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2015 (6) TMI 722 - ITAT MUMBAI

2015 (6) TMI 722 - ITAT MUMBAI - TMI - Treatment to Agricultural income - CIT(A) held that the expenditure incurred for earning agricultural income has to be set off against the income from agricultural operations and the resultant loss from agricultural operations was treated as the net disallowance u/s 14A - Held that:- The finding recorded by the ld. CIT(A) has not been controverted by the ld. D.R. by bringing any positive material on record, we, therefore, find no reason to interfere with th .....

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nd attributable to earning of exempt income.

Revenue ground with regard to additional evidence accepted by the ld. CIT(A) without giving opportunity to the A.O is not acceptable as the A.O. has not given sufficient opportunity to the assessee, insofar as the documents were asked at the fag end of the assessment proceedings, therefore, the assessee could not furnish the same before the A.O. These documents were filed before the ld. CIT(A) who has sent all these documents to the A.O. fo .....

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42 crores which were genuine and there was no contravention of TDS provisions while making payment for such expenses, we do not find any infirmity in the order of ld. CIT(A). We accordingly do not find any reason to interfere with the finding of ld. CIT(A) deleting the disallowance of expenses incurred on ship management.- Decided against revenue.

Disallowance of losses from activity of horse breeding and owning and maintaining race horses - CIT(A) partly allowed the assessee’s claim .....

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that an amount of ₹ 1.94 crores is recovered on account of livery expenses from other horse owners, who have utilized the stables and other services of the stud farm of the assessee. After considering the remand report and corroborative evidences filed before him, the ld. CIT(A) reached to the conclusion that only the business loss in respect of horse breeding activity amounting to ₹ 1,89,92,554/- was liable to be set off against business income whereas loss of ₹ 1,18,63,894/- .....

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paid in respect of land used for agricultural income which is exempt. Since the expenditure was incurred for earning exempt income, the ld. CIT(A) has correctly disallowed the claim u/s 14A of the Act. Accordingly, the additional ground raised by the assessee is dismissed. - I .T.A. Nos. 2151/Mum/2012,I .T.A. Nos. 2767/Mum/2012,I .T.A. Nos. 2152/Mum/2012,I .T.A. Nos. 2766/Mum/2012 - Dated:- 11-6-2015 - SHRI R.C. SHARMA and Ms. SUSHMA CHOWLA, JJ. For the Petitioner: Shri S.U. Pathak For the Resp .....

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e sake of convenience. 3. First, we shall take up the appeal for A.Y. 2007-08. 4. Rival contentions have been heard and record perused. Facts of the case in brief are that the assessee company is engaged in the business of ship management. It is also involved in the activity of horse breeding and owning and maintaining Race Horses. In the return of income for A.Y. 2007-08, the assessee claimed agricultural income of ₹ 8,01,175/- and lease rent on agricultural land at ₹ 26,59,140/-. D .....

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ultural income and expenditure were also not furnished. Therefore, A.O issued a show cause notice dated 24.12.2009 to the assessee wherein it was stated that 7/12 extracts did not indicate any agriculture activities that were carried on and the yield of grass disclosed in the 7/12 records is attributable to the natural activity. It was further stated that since the details of agricultural income and expenditure along with the vouchers were not furnished to substantiate the claim of agricultural .....

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.2009 has stated that the assessee company owns a large extent of land and has always used the lands to raise agricultural products, which are suitable for consumption by the horses and by the staff. Any surpluses were sold to persons in the nearby localities not with an intention of earning income but to avoid wastage of perishable goods. During the year under consideration, the company took agricultural land on lease from the directors and paid lease rentals as per the lease deeds. It is furth .....

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iod F.Y.2006-07. The A.O. has taken a view in the assessment that since the grass grows naturally, it is not an agricultural produce, According to the AO, the claim of the assessee that certain grams, vegetables etc. produced are not supported by any evidence in the form of 7/12 extracts. The A.O took the view that there was no agricultural activity carried on the lands taken on lease and, therefore, the income claimed to have been earned from agricultural activities has to be treated as Income .....

