Vildirect: IncomeTax-caselaws-2000-VIL-302-ITAT-KOL

2000-VIL-302-ITAT-KOL

Equivalent Citation: [2002] 253 ITR (A. T.) 26

Income Tax Appellate Tribunal KOLKATA

Date: 13.07.2000

VIJAY INTERNATIONAL

ASSISTANT COMMISSIONER OF INCOME-TAX

S. Bandyopadhyay (Accountant Member)-All these appeals filed by the assessee raise a common single issue. Hence, the appeals are being consolidated and a common order is being passed for the sake of convenience.
The assessments for the assessment years 1992-93 up to 1995-96 were completed earlier. During the course of a survey operation under section 133A conducted in the premises of the assessee on January 6, 1997, it was found by the Assessing Officer that the assessee had claimed rent payment in respect of a property not actually used by it. On the basis of the said information, the proceedings for all these years were reopened under section 147. So far as, however, the assessment year 1996-97 is concerned, the original assessment was still pending and, hence, the issue under consideration, was tackled during the course of the said original assessment proceeding.

BENCH

Order

JUDGMENT

The assessments for the assessment years 1992-93 up to 1995-96 were completed earlier. During the course of a survey operation under section 133A conducted in the premises of the assessee on January 6, 1997, it was found by the Assessing Officer that the assessee had claimed rent payment in respect of a property not actually used by it. On the basis of the said information, the proceedings for all these years were reopened under section 147. So far as, however, the assessment year 1996-97 is concerned, the original assessment was still pending and, hence, the issue under consideration, was tackled during the course of the said original assessment proceeding.

For all these years, the assessee had claimed rent payment of Rs. 3,78,000 in respect of a godown taken by it on rent from Ganges Rope Co. Ltd. somewhere in Howrah. The Assessing Officer has strongly relied on the deposition given during the course of the survey operations, by Sri Sushil Kumar Agarwal, karta of S. K. Agarwal (HUF), which was a partner of the assessee-firm during all these years. Sri Agarwal had stated that the godown in question had never been used for the business purpose of the assessee although the same had been taken for business purpose. Sri Agarwal furthermore claimed that rent had been paid to the party through cheques after deduction of the tax deducted at source. The payment of rent was also as per the agreement between the assessee and its landlord. It was tried to be represented on behalf of the assessee that Sri Agarwal had stated that the godown was not being used for the business purpose of the assessee simply because it was lying vacant at the time of the survey operation. The Assessing Officer however, did not accept the contention of the assessee. He was of the opinion that inasmuch as the godown had never been used for the purpose of business of the assessee, the rent paid on the godown was not allowable as business expenditure. He furthermore states in this connection that even the same is not allowable under section 37 of the Income-tax Act also. Accordingly, he disallowed the claim of godown rent of Rs. 3,78,000 for all the five years under consideration. Before the Commissioner of Income-tax (Appeals), the assessee first of all challenged the validity of the reopening for the first four years. The Commissioner of Income-tax (Appeals) firstly held that this was not the case of a mere change in the opinion on the part of the Assessing Officer inasmuch as when the original assessments had been completed an important fact (which later on came to the notice of the assessee out of the deposition of Sri S. K. Agarwal) was not in the knowledge of the Assessing Officer. The Commissioner of Income-tax (Appeals) held that on discovery of the fact that the assessee had not used the godown under consideration, the Assessing Officer could have formed a reasonable belief about the expenditure on rent having wrongly been allowed and in that way income chargeable to tax having escaped assessment.

The Commissioner of Income-tax (Appeals) furthermore discussed the effect of the amendment brought to section 147 from April 1, 1989. He was of the opinion that after the amendment, it was not necessary that the escapement of income had taken place due to any omission or failure on the part of the assessee. The learned Commissioner of Income-tax (Appeals) discusses in this connection that since in the instant case, there cannot be any doubt about the fact that income to the extent of Rs. 3,78,000 had escaped assessment, the Assessing Officer was very much within his power to reopen the proceedings under section 147. Thus, the learned Commissioner of Income-tax (Appeals) upheld the validity of the reopening proceeding for all the first four years under consideration.

Before us, the assessee challenges the above action of the Commissioner of Income-tax (Appeals). We are of the opinion that on the basis of the survey conducted in the premises of the assessee and also the deposition given by Sri S. K. Agarwal, the Assessing Officer could have formed a reasonable belief that the rent payment had wrongly been allowed and in that way income to the extent of Rs. 3,78,000 had escaped assessment for all the years under consideration. Since no other pre-condition is necessary for the Assessing Officer to assume jurisdiction under section 147 in view of the amended provision of the Act, we are of the opinion that the Assessing Officer had the jurisdiction to reopen the proceedings under section 147. In that way, we uphold the action of the Commissioner of Income-tax (Appeals) in considering the reopening proceedings to be valid. So far as the merits are concerned, the Commissioner of Income-tax (Appeals) has been of the opinion that there is no evidence on record to show that the godown under consideration had actually been used by the assessee for the purpose of its business. By relying on various decisions and especially that of the Madhya Pradesh High Court in the case of Noshirwan and Co. Pvt. Ltd. v. CIT [1970] 77 ITR 822, the Commissioner of Income-tax (Appeals) has come to the conclusion that when the building was not used for the business purpose of the assessee, the rent paid was not allowable and also that since the payment of rent is allowable as deduction under section 30, the same cannot be allowed separately under section 37. As such, the learned Commissioner of Income-tax (Appeals) upheld the disallowance for all the years including the assessment year 1996-97.

