ITAT allows proportionate expenses related to office-cum-residence used by ‘Farah Khan’

ACIT Vs Farah Khan (ITAT Mumbai)

During the course of assessment proceedings, it transpired that the assessee owned 6 flats / units (A3501A, A3501B, A3501C, A3601A, A3601B & A3601C) on 35^th & 36^th floor of a Building namely Oberoi Sky Heights situated at Lokhandwala Complex, Andheri (West), Mumbai. All the units were stated to be used as office-cum-residence for the assessee. It was submitted that a specified part thereof was used by her as office and remaining part was used for the purpose of residence. For the specified part which was being used as office, the assessee claimed deduction of expenditure as per following details: –

The interest on loan borrowed by assessee to acquire office premises was claimed as deduction u/s 36(1)(iii), claim of deprecation was made u/s 32 whereas society charges and electricity charges were claimed u/s 37(1) of the Act. These expenses were claimed on the plea that half of the premises was used as assessee’s offices whereas remaining half was being used as residence. The area of office and residence was stated to be clearly demarcated and having office next door to assessee’s residence, would provide her comfort of not having to be in public spaces except where necessary.

As is evident from record, the assessee is a creative artist. The assessee was engaged as Choreographer and film producer. For the said purpose, the assessee would require creative space from where she could carry out professional engagements. It could be appreciated that as a Choreographer and a film producer, the assessee would need work space to practice dance moves and also for story sessions and other meetings. In this year, except for this space, she has not claimed any other office set-up. Another fact borne out of the record is that till 2011, the assessee was having similar units at Embassy Tower which were being used as office-cum-residence, in the same manner. The proportionate expenses relating to office in all the earlier years were allowed to the assessee. To meet expanding professional demands and to meet the need for bigger house, the assessee moved to new duplex apartment. The said premises were stated to be similarly used by the assessee for office-cum-residence purposes. The assessee was having 6 units out of which 2 units are stated to be used for professional purposes. The assessee has claimed proportionate expenses relating to these two units.

It could also be gathered that the six units were acquired by the assessee in AY 2012-13. The assessment for that year was framed by Ld. AO  n scrutiny assessment u/s 143(3). Apparently, all the requisite details as to acquisition of units as well as expenditure incurred therein were called from the assessee which were supplied as well as verified by Ld. AO. The units were split into two parts viz. units which were used as residence and units which were used for the purpose of profession. The depreciation on units as well as other proportionate expenditure with respect to units which were used for professional purposes was claimed as well as allowed by Ld.AO. Thus, it is quite clear that these units form part of the opening block of asset in this year. As per the scheme of the Act, under the concept of block of asset, the assets would lose individual identity and depreciation on asset is allowed on block concept notwithstanding the fact that few of the assets were not used for business / professional purposes. As long as the assets remain part of the block and are not parted with by the assessee, the same remain part of the block of asset and depreciation is allowable to the assessee. Since the depreciation on the block has been allowed to the assessee in earlier years, the same could not be denied to the assessee in this year since individual assets have lost their specific identity. The case laws as cited by Ld. CIT(A) in the impugned order support this view and are quite applicable to the facts of the case. Hence, Ld. CIT(A), in our considered opinion, has clinched the issue in correct perspective.

Even otherwise also, as per the requirement of Sec.32, to be eligible to claim depreciation, the assessee must own the asset and the asset must be used for the purpose of business or profession. The assessee, in our opinion, has satisfied, both these conditions since building as well as furniture was owned by the assessee and the same was used for the purpose of profession. The assessee has claimed depreciation proportionately on that part only which has been used for the purpose of profession. Therefore, the deprecation claim on building and furniture would be an allowable allowance u/s 32. We order so. The grounds, thus raised by revenue, stand dismissed.

Regarding interest claim, we find that the provisions of Sec.36(1)(iii) provide for deduction of interest in respect of capital borrowed for the purpose of the business or profession. The interest paid on capital borrowed for acquisition of an asset after the date on which the asset is first put to use is also allowed as deduction. The assessee has borrowed loan from Standard Chartered Bank for acquisition of the said property at Oberoi Sky Heights. The interest paid on such loan has been bifurcated between residential portion and office portion and interest paid relating to office portion has been claimed as deduction. It was the submissions of the assessee that office has been acquired for the purpose of her profession and therefore, loan is borrowed for the purpose of profession. Further, the unit was put to use during financial year 2011-12 relevant to Assessment Year 2012-13. Therefore, proviso to Sec.36(1)(iii) would not apply and whole of the interest would be an allowable deduction u/s 36(1)(iii). We concur with these submissions.