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towards agricultural operations amounting to ₹ 26,59,1401- but has also brought to tax an amount of ₹ 8,O 1, 175/- under the head Other sources. 6. Before the ld. CIT(A), the assessee filed written submission along with evidences pertaining to the agricultural activities. The ld. CITA) sent all these documents to the A.O. for his remand report. The ld. CIT(A) after considering the assessee s submission as well as the remand report held that the expenditure incurred for earning agricu .....

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the appellant, the remand report submitted by the A.O and the rejoinder filed by the appellant. It is a fact that the 7/12 extracts are not so meticulously maintained by the State Revenue authorities to accurately reflects the agricultural operations and the details of crops grown. Therefore, it evidences furnished by the appellant also cannot be rejected on the ground that cannot be treated as a clinching evidence to decide the issue. The corroborative evidences furnished by the appellant also .....

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he paper book provided the details of the sale of agricultural produce which were part of the books of accounts maintained. It is seen from the details made available in the paper book that French Beans, Cabbage, Cauliflowers, Carrot, Cucumber, Ladies Finger, Mango are sold during the relevant previous year which constituted the agricultural income that was credited to the Profit & Loss Account under the head Other Income. The lease agreements entered into with the directors/ land owners of .....

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lease. But no such factual verification was carried out by the A.O. Therefore, on the basis of the available materials, it has to be concluded that agricultural operations were carried out on the lands taken on lease. Accordingly, the income stated to have been earned from agriculture cannot be brought to tax as the Income under the head Other Sources. A.O is hereby directed to delete the addition of ₹ 8,01,175/-. The other connected issue is the allowability of lease rents paid to the Dir .....

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off against the income from agricultural operations. Consequently, the expenditure amounting to ₹ 26,59,1401- has to be set off against the income of ₹ 8,01,175/- and the resultant loss from agricultural operations amounting to Rs.l8,57,965/- has to be treated as the net disallowance u/s. 14A of the Act. 7. Against the above order of the ld. CIT(A), both the assessee and Revenue are in further appeal before us. 8. Rival contentions have been considered and record perused. We found th .....

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stud farm at Nanoli near Talegaon, Pune. It has its own land and it has also taken about 133 acres of land on rent from Dhunjibhoy Family. The assessee uses the land for stud farm and also for agricultural operations. It has about 4 lakhs trees of Gauva, Jambhun, Mango, Coconut, etc. etc. on the land and it also grows paddock (dhoop) grass for the horses, rice, vegetables on this land. It sells some agricultural produce like vegetables and fruits in the market while part of this produce is utili .....

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ontaneous growth and hence, it is an agricultural activity. In the following cases, it has been held that if the grass is planted, it is an agricultural activity. a) ITO vs. Kanchanlal Mancha Ram (1988) 32 TTJ (Ahd.)(TM) 38 b) ACIT vs. PZ Estates (P) Ltd. (2005) 2 SOT 563 (Del). The ld. CIT(A) after considering the corroborative evidence filed on record, observed that the assessee had sold French Beans, Cabbage, Cauliflowers, Carrot, Cucumber, Ladies Finger, Mango during the relevant previous ye .....

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olding that the assessee had earned agricultural income of ₹ 8,01,175/-. With regard to lease rent expenditure of ₹ 26,59,140/- incurred by the assessee, the ld. CIT(A) has disallowed the same on the plea that the expenditure was incurred for earning exempt income. We also find that the lease rent was paid to the directors of the assessee company for leasing the lands to the assessee which deserves to be disallowed u/s 14A of the Act to the extend attributable to earning of exempt in .....

