Vildirect: IncomeTax-caselaws-2010-VIL-428-ITAT-PNE

2010-VIL-428-ITAT-PNE

Income Tax Appellate Tribunal PUNE

ITA No 1425 /PN/08, ITA No 1524/PN/08

Date: 24.09.2010

AVINASH NIVRUTTI BHOSALE,

. ADDL. CIT, RANGE-3, & VICE VERSA

Appellant by : Shri S U Pathak
Respondent by : Shri Abhay Damle

BENCH

Shri I C Sudhir and Shri D. Karunakara Rao

JUDGMENT

Per D. Karunakara Rao AM

These are the cross appeals filed by both the parties against the order of CIT(A)-II, Pune dated 22-08-2008.

ITA No. 1425 & 1524/PN/08 A.Y 2005-06

2. The grounds in the assessee’s appeal are as under:-

“1. The learned CIT(A)-II erred in estimating the quantum of disallowance of aviation expenses and depreciation with respect to Bell Helicopter to the extent of 20% instead of 1/7th of the expenditure. The ‘a’ pleads that the A.O be directed to restrict the disallowance at 1/7th of the amount of depreciation and aviation expenses as has been done in the past.

2. The learned CIT(A)-II erred in estimating the quantum of disallowance of aviation expense and depreciation with respect to Cessna aircraft of 30% instead of 1/7th of the expenditure. The ‘a’ pleads that the Assessing Officer be directed to restrict the disallowance at 1/7th of the amount of depreciation and aviation expenses as has been done in the past.”

3. Further, during the proceedings before us, the assessee filed an additional ground which is reproduced as follows:-

“Without prejudice to the claim of the assessee that the interest expenditure of Rs. 22,13,037/- is rightly allowed by the learned CIT(A) while computing income from other sources, the assessee submits that alternatively, the said interest expenditure is allowable as a business expenditure while computing the total income.”

4. Thus, from the grounds and the additional grounds, it is evident that the following are the issue’s for adjudication:-

1) Fairness of the estimation of the aviation expenses and depreciation relatable to Bell Helicopter @ 1/5th of the claim instead of 1/7th as agreed by the assessee.

2) Fairness of the estimation of quantum of disallowance of aviation expense and depreciation relatable to Cessna Aircraft @ 30% of the claim as against 1/7th of the claim of expenditure agreed to by the assessee.

3) whether the CIT(A) should have allowed the claim of interest expenditure of Rs. 22,13,037/- as business expenditure too.

5. Briefly stated relevant facts of the case are that the assessee is the individual and has 1/5th share in the Arki Aviation (AOP) which own the Bell Helicoptor. He also have 25% share in the JV (Joint Venture) which owns Cessna aircraft. Assessee runs a proprietor concerns namely Amit Constructions and Swapnil Constructions engaged in the business of government contracts. Assessee has the business of share trading too. Assessee filed the return of income declared in the total income of Rs. 18,55,70,670/- and the same was subsequently revised to 19,30,59,360/-. The assessment was completed u/s. 143(3) of the Income Tax Act determining the total income at Rs. 20,31,89,304/. A.O made various additions during the assessment. Aggrieved with all the additions, the assessee filed an appeal before the CIT(A), who partly allowed the appeal of the assessee. Aggrieved with the relief given by the CIT(A), the Revenue filed the appeal vide ITA No. 1524/PN/2008. Further, aggrieved with the decision of the CIT(A) in sustaining the additions, the assessee filed the appeal with the grounds and additional grounds reproduced above. Now, we shall first take up the assessee’s appeal. There are three issues in the appeal of the assessee and first two issue relate to reasonableness of claims of aviation expenditure and depreciation of both Bell Helicoptor and Cessna Aircraft.

6. Relevant facts in this regard are that during the assessment proceedings, the AO issued a letter dated 31-07-2007 requesting the assessee to furnish various details like copy of return of AOP, copy of purchase bill, share of the assessee in the total cost of aero engines. But those were not submitted for 2 ½ months. Assessee filed the log book pertaining to Bell Helicoptor. The original log books for the Cessna aircraft were not produced. From the logbook of Bell Helicopter produced and verified by the Assessing Officer, it was observed that there were personal visits to places like Shirdi, Lonavala, Tirupati, Amby Valley, etc. It was stated by the assessee that 30% of the disallowance on depreciation and aviation expenses were on the higher side since in the earlier years the Assessing Officer had routinely disallowed 1/7th of the running and maintenance expenses in the total income of each member of the AOP which was not disputed. Further, it was stated that traveling to hill stations or tourist spots was not only for the purpose of enjoyment but it was a landing point for visit to Koyna site of the assessee. Further, the visit to Lonavala and Amby Valley was for scouting of employees for hotel projects of the assessee. On the basis of the above, it was stated that all such trips are not for the personal purposes of the assessee. The Assessing Officer applied the provisions of section 38(2) of the Act and disallowed the depreciation and aviation expenses @ 30% totaling Rs. 28,19,032/-. The claims as per assessee and the disallowances by the AO are tabulated as follows.

