M/S. Universal Buildrise Private Limited (Appellant) filed an appeal against Order dated September 30, 2019 of the Ld. CIT(A)-9, New Delhi, relating to the Assessment Year (AY) 2016-2017.
The Appellant filed its return of income declaring loss and paid taxes on book profit under Minimum Alternate Tax (“MAT”) provisions. The case was selected for scrutiny and a notice under Section 143(2) of the Income Tax Act, 1962 (“the IT Act”) was issued. During the course of assessment proceedings, the Assessing Officer (“AO”) noted that the Appellant claimed to be engaged in the business of supplying books and during the financial year 2016 – 2017, the name of the Appellant has been changed from “M/s. Universal Book Distributors Private Limited” to “M/s. Universal Buildrise Private Limited”. The source of income of the Appellant was rental income, but he also claimed to be engaged in the trading of the book etc.
The AO held that the Appellant had not carried out any business activities and the payments made as managerial remuneration and other expenses were not business expenses. The AO alleged that the business loss claimed by the Appellant was just to avoid the tax on income from house property.
The Appellant contented that for the fiscal years 2012-2013 and 2014-2015, the Tribunal ruled in his favor and permitted the managerial remuneration to be deducted as a business expense.
After taking perusal of all the facts and evidences, the Income Tax Appellate Tribunal (“ITAT”), New Delhi held that the Appellant is entitled to the business loss which includes an amount of Rs. 39 lakhs paid as managerial remuneration.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the Assessee is directed against the Order Dated 30.09.2019 of the Ld. CIT(A)-9, New Delhi, relating to the A.Y. 2016-2017.
2. The facts, in brief, are that the assessee is a Private Limited Company and filed its return of income on 30.09.2016 declaring loss of Rs.8,26,798/- and paid taxes on book profit of Rs.7,22,986/- under MAT provisions. The case was selected for scrutiny and statutory notice under section 143(2) of the I.T. Act, 1961 was issued. During the course of assessment proceedings, the A.O. noted that assessee company claimed to be engaged in the business of supplying books. He noted that during the financial year 2016-17, the name of the assessee company has been changed from M/s Universal Book Distributors Private Limited to M/s Universal Buildrise Private Limited vide order dated 08.12.2016. The source of income of the assessee company was rental income, but the assessee also claimed to be engaged in the trading of the book etc.
2.1. From the details furnished by the assessee, the A.O. noted that the assessee has declared Rental Income of Rs.52,66,381/-, Business Receipt of Rs.2,27,777/-. He further noted that the total purchase made by the assessee company was Rs.2,03,225/- from M/s UBS Publishers Distributors Pvt. Ltd., a sister concern of the assessee company. Further, total sales of Rs.2,27,777/- includes sale of Rs.70,857/- to M/s Faculty of Management, Mohan Lai Sukhadia University, Udaipur (MLSU) and sale of Rs.1,56,920/- to M/s IELTS Band 7.Com, Dehradun. He observed from the Profit & Loss account that the assessee has claimed huge expenses under the head “Employee Benefit Expenses” of Rs.44,45,875/- which include Directors remuneration of Rs.39 lakhs. He noted that in the earlier assessments, the assessee company had shown business losses which was adjusted against the rental income from House Property in order to reduce the tax liability. According to the A.O. the assessee company was not engaged in the business of trading/supply of books, but, the intention of the assessee was to show business income in order to adjust the huge amount of remuneration paid to the director which was not allowable expenses against the rental income under the head “Income from house property”. In order to verify the sales, he issued notice under section 133(6) of the Income Tax Act, 1961 to M/s Faculty of Management, Mohan Lal Sukhadia University, Udaipur (MLSU) and M/s IELTS Band 7.Com, Dehradun. However, no reply was received from first party and notice under section 133(6) was returned with the postal remark “Incomplete Address” in relation to second party. Subsequently, the A.O. issued notice under section 133(6) again in the new address and also asked the assessee to produce the above parties. However, no reply was received from the above parties. The A.O, therefore, asked the assessee to explain as to why the business activity be not disallowed and why the rental income should not be brought to tax as “Income from house property”. Rejecting the various explanation given by the assessee, the A.O. held that assessee company had not carried out any business activities and the payments made to its Director as remuneration and other expenses are not business expenses. The business loss claimed was just to avoid the tax on income from house property. He, therefore, disallowed the business loss of Rs.44,55,096/- and brought to tax the rental income from house property at Rs.36,28,298/- after allowing the deduction under section 24 of the I.T. Act, 1961.
2.2. In appeal, the Ld. CIT(A) upheld the action of the A.O. While doing so, he held that identical issue had come up before his predecessor for the A.Ys. 2012-2013 and 2014-2015 and the Order of the A.O. has been upheld. He, accordingly, upheld the Order of the A.O.
