inspecting Assistant Vs. S.M.S. Investment Corpn. (P.) - Court Judgment

Excerpt:
1. the revenue is in appeal against the order passed by the cit(appeals) raising for our consideration the following grounds:-- on the facts and in the circumstances of the case, the learned cit(appeals) erred in : (i) restricting the disallowance to l/5th of the rent in respect of the house property at 77, sundar nagar, new delhi; 2. the respondent in this case is private limited company, deriving income from property, interest and dividends. the ito in the course of the assessment proceedings, came across a claim for rent paid at rs. 2,500 per month, for a property at no. 77, sundar nagar, new delhi, the total claim being rs. 27,500 for a period of 11 months beginning june 1979 to april 1980. on further investigation, the following facts emerged:-- (a) that, during the assessment year under consideration, the assessee had an office at m-132, connaught place, new delhi, as also an office at raj mahal palace, jaipur. (b) that the house at no. 77, sundar nagar, was already on rent jointly in the name of the assessee and raj mahal palace hotel at a rent of rs. 5,000 per month since 27-1-1976. (c) that no deduction had been claimed in respect of the rent paid in the preceding assessment years. (d) that shri bhawani singh was the chairman of the board of directors of the assessee-company as well as a partner in the firm, m/s. raj mahal palace hotel, and as per the terms of the lease-deed, the property was primarily meant for his residential purposes as also other family members. (e) that in the lease-deed executed on 27-1-1976 had expired on 26-1-1979 there was a clear stipulation that the property was to be used only for residential purposes and not for the purposes of maintaining an office or for any other commercial purpose. (f) that although there was no lease-deed operating in so far as the assessment year under appeal was concerned, the compromise decree obtained by the landlord from the court of the additional rent controller under section 23 of c.p.c. categorically stated that the property shall be used only for residential purposes.3. on the basis of the aforesaid facts, the ito in the ultimate analysis concluded that the property being used for the residential purposes of shri bhawani singh and other members of the royal family of jaipur, the claim for deduction in respect of the rent paid was not tenabi.e., the ito also took note of the fact that, during the period 30-6-1975 to 19-5-1983 only two meetings of the board of directors had taken place at 77, sundar nagar, new delhi, i.e., on 29-12-1979 and 7-1-1983 out of a total of 39 meetings. it was also noted that 36 meetings were held at raj mahal palace, jaipur. this verification was undertaken by the ito vis-a-vis the assessee's explanation that the property at 77, sundar nagar, new delhi, was used for official purposes, viz., to hold meetings of the board of directors.4. we may mention at this stage that the facts stated in the preceding paras were not challenged by the assessee in the course of proceedings under section 144b before the iac, who ultimately agreed with the view taken by the ito to disallow the rent paid amounting to rs. 27,500. the iac was of the further view that holding of a few meetings of the board of directors in residential premises, would not tantamount to conversion of these premises into official accommodation, the rent in respect of which was required to be allowed as a bonafide deduction against the income of the assessee-company.5. being aggrieved with the order passed by the ito, the assessee came up in appeal before the cit(appeals), who was of the opinion that the rejection of the entire claim was not justified. after going through the facts found by the ito and hearing the assessee's counsel, the cit(a) came to the conclusion that the disallowance to the extent of 1/5th out of the actual rent paid would be justified and reasonabi.e., in this way, the addition of rs. 27,500 made by the ito was reduced to rs. 5,500.6. the learned departmental representative at the outset supported the order passed by the ito reiterating thereafter the reasons recorded by the ito in rejecting the assessee's claim in toto. a reference was also made to the basis on which the cit(appeals) had allowed necessary relief to the assessee with the submission that the same was neither rational nor proper on the facts of the case. the learned counsel for the assessee, on the other hand, supported the order passed by the cit(appeals) reiterating thereafter the arguments advanced before the ito as also before the cit(a) in support of the claim.7. we have examined the rival submissions and have also perused the material on record to which our attention was invited by the parties.we