Delhi High Court
Commissioner Of Income Tax-Iv vs M/S Francis Wacziarg on 8 November, 2011
Author: Sanjiv Khanna
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ Income Tax Appeal No. 338/2011
Reserved on: 31st October, 2011
% Date of Decision: 8TH November, 2011
Commissioner of Income Tax-IV ....Appellant
Through Mr. N.P. Sahni and Mr. Ruchesh Sinha,
Advocates.
Versus
M/s Francis Wacziarg ...Respondent
Through Mr. Salil Kapoor, Mr. Sanat Kapoor and
Mr. Vikas Jain, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
1. Whether Reporters of local papers may be
allowed to see the judgment?
2. To be referred to the Reporter or not ? Yes.
3. Whether the judgment should be reported Yes.
in the Digest ?
SANJIV KHANNA, J.
With the consent of the learned counsel for the parties, the
present appeal under Section 260A of the Income Tax Act, 1961 (Act,
for short) against the order of the Income Tax Appellate Tribunal
(Tribunal, for short) dated 23rd April, 2010, relating to the assessment
year 2003-04 in the case of Francis Wacziarg, was taken up for hearing
and disposal.
2. As several separate subject matters/issues are raised, it will be
appropriate to deal with them under separate headings.
A. Whether income earned by the respondent assessee from one
property located at Pondicherry and two properties located at
Ramgarh should be taxed under the head of 'Income from
business and profession' or under the head 'income from house
property' and whether deletion of disallowance of 80% of the
expenses and depreciation amounting to Rs.53,18,761/- is
correct?
3. The assessing officer had held that income of Rs.13,27,855/- and
Rs.1,20,000/- (total Rs.14,47,855/-) received from Neemrana Hotels
Private Limited (NHPL, for short) towards and on account of
Pondicherry and Ramgarh properties were rental income. The
assessing officer observed that these properties were being run as
hotels by NHPL and possession of the properties was transferred to
them, while ownership remained with the assessee. The reasoning
given by the assessing officer is as under:-
"A perusal of the above depicts that the Ramgarh
and Pondicherry properties were let out by the assessee to
M/s Neemrana Hotels (P) Ltd but the arrangement was
made in a manner so that the income of the same treated
as "Income from business & Profession" in the hands of
the assessee e. in order to claim the expenditure and the
huge depreciation thereon. Since, the property has been
let out by the assessee, possession has also been
transferred, ownership remained with the assessee and
business run by Neemrana Hotels Private Limited. All
these facts clearly fit the case to treat the income of the
assessee on letting out of the property at Ramgarh and
Pondicherry to NHPL as "Income from House Property" On
the basis of the above, it can be said that the property
which has actually been used by the assessee for the hotel
business was only the Metharan Property which qualifies
for the depreciation. Hence the depreciation on other
properties and the expenses other than the operating
expenses be disallowed since the main business of the
assessee is the operation of the hotels, the consultancy
fees/service charges has to be treated as 'Income From
Other Sources' and all the expenses including
depreciation but excluding operating expenses being
related to other income is disallowed but keeping in view
the natural justice and the fair play, 20% of all the
following expenses other than depreciation is being
allowed to the assessee by treating that the same might
have incurred for the purpose of the business only. Thus,
the disallowance of the following expenses are being
made:
Staff Salaries & Other 3,69,864/-
Expenses (80%)
Travelling & Conveyance 7,499/-
(80%)
Postage, Telephone and 72,730/-
Courier (80%)
Rent Paid (80%) 1,07,520/-
Rent received adjusted 3,36,000/-
in rent paid (80%)
Repair & Maintenance 7,79,308/-
(80%)
Depreciation (Other 36,45,840/-
thanMetharan Property)
(as claimed by the
assessee)
53,18,761/-"
4. The assessing officer disallowed expenses to the extent of 80%
under the head staff salary and other expenses; travelling and
conveyance; postage, telegraph and courier; rent received adjusted
against the rent paid; repair and maintenance; and depreciation. The
assessing officer has further recorded that notice dated 8th March, 2006
under Section 131 of the Act was issued for summoning the Principal
Officer/Managing Director of NHPL, but they did not appear and it was
stated that they were out of country and would be available in April,
2006, and as the case was getting time barred and was to be decided by
31st March, 2006, the assessment order was passed. It may be
interesting to note that the assessing officer while disallowing 80% of
the expenses amounting to Rs.53,18,761/- and adding Rs.14,47,855/-
under the head 'income from house property', did not reduce the same
amount of Rs.14,47,855/- from income declared by the assessee under
the head 'business from business and profession'. An application filed
by the assessee under Section 154 remained pending till the matter was
taken up and heard in appeal by the Commissioner of Income Tax
(Appeals) [CIT (Appeals), for short].
