Income Tax Appellate Tribunal - Amritsar
Indersons Leathers P. Ltd. vs The Addl. C.I.T., Range I on 2 February, 2007
ORDER
A.D. Jain, Judicial Member
1. These are cross appeals for the assessment year 2001-02. The assessee, in I.T.A. No. 449(ASR)/2004, vide its two grounds of appeal.. has pleaded that the learned CIT(A) erred in confirming the assessment of income from lease of business/commercial assets amounting to Rs. 10,54,000/- under the head "Income from House Property" and in confirming that no activity was carried on by the assessee from the previous year, ignoring the amount of business expenditure, failing to consider the fact of existence of the business.
2. As per the submissions filed before us, the assessee is a Private Ltd. Company incorporated on 14-11-1985 under the Companies Act, 1956, which started manufacturing operations on 1-6-1987, producing, principally, shoe uppers; that the company's sales started declining and in the late 1990, losses started mounting, due to which, the company decided to stop its activity and to look for some other avenue, without any intention to close down the company and ultimately, the business; that to mitigate further losses, outdated equipment was sold and steps were taken to dispose of the lying stocks; that the company continued and is still in existence and in order to reduce the burden of routine expenses, it leased out its commercial assets, i.e., its shed alongwith fittings etc., duly disclosed in the balance sheet, under a composite lease, for the time being, to exploit these commercial assets to its benefit; and that the income therefrom was shown as income from business, which has, however, been assessed as income from house property.
3. The A.O. observed that the assessee had sold all its plant and machinery and stocks during the financial year 1999-2000 and that no business activity was carried out by the assessee during the year. Accordingly, the assessee was asked as to why rental income of Rs. l0,54,000/- be not treated as income from house property and not as business income, as claimed. In response, the assessee submitted that renting out that part of its business premises was itself business activity; that it had leased its premises to an outsider as a source of business income allowable by its Memorandum of Association, as its business object; that hence, it was business income for the assessee company, till it decided to pursue its own business in the future; that the company had liability to take care of which led to the decision of its Board to change its business activity as a source of income; that the leased income earned was being utilised to meet the day to day expenses of the company; that the assessee company was paying municipal house taxes as a commercial organization; that the company still had open land of 3000 sq. yards us its custody, which had formed an integral part of the total land area; that the company was filing its returns of a business set up with the Registrar of Companies, Punjab, under the Companies Act, 1956; and that since the company existed and was already filing its due returns/papers to the Registrar of Companies, Punjab, which fell under the Department of Law and Company Affairs, Govt. of India, as well as to the other Departments, including the Income tax Department all expenses reflected in its Revenue accounts were business expenses and were allowable as a business expenditure.
4. The A.O., however, did not accept the Stand taken by the assessee and proceeded to assess the rental income/leased income of the assessee as income from house property. It was observed as follows:
i) The main objective of the assessee company was to manufacture and sell of hides, skins and leather items etc. and us per memorandum and article of association all other objects are ancillary to attain main object. Since assessee has disposed off all its plant, machinery and stocks, it proves that there is no intention of assessee to come back and restart the business. Assessee has rented out property to a publication of Hindi Daily M/s. Aniar Ujala vide Rent Deed executed on 4th day of August, 1999. A photocopy of the Rent Deed was obtained during the course of assessment proceedings. It is pertinent to mention that page 2 of the Rent Deed it has been mentioned that the backside plain area along with 2 small rooms (stores) size approximately 14'x26' will remain 2nd party (owner) and the balance front portion including all existing buildings and structures and along with existing electric, water and sewer connections have been taken over on rent by first party. This premises was rent out for a period of five years. No business was started by the Company till date.
ii) Their lordships of Supreme Court in an exactly similar ease (Universal Plasts Ltd. v. CIT) cited at 237 ITR 454 have held that the amount earned by the assessee by leasing out the assets of the business would not be income from business carried out by it. Various High Courts have also held the similar view on this issue. Some of such decisions are as under:
i) 262 ITR 122 (Madras Silk & Rayon Mills Pvt. Ltd. v. ITO/Ass. CIT, Madras),
ii) 253 ITR 168 (Scindia Potteries (P) Ltd. v. CIT) (Delhi High Court)
iii) 258 ITR 93 (CIT v. Indian Warehousing Inds. Ltd.) (Madras High Court),
iv) 154 ITR 861 (Guntur Merchants Cotton Press Co. Ltd. v. CIT) (Andra Pradesh High Court L).