have already indicated in the earlier part of our order the undisputed facts of the case, which were not challenged by the assessee, either before the ito, the iac in 144b proceedings, the cit(appeals) and even before us. the situation now boils down to the uncontroverted fact that the property at 77, sundar nagar was meant for the use of "the chairman of sms corp. p. ltd. or any of its officer, servants and agents or for the partners of raj mahal palace hotel, jaipur or for the officers of the said sms corp. p. ltd. or rajmahal palace hotel" (clause 9 of the lease-deed dated 27-1-1976). the same clause categorically states that, in case the premises are to be used for the purpose of running an office or any other commercial establishment, then the lessee, which, in this case, happens to be the assessee, jointly with m/s. rajmahal palace hotel, jaipur, would have to obtain prior permission of the delhi development authority or land development officer, whichever would be relevant for that purpose.there is nothing on record to show that any such permission was obtained. the further facts on record show that the property was being used by shri bhawani singh and other family members and even before us this fact found by the authorities below, remained uncontroverted. no doubt, the lease-deed dated 27-1-1976 expired on 26-1-1979, but there is no challenge on the part of the assessee to the fact that the terms on which the property had been taken on rent remained the same. it is also an accepted fact that during the entire period from 30-6-1975 to 19-5-1983, only two meetings of the board of directors took place at 77, sundar nagar, new delhi, whereas the remaining meetings were held at the office of the company at jaipur. it is also a matter of fact that, during the assessment year under consideration, the assessee was having another office at m-132, connaught place, new delhi and one at rajmahal place, jaipur. in view of the aforesaid facts, we have no hesitation in corning to the conclusion that the claim for deduction on account of the rent paid for property located at 77 sunder nagar was not justified at all. as rightly observed by the iac in the directions issued under section 144b, the mere fact of holding some meetings of the board of directors in the residential premises being used by the managing director of the company would not convert these premises into official ones enabling the assessee to claim the rent paid against the taxable income of the company. it is also an undisputed fact on record that there was no agreement between the assessee-company or its managing director or any of the directors for providing rent free accommodation to them. the cit(appeals), it appears has not taken note of the aforesaid undisputed facts on record and has proceeded to allow a substantial part of the claim only on estimated basis specially when we find no scientific method or rationale adopted by her in scaling down the disallowance to 1/5th of the claim. in the final analysis, the order of the cit(appeals) is reversed and that of the ito restored. the first ground in the appeal is allowed.8. as regards the second ground in the revenue's appeal, the ito while processing the claim for bad debts written off, came across an amount of rs. 35,510 pertaining to one smt. sashi prabha devi. on obtaining the detailed accounts from the debtor, the ito found that she had taken certain loans in 1965 and again in 1978, the total amount outstanding on 30-11-1979 being rs. 57,309. out of the aforesaid, a sum of rs. 15,800 was received and the balance of rs. 35,509 was written off. the ito took note of the fact that there was no agreement between the parties for writing off the amount and nor had any suit been filed for recovery. the debtor was summoned by the ito, who proceeded to record her statement and also allowed the assessee's representative to cross-examine her. the aforesaid brought out the following facts: (a) that the debtor had served as a lady in waiting to maharani gayatri devi, on a monthly salary of rs. 300, but had left the service in 1953. (b) that she wanted some money for the marriage of her daughters for which she had made a request to late maharaja sawai man singh and at whose direction, the amounts were handed over to her by maharaja jai singh. (c) that, on the date of recording of the statement, she had a sum of rs. 30,000 lying in her bank account and also had a deposit of rs. 15,000 with the indian hotel co. ltd., bombay. (d) that the title deeds of certain immovable properties kept by the debtor with the assessee were returned to her even before the repayment of the loans. (e) that after the return of these title deeds, certain properties were sold by the debtor and fresh properties purchased in the names of the