Rajivkumar D. Agarwal, Mumbai vs Assessee

श्री आर.सी. शर्मा, ऱेखा सदस्य एवुं श्री विजयपमऱ रमि, न्याययक सदस्यके समक्ष

BEFORE SHRI R.C. SHARMA, ACCOUNTATN MEMBER AND SHRI VIJAYPAL RAO, JUDICIAL MEMBER

आमकय अऩीर सं. / ITA no.4865/Mum./2013 (ननधधायण वषा / Assessment Year : 2008-09)

Shri Rajkumar D. Agarwal 39, Mehra Industrial Estate ................. अऩीरधथी / Sakinaka, Andheri Kurla Road Mumbai 400 072 Appellant PAN - ACYPA2510K

फनधभ v/s

Income Tax Officer ................... प्रत्मथी / Ward-31(3)(4), Mumbai Respondent

ननधधारयती की ओय से / Assessee by : Shri Satish R. Mody यधजस्व की ओय से / Revenue by : Shri Santosh Kumar

सन ु वधई की तधयीख / आदे श घोषणध की तधयीख / Date of Hearing - 30.04.2015 Date of Order - 29.05.2015

आदे श / ORDER

विजयपमऱ रमि, न्याययक सदस्य के द्वारा / PER VIJAYPAL RAO, JUDICIAL MEMBER

The present appeal preferred by the assessee is directed against

the impugned revision order dated 25th March 2013, passed by the

Commissioner (Appeals)-21, under section 263 of the Income Tax Act, Shri Rajkumar D. Agarwal

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1961 (for short "the Act") Mumbai, for the assessment year 2008-09.

Following grounds have been raised by the assessee:-

"1. The learned CIT(A) erred in passing an order u/s 263 of the Act. The same needs to be quashed and annulled, since it is illegal and it is contrary to the applicable law, as also the facts of the case.

2. The learned CIT(A) erred in cancelling the order u/s 143 dated 14th December 2010, as being prejudicial to the interests of the Revenue and directing the Assessing Officer to frame it afresh.

3. The learned CIT(A) erred in directing the Assessing Officer to re-examine the statement of affairs of the partnership firm in which the assessee has a share and his late mother is a partner / guarantor and consequently disallow amount appropriated by the Bank towards mortgage debt as cost of acquisition of the flat sold."

2. The assessment, in the case of the assessee, was completed

under section 143(3) of the Act on 14th December 2010. Subsequently,

on a perusal of the record, the learned CIT noted that the assessee

had inherited two flats from his mother and the same were sold during

the year under consideration for a total consideration of ` 2.40 crores.

However, the assessee, while computing the capital gain, has

considered only ` 77,52,076, as full value consideration received as

the balance amount was appropriated by the Union Bank of India

towards discharge of mortgage debt. Since the full value of sale

consideration is ` 2.40 crores and the same was not adopted for

computation of capital gain. Therefore, the correct capital gain was not

offered to tax. The learned CIT further noted that the assessee has not

deducted TDS of ` 22,868, on contract payments as stated in the audit Shri Rajkumar D. Agarwal

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report. Accordingly, the learned CIT found that the order passed by

the Assessing Officer is erroneous and prejudicial to the interest of

Revenue and, accordingly, a show cause under section 263 of the Act,

was issued. In response, the assessee filed its reply / submissions vide

letter dated 20th March 2013, and contended that the amount

appropriated towards discharge of mortgage liability of the bank is an

allowable deduction as per section 48 of the Act. The learned CIT did

not accept the contention of the assessee and held that the Assessing

Officer has failed to carry out necessary verification which has

rendered the assessment order erroneous and prejudicial to the

interest of Revenue. Accordingly, the assessment order was set aside

for making fresh order.

3. On the issue of non-deduction of TDS on contractual payments,

the learned CIT held that the assessee contravened the provisions of

TDS and, hence, such expenditure needs to be disallowed.