At this stage of hearing of the appeals before us, learned counsel for the assessee strongly contends that the assessee-firm carries on the business of buying and selling medicines and also as the C & F agent for various parties on commission basis. It is argued that the business of the assessee thus requires basic facilities for storage of goods. It is contended that looking into the higher business prospects and the possibility of the assessee acquiring the agencies of various other companies, the assessee took the godown under consideration on rent from April 1, 1991, at the annual rent of Rs. 3,78,000. It is stated that although the assessee was not ultimately required to use the godown in an effective manner, it had maintained the said godown, however, in the expectation of getting good business in agency line which would have required the user of the godown. It is thus stated that ultimately the godown was surrendered back with effect from April 1, 1996. During the course of the hearing of the appeals before us, learned counsel for the assessee also stated at the Bar that actually the godown was also used in connection with the existing business of the assessee for the purpose of storing goods from time to time although there are not any documentary evidences in that regard. It is also contended that the rent was paid for godown through account payee cheques and that the godown was never used for any other purpose nor even sublet to other parties. It is also pointed out that subletting the godown was not authorised by the leave and licence agreement dated April 1, 1999, under which the possession of the godown had been taken. It is thus contended, by placing reliance on various decisions that the assessee must be considered to have used the godown for its business purpose in a passive manner and, hence, the rent paid/payable should be considered as an allowable either under section 30 or 37(1).

We find that the main reason why the disallowance for the different years have been made is the deposition given by Sri S. K. Agarwal to the effect that the godown had never been actually used for the business purpose of the assessee. In this connection, the Department relies strongly on the judgment of the Madhya Pradesh High Court in the case of Noshirwan and Co. Pvt. Ltd. [1970] 77 ITR 822. In that particular case, it was found that there was a very intimate connection between the landlord of the premises taken on rent by that assessee and the assessee itself. The building which had actually been taken on rent in that case was also still under construction. That is why the Tribunal had disallowed the claim of the assessee on the ground that it cannot be said that the building was used for the assessee’s business during the accounting year. So far as, however, the present case is concerned, learned counsel for the assessee places strong reliance on a judgment of the Gujarat High Court in the case of CIT v. R. Tolat and Co. [1980] 126 ITR 551. In this particular case, that assessee-firm, which carried on the business of giving on hire loud speakers, film projectors, stage lighting etc., took on lease a piece of land on April 1, 1970, and started construction of a store-room and office building on the leased land. The construction was completed in March, 1973. The issue before the Tribunal related to the allowability of rent paid for the assessment years 1971-72 and 1972-73, by the assessee. The Departmental view was that the assessee had not put the land to use for the purposes of the business in the relevant previous years but it merely started construction on the land for a show-room and office with a view to extend its business which the assessee was carrying on in a small place in another part of the city. The Tribunal, however, held that the payment of lease rent was not in respect of a new asset acquired by the assessee, but that it was the lease rent paid in order to keep the business in proper running, that even if a building had not been put to use, the rent paid therefor would be a permissible deduction under section 37 if such building had been acquired for the purpose of business. The order of the Tribunal was upheld by the Gujarat High Court.

