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The Commissioner of Income Tax-12 Versus M/s. Sane & Doshi Enterprises

2015 (4) TMI 882 - BOMBAY HIGH COURT

Charge of rental income - business income or income from house property - Tribunal directing the Assessing Officer to tax the rental income as 'income from house property' and to allow deduction u/s 24 - ITAT allowed the claim of expenses of ₹ 45 lakhs on account of provision for incomplete work - interest paid as capital brought in by partners - Held that:- We do not think that when the Tribunal relied upon the judgment of the Hon'ble Supreme Court in the case of East India Housing [1960 .....

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ortgaged and what was before the Supreme Court was the fact that the High Court, with the approval of the assessee and the creditors evolved a scheme where under the business assets of the assessee were let out to M/s. General Fibres Dealers (P) Ltd. It is in that peculiar fact situation that the Supreme Court took the view and with regard to the nature of income. We are of the view that on the essential contentions raised before the Tribunal and as elaborated or additionally proposed before us .....

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e income of the assessee. As find the assessee has been following the project completion method and on account of completion of major part of the project, the assessee worked out its profit and offered it to tax. In the P & L account, he claimed a provision of incomplete work of ₹ 45 lakhs relating to unsold premises. While calculating its closing stock, he has taken this figure of cost of provision of incomplete work of ₹ 45 lakhs. It is an undisputed fact that in the case of projec .....

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ee on the ground that the provision of incomplete work should not have been made in the impugned assessment year, without looking to the facts that same cost of incomplete work was taken in the closing stock. Keeping in view of the facts of the case, we are of the opinion that CIT (A) has properly adjudicated the issue in the light of given facts and circumstances of the case. We, therefore, find ourselves in agreement with the Order of the CIT (A). We do not think that the Assessing Officer's v .....

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th which it concurred prevails, then, we do not think how the Revenue can raise this issue. The issue has been considered bearing in mind the typical factual background. If the entire interest paid on the partners' capital was related to the premises which were let out by the assessee but the construction thereof came from the contributions of the partners, then, the interest was due and payable to them. That interest was payable not only in terms of the general principle of partnership and high .....

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ded against revenue. - Income Tax Appeal No. 375 of 2013, Income Tax Appeal No. 5313 of 2010, Income Tax Appeal No. 5592 of 2010, Income Tax Appeal No. 6230 of 2010, Income Tax Appeal No. 6232 of 2010, Income Tax Appeal No. 6234 of 2010, Income Tax Appeal No. 1498 of 2011 - Dated:- 9-4-2015 - S. C. Dharmadhikari And A. K. Menon, JJ. For the Appellants : Mr. P.C. Chhotaray For the Respondent : Mr. S.C. Tiwari with Ms. Natasha Mangat JUDGMENT [Per S.C. Dharmadhikari, J.] 1. These appeals were hear .....

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It filed its return of income for the assessment year 2000-01 dated 25th October, 2000, declaring total income at ₹ 5,51,81,680/- including rental income of ₹ 45,57,272/- and claimed deduction under section 24(a) of the Income Tax Act,1961 (hereinafter referred to as the IT Act ) of ₹ 11,39,318/-. This claim of the assessee was not accepted by the Assessing Officer. The Assessing Officer treated the rental income as business income on the ground that the receipts from this pro .....

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efore the Commissioner of Income (Appeals). The Commissioner passed an order on 19th September, 2006 (Annexure C) partly allowing the appeal. The Commissioner concluded that the claim of the assessee of expenses of ₹ 45,00,000/- should have been allowed. Therefore, ground No.5 in the Memo of Appeal before the Commissioner and raised by the assessee came to be accepted. 4. The Commissioner also accepted the ground of the assessee and pertaining to the charge of rental income. The Commission .....

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is common ground that we are concerned with Ground Nos.2, 3, 4 and 5 which have been allowed by the Commissioner. 6. It is aggrieved by such an order of the Commissioner that the Revenue approached the Income Tax Appellate Tribunal and Bench at Mumbai by filing Income Tax Appeal No.6449/Mum/2006. By the impugned order dated 11th December, 2008, the Tribunal proceeded to dismiss the appeal. 7. Mr. Chhotaray, the learned counsel appearing on behalf of the Revenue in support of these appeals tende .....