5. The respondent assessee filed detailed grounds of appeal and
written submissions before the CIT (Appeals). The assessing officer was
asked to furnish a remand report. The respondent assessee before the
CIT (Appeals) pointed out that he was owner of the properties at
Matherana, Pondicherry and one property at Ramgrah, while the fourth
property at Ramgarh was taken on lease from the Uttrakhand
Government. Further he had constructed 14 rooms at Pondicherry to
be run as a hotel and 7 rooms in the two properties at Ramgarh to be
run as hotels. All the rooms were fully furnished having all facilities
including air conditioners, generators, crockery, EPABX machines, fax
machines, refrigerator, telephone facilities, computers, televisions, bed
sheets, blankets, bath towels, face towels, provisions for
meals/beverages etc.
6. The respondent's stand was that NHPL had been permitted to
operate and manage these hotels but NHPL was not a tenant in
possession of the properties. No lease deed had been executed. The
respondent was a Director in the NHPL and was having control over the
working of the hotels. All purchases, correspondences, cheques or
payments etc. from NHPL passed through him. The respondent had a
revenue sharing agreement with NHPL and was entitled to 20% of the
gross operating profit calculated in terms of the agreement in the case
of Pondicherry property. Similarly, there was agreement in respect of
the Ramgarh properties.
7. The CIT (Appeals) after considering the contentions of the parties
had held as under:-
"Thus, considering the facts and circumstances of the case
and the nature of activities carried out by the appellant
and also on going through the judgments as stated by the
appellant. It is seen that the appellant is receiving license
fee from Nimrana Hotels (P) Ltd as revenue share for
running of the property at Pondechery. It is also seen that
the the appellant is involved in all the aspects of
management and day to day running of the properties
being used as hotels etc. It is also seen that the licence fee
received by the appellant for various years is not a fixed
sum of money as in the case of income from house
property but it has been varying from year to year as it is
based on a revenue sharing arrangement, which arises
according to the receipts. It is also seen that the appellant
has been substantially increasing the capacity of the
hotels, income from which is being shared by the appellant
and Mis. Nimrana Hotels (P) Ltd as per their terms and
conditions. There does not seem to be any conclusive fact
which could point towards the income received by the
appellant to be in the nature of rental income The AO`s
contention that the assessee has so arranged his affairs in
the manner that income of the same be treated as income
from business or profession so that the claim of
expenditure can be made and huge depreciation can be
claimed. does not seem to fit in the facts and
circumstances of the case. The quantum of depreciation
claimed by the appellant does not change the nature of
the head in which income has to be assessed. The AO`s
observation that the business is being run by Mis. Nimrana
Hotels (P) Ltd. and not by the appellant does not also
appear to be totally correct. It is not correct to say that the
exclusive use and maintenance of these properties are
with M/s Nimrana Hotels (P) Ltd.. The AO seems to have
branded the license agreement between the appellant and
M/s. Nimrana Hotels (P) Ltd as a -sham agreement
without any cogent finding. except that the appellant is
incurring huge expenses and claiming huge depreciation.
Even otherwise the AO has made the addition without
arriving at any definite conclusion as it has been observed
by the AO In the assessment order that certain enquiries
are pending on this issue and the assessment has to be
completed by 31.3.2006 and therefore. "the stand taken
by the assessee is not accepted subject to pending
verification at later stage."