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ort. The A.O. has examined all these documents and sends his remand report. Accordingly, there is no violation of Rule 46A insofar as the A.O. has been given due opportunity by the ld. CIT(A) by examining the documents and give his report. After considering the remand report sent by the A.O., the ld. CIT(A) has decided the issue. Thus there is no contravention of Rule 46A, we, therefore, do not find any merit in the ground taken by the Revenue. 10. In view of the above, we dismiss the grounds ta .....

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O. that the assessee had not proved the expenditure amounting to ₹ 60,42,28,258/-as laid out for the purpose of earning the ship management business income. Further, it was stated in the show cause notice dated 24.12.2009 that the expenditure of ₹ 60,42,28,258/- is liable to be disallowed U/S 40(a)(ia) since the TDS provisions were not complied with. In response to the show cause notice, the assessee furnished a reply wherein it was stated that it had been consistently following the .....

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such as 192 - Salary, 194 - Interest, 194C-Contracts, 194 H - Commission I Brokerage, 194 I - Rent and 194J - Professional or Technical services have been complied with and the TDS returns have also been filed. It was further submitted that copies of certificates issued by M/s Bansi S. Mehta & Co., Chartered Accountants, certifying that the company spent I incurred operating expenses relating to 15 ships amounting to ₹ 37,67,12,168/- during April, 2006 to March, 2007 on behalf of M/s. .....

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a stand in the assessment order that the assessee did not comply with the TDS provisions and, therefore, the said expenditure is also disallowed u/s 40(a)(ia) of the Act. 12. The written submissions and the paper book dated 05.02.2010, submitted during the appeal proceedings, was forwarded to the A.O and a remand report was called for. A.O in the remand report dated 07.05.2010 has firstly objected to the additional evidences submitted by the appellant during the appeal proceedings on the ground .....

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ite very few days of time given by the A.O., the available details were furnished. Therefore, the appellant contended that the objections raised by the A.O for admitting the details/additional evidences required with reference to the huge disallowances made are not in accordance with the principles of natural justice. By the impugned order, the ld. CIT(A) deleted the disallowance after observing as under:- 15. On a careful examination of the facts of the case, the stand of the A.O and the conten .....

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vailable at its disposal. Since adequate opportunity was not provided to the appellant, it is only fair and just that the additional evidences and relevant details submitted during the appeal proceedings are admitted in terms of Rule 46A of the LT. Rules, 1962. Therefore, the objections raised by the A.O in the remand report were liable to be overruled and the additional evidences and the relevant details furnished by the appellant during the appeal proceedings were required to be taken on recor .....

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the expenses amounting to ₹ 60.42 crores. 17. Thereafter, the appellant by letter dated 04th January, 2011 submitted that the assessment proceedings for the A.Y.2008-09 were concluded and the Assessing Officer has examined the genuineness of expenses incurred and the compliance with the TDS provisions of the similar expenditure incurred in the relevant previous year for the A .. Y.2008-09. On that basis, it was submitted that since the A. a had denied a proper opportunity to the assessee .....

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llowance made by the' A.O on an identical issue in the A.Y.2007-08, but not made in the A.Y.2008-09 (entire expenditure was allowed) and the inconclusiveness of the first remand report, A.O was, once again, directed by letter dated 14.02.2011 to verify the written submissions and the evidences filed by the appellant in support of the allowability of the expenses of ₹ 60.42 crores and submit a remand report. A.O, in the remand report, has once again raised same objections against the ad .....

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xpayer. Assessing Officer has completely disregarded the principles of natural justice while adopting such a course of action, which has resulted in a huge tax demand. Instead of conceding the fact of inadequate opportunities given to the assessee during the assessment proceedings, the Assessing Officer has repeated his objections against the admission of the basic information that is required to decide the issues on merits. The requirement of giving proper opportunity by the Assessing Officer t .....

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ar disallowance made in the A.Y.2007-08, A.O, in the remand report dated 21.02.2011 has, once again, objected to the admission of the required information / evidences. Such an approach is found to be inconsistent with the A.O's own findings since on an identical issue entire expenditure has been allowed in the assessment order for the A.Y.2008-09. Therefore, the objections raised by the A.O are found to be in contravention of Rule 46A of the Income Tax Rules and, therefore, unwarranted. In t .....

