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2015 (5) TMI 304 - ITAT PUNE

2015 (5) TMI 304 - ITAT PUNE - TMI - Depreciation u/s 32 - ownership - building in question named, “Shubhalaxmi” consists of 14 apartments which have been acquired by the two Directors of the assessee company in their individual names - whether arrangement entitles the assessee to be understood as an ‘owner’ of the property qua the provisions of section 32(1)? - Held that:- In the present case, the formal deed of title of the property is not executed and registered in the name of assessee compan .....

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of which assessee is using the property is the arrangement with the individual Directors, which is supported by the resolutions of the Board of Directors. The individual Directors have acquired the property in their names and the transfer of the property into the account books of the assessee company is merely by way of a book entry supported by the resolution of the Board of Directors. Such arrangement ostensibly does not invest the assessee with the dominion over the property to the exclusion .....

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arges incurred in relation to the property ‘Shubhalaxmi’ - Held that:- The appellant company has been consistently asserting before the Assessing Officer as well as before the CIT(A) that the premises are being used for the business of the assessee and even before us various functions have been enumerated to justify the usage of the property for the business of the assessee. Though, there is no clinching evidence in favour of the assertions of the assessee but at the same time the Assessing Offi .....

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tricity bills, repair & maintenance, municipal taxes and water expenses, and disallow the balance - Decided partly in favour of assessee.

Benefit of exemption u/s 35(1)(iv) denied - assessee contended that the impugned sums of capital nature were expended on scientific research related to the business carried on by it - Held that:- The Hon’ble Gujarat High Court in DCIT vs. Mastek Ltd. [2012 (9) TMI 264 - GUJARAT HIGH COURT ] noted that in the absence of the Assessing Officer having o .....

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CIT(A) - Decided in favour of assessee.

Validity of assessment u/s 153A - Held that:- No justification on the plea of the assessee challenging the validity of assessment u/s 153A r.w.s. 143(3) of the Act on the ground that additions to the income made by the Assessing Officer were not on the basis of any incriminating document. - Decided against assessee.

Owner of property at Shubhalaxmi - Held that:- The income-tax authorities were justified in holding that the property ‘S .....

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refore deduction of balance interest calculated on the basis of proportionate area used by him for his profession be allowed at 100% - Held that:- 50% of the building can be said to have been used for the purposes of the business of the company itself. As a consequence Assessing Officer is directed to re-visit the aforesaid pleas of the assessee afresh and allow appropriate relief as per law. - Decided in favour of assessee for statistical purposes.

Expenditure for securing the right .....

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spute. The Assessing Officer has also accepted the position that assessee incurred such expenditure with the expectation that his own business would improve in the long run because of the association with Jahangir Hospital.Once the objective of the expenditure being improvement in business prospects is accepted, then it has to follow that such an enduring benefit is in the revenue field. If the benefit, though long term is in the revenue field, then the corresponding expenditure which has result .....

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A No.2192 to 2197/PN/2013 - Dated:- 10-4-2015 - Shri G.S. Pannu And MS. Sushma Chowla JJ. For the Appellant : Mr. Sunil Pathak For the Respondent : Mr. B. C. Malakar ORDER Per G. S. Pannu, AM The captioned appeals relate to two connected assessees involving certain common issues, therefore they have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. 2. ITA No.2060/PN/2013 in the case of Phadnis Clinic Pvt. Ltd. relating to assessment .....

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ll and void. 2] The learned CIT(A) erred in disallowing the expenses of ₹ 50,10,056/- claimed on account of depreciation, repairs and maintenance, interest on loan and electricity charges in respect of the property Shubhalaxmi . 3] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal. 4. Before we proceed to adjudicate the specific Grounds of Appeal raised, it would be appropriate to refer to the background of the dispute. The captioned assessees com .....

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the captioned assessee company i.e. Phadnis Clinic Pvt. Ltd.. As a consequence of the aforesaid, assessments in the hands of the individual Director has been made u/s 153A r.s.w. 143(3) of the Act whereas in the case of assessee company, Phadnis Clinic Pvt. Ltd. assessments have been made u/s 153C r.w.s. 143(3) of the Act for the captioned assessment years. 5. In this background, the first issue raised before us is by way of Ground of Appeal No.1 wherein it is contended that the assessment made .....