Sr. No.	Name of the Aeroengine	Depreciation Claimed	Aviation exp. Claimed	Disallowance @ 30%
1.	Bell Helicopter	16,81,010/-	19,39,836/-	10,86,254/-
2.	Cessana Aircraft	49,23,970/-	8,51,955/-	17,32,778/-
		66,04,980/-	27,91,791/-	28,19,032/-

7. Aggrieved with the above disallowances the assessee filed the appeal before the CIT(A). During the first appellate proceedings, it was submitted that the assessee claimed total expenditure of Rs. 66,04,980/- on account of depreciation in respect of two aero engines. It was further stated that out of this total expenditure of Rs. 66,04,980/-, Rs. 16,81,010/- was for Bell helicopter and the balance of Rs. 49,23,970/- was for Cessna aircraft. It was stated that the Assessing Officer sought to disallow an amount of Rs. 28,19,032/-, being 30% of the total expenditure of Rs. 66,04,980/- and 27,91,791/- claimed on accounts of depreciation and aviation expenditure respectively on adhoc basis and with any credible basis. It is obvious that the assessee submitted that the disallowance at the rate of 30% of the claim is on higher side and restricting the disallowance to 1/7th of the claim as done in earlier Asst years would be alright. On considering the arguments and written submission of the assessee, the CIT(A) decided the issues as under. Relevant parts of the impugned order are reproduced as under.

“5.3 I have gone through the facts of the issue. Regarding the Bell helicopter the Assessing Officer has not given any reasons for rejecting the explanation by the assessee that Mahabaleshwar was a landing point for visit to the Koyna site of the assessee. Further, the visits to Amby Valley and Lonavala were stated to have been undertaken for scouting of employees for hotel projects of the assessee. The Assessing Officer held that the trips to Amby Valley and Lonavala taken for the hotel projects, were not allowable because the hotel projects were being undertaken by different companies and not by the assessee in his individual capacity. The appellant has not contradicted this finding of the Assessing Officer in the appellate proceedings. It is correct that the assessee had not gone to Shirdi or Pandharpur, etc. for any business purposes but on purely religious, personal purposes and in the earlier years 1/7th of the running and maintenances expenses were disallowed on adhoc basis by the Assessing Officer which was accepted by the assessee. The Assessing Officer has given reasons for disallowance of expenditure but restored to adhoc disallowance of 30% as the details of expenditure was not forthcoming. It is no ones case that irrespective of the amount spent on personal purposes, the Assessing Officer should stick to disallowance of 1/7th of the maintenance expenditure. It is trite law that for claiming the expenditure the burden of proof is on the assessee. It is also seen that the assessee was asked to submit and furnish details vide letter dated 31- 07-2007 and again vide letter dated 16-10-2007 and 26-11-2007 when the original logbooks of the Bell helicopter were produced from where the Assessing Officer was able to know the personal nature of the expenditure incurred for various trips. It was only on 18-12-2007 that the reply to the final notice was given to the Assessing Officer. In view of the above facts and taking into consideration the reply of the assessee, in my considered view, the ends of justice would be met if 1/5th of the aviation expenses are disallowed with respect to Bell helicopter.

5.4 Regarding the Cessna aircraft, the Assessing Officer lamented that the assessee was requested several times to produce the logbook of Cessna aircraft so to see the use for business activity, but no logbook was produced. The final notice was issue on 17-12-2007 proposing to disallow the entire depreciation when Xerox copies of the logbook were produced on 19-12-2007. the original logbooks of Cessna aircraft were not produced before the Assessing Officer. Those logbooks were not produced in the appellate proceedings also. The Assessing Officer also brought on record the fact that the use of both the aero engines for personal purposes could not be denied as many a time visits had been made to places like Goa, Tirupati, etc. Further, the hotels run by the assessee were owned by different companies and not the assessee. The other joint owner, namely Serum Institute of India maintained the details like names of the passengers traveling on the Cessna aircraft but no such details were maintained by the appellant. The Assessing Officer also rightly rejected the claim of the appellant that the aircraft was used by other members of the AOP as irrelevant as disallowance was being made only from the appellant’s share of expenditure debited to the Profit and Loss Account. It is an established principle of law that the appellant has to lead evidence in support of the claim of an expenditure and that the burden of proof is cast upon the appellant to substantiate such claim. The primary condition for allowance of deduction of particular expenditure is that the expenditure is incurred wholly and exclusively for the purpose of business or profession. It has been judicially decided that the first adverb “wholly” in the phrase of “laid out or expended wholly and exclusively” in section 37(1) refers to the quantum of expenditure, the sum of moneys spent, while the second adverb “exclusively” has reference to the motive or object behind the expenditure. Unless such motive or object is exclusively, i.e. solely for the promotion of the business, the expenditure will not qualify for deduction. In support of this view, reference is made to the case of Siddho Mal & Sons vs. ITO reported in 122 ITR 839 (Del.). In the case of Meattles Ltd. vs. CIT reported in 68 ITR 79(Del.), it was pointed out that in order to ascertain whether an expenditure has been incurred wholly and exclusively for the purpose of assessee’s business, one must look to the direct purpose for which the money was laid out or expended and not to the remote results, which may follow from or motivate the expenditure. The true test of an expenditure laid out wholly and exclusively for the purpose of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. It has to be examined whether the expense has been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration. If the expense is found to bear an element other than the trade or business interest of the assessee the expenditure is not allowable one. On the basis of the fact that the assessee was not maintaining the details of passengers traveling on Cessna aircraft, the purpose of visit and there was undeniably visits to holy places like Tirupati and tourist places like Goa, etc. the action of the Assessing Officer in disallowing 30% of the expenditure for non-business purposes is, confirmed.