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able TDS provisions in respect of the expenditure amounting to ₹ 60,42,28,258/-. While examining the details and evidences furnished by the appellant during the remand proceedings, A.O has neither raised any issues nor brought any other material on record to doubt the genuineness of the expenses incurred towards the ship management activities. The explanation of the appellant that the ship management fee credited to the P&L a/c was arrived at, after netting off the expenses, is not fou .....

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y, the entire disallowance of ₹ 60,42,28,258/- is hereby deleted. 13. Revenue is in appeal before us against the above disallowance. 14. We have considered the rival contentions and found from record that the A.O. has disallowed an expenditure of ₹ 60.42 crores incurred on ship management fees of ₹ 71.03 crores earned by it. The assessee is in the business of managing the ships. It has agreements for management of the ships with Great Eastern Shipping Co. and Five Star Bulk Car .....

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uring remand proceedings, the A.O. examined with regard to the expenditure of ₹ 60.42 crores incurred on earning the ship management business income and also the TDS compliance thereon. In the remand report, the A.O. categorically mentioned that the assessee had deducted and paid TDS and complied with the TDS provisions in respect of expenditure amounting to ₹ 60.42crores. Before the CIT(A), the assessee submitted the entire details of the expenses, the details of TDS deducted on var .....

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d that the assessee has deducted the TDS wherever applicable. It is to be noted that the disallowance u/s 40(a)(ia) can be made only when tax is deductible as per law on the payment and it is not deducted. Reliance is placed on 116 ITD 328] ITAT Gauhati Bench decision in the case of George Williamson Ltd. and Delhi H.C. decision in [323 ITR 130] in the case of Van Oord ACZ India Ltd. Thus, the A.O. on full verification did not find any discrepancy and he has clearly stated in the remand report t .....

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incurred towards the ship management activities. The ld. CIT(A) has also observed that the ship management fees has arrived at after netting off the expenses is not found to be incorrect or inconsistent with the accounting policies of the assessee company. We found that the ITAT in assessee s own case for A.Y. 1989-90 vide order dated 01-09-2003 has approved the accounting policy followed by the assessee company. 15. In view of the above discussion and considering the remand report wherein A.O. .....

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llowed losses from activity of horse breeding and owning and maintaining race horses amounting to ₹ 3,08,56,448/-. In this respect, the A.O has examined the activities undertaken by the assessee. It was observed that the assessee has been carrying on the business of (i) Ship Management and (ii) Owning and maintaining horse breeding farm cum-race horses. It is stated by the A.O, in the assessment order, that the total receipts from the activities of owning and maintaining horse breeding far .....

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,05,82,087/-. Accordingly, in the show cause notice, the total expenditure was arrived at ₹ 7,50,25,131/- (5,44,43,044 + 2,05,82,087). Further, the A.O examined the common expenditure debited in the P&L a/c, which included Directors' remuneration of ₹ 1,12,20,0001- and pointed out that the said expenditure has to be bifurcated between the activities of ship management and owning & maintaining race horses. By considering all the above expenses, the Assessing Officer arrive .....

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d a detailed reply and the same is fully reproduced in para 5.3 of the assessment order. The salient features of the reply of the assessee are that the assessee is involved in the activity of livestock breeding and the said activity is not hit by Section 74A(3) of the Act; the said provisions are applicable only to a case of an assessee who is the owner of horses maintained for running in horse races; there was no iota of material evidence which can lead to the inference that the assessee was ma .....

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rses which is a human-directed process involving selective breeding of animals and aided by planned mating for achieving the desired characteristics in the progeny. The horse breeding activity involved horse breeding / reproduction in the horses by selective breeding, employment of skilled workers, management of stables, engaging supervisors and managers to run the stud farm operations. etc. Further modem breeding management & technologies increase the rate of conception, a healthy pregnancy .....