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eduction under section 24(b) of the IT Act as interest on borrowed capital. In Income Tax Appeal No.1504 of 2012 and which pertains to assessment year 2007-08, this additional question of law would also arise according to Mr. Chhotaray. Lastly, he would submit that in Income Tax Appeal No.418 of 2013 also, the additional questions would arise. This appeal pertains to assessment year 2008-09. 9. Thus, it is submitted by Mr. Chhotaray that the following questions are substantial questions of law : .....

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Appellate Tribunal was justified in directing the Assessing Officer to allow the claim of expenses of ₹ 45 lakhs on account of provision for incomplete work ignoring the fact that there was no incomplete work in the project as is evident from the fact that assessee has received rental income out of closing stock shown by him ? (c) Whether the rental income earned by the assessee is a business income of the assessee earned on account of exploitation of the business assets or it was an incom .....

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ied in treating the rental income as income from house property when the assessee had not maintained any separate account in respect of the income from the house property and all that the assessee has done was to take out the items of rental receipt and property taxes from the consolidated profit and loss account for separate consideration without taking out the corresponding proportionate expenses relatable to the rented property in the profit and loss account and at the same time has claimed t .....

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iven on lease by the firm would not enable it to claim the income derived therefrom as income from House property. Since the business of the firm is of development and construction of property, then, this income and which is derived from the stock of unsold units or flats is business income and ought to be treated as such. Mr. Chhotaray's complaint was that by some jugglery or manipulation of the accounts, the assessee firm claimed the income derived from this lease transactions as income ge .....

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uction of buildings with a view to sell the units therein and not letting out the same. A business transaction of leasing of unsold units was thus nothing but a transaction to generate business income. The assessee maintains a consolidated Profit & Loss Account thereby combining its trading and rental receipts. However, to claim the deduction as above, it has taken out the rental receipts and property taxes and shown it under a separate head of income from house property. The Assessing Offic .....

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of any individual item of expenditure pertaining to the rented property. 11. Mr. Chhotaray has relied upon these findings in the Assessment Officer's order and by referring to the Partnership Deed dated 16th March, 1999 (clause 6 page 3 of the same), he would submit that upon examination of all this material, the Assessing Officer rightly concluded that the rental income is taxable as business income. The Profit & Loss Account was taken as the starting point and that is how the income f .....

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therefore, rightly asserted and by relying on case law that the exploitation of business assets would yield business income. Mr. Chhotaray has submitted that the judgments of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Maheshwari Devi Jute Mills (1965) 57 ITR 36; Universal Plast Ltd. vs. Commissioner of Income Tax 237 ITR 454 and Commissioner of Income Tax vs. Vikram Cotton Mills Ltd. (1988) 169 ITR 597 and finally the order passed by the Hon'ble Madras High .....

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n interfered with by both the First Appellate Authority and the Tribunal. Both have lost sight of the fact that no separate accounts are maintained in respect of the properties which have been let out yielding rental income. One consolidated Profit & Loss account is prepared and on the right side of which trade receipts and rent receipts appear. The expenses are common. No separate account of expenses was maintained in respect of the property let out and from which rental income is received. .....

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the accounts are maintained in the normal course treating the entire receipts including rental income as business receipts, then, there is no question of claiming deduction under section 24(a). The problem arose when the assessee abruptly deviated from the accounting practice by taking out only two items - rental receipts and property taxes from house property and claimed huge deduction under section 24(a). For the reasons that have been assigned by the Revenue and noted hereinabove, particularl .....

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ccepted straight away. The Commissioner and the Tribunal ought to have sent the matter back to the Assessing Officer to determine this allowable part of the expenditure and pertaining to the letting out of the premises. That is one more reason for which this Court should set aside these concurrent orders. 16. Then Mr. Chhotaray addressed us on the issue of interest paid as capital brought in by partners. He submits that interest paid on partners capital is claimed as deduction under section 24(b .....

