Janak Texturisers Pvt. Ltd. Vs ITO (ITAT Mumbai)

The appeal filed by Janak Texturisers Pvt. Ltd. (the assessee) before the Income Tax Appellate Tribunal (ITAT) Mumbai arises from a reassessment order passed by the Joint Commissioner of Income Tax (CIT) for the assessment year (A.Y.) 2010-11. The primary issues contested in the appeal include the validity of the reassessment notice under section 148 of the Income Tax Act and the disallowance of expenses amounting to Rs. 6,78,980 by the assessing officer (AO).

Reassessment and Validity of Notice The assessee argued that the notice issued under section 148 of the Income Tax Act was vague and void due to the absence of prior sanction and failure to provide reasons for the reopening of the assessment. The tribunal, however, upheld the earlier assessments, dismissing the claims regarding the validity of the reassessment notice.

Disallowance of Expenses The core issue in the appeal was the disallowance of expenses, amounting to Rs. 6,78,980, which the assessee had incurred. The expenses included various operational costs such as bank charges, electricity, depreciation, office rent, repairs, and vehicle expenses. The AO disallowed these expenses, contending that the assessee did not have any business income and thus, the expenses related to business operations could not be claimed. The assessee contended that despite the slowdown in manufacturing operations, the rental income from the factory premises, which formed part of the business asset, justified these expenses.

The tribunal considered the facts presented by the assessee, noting that the rental income earned from the factory premises was treated as income from house property and not as business income. The tribunal referred to section 57 of the Income Tax Act, clarifying that the expenses incurred to maintain the property rented out could be deducted under this section, as opposed to being treated as business expenses.

Judicial Precedents Referenced The assessee cited several judicial precedents to support its argument, including the case of Raja Bahadur Motilal Mills Ltd. vs. ACIT, and Hindustan Chemical Works Ltd. vs. CIT, where it was held that expenses related to maintaining assets, even if not generating income at the time, could still be claimed as deductions. However, the tribunal found these cases distinguishable on facts, as the assessee did not demonstrate any revival of business operations in the current or subsequent years.

Final Judgment The ITAT partly allowed the appeal. It directed the AO to verify the rental income earned by the assessee and compute taxability under section 57, allowing proportionate expenses related to the rental income. The tribunal rejected the broader claim for business expenses under section 37(1) due to a lack of evidence showing the continuation or revival of the business activities.

In conclusion, the ITAT’s ruling provided clarity on the treatment of rental income and business expenses, reinforcing the necessity of appropriate categorization under relevant sections of the Income Tax Act.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Present appeal filed by the assessee arises out of order dated 15.12.2023 passed by the Ld. Addl/Joint Commissioner of Income Tax (Appeals), Kolkata (in short “Ld. Addl./Joint Commissioner”) for A.Y. 2010-11 on following grounds of appeal:

“1. The orders passed by the learned lower authorities are bad in law and bad in facts.

2. Assessment Order passed by the learned Assessing Officer is ab-initio void inasmuch as, reasons recorded, if any prior to issue of notice u/s 148 of the I.T. Act, 1961 were not provided to the appellant.

3. The notice issued under section 148 of the I.T.Act, 1961 being a vague notice is ab-initio void.

4. The notice issued under section 148 of the I.T.Act, 1961 is ab-initio void, for want of sanction by designated authority. Consequently, assessment order passed in pursuance of said notice is also ab-initio void

5. The learned lower authorities have grossly erred in disallowing / confirming disallowance of expenses to the extent of Rs. 6,78,980/-. Reasons assigned for the impugned disallowance are wrong and contrary to settled legal position.

6. The learned lower authorities have grossly erred in not appreciating the fact that in case of a private limited company, certain expenses are essentially relatable to its existence / establishment hence same ought to have been allowed in its entirety.

7. Having regard to the facts and circumstances of the case, provisions of law & judicial propositions, entire amount of of the expenses incurred at Rs. 6,78,980/- ought to have been allowed in full.

8. The appellant may please be permitted to raise any additional or alternative ground on or before the hearing of appeal.”

Brief facts of the case are as under:

2. The assessee is a private limited company. It is noted that the assessee did not file any return of income for the year under consideration and accordingly the assessment was reopened by issuing notice u/s 148 of the Act on 31.03.2017.

2.1. In response to the notice, assessee filed its reply on 28.04.2017 requesting to drop the reassessment proceedings, however, no return of income was filed in response to the notice u/s 148 of the Act.

2.2. Subsequently, notice u/s 142(1) was issued calling upon assessee to furnish complete set of return of income filed, copy of balance sheet and capital account and other accounts maintained with all attachments. There was no response to the notices issued. Subsequently, notice u/s 142(1) was sent to the email of the assessee requesting for an immediate compliance as there was no response to the second notice issued. Summon u/s 131 of the Act was issued calling upon the assessee to appear for the reassessment proceedings. Subsequently, one more letter was issued asking upon assessee to furnish the details as called for. In compliance, assessee vide letter dated 12.12.2017 filed details such as computation of income, financial statements, copy of acknowledgment of return filed on 11.12.2017 declaring total income of Rs.2,54,132/-.