4. Before us, the learned Counsel for the assessee reiterated the

contention raised before the learned CIT and submitted that these flats

were mortgaged by her mother with the Bank for grant of credit

facilities to M/s. Varun Overseas, a partnership firm wherein his

mother was a partner. Thus, the flats were charged and encumbrance

was created thereupon by the mother of the assessee. The assessee

has inherited the flats from his mother along with the encumbrance on Shri Rajkumar D. Agarwal

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account of mortgage created by his mother, therefore, the payment

made to the bank to discharge the mortgage created by the mother /

previous owner will be part of cost of acquisition of the property in

question inherited by the assessee. It was an obligation on account of

mortgage that created by the previous owner and, therefore, to

discharge the said obligation, the sale consideration has been

appropriated by the bank and only the balance consideration was

received by the assessee on transfer of the property in question.

5. The learned Counsel for the assessee relied upon the decision of

the Tribunal, Mumbai Bench, in Vilas Kashinath Sakpal v/s ITO, ITA

no.3885/Mum./2010, order dated 6th June 2012, and submitted that in

the identical facts, the Tribunal has held that the amount paid to the

bank for discharge of mortgage obligation / debt is an allowable

expenditure under section 48 of the Act. Thus, the learned counsel

submitted that the payment made by the assessee for the purpose of

clearing the mortgage created by the previous owner is to be treated

as cost of acquisition of the property and, therefore, the same is

deductible under section 48 of the Act.

6. On the other hand, the learned Departmental Representative

supported the order of the learned CIT and submitted that the

mortgage was created by mother of the assessee for grant of credit

limit to M/s. Varun Overseas, a partnership firm, therefore, the charge Shri Rajkumar D. Agarwal

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created on the property in question is nothing to do with the

acquisition of the property or title of the property but it was only for

the business of the partnership firm. The assessee has also inherited

the business and assets of the partnership firm from his mother and,

therefore, the liability of re-payment of the due amount to the bank is

a liability of the assessee in connection with the business inherited of

partnership firm. The assessee has used the sale consideration of the

property in question for discharge of business liability, therefore, the

same is not allowable under section 48 of the Act.

7. We have considered the rival submissions as well as the relevant

material on record. There is no dispute on the point that an

expenditure to remove impediment or encumbrance in the way of

transfer of capital asset is an allowable deduction under section 48 of

the Act, however, such an impediment or encumbrance by way of

mortgage of the property by the previous owner has to be in

connection with the acquisition of the property, improvement of the

property, title of the property or for some other personal obligation of

the previous owner. In the present case, the properties were

mortgaged by the mother of the assessee to facilitate the bank credit

to the partnership firm in which the mother of the assessee was a

partner. During the course of hearing, on a query from the Bench, the

assessee has accepted that the assessee has inherited the business / Shri Rajkumar D. Agarwal

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asset of the partnership firm. There is no dispute that the mortgage on

these properties was created for the purpose of business of the

partnership firm. To discharge the outstanding dues of the bank is the

obligation of the principal debtor which is the partnership firm. Even

otherwise, the partnership firm is a separate business entity and also a

separate person for the purpose of income tax. In a case where a

partnership firm was not able to discharge the liability towards the

bank, the recovery can be effected by sale of the mortgaged property.

In the present case, it is not the case of the assessee that partnership

firm was not in a position or capable to discharge the liability of the

bank and defaulted the re-payment of dues to the bank. Thus, it is not

the case of the assessee that the due to the default by the partnership

firm the assessee was under obligation being the owner of the

property to re-pay the bank dues. It is pertinent to note that even in

the case when the assessee inherited the business of his mother then

the business liability cannot be imputed to the private property of the

partner until and unless a case is made out that the partnership firm

has defaulted in discharge of its liability. Even in such case, when the

partnership defaulted to discharge the liability and the same is

recovered from the assessee / the mortgaged property, the right of

the assessee to recover the said amount from the partnership firm is

not fettered. In any case, the discharge of the liability by the assessee

is only in the capacity of a guarantor and on behalf of the principal Shri Rajkumar D. Agarwal

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debtor, therefore, the assessee shall have a right to recover the

amount from the principal debtor i.e., the partnership firm.