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on was completed in financial years 1999-2000 and 2001-2002 respectively. If the construction was carried out with the contribution of capital by partners and the interest paid on partners' capital as tabulated should be allowed, then, it is important to note that the Assessing Officer's order was set aside and this claim has been allowed by the Commissioner without any deduction. The matter has not been examined by the Tribunal also at length. If the deduction has not been claimed under .....

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is itself shows that conflicting claims were made. If the units constitute the stock-in-trade of the firm, then, dealing with such stock-in-trade would generate only business receipts. As the same reasoning has been adopted to disallow the interest claim, then, the conclusion of the Assessing Officer should not have been interfered with. There was actually no interest expenditure incurred on borrowed capital. All such claims were clearly an afterthought. The partnership capital could have been u .....

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s written submissions as to how this claim had been elaborated throughout by the Revenue. They have highlighted the conduct of the assessee. For all these reasons he submits that the Commissioner and the Assessing Officer were not in error with regard to this claim and their conclusions were based on the settled legal principles. The existence of the firm and independent of the partners is a principle which has been applied. If there is no such existence as distinct and understood in the case of .....

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ion for this provision. A new explanation was given before the Commissioner of Income Tax (Appeals) and the Tribunal which has been accepted by the said authorities. Therefore, if they were inclined to take a different view, they ought to have sent the matter back to the Assessing Officer. 18. Mr. Chhotaray's submissions have been countered by Mr. Tiwari appearing for the assessee by pointing out that the additional questions which are proposed have never been subject matter of any arguments .....

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39;s order was sought to be supported by the Revenue before the Tribunal was that rental income was received from business assets and shown as closing stock. Therefore, the additional two questions proposed for assessment year 2000-01, 2002-03 to 2005-06 and first two additional questions proposed for assessment year 2006-07 are identically worded but do not arise. In any event, non maintenance of a separate Profit & Loss account for rental income cannot be a reason for denying the deduction .....

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t does not decide the assessee's tax liability. In that regard, reliance is placed on Kedarnath Jute Manufacturing Company Limited vs. Commissioner of Income Tax 82 ITR 363 and Sutlej Cotton Mills Ltd. vs. Commissioner of Income Tax, 116 ITR 1. Mr. Tiwari submits that as far as assessment year 2006-07 onwards are concerned, there is no income from sale of apartments. In none of the assessment orders, the Assessing Officer has found any fault with the Profit & Loss account of the responde .....

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have been let out on rent and there is no trading income. For this reason, the deduction of interest under section 24(b) of the Act has been claimed from assessment year 2006-07 onwards and not in earlier years. The Tribunal has duly noted this fact. Mr. Tiwari also relies upon the Indian Partnership Act, 1932 and particularly section 13 thereof to submit that interest on capital and taken from the partners is a permissible. The law does not oblige the assessee to use his own funds for carrying .....

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eal No.675 of 2013 and Income Tax Appeal No.775 of 2013 because the counsel for the Revenue realises that for these two assessment years, there is no closing stock. Similar, substitution is called for assessment year 2006- 07 also in Income Tax Appeal No.1498 of 2011. In the circumstances, Mr. Tiwari would submit that this Court should only focus on the main question and which is the objection of the Revenue for treating the income generated by leasing of the unsold flats or units as income from .....

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enue is misconceived. There leasing out the factory as distinguished from the factory building was in issue. Whether the income from that should be assessed under the head profits and gains of business or profession or income from other sources was the further aspect under consideration. In that decision the Hon'ble Supreme Court did not consider as to whether such income could be termed as income from house property. Therefore, the parameters relating to income from other sources would not .....

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er to each and every Memo of Appeal and its annexures. Thus, we are not required to refer to all the Memos of Appeal and the individual facts therein or the view taken by the authorities under the I.T. Act simply because the points or questions raised are common to all of them. We have noted not only the rival stands as emerging from the oral arguments, but from the written submissions only because Mr. Chhotaray submits that the enormity of the Revenue and the impact of the view taken by the Tri .....

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ignoring the fact that the income was received from the business asset (unsold flats) shown as closing stock. The other was the direction of the Commissioner to the Assessing Officer to allow the claim of expenses of ₹ 45 lakhs on account of provision for incomplete work. The Tribunal noted the rival contentions. It found that there is no dispute that the assessee was engaged in construction business and has constructed a commercial property known as May Fair Tower. The unsold portion of .....