The above facts and circumstances reflect that
there is no conclusive evidence to show that the
appellant`s income should tall under the heed income
from house property and not business income. In fact all
the facts and circumstances point towards the income of
the appellant being income from business and profession.
Therefore, under the circumstances it is held that the
income of Rs. 14,47,855/- cannot be treated as income
from house property.
Further it has been pointed out that while adding
the income of Rs. 14,47,855/- to the income from house
property. The AO has not reduced the same from business
income shown by the appellant. It is stated that this has
resulted in double taxation of the same income twice -
once under the head income from profits and gains of
business or profession and the second time as income
from; house property.
The above contention of the appellant has been
examined and it seems to be correct. This issue can be
resolved by resort to the provisions of Sec. 154 of the Act.
However, since the above income of Rs. 14,47,855/- has
been held to be business income of the appellant in the
preceding paragraphs the amended ground of appeal
taken up by the appellant becomes irrelevant and is,
therefore, ignored. This disposes of the ground No. 2(b)."
8. In view of the findings recorded above, the CIT (Appeals) went on
to consider the second question of 80% disallowance in the expenditure
by the assessing officer, under various heads mentioned above. It
appears from the order of the assessing officer that 80% adhoc
reduction on account of the expenses was made as income from the
three properties had been treated and taxed as 'income from house
properties'. However, there is no discussion in the assessment order on
what basis what principle expenses to the extent of 80% were
disallowed.
9. CIT (Appeals) deleted the aforesaid additions recording as under:-
"After carefully examining the submissions of the
appellant and other details submitted during the appellate
proceedings, it is seen that the expenses amounting to
Rs.53,18,761/- [including depreciation of Rs.36,45,840/-]
are expenses relating to the business income of the
appellant, It is clear that the appellant is carrying on the
business of running hotels on various properties as
discussed in the preceding paragraphs, It is also a matter
of record that the appellant is using the premises at A-58
for his business purposes and the expenses incurred
therein are for the purposes of earning of business income
only, The AO's stand that these expenses are not related
to the business of the assessee cannot be upheld. The AO
has disallowed 80% of these expenses by observing that
the main business of the assessee being operation of
hotels, consultancy fee/service charges has to be treated
as income from other sources. After having said that the
AO should have disallowed the entire claim of expenses
made by the appellant, However, the AO disallowed only
80% and allowed the balance 20% by observing that
"keeping in view the natural justice and the fair play, 20%
of all the expenses other than depreciation is being
allowed to the assessee by treating that the same might
have incurred for the purposes of the business only. This
clearly shows that the AO is herself not entirely sure about
the stand taken by her. It appears that the disallowance
has been made without any cogent reason, Further no
basis has been brought out in the assessment order as to
why the proportion of 80%:20% has been applied. Since it
is clear that the various properties are being used for the
purpose of the appellants hotel business, the disallowance
of these expenses @ 80% does not appear to be justified.
These expenses are related to the claming(sic) of the
appellant's business income. These expenses are related
to the earning of the appellants business income Hence
the disallowance made by the AO deserves to be deleted."
10. In the appeal preferred by the Revenue before the tribunal, the
following grounds were raised :-
"1. On the facts and circumstances of the case and in
law, the CIT(a) has erred in deleting the addition of
Rs.3,69,864/- on account of staff ties and other expenses
which are not related to business.
2. On the facts and circumstances of the case and in
law, the CIT(A) has erred in deleting the addition of
Rs.7,499/- on account of traveling and conveyance
expenses, which are not related to business.
3. On the facts and circumstances of the case and in
law, the Ld. CIT(A) has erred in deleting the addition of
Rs.72,730/- on account of postage, telephone & courier
expenses, which are not related to business.
4. On the facts and circumstances of the case and in
law, the CIT(A) has erred in deleting the addition of
Rs.1,07,520/- on account, of rent paid.
