Phelix Appliances Ltd. vs Income Tax Officer

Mukesh R. Shah, J.—Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal") dated July 31, 2013, passed in I.T.A. No. 2536/AHD/2012 for the assessment year 2009-10, the assessee has preferred the present tax appeal with the following proposed questions of law.

"A. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in upholding the order of the lower authorities in not allowing the set off of business loss against income from house property as provided under section 71 of the Act?

B. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in passing an unreasonable order devoid of any cogent reasons for rejection?"

That the assessee filed the return of income for the year consideration declaring a total income at Rs. 18,58,721. The same was processed under section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The case was later on selected for scrutiny assessment. Notice under section 143(2) of the Act was issued, which was duly served upon the assessee. It appears that during the year under consideration and though the assessee-company had given the complete production facility on rent and entered into lease agreement with Rextone Industries Ltd., Mumbai, to allow them to utilize the buildings along with land located at Plot No. 5, GIDC, Por, Vadodara, and received total rental income at Rs. 39 lakhs. The assessee furnished computation of income and it was notice that the rental income at Rs. 39 lakhs under the head "Income from house property" and claimed deduction under section 24 of the Act of Rs. 11,70,000. The assessee also claimed set off business loss of Rs. 8,71,279 against the income from house property under section 71 of the Act. The assessee was called upon to justify its claim of set off business loss at Rs. 8,71,279 against the income received from house property and the assessee tried to notify the claim, however, the Assessing Officer was not satisfied with the explanation. The Assessing Officer opined that as such there was no business or manufacturing activity carried out during the year under consideration and business loss claim and set of against the income shown under the head of house property is not allowable. Consequently, the Assessing Officer disallowed the business expenditure of Rs. 8,71,279 claim of set off against the income from house property and added to the income of the assessee.

1.1. Feeling aggrieved and dissatisfied with the order of assessment passed by the learned Assessing Officer disallowing the claim of the set off Rs. 8,71,279 against the income from house property, the assessee preferred appeal before the learned Commissioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals) has concurred with the findings recorded by the Assessing Officer and dismissed the appeal.

1.2. Feeling aggrieved and dissatisfied with the order passed by the learned Commissioner of Income-tax (Appeals), the assessee preferred further appeal before the learned Income-tax Appellate Tribunal and by judgment and order, the learned Tribunal has dismissed the said appeal confirming the orders passed by the Assessing Officer as well as learned Commissioner of Income-tax (Appeals).

1.3. Feeling aggrieved and dissatisfied with the impugned order passed by the learned Income-tax Appellate Tribunal, the assessee has preferred present tax appeal with the aforesaid proposed questions of law.

Shri Tej Shah, learned advocate for the appellant-assessee, has vehemently submitted that the Assessing Officer has materially erred in considering Rs. 8,71,279 as business expenditure and set off the claim by the assessee from the income received from the house property. It is submitted that as such the assessee claimed the business loss of Rs. 8,71,279 as set off from the income received from the house property as provided under section 71 of the Act. It is submitted that, therefore, the Assessing Officer has materially erred in not properly appreciating the scope of ambit of section 71 of the Act.

2.1. It is submitted that as such the assessee notify the claim the business expenditure of Rs. 8,71,279 as set off against the income from house property under section 71 of the Act. It is submitted that what was claimed by the assessee was the business loss of Rs. 8,71,279 from the income of the house property as provided under section 71 of the Act. It is submitted that the learned Assessing Officer has materially erred in not properly appreciating the aforesaid fact. It is submitted that, therefore, the learned Commissioner of Income-tax (Appeals) as well as the learned Tribunal have materially erred in confirming the order passed by the Assessing Officer. It is further submitted by Shri Shah, learned advocate for the assessee, that even the learned Tribunal has not considered and/or dealt with the decision of the Tribunal of the Delhi Bench in the case of ITO v. Mokul Finance P. Ltd. reported in [2009] 29 SOT 11 (Delhi) which was relied upon by the assessee. It is submitted that the same was required to be dealt with and considered by the learned Tribunal. It is further submitted that even the learned Tribunal has relied upon the decision of the Rajkot Bench of the Income-tax Appellate Tribunal in the case of Master Silk Mills (P.) Ltd. v. Deputy CLT [2001] 77 ITD 530 (Rajkot), however, against the aforesaid decision, tax appeal is pending before this court. Therefore, it is requested to admit the present tax appeal and to be heard with aforesaid Tax Appeal No. 17 of 2001. Making above submissions, it is requested to admit/allow the present tax appeal.