debtors.9. the aforesaid facts led the ito to conclude that no serious efforts had been made by the assessee to recover the amount from the lady debtor, whose financial position was otherwise sound. according to him, the amount had been remitted considering the close association of the lady debtor with maharani gayatri devi and the late maharaja sawai man singh. in view of this, the ito in the ultimate analysis, concluded that the debt would not be considered to have become bad and since the same had not been written off in the normal course of the assessee's business and in the interest of the said business, the same was required to be disallowed. the disallowance proposed by the ito was also upheld by the iac under section 144b.10. being aggrieved with the decision of the ito, the assessee came up in appeal before the cit(appeals). the first appellate authority proceeded to examine the material on record such as the statement of account of the lady debtor, statement recorded under section 131 as also the minutes of the meeting of the board of directors, approving the write off. it was noticed by her that the debtor had not paid anything over a period often years out of the principal amount and in so far as the interest was concerned, the whole of it remained unpaid.a note was also taken of the fact that the conditions laid down under section 36(2) were duly satisfied, inasmuch as the interest debited to the account of the debtor had been duly subjected to tax in the preceding assessment years. in view of this position, the cit(appeals) allowed the claim to the extent of rs. 34,410 vis-a-vis the interest component disallowing in the process the balance of rs. 1,000 which remained unpaid at the particular time out of the principal amount.11. we have heard both the parties at some length in respect of the specific ground raised in the revenue's appeal. a combined perusal of the copy of the account of the debtor in the books of account of the assessee, the statement recorded by the ito, and the cross-examination conducted by the assessee's representative, lead as to conclude that although the amount was advanced to the lady with the stipulation that interest would be charged, the debtor in turn was always under the impression that no such interest was to be paid and from time to time she did make the position explicit and quite clear. a specific reference in this connection may be made to the following questions and answers extracted from the statement recorded by the ito:-- q. why you did not repay the total amount outstanding in your account? a. i repaid the principal loan and did not repay amount of interest because i had told them in the beginning that i shall repay only the principal. a. once or twice certain envelopes did come to me but i do not know what those letters contained since i had already told the darbar that i shall not pay interest. darbar mean late h.h. man singhji. when i took the advance in 1968-69 i told the darbar late h.h. man singhji that i shall not pay interest. q. maharaj jai singh ji advanced the loan as the director of m/s sms invest. corp. p. ltd. and there was a stipulation regarding interest payment in the documents executed by you. what you have to say in this regard a. i did not read the paper. i, however, told about it not payment of interest. q. when you received notices for interest payment why did you not press to give the same a. when i had already told both late sawai man singhji as well as mah. jai singhji regarding non-payment of interest, why should i bothered.12. a perusal of the copy of account of the debtor in the assessee's books of account shows that at the first instance, a sum of rs. 5,000 was advanced to her in 1965, which was repaid from her in december 1967. a further sum of rs. 1,000 was received by her in october 1968 and this could be adjusted against a part of the interest which had been debited to her account prior to that date. a further amount of rs. 16,700 was advanced partly on 30-10-1968 and again in april 1969.thereafter, the amount of interest from year to year was debited to her account making up a total of rs. 51,309 on 30-11-1979 when a sum of rs. 15,800 was remitted by her in full and final settlement. this settlement stands dully approved by the board of directors in their meeting held on 26-6-1980. in this view of the matter, it would have been a futile exercise on the part of the assessee in case it was to take legal action against the debtor, specially when the said debtor had at every stage, questioned the demand for payment of interest. in the final analysis, we uphold the action of the cit(appeals) in allowing necessary relief to the assessee on account of the bad debt written off. the second ground in the revenue's appeal is, accordingly, rejected.

