Rajesh Kumar, A.M.:— This appeal by the revenue is directed against the order dated 11.06.2012 of Commissioner of Income Tax (Appeals)-40, Mumbai (Hereinafter called as the CIT(A)) for assessment year 1997-98. The assessee has raised the following grounds of appeal:

1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that for calculating the eligible income u/s 80RR, the indirect expenses relatable to the assessee's foreign income be calculated on the number of days spent by the assessee abroad instead of in the same proportion which the foreign turnover has with the total turnover of the assessee as done by the AO.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the addition on account of ‘on money’ paid in respect of acquiring tenancy rights of heritage bungalow, which was an exclusive property, the payment of which was made through undisclosed sources.”

3. The issue raised in the first ground by the revenue is against the CIT(A) holding that for the purpose of calculation of income u/s 80RR of the Act, the indirect expenses relatable to the foreign income be calculated by taking the number of days the assessee spent abroad as against the proportion which the foreign receipts has to the total turnover by the AO whereas the second ground is against the deletion of addition of Rs. 1,20,00,000/- made by the AO on account of “on money” for acquiring the tenancy rights of heritage bunglow.

4. The brief facts are that the assessee filed his return of income on 29.10.1997 declaring an income of Rs. 1,15,84,220/- along with audit report u/s 44AB of the Act. The residential premises of the assessee was searched u/s 132(1) of the Act on 18.12.1996 and notice u/s 158BC was issued for filing the return of income however the assessee did not file any return of income tax for the block period and the block assessment was completed on 26.08.1999 at Rs. 2,69,91,065/-.

5. During the course of assessment proceedings the AO noticed that the assessee had travelled abroad in connection with his professional engagements and the AO was of the view that the deduction u/s 80RR of the Act was to be calculated after considering all the expenses debited and charged to the income and expenditure account whether or not attributable to earning of foreign income. The assessee's gross receipts included Rs. 95,27,000/- as domestic receipts and Rs. 1,35,60,618/- from foreign receipts and thus the gross turnover of the assessee during the year was Rs. 2,30,87,618/- and the total expenses as charged to the income and expenditure account were Rs. 19,16,537/- resulting in the net surplus during the year of Rs. 2,11,71,081/-. The AO worked out the proportionate expenses relating to foreign travel at Rs. 11,25,686/- as not being allowable in calculating of deduction u/s 80RR of the Act and disallowed and added 75% thereof to the income of the assessee i.e Rs. 8,44,265/-. The detailed calculation of the said workings were given by the AO on page 30 para 34 of the assessment order.

5.1. On appeal before the CIT(A) by the assessee, the CIT(A) allowed the appeal by following the appeal order for the AY 1995-96 and 1996-97 and directed the AO to calculate the disallowance by taking the number of days the assessee stayed abroad to total number of days.

5.2. The ld AR at the outset pointed out that the case of the assessee was covered in his favour by a decision of the tribunal by own case in the I.T.A. No. 6008/Mum/2006 Assessment Year 2003-04 vide order dated 21.10.2008. the ld counsel submitted before us that the assessee was abroad during the year for 17 days in all and prayed for 15% of the expenses be taken as relating to earning of foreign income for the purpose of calculation of deduction u/s 80RR. The ld DR on the other hand relied on the order of AO.

5.3. We have considered the rival submissions and perused the materials on records and after going the records before us find that in I.T.A. No. 6008/Mum/2006 Assessment Year 2003-04 a similar issue was decided in favour of the assessee by the Tribunal vide order dated 21.10.2008. The relevant para No 7 of the said order is extracted below:—

“We have considered his submissions. We find that in I.T.A. No. 787/Mum/02 for A.Y. 1995-96 as well as I.T.A. No. 3894/Mum/02 and 3658/Mum/02 for A.Y. 1998-99, the same issue was considered by the Tribunal and the Tribunal held that the allocation of expenses against the income eligible for deduction u/s 80RR should be on the basis of number of days spent by the assessee abroad. In A.Y. 1998-99, the assessee had spent 13 dyas abroad and in that year, the Tribunal held that 10% of the expenses should be considered as having been incurred in earning foreign income. In AY 1995-96, number of days spend by the assessee abroad was 50 days and 25% of the expenses was held to be attributable to earning the income from aborad. In the present assessment year, the assessee has spent 6 days abroad. In the circumstances, we are of the view that 7% of the expenses can reasonably said to be attributable to earning of income outside India. The Assessing Officer is directed to compute deduction u/s 80RR accordingly. The appeal of the revenue is dismissed with the aforesaid directions.”