2.3. The Ld. AO after verification of the details observed that, assessee has earned income from rent and interest income during the year under consideration and has claimed expenses in the books of account amounting to Rs.7,62,261/-. The Ld. AO was of the opinion that, the assessee did not have any income arising out of the business activity and hence disallowed the expenditure claimed to the extent of Rs.6,78,980/-.

2.4. The Ld. AO observed that, the assessee had claimed deduction u/s 24 against the rental income of expenses incurred for the purpose of business was also set off against the rental income which according to him was not allowable.

Aggrieved by the order of the Ld. AO, the assessee preferred appeal before the Ld. CIT(A).

3. The Ld. CIT(A) summarily upheld the additions made by the Ld. AO by observing that there was no business activity and assessee failed to submit any documentary evidences to prove the genuineness and nexus of expenses.

Aggrieved by the order of the Ld. CIT(A) the assessee is in appeal before this Tribunal.

4. The Ld. A.R. submitted that, the only issue contested by the assessee before this Tribunal is Ground Nos.5, 6 & 7 relating to disallowance of expenses of Rs.6,78,980/-. He submitted that, vide written submission filed before this Tribunal the ground Nos.1 to 4 have not been pressed by the assessee. The said written submission is placed on record to support the submissions of the Ld. D.R.

Accordingly ground Nos.1 to 4 raised by the assessee stand dismissed.

5. In respect of Ground Nos.5 & 6 the Ld. A.R. submitted that, assessee had claimed expenditure to the extent of Rs.7,62,261/-, the breakup of which are as under:

5.1. He submitted that, out of the above expenses the Ld. AO allowed expenses to the extent of Rs.26,899/- being appeal filing fee, legal and professional charges and payment to the auditors.

5.2. The Ld. A.R. submitted, that the other expenses disallowed are without any basis as there was no business income for the year under consideration. He submitted that, on perusal of the above expenses none of the expenses could be categorized as not for the purposes of business. He submitted that, assessee, being a private limited company, has to incur expenses to maintain the establishment and there are certain relevant statutory payments that have to be incurred.

5.3. The Ld. A.R. submitted that, the main business of the assessee was to manufacture nylon threads at the factory which considerably slow down from the year 2009 due to financial difficulties. The Ld.AR submitted that, instead of carrying out own manufacturing/trading activity the assessee thus exploited its business asset by way of renting out its business assets. He submitted that, the factory premises formed part of the block of assets that was rented out against which the rental income was earned.

He submitted that, the business asset were thus utilized by the assessee and the expenses incurred on day to day basis for renting of the establishment cannot be denied.

5.4 The Ld. A.R. placed reliance on the decision of co-ordinate Bench of the Tribunal in case of Raja Bahadur Motilal Mills Ltd. vs. ACIT, Circle VI(5), Bombay in ITA Nos.6717 to 6721 for AY 1978-79 to 1982-83 and also on the decision of the Hon’ble Delhi Tribunal in case of ITO vs. Mokul Finance (P) Ltd. 110 TTJ (Del) 445, CIT vs. Kriti Resorts Pvt. Ltd. 60 DTR (HP) 138.

5.5 The Ld. A.R. thus submitted, that the claim of the assessee being in accordance with law cannot be denied. He also placed reliance on the decision of Hon’ble Bombay High Court in case of Hindustan Chemical Works Ltd. vs. CIT reported in 124 ITR 561 wherein Hon’ble Bombay High Court held that, even though no income was actually earned for sometime from the assets which were in possession of the company that fact was not relevant for considering the assessee’s claim of deduction of expenditure incurred for holding these assets.

5.6 On the contrary, the Ld. D.R. relied on the orders passed by the authorities below.

I have perused the submissions advanced by both the sides in the light of records placed before me.

6. It is noted from the records that the assessee has computed the rent receipt from the factory premises as income from house property against which standard deduction has been claimed further the expenses has been claimed in the profit and loss account and the rent received is also declared as income from under the head other income, this categorically clear from Schedule-I to the profit and loss account.

6.1 In my view, assessee computed the rental income received under the “income from house property” as well as business income which is not the right procedure. No doubt, the rental income received, from the factory premises, amounts to income under the head house property. However, considering the fact that the premises rented out formed part of the fixed Schedule assets, it would be appropriate if the rental income received is considered u/s 57 of the Act, wherein all related expenses incurred by the assessee to keep up the property could be claimed as an expenditure.

6.2 Decisions relied by the Ld.AR are distinguishable on facts as in those cases the assessee therein re-started its business subsequently on this background Hon’ble Courts considered the claim of assessee by allowing expenditure to be claimed u/s 37(1) of the Act. However in the present facts of the case, there is no evidence brought on record by the Ld.AR regarding revival of business activity in subsequent years.

6.3 It is therefore, directed to the Ld.AO to verify the rental income received by the assessee and compute taxability u/s 57 of the Act by considering proportionate expenses against such rental income. The Ld.AO is directed to re-compute the taxable income of the assessee in the hands of the assessee u/s 57 of the Act as mentioned hereinabove. Accordingly, grounds raised by the assessee stands partly allowed.

In the result, appeal filed by the assessee stands partly allowed.

Order pronounced in the open court on 13.01.2025.