Judgment:
1. The revenue is in appeal against the order passed by the CIT(Appeals) raising for our consideration the following grounds:-- On the facts and in the circumstances of the case, the learned CIT(Appeals) erred in : (i) restricting the disallowance to l/5th of the rent in respect of the house property at 77, Sundar Nagar, New Delhi; 2. The respondent in this case is Private Limited Company, deriving income from property, interest and dividends. The ITO in the course of the assessment proceedings, came across a claim for rent paid at Rs. 2,500 per month, for a property at No. 77, Sundar Nagar, New Delhi, the total claim being Rs. 27,500 for a period of 11 months beginning June 1979 to April 1980. On further investigation, the following facts emerged:-- (a) That, during the assessment year under consideration, the assessee had an office at M-132, Connaught Place, New Delhi, as also an office at Raj Mahal Palace, Jaipur.

(b) That the house at No. 77, Sundar Nagar, was already on rent jointly in the name of the assessee and Raj Mahal Palace Hotel at a rent of Rs. 5,000 per month since 27-1-1976.

(c) That no deduction had been claimed in respect of the rent paid in the preceding assessment years.

(d) That Shri Bhawani Singh was the Chairman of the Board of Directors of the assessee-company as well as a partner in the firm, M/s. Raj Mahal Palace Hotel, and as per the terms of the lease-deed, the property was primarily meant for his residential purposes as also other family members.

(e) That in the lease-deed executed on 27-1-1976 had expired on 26-1-1979 there was a clear stipulation that the property was to be used only for residential purposes and not for the purposes of maintaining an office or for any other commercial purpose.

(f) That although there was no lease-deed operating in so far as the assessment year under appeal was concerned, the compromise decree obtained by the landlord from the Court of the Additional Rent Controller under Section 23 of C.P.C. categorically stated that the property shall be used only for residential purposes.

3. On the basis of the aforesaid facts, the ITO in the ultimate analysis concluded that the property being used for the residential purposes of Shri Bhawani Singh and other members of the royal family of Jaipur, the claim for deduction in respect of the rent paid was not tenabi.e., The ITO also took note of the fact that, during the period 30-6-1975 to 19-5-1983 only two meetings of the Board of Directors had taken place at 77, Sundar Nagar, New Delhi, i.e., on 29-12-1979 and 7-1-1983 out of a total of 39 meetings. It was also noted that 36 meetings were held at Raj Mahal Palace, Jaipur. This verification was undertaken by the ITO vis-a-vis the assessee's explanation that the property at 77, Sundar Nagar, New Delhi, was used for official purposes, viz., to hold meetings of the Board of Directors.

4. We may mention at this stage that the facts stated in the preceding paras were not challenged by the assessee in the course of proceedings under Section 144B before the IAC, who ultimately agreed with the view taken by the ITO to disallow the rent paid amounting to Rs. 27,500. The IAC was of the further view that holding of a few meetings of the Board of Directors in residential premises, would not tantamount to conversion of these premises into official accommodation, the rent in respect of which was required to be allowed as a bonafide deduction against the income of the assessee-company.

5. Being aggrieved with the order passed by the ITO, the assessee came up in appeal before the CIT(Appeals), who was of the opinion that the rejection of the entire claim was not justified. After going through the facts found by the ITO and hearing the assessee's counsel, the CIT(A) came to the conclusion that the disallowance to the extent of 1/5th out of the actual rent paid would be justified and reasonabi.e., In this way, the addition of Rs. 27,500 made by the ITO was reduced to Rs. 5,500.

6. The learned Departmental Representative at the outset supported the order passed by the ITO reiterating thereafter the reasons recorded by the ITO in rejecting the assessee's claim in toto. A reference was also made to the basis on which the CIT(Appeals) had allowed necessary relief to the assessee with the submission that the same was neither rational nor proper on the facts of the case. The learned counsel for the assessee, on the other hand, supported the order passed by the CIT(Appeals) reiterating thereafter the arguments advanced before the ITO as also before the CIT(A) in support of the claim.

7. We have examined the rival submissions and have also perused the material on record to which our attention was invited by the parties.

