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TMI Blog2015 (6) TMI 722X X X X Extracts X X X X X X X X Extracts X X X X ..... tional 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. for his remand report. The A.O. has examined all these documents and sends his remand report. Accordingly, there is no violation of Rule 46A.- Decided against revenue. Disallowance u/s 40(a)(ia) - assessee did not comply with the TDS provisions - expenditure incurred on ship management fees - CIT(A) deleted the addition - Held that:- A.O. has himself certified that the assessee company has complied with the applicable TDS provisions in respect of the expenditure amounting to ₹ 60.42 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38, Mumbai for the assessment years 2007-08 2008-09 in the matter of order passed u/s 143(3) of the Income Tax Act, 1961. 2. Common grounds have been taken in both the assessment years under consideration, therefore, both the appeals were heard together and disposed of by this single consolidated order for the 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/-. During the course of assessment proceedings, A.O. has examined the agricultural income of ₹ 8,01,175/-, stated to have been earned from the land taken on lease from three directors of the assessee company to whom lease rents aggregating to ₹ 26,59,1401- was paid. The A.O has stated that 7/12 extracts of the revenue records pertaining to agricultural operations did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under 'Other Sources'. Further, it was held that the expenditure incurred towards the lease rent paid to the directors as disallowable. A.O has also taken an alternative stand to the effect that since the lease rent paid to the directors pertains to earning income, which is exempted from taxation, the expenditure in relation to earning such income cannot be allowed in view of the provisions of Section 14 A of the Act. Therefore, A.O has not only disallowed the entire expenditure claimed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O was to establish that neither the special grass nor the fruit bearing trees and vegetable crops existed in the lands taken on 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 Directors of the appellant company for leasing the lands to the appellant. In terms of Section 14A of the Act, expenditure incurred in relation to earning any exempted income is liable to be disallowed. In this case, earning of agricultural income involved expenditure of lease rents amounting to ₹ 26,59,1401- and the same is rightly disallowed. Therefore, the said disallowance is upheld in terms of Section 14A of the Act. The expenditure incurred for earning agricultural income has to be set off against the income from agricultural operations. Consequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Ladies Finger, Mango during the relevant previous year which constituted the agricultural income which was credited to the P L account under the head other income . The ld. CIT(A) also recorded a finding to the effect that 7/12 extracts reflected that mango trees, coconut trees, guava, jamun, rice, cashew nut etc. are being grown. 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 the findings recorded by the ld. CIT(A) holding 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 income. 9. The Revenue has also taken a ground with regard to additional evidence accepted by the ld. CIT(A) without giving opportunity to the A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4C-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. Great Eastern Shipping Company Limited was being furnished for the perusal of the A.O. A similar certificate certifying the expenses relating to six ships amounting to ₹ 10,31,46,275/- on behalf of M/s. Five Star Bulk Carrier Limited was submitted in response to the show cause notice dtd.24.12.2009. However, A.O disagreed with the explanations and written submissions filed during the assessment proceedings and disallowed an amount of ₹ 60,42,28,258/-. In addition, A.O also has taken 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, submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opportunity to the appellant and did not fully examine the issue of genuineness of the expenses incurred and the compliance of the TDS provisions so as to quantify and substantiate the disallowances, if any. A.O merely raised certain general observations to disregard the additional evidences and submissions furnished by the appellant in support of the allowability of 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 during the assessment proceedings for A.Y.2007-08, the required details and explanations could not be furnished, which resulted in a huge disallowance of ₹ 60.42 crores in the assessment order for A.Y.2007-08. Therefore, it was submitted that the matter may be remanded back to the A.O, once again, for verification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the light of the above and since it is a case where the appellant was not provided with adequate opportunity during the, assessment proceedings, the said objections are hereby overruled. 