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ct has been wrongly invoked. The Ld. Representative pointed out that on the basis of search on the individual Directors, the information or documents found can at best be said to be pertaining to assessee company s claim for depreciation and expenses relating to a residential building named Shubhalaxmi . It was submitted that such information cannot be said to be incriminating or unearthed due to search because the said claim was already made in the returns of income filed by the assessee compan .....

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tified. 7. We have carefully considered the aforesaid aspect of the controversy. The stand of the assessee is that the additions/disallowances with respect to the deprecation/expenses relating to the residential property, Shubhalaxmi has been made by the Assessing Officer in the impugned assessments on the basis of an information and material already on record and not on the basis of any incriminating evidence found during the course of search. It has also been pointed out that as regards the sp .....

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td. (supra) has made the following observations in the context of section 153C of the Act :- There is no requirement in section 153C(1) that the Assessing Officer should also be satisfied that such valuable articles or books of account or documents belonging to the other person must be shown to conclusively reflect or disclose any undisclosed income. 9. If the facts of the present case are examined in the light of the aforesaid observations of the Hon ble Delhi High Court, it would be noticed th .....

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on 153C(1) of the Act that the Assessing Officer should also be satisfied that such documents found on the person searched must also be shown to reflect conclusively any undisclosed income of the other person. In this view of the matter, in our view, the CIT(A) made no error in dismissing assessee s plea challenging the validity of assessment u/s 153C r.w.s. 143(3) of the Act. The said decision of the CIT(A) is hereby affirmed and accordingly, assessee fails on Ground of Appeal No.1. 10. In so f .....

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ty was purchased by its Directors in their individual names. 11. In brief, the relevant facts and circumstances leading to the aforesaid dispute can be summarized as follows. The appellant is a Private Limited Company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of running a Gynaecology and Infertility Clinic/Hospital. Two of its Directors, namely, Dr. Avinash R. Phadnis and Dr. (Mrs.) Amita Avinash Phadnis are associated with the compa .....

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s.30,79,558/- (iii) ICICI Bank Home Loan Rs.2,08,00,000/- TOTAL Rs.2,60,09,920/- 12. The loan from ICICI Bank was raised by the Director, Dr. Avinash R. Phadnis in his individual capacity. Once the property was acquired by the two Directors in their individual names, it was transferred/incorporated into the account books of the assessee company and taken as a part of its assets through a journal book entry. Simultaneously, the personal funds put into the purchase of property by the two Directors .....

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rred by the assessee company and claimed as an expenditure in its Profit & Loss Account. The interest paid on loan from ICICI Bank home-loan was also claimed as an expenditure in the Profit & Loss Account. In the return of income, assessee also claimed depreciation on the cost of the building on the ground that the building was owned and put to use for its business. 13. The Assessing Officer required the assessee to justify its claim of depreciation and other related expenditure on the g .....

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ssessee company prior to the purchase of property as well as the subsequent efforts of the Directors vis-à-vis the assessee company showed that the intention was always to ensure that assessee alone was the beneficiary of the property. It has been explained before us that the reason for initiating the purchase of the new premises was to accommodate the growing business of the hospital and also to ensure that Dr. Avinash R. Phadnis and his family stayed in the vicinity of the hospital so t .....

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g specialized infertility treatment and running a maternity hospital wherein emergencies are frequent and therefore it was a crucial business necessity that the Dr. Avinash R. Phadnis be accommodated in such a manner that he is available for emergencies round the clock. The Ld. Representative pointed out that the new building purchased was exactly opposite the hospital premises and the purchase was necessitated for the aforesaid reasons. 14. It was also explained that the title of the property w .....

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he Board of Directors of the assessee company, copies of which have also been placed in the Paper Book filed before us. 15. It was explained that as soon as the loan of ₹ 208 lakhs was raised by Dr. Avinash R. Phadnis from the bank, the liability of the same was transferred to the books of the assessee company by way of a journal entry. The repayment of the principal amount of the loan as well as interest is being made by the assessee company by way of reimbursement to Dr. Avinash R. Phadn .....