5. On the facts and circumstances of the case and in
law, the CIT(A) has erred in deleting the addition of
Rs.Rs.3,36,000/- (sic) on account of rent received adjusted
in rent paid.
6. On the facts and circumstances of the case and in
law, the CIT(A) has erred in deleting the addition of
Rs.7,79,308/- on account of repairs & maintenance.
7. On the facts and circumstances of the case and in
law, the CIT(A) has erred in deleting the addition of
Rs.36,45,840/- on account of depreciation.
8. On the facts and circumstances of the case and in
law, the CIT(A) has erred in deleting the addition of
Rs.1,34,400/- on account of discrepancy in rent note.
9. On the facts and circumstances of the case and in
law, the CIT(A) has erred in deleting the addition of
Rs.1,89,201/- on account of business development
expenses incurred on producing opera.
10. On the facts and circumstances of the case and in
law, the CIT(A) has erred in deleting the addition of
Rs.115,14,506/- on account of deemed dividend u/s
2(22)(e) of the Act."
11. It is noticeable from the aforesaid grounds that the Revenue did
not specifically challenge the finding of the CIT (Appeals) that income
from the three properties was taxable under the head 'income from
business or profession' and not under the head 'income from house
property'. In these circumstances, we fail to understand, how the
Revenue can now in the present appeal on substantial question of law
challenge the order of the tribunal on the ground that income from the
three properties is chargeable under the head 'income from house
property' and not under the head of 'income from business and
profession'.
12. Even otherwise, we find that CIT (Appeals) has given detailed
factual finding why income earned by the assessee from the three
properties is taxable under the head 'income from business or
profession' and not under the head 'income from house property'. The
reasoning given by the assessing officer is cryptic and she has not
considered the relevant aspects. On the basis of findings recorded by
her, it is not possible to hold that the finding of fact recorded by the CIT
(Appeals)/tribunal are unfounded or unreasonable. In any case, the
said findings are not perverse and are based on documents and
material placed on record. The reasoning is cogent and well explained.
Therefore, we do not find that any question of law arises on the first
aspect and we are not inclined to frame any substantial question of law
whether the income earned by the respondent assessee is taxable
under the head 'income from house property'.
13. Once it is held that the income from the three properties is
taxable under the head 'income from business or profession'
depreciation has to be allowed under the provisions of Section 32 of the
Act. Similarly, disallowance of 80% from the expenses deleted by the
CIT(Appeals)/tribunal has been explained and supported by cogent
reasoning. The CIT (Appeals) has rightly pointed out that there was a
confusion in the mind of the assessing officer when she had passed the
above order, disallowing 80% of the expenses. It may be noted that
the assessee had filed the revised income declaring income of Rs.
19,35,067/- which included income from consultancy services provided
to third parties. Besides the assessee was running his office from A-58
Nizamuddin (East), New Delhi 110013 and had engaged staff of about
20 persons who are paid salary, ESI, PF and other perks. The assessee
was also running a hotel at Matheran. In view of the foresaid, we do
not find any reason to interfere with the order of the tribunal in respect
of the said disallowances. No substantial question of law arises and the
appeal on the said subject matter is dismissed.
B. Whether the tribunal is right in upholding the order of the CIT
(Appeals) deleting addition of Rs.1,34,400/- on account of discrepancy
in the rent note?
14. Premises No. A-58, Nizamuddin (East), New Delhi 110 013, does
not belong to the assessee and was taken on rent from Dugal Brothers.
The assessee had produced a rent note dated 5th April, 2001, before the
assessing officer, but addition of Rs.1,34,400/- was made on the ground
that the rent note was signed by one of the owners and not by both
owners who were equally receiving the rent and as per the books of
accounts, the total rent paid was Rs.1,32,000/- but as per the profit and
loss accounts/return, Rs.1,34,400/- was shown as rent paid. The
reasoning given by the assessing officer to make the said addition reads
as under:-
"5. Service Charges from M/s Neemrana Motels (P) Ltd.