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he Hon'ble Supreme Court held in that case that the assessee company was incorporated with the object of also developing landed properties. The construction of shops and stalls on purchased lands was made and these were let out to different tenants. The question arose as to whether rental income received by the assessee is an income from house property or a business income. The Hon'ble Supreme Court, according to the Tribunal, concluded that income received from tenants or shops and stal .....

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of developing and setting up markets or because occupants are not permanent. 22. Then the Hon'ble Supreme Court decisions and rendered later than this judgment in East India (supra) have been referred by the Tribunal including some of the High Court judgments and the parameters laid down therein. The Tribunal found that the Commissioner examined this issue in detail. Para 2.23 of the Commissioner's order with specific references to the legal provisions have been reproduced in the Tribun .....

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Tribunal decisions and the judgments of the Hon'ble Supreme Court and some of the High Courts and referred by the Commissioner dealt with identical claim. If the assessee company is engaged in the business of construction and real estate development and it earned income in the form of rent from the tenants / lessees to whom the property was let out, then, whether the property is held as stock-intrade or otherwise is not what is material. The real and main issue is whether this income is ear .....

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s rendered by the Hon'ble Supreme Court, then, there is no legal infirmity in the findings of the Commissioner. 23. If the Tribunal also had before it the Profit & Loss account and it referred to the treatment given by the assessee therein, then, we do not find how the Revenue can complain otherwise. 24. We have before us a copy of the judgment of the Hon'ble Supreme Court in the case of East India Housing (supra). There, the appellant company which was incorporated with the object o .....

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because it is a company formed with the object of promoting and developing markets, its income derived from the shops and stalls is liable to be taxed under section 10 of the Income-tax Act as profits or gains of business and that the income is not liable to be taxed as income from property under section 9 of the Act. The appellant is undoubtedly, under the provisions of the Calcutta Municipal Act, 1951, required to obtain a licence from the Corporation of Calcutta and to maintain sanitary and .....

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y (4) profits and gains of business, profession or vocation, (5) income from other sources and (6) capital gains. This classification under distinct heads of income, profits and gains is made having regard to the sources from which income is derived. Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. Bu .....

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stalls is income received from property and falls under the specific head described in section 9. The character of that income is not altered because it is received by a company formed with the object of developing and setting up markets. In United Commercial Bank Ltd. v. Commissioner of Income-tax, this court explained after an exhaustive review of the authorities that under the scheme of the Income-tax Act, 1922, the heads of income, profits and gains enumerated in the different clauses of se .....

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rtain services such as heating and cleaning to the tenants at an additional charge. The taxing authorities sought to charge the income from letting out of the rooms as receipts of trade chargeable under Schedule D, but that claim was negatived by the House of Lords holding that the rents were profits arising from the ownership of land assessable under Schedule A and that the same could not be included in the assessment under Schedule D as trade receipts. In Commercial Properties Ltd. v. Commissi .....

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ned could not be regarded as altered; the income came more directly and specifically under the head property than income from business. The income received by the appellant from shops is indisputably income from property; so is the income from stalls from occupants. The character of the income is not altered merely because some stall remain occupied by the same occupants and the remaining stalls are occupied by a shifting class of occupants. The primary source of income from the stalls is occupa .....

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us to take any different view. Even if what has been emphasised by Mr. Chhotaray is taken into account, what the underlying test and as evolved throughout is whether the income has been derived from property. The treatment given in the books of account as stock-in-trade would not, therefore, alter the character or the nature of the income as held by the Hon'ble Supreme Court. If there is a test and which is in the field and emerging from repeated judgments rendered either by the Hon'ble .....

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x (1999) 237 ITR 454. There, the facts emerging from the judgment itself denote that the assessee set up a factory styled as UPL Factory for carrying on the business of manufacturing PVC sheets and allied products. The assessee suffered losses for two years. It then entered into an agreement styled as leave and licence agreement with M/s. Leatherite Industries Limited for a period of seven years commencing on 30th March, 1977. This was an agreement containing a renewal clause and further stipula .....

