Income Tax Appellate Tribunal - Mumbai
Shree Prabha Trade & Finance Co., Mumbai vs Assessee on 30 June, 1977
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'H', MUMBAI
Before Shri P.M. Jagtap (Accountant Member) and
Shri N.V.Vasudevan, (Judicial Member)
I.T.A.No. Assessment Year
6291/Mum/2009 2001-02
6292/Mum/2009 2002-03
6293/Mum/2009 2003-04
6294/Mum/2009 2005-06
6295/Mum/2009 2006-07
M/s. Shree Prabha Trade & Finance The Income-tax Officer-14(2)(3),
Co., Laxmi Bhavan, 4th floor, Mumbai.
158/164, Kalbadevi Road, Vs.
Mumbai 400 002
PAN: AAAFS 6533 L
(Appellant) (Respondent)
Appellant by : Shri Vimal Punmiya
Respondent by : Ms. Amrita Misra
ORDER
PER N.V. VASUDEVAN, JM:
These are five appeals filed by the assessee against orders of the Commissioner of Income-tax (Appeals), Mumbai, as per the details given below:
(1) ITA No.6291/M/2009 Order dtd.29.9.2009 of CIT(A)-25,Mumbai A.Y. 2001-02 (2) ITA No.6282/M/2009 Order dtd.29.9.2009 of CIT(A)-25,Mumbai A.Y. 2002-03 (3) ITA No.6293/M/2009 Order dtd.29.9.2009 of CIT(A)-25,Mumbai A.Y. 2003-04 (4) ITA No.6294/M/2009 Order dtd.29.9.2009 of CIT(A)-25, Mumbai A.Y. 2005-06 (5) ITA No.6295/M/2009 Order dtd.29.9.2009 of CIT(A)-25,Mumbai A.Y. 2006-07
2. One of the common issues in all these appeals is as to under what head the income in the form of License fee and compensation received by the assessee on renting out of a property should be assessed. The issue arose for the first time in the assessment year 2005-06 and therefore, we take up for consideration the appeal in ITA No. 6294/Mum/2009 for the assessment year 2005-06.
3. Ground No. 1 raised by the assessee reads as under:
"The learned CIT(A) erred in confirming and treating rent received of Rs. 3,47,898/- by the assessee as income from house property as against income from business treated by the assessee."2 ITA Nos.6291-95/M/09
Shree Prabha Trade & finance Co.
4. The assessee is a partnership firm. It is engaged in trading in textiles and money lending. As per the Partnership Deed, it was authorized to carry on the business of money lending, borrowing, financing and other business to earn interest and business to earn rent. M/s. Shree Madhu Industrial Estate Ltd., owned premises known as Madhu Industrial Estate, standing at Globe Mills Passage, Mumbai 400 013. One Shri Indra Kumar Somani by virtue of holding debentures in Sree Madhu Induatrial Estate Ltd., was entitled to occupy a portion of the premises in Madhu Industrial Estate. By two Memorandum of Agreements, both dated 30.6.1977, a portion in the third floor of the building known as Madhu Industrial Estate (hereinafter referred to as "the property"), M/s. Madhu Industrial Estate Ltd., conferred a right of occupation either by Shri Indra Kumar Somani or his nominee/es. It is not clear as to how the Assessee became entitled to let out the property and receive rents by letting it out. The assessee had let out this property and had shown the receipts from such letting out as license fees as well as compensation receipt. These receipts were claimed as income from business.
5. In the course of assessment proceedings for the assessment year 2005-06, the Assessing Officer was of the view that the receipts from letting out of the property has to be taxed under the head "income from house property" and he accordingly taxed the income under the head "income from house property". Consequently expenses claimed in the Profit and Loss Account were disallowed.