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is borne, it is maintained at the farm for two years and is sold by a private sale or through auctions conducted by the Turf Club Authorities; the horse breeding business requires services of expert paternity doctors, expert trainers at the breeding farm; at the farm the broodmares belonging to other owners are also maintained for which the assessee charges a fixed monthly amount, which is a business income of the Farm. 18. The assessee has taken a stand that horse breeding is an industry not on .....

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ely Director Animal Husbandary and Vaternary Services of State Government. It was also submitted that the appellant's farm was first India's ISO certified farm. It is further submitted that the objective of identification of high quality horses can only be achieved if selected horses are put to real ground test by way of races. Accordingly, some of the two year olds are selected and retained for running them in races and those who perform are utilized in breeding business because its pro .....

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horse before buying. Therefore, it is necessary to participate in various races conducted by the Turf Clubs at various racing centres and expenses are incurred on entry fee, registration etc. which necessarily have to be incurred through Turf Clubs. It is also stated by the assessee in the reply that the stake money won by the horses also constitutes an income of this business. Thus, the business is only of horse breeding and placing some of the horses occasionally for races is incidental to th .....

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satisfied; it was requested that technical persons would make further submissions and submit further evidences to explain the horse breeding activity. 19. By the impugned order, the ld. CIT(A) partly allowed the assessee s claim after observing as under:- The facts of the case, the stand taken by the A.O in the assessment order and the contentions of the appellant during the assessment proceedings as well as during the appeal proceedings have been carefully considered. Further, the contentions .....

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and report that the assessee has not provided the 'racing' and 'breeding' business incomes separately in the return of income or during the scrutiny proceedings. On a perusal of the assessment order, it is seen that appellant's written submission filed before the A.O which is made a part of the assessment order itself (also reproduced in page nos.24 to 31 supra) indicates that these issues were also raised by the appellant during the assessment proceedings itself. In para 2.7 .....

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s, there is no warrant for considering other expenses on proportionate basis etc. and only expenditure incurred "wholly and exclusively for the purpose of maintaining race horses" can be considered. The other expenses are for breeding and covering and have not been incurred for races. For example, Sponsorship expenses and Legal & Professional Fees as stated in are for the business relating to advertisement of shipping business and breeding business. Most of the professionals are as .....

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es. Apart from the above, the company incurred various expenses under the head Sponsorship Expenses, Legal and Professional Fees etc. which are common expenses relating to the ship management business and breeding business of the company and such expenses had benefited the company in getting shipping business and breeding business. These expenses are directly related to the promotion of its business of ship management and breeding of livestock and hence these are legitimate expenses incurred exc .....

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o determine breakup of the incomes and expenditure pertaining to breeding activities and racing activities as two distinct activities. Instead A.O has treated both the activities as falling under section 74A(3) of the Act which deals with only the losses arising on account of owning & maintaining race horses. The remand report on this issue is a common remand report in respect of the A.Y.2007-08 and 2008-09. As verified and reported by the A.O in the remand report, the incomes & expendit .....

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on, it is apparent that the appellant has been carrying on the business of a stud farm which was commenced several years ago. There are certain distinct streams of income which are attributable to only horse breeding activities I stud farm. They are training fees, covering fees, livery expenses, sale of livestock etc. These streams of income cannot be considered as income derived from owning & maintaining the race horses. For instance, an amount of Rs.l,94,64,9201- is recovered on account of .....

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were identifiable in the books of accounts under different accounting codes. As stated by the A.O in the Remand Report, the income & expenditure breakup provided specifically for stud farm and racing was verified vis-avis the P & L Account during the remand proceedings. As stated in the remand report, the breakup submitted by the appellant for the stud farm and racing income is in consonance with the P & L Account submitted before the A.O. Therefore, the bifurcation as submitted by t .....