Heard Shri Tej Shah, learned advocate for the appellant-assessee. At the outset, it is required to be noted that as such there are concurrent findings of fact recorded by the all the authorities below that the assessee incurred the expenditure of Rs. 8,71,279 as claimed and, consequently, the loss suffered by the assessee to the aforesaid extent. There are concurrent findings of fact recorded by all the authorities below that as such the assessee had stopped the manufacturing activity in the factory premises in question and started only trading activity of selling air-conditioners and during the year under consideration sold only three air-conditioners for an amount of Rs. 45,000. It is required to be noted that as such the factory premises in question, in which, the manufacturing activity was earlier carried was given on lease to one Rextone Industries Ltd., Mumbai, and the assessee earned the rental income from the house property of Rs. 22,50,000. That the assessee claimed the benefit under section 24 of the Act with respect to the rental income of Rs. 22,50,000. The assessee also claimed the business loss of Rs. 8,71,279 by submitting that the assessee had incurred the said expenditure while doing the business and claimed that there was business loss of Rs. 8,71,279 and claimed the set off of the said business loss from the rental income from the house property. On appreciation of evidence and considering the factual aspect all the authorities below have not accepted the claim of the assessee that it had incurred expenditure of Rs. 8,71,279 while doing the business and, consequently, there was business loss to the extent of Rs. 8,71,279 and, therefore, did not allow the set off claimed by the assessee from the rental income received from the house property. The aforesaid is discussed in detail by the learned Commissioner of Income-tax (Appeals) in paragraph 3.2 to 3.2.5, which reads as under:

"3.2. I have considered the appellant''s submissions and the Assessing Officer''s observation. On a perusal of the lease agreement between the appellant and Rexton Industries Ltd., it is seen that the appellant has leased out the property consisting of land and building located at Plot No. 5 GIDC Por, Vadodara. The deed mentions only the land and the building and, hence, the machinery has not been leased out to the lessee. This is also evident from the fact that the appellant was in the business of manufacture of air-conditioners, whereas the lessee has taken this premises on lease for the production of printing inks. This is also a fact that the entire premises has been given on lease and, thus, the appellant is not carrying on any business activity from this premises. The deed also provides that all the utilities payments on this premises such as electricity telephone, water, drainage charges, etc., shall be fully paid by the licensees from February 1, 2008, up to the date of occupancy. The licensee has also been allowed to make the interior improvements or alterations on its own expenses. It also provides that the licensee shall be responsible entirely for the repairs and maintenance of any of breakages and damages to the demised premises during the entire term of the agreement. The licensee is also obliged to take comprehensive insurance policy for this building. The deed further provides that the notified are charges of Rs. 1,27,254 shall be paid by the licensor.

3.2.1. Now, the computations of income filed by the appellant is as follows:

3.2.2 The break-up of expenses disallowed by the appellant in computation of income under the head of business and profession by stating that these relate to other heads of income amounting to Rs. 11,87,880 has been submitted as repairs of factory building. The appellant had filed details of repair expenses before the Assessing Officer from which it is seen that the total expenditure claimed under the head repair and maintenance (factory) is of Rs. 12,42,880. Out of this, an amount of Rs. 55,000 has been credited to the licensee, i.e., Rexton Industries Ltd. as a journal entry on October 1, 2008, and the balance expenses have been made in cash from the period April 2, 2008, to March 27, 2009, on different dates and on each date, the amount has been shown below Rs. 20,000. As already stated above, the repairs and maintenance was the responsibility of the licensee after April 1, 2008, and, hence, the expenses shown as repair expenses by the appellant has not been incurred for the purpose of this factory premises. Secondly, the payment of the notified area committee amounting to Rs. 1,27,254 was also related to his house property given on lease by the appellant but still the appellant is claiming this expenditure under the head of income from business and profession. Besides, the appellant has also claimed travelling and conveyance expenses of Rs. 78,300 which had been disallowed by itself in the computation of income. Except for these expenses, the other expenses mostly consist of remuneration to director Rs. 2.04 lakhs, salary and wages Rs. 29 lakhs, visiting fees Rs. 26,068 insurance expenses Rs. 15,611 interest expenses Rs. 10,021, etc.