6. Before the CIT(A) the assessee submitted that one of the objects of the partnership was to derive income from letting out of the property and, therefore, the income in question has to be treated as business income. It was also submitted that in the past similar income was considered as income from business and there was no reason to give a different treatment in the present assessment year. The CIT(A), however, rejected this contention. The CIT(A) held that there was no business activity by merely letting out of the property. He has also found that in the TDS certificate, 3 ITA Nos.6291-95/M/09 Shree Prabha Trade & finance Co.
the description of the receipt was mentioned as rent. The CIT(A) also found that the Profit & Loss Account several expenses have been claimed which are generally not allowed while computing the income from house property. The CIT(A) also found that under the Agreement of Leave and License, it was a mere letting out the premises to earn rental income and such receipts cannot be treated as business income. The CIT(A) also held that the fact that the income was accepted as business income in the past will not be a bar to make an assessment under a different head in the present assessment year. In this regard, the CIT(A) has also found that in the assessment year 1995-96, there was a scrutiny assessment and an order under section 143(3) of the Act in which there was no specific finding as to how the income from letting out the property was to be accepted as business income. He also found that in all the assessment years the return of the assessee was accepted under section 143(1) of the Act. For all the above reasons the CIT(A) held that the income in question has to be allowed as "income from house property". Aggrieved by the aforesaid order of the CIT(A), the assessee has raised ground No.1 before the Tribunal.
7. We have heard the submissions of the learned counsel for the assessee who reiterated the stand of the assessee as was taken before the CIT(A). We are of the view that the assessee was merely let out the property and deriving rental income. He was not carrying on any systematic or organized activity which could be said to be carrying on a business. The Assessee has neither pleaded nor proved facts by which it could be said that the income in question was income from business. The fact that in the past the treatment of the income as one from business cannot be a bar to make assessment of the income under the correct head of income in accordance with law. The other reasons given by the CIT(A), in our view are proper. The revenue has rightly placed reliance on the decision f the Hon'ble Supreme Court in the case CIT v. Shambu Investments P.Ltd. (249 ITR 47)(SC). In the said case, property was let out by an assessee together with the right to use furniture and fixtures and other common 4 ITA Nos.6291-95/M/09 Shree Prabha Trade & finance Co.
facilities in addition to security fees. Income derived by letting out was still considered as income from house property. In the case of the assessee there are no facts brought out as to why the income in question has to be considered as income from business. In these circumstances, we confirm the order of the CIT(A) and dismiss ground No.1 of the assessee.
8. Ground No. 2 raised by the assessee reads as under:
"The learned CIT(A) erred in confirming and treating amounting to Rs. 16,685/- as income from other sources."
9. During the previous year assessee received interest income of Rs. 16,685/- which was taxed under the head "income from other sources". Before the CIT(A), the assessee submitted that its line of business was money lending and financing and, therefore, interest income has to be considered as business income. The CIT(A), however, found that the interest was received in respect of loan given to one M/s. Vinod Associates. The CIT(A) found that in the Balance Sheet there was no borrowing nor was the assets side of the Balance Sheet found to be containing under the head "loans and advances outstanding of M/s. Vinod Associates". In the above circumstances, the CIT(A) held that the contention of the assessee that the loan in question was given in the course of its business of carrying on money lending business was not correct. Accordingly, the AO's action was upheld.
10. Before us, the learned counsel for the Assessee could not point out any circumstances or show as to why the findings of the CIT(A) were not correct. In the circumstances, we uphold the order of the CIT(A) and dismiss ground No.2 raised by the assessee.
11. The other grounds are relating to levy of interest under section 234A and 234C which is purely consequential and the ground relating to initiation of penalty proceedings cannot be subject matter of appeal. Consequently, the appeal by the assessee is dismissed.
5 ITA Nos.6291-95/M/09
Shree Prabha Trade & finance Co.
12. Now we shall take up the appeal in ITA No. 6291/Mum/2009 for the assessment year 2001-02. Ground No. 1 raised by the assessee reads as under:
"The Assessing Officer is not justified in re-opening the case u/s.148 of the Income-tax Act, 1961."
