Mahle Filter Systems Pvt. Ltd. Vs Add. CIT (ITAT Delhi)
The issue under consideration is whether A.O. is correct in treating the ‘rental income’ as ‘income from other sources’?
The assessee has disclosed rental receipts from its factory building and after deducting 30% as per provisions of section 24 of the Act, income from house property has been disclosed. The Assessing Officer found that the assessee has entered into a ‘Leave and License’ Agreement and not ‘Lease Rental’ Agreement. According to the Assessing Officer, ‘Lease Rental Agreement’ is different from ‘Leave and License Agreement’ and therefore, rental income received by the assessee cannot be treated as income from house property. Accordingly, the Assessing Officer taxed the entire receipts as income from other sources.
ITAT states that there is no dispute that the factory building owned by the assessee was let out to M/s Anand Engines Component Ltd., for which the assessee earned rental income. Whether there existed ‘leave and licence’ agreement and not ‘rental agreement’ would not change the colour of receipts in the hands of the assessee. The unchanged fact is that the assessee has earned rental income from letting out its property and the same has to be taxed under the head ‘income from house property’ eligible for deduction as per the provisions of section 24 of the Act. ITAT, accordingly, direct the Assessing Officer to tax rental income under the head ‘income from house property’ as per provisions of law. Therefore, appeal is allowed in favour of Assessee.
FULL TEXT OF THE ITAT JUDGEMENT
The above two captioned cross appeals by the assessee and revenue are preferred against the order of the Commissioner of Income Tax [Appeals] – IX, New Delhi dated 29.09.2014 pertaining to assessment year 2009-10. Since both these appeals were heard together and involve common issues, these are being disposed of by this common order for the sake of convenience and brevity.
ITA No. 314/DEL/2015 [Assessee’s Appeal]
2. Ground No. 1 relates to the disallowance of Rs. 88,577/- made u/s 14A of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] read with Rule 8D of the Income tax Rules, 1962 [hereinafter referred to as ‘the Rules’].
2. At the very outset, the ld. AR stated that as per the ratio laid down by the Hon’ble Delhi High Court in 372 ITR 694, total disallowance u/s 14A of the Act cannot be more than the exempt income.
3. We find force in the contention of the ld. AR. Without going into the merits of the disallowance, we find that the assessee has disclosed exempt dividend income of Rs. 20,995/- u/s 10(33) of the Act. In the light of the decision of the Hon’ble Delhi High Court [supra], we direct the Assessing Officer to restrict the disallowance to the extent of exempt income of Rs. 20,995/-. Ground No. 1, with all its sub-grounds is partly allowed.
4. Ground No. 2 relates to the disallowance of expenses distributed by the assessee to its employees amounting to Rs. 1,57,074/-.
5. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has debited Rs. 3,14,148/- as gift. The Assessing Officer was of the opinion that the payment of gift cannot be said to be incurred wholly and exclusively for the purpose of business as per the provisions of section 37(1) of the Act. The Assessing Officer found that the assessee has disclosed 50% as Fringe Benefit and accordingly, disallowed the balance 50% of the expenditure.
6. The assessee carried the matter before the CIT(A) but without any success.
7. Before us, the ld. AR vehemently contended that since the assessee has paid Fringe Benefit Tax [FBT], therefore, expenditure cannot be disallowed. It is the say of the ld. AR that once a FBT has been paid, no disallowance can be made.
8. On the other hand, the ld. DR strongly supported the findings of the AO.
9. We have given a thoughtful consideration to the orders of the authorities below. The Assessing Officer, at para 11.1 of his order, has himself accepted that 50% of the gift as eligible expenditure and, therefore, we fail to understand why balance 50% has been disallowed. Moreover, there is no dispute that the assessee has paid FBT @ 50%. Now it is a settled position of law that no disallowance can be made once expenses are exigble to FBT. Our view is supported by the decision of the co-ordinate bench in the case of BG Shirke Construction Technology [P] Ltd Vs. CIT ITA No. 1430/PROVISIONS /2010 vide order dated 17/07/2012 wherein it has been held as under:
“As the CBDT explaining the provisions regarding the FBT makes it clear that FBT is levied on the expenses incurred by the employer irrespective of whether the same are incurred for official or personal purposes. Once FBT is levied on such expense it follow that the same are treated as fringe benefits treated by the assessee as employer to its employees and the same have to be properly allowed as expenses incurred wholly and exclusively for the purpose of business. Following the decision in the case of Hansraj Mathuradas (2012 (10) TMI 300, ITAT, Mumbai direct the AO delete the disallowance. Issues decides in favour of assessee.”
10. Respectfully following the same, we direct the Assessing Officer to delete the addition of Rs. 1,57,074/-.
11. Ground No. 3 relates to the treatment of ‘rental income’ as ‘income from other sources’.
12. While scrutinising the Return of Income, the Assessing Officer noticed that the assessee has disclosed rental receipts from its factory building at Gurgaon amounting to Rs. 47,26,510/- and after deducting 30% as per provisions of section 24 of the Act, income from house property has been disclosed at Rs. 33,08,557/-. The Assessing Officer found that the assessee has entered into a ‘Leave and License’ Agreement and not ‘Lease Rental’ Agreement. According to the Assessing Officer, ‘Lease Rental Agreement’ is different from ‘Leave and License Agreement’ and therefore, rental income received by the assessee cannot be treated as income from house property. Accordingly, the Assessing Officer taxed the entire receipts as income from other sources.