5.5 Further, the provisions of section 38(2) of the Income Tax Act are squarely applicable in the case of the assessee as both the aero engines were not exclusively used for the purposes of business. In Section 38(2), the words used are “not exclusively used for the purposes of business or profession.” It signifies that the asset has been used for other purposes and not exclusively for the purposes of business or profession. This section specifically provides for part disallowance of certain expenses including depreciation in relation to business asset. Where the motor car belonging to the assessee were used partly for nonbusiness purposes the depreciation is required to be partly disallowed in the case of the firm. Refer 167 ITR 147 – Bhilai Motor (MP), K.L Bhasin and Co. reported in 158 ITR 623 (Patna). The Bombay ITAT in 18 TTJ 41 (AT) in the case of Marshall Produce Brokers Co. Ltd. held that use of vehicle of the firm by persons for their personal purposes cannot be stated to be use of vehicle for business purposes. Where 1/5th of expenses on motor car were disallowed for personal use, disallowance on depreciation in the same proposition was justified (Senco Jeweler House- 17 ITD 223 (Cal) (AT).

On the basis of the above the Assessing Officer is directed to disallow 20% of the depreciation and aviation expenses of Bell helicopter and 30% of the depreciation and aviation expense on Cessna aircraft.”

8. Aggrieved with the above decision of the CIT(A), the assessee filed the present appeal with the above mentioned grounds. During the proceedings, Ld Counsel for the assessee made various submissions and briefly, they are: (a) the disallowances on accounts of use of both aviation vehicles must be restricted to 1/7th of the claim; (b) the inequal treatment in adopting the different adhoc percentages in respect of Helicoptor and the Aircraft is artificial and not based on any credible evidence; (c) no additional reasons are given by the revenue for finally arriving at the 20% in respect of Helicoptor or 30% in respect of Aircraft in this AY while the revenue restricted the disallowance to 1/7th only in the earlier years; (d) Ld counsel filed copies of the assessment orders for the earlier AYs demonstrating the disallowance was restricted to 1/7th of the claim only; (e) accepting that the case of the assessee attracts the provision of section 38(2) of the Act, the counsel mentioned that the estimation adopted by the AO and CIT(A) are neither fair nor reasonable; and (e) LD counsel relied on various decisions to demonstrate that the in resorting to the estimations, the revenue considered the cases of decisions where the disallowances on account of personal car were the subject matter and cases involving personal use of cars are not comparable with that of the aviation vehicles, which involves stricter scrutiny and aviation vehicle are not available for use of the employees indiscriminately and these vehicles are subjected to aviation rules too.

9. On the other hand, the DR for the revenue relied heavily on the order of the Income Tax authorities. Further, he argued stating that the onus is on the assessee in these matters relating the making of claims of deduction and in this case, the assessee failed miserably to discharge the same. As per the DR, assessee neither filed the logbook in respect of the aircraft nor filed the list of the passengers travelled nor the details of the destinations covered by these helicopter or aircraft, as the case may be nor the purposes of the travel using the impugned helicopter or aircraft. In such circumstances, the decisions of the CIT(A) do not need any mutation or interference.

10. We have heard the parties and perused the orders and the paper books made available to us. Undisputed facts are that the assessee used both Bell helicopter as well as the Cessna aircraft for the mixed use and therefore, there is no dispute on the invoking of the provisions of section 38(2) of the Act. Further, there is no dispute that the AO restricted the disallowance art 1/7th of the claim. The same is evidenced by filing the copies of the assessment orders for the AYs 2002-03 to AYs 2004-05. They are placed at pages 128 to 145 of the paper book. For the instant year, the AO adopted 30% as against 1/7th in the past and therefore the issue travelled to the Tribunal for the first time for the instant AY. Before, it is adequately made out that the 1/7th is reasonable. Therefore the issue in dispute is whether the disallowance on accounts of aviation expenses and the depreciation of both Bell Helicoptor and the Cessna Aircraft should be restricted to 1/7th of the claim or not.