13. In this assessment year, the assessee filed its return of income on 30.6.2001, which was accepted under section 143(1) of the Act. Later on a notice under section 148 was issued and served on the assessee on 27.3.2008. The reasons for initiation of re-assessment proceeding was the outcome of the assessment in the Assessment Year 2005-06, wherein it was held that income from letting out the property has to be assessed under the head "income from house property". Before the lower authorities the assessee did not challenge the validity of initiation of re-assessment proceedings.
14. Before us it was submitted that in the assessment completed in the past, the income has been accepted as income from business and reopening has been done purely on a change of opinion. We are of the view that this objection cannot be accepted for the reason that the outcome of the assessment in the assessment year 2005-06 was sufficient for the A.O. to entertain a belief regarding escapement of income. The assessee by claiming the income from letting out the property under the head "business income" was also claiming deduction of expenses which were allowed normally under the head "income from house". By reason of changing of head of income those expenses cannot be allowed as a deduction. Thus, there was reason to believe that income chargeable to tax has escaped assessment. The A.O. has validly initiated re-assessment proceedings. Consequently, ground No.1 is dismissed.
15. Ground No.2 raised by the assessee reads as under:
"The Ld.CIT(A) erred in confirming and treating licence fees received of Rs. 1,80,425/- from Rav Tech and Rs. 84,000/- from Tropical Ent. As income from other sources as against treated by assessee as business income."6 ITA Nos.6291-95/M/09
Shree Prabha Trade & finance Co.
16. The issue in ground No.2 as to whether the income from letting out the property is to be assessed as income from other sources or income from business. We have already seen that the Assessee that in AY 05-06, the income from letting out of the property was considered as income under the head "Income from House Property". In this assessment year the income from letting out the property was treated by the A.O. as assessable under the head "income from other sources". According to the A.O. the income from letting out the property can be assessed under the head "income from House property" only if the assessee is the owner of the property. According to the A.O. the assessee was only a licensee and not the owner of the property. Therefore, the income had to be assessed under the head "income from other sources". The CIT(A) confirmed the order of the A.O.
17. We have heard the rival submissions on this issue. We have already seen that the assessee as a nominee of the original debenture holder in Shree Madhu Industrial Estate Ltd. had a right of occupancy over the property. As to whether such occupancy rights had all the attributes of ownership, has neither been examined by the AO nor explained by the Assessee. The Assessee has not explained before us as to how it had a right of occupancy of the property. It is necessary to consider income from letting of property to be regarded as "Income from House Property" that the recipient of the rent should be the owner as under stood under the Act. In this regard we find the original allottee was one Indira Kumar Somani. As to how the Assessee came into possession of this property and as to how its right over the property, should be considered as a right of ownership of the property, are all matters which are not clear from the records. We therefore set aside the order of CIT(A) on this issue and direct the AO to examine this issue afresh. The Assessee will explain as to how it has to be considered as owner of the property and as to how the rent from letting of the property has to be considered as "Income from House Property". As far as A.Y.'s in which the income has been considered by the AO himself as "Income from House property", such assessments will hold good so long as they are not disturbed by a 7 ITA Nos.6291-95/M/09 Shree Prabha Trade & finance Co.
process known to law. We accordingly allow ground No.2 raised by the assessee for statistical purposes.
18. Ground No. 3 raised by the assessee reads as under:
"The ld.CIT(A) thereby erred in allowing only compensation paid to Shree Madhu Indl. Estate Ltd. to Rs. 18,314/- and compensation paid to Somani & Co. Pvt. Ltd. at Rs. 12,000/- only and thereby erred in disallowing other expenses deb9ted to profit and loss account."
19. The assessee claimed the fee that it paid to Shree Madhu Indusal Estates Ltd., the owner of the property and Somani & Co. Pvt. Ltd., the owner of the property, for obtaining rights to let out the property were claimed as deduction against the income from house property. This was disallowed for the reason that the income in question is assessed under section 57 i.e. income from other sources and in such event section 57(iii) of the Act only expenditure incurred wholly and exclusively for earning the income can be allowed as a deduction. Consequent to our decision while deciding ground No.2 remanding the issue as to whether the income in question has to be assessed under the head "Income from House Property" or "Income from other sources", this issue should also be examined afresh by the AO. Accordingly, we remand the issue to the AO for fresh consideration in the light of the facts that might emerge in the set aside proceedings before the AO. Accordingly, ground No. 3 is allowed for statistical purposes.