We, therefore, respectfully following the order of the coordinate bench of Mumbai, are of the view that 15% of the expenses are reasonable and be attributed to earning foreign income from outside India. The AO is directed to compute deduction u/s 80RR of the Act accordingly. The appeal of the revenue on this ground is dismissed with the above direction.

6. During the course of scrutiny proceedings the AO observed that the assessee had acquired a heritage bunglow at Bandra (W) on tenancy basis of permanent nature by paying a deposit of 4,00,00,000/- Cr and monthly rental of Rs. 5000/- with absolute authority to further lease out the property and other rights as incorporated in para 35(2)(a) & (b) of the assessment order. The said property consisted of constructed area of 5500 Sq. Fts with free hold land measuring 2500 per sq fts. It was also observed that in that area the stamp duty valuation as Govt rate was Rs. 8,000/- per sq. fts in respect of constructed area and Rs. 3200/- per sq. fts for the land. The market rate of the property as published in September edition of accommodation was Rs. 10,000/- per Sq. fts. Thus finally the AO came to the conclusion that the assessee might have paid Rs. 1,20,00,000/- as on money on the basis that the assessee paid less 20% for the property value and added the same to the income of the assessee on protective basis as similar addition was made on substantive basis in the block assessment.

6.1. Aggrieved by the order of AO, the assessee preferred an appeal before CIT(A) who allowed the appeal by holding that the tenancy agreement was entered into on 01.03.1996 whereas the purchase agreement was made on 25.08.2001 after obtaining the permission from Income Tax Department and the AO did not bring any materials or evidence on records to substantiate his action and addition made without any materials on records and was on based upon suspicion. Besides no incremating materials were seized during the course of search to corrobaorate of the action of AO and both documents agreement to sell and tenancy agreement pertained to other years and not the year under consideration.

6.2. The ld DR relied on the order of AO by submitting that the assessee paid on money to acquire interest in the property of perpetual nature and the AO had made the additions rightly and prayed that order of CIT(A) be set aside by upholding the order of AO. Per Contra Ld AR for the assessee argued that the date of the tenancy agreement was 01.03.1996 was and did not relate to the AY 1997-98. The deed of assignment which was made on 25.08.2001 after obtaining the due permission from the Income Tax Department u/s 269UL(3) of the Act also did not pertain to the year under consideration a copy of which is placed at page 28 of the paper book of the assessee. The ld counsel drew our attention to the various clauses in the said deed of assignment including the consideration for purchase of Rs. 13.32 Cr which is placed at page no 9 to 36 of the paper book. The Ld authorized representative for the assessee Shri Hero Rai finally submitted before us that the ld CIT(A) has passed by order after going into various legal and factual involved in the case of the assessee and did not require any interference. He summed up by arguing that the property was not acquired during the year but as a matter of fact was purchased in the subsequent year that too with the prior permission of the Income Tax Departments and ultimately prayed that the order of CIT(A) be upheld.

6.3. We have heard the rival submissions and perused the materials on records. We find from the order of AO that during the year the assessee had neither taken any property on lease nor purchased as is clear from tenancy agreement and deed of assignment which relates to the years other than the year in question. We also note that the addition in the current year was on protective basis and the substantive addition was made in the block assessment which was stated to be barred by limitation. We find merit in the arguments of ld AR that that the property taken on tenancy in the earlier year was subsequently purchased with the prior permission of the departments and the certificate u/s 269UL(3) of the Act is placed at page no 28 of the paper book. In the lights of all these facts the addition as made by the AO is just a notional and hypothetical which lacks any basis and there is nothing on records to corroborate the action of the AO. In our opinion the order of CIT (A) who had comprehensively gone in into all the issues appears to correct and does not require any interference on our part and accordingly the appeal of the revenue is dismissed.

In the result, the assessee's appeal is allowed.