11. In this regard, we have perused the provisions of section 38(2) of the Act which reads as under. Building, etc, partly used for business, etc, or not exclusively so used Section 38(1)…. (2) Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deductions under sub-clause (ii) of clause (a) and clause (c) of section 30, clauses (i) and (ii) of section 31 and clause (ii) of sub-section (1) of section 32 shall be restricted to a fair proportionate part thereof which the Assessing Officer may determine, having regard to the user of such building, machinery , plant or furniture for the purposes of the business or profession.”

From the above, it is evident that the restriction should be a ‘fair proportionate part thereof which the Assessing Officer may determine, having regard to the user of such ….., machinery , plant or ….. for the purposes of the business or profession’. If the requirement of the law that the A.O is under obligation to determine having regard to the user of such machinery for determining the same, there is need for reliable data either supplied by the assessee or garnered by the A.O. Neither is available in this case.

12. In this regard, we have perused existing judicial pronouncements and found that the special bench decision in the case of Gulathi Saree Centre (71 ITD 73)(Chd)(SB) was in favour of 1/5th disallowance in respect of the car and coordinate bench decision in the case of Mayur Kothari (10 SOT 338)(Mum) is in favour of 1/6th again in the context of a car as discussed in para 8 of the decision and relevant Para 8 of the decision in the case of Mayur Kothari (supra) reads as under:-

“We have considered the submissions of both sides, material on record and orders of authorities below. Admittedly, the assessee has not maintained the log book. The possibility of personal user of the car cannot be ruled out. In the case of Gulati Saree Centre vs Asstt CIT [1999] 71 ITD 73 (Chd)(SB) [ITAT Chandigarh Bench], the Tribunal held that even after the incorporation of the concept of block asset, the provisions of section 38(2) were applicable and the Assessing Officer was empowered to restrict the depreciation to a fair part thereof having regard to the user of asset for the purposes of business. In this view of the matter, we hold that order of the revenue authorities is correct in law. As far as the proportion of disallowance for personal use is concerned, we find that the revenue authorities have made a reasonable proportionate disallowance at the rate of 1/6th of the total expenses including depreciation. Accordingly, we decline to interfere in the matter.”

Further, it has come to our notice that the Pune bench has taken decision in the case of M/s Kirloskar Oil Engines Ltd vide ITA no 1039 and 1040 for the AY 1995-96 and 1996-97 in connection with the disallowance of aircraft expenditure and held that the disallowances at the rate of 15% (nearly 1/7th) of the claim is fair and reasonable. Relevant para 12 and 13 of the said decision is as follows.

“12. Ground No 4 is directed against the CIT(A)’s order in confirming Aircraft expenses amounting to Rs. 10,28,179/-.

13. We have heard both the parties. In the assessment year 90-91, this issue was decided against the assessee by the Tribunal vide order dt 20.7.2005 in ITA No. 916/PN/95. However, in assessment year 92-93 the issue was decided in favour of the assessee by observing that the matter stands covered in favour of the assessee in assessment assessment year 90-91, though actually in AY 90- 91 the matter was decided against the assessee. Therefore, there was a mistake in the Tribunal’s order in assessment year 92-93. While deciding this issue in assessment year 93-94 in ITA No 429/PN/97 this position has been clarified and the issue was decided against the assessee in the light of the Tribunal’s decision for assessment year 90-91. In assessment year 94-95 vide ITA No 606/PN/99 the issue was also decided against the assessee. In the course of hearing of this appeal, the assessee has relied on the Tribunal’s decision in AY 92-93 which, in our considered view, is not actually in favour of the assessee, but is against the assessee. The case of other assesses who shared the aircraft expenses is on different footing, inasmuch as in the present case the assessee has not been able to prove and establish that the aircraft was used for the purpose of the assessee’s business. In this view of the matter, the order of the CIT(A) is upheld in confirming the disallowance of Rs. 10,28,179/- (i.e. 15% of the claim) on account of aircraft expenses.“ (Emphasis supplied)

13. From the above, it is clear that special bench decision in the case of Gulathi Saree Centre (supra) or the decision in the case of Mayur Kothari (supra) are in the context of the personal cars; whereas the pune bench decision in the case of M/s Kirloskar Oil Engines Ltd (supra) relates to the aviation vehicles, which is also the case of the assessee an whether it is the case of a Helicopter or Aircraft should not make any difference. Thus, the decision in the case of Gulathi Saree Centre (supra) or the decision in the case of Mayur Kothari (supra) are distinguishable as the subject matter of these appeals are the disallowance out of the claims involving the personal cars. Further, we may mentioned that the revenue is no fair in adopting 20% (1/5th of the claim) in respect of the Bell Helicoptor and in adopting 30% (nearly 1/3th of the claim) in respect of the Cessna Aircraft and in our opinion, it constitutes an artificial difference. It is also relevant to mention that the section 38(2) refers to the expression ‘fair’ and neither of the IT authorities ie AO or CIT(A) have undertaken any exercise to establish the said fairness in adopting the said percentages. It is true that the onus is on the assessee to substantiate the claim of the assessee. Considering the peculiar circumstances better known to the assessee, there is surrender of claim to the extent of 1/7th of the total claims Rs. 93,96,771/- (ie Rs. 66,04,980/- on account of depreciation of vehicles and Rs. 27,91,791/- on account of aviation expenses). At this point of time, in our opinion, the Onus has shifted to the revenue to demonstrate that the said surrender is incorrect and estimations made by the AO are fair within the meaning of section 38(2) of the Act. Fairness is an important factor in matters of quantification of the disallowances, when section 38(2) of the Act is invoked. The revenue has not done any probe independently to demonstrate that assessee’s offer is unfair and his estimations are fair. Hence, we are of the opinion, that the estimations made by the AO, which are confirmed in case of the Cessna Aircraft and alterted in case of Bell Helicoptor are hereby set aside.