Keeping in view the above facts and case laws the income from the rent of Rs. 10,54,000/- is being assessed as income from House Property not the Business Income.
5. The learned CIT(A) confirmed the assessment order, holding as follows:
1) Disposing off plant, machinery and stocks proves that there is no intention of revive the business activity.
2) Five years is quite a reasonable period to infer the munition behind any deal/agreement.
3) In my view rent received cannot but be assessed under house property, more so under the circumstances of this case. I am of the view that there is no intention of revival of business. The judgment of Hon'ble Supreme Court in the case of CIT v. Universal Plastics Ltd. Reported at 237 ITR 454 has also clearly held that income from leasing out premises under these circumstances can not be assessed as business income.
Aggrieved, the assessee is in appeal before us.
6. The learned Counsel for the assessee has, before us, broadly, maintained the stand taken by the assessee before the taxing authorities. It has been submitted that the assessee company existed and is still in existence; that the assessee carried out business activity during the year and sold leather stock of Rs. 3 lacs, duly disclosed in the profit and loss account, as sale had concluded during the year under reference; that debit note for this sale was raised on 19-3-2001; that till a sale bill/debit note is raised by the seller, ownership of the goods remains with the seller and the purchaser does not get any title to the goods; that the lease entered into by the company is a composite lease for lease of commercial/industrial shed; that it is a composite lease of business assets, i.e., part of shed and building and fittings, as clearly stated in the lease agreement; that the fittings are a part of the plant and machinery and are still assets of the company, as is evident from the balance sheet of the company; that the lease is one of a commercial asset; that the intention of the assessee has never been to abandon the business, rather it has been to revive the business; that in the lease deed, no option has been given to the lessee to buy the property, since the assessee has always intended and still intends to revive its business; that this intention of the assessee stands duly noted in the resolution of its Board of Directors, a note whereof is placed at page 27 of the assessee's paper book ("APB", for short); and that further, the lessee is also using the building leased out to it, for. commercial purposes. Reliance has been placed on the decision of the Hon'ble Supreme Court in the case of "Universal Plast Ltd. and Anr. v. C.I.T." 237 ITR 454 (SC). Reliance has also been placed on the decision of the Hon'ble Andhra Pradesh High Court in the case of "Ambica Tobacco Co. (P.) Ltd. v. CIT" 172 ITR 343 (AP).
7. On the other hand, supporting the orders of the taxing authorities, the learned D.R. has submitted that the income in question has correctly been treated as income from house property, rather than as business income, as claimed by the assessee. He submits that all plant and machinery and stock stands sold out by the assessee, four long years back, and even no business activity was carried out during the year under consideration. It is submitted that as noted by the learned CIT(A), there has been no business activity of the assessee for the last five years, It is contended that the assesse has not been able to prove, at all, its suited intention of reviving its business.
8. We have heard the parties and have perused the material on record. In this case, the admitted facts are that the assessee was carrying on business as a company manufacturing, primarily, shoe uppers. However, in the late 1990s, it decided to stop such activity. It sold all its plant and machinery and stocks and leased out its commercial shed alongwith its fittings. The lease rent obtained there-from amounted to Rs. 10,54,000/- perannum. The assessee claimed this rent to be its business income. The A.O. as well as the CIT(A), however, assessed it as income from house property.
