Royal Westen India Turf Club Ltd, Mumbai vs Assessee

A C I T - 7(2) M/s. Royal Western India Turf Room No. 624 Àayakar Bhavan Club Ltd. Vs. M.K. Road, Mumbai 400020 Mahalaxmi Race Course Mahalaxmi, Mumbai 400034 PAN - AABCR8519H Appellant Respondent

ITA No. 6453/Mum/2012 (Assessment Year: 2005-06) ITA Nos. 6454 & 6452/Mum/2012 ITA No. 3958 /Mum/2011 (Assessment Year: 2006-07) Co No. 64/Mum/2013 (Assessment Year: 2005-06)

M/s. Royal Western India Turf A C I T - 7(2) Club Ltd. Room No. 624 Àayakar Bhavan Vs. Mahalaxmi Race Course M.K. Road, Mumbai 400020 Mahalaxmi, Mumbai 400034 PAN - AABCR8519H Appellant Respondent

Revenue by: Shri A.K. Srivastava Assessee by: S/Shri Salil Kapoor/ Vikas Jain

Date of Hearing: 16.07.2015 Date of Pronouncement: 22.07.2015

ORDER

Per Bench

These cross appeals pertain to assessment years 2005-06 and 2006-07. Facts necessary for disposal of the appeals are interconnected and, therefore, we proceed to dispose of these appeals by a combined order for the sake of convenience.

2 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

2. Assessee-company, in the name of M/s. Royal Western India Turf Club Ltd., carried on the activity of running a club providing hospitality services to its members and their guests apart from conducting horse races. In respect of the previous year relevant to A.Y. 2005-06 it declared loss of `2,21,39,900/-. When the case was taken up for scrutiny the assessee did not respond to the notices issued under sections 143(2) and 142(1) of the Act. Therefore the AO proceeded to complete the assessment under section 144A of the Act whereby the income of the assessee was determined at Nil.

3. Similarly, in A.Y. 2006-07 assessee declared loss of `2,71,93,700/-. Assessment was completed under section 144 of the Act wherein the expenses claimed by the assessee were disallowed and determined the loss at Nil; in other words the total income of the assessee was determined at Nil.

4. It may be noticed that the assessee received a sum of `5,17,74,750/- and `2,02,97,000/- for the assessment years 2005-06 and 2006-07 respectively as entrance fees from the members. According to the assessee- company the amount received from the Members as entrance fees is a capital receipt and, therefore, not liable to tax since it is a onetime payment made by the members. It was also submitted that the entrance fees is accounted for in the year in which the members are elected and the same is credited to the general Reserve; hence it does not have the character of revenue receipt. In Form 3CD, annexed to the return of income, the auditors have mentioned that the assessee treated it as capital receipt. During the course of proceedings under section 144 of the Act the AO has not rejected the claim of the assessee. The order for A.Y. 2005-06 was passed on 14.12.2007 whereas for A.Y. 2006-07 assessment was made on 29.12.2008.

5. The learned CIT-7, Mumbai called for the records of the AO for both the years and noticed that the assessment is deficient on the following issues: -

Assessment Year: 2005-06

"i) The assessee has shown addition in fixed assets at `3,75,59,860/-.

The total expenses as per income & expenditure account are `38,15,57,668/-. The AO did not make any independent enquiry into 3 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

allowing of expenses and depreciation. By assessing the income at nil, the adhoc disallowance comes to only `2,21,39,900/-.

ii) Further, it is noticed from the perusal of assessment order that the assessee's claim of expenses was disallowed on account of non compliance by the assessee. However, no penalties under section 271(1)(c) were initiated. Since the assessment order was passed under section 144 of the I.T. Act, explanation 1A to section 271(1)(c) was applicable in this case as the assessee failed to offer an explanation in respect of facts materials to the computation of total income. Therefore, the amount disallowed was deemed to be the income in respect of which particulars have been concealed.

iii) Under the circumstances and above said reasons, the assessment order passed by the then DCIT-7(2), Mumbai dated 12.12.2007 is considered to be erroneous and prejudicial to the interest of Revenue. You are hereby given opportunity to state as to why the assessment be not set aside, enhanced or suitably modified."