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l premises itself. It was also pointed out that apart from the being used as a residence for Dr. Avinash R. Phadnis and his family, property is being used for hospital business also, for instance waiting rooms for the patients, examination room for patients, rest room for staff/doctors in the night, place for the meeting of doctors, etc.. It was pointed out that almost 50% of the area in the new property was being directly used for the hospital business on account of the aforesaid activities. Al .....

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individual name of the Director. In the course of the hearing, the Ld. Representative has also relied upon the following decisions in order to support the plea that that depreciation is allowable in the hands of the assessee :- (i) Rohan Builders (India) Pvt. Ltd. vs. ACIT (ITA No.813/PN/2004 dated 10.03.2007; (ii) ACIT vs. Choice Trading Corporation Ltd., 90 ITD 1 (Coch.); (iii) Gowersons Publishers (P) Ltd. vs. CIT, 240 ITR 191 (Del.); and, (iv) CIT vs. Fazilka Dabwali TPT Co. Pvt. Ltd., 270 .....

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zed that in the present case the property has indeed being purchased by the individual Directors in their own name and by arranging funds in their individual capacity and that the property has also been transferred in their individual names. The title of the property is being held by the two individual Directors and it could not be said that assessee had purchased the property at any stage. According to the Ld. Departmental Representative, an immovable property cannot be transferred otherwise th .....

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tion on the cost of the prescribed assets which are owned by the assessee and used for the purposes of business or profession. It is well understood that in order to claim the allowance for depreciation with respect to an asset, assessee is not only required to put it to use for the purposes of its business but also should be its owner. In the present case, the building in question named, Shubhalaxmi consists of 14 apartments which have been acquired by the two Directors of the assessee company .....

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count of their own funds deployed for buying the property as also the amount of ICICI Bank home-loan raised by one of the Directors to acquire the property. The moot question is as to whether such an arrangement entitles the assessee to be understood as an owner of the property qua the provisions of section 32(1) of the Act. 19. In this context, it is gainful to refer to the judgement of the Hon ble Supreme Court in the case of Mysore Minerals Ltd. vs. CIT, (1999) 239 ITR 11 775 (SC). As per the .....

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(P) Ltd., (1997) 226 ITR 625 (SC) and observed that assistance can be taken from the law laid down in the aforesaid case for finding out the meaning of the term owned as occurring in section 32(1) of the Act. It was held by the Hon ble Supreme Court :- In our opinion, the term "owned" as occurring in section 32(1) of the Income tax Act, 1961, must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable ot .....

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ight uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of laws such as the Transfer of Property Act and the Registration Act, etc., but nevertheless is entitled to hold the property to the exclusion of all others. 20. The aforesaid discussion by the Hon ble Supreme Court shows that a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, Registr .....

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rs . In the background of the said legal position, now we may examine the facts in the present case so as to determine whether assessee can be understood as an owner for the purposes of section 32(1) of the Act. 21. No doubt, in the present case, the formal deed of title of the property is not executed and registered in the name of assessee company. The moot question is as to whether assessee can be said to have acquired possession over the property in its own right and is using it for the purpo .....

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Directors, which is supported by the resolutions of the Board of Directors. The individual Directors have acquired the property in their names and the transfer of the property into the account books of the assessee company is merely by way of a book entry supported by the resolution of the Board of Directors. Such arrangement ostensibly does not invest the assessee with the dominion over the property to the exclusion of all others. Therefore, in the light of the legal position laid down by the H .....

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hased in the name of the individual Directors but were shown as assets of the assessee company. The Tribunal allowed the claim for depreciation on such vehicles although the registration of the vehicle stood in the name of the individual Directors. The Tribunal found that the assessee company had invested the initial amount on purchase of car and the loan was also repaid by the assessee company. The Tribunal also found that the assessee had stated before the RTO that the car actually belonged to .....

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to the exclusion of others. Whereas in the present case the factual findings are to the contrary and moreover the case before us relates to an immovable property and not a movable property being considered by the Tribunal in the case of Rohan Builders (India) Pvt. Ltd. (supra). Therefore, the ratio of the said decision is not applicable in the present case. 23. On the same analogy the decision of the Cochin Bench of the Tribunal in the case of Choice Trading Corporation Ltd. (supra) relied upon .....