9. The issue before us is as to whether the aforesaid lease rent is income from house property of the assessee or its business income. The A.O. has held that since the assessee has disposed of all its plant and machinery and stocks, this goes to prove that there is no intention of the assessee to go back and re-start the business. The learned CIT(A) has endorsed this by stating that five years is quite a reasonable period to infer the intention behind any bill/agreement and that the assessee does not have any intention of revival of its business. As against this, the stand of the assessee is that the equipment was sold out since it was-out-dated. However, this assertion has not been expanded upon. It has not been mace out as to what equipment was used for making shoe uppers by the assessee upto late 1990s, which has become out dated or obsolete, It has also not been stated that the process of manufacturing shoe uppers has under-gone such a marked change in technology that none of the machineries earlier used by the assessee was of use to the assessee any longer, which persuaded it to sell off such equipment while still allegedly holding on to the intention to re-start its business at some point in the future. As they stand, the facts on record do not go to prove any intention of the assessee, while selling the equipment and stock, ever again to go into the business of producing shoe uppers.
10. Another contention of the assessee has been that the authorities below wrongly concluded that no business activity was carried out by the assessee during the year, whereas leather stock Rs. 3 lacs was sold by it during the year under consideration and duly disclosed in the profit and loss account. In this regard, as per the assessment order, its sale took place in financial year 1999-2000, relevant to the assessment year 2000-01 and not to the year under consideration, i.e., the assessment year 2001 -02. The assessee responded by saying that the stocks were despatched in the next year. Before us, the assessee has submitted that the debit note in this regard, was raised on 19-3-2001 and that till such raising of debit note, the sale did not take place, since the ownership remained with the assessee and no title in the goods vested with the purchaser.
10.1 In this regard, even if the contention of the assessee is accepted, for the sake of argument, it does not help the case of the assessee at all. This transaction was of sale of old stock of leather of the assessee. This does not, in any manner, amount to the assessee having carried out any "business" in the year under consideration.
11. The assessee has next contended that what it has leased out is its commercial asset alongwith its fittings, which formed part of the plant and machinery of the assessee, and that even the lessee is carrying on commercial activity there at.
11.1 As far as the first part of the argument is, the assessee is merely clutches at straws. Having sold off its entire plant and machinery, the mere fact that its commercial shed has been leased out alongwith its fittings, which, according to the assessee, formed part of its plant and machinery, does not act as even an iota of evidence in favour of the intention of the assessee being to re-start its erstwhile business ever. Then, the other part of the argument also does not take the assessee's case any further. The fact that the lessee is carrying on commercial activity in the commercial shed of the assessee does not amount 10 saying that the commercial activity of the lessee is being carried on behalf of the assessee. If the lessee is carrying on such commercial activity, it is no pointer to the intention of the assessee regarding re-starting its business in the future.
12. Apropos the case laws cited by the assessee, in "Universal Plast" (supra), the Hon'ble Supreme Court has laid down the general principles relating to the income from leasing out assets of the business by the assessee. At the very outset, it has been observed that no precise test can be laid down to ascertain whether income received by the assessee from leasing or letting out of assets would fall under the head "Profits and gains of business or profession". Their lordships have observed that it is a mixed question of law and fact and has to be determined on the facts and in the circumstances of each case. It has been held that where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to come out of business or to go back and restart the same. Testing the facts of the present case on these principles, it is seen that the facts and the circumstances of this case do not evince any intention of the assessee to ever re-start its erstwhile business of producing shoe uppers. The assessee has long ago sold off all its machinery. It has not carried on any business activity during the year under consideration. The commercial shed of the assessee has been leased out for a period of five years, which does not show any intention of the assessee to re-start the business for a period of atleast five years from the moment of coming into operation of the lease. "Universal Plast" (supra), therefore, goes against rather than helps the assessee. 12.1 The facts of "Amber Tobacco Co. (P) Ltd." (supra) are entirely different from those of the present case. In that case, the income being considered was from the lease of machinery which, though purchased for purposes of manufacture, was never used for such purposes, in the present case, however, the assessee has sold off its entire machinery long ago and it is the commercial shed which has been let out, and the income therefrom is sought to be assessed as business income. Remarkably, in "Amber Tobacco Co. (P) Ltd." (supra), the income from lease of machinery was held assessable as income from other sources. The assessee contends that it had used its commercial shed as a commercial asset and, therefore, income therefrom is business income. However, as observed hereinabove, the mere fact of leasing out its commercial shed by the assessee does not lead to the conclusion, by itself, that the income therefrom is the business income of the assessee. The assessee has admittedly stopped its business for long years and its acts do not strow its intention to re-start its business at all.