20. Ground No.4 raised by the assessee reads as follows:
"The Ld.CIT(A) erred in confirming interest received of Rs. 1,52,858/- as income from other sources as against treated by the assessee as business income."
21. The assessee was carrying out the business of construction of building. Monies were borrowed for the purpose of construction of the building, which was to be sold to third parties. Due to several reasons, the project of construction of the building could not proceed and therefore, the amounts received as loan were lent and interest income was received by the assessee. The same was claimed as income from business. According to the A.O. since the building was already completed the receipts by ay of interest cannot be 8 ITA Nos.6291-95/M/09 Shree Prabha Trade & finance Co.
treated as income from business. He, therefore, treated the same as income from other sources. The CIT(A) confirmed the order of the A.O.
22. Before us the learned counsel for the assessee reiterated the submissions made before the lower authorities, i.e. in the past interest income was accepted as income from business.
23. We have considered the submission of the assessee and are of the opinion that the same cannot be accepted. The only assessment u/s.143(3) in the case of the assessee was for the assessment year 1995-96 and in that year, there was no occasion to examine this issue. In the given circumstances, we are of the view that the assessee was not engaged in the activity of earning interest as business. Consequently, ground No. 4 raised by the assessee is dismissed.
24. Ground No. 5 with regard to levy of interest under section 234B is purely consequential.
25. Ground No. 6 was not pressed and the same is dismissed as not pressed.
26. In the result, ITA No. 6291/Mum/2009 is partly allowed for statistical purposes. ITA No.6292/Mum/2009 for the assessment Year 2002-03
27. Ground No.1 is with regard to validity of reassessment proceedings and ground No.2 with regard to treating the licence fees received as income from other sources have already been decided while deciding ground No. 1 and 2 of the assessee's appeal for the A.Y. 2001-02. For the reasons stated therein, ground No. 1 is dismissed, while ground No. 2 is allowed for statistical purposes.
28. Ground No. 3 raised by the assessee reads as follows:
"The Ld.CIT(A) thereby erred in allowing only compensation paid of Rs.50,563/- only and thereby erred in disallowing other expenses debited to profit & loss account."
29. This ground is purely consequential to ground No.2. The outcome of this ground of appeal will depend on the outcome in the set aside proceedings. The AO will consider the allowability of the expenditure in the set aside proceedings depending on the head of 9 ITA Nos.6291-95/M/09 Shree Prabha Trade & finance Co.
income under which the income from letting is assessed. Accordingly, ground 3 is allowed for statistical purposes.
30. Ground No. 4 reads as follows:
The Ld.CIT(A) erred in confirming and treating commission received as income from other sources as against treated by the assessee as income from business."
31. The claimed to have been received commission of Rs. 1,30,635/- which was claimed to be income from business. On an enquiry by the A.O. it transpired that the said amount was received from M/s. Kamla Paper Traders for the services rendered. The assessee, however, was not in a position to give the nature of services rendered. The A.O. also found that in the past no such income was declared by the assessee. In such circumstances, the receipt was treated as income from other sources. Consequently the expenses debited in the Profit & Loss account were not allowed as a deduction. The order of the A.O.was confirmed by the CIT(A).
32. Before us the learned counsel for the assessee could not point out any evidence to controvert the findings of the lower authorities. In the circumstances, we uphold the order of the CIT(A) and dismiss ground No.4 raised by the assessee.
33. Ground No. 5 reads as follows:
"The Ld.CIT(A) erred in treating interest received of Rs. 2,245/- as income from other sources a against treated by the assessee as Business income."
34. This ground is identical to ground No. 4 in the appeal for the assessment year 2001-02. For the reasons stated therein, this ground of appeal of the assessee is dismissed.