13. Aggrieved, the assessee carried the matter before the CIT(A), but without any success.
14. Before us, the ld. AR stated that by letting out its factory building at Gurgaon, the assessee has received rental income and the same has to be taxed under the head ‘income from house property’ eligible for deduction @ 30%.
15. On the other hand, the ld. DR supported the findings of the Assessing Officer and reiterated that ‘leave and licence agreement’ is not similar to ‘lease rental agreement’.
16. We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that the factory building owned by the assessee was let out to M/s Anand Engines Component Ltd., for which the assessee earned rental income of Rs. 47.26 lakhs. Whether there existed ‘leave and licence’ agreement and not ‘rental agreement’ would not change the colour of receipts in the hands of the assessee. The undeniable fact is that the assessee has earned rental income from letting out its property and the same has to be taxed under the head ‘income from house property’ eligible for deduction as per the provisions of section 24 of the Act. We, accordingly, direct the Assessing Officer to tax rental income under the head ‘income from house property’ as per provisions of law. Ground No. 3 is, accordingly, allowed.
17. Ground No. 4 relates to MAT credit claimed amounting to Rs. 72,30,482/-.
18. We are of the considered opinion that MAT credit has to be allowed to the assessee as per the provisions of law and after considering the provisions and the assessment history of the assessee. We, accordingly, direct the Assessing Officer to allow MAT credit as per provisions of law after considering the provisions and the assessment history of the assessee. Ground No. 4 is allowed for statistical purposes.
19. As a result, the appeal filed by the assessee is partly allowed for statistical purposes.
ITA No. 6679/DEL/2014 [Revenue’s appeal]
20. Representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused.
21. First ground raised by the assessee relates to the deletion of disallowance of Rs. 2.96 crores u/s 80IC of the Act.
22. Elements of Ground No. 1 and Ground No. 4 have the same issue.
23. We are of the considered opinion that the Assessing Officer has not appreciated the underlying facts in issue in true perspective. Correct facts are that the manufacturing unit at Parwanoo, Himachal Pradesh was eligible for deduction u/s 80IC of the Act. The said undertaking belongs to M/s Purolotor India Ltd. The Assessing Officer proceeded by wrong assumption of facts that M/s Purolator India Ltd got amalgamated with M/s Mahle Filter Systems [India] Ltd whereas the fact of the matter is that Mahle Filter systems [India] Ltd was the transferor company and amalgamated with M/s Purolator India Ltd which was the transferee company by order of the Hon’ble High Court of Delhi in the matter of Scheme of Amalgamation of Company Petition No. 53/2008 connected with Company Application No. 172/2007. Subsequently, the name of M/s Purolator India Ltd was changed to M/s Mahle Filter Systems [India] Ltd.
24. According to the ld. DR, this is nothing but a sham transaction to take the benefit of section 80IC of the Act. We do not find any force in this contention of the ld. DR. The Scheme of Amalgamation has been approved by the Hon’ble High Court of Delhi and, therefore, by no stretch of imagination, the transaction of amalgamation can be considered as a colourable device or a sham transaction. There is no dispute that the manufacturing unit at Parwanoo was eligible for deduction u/s 80IC of the Act the same always belonged to the assessee, previously known as M/s Purolator India Ltd.
25. Provisions of section 80IA(12) of the Act have been wrongly applied by the Assessing Officer because the said provision is applicable where any undertaking which is entitled to the deduction u/s 80IA is transferred before expiry of the period specified therein to another India company in a scheme of amalgamation or demerger, whereas the facts of the case in hand show that the manufacturing unit at Parwanoo, HP continued to belong to the assessee and it is only M/s Mahle Filter systems [India] Ltd which amalgamated with the assessee M/s Purolator India Ltd and only the name has been changed to M/s Mahle Filter systems [India] Ltd. Accordingly, even consequent to the amalgamation, the unit at Parwanoo was still owned and managed by the assessee in the same manner as it was managed prior to amalgamation. Considering the correct facts in true perspective, we do not find any error or infirmity in the findings of the CIT(A). Ground Nos. 1 and 4 raised by the revenue stand dismissed.
26. Ground No. 2 relates to the deletion of disallowance of Rs. 64,23,771/- for the purpose of calculating deduction u/s 80IC of the
Act.
27. During the course of scrutiny assessment proceedings, on perusal of the profit and loss account of the Purwanoo Unit, the Assessing Officer observed that the assessee has disclosed ‘Other Income’ of Rs. 64,23,771/- which consisted of rent receipts, interest receipts, scraps as well as discount received and foreign exchange gain. The Assessing Officer was of the firm belief that the expression ‘derived from’ in the language of section 80IC of the Act shows that the income must directly result from the eligible business and hence it should have a direct nexus with the eligible business. The Assessing Officer, accordingly, disallowed the claim of deduction u/s 80IC of the Act.
28. The assessee carried the matter before the CIT(A) and furnished the details of ‘Other income’ which read as under:
