Dream Motels (P) Ltd. Vs ITO (ITAT Mumbai)
The issue under consideration is whether treating municipal taxes paid is considered as a part of rent liable to be taxed u/s 23 of the act?
ITAT states that, upon due consideration of factual matrix, the crystal-clear position that emerges is the fact that as per the terms of lease and license agreement, the licensee alone was liable to pay all taxes / outgoings with respect of leased premises. However, the same could be paid by the assessee and the same were reimbursable by licensee. This position has also been reiterated by the assessee in its submissions. However, the liability to pay the taxes was with respect of licensed premises only which was approx. 19% (232 Sq.Meters out of 1246.66 Sq. Meters) of total area of the building. Therefore, 19% of BMC taxes amounting to Rs.7,99,519/- could be attributed to licensed premises. The proportionate amount comes to Rs.1,51,900/-. In our opinion, this amount shall be added back to the rental income of Rs.76 Lacs earned by the assessee. Consequently, the deduction of Rs.1,51,900/- shall be allowable to the assessee. The rental income, after statutory deduction of 30%, would work out to Rs.53.20 Lacs. Hence where municipal taxes were paid by assessee for full building and out of the same, only some area on ground floor was given on rent, thus, the deduction in respect of the municipal taxes paid on the remaining area that was not leased out, would be allowable. Accordingly, the appeal is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
1.1 Aforesaid appeal by assessee for Assessment Year [in short referred to as ‘AY’] 2012-13 contest the order of Ld. Commissioner of Income-Tax (Appeals)-20, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-20/ITO-12(2)(1)/IT-10031/15-16 dated 28/03/2018 on following grounds of appeal: –
GROUND No. I: TREATING MUNICIPAL TAXES PAID AMOUNTING TO RS.7,99,519/- AS PART OF RENT LIABLE TO BE TAXED U/S 23 OF THE ACT:
On the facts and in circumstances of the case and in law, the CIT(A) erred in making an addition of Rs. 7,99,519/- to the annual letting value (‘ALV’) by treating the same as part of effective rent received by the appellant.
GROUND No. II: On the facts and in circumstances of the case and in law, the CIT(A) erred in not admitting and considering the additional evidence filed by the appellant.
GROUND No. III: DISALLOWANCE OF ALL EXPENDITURE DEBITED TO P/L ACCOUNT AMOUNTING TO RS. 44,52,054/-
1. On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the Assessing Officer (‘AO’) in disallowing the expenditure debited in the P/L Account alleging that the business of the appellant had not commenced and, therefore, the expenditure so incurred could not be allowed as a deduction.
2. On the facts and circumstances of the case and in law, the CIT(A) erred in not appreciating that for allowing deduction of expenses, setting up of business is relevant and not commencement of business.
3. The Ld. CIT(A) failed to appreciate that in the earlier three assessment years it has been accepted that the appellant’s business has been set up and, therefore, in the fourth year it could not be alleged that the business has not been set up. WITHOUT PREJUDICE TO GROUND NO. III ABOVE
GROUND NO. IV: DEDUCTION U/S 57(iii) OF THE ACT
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have allowed the expenses of Rs. 44,52,054/- debited to P&L A/c u/s 57(iii) of the Act as being necessary to maintain corporate status of the appellant.
1.2 We have carefully heard rival submissions and perused relevant material on record including documents placed in the paper-book. We have also deliberated on various judicial pronouncements as cited before us during hearing of the appeal. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.
2.1 Briefly stated, the assessee being resident corporate assessee earning rental income was assessed for year under consideration u/s 143(3) on 30/01/2014 wherein the income of the assessee was determined at Rs.53.20 Lacs after certain adjustments / additions as against returned income of Rs.11.07 Lacs e-filed by the assessee on 20/09/2012.
2.2 It transpired that the main object of assessee company was to run hotels, restaurants and guest houses etc. The assessee earned rental income of Rs.76 Lacs which was offered under the head Income from House Property. After deducting municipal taxes for Rs.7.99 Lacs and after claiming statutory deduction of 30%, the rental income thus offered to tax amounted to Rs.47.60 Lacs. Although the assessee claimed business expenditure of Rs.44.52 Lacs but did not reflect any business income. The broad break-up of business expenditure, except BMC Taxes, as claimed by the assessee was as follows: –