18. As regards the merits, A.O in the second remand report dated 21.02.2011hasexamined the details with regard to the expenditure of ₹ 60.42 crores incurred and the TDS compliances thereof. The Assessing Officer examined and has categorically certified that the appellant company has complied with the applicable 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 cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd place in the paper book has accepted that the assessee has deducted and paid the TDS wherever deductible. He has given a detailed remand report on this issue and thus, the A.O. accepted 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 that the assessee has deducted and paid TDS wherever applicable and accordingly, the ld. CIT(A) has allowed the relief. We also found that A.O. himself in all the other assts. including A.Y. 2008-09 has not made such disallowance and has accepted that the assessee has made TDS payments. The ld. CIT(A) also recorded a categorical finding after considering the remand report that the A.O. has neither raised any issues nor brought any other material on record to doubt the genuineness of the expenses incurred towa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning race horses. By considering all the above expenses, the Assessing Officer arrived at the loss attributable to the horse breeding activities and owning maintaining race horses at ₹ 3,08,56,448/~. In the said show cause notice, A.O proposed to disallow the set-off of the above expenditure of ₹ 3,08,56,448/- against the business income i.e., the income earned from ship management fee and proposed to allow carry forward of the said expenditure, in terms of subsection (3) of Section 74A of the Act. 17. In response to the show cause notice, the assessee submitted 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 maintaining horses for participating in races. The assessee has also explained the nature of the business. It is submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 progeny fetches a good price. For this purpose, the horses are trained at the farm and products have to be showcased to the potential purchasers. For this reason, a few horses are entered into the races so as to earn good reputation as a breeder and to ensure better price for the progenies produced in the stud farm of the assessee. It is further stated that the breeders do not participate in the horse races but their horses run when there is a prospective buyer who wants to see the potential of the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in case you are not agreeing to our submission of this business activity, income / loss from owning and maintaining race horse has to be determined as per the provisions of Explanation (a)(ii) to sub-section 3 of Section 74A of the Act. Loss per this provision mean stake money less expenditure incurred wholly and exclusively for the purpose of maintaining race horses . Thus, 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 associated with the shipping business of the company and are associated with breeding business of the company. All breeding expenses are not related to only maintaining of the race horses. During the year under consideration, the company had on an average 300 horses owned by it at the farm and horses of the clients at the farms and only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm. 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 livery expenses from other horse owners, who have utilized the stables and other services of the stud farm of the appellant. Appellant has submitted that the nature of the receipt and the quantum of the receipt were reflected in the books of accounts and identifiable with distinct accounting codes. Similarly other receipts attributable to the horse breeding activities of the stud farm and the receipts attributable to the racing activities such as stake money are distinct in nature and the same 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness activity is considered in the light of decision of Hon 'ble Madras High Court in the case of Mrs.Kamala Muthia vs. CIT (259 ITR 184) (Madras). As held, 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 business profits or losses and the same have to be computed under the head Business. On the other hand, the loss as computed by the appellant in terms of the racing segment, and verified by the A.O during the remand proceedings, has to be carried forward u/s. 74 A(3) of the Act. The stand taken by the A.O in the assessment order is not legally tenable since it is not intended as per the scheme of computation of income under Income Tax Act to set off business loss, arising on account of horse breeding activity, against the profits ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record the receipts and expenditure in respect of race horses and breeding horses. In the remand report, the A.O. has agreed that the bifurcation is in consonance with the P L Account. Accordingly, the CIT(A) has held that the loss of Rs. l,18,63,894/- is from racing activity and he did not allow the set off of this loss against the business income from ship management activity. While he held that the loss of Rs. l,89,92,554/- is from breeding activity and he allowed the set off of this loss against the income. The Revenue s ground is that the entire 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 is the main activity. The assessee has given its object in the Memorandum of Association which is the breeding activity. As per turf club regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 amounting to ₹ 1,89,92,554/- was liable to be set off against business income whereas loss of ₹ 1,18,63,894/- is from horse racing activity not eligible for set off against business income in view of provisions of section 74A of the Act. The findings recorded by the ld. CIT(A) are as per material on record, thus we do not find any reason to interfere in the findings of ld. CIT(A) and accordingly we confirm the same. 21. The assessee has taken additional ground with regard to disallowance of lease rent of ₹ 26,59,140/- paid to the directors of the company. The contention of the ld. Counsel for the assessee was that the additional ground is purely a legal ground as all the facts are on record and the same may be admitted i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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