Regarding Society & electricity charges, the assessee submits that the unit being used as office is a multi-storeyed building being managed by a housing society. The society charges monthly compensation for providing various services. The appellant has bifurcated and claimed society charges relating to units used as office. Similarly, electricity charges relating to units used as office are claimed as deduction. The said claim is under section 37(1) which provide that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. We find that the assessee fulfils the prescribed conditions of Sec.37(1). More so, the rule of consistency would debar the Ld. AO to adopt different view, facts remaining the same. The usage of units for professional use was accepted in earlier years and similar expenditure claimed in that year was duly allowed to the assessee. Moreover, the assessee has already produced sufficient documentary evidences in the shape of copy of Service Tax Registration Certificate, copies of commercial contracts entered into with producers / third parties, professional fees / sales invoices raised by the assessee on third parties etc. All these documents mentioned assessee’s address as unit no. 3501 & 3601 and support the claim of the assessee. The assessee has also produced the photographs of the office along with an affidavit affirming the facts relating to her office at Oberoi Sky Heights. To overcome the deficiency in photograph as stated by the Assessing Officer, a video recording of the office and residence to prove that a clearly demarcated part is used as office, was furnished during the course of hearing. The same clearly support the case of the assessee. In other words, the assessee has proved that a clearly demarcated part of the premise was used by her as the office which is duly supported by various documents on record. There is nothing on record to disprove this claim. Therefore, we are of the considered opinion that the assessee has well substantiated her claim. This being so, our interference is not required in the impugned order, in any manner. The grounds, this raised by the revenue, stands dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. Aforesaid appeal by revenue for Assessment Year (AY) 2013-14 arises out of the order of learned Commissioner of Income-Tax (Appeals)-4, Mumbai [CIT(A)], dated 12/04/2019 in the matter of assessment framed by Ld. Assessing Officer (AO) u/s 143(3) on 29/03/2016. The grounds raised by the revenue read as under: –

(i) Whether on the facts, in the circumstances of the case and as per law, the Ld.CIT(A) has erred in directing to delete the disallowance of expenses to the tune of Rs.1,55,74,455/- relating to residential premises, without considering the fact that the said premises was not utilized by the assessee for carrying out her professional activities.

(ii) Whether on the facts, in the circumstances of the case and as per law, the Ld.CIT(A) has erred in directing to delete the disallowance of expenses to the tune of Rs.1,55,74,455/- relating to residential premises, ignoring the fact that the Ward Inspector who inspected the premises had categorically reported that the said premises was utilized only for residential purpose.

(iii) The appellant prays that the order of Ld.CIT(A) on the above grounds be set-aside and that of the assessing officer be restored.

As evident, the revenue is aggrieved by deletion of disallowance of Rs.155.74 Lacs as made by Ld. AO in assessment order dated 29/03/2016.

2. We have carefully heard the rival submissions and perused relevant material on record. The Ld. DR pleaded for restoration of assessment as framed by ld. AO while Ld. AR supported the order of learned first appellate authority. For this, Ld. AR drew our attention to the documentary evidences as well as photographs / audio-visual clips as placed on record. The audio-visual clips were displayed before us and the same were duly appreciated. The Ld. AR also raised a plea that similar expenses were allowed by revenue in earlier years and therefore, disallowing the same in this year would violate the rule of consistency. After due consideration of material facts, our adjudication to the appeal would be as given in succeeding paragraphs.

Assessment Proceedings

3.1 The material facts are that the assessee being resident individual is stated to be engaged as film director as well as professional choreographer. The return of income was filed for the year under consideration declaring income of Rs.99.19 Lacs. During the course of assessment proceedings, it transpired that the assessee owned 6 flats / units (A3501A, A3501B, A3501C, A3601A, A3601B & A3601C) on 35^th & 36^th floor of a Building namely Oberoi Sky Heights situated at Lokhandwala Complex, Andheri (West), Mumbai. All the units were stated to be used as office-cum-residence for the assessee. It was submitted that a specified part thereof was used by her as office and remaining part was used for the purpose of residence. For the specified part which was being used as office, the assessee claimed deduction of expenditure as per following details: –