Rs.4,20,000/-"
In this regard, vide questionnaire dated 30.01.2006, the
assessee was show caused as under:
"As per your explanation, the service charges from M/s
Neemrana Hotels Private Limited amounting to
Rs.4,20,000/- has been credited to the Rent Paid account
which is paid to Dugal Brothers, being joint owner of the
property at A-58, Nizamuddin, Delhi. In support, you have
also submitted the copy of the Rent Note dated
05.04.2001. First of all, the said Rent Note is signed by
only one owner out of the two owners who are receiving
the income equally on the said property and secondly as
per the ledger account of Rent paid, the net expense is
Rs.1,32,000/- but as per the Profit & Loss Account, it is
Rs.1,34,400/-. Please explain the same."
In response to this, the assessee vide reply dated
03.02.2006, acknowledged the discrepancies in the Rent
Note which clearly gives rise to a perfect case for
application of section 69C, hence the amount of
expenditure to the tune of Rs.1,34,400/- is disallowed.
Penalty proceedings u/s 271(1)(c) is initiated on this point
for furnishing of wrong particulars.
(Disallowance Rs.1,34,400/-)"
15. The aforesaid reasoning is laconic and has to be rejected as
perverse. The CIT (Appeals) examined the said aspect and has rightly
recorded that the addition cannot be sustained. The rent was
deposited in the bank account of Dugal Brothers and even tax at source
was deducted. The respondent was not the owner of the property. The
assessing officer did not hold that Dugal Brothers were not owners. Once
payment of rent was not disputed and admitted, signature on rent note
becomes inconsequential. Oral tenancy is legal and recognized. The
respondent had paid security service charges per quarter to the
Security Agency appointed by the Welfare Association of Nizamuddin
(East). Thus, the respondent assessee had paid Rs.2,400/- in addition to
rent of Rs.1,32,000/-. The aforesaid order of the CIT (Appeals) was
affirmed by the tribunal. We fail to understand why and on want
ground Revenue has filed appeal on this ground. Accordingly, the
appeal of the Revenue is dismissed on the above issue.
C. Addition of deemed dividend under Section 2(22)(e) amounting
to Rs.115,14,503/- (sic.).
16. It was admitted during the course of hearing of the appeal that
the total amount is not Rs.115,14,503/- but Rs.15,14,503/-. The break-
up of the said amount is as under:-
(i) NHPL Rs.11,97,918/-
(ii) M/s Fawn Trade & Travels (P) Ltd. Rs. 1,88,129/-
(iii) M/s Delhi Warehousing (P) Ltd. Rs. 1,28,459/-
17. The reasoning given by the assessing officer was that the
aforesaid amounts were shown as credit balance in the books of the
assessee and were outstanding and, therefore, were in the nature of
advances.
18. CIT (Appeals) deleted the said additions recording as under:-
(a) The credit balance payable by NHPL was on account of licence fee
which had to be paid in installments and the said credit balance had
been recorded, but as per the terms of the licence deed, the licence fee
was payable after the close of the year. The amount was the share of
the respondent from gross profit earned by NHPL.
(b) Amount payable to Fawn Trade & Travels (P) Ltd. was on account
of outstanding bills for various purchases and no loan or advance was
given to the assessee. In fact the assessee had given loan to Fawn
Trade & Travel (P) Ltd. and outstanding balance as on 31/3/2003 was
Rs.61,42,095/-.
(c) The outstanding balance payable by Delhi Warehousing Pvt.
Limited, was towards "cheques in hand" which were subsequently
cleared.
19. CIT (Appeals) deleted the said additions recording as under:-
"After carefully examining the details, facts and
submissions and the assessment order as discussed above,
it is seen that the amounts treated. As deemed dividend
by the AO are neither advances nor loans given to the
assessee by these companies. The copies of A/cs and
confirmations filed by the appellant before the AO have
not been discussed by her in the body of the assessment
order. Nor the explanations of the appellant have been
discussed or found to be incorrect by the AO. In view of
the confirmations and copies of accounts filed by the
appellant showing that the amounts appearing in the-
account were in fact receipts due to the appellant, in his
normal course of business dealings with these companies,
it is held that the receipts of the appellant from these
companies cannot be treated as loans and advances,
Hence the AO was not correct in treating these receipts as
deemed dividend u/s. 2(22)(e)."