6. For A.Y. 2006-07, vide notice dated 09.02.2011, under section 263 of the Act, the learned Commissioner called upon the assessee to show cause as to why the assessment made by the AO should not be considered as deficient in the following respects and deserves to be revised. Relevant paras of the show cause notice is extracted for immediate reference: -

"(i) As per ITS/AIR information, the following receipts/transactions are reflected in the system :

a) Rent receipts Rs.52,87,646/- b) Interest receipts Rs.52,87,646/- c) Receipts and contractors Rs.15,96,543/- d) Cash deposit Rs.72,60,000/- e) Mutual Fund Investment Rs.1,45,00,000/-

The assessee did not file any explanation in respect of the same.

However, these amounts were not added/disallowed as unexplained investments, undisclosed receipts and the assessment order is also erroneous in so far as prejudicial to the interest of revenue on this account.

(ii) Further, even though the assessee did not comply with the notices issued by the department, there has been no inquiry on the part of AO independently for verification of various expenses and claims of assessee. The expenses claimed are to the extent of Rs.44,78,73,6961- as per P & L A/c. Such lack of inquiry also made the assessment order erroneous in so far as prejudicial to the interest of revenue.

(iii) In the assessment order, the AO mentioned that all the expenses except those pertaining to computation of Fringe Benefit Tax are disallowed. The expenses claimed as per P & L A/c are 4 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

Rs.44,78,73,696/-. Out of these expenses only Rs.1,29,15,512/- pertain to computation of Fringe Benefit Tax. However, the final assessed income is nil. Therefore, the expenses claimed have not been disallowed in the computation, except to the extent of returned loss.

(iv) In the schedule 2 of the return, the assessee has set off long term capital loss against short term capital gains. No verification of these claims have been made and the set off has been wrongly allowed in violation of statutory provisions.

(v) The assessee's claim of expenses was disallowed on account of non compliance by the assessee. However, no penalties u/s.271(1)(b) and 271(1)(c) were initiated. Since the assessment order was passed u/s.144 of the I.T. Act, explanation 1A to section 271(1)(c) was applicable in this case, as the assessee failed to offer an explanation in respect of facts material to the computation of total income. Therefore, the amount disallowed was deemed to be the income in respect of which particulars have been concealed."

7. In response to the show cause notice the assessee's representative filed a written submission and also furnished certain details. After considering the details and submissions the learned Commissioner was of the opinion that the income was determined at Nil without bringing any facts on record and without making any outdoor enquiries in respect of the items proposed in the show cause notice and, therefore, the assessment orders were set aside to the file of the AO with a direction to the AO to make fresh assessments after making proper enquires. While passing orders under section 143(3) r.w.s. 263 of the Act the AO noticed that the assessee received a sum of `5,17,74,750/- for A.Y. 2005-06 and `2,02,97,000/- for A.Y. 2006-07 towards entrance fees and credited to General Reserve by claiming it as capital receipt whereas it has to be considered as business income. The AO, in his orders dated 29.12.2010/13.12.2011, for assessment years 2005-06 and 2006-07, included the entrance fees received as income of the assessee and accordingly assessments were completed. Aggrieved by the orders passed by the AO the assessee preferred appeals before the learned CIT(A).

