assessee may transfer any of the stock-in-trade from his trading activity and decide to hold them as investment. In doing so the stocks so held would assume the character of capital asset from the date of such holding. There is an undisputed fact in the present case that the actual holding of these two flats by the assessee company before the date of the sale was about 7 years before the sale in respect of one flat and 9 years in respect of another flat. These flats were sold on 15.02.2006 and 30.12.2005. The said flats were held as stock in trade throughout for the last 7/9 years is not in dispute. Nothing has been brought on record that the said flats were further held as investment right from the beginning of such flats for the last seven or nine years. The ld. CIT(A) has recorded at page 8 that the records of the company would show that these flats are from investment. The ld. CIT(A) has failed to mention what are the records of the company would show these flats as investment. The ld. CIT(A) at page 8 of his order shows that these flats are held as investment. In absence of any record that when this mistake came to light, the directors immediately passed a resolution and transferred the cost of such flats to the investment. We are of the view that there is no basis for considering the transfer of stock in trade into investment and taking cognizance of the mistake of the assessee company by the ld. CIT(A) is of no consequence and cannot help the assessee. Therefore conversion of stock in trade into investment after holding the flats for seven or nine years in the year of sale itself is nothing but to evade tax. Therefore in the circumstances and facts of the case the order of the ld. CIT(A) is without any basis and he has given his practical view for which no basis are on record. In the circumstances and facts of the case the order of the ld. CIT(A) is reversed and that of the AO is restored. Thus grounds of the revenue's appeal are allowed.

14. Now we take up the appeal of the assessee in ITA No.1632/Kol/2012. 14.1. As regards Ground Nos. 1 to 4 of the assessee the brief facts of the case are that AO has assessed the fringe benefits at Rs.77,931/- on the expenditure incurred by the assessee u/s 115WB of the Act. The ld. CIT(A) confirmed the action of AO.

ITA Nos.1631,1632&1710/Kol/2012 8 M/s.P.C.Combines Private Limited A.Yr.2006-07

15. The ld. Counsel of the assessee submitted before the ld. CIT(A) and also before us that the assessee had no employees on its pay roll. Therefore the fringe benefit is not applicable. The relevant section of the fringe benefits are not applicable and prayed to reverse the order of the ld. CIT(A). The ld. DR, on the other hand, relied upon the orders of the authorities below.

16. We have heard the rival contentions and perused the facts of the case. Before the ld. CIT(A) the ld. Counsel for the assessee made the submissions. They are on record and reproduced at page 3 of the ld. CIT(A) order. For the sake of convenience they are reproduced herein below :-

"This appeal is filed against the order u/s 115WE(3) of the I.T.Act,1961 dtd. 19.12.2008 for the Asst.Yr.2006-07. The A.O. has invoked the provisions of sec.115WA(1) by holding that the reimbursement of the Car running expenses to the director of the company which included salary of the driver and petrol expenses by presuming that it amounted to payment of salary by the company. Such presumption by the A.O. is wholly misconceived & wrong. From the audited accounts it will be observed that there is no expenditure under the head salary. In view of the fact that the company did not incur any expenditure on salary the provisions of Fringe benefit tax is therefore wrong and misconceived. The appellant company simply reimbursed the expenditure on account of Motor car expenses to the director of the company which does not tantamount to payment of salary by the company. The levy of Fringe benefit tax is therefore basically wrong and unjustified - the order passed by the Ld. A.O. therefore needs to be cancelled."

16.1. The claim of the assessee is that the assessee has simply reimbursed the expenditure on account of motor car expenses which does not tantamount to payment of salary by the company. Whereas the AO has categorically mentioned by observing in the assessment order that the assessee has made the payment of monthly salary to the driver of the cars owned by the assessee. From the balance sheet it is evident that assssee owned two motor cars and obviously these have been used by the directors for the activities of the company and if there was no employee driver in the pay roll then who drove these cars. In such circumstances and facts of the case the arguments made before ld. CIT(A) is without any basis and claim made before ld. CIT(A) has not been substantiated and nothing has been brought on record before us as well to substantiate the said claim. In such circumstances and facts of the case we find no infirmity in the ITA Nos.1631,1632&1710/Kol/2012 9 M/s.P.C.Combines Private Limited A.Yr.2006-07

order of ld. CIT(A) who has rightly confirmed the action of AO. Thus ground nos. 1 to 4 of the assessee are dismissed.

17. In the result both the appeals of the assessee in ITA No.1631/Kol/2012 and 1632/Kol.2012 are dismissed and the appeal of the revenue in ITA No.1710/Kol/2012 is allowed.

Order pronounced in the court on 30.04.2015.

Sd/- Sd/- [ Mahavir Singh ] [B.P.Jain] Judicial Member Accountant Member

Date: 30.04.2015.

R.G.(.P.S.)

Copy of the order forwarded to:

1. M/s.P.C.Combines Private Limited, 5F, Everest, 46/C, Chowringhee Road, Kolkata-700071.

2 I.T.O., Ward-8(3), Kolkata

3. CIT(A)-VIII, Kolkata 4. CIT - Kolkata.

5. CIT-DR, Kolkata Benches, Kolkata

True Copy, By order,

Deputy /Asst. Registrar, ITAT, Kolkata Benches