13. From the above discussion, it is also clear that the learned CTT(A) rightly confirmed the observation of the A.O. that no business activity was carried on by the assessee during the year under consideration. Merely incurring of business expenditure does not amount to carrying on of business during the previous year.
14. In view of the above discussion, finding no error with the order of the learned CIT(A) on this issue, we confirm the same. The grounds raised by the assessee are, as such, rejected.
15. The department in I.T.A. No. 459(ASR)/2004 has raised (he following grounds:
1. The ld. CIT(A) has erred both in law and on the facts of the case in deleting the addition of Rs. 23,47,626/- made Under Section 41(1) of the Income tax Act, 1961 on the basis of cession of liability to creditors inspite of the decision of Hon'ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. (222 ITR 344).
2. The ld. CIT(A) has erred both in law and on the facts of the case in directing the AO to hold that interest free advance to the assessee for renting out the property should not be considered to arrive at the sum, which the property might reasonably be expected to let from year to year as per provisions of Section 23(1)(a) of the Income tax Act, 1961.
16. Apropos the first issue, the A.O. observed that the assessee company had shown unsecured loans of Rs. 23,47,626/- in its balance sheet. The assessee was asked to furnish a confirmed copy of account of all the depositors alongwith their assessment particulars. The assessee replied that the copy of accounts of the unsecured loans duly confirmed would be submitted on its receipt. Vide a later reply, the assessee submitted that all these loans were over ten years old and no interest was paid thereon. However, neither any confirmations nor the addresses of these depositors were furnished. The A.O. observed that the assessee had not returned the money to the depositors, nor the depositors had claimed the money or interest thereon; that the money was received by the assessee in the course of carrying on its business; that although it was treated as deposit and was of capital nature when it was received, by efflux of time, the money had become the assessee's own money and the claim of the depositors had become barred by limitation; that there was, as such, cessation of liability on the part of the assessee. Applying the decision of the Hon'ble Supreme Court in the case of "CIT v. Sundaram Iyengar & Sons Ltd." 222 ITR 344 (SC), the A.O. added back these loans under Section 41(1) of the Income tax Act as bogus liability in the shape of unsecured loans, the confirmation whereof had not been received in the assessment proceedings.
17. The learned CIT(A) deleted this addition, observing as follows:
I have considered the views of both sides on this issue, I am of the opinion that the liability of an assessee does not cease merely because it is barred by limitation. It ceases only when after getting barred by limitation, the assessee unequivocally expresses his intention not to honour it even when demanded. In oilier words, liability never ceases. Debt is never extinguished, the Limitation Act only prevents its enforcing. It does not also confer any benefit on the debt or as contemplated by Section 41(1) of the I.T. Act, 1961. The decision resorted by the AO is distinguishable from the facts of assessee's case of T.V. Sundaram Iyengar and Sons Ltd. Ltd. 222 ITR 344 (SC), the assessee received deposits from customers which were unclaimed and transferred to P&L A/c, but the included in the total income. It was in this particular situation that the Hon'ble Supreme Court held unclaimed balance transferred to P&L A/c as taxable. In a later decision of larger bench of Hon'ble Supreme Court of India dated 19-3-2000 in CIT v. Keshoria Tea Co. Ltd. 173 CTR 394 (SC), it has been held that resort to Section 41 could arise only if the liability of the assessee can be said to have ceased finally. Unilateral action on part of assessee by way of writing off the liability in its accounts does not necessarily mean that liability has ceased in eyes of law. The amount of purchase tax written back was held as not chargeable to tax since there still was dispute between the assessee and Sales Tax Department. Two basic rule's for invoking season 41(1) have to be adhered to:
1) an allowance or deduction has been made in assessment from any year in respect of loss, expenses or trading liability by the assessee.