We have already indicated in the earlier part of our order the undisputed facts of the case, which were not challenged by the assessee, either before the ITO, the IAC in 144B proceedings, the CIT(Appeals) and even before us. The situation now boils down to the uncontroverted fact that the property at 77, Sundar Nagar was meant for the use of "The Chairman of SMS Corp. P. Ltd. or any of its officer, servants and agents or for the partners of Raj Mahal Palace Hotel, Jaipur or for the officers of the said SMS Corp. P. Ltd. or Rajmahal Palace Hotel" (clause 9 of the lease-deed dated 27-1-1976). The same clause categorically states that, in case the premises are to be used for the purpose of running an office or any other commercial establishment, then the lessee, which, in this case, happens to be the assessee, jointly with M/s. Rajmahal Palace Hotel, Jaipur, would have to obtain prior permission of the Delhi Development Authority or Land Development Officer, whichever would be relevant for that purpose.

There is nothing on record to show that any such permission was obtained. The further facts on record show that the property was being used by Shri Bhawani Singh and other family members and even before us this fact found by the authorities below, remained uncontroverted. No doubt, the lease-deed dated 27-1-1976 expired on 26-1-1979, but there is no challenge on the part of the assessee to the fact that the terms on which the property had been taken on rent remained the same. It is also an accepted fact that during the entire period from 30-6-1975 to 19-5-1983, only two meetings of the Board of Directors took place at 77, Sundar Nagar, New Delhi, whereas the remaining meetings were held at the office of the company at Jaipur. It is also a matter of fact that, during the assessment year under consideration, the assessee was having another office at M-132, Connaught Place, New Delhi and one at Rajmahal Place, Jaipur. In view of the aforesaid facts, we have no hesitation in corning to the conclusion that the claim for deduction on account of the rent paid for property located at 77 Sunder Nagar was not justified at all. As rightly observed by the IAC in the directions issued under Section 144B, the mere fact of holding some meetings of the Board of Directors in the residential premises being used by the Managing Director of the company would not convert these premises into official ones enabling the assessee to claim the rent paid against the taxable income of the company. It is also an undisputed fact on record that there was no agreement between the assessee-company or its Managing Director or any of the Directors for providing rent free accommodation to them. The CIT(Appeals), it appears has not taken note of the aforesaid undisputed facts on record and has proceeded to allow a substantial part of the claim only on estimated basis specially when we find no scientific method or rationale adopted by her in scaling down the disallowance to 1/5th of the claim. In the final analysis, the order of the CIT(Appeals) is reversed and that of the ITO restored. The first ground in the appeal is allowed.

8. As regards the second ground in the Revenue's appeal, the ITO while processing the claim for bad debts written off, came across an amount of Rs. 35,510 pertaining to one Smt. Sashi Prabha Devi. On obtaining the detailed accounts from the debtor, the ITO found that she had taken certain loans in 1965 and again in 1978, the total amount outstanding on 30-11-1979 being Rs. 57,309. Out of the aforesaid, a sum of Rs. 15,800 was received and the balance of Rs. 35,509 was written off. The ITO took note of the fact that there was no agreement between the parties for writing off the amount and nor had any suit been filed for recovery. The debtor was summoned by the ITO, who proceeded to record her statement and also allowed the assessee's representative to cross-examine her. The aforesaid brought out the following facts: (a) That the debtor had served as a lady in waiting to Maharani Gayatri Devi, on a monthly salary of Rs. 300, but had left the service in 1953.

(b) That she wanted some money for the marriage of her daughters for which she had made a request to Late Maharaja Sawai Man Singh and at whose direction, the amounts were handed over to her by Maharaja Jai Singh.

(c) That, on the date of recording of the statement, she had a sum of Rs. 30,000 lying in her bank account and also had a deposit of Rs. 15,000 with the Indian Hotel Co. Ltd., Bombay.

(d) That the title deeds of certain immovable properties kept by the debtor with the assessee were returned to her even before the repayment of the loans.