35. Ground No. 6 is with regard to charging of interest under section 234B of the Act is purely consequently.
36. Ground No. 7 was not pressed. Hence, it is dismissed as not pressed.
37. In the result, the appeal in ITA No. 6292/Mum/2009 is partly allowed for statistical purposes.
10 ITA Nos.6291-95/M/09
Shree Prabha Trade & finance Co.
ITA No. 6293/M/2009 for the assessment year 2003-04
38. Ground No. 1 is with regard to the validity of initiation of reassessment proceedings for the reasons stated while deciding similar ground of appeal in the assessment year 6291/Mum/09 for the assessment year 1991-92, this ground is dismissed.
39. Ground Nos. 2 & 3 raised by the assessee read as under:
"2. The Ld. CIT(A) erred in confirming and treating licence fees received of Rs.4,17,300/- as income from other sources as against treated by assessee as business income.
3. The Ld.CIT(A) erred in allowing only compensation paid of Rs. 50,565/- and disallowed other expenses debited to profit and loss account."
40. We have already decided identical grounds of appeal in the assessee's appeal for the assessment year 2002-03 in ITA No. 6292/Mum/2009 above, viz. ground Nos. 2 & 3. For the reasons stated therein, ground No.2 and ground No. 3 are allowed for statistical purposes.
41. Ground No. 4 raised by the assessee reads as under:
"The Ld.CIT(A) in offering profit from completed project the profit therefrom is estimated @ 15% i.e. Rs. 11,29,469/- of the WIP and thereby deducted the brought forward loss of assessment year 1999- 2000 of Rs. 35,434/- and the brought forward loss of Rs. 65,669/- for assessment year 2000-01 and added Rs. 10,28,366/- as income from business."
42. The assessee was carrying out construction of buildings on Plot No. 16-C of Survey no. 161 Part, Pahadi, Bangur Nagar at Goregaon (West), Mumbai 400 090. The construction of the building was in progress and as on 31.3.2002, 90% of the construction was completed. The assessee had constructed in all about 15 flats out of which assessee had received advances for purchase from 9 persons. There were disputes raised by the neighbours of the property where the assessee was putting up construction. The Hon'ble Bombay High Court in the dispute between the assessee and the neighbors passed an order dated 3.3.1993 permitting the assessee to carry and complete the construction. The Hon'ble Bombay High Court has also directed that the assessee shall not create any third party rights for the flats except the rights 11 ITA Nos.6291-95/M/09 Shree Prabha Trade & finance Co.
already created. Further the Court also directed that the assessee will not give possession to the third party or occupy the flats. In the event of the neighbors succeeding in the suit, the assessee was required to demolish the building. On the above terms, the Hon'ble Bombay High Court passed the order. The order was passed pending the decision over the suit filed by the neighbors against the assessee. It is not in dispute before us that the said suit is still pending adjudication. The assessee had shown the investments that it had made in the construction of the property as work- in-progress in the balance sheet.
43. In the course of assessment proceedings the A.O. called upon the assessee to show cause as to why the profits of the project of construction of flats has not been offered for taxation though the construction has been completed. The assessee in reply submitted that the occupation certificate is yet to be obtained. The Assessee also pointed out that the Hon'ble Bombay High Court has already directed that the assessee shall not part with possession of the flats to any third parties. The assessee, therefore, submitted that no profits whatsoever had accrued to the assessee and therefore, no profit should be taxed. The A.O. however, held that the assessee had completed the construction and has received the payments from buyers. According to him, in construction business profit is earned in every year of construction activity and builders generally offer profits for taxation at certain percentage every year. This method of offering income from construction contracts is called as percentage completion method of accounting profits from construction contracts. The A.O. referred to the fact that some builders follow project completion method and offer profits from the project for taxation when 80% of the project is completed. According to the A.O. the assessee cannot postpone the payment of tax on the profits earned on technical ground. Since the construction of flat was completed and only occupation certificate is pending, the A.O. was of the view that profits had been generated from the construction activity. He estimated 50% of the Work in progress shown in the 12 ITA Nos.6291-95/M/09 Shree Prabha Trade & finance Co.
balance sheet as the profit of the assessee for the previous year and thereby added a sum of Rs. 11,29,4469/- to the total income of the assessee.