2) In subsequent year assessee has obtained benefit in respect of amount so allowed by way of remission or cessation of liability.
In this case, these are cash credits and not trading receipts "even though these are unconfirmed, unsecured loans these can not be brought to tax Under Section 41(1) of the I.T. Act, 1961. As such, the assessee's appeal on this ground is allowed.
18. The learned D.R. has, while impugning the first appellate order, supported the assessment order in this regard.
19. The learned Counsel for the assessee, on the other hand, has placed his reliance on the order passed by the learned CIT(A).
20. In this regard, it is seen that in making the addition, the A.O. placed reliance in the case of "CIT v. T.V. Sundaram Iyengar & sons Ltd." (supra). In this decision, it has been held that where deposits received from customers were not claimed by them, the claim became barred by limitation and the unclaimed balance was transferred to the profit and loss account, the amount was assessable as income. However, the amounts considered by the Hon'ble Supreme Court were amounts received in the course of a trading transaction. In the present case, undeniably, the amounts received by the assessee were not trading transactions and these were neither written off nor transferred to profit and loss account. The department has nowhere pleaded otherwise. Therefore, T.V. Sundaram Iyengar & sons Ltd. is not applicable. Moreover, it has not been made out by the A.O., as to how the provisions of Section 41(1) apply.
21. In view of the above, the order of the learned CIT(A) on the issue at hand does not call for any interference by us. It is hereby confirmed. Ground No. 1 raised by the department stands rejected.
22. Apropos the second issue, the A.O. observed that as per the Rent Deed, the assessee had rented out property @ Rs. 85,000/- per month, i.e., for Rs. 10,20,000/- for the whole year, but the only value of the property to be reckoned was in accordance with Section 23(1) of the Income tax Act, 1961. For this purpose, the A.O. took into account the yield from the interest free advance amounting to Rs. 10,20,000/- taken by the assessee from his tenant. The A.O. increased the amount of rent actually received by the assessee by 10% of such rent, amounting to Rs. 1,02,000/-. The learned CIT(A) deleted this addition.
23. Before us, the learned D.R. has placed reliance on the A.O.'s order, whereas the learned Counsel for the assessce has relied on the order of the learned CIT(A), as also on the decision of the Hon'ble Calcutta High Court in the case of "CIT v. Satya Co. Ltd." 140 CTR 569 (Cal.) (copy placed on record).
24. In this regard, it is seen that the learned CIT(A) also placed reliance on "Satya Co. Ltd." (supra), wherein it has been held that Section 23 of the Act does not permit any addition to the entire value, such as notional interest on interest free deposits by tenants; that the computation of income under the head "House Property" being on a deemed basis, there is no scope for making any addition from notional interest; and that what can be said in such cases is that the rent was depressed, but Section 23 does not permit the value of benefit of interest free deposit to be treated as a pan of rent.
25. The department has not been able to refute the above legal position. Section 23, though it talks about the determination of annual value of property, it does not provide for any addition to such annual value. Respectfully following the decision of the Hon'ble Calcutta High Court in the case of "Satya Co. Ltd." (supra), we uphold the order of the learned CIT(A) on this score also, rejecting ground of appeal No. 2.
26. In the result, both the appeals of the assessee as well as that of the Revenue are dismissed.
Order pronounced in the Open Court on 2nd Feb., 2007.