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he assessee on a building was denied on the ground that the formal sale deed was not executed in favour of the assessee. The Hon ble High Court found it fit to allow the claim of depreciation by noticing that assessee company had taken over the building from a firm along with other assets and it was reflected in the Balance Sheet. The assessee had paid full price and was using the asset for its own business. The Hon ble High Court found that for reason of some restrictions which were applicable .....

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ing than the case before us. In the case before the Hon ble Delhi High Court, only a delay in the execution of a formal sale deed in the property in favour of the assessee was the stumbling block for the claim of depreciation. Whereas in the present case, there is no such situation and rather it is a case where there is no scope for argument that a registered document of title is liable to be executed in favour of the assessee. Thus, the decision in the case of Gowersons Publishers (P) Ltd. (sup .....

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arious expenses, viz. repairs & maintenance, interest on loan and electricity charges incurred in relation to the property Shubhalaxmi . The details of such expenses are as under :- Interest on loan - Rs.10,27,165/- Repairs & Maintenance - Rs.13,60,329/- Electricity Charges - Rs.20,970/- 28. In this context, the Assessing Officer noted that the property in question was not being used for direct business operations of the assessee and therefore such expenditure cannot be allowed as deduct .....

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r the company s business purposes as residence of Dr. Avinash Phadnism medical consultant on whom the business of the assessee depends as well as for other business purposes. It was pointed out that on various occasions Dr. Avinash R. Phadnis examined the patients at his residence also the administrative matters relating to the hospital were also dealt with at the residence on many occasions. In any case, the Ld. Representative pointed out that it cannot be denied that a portion of the property .....

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not an allowable deduction. 31. We have carefully considered the rival submissions. In so far as the allowability of expenses in relation to the impugned property is concerned, the insistence on its ownership being in the name of the assessee is not justified. What is required to be examined is as to whether the expenses in question have been incurred on the premises so as to facilitate carrying on of assessee s business. The appellant company has been consistently asserting before the Assessing .....

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ice if it is to be understood that 50% of the expenses relating to repair, maintenance, electricity bills, municipal taxes and water expenses incurred on property are relatable to the carrying on of the hospital business of the assessee. Thus, we set-aside the order of the CIT(A) and direct the Assessing Officer to allow only 50% of the expenses on electricity bills, repair & maintenance, municipal taxes and water expenses, and disallow the balance. Thus, in so far as the Ground of Appeal No .....

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-mutandis in the other aforestated appeals also. 34. In the result, the appeals of the assessee for assessment years 2001- 02 and 2003-04 to 2007-08 in the case of Phadnis Clinic Pvt. Ltd. are partly allowed. 35. Now, we take-up the appeals of the Revenue which relate to assessment year 2001-02, 2004-05 to 2006-07 vide ITA No.2013 to 2016/PN/2013 respectively in the case of M/s Phadnis Clinic Pvt. Ltd.. In all these appeals, a common issue has been raised by the Revenue arising out of the action .....

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Expenses Claimed u/s 35(1)(iv) 2001-02 58,26,895 2004-05 31,50,000 2005-06 5,33,894 2006-07 21,50,000 37. The Assessing Officer noted from the details of expenditure that it mostly related to cost of machineries and other accessories. The Assessing Officer further observed that the machinery in question appeared to be diagnostic equipment used by the assessee for the purposes of its business. The Assessing Officer show-caused the assessee to justify allowance of the claim u/s 35(1)(iv) of the A .....

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to whether such activity constituted scientific research or not? As at the time of completion of the assessment a response from the Board was awaited, the Assessing Officer passed an assessment order denying the benefit of exemption u/s 35(1)(iv) in the assessment years of 2001-02, 2004-05, 2005-06 and 2006-07 amounting to ₹ 58,26,895/-, ₹ 31,50,000/-, ₹ 5,33,894/- and ₹ 21,50,000/- respectively. 38. Assessee carried the matter in appeal before the CIT(A), who has affirme .....