44. On appeal by the assessee the CIT(A) confirmed the order of the A.O. According to the CIT(A) the assessee was following the project completion method and 80% of the project was complete. According to the CIT(A), the assessee had received the payments against sale of flats and though the possession of the flat has not been delivered and though there was an order of the Bombay High Court restraining the assessee from partying with possession, yet the profit on construction had to be brought to tax. Aggrieved by the order of the CIT(A), the assessee had raised the aforesaid ground of appeal before the Tribunal.
45. We have heard the rival submissions. The admitted facts in the case are that ultimately if the litigation is decided against the assessee, the assessee has to pull down the entire structure. In that event the assessee has to refund all the monies to the purchasers of the flat. Admittedly, the assessee could not part with possession of the flats. In this scenario, it cannot be said that the assessee has completed the construction project. Neither the completed contract method of accounting nor percentage completion contract method of accounting could be applied. The entire construction project having been locked up in litigation, it could not be said that there was any accrual of income to the assessee. Admittedly, the assessee follows mercantile system of accounting. In the mercantile system of accounting it is the legal right to income which will decide accrual of income. In the given facts and circumstances, it cannot be said that any income whatsoever has accrued to the assessee. Consequently, we hold that the revenue authorities were not justified in bringing to tax any income out of the construction project in the hands of the assessee. The addition sustained by the CIT(A) is deleted. Ground No. 4 raised by the assessee is allowed.
13 ITA Nos.6291-95/M/09
Shree Prabha Trade & finance Co.
46. Ground No. 5 raised by the assessee reads as follows:
"The learned CIT(A) erred in confirming and treating interest received of Rs. 10,881/- as income from other sources as against treated by the assessee as business income."
47. This ground of appeal is identical to ground No. 4 in ITA No. 6291/Mum/2009 for the assessment year 2001-02. For the reasons stated therein, this ground of appeal of the assessee is dismissed.
48. Ground Nos. 6 & 7 are identical to ground No. 5 and 6 raised by the assessee in ITA No. 6291/Mum/2009 for the assessment year 2001-02. For the reasons stated therein, it is held that ground No. 5 is purely consequential and ground No. 6 is dismissed.
49. In the result, appeal by the assessee is partly allowed. ITA No. 6295/Mum/2009 : Asst. Year 2006-07
50. Ground No. 1 raised by the assessee reads as follows:
"The Ld. CIT(A) erred in confirming and treating licence fees received of Rs. 3,86,438/- as income from house property as against treated by assessee as business income."
51. This ground of appeal is identical to ground No.1 raised by the assessee in the assessee 2005-06 in ITA No.6294/Mum/2009. For the reasons stated therein, this ground of appeal of the assessee is dismissed.
52. Ground No.2 raised by the assessee reads as follows:
"The Ld.CIT(A) erred in confirming and treating interest received of Rs.7,749/- as income from other sources as against treated by the assessee as business income."
53. This is identical to ground No.4 in ITA No. 6291/Mum/2009 for the assessment year 2001-02. For the reasons stated therein, this ground of appeal is dismissed.
54. Ground No. 3 with regard to charging of interest u/s.234B and 234C is purely consequential.
14 ITA Nos.6291-95/M/09
Shree Prabha Trade & finance Co.
55. Ground No.4 with regard to initiation of penalty proceedings cannot survive because there is no right of appeal against the initiation of penalty proceedings.
56. In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court on this 15th day of October, 2010.
Sd. Sd.
(P.M. Jagtap) (N.V. Vasudevan)
Accountant Member Judicial Member
Mumbai dated the 15th October, 2010.
kn
Copy to:
1. The Assessee
2. The Revenue
3. The CIT-14, Mumbai
4. The CIT(A)-25, Mumbai
5. The DR 'H' Bench, Mumbai By order
/True copy/
Asst. Registrar, ITAT, Mumbai