8. It deserves to be noticed that in respect of assessment years 2005-06 & 2006-07 assessee challenged the orders passed by the AO under section 144 of the Act on the ground that due to personal reasons of the Consultant of the assessee necessary details could not be furnished which resulted in 5 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

exparte assessment by rejecting retuned loss which is not in accordance with law. The learned CIT(A) having dismissed the appeals filed by the assessee the matter was taken up in second appeal before the ITAT. The ITAT, in turn, restored the matters to the file of the CIT(A) to decide them afresh. Thus the appeals were taken up by the learned CIT(A) for hearing. It deserves to be noticed that by the time the matter was taken up for hearing the original assessment order was set aside by the Revisional Authority in exercise of the powers vested in him under section 263 of the Act. Though in the orders passed under section 144 of the Act there is no addition referable to entrance fees received from members, the learned CIT(A) made brief mention about it while disposing of the appeals. Therefore the assessee preferred appeals against the orders passed by the AO under section 144 contending, inter alia, that during the course of assessment proceedings under section 144 of the Act the AO having not added any amount on account of annual subscription, etc. it is not the subject matter of appeal and thus the CIT(A) is not justified in making a mention about the issues arising out of the orders passed under section 143(3) r.w.s. 263 of the Act. In the opinion of the assessee the assessments made under section 144 of the Act no longer survive since the assessments were set aside by the CIT and there is no need for the CIT(A) to make any mention with regard to the additions made under section 143(3) r.w.s. 263 of the Act in the proceedings arising out of the best judgement assessment.

9. At the time of hearing the learned counsel for the assessee prepared a chart to submit that in A.Y. 2005-06 the assessee preferred appeal (ITA 6453/Mum/2012) against the order passed by the AO under section 144 of the Act wherein in was contended that the addition of `1 lakh, sustained by the learned CIT(A) under section 14A r.w. Rule 8D, deserves to be allowed whereas in the appeal filed by the Revenue (ITA No. 1654/Mum/2012) the Revenue contends that the CIT(A) erred in treating the entrance fees received by the assessee as capital receipt. Similarly, for A.Y. 2006-07 the assessee preferred appeal against the order passed under section 144 (ITA No. 4654/Mum/2012) wherein the assessee contends that the AO having not added any amount on account of annual subscription while passing the 6 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

order under section 144 of the Act dated 28.12.2008 the learned CIT(A) erred in treating the annual subscription fees as revenue receipt. The learned counsel submitted that the appeals filed against the orders under section 144 of the Act would become academic if the appeals arising out of the order passed under section 143(3) r.w.s. 263 or the appeals filed against the orders under section 263 are disposed of since in those cases the assessee challenged the jurisdiction of the AO while giving effect to the order passed by the CIT(A), i.e. to make any addition other than what was considered by the Revisional Authority.

10. In fact for A.Y. 2006-07 the assessee preferred an appeal against the order passed under section 263 of the Act (ITA No. 3958/Mum/2011) wherein it was submitted that the observations of the CIT in the impugned order in response to obtaining information on various issues are illegal since the Commissioner did not give assessee an opportunity of hearing on the issues mentioned in the show cause notice.

11. Both the parties admitted that the appeals arising out of the orders passed under section 143 r.w.s 263 should be taken up first and we accordingly proceed to consider the matters. The case of the learned counsel for the assessee is that the jurisdiction of the Revisional Authority, in exercise of powers vested in him under section 263 of the Act, is limited to the issues that were mentioned in the show cause notice or on such other matters which were specifically dealt with by the learned Commissioner upon putting it up to the assessee; in short the order passed by the AO outside the ambit of the issues mentioned in the show cause notice, deserve to be considered as illegal and bad in law. In other words before a Commissioner passes an order he should give the assessee an opportunity of being heard and thereafter record, prima facie, that the assessment order is erroneous in so far as it is prejudicial to the interests of the Revenue. The requirement of giving the assessee an opportunity of being heard is for the simple reason that the assessee may be able to refute, prima facie, the plea of the Commissioner which might have been formed on examination of the record. When the Commissioner's powers are limited to the issues which 7 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

were put to the assessee, the AO, under guise of framing fresh assessment, cannot enlarge the scope of revisionery proceedings. In other words, the AO, while making assessment under section 143(3) r.w.s. 263 of the Act, should exercise the powers in relation to the items forming part of the show cause notice issued by the Commissioner and considered in the proceedings under section 263 of the Act.