3. Aggrieved with such Order of the Ld. CIT(A), assessee is in appeal before the Tribunal by raising the following grounds :
1. The Order of the Ld. Commissioner of Income Tax (A) is bad in law and on facts.
2. That on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in disallowing business expenses amounting to Rs.44,55,096 as claimed by the appellant in the return of income, on the alleged contention that no business activity was carried by the appellant, ignoring the fact that during the year there were transactions of sale & purchases.
3. That on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred on facts in stating that the appellant has created an impression of doing business by introducing small amount of purchases from its sister concern and claimed huge expenditure of remuneration as a business expenses, ignoring the facts that actual business activities done in business by the appellant during the year.
4. That on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred on facts in stating that remuneration paid by the appellant to the Managing Director was connected with the enhancement of rent which is not for the purpose of the business.
5. Without prejudice to above grounds, there is no loss to the revenue as Managing Director has paid tax on remuneration at same rate as which the appellant was taxable.
6. Without further prejudice to the above grounds even if the director remuneration is considered as excessive then a direction may be given to the Ld. Assessing Officer to allow a reasonable amount of such remuneration as is attributable to the business activities carried on by the appellant.”
3.1. Learned Counsel for the Assessee at the outset submitted that during the A.Ys. 2012-2013 and 2014-2015, the Tribunal has decided the issue in favour of the assessee and had allowed the managerial remuneration as business expenses. Therefore, following similar reasonings, managerial remuneration should be allowed as business deduction. He further submitted that in A.Y. 2013-2014 the return has been accepted under section 143(1) of the I.T. Act, 1961.
4. The Ld. D.R. on the other hand relied upon the Orders of the lower authorities.
5. I have heard the rival arguments made by both the sides and perused the record. I find identical issue had come up before the Tribunal in assessee’s own case in A.Y. 2014-2015 vide ITA. No. 6505/Del./2018 Order Dated 19.03.2021. I find the Tribunal following the Order for the A.Y. 2012-2013 in assessee’s own case has decided the issue in favour of the assessee by observing as under :
“9. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also gone through the order of the Tribunal in assessee’s own case for AY 2012-13. We find that the assessee in the instant case, is engaged in the business of supply of books and is also deriving income from house property. It has shown loss from business at Rs.41,44,219/- and the income from house property at Rs.37,37,983/-. Since, the assessee has made purchases of Rs.1,09,613/- and that too from its sister concern and since, the major sale has been made to only one party i.e. to Mohan Lal Sukhadia Univsersity amounting to Rs.1,22,211/-, the Assessing Officer held that the intention of the assessee was only to set off the rental income against such business loss. He, therefore, disallowed the business loss claimed by the assessee against the rental income. We find that CIT(A) confirmed the action of the Assessing Officer, the reason of which has already been reproduced in the preceding paragraphs.
10. We find that the CIT(A) while deciding the issue against the assessee has followed the order of his predecessors for AY 2012-13. We find the order of the AY 2012-13 of the CIT(A) has been reversed by the Tribunal in assessee’s own case vide ITA No. 172/Del/2019, order dated 21.02.2020. The relevant observations of the Tribunal reads as under:-
“4. On the perusal of record and after hearing both the authorized representatives, the limited issue which arises is against the disallowance of the managerial remuneration paid to the Managing Director Sh. Anshul Chawla of Rs.36 Lacs.
5. The Hon’ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) (P.) Ltd. (2008) 219 CTR 562 (Bom) had laid down the proposition that where the assessee and its subsidiary were in the same tax bracket and paid same rate of tax, there was no question of diversion of funds by paying higher rate to the subsidiary company and hence no disallowance under section 40(A)(2) of the Act. Applying the said proposition to the facts of the case where the Director Shri. Anshul Chawla is assessed to tax and has paid taxes on the said remuneration received by him then it cannot be said that there was diversion of funds by the assessee to its Managing Director for tax avoidance. Hence there is no merit in making any disallowance on account of the said managerial remuneration paid to the Managing Director. Accordingly, we direct the AO to allow expenditure of Rs. 36 Lacs. The grounds of appeal raised by the assessee are allowed.
6. In the result, the appeal of the assessee is allowed.”
11. Since, the CIT(A) while deciding the issue against the assessee has followed the order for AY 2012-13 and since the Tribunal has already decided this issue in favour of the assessee for Assessment Year 2012-13, therefore, respectfully following the decision of the Tribunal in assessee’s own case for Assessment Year 2012-13, we set-aside the order to the CIT(A) and direct the Assessing Officer to allow the business loss amounting to Rs.41,44,219/- claimed by the assessee which includes an amount of Rs.39 Lakhs paid to the Managing Director. The grounds raised by the assessee are accordingly allowed.
12. In the result, appeal filed by the assessee is allowed.”
6. Since the facts of the instant case are identical to the facts of the case for the A.Y. 2014-2015, therefore, respectfully following the decision of the Tribunal in assessee’s own case cited (supra), I hold that the assessee is entitled to the business loss which includes an amount of Rs.39 lakhs paid as managerial remuneration. The Grounds raised by the assessee are accordingly allowed.
7. In the result, appeal of the Assessee is allowed.
Order pronounced in the open Court on 14.09.2021.