14. In view of the existence of the Pune bench decision, which is binding, we are of the opinion, that the offer of the assessee to restrict the disallowance to 1/7th of the claims in respect of both Bell Helicoptor and the Cessna Aircraft, is reasonable and fair. Accordingly, the AO is directed. Thus, the original grounds raised by the assessee are allowed.

15. The additional ground raised by the assessee is relevant in the context of ground 3 raised in the appeal by the revenue vide ITA NO 1524/PN/2008. This ground is adjudicated while dealing with the appeal of the revenue. Accordingly, the additional ground is allowed.

16. In the result the appeal of the assessee is allowed.

ITA NO 1524/PN/2008

17. The grounds in the Revenue’s appeal are as under:-

“1. On the facts and circumstances of the case and in law whether CIT(A) is right in deleting the addition made by Assessing Officer on account of income from house property by determining annual value of let out property at Rs. 6,00,000/- against Rs. 1,50,000/- as shown by assessee.

2. On the facts and circumstances of the case and in law whether CIT(A)-II, Pune is right in allowing the expenditure made in respect of interest of Rs. 22,13,037/- paid on borrowed funds which were utilized to acquire the shares.

3. On the facts and circumstances of the case and in law whether CIT(A) is right in restricting the disallowance made out of the depreciation and aviation expenses on Bell Helicopter to 20% against 30% as per Assessing Officer’s order.

4. On the facts and circumstances of the case and in law whether CIT(A) is right in deleting the addition made by Assessing Officer on account of unaccounted commission payment of Rs. 7,48,505/-.”

18. Ground 1 relates to the determination of the annual letting value (ALV) of the house property of the assessee. AO determined the ALV at Rs. 6 lakhs against the assessee’s ALV of Rs. 1.5 lakhs. Para 3.1 to 3.5 of the impugned order are relevant for facts as well for the reasoning of the CIT(A) for deleting the addition. In fact, the CIT(A) did not approve the AO attempts in resorting to the estimations when the ALV is to be calculated where the assessee followed the method of determining the ALV of the Walkeswhare property based on the actual rental receipts.

19. Aggrieved with the same, the Revenue is before us. Ld DR for revenue argued that the AO is empowered to determine the ALV of the property on the basis of the comparable cases. In this regard, he relied on the decision of the co-ordinate Bench in the case of Makrupa Chemicals (P) Ltd (108 ITD 95) where the ITAT has discussed the scope of different decisions of the judgments of the High Courts as well as the Supreme Court and the Tribunal in Para 14 of the said order that the “Municipal ratable value is not binding on the AO if the AO can show that the ratable value and municipal laws does not represent the fair rent. Further, he relied on the order of the AO.

20. On the other hand, Ld AR for assessee heavily relied on the orders of the CIT (A) and the jurisdictional High Court judgments in the case of J K Investors (Bom) Ltd and above cited apex court judgments ie Dewan Daulat Rai Kapoor (supra). He took us through the relevant paras of the said judgments. He argued that the AO is under obligation to go by the ratable value or Standard Rent and the AO must not invoke the comparable cases.

21. We have heard the rival submissions and perused the orders of the revenue authorities as well as paper book filed before us and copies of the decisions filed before us. Undisputedly, this is the case, where the property is let to the sister concern for rent and therefore, clause (b) of section 23(1) apply to the case. AO has not made out a case that the case fall in the exempted cases of Maharashtra Rent Control Act, 1999. The provisions of clause (b) of section 23 are as under:-

“23(1) Annual value how determined Subsection (1) for the purpose of section 22, the annual value of any property shall be deemed to be,

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable”.

Clause (b) refers to a property, which are let. Annual value of a property determined under section 23 shall be adopted for computing the income from property in terms of section 22. The annual value determination shall be strictly in accordance with the provisions contained in section 23 as upheld by the Coordinate Bench in the case of Delite Enterprises (P) Ltd v. ITO [2008] 22 SOT 245(Mum). Accordingly, where the Rent Control Act is applicable only the standard rent is to be taken as the annual letting value. In the absence of standard rent the municipal ratable value is to be taken. Where the municipal ratable value of rent is less than actual rent, the actual rent shall be fair rental value for computing income from house property. However, it is the decision of the co-ordinate Bench in the case of Makrupa Chemicals (P) Ltd [2007] 108 ITD 95/12 SOT 68 (Mum) that the standard rent is the upper limit for determining the annual value. The above synopsis goes well with the decisions of the Apex Court in the case of Dewan Daulat Rai Kapoor (supra) and also apex court judgment in the case of Dr Balbir Singh and others (supra) for the proposition that the ratable value determined by the municipal authority is binding unless the standard rent is higher.