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ority, the Board being the prescribed authority in terms of section 35(3) of the Act, the Assessing Officer could not have disallowed the expenditure. In coming to such conclusion, the CIT(A) followed the judgement of the Hon ble Gujarat High Court in the case of DCIT vs. Mastek Ltd., (2012) 25 taxmann.com 133 (Guj.). In this context, the following discussion made by the CIT(A) in the context of assessment year 2001-02 is relevant :- 6.7 In the present case, the AO no doubt referred the matter t .....

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learned AO. As such, since no adverse decision has evidently been given by the prescribed authority holding the activity carried on by the appellant not to be of the nature of scientific research', and such a decision being a mandatory requirement as held by the Hon. Gujarat High Court in the afore-cited decision, the addition of ₹ 58,26,895/- made by the learned AO disallowing the claim of deduction under section 35(1)(iv) on account of capital expenditure on scientific research rela .....

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any question arises u/s 35 of the Act as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to - (a) the Central 20 Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1), or (b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a) above. Section 35(3) further pr .....

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tion was required to be referred to the prescribed authority by the Board. It is emerging from the orders of the authorities below that the Assessing Officer before completion of assessment referred the matter to the Board and no reply had been received from the Board before completion of assessment or even when the CIT(A) passed the impugned order. Even in the course of hearing before us, when it was expressly put to the Ld. Departmental Representative, no assertion has been made to say that an .....

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e made by the Assessing Officer. The Hon ble Gujarat High Court noted that in the absence of the Assessing Officer having obtained any adverse decision from the prescribed authority, there was no justification in rejecting assessee s claim for deduction of expenditure incurred for scientific research. As a consequence of the aforesaid discussion, in our view, the CIT(A) was justified in setting-aside the action of the Assessing Officer disallowing the claim of deduction u/s 35(1)(iv) of the Act .....

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mmissioner of Income Tax (Appeals)-Central, Pune dated 27.09.2013 which, in turn, has arisen from the respective orders dated 31.12.2008 passed by the Assessing Officer u/s 143(3) r.w.s. 153A of the Act. 43. Firstly, we may take-up the appeal for assessment year 2003-04 vide ITA No.2192/PN/2013 wherein the Grounds of Appeal raised by the assessee, read as under :- 1. The learned CIT(A) was not justified in holding that the assessment u/s 143(3) r.w.s. 153A was a valid assessment. 1.1) The learne .....

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arch operations. But still search operation was carried out and assessment was made u.s. 153A even though no hidden income/ wealth or undisclosed sources of income was found 2. The learned CIT(A) erred in holding that the immovable property Shubhalaxmi" belongs to Dr. Avinash Phadnis and Dr Mrs. Amita Phadnis and not to Phadnis Clinic Pvt. Ltd. when the funds for its acquisition, renovation, maintenance are being borne by the company i.e. Phadnis Clinic Pvt. Ltd.. Similarly, the company is .....

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o Dr. Avinash Phadnis for his self-occupied area, therefore deduction of balance interest calculated on the basis of proportionate area used by him for his profession be allowed at 100%. b Depreciation at appropriates rates be allowed for area used for profession by Dr. Avinash Phadnis and expenditure for maintaining the property be also allowed separately, i.e. 'repairs and maintenance, taxes, electricity, etc. 3. The appellant requests for admission of additional evidences, it any, require .....

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undisclosed sources of income. The said plea of the assessee is somewhat similar to what has been raised in the case of M/s Phadnis Clinic Pvt. Ltd. in ITA No.2060/PN/2013 dealt with by us in earlier paras. Though, in the case of M/s Phadnis Clinic Pvt. Ltd. (supra) the issue was raised in the context of the Assessing Officer having invoked section 153C r.w.s. 143(3) of the Act whereas in the present case, the Assessing Officer has invoked section 153A r.w.s. 143(3) of the Act. Ostensibly, a sea .....

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es in question have been made on the basis of the documents found in the course of search. 46. In the context of the above, we find that the CIT(A) noted that the factum of seizure of documents during the course of search is undeniable. As per the CIT(A), once a search/requisition is made u/s 132(1) of the Act, the Assessing Officer is bound to issue notice u/s 153A to the assessee calling for the return of income for each of assessment year falling within six immediately assessment years releva .....