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Officer did not accept that it was business income and assessed the same as income from other sources. The Commissioner of Income-tax (Appeals), however, accepted the plea of the assessee that it was its business income and allowed the appeal on 27th April, 1985. The Revenue unsuccessfully appealed against the order of the appellate authority before the Income Tax Appellate Tribunal. However, the Tribunal drew up a statement of case and referred the questions of law which have been reproduced in .....

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eld. It is thereafter that the propositions have been summarised and which read as under : (1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, least,amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head Profits and gains of business or profession ; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts .....

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case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets. 27. We cannot ignore the fact that when the assessee was in business, set up factories and entire infrastructure for .....

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an income be given the nomenclature, lease amount, rents, licence fee received by an assessee from leasing or letting out of assets would fall under the head Profits and gains of business or profession . Pertinently the Supreme Court held that it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business, on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out .....

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taking into account the facts and circumstances of each case. These are not general tests or rules which have been laid down. They have been evolved and that is how we do not think that reliance by the Revenue on this decision would carry the matter any further. Equally, we do not think that any factual aspect and particularly on the conduct of the assessee and the treatment or non treatment in the books of account would carry the matter further. Eventually, the character and nature of the incom .....

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tances of a given case. Similarly, we do not think that the reliance on the judgment of the Hon'ble Supreme Court in the case of Commissioner of Income- tax vs. Maheshwari Devi Jute Mills Ltd. would assist the Revenue. The Madras High Court case ought to be then noticed. There, the assessee was a company carrying on business as authorised dealers in Tata diesel vehicles in a building on Mount Road in Madras. The building consisted of three floors including the ground floor. While the ground .....

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me-tax Officer rejected the contention and treated this income as income from property disallowing the deduction claimed under the head business towards repairs. The matter was carried by the assessee before the Tribunal and it allowed the claims. On a reference by the Tribunal, the Hon'ble High Court of Madras held that as the building in question was a commercial asset, the assessee could exploit it either by itself or by letting it to others. Therefore, in a matter like this, the fundamen .....

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premises and the income derived by way of rent therefrom was rightly assessable under the head business income . In holding and taking the above view, the Hon'ble Madras High Court distinguished the judgments and particularly in the case of East India Housing and Land Development Trust Ltd. We do not think that such a view and essentially confined to the facts of that assessee's case would enable the Court on the Revenue in this matter to interfere with the concurrent findings of the Co .....

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t time, raising them does not enable the Revenue to urge and contrary to what is held by the Tribunal. 30. The position also appears to be identical in the case dealt with by the Hon'ble Supreme Court in Commissioner of Income-tax v. Vikram Cotton Mills Limited. There as well, the property came to be mortgaged and what was before the Supreme Court was the fact that the High Court, with the approval of the assessee and the creditors evolved a scheme where under the business assets of the asse .....

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ssessing Officer observed that the assessee has shown the sale of 44,960 sq. feet and the remaining 76,106 sq. feet was shown as closing stock on which the assessee claims to have earned rental income. It disallowed ₹ 45 lakhs as expenses incurred on that part of the stock and added the same to the income of the assessee. 32. The Commissioner found that in the Profit & Loss account, the assessee had offered the profit of the May Fair Tower I on the basis that construction work was subs .....

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e Profit & Loss account in accordance with the matching principle of accounting then the entire provision for incomplete work amount had been actually paid, the proportionate amount of provision of incomplete work of ₹ 45 lakhs relating to unsold premises had been carried forward. This explanation which was given by the assessee was carefully examined and the Commissioner being convinced with it, allowed the claim. The Commissioner's factual findings have been reproduced in paragra .....

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n of incomplete work of ₹ 45 lakhs relating to unsold premises. While calculating its closing stock, he has taken this figure of cost of provision of incomplete work of ₹ 45 lakhs. It is an undisputed fact that in the case of project completion method the project is deemed to have been completed on its completion and sale of its 80%. The remaining portion of 20% is under either renovation or under sale. The common areas are generally renovated after the completion of the project. In .....