8. The encumbrances on the property were not on account of the

personal liability of the mother of the assessee being the owner of the

property but it was for the business of the partnership firm.

Accordingly, the assessee cannot claim the amount paid to the bank as

expenditure or cost of acquisition of the property when the liability

pertains to the partnership firm / principal debtor. Diversion of

payment from business liability to partner's capital asset is nothing but

to avoid the due tax on the capital gain. The sole purpose of the claim

is to reduce the tax liability on capital gain instead of discharging the

same by the firm. The charge on the property has no direct or indirect

or proxy nexus with the acquisition, improvement or title of the

property as it was not the personal liability of the previous owner.

Therefore, when the Assessing Officer has not even taken up the issue

for examination, the order of the Assessing Officer is erroneous and

prejudicial to the interests of the Revenue for want of enquiry and

application of mind. We find that the assessment order does not

exhibit anything to demonstrate any thought process on the part of

the Assessing Officer. The order of the Assessing Officer is so cryptic

and non-speaking that a glance of the same is sufficient to note that

there is a complete lack of enquiry and application of mind on the part Shri Rajkumar D. Agarwal

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of the Assessing Officer. For ready reference, we reproduce the

relevant part of the assessment order dated 14th December 2010:-

"The return of income for A.Y. 2008-09 was e-filed by the assessee on 30.09.2008 declaring total income at ` 1,67,510. Subsequently, the case was selected for scrutiny under CASS. Notice u/s 143(2) was issued on 06.08.2009. Thereafter, notice u/s 142(1) was issued on 28.04.2010 and 09.07.2010 duly served upon the assessee.

In response to the above notes, the assessee Shri Rajiv Agarwal himself attended from time to time and produced the details called for and the case was discussed with him.

The assessee is derives income from his Manufacturing and Exporting textiles Business.

Subject to the above remarks, returned income of the assessee is accepted.

Total income ` 1,67,510

Assessed accordingly Charge interest as applicable Issue demand notice and challan."

9. There is nothing either in the assessment order or in any other

record to suggest that any question or query raised by the Assessing

Officer on this issue, therefore, this is a case of complete lack of

enquiry and non-application of mind by the Assessing Officer. The

decision relied upon by the assessee are not applicable on the facts of

the case because the assessee has failed to show that the partnership

firm was not in a position to discharge the debt liability of the bank

and, therefore, the assessee had no option but to discharge the same.

Shri Rajkumar D. Agarwal

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Accordingly, in the facts and circumstances of the case, we do not find

any error or illegality in the impugned order of the learned CIT.

10. ऩरयणधभत् ननधधारयती की अऩीर खधरयज की जधती है ।

10. In the result, assessee's appeal is dismissed.

Order pronounced in the open Court on 29.5.2015

Sd/- Sd/-

आर.सी. शर्मा विजयपमऱ रमि, ऱेखा सदस्य न्याययक सदस्य R.C. SHARMA VIKAYPAL RAO ACCOUNTANT MEMBER JUDICIAL MEMBER

मुंबई MUMBAI, ददनाुंक DATED: 29.5.2015

आदे श की प्रनतलरपऩ अग्रेपषत / Copy of the order forwarded to:

(1) ननधधारयती / The Assessee;

(2) यधजस्व / The Revenue;

(3) आमकय आमुक्त(अऩीर) / The CIT(A);

(4) आमकय आमुक्त / The CIT, Mumbai City concerned; (5) पवबधगीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / The DR, ITAT, Mumbai; (6) गधर्ा पधईर / Guard file.

सत्मधपऩत प्रनत / True Copy आदे शधनुसधय / By Order प्रदीऩ जे. चौधयी / Pradeep J. Chowdhury वरयष्ठ ननजी सधचव / Sr. Private Secretary उऩ / सहधमक ऩंजीकधय / (Dy./Asstt. Registrar) आमकय अऩीरीम अधधकयण, भुंफई / ITAT, Mumbai