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on with regard to scheme of assessment in search cases to be completed under section 153A read with section 143(3). The appellant has relied upon a series of case laws. It is seen, however, that the decisions cited by the appellant are over a year old. In a more recent decision (dated 20th March, 2013) delivered by the ITAT (Mumbai) in the case of Scope (P) Ltd. v DCIT it has been held that [i] once a search/requisition is made u/s 132 of the IT Act, the AO is bound to issue notice u/s 153A to t .....

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tion of search, the case would fall under the category of 'reassessment' u/s 153A; [v] once the AO has issued notice u/s 153A inviting the return of income, he is duty-bound to proceed with the reassessment proceedings; [vi] where there is no incriminating material found during the course of search relating to the assesses for the AY under consideration, the question whether the AO can make an addition in the reassessment proceedings u/s 153A depends on the nature of addition and the fac .....

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affirm the order of the CIT(A) on this aspect and accordingly assessee fails in Ground of Appeal No.1. 48. In so far as the Ground of Appeal No.2 is concerned, it arises from the action of the income-tax authorities in holding that the property at Shubhalaxmi belongs to the assessee individual and not to company, M/s Phadnis Clinic Pvt. Ltd.. Similar aspect of the matter has already been considered by us in the appeal relating to M/s Phadnis Clinic Pvt. Ltd. vide ITA No.2060/PN/2013 in the earl .....

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ssessee that if the property M/s Shubhalaxmi is held to be belonging to the assessee then appropriate relief as stated in the item (a) and (b) of Ground of Appeal No.2.1 be allowed in the hands of the assessee. The aforesaid aspect of the matter, in our view, deserves to be appropriately considered in the hands of the assessee individual. 50. In this context, the relevant facts are that consequent to holding that the property Shubhalaxmi was owned by the individual Directors, Dr. Avinash Ramchan .....

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fficer but proportionate interest relatable to the portion of the property which is stated to be used for business purposes be allowed as deduction. It was also contended before the CIT(A) that the depreciation on the cost of the area of the property used for the purposes of business should also be allowed. This aspect of the matter have been rejected by the CIT(A) on the ground that assessee could not establish that the building in question was being partly used for the purposes of business or .....

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Assessing Officer is directed to re-visit the aforesaid pleas of the assessee afresh and allow appropriate relief as per law. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard before passing an order on this aspect in accordance with law. 52. Thus, in so far as the Ground of Appeal No.2.1 is concerned, assessee succeeds for statistical purposes. 53. In the result, appeal of the assessee for assessment year 2003-04 is partly allowed. 54. The .....

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tue of the agreement, had divested himself of the ownership rights of the machineries and other expenditure on restructuring of the IVF Lab at the hospital, and had given the same to the hospital. The expenditure, the appellant submits, was incurred wholly and exclusively for the furtherance/continuation of the business and did not create any capital asset and should be consequently allowable as business expenditure u/s 37. 55. In this context, brief facts are that in assessment year 2005-06, as .....

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xplained that assessee was a well-known Gynecologist in India practicing since many years and was a Director of Phadnis Clinic Pvt. Ltd.. He was looking after all the major activities of the hospital of Phandis Clinic Pvt. Ltd.. Apart therefrom, assessee was a visiting faculty at Jahangir hospital, which was a major hospital in Pune. For the purposes of maintaining close relationship with a large hospital and from a professional view point, assessee made an agreement with Jahangir Hospital which .....

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expand his business and therefore, it was to be allowed as a revenue expenditure. The Assessing Officer has rejected the plea of the assessee by making the following discussion in the assessment order :- 5.2 The submissions of the assessee have been considered. In this case, it is clear that the assessee incurred the expenditure to derive a long term benefit. It is an admitted fact that the assessee expected his own business to improve in the long run because of his association with Jahangir Ho .....

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re us. 58. The Ld. Representative for the assessee has vehemently canvassed that the assessee incurred such expenditure on business considerations. According to the Ld. Representative, the machinery in question was donated to Jahangir Hospital in terms of the agreement and that such expenditure provided assessee with prospects of expanding his business on account of his association with Jahangir Hospital. Therefore, such an expenditure is to be viewed as having been incurred for the purposes of .....

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