11. In the light of the above legal position we have examined the facts of the instant case. The assessee has let out space to the sister concern, which is undisputed fact and is receiving Rs. 10,000/- per month from each sister concern. Therefore, the assessee’s property is covered by provisions of clause (b) of section 23(1). This is a fact that assessee’s actually rent received or receivable in respect of the said property is not in excess of the ALV computed under clause (a) of section 23(1). In the light of these facts, AO’s decision to invoke a comparable case to the property covered under clause (b) is not in tune with the above referred legal position. Further, it is not also the case of the AO that assessee is covered by the exemptions provided in the Maharashtra Rent Control Act and, therefore, ALV of the property shall be determined on the basis of the comparable cases. In any case, the standard rent is upper limit for determination the ALV as held in the case of Makrupa Chemicals Pvt Ltd (supra). Therefore, we are of the opinion that the order of the CIT (A) does not call for any interference.

22. Thus, it is not the case of the revenue that the ALV determined by the assessee is less than the standard rent. Considering the above factual and legal position in force, we are of the opinion that the order of the CIT(A) does not call for any interference for the above reasons. Accordingly, ground 1 of the revenue is dismissed.

23. Ground 2 relates to claim of interest expenditure of Rs. 22,13,037/- paid to the PNB Bank and netted against the interest income offered under the head income from other sources. Relevant facts are that the assessee offered income from other sources at Rs. 2,62,66,595/-bring interest from fixed deposits with banks, interest on bonds, and deposits with other concerns. This is net income after substracting the interest expenditure of Rs. 37,62,811/-. It includes the interest expenditure of Rs. 22,13,037/- incidental to the loan taken from BNP Paribus Bank. The impugned loan was utilized for making the investments in IPOs as under.

(i) 09-08-04 Amount withdrawn for Investment in TCS shares Rs. 8,09,99,500/-

(ii) 09-11-04 Amount withdrawn for Investment in SPANCO shares Rs. 5,00,00,000/-

The Assessing Officer disallowed the amount of Rs. 22,13,037/- out of interest Rs. 37,62,811/- relying upon various decisions and held that such expenditure of interest cannot be allowed as deduction against the assessee’s business income also as they relate to the capital assets. Further, the AO mentioned that the TCS shares were sold by the assessee on 17-02-2005 treating them as his “personal assets” and corresponding long term capital gain or loss has been offered by the assessee. As far as SPANCO shares are concerned, the share application amount was received back by the assessee on 06-12-2004 and accordingly, no income was earned by the assessee on this transaction. Thus, the AO is of the opinion that the interest deduction cannot be allowed to the assessee either u/s. 57(iii) or u/s 36(1)(iii) of the Income Tax Act, 1961. He accordingly, made the addition of Rs. 22,13,037/-. Aggrieved with the same the assessee filed an appeal before the CIT(A). Assessee made various submissions before him. On considering the submissions the CIT(A) gave relief to the asssessee and relevant discussion is given in para 4.2 & 4.3 of the impugned order and the same are as follows.

“4.2 I have gone through the facts of the issue. It is not in dispute that out of the total amount of loan obtained, Rs. 13,09,99,500/- is utilized for purchase of shares of TCS (Rs. 8,09,99,500) and for purchase of shares of SPANCO (Rs. 5,00,00,000/-). The Assessing Officer in the last lines of para 5.3 observed that “in the case of the assessee, there is a direct nexus between the funds borrowed from BNP Paribus Bank and the investment made in shares…” It was held that decision in the case of Shree Digvijay Cement Co. Ltd. vs. CIT (supra) was applicable. In that case the investment in shares made out of borrowed funds was not proved as no new borrowings were made. The TCS shares were sold by the assessee on 17-02-2005 and long term capital gain has been offered for taxation. In case of SPANCO shares, the share application amount was received back by the assessee on 06-12-2004 and according to the Assessing Officer no income was earned by the assessee on these transactions.