Learned counsel for the assessee has also relied on several other judgments including that of the Karnataka High Court in the case of Mysore Kirloskar Engineering Ltd. v. CIT [1987] 166 ITR 836. In that case it was held that the words “for the purpose of the business” used in section 37(1) should not be limited to the meaning of “earning profit alone”. Further, reliance has also been placed on the judgment of the Supreme Court in the case of Sassoon J. David and Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261, in which case it was observed that the expression “wholly and exclusively” used in section 10(2)(xv) of the Indian Income-tax Act, 1922, does not mean “necessarily”. It was furthermore held that such expenditure may even be incurred voluntarily and without any necessity if it be done so for promoting the business and to earn profits. Reliance have also been placed on another judgment of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, and also a further judgment in the case of Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC). Various other judgments have also been cited on behalf of the assessee to argue that an expenditure may be incurred for the purpose of the business of the assessee just with the expectation of earning income and that the presence of such income during the year would not be necessary for allowance of the expenditure. So far as the present case is concerned, we find that there was a duly executed lease and licence agreement between the assessee and the landlord under which the payment of rent was done by the assessee. The facts that the assessee had actually taken the possession of the godown under consideration and also made payments of the rent therefor are not at all in dispute. It is also of not the departmental case that the entire arrangement was a sham, bogus or a collusive arrangement. The Department also does not contend that the money expended by the assessee by way of rent came back to it in some way or other. The undisputed facts are, therefore, that the assessee had taken the godown on rent and had paid for the rent also. Whether the assessee kept any goods therein or not does not exactly constitute the element of “user” of the godown. The facts of the case on record clearly show that the assessee was in the expectation of getting its business boosted in a very large way by acquiring various commission agencies from different parties. Copies of correspondence entered into by the assessee for this purpose have been placed on our records. At the time, therefore, when the godown was taken on rent, the necessity for doing so could not disputed. A businessman is required to have a long vision and should take into consideration the future possibilities of improvement into business and act accordingly. Hence, the action of the assessee in taking the godown on rent must be considered to be in the business interest of the assessee, as at that time and not only that, the same should be considered to be a rather prudent action on the part of the assessee. There is nothing on record to show that the godown was actually utilised for a collateral or a non-business purpose or was given away or sublet to any other party during the years under consideration in a clandestine manner. Even if we, therefore, do not pay much attention to the assertions made by the learned counsel for the assessee that actually the godown had been put to use from time to time, the passive user of the godown cannot at all be negated.

The facts of the case clearly lead to the conclusion that the godown had been taken on rent and also thereafter kept so for a number of years in the business interest of the assessee and wholly and exclusively for its business purpose. Although section 30 prescribes that rent payment is to be allowed in respect of any premises used for the business purpose, there is nothing in that particular section to suggest that the expression “used” must mean actually utilised. If the godown was taken for the purpose of business and not utilised otherwise, it must be considered as having been used for the purpose of business of the assessee. Hence, taking into consideration all these aspects, we are of the view that the payment of rent is allowable even under section 30. The ratio decidendi of the judgment of the Madhya Pradesh High Court in the case of Noshirwan and Co. Pvt. Ltd. [1970] 77 ITR 822 should be considered to be limited to the facts of that particular case that property in that case being under construction could not have been used by the assessee for its business purpose in those years. On the other hand, the judgment of the Gujarat High Court in the case of R. Tolat and Co. [1980] 126 ITR 551 are on all fours of the present case and hence should guide the principle in deciding the issue in the present case in favour of the assessee.

Even if it be argued that since the godown under construction was not actually used by the assessee, the provisions of section 30 would not be applicable what it has got to be said that in such condition, the expenses would be allowable under section 37(1). Section 30 speaks of allowability of rent, etc., for premises, used for the purposes of the business of the assessee. If it be considered that the premises were not used for the purpose of business of the assessee during the relevant year, then section 30 would not apply to such premises and the omnibus provisions of section 37(1) would, therefore, clearly apply to such a case. This is so because the Legislature has used the expression “described in sections 30 to 36” and not “covered by sections 30 to 36”, in section 37(1). Vide Chenab Forest Co. v. CIT [1974] 96 ITR 568 (J & K), at pages 575 and 576. The Supreme Court has also held in the case of CIT v. Kalyanji Mavji and Co. [1980] 122 ITR 49, at page 53, that since on current repairs should only describe in sections 30 and 31, allowability of other types of repairs would be guided by the omnibus provisions of section 37(1).

So far as the applicability of the provisions of section 37(1) to the present case is concerned, the expenses incurred by the assessee will have to be allowed under this section only if it is incurred wholly and exclusively for the purpose of the business. “User” of the premises is no pre-condition for allowance under this broad section. There cannot be any doubt about the fact that the godown was taken on rent wholly and exclusively for the purpose of the business of the assessee which originally required storage space in godowns and warehouse. Hence, the expenses should clearly be allowed under section 37(1). The Gujarat High Court has also held so in the case of R. Tolat and Co. [1980] 126 ITR 551.

If it be argued that the expenses relate to an aborted business enterprise on the part of the assessee, it must be said that such business enterprise was merely a part and extension of the existing business. The assessee was already in the line of business as seller of medicines and also acting as C &F agents on commission basis. Both these activities required, even originally, considerable storage space and the assessee was already using one godown at Amnatolla Road. The hiring of another godown must, therefore, be considered to be in the interest of the existing business only, looking to its future prospects. Hence, from this angle, we are of the opinion that the expenditure must have to be allowed as a part of the existing business expenditure.

Taking into consideration all these aspects, we are of the view that the lower authorities have not acted correctly in disallowing the claims of the assessee towards payment of rent for all the years under consideration. We, therefore, reverse their orders and delete the disallowances of claims of rent of the amount of Rs. 3,78,000 for all the five years.

In the result, the appeals for the assessment years 1992-93 to 1995-96 are partially allowed to the abovementioned extent, whereas the assessee’s appeal for the assessment year 1996-97 is fully allowed.

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