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ly the loss as computed by the A.O in the assessment order is allowed to be carried forward u/s.74A(3) of the Act. The factual information and the accounting data do. not support the conclusions as arrived at in the assessment order. For instance, the appellant has also highlighted the fact that only a small percentage of the total number of horses have participated in the races. It is also emphasized that horses such as Stallions and Broodmares are completely dedicated to the horse breeding act .....

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holly and exclusively for the purpose of maintaining race horses. 19.11 On a careful examination of the above contentions of the appellant, it is seen that the stand taken by the A.O in the assessment order is erroneous. On the other hand, the main grounds of appeal of the appellant that the entire activity has to be treated as horse breeding activity and racing activity being only incidental to the main activity of horse breeding activity, the same ought to be considered as a part of the busine .....

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carrying on an activity in an organized manner not only in the year in question but also in the prior years and also in the subsequent years with a profit motive is a commercial activity. Any such commercially organised activity carried on by an assessee, with a profit motive, has to be viewed as a business activity. In the case of the appellant, the horse breeding activity is nothing but a business activity. Therefore, the profits or losses arising from such an activity have to be treated as b .....

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ding activity, against the profits earned in the segment of owning & maintaining race horses - in an event there is a loss in the horse breeding activity and there is a profit in the segment of owning & maintaining race horses. Therefore, A.O is hereby directed. to allow the set off of only the business loss arrived at in respect of horse breeding activity amounting to ₹ 1,89,92,554/- against the other business income and carry forward the loss arrived at in the racing segment amou .....

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t of breeding and only 15% of its horses take part in the racing activity. Over all, it incurred a loss of ₹ 3,08,56,448/-. It has set off of this loss against the income from shipping business as per the P&L account. The A.O. held that breeding and racing activities constitute one activity u/s 74A the loss from the activity of owning and maintaining race horses cannot be set off against any other income and it can be carried forward and set off only against the income from the activit .....

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ntire loss is from breeding activity as racing activity is only incidental to the breeding activity. It was also observed that assessee submitted a columner profit and loss account of the race horses owning and maintenance activity and breeding horses owning and maintenance activity for the year ended 31st March 2007. This bifurcation was done on the basis of separate cost code and ledger accounts maintained in the books of accounts to record the receipts and expenditure in respect of race horse .....

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re loss should be disallowed for set off as it is from the racing activity while the assessee's appeal is on the issue that the entire loss should be allowed for set off. The assessee has also shown the bifurcation of its receipts from stud farm and it is to be noted that out of the total receipts of ₹ 4,75,70,112/- from this activity, stakes won in the races are amounting to ₹ 69,51,746/- only and hence, this indicates that racing income is just 15% of total income and breeding .....

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uld only be disallowed for set off against business income. Accordingly, on the basis of facts and figures, he has correctly held the loss of ₹ 1,18,63,894/- pertains to racing activity and the same is to be disallowed for set off while the balance loss of ₹ 1,89,92,554/- is from breeding activity and it is allowed to be set off against the income from ship management business as section 74A cannot be applied to the loss from breeding business. The ld. CIT(A) has recorded a categoric .....

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of composite livestock business as well as racing activity with books of account and found the same in consonance with the books of account submitted by the assessee company. After considering the remand report and corroborative evidences, the ld. CIT(A) recorded a categorical finding to the effect that it constitutes only around 15% of the gross receipt, therefore, only loss incurred thereon is liable to be disallowed u/s 74A to be set off against other income. Section 74A is not applicable for .....

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captured under two different accounting codes in respect of both the assessment years. The ld. CIT (A) also found that an amount of ₹ 1.94 crores is recovered on account of livery expenses from other horse owners, who have utilized the stables and other services of the stud farm of the assessee. After considering the remand report and corroborative evidences filed before him, the ld. CIT(A) reached to the conclusion that only the business loss in respect of horse breeding activity amounti .....

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