4.3 Irrespective of the fact whether any income was earned by the appellant from the investment in shares, interest paid on money borrowed for investment in shares is deductible u/s. 57(iii) of the Act for section 57(iii) requires that the expenditure must be laid out and expended wholly and exclusively for making and earning income and not that such income must have been earned. Reliance is placed in this regard on the decision in the case of CIT vs. Rajendra Prasad Moody reported in 115 ITR 519 (SC). The contention of the Assessing Officer that the deduction is permissible u/s. 57(iii) only if there was some income earned under the head ‘income from other sources goes’ goes directly against the decision of the Supreme Court in the case of Rajendra Prasad Moody (supra). The reliance of the Assessing Officer on the decision referred by her infact goes against the factual position narrated by the Assessing Office in the assessment order for the decision in the case of CIT vs. Mangalam Cements Ltd. (supra) there was no nexus between the receipt of interest on short term deposits and payment of interest on loan borrowed. In the case of Bai Bhuriben Lalubhai vs. CIT (supra) again the observation was that there was no direct or indirect nexus between the expenditure incurred and the income earned on the fixed deposits, the decision in the case of CIT vs. Sujani Textiles Pvt. Ltd. (supra) the director was advancing money without charging interest and there was no investment in shares as in the case of the assessee and therefore, all the cases relied upon by the Assessing Officer are not applicable to the facts of the case. Further, the contention of the Assessing Officer that the expenditure on interest was not allowable against business income is not required to be adjudicated for it was not in dispute that those shares purchased were admittedly not the assessee’s business assets. At the same time it cannot be stated that the assessee was not in the business of sale and purchase of shares for the assessee has shown a profit of Rs. 26,689/- from share trading business during the year under consideration even when the shares were sold out of opening balance during the year. In view of the above the addition of Rs. 22,13,037/- being disallowance of interest paid on borrowed funds is held to be allowable u/s. 57(iii) of the Act. Ground of appeal No. 2 is allowed.”

24. From the above extract, the CIT(A) is of the opinion that since the assessee earned interest income from the FDs and others with the Bank and also incurred the interest expenditure, therefore the set off is allowable u/s 56(iii) of the Act. Alternatively, CIT(A) is the view that the assessee since engaged in the business of trading of the share, the claim is allowable as business expenditure too. In connection with the interest expenditure claim relatable to the investment of the loan in the IPO of the SPANCO shares unsuccessfully, the CIT(A) is of the view that the ‘earning of income’ does not mean the dividend income should have been actually earned in the year under consideration. Finally, as per the CIT(A), the addition of Rs. 22,13,037/- being disallowance of interest paid on borrowed funds is held to be allowable u/s. 57(iii) of the Act.

25. Aggrieved with the said decision of the CIT(A), the revenue filed the present appeal with ground 2. During the proceedings, the Ld DR mentioned that the impugned interest claim of Rs. 22,13,037/- has two segment ie (i) the interest relatable to the investment in TCS shares and (ii) the interest relatable to the investment in the IPO of the SPANCO shares. As per the DR, the Revenue has strong objection to the decision of the CIT(A) in treating the interest payment relatable to the borrowed funds invested in SPANCO shares unsuccessfully as allowable u/s. 57(iii) of the Act, as this is the case of investment which never resulted in earning of the shares forget about the earning of dividend income. As per the DR, this part of the reasoning given by the CIT(A) must be dismissed. Regarding the other reasoning about the allowability of the impugned interest claim as business expenditure u/s 36(iii) of the Act, the DR mentioned that, when the assessee invested in SPANCO shares, the assessee never intended business purposes and therefore, the claim is not allowable u/s 36(iii) of the Act. Regarding the interest expenditure relatable to the loan invested in the TCS shares, the DR is of the opinion, the same is relatable to the acquisition of the share and therefore relatable to the earning of the capital gains/loss and not the business profits.

26. On the other hand, Ld Counsel for the assessee made various arguments and they are: (a) the assessee took the loan for investment in shares and accordingly, the assessee made investment in both TCS shares and SPANCO shares too. But, the allotment of SPANCO shares never materialized. However, the assessee had to make the payment of interest to the Bank and it is the expenditure incidental to the business of the share trading and relied on the additional ground raised by the assessee in this regard. The allotment of shares against the investment in the IPO of SPANCO shares is not the hands of the assessee; (b) assessee is engaged in the business of share trading and the same is evidenced by the fact of profit of Rs. 26,689/- from share trading business during the year under consideration; (c) as per the Counsel, the sum of Rs. 22,13,037/- being disallowance of interest paid on borrowed funds is actually and undisputedly incurred and he is entitled to deduction out of his total income; (d) the Counsel relied upon various citations in order to demonstrate that the impugned interest expenditure is allowable u/s 36(iii) of the Act.

27. We have heard the parties and perused the orders of the revenue. Both parties agreed that there is no issue so far as the allowability of the interest expenditure relatable to the investment in TCS shares under some ‘head of income’ as the assessee already offered the relevant capital gain/loss during the year. On considering the facts that the assessee is in fact entitled to the deduction in respect of the relatable interest on the loan invested in the acquisition of the TCS shares, the claim is allowable either u/s 36(iii) or section 48 of the Act and certainly not under the provisions of section 57(iii) of the Act for the reason that the impugned interest expenditure is not ‘expanded wholly and exclusively for the purpose of making or earning such income’ ie interest income against which the said interest expenditure is allowed by the CIT(A) to be set off. The expression such income in the provisions of section 57(iii) relates to incomes chargeable to tax u/s 56 of the Act. The same reasoning applies to the interest expenditure relatable to the loan invested in the investment SPANCO shares too and the assessee is not eligible for set off against the other interest income receipts chargeable to tax u/s 56 of the Act as the assessee has no chance of ‘such income’ out of the SPANCO shares as he never got allotment of such shares. Therefore, we do not agree with the CIT(A) in concluding that the addition of Rs. 22,13,037/- being disallowance of interest paid on borrowed funds is held to be allowable u/s. 57(iii) of the Act.