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e of the opinion that CIT (A) has properly adjudicated the issue in the light of given facts and circumstances of the case. We, therefore, find ourselves in agreement with the Order of the CIT (A). Accordingly, we confirm the same. 33. We do not think that the Assessing Officer's view having been interfered with in such a scenario that any substantial question of law arises for our determination and consideration. Thus, the appeals fail on these two grounds. 34. Then what remains for our con .....

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fide. The assessee claimed this deduction by giving conflicting versions. The assessee could not have argued in one matter while claiming deduction under section 24(a) and adopted a contrary position with regard to the claim under section 24(b). The argument is that the claim was made for the first time in the assessment year 2006-07. The explanation given is that this claim was not made in the initial years because in those years the stock-in-trade is completely unsatisfactory. If these were s .....

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that in respect of property referred to in subsection (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees : Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed or after the 1st day of April, 1999 and such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed, the amount of deduction under this clause shall not exceed one lakh .....

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o stipulates that where the property referred to in subsection (2) of section 23 is acquired or constructed with capital borrowed on or after 1st April, 1999 and such acquisition or construction is completed within three years from the end of the financial year in which the capital was borrowed, the amount under this claim shall not exceed ₹ 1,40,000/-. This proviso and the explanation thereafter has not been pressed into service. 37. The Tribunal in Income Tax Appeal No.3216/Mum/2009 for .....

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Officer while assessing the rental income as business income. This ground was taken with a view that the rental income would be treated as income from house property and then as a natural corollary the interest paid on the amounts borrowed for the construction of the property should be allowed as a deduction against the rental income. Since ground Nos.1 and 2 pertained to the rental income and taxing the same as income from house property that the Commissioner held that in the light of his find .....

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me is related to the premises which were let out by the assessee. Therefore, there is no reason to interfere with the order of the Commissioner. 38. However, Mr. Chhotaray has invited our attention to the Memo of Appeal in Income Tax Appeal No.1504 of 2012. He highlighted the substituted question of law and submits that there the Commissioner had not granted such a claim. 39. In that regard, we have perused the order passed by the Commissioner on 30th July, 2010, copy of which is at Annexure C. .....

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lending in order to amount to any borrowing. Where there is no relationship of borrower and lender, no deduction is permissible towards interest. In the instant case, the assessee's business was to construct flats or commercial units and sell them at profit. The partners of the firm had subscribed capital for the purpose of business and interest deduction to partner from business income has been allowed over the years. The partner's capital contribution has not been made for the purpose .....

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siness) and was utilised for construction of properties, interest was not allowable deduction under section 24(i)(vi). Where the assessee was a partner of a firm and on dissolution of the firm, it took over all assets and liabilities including a building, another judgment was relied upon and rendered by the High Court of Punjab & Harayana in the case of Commissioner of Income Tax vs. Four Fields (P) Ltd. (1998) 96 Taxman 143 which held that no relationship of borrower and lender had come int .....

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e the amount is held as not a borrowing for the purposes of section 24(b), the question of nexus between the capital contribution of the partners and its use for acquisition / construction of relevant properties is not relevant. He, therefore, confirmed the order of the Assessing Officer by such reasoning. 40. While carrying the matter to the Tribunal, the assessee specifically urged that the Commissioner erred in rejecting his claim without appreciating the fact that interest is paid to partner .....

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nce made by the AO on account of the assessee's claim for deduction u/s 24(b) for interest paid on partners' capital account by relying on the various reasons given in the impugned order, the learned counsel for the assessee has filed a written submission to meet satisfactorily each and every point raised by the learned CIT(Appeals) while confirming the disallowance made by the AO on account of assessee's claim for deduction u/s 24(b). Moreover, as rightly submitted by the learned co .....

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ted to the premises which were let out by the assessee and the same, therefore, was allowable as deduction u/s 24(b) while computing income of the assessee under the head Income from house property . Respectfully following the said decision of the Tribunal in assessee's own case for assessment year 2006-07, we direct the AO to allow the claim of the assessee for deduction on account of interest paid on partners' capital u/s 24(b). 41. The Tribunal held that if a similar issue was involve .....

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