3.2.3. The appellant has also shown sales of Rs. 45,000. Against this cost of goods sold has been shown at Rs. 38,765. This cost is on account of material consumed of Rs. 37,500 and power and fuel Rs. 1,265. The sale is of three units of air-conditioners. These sales also have been made in cash on 3 different dates. Besides, the appellant has also shown purchase of one Onida make split air-conditioner, which has been shown as part of the closing stock. The cost of this air-conditioner is Rs. 18,800.

3.2.4. Thus, the appellant evidently has stopped its manufacturing activity and rented out the entire factory premises to other party. Still, it is showing huge repair expenses to the factory in its books of account. Besides, it is showing three transactions of sale in order to show that it still carrying on business activity. But these three transactions are only a device to claim huge expenses being debited in the profit and loss account and which are not allowable as a deduction in the computation of income from house property. The Rajkot Bench of the Income-tax Appellate Tribunal in its decision in the case of Master Silk Mills (P.) Ltd. [2001] 77 ITD 530 (Rajkot) had refused to accept a similar argument on the basis of insignificant and small transactions that the business was still carried on by the appellant. Hence, it is held that the appellant has not carried on any business activity in this year.

3.2.5. Thus, at one hand, the appellant is claiming statutory deduction under section 24 of the Income-tax Act, 1961, equal to 30 per cent of the annual value amounting to Rs. 11,70,000 but the appellant is not allowing any part of the director''s remuneration, salary and wages and other expenses towards the house property income except for repair expenses, which have been made in cash and which were not the liability of the appellant at all discussed above. It is pertinent to note here that earlier there were separate deduction for repairs, collection or rent, insurance, ground rent, land revenue, etc., under section 24 of the Income-tax Act, 1961. But with effect from April 1, 2002, in lieu of this deduction, a consolidated sum equal to 30 per cent of the annual value was allowed as a deduction in computation of income from house property. Thus, due to the fact that the appellant is not carrying on any business activity, the expenses debited in the profit and loss account relating to the director''s remuneration, salary and wages, rent, etc., have been incurred for the purpose of earning of house property income. Hence, the appellant''s claim that all these expenses should be set off against the house property income is not acceptable as it will amount to allowing double deduction to the appellant, i.e., one in the form of standard deduction and another in the form of actual deduction from the income from house property."

3.1. The aforesaid has been confirmed by the learned Income-tax Appellate Tribunal. In the facts and circumstances of the case, we are in complete agreement with the view taken by the learned Commissioner of Income-tax (Appeals) confirmed by the learned Tribunal. There is no error committed by the learned Assessing Officer or the learned Commissioner of Income-tax (Appeals) or the learned Tribunal in disallowing the claim of set off claimed by the assessee of Rs. 8,71,279 from the rental income from the house property claimed under section 71 of the Act.

Now, so far as the contention on behalf of the appellant-assessee that the learned Tribunal has not dealt with the decision of the co-ordinate Bench of the Tribunal, i.e., the Delhi Bench relied upon by the assessee is concerned, it is true that the learned Tribunal ought to have considered the same. However, we ourselves have considered the same instead of remanding the matter on that ground and we are of the opinion that in the facts and circumstances of the case the said decision would not be of any assistance to the appellant-assessee. There are concurrent findings of fact recorded by all the authorities below not accepting the claim of the assessee with respect to the business expenditure of Rs. 8,71,279 and, consequently, the business loss of Rs. 8,71,279 and set off the same claimed by the assessee from the rental income received from the house property.

Now, so far as the contention on behalf of the appellant that the learned Tribunal has relied upon the decision of the Rajkot Bench of the Income-tax Appellate Tribunal in the case of Master Silk Mills (P) Ltd., against which, the tax appeal is admitted and, therefore, the present tax appeal be admitted is concerned, it is required to be noted that irrespective of and/or independent to the decision of the Rajkot Bench of the Income-tax Appellate Tribunal in the case of Master Silk Mills (P) Ltd., on facts we are in complete agreement with the view taken by the learned Assessing Officer and the learned Commissioner of Income-tax (Appeals). It is required to be noted that the aforesaid decision was relied upon additionally and over and above the facts and findings recorded. The decision of the learned Tribunal is not solely based upon the decision of the Rajkot Bench of Income-tax Appellate Tribunal in the case of Master Silk Mills (P) Ltd. In view of the above and for the reasons stated above, we see no reason to interfere with the impugned judgment and order passed by the learned Assessing Officer, learned Commissioner of Income-tax (Appeals) as well as learned Tribunal. Under the circumstances, the present tax appeal deserves to be dismissed and is accordingly dismissed.