28. Now we proceed to examine if the assessee is entitled to deduction either u/s 36(iii) of the Act or not. In this regard, we have considered the following undisputed facts, ie (i) very existence of business of trading in shares, (ii) earning of profit to the tune of Rs. 26,689/- from share trading activity during the year, (iii) undisputed fact of actual incurring of expenditure in the form of interest payment to the Bank incidental to the process of acquisition of the shares. In our opinion, the assessee entitled to the deduction under the provisions of section 36(iii) of the Act. Therefore, we approve this part of the reasoning given by the CIT(A) in granting relief to the assessee. But the fact is that that the assessee offered the gains/loss on account of TCS shares under capital gains head of income. To bring harmony, in our opinion, it is appropriate that the assessee is entitled to relevant interest segment relatable to TCS shares under the head capital gains head of income. AO may undertake appropriate action in this regard, if there are any tax implications in their favour. Otherwise, in the absence of any tax implications, there is no need for disturbing the computation of income as it merely an academic exercise to no gains or loss to either side of the dispute. Regarding the relevant interest segment relatable to SPANCO shares, in the absence of any successful acquisition of shares and no consequential income chargeable to tax u/s 48 or 56 of the Act, we are of the opinion, the assessee is entitled to deduction u/s 36(iii) of the Act. Accordingly, the additional ground raised by the assessee is allowed and consequently, the ground raised by the revenue is dismissed.

29. Ground 3 relates to the decision of the CIT(A) in restricting the disallowance made out of the depreciation and aviation expenses on Bell Helicopter to 20% against 30% as per Assessing Officer’s order. This issue is already addressed by us while adjudicating the ground 1 of the appeal of the assessee relating to Bell Helicoptor. Finally, relying on the decisions of a coordinate bench in the case of Kirloskar Oil Engines Ltd (supra) and other decision mentioned in paras above, we have taken the view that the assessee offer for disallowance at the rate of 1/7th of the claim is fair with in the meaning of the provisions of section 38(2) of the Act. Consequently, we are of the opinion, the grand 3 of the revenue’s appeal is to be dismissed.

30. Ground 4 relates to the deletion of addition of Rs. 7,48,505/- u/s 69C of the Act . It works out to 10% of the Rs. 74,85,057/-, the sale value of penny shares. Assessee offered the relevant investment as income of the assessee. While making the assessment the AO disallowed the said 10% towards the relatable or incident cost of the alleged investment. But the fact, AO is not in possession of any direct evidence to support the impugned addition. CIT(A) deleted the same as per the discussion given in para 7.2 of the impugned order. During the proceedings, Ld Counsel for the assessee brought to our notice the decision of the Tribunal of the Pune bench for the proposition that the addition is not sustainable in the absence of any evidences to support the payment of unaccounted commission in connection with the investment in the penny stock. On the other hand, Ld DR for the revenue relied on the order of the AO.

31. We have heard the parties and perused the orders of the revenue and the paper book filed before us. It is a fact that the assessee surrendered the unaccounted investment in the penny stocks. At the same time, it is also a fact that there is no direct evidence to demonstrate the payment of the alleged commission to the broker for arranging the transactions of bogus purchase and sale bill and other incidental services. In such cases, the possibility of payment is as equal as possibility of non payment. It is not necessary that in each and every case of the impugned transactions, commission payment is necessarily involved. With this back ground, we have perused the contents of para 7.2 of the impugned order, which read as follows.

“7.2 I have gone through the facts of the issue. Irrespective of the fact that the assessee has not given any reply to the addition made by the Assessing Officer, the Assessing Officer has not brought any material on record to show that the assessee had infact paid unaccounted commission @ 10% to his broker for manipulating the transactions of purchase and sale of Fast Track shares. The Assessing Officer has not produced the details of any enquiries conducted by the Investigation Directorate in the case of the assessee for penny shares irregularly. No proof that the broker was paid 10% commission by the assessee was brought on record. No documents or statement of the assessee or the broker or any material on which the Assessing Officer has relied has been brought on record before making the addition @ 10% of the sale consideration. As the addition has been made entirely on conjectures and surmises the addition of Rs. 7,48,500/- is directed to be deleted….”

32. Therefore, it is the case of addition based on the surmises, which is not sustainable in law. Accordingly, the we find no reason to interfere with the order of the CIT(A). Accordingly, ground 4 of the revenues appeal is dismissed.

33. In the result, the appeal of the revenue is dismissed.

Order pronounced on 24th September, 2010.

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