(e) That after the return of these title deeds, certain properties were sold by the debtor and fresh properties purchased in the names of the debtors.

9. The aforesaid facts led the ITO to conclude that no serious efforts had been made by the assessee to recover the amount from the lady debtor, whose financial position was otherwise sound. According to him, the amount had been remitted considering the close association of the lady debtor with Maharani Gayatri Devi and the late Maharaja Sawai Man Singh. In view of this, the ITO in the ultimate analysis, concluded that the debt would not be considered to have become bad and since the same had not been written off in the normal course of the assessee's business and in the interest of the said business, the same was required to be disallowed. The disallowance proposed by the ITO was also upheld by the IAC under Section 144B.10. Being aggrieved with the decision of the ITO, the assessee came up in appeal before the CIT(Appeals). The first appellate authority proceeded to examine the material on record such as the statement of account of the lady debtor, statement recorded under Section 131 as also the minutes of the meeting of the Board of Directors, approving the write off. It was noticed by her that the debtor had not paid anything over a period often years out of the principal amount and in so far as the interest was concerned, the whole of it remained unpaid.

A note was also taken of the fact that the conditions laid down under Section 36(2) were duly satisfied, inasmuch as the interest debited to the account of the debtor had been duly subjected to tax in the preceding assessment years. In view of this position, the CIT(Appeals) allowed the claim to the extent of Rs. 34,410 vis-a-vis the interest component disallowing in the process the balance of Rs. 1,000 which remained unpaid at the particular time out of the principal amount.

11. We have heard both the parties at some length in respect of the specific ground raised in the revenue's appeal. A combined perusal of the copy of the account of the debtor in the books of account of the assessee, the statement recorded by the ITO, and the cross-examination conducted by the assessee's representative, lead as to conclude that although the amount was advanced to the lady with the stipulation that interest would be charged, the debtor in turn was always under the impression that no such interest was to be paid and from time to time she did make the position explicit and quite clear. A specific reference in this connection may be made to the following questions and answers extracted from the Statement recorded by the ITO:-- Q. Why you did not repay the total amount outstanding in your account? A. I repaid the principal loan and did not repay amount of interest because I had told them in the beginning that I shall repay only the principal.

A. Once or twice certain envelopes did come to me but I do not know what those letters contained since I had already told the Darbar that I shall not pay interest. Darbar mean late H.H. Man Singhji.

When I took the advance in 1968-69 I told the Darbar late H.H. Man Singhji that I shall not pay interest.

Q. Maharaj Jai Singh Ji advanced the loan as the Director of M/s SMS Invest. Corp. P. Ltd. and there was a stipulation regarding interest payment in the documents executed by you. What you have to say in this regard A. I did not read the paper. I, however, told about it not payment of interest.

Q. When you received notices for interest payment why did you not press to give the same A. When I had already told both late Sawai Man Singhji as well as Mah. Jai Singhji regarding non-payment of interest, why should I bothered.

12. A perusal of the copy of account of the debtor in the assessee's books of account shows that at the first instance, a sum of Rs. 5,000 was advanced to her in 1965, which was repaid from her in December 1967. A further sum of Rs. 1,000 was received by her in October 1968 and this could be adjusted against a part of the interest which had been debited to her account prior to that date. A further amount of Rs. 16,700 was advanced partly on 30-10-1968 and again in April 1969.

Thereafter, the amount of interest from year to year was debited to her account making up a total of Rs. 51,309 on 30-11-1979 when a sum of Rs. 15,800 was remitted by her in full and final settlement. This settlement stands dully approved by the Board of Directors in their meeting held on 26-6-1980. In this view of the matter, it would have been a futile exercise on the part of the assessee in case it was to take legal action against the debtor, specially when the said debtor had at every stage, questioned the demand for payment of interest. In the final analysis, we uphold the action of the CIT(Appeals) in allowing necessary relief to the assessee on account of the bad debt written off. The second ground in the revenue's appeal is, accordingly, rejected.