12. In this regard the learned counsel for the assessee placed reliance upon the decision of the Hon'ble Gujarat High Court in the case of CIT vs. D.N. Dosani 280 ITR 275 wherein it was observed that Assessing Officer cannot consider items not covered by revisional proceedings.

13. The learned counsel for the assessee adverted our attention to the show cause notice issued by the Revisional Authority and the operative part of the order of the CIT to highlight that at no stage of the proceedings the CIT had touched upon the issue of taxability of the entrance fees and hence while passing the orders under section 143(3) r.w.s. 263 of the Act the AO was not justified in raking up the issue at this stage since he has no jurisdiction to touch upon the issue which was not subject matter of consideration by the Revisoinal Authority.

14. The learned D.R. admitted that this issue was not mentioned in the show cause notice issued by the CIT or in the final order passed under section 263 of the Act. But it was submitted that the assessment order having been set aside with the direction to make de novo assessment the AO is free to make fresh assessment and thus justified the action of the AO.

15. We have heard the rival submissions and carefully perused the record. When the Revisional Authority calls for the assessment records and proceeds to set aside the assessment the standard language employed, in the revisional orders, is to direct the AO to make de novo assessment; but one should not go by the language employed therein if it comes in conflict with the powers vested in the Commissioner while passing the order under section 263 of the Act, which were considered in detail by the Hon'ble Gujarat High Court (supra). The direction given by the Commissioner has to be understood in the context/setting in which such direction is given; in the 8 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

instant case the show cause notice was issued on specific items and upon calling for the details the Commissioner was satisfied that the AO has not made proper enquiries with regard to certain items which were specifically listed out in the order passed under section 263 of the Act and in this background the matter was set aside with a direction to the AO to make a fresh assessment and thus it has to be assumed that the direction was limited to the issues which were considered by the Revisional Authority. Such being the case the AO has no jurisdiction to touch upon a fresh issue which does not emanate from the notice issued by the Commissioner under section 263 of the Act, while making assessment under section 143(3) r.w.s. 263 of the Act. In the instant case the AO had not treated the entrance fees as revenue receipt despite the fact that the assessee, in the audit report annexed to the return of income, furnished the details with regard to the receipt of entrance fees from members of the club and the mode of recording the same in the books of account. Such being the case it could not have been considered in the proceedings under section 143(3) r.w.s. 263 of the Act. We, therefore, hold that the addition, towards entrance fees, made by the AO, in the proceedings under section 143(3) r.w.s. 263, is beyond the jurisdiction of the AO and therefore deserves to be deleted and we direct the AO accordingly. Though the learned CIT(A) has disposed of the appeals on merits, by following the decision of the Hon'ble Bombay High Court in the case of Diners Business Services P. Ltd. 263 ITR 1, we need not have to go into the nature of the entrance fees at this stage since the same cannot be subject matter of consideration in the proceedings under section 143(3) r.w.s. 263 of the Act. We, therefore, accept the plea raised by the assessee in the cross objections in CO No. 64/Mum/2013 (A.Y. 2005-06) and in appeal No. 6334/Mum/2012 (A.Y. 2006-07). Consequently the appeals filed by the Revenue (ITA No. 1654/Mum/2012 and ITA No. 6334/Mum/2012 for A.Ys. 2005-06 and 2006-07 respectively) become academic and therefore dismissed accordingly.

16. It may be noticed that the assessee also preferred appeal against the order passed by the CIT(A) dated 09.07.2012 for A.Y. 2005-06 (IT No. 6333/Mum/2012) wherein it was contended that the AO having not made 9 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

any addition in the order passed under section 144 of the Act, in the appeal arising out of order under section 144 of the Act no addition can be made by the CIT(A). In fact it was brought to the notice of the CIT(A) that the AO made addition under section 143(3) r.w.s. 263 referable to the entrance fees received from members by treating it as revenue receipt; in this context the learned CIT(A) made a comment by merely observing as under:

"Entrance fees from members is capital receipt. Hence no further comments are called for."