20. The tribunal has rightly dismissed the appeal of the Revenue. In
fact there is hardly any justification and reason for the assessing officer
to make these huge additions. Appeal on this ground is dismissed.
D. Disallowance of Rs.1,89,201/- on account of business
development expenses incurred on production of Opera.
21. After hearing the learned counsel for the parties, the following
substantial question of law is framed:-
- Whether the tribunal was right in allowing the appeal of the
assessee and deleting addition of Rs.1,89,201/- on account of
business development expenses for production of Opera?
22. The assessing officer had disallowed the said expense on the
ground that the assessee's daughter had participated in an opera but
this did not justify and cannot be regarded as a business expense. The
total cost of the Opera of Rs.80 lakhs was borne by Delhi Symphony
Society and the respondent assessee was not in the business of Opera
production etc. There was no need for the assessee to incur the said
expenditure. Referring to the explanation of the assessee, it was held
that the same should be disallowed as capital in nature. This was after
recording statement of Gautam Kaul, Secretary of the Delhi Symphony
Society in which he had stated that the Opera was a dream project of
the assessee and it was in process since the year 1999. The CIT
(Appeals) had dismissed the appeal of the assessee on this ground.
However, it appears that both the Revenue and the assessee had filed
appeals before tribunal. It appears that both the sides were confused
on this aspect as to the actual effect of the order of the CIT (Appeals).
On a reading of the order of the CIT (Appeals), it is clear that the said
expense was disallowed. The CIT (Appeals) had recorded as under:-
"These submissions of the appellant are very general-in
nature and the AO has given a finding in the assessment
order that it was organized with a view to promote the
career of the appellant`s daughter who is a soprano.
Under these circumstances the allowing of this
expenditure as revenue expenditure does not seem
justified. Further the AO has observed that the Balance
Sheet of Delhi Symphony Society was not tiled by the
appellant for necessary verification. In addition the AO has
correctly pointed out that the business of the assessee
does not envisage the staging of Opera productions etc.
Keeping in view the above facts and circumstances, it is
held that this expenditure of Rs. 1,89,201/- has been
rightly disallowed by the AO and is accordingly upheld.
However, it is held that the 80% disallowance made by the
AO separately in this regard will be deleted as the same
expenditure cannot be disallowed twice."
23. Tribunal in this regard has held as under:-
"7. We have heard both sides. The CIT(A) has
discussed this issue in para 10 of his order. All these
expenses were incurred on producing "The Fakir of
Banaras" which was a show organized by Delhi Symphony
Society. The reasoning given by the assessing officer to
make disallowance are strange. Merely because the
assessee's daughter participated in the show, does not
warrant disallowance, as it is very common for the family
members of the assessee to assist the family business of
the assessee. Moreover, the assessing officer wanted the
production of the balance-sheet of Delhi Symphony
Society, on which the assessee had no control. The
assessee had only incurred some expenses like printing of
invitations etc. which is totally insignificant comparing to
the total expenditure incurred for conducting the show.
All these expenses are incurred for the purpose of
business as rightly pointed out by the CIT(A). We agree
with him and decline to interfere."
24. The order of the tribunal is not clear and in fact contrary to the
findings of the CIT (Appeals) as it has been held that they were in
agreement with CIT (Appeals) and it is further stated that "we are not
inclined to interfere". This aspect requires fresh consideration and
decision by the Tribunal. Accordingly, the aforesaid question is partly
answered in favour of the Revenue and against the assessee and an
order of remit is passed. Parties will appear before the Additional
Registrar on 30th November, 2011, when a date of hearing shall be
given.
25. The appeal is accordingly disposed of. There will be no order as
to costs.
(SANJIV KHANNA)
JUDGE
(R.V. EASWAR )
JUDGE
November 8th , 2011
kkb