Aggrieved, Revenue preferred appeal before the Tribunal.

17. Since we have already taken a view that in the order passed under section 143(3) r.w.s. 263 of the Act the AO has no jurisdiction to consider a new issue which was not forming part of the direction by the Revisional Authority this addition by the CIT(A) while disposing of the appeal arising out of 144 proceedings, referable to receipt of entrance fees, is not in accordance with law. The present appeal filed by the Revenue is of academic importance since there was no addition made in the order passed under section 144 of the Act and thus the issue does not arise out of the order passed by the AO and consequently the CIT(A) could not have considered this issue in his order dated 09.07.2012. With these observations the appeal filed by Revenue is dismissed as infructuous.

18. As regards the appeal filed by the assessee against the order passed under section 144 dated 12.12.2007 and the order dated 02.07.2008 in respect of A.Y. 2005-06 the only issue is with regard to the addition of `1 lakh confirmed by the learned CIT(A) under section 14A r.w. Rule 8D. On this issue the learned counsel for the assessee submitted that in the proceedings under section 144 of the Act the AO has not disallowed any amount under section 14A of the Act and even in the order passed under section 263 of the Act there is no specific mention about this issue and thus, in the light of the decision of the Hon'ble Gujarat High Court (supra), the addition sustained by the learned CIT(A) is not in accordance with law.

19. Having regard to the circumstances of the case we accept the plea of the assessee and delete the impugned addition. In respect of A.Y. 2006-07 10 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

assessee filed an appeal against the order under section 263 of the Act as well as the order passed under section 144 of the Act. No arguments were advanced to challenge the order passed under section 263 of the Act except stating that sufficient opportunity was not given. We do not find any merit in the submissions of the assessee and accordingly dismiss the appeal filed by the assessee (ITA No. 3958/Mum/2011). With regard to the appeal filed by the assessee against the order passed under section 144 of the Act for A.Y. 2006-07 the plea of the assessee was that the learned CIT(A) has no jurisdiction to add the annual subscription of `15,85,940/- since that was not the subject matter of consideration by the AO under section 144 of the Act. In this case also there is no specific mention about the addition made in the proceedings under section 144 of the Act. Therefore it cannot be inferred that the Commissioner has made the impugned addition afresh while disposing the appeal arising out of the order passed by the AO under section 144 of the Act. We, therefore, do not find any merit in the contention of the assessee. However, going by para 4.1 in the order passed by the CIT(A) it has to be assumed that the CIT(A) has considered this issue. We, therefore, set aside the order of the CIT(A) to that extent since it only arises out of the order passed under section 143(3) r.w.s. 263 of the Act.

20. To summarise, the appeals in ITA Nos. 1654/Mum/2012, 6333/Mum /2012, 6334/Mum/2012, 3958/Mum/2911 and 6452/Mum/ 2012 are dismissed whereas the CO No. 64/Mum/2013 and ITA Nos. 6453/Mum/ 2012 and 6454/Mum/2012 are treated as allowed.

Order pronounced in the open court on 22nd July, 2015.

Sd/- Sd/- (Sanjay Arora) (D. Manmohan) Accountant Member Vice President

Mumbai, Dated: 22nd July, 2015 11 ITA No. 1654+7/Mum/2012 M/s. Royal Western India Turf Club Ltd.

Copy to:

1. The Appellant 2. The Respondent 3. The CIT(A) - 13, Mumbai 4. The CIT- 7, Mumbai City 5. The DR, "D" Bench, ITAT, Mumbai

By Order

//True Copy// Assistant Registrar ITAT, Mumbai Benches, Mumbai