Income Tax Appellate Tribunal - Mumbai
Electronic & Engineering Company , ... vs Department Of Income Tax
1
ITA No.4516/Mum/2010
M/s Electronic & Engineering Company
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'H' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI D.K. AGARWAL, JM & SHRI R K PANDA, AM
ITA No. 4516/Mum/2010
(Asst Year 2005-06)
DCIT - 20(3), VsM/s Electronic & Engineering
Room No. 506, Company,
Piramal Chambers, Parel, EEC House, Plot No. C-7,
Mumbai 400 012. Dalia Industrial Estate,
New Link Road,
Andheri (West),
Mumbai - 400 053.
(Appellant) (Respondent)
PAN NO. AAAFE 0594M
Appellant by Shri V.V. Shastri
Respondent by Shri Mayur Kisnadwala
PER R K PANDA, AM
This appeal filed by the Revenue is directed against the order dated 15.03.2010 of the CIT(A)- 31, Mumbai relating to Assessment Year 2005-06.
2 The grounds raised by the Revenue are as under:-
"I. The learned CIT(A) has erred on facts and in law and in the circumstances of the case in directing the Assessing Officer to treat the rent compensation and service charges as Income from business instead of income from House Property as adopted by the Assessing Officer.
II. The learned CIT(A) has erred on facts and in law and in the circumstances of the case in not appreciating the fact that this issue has been settled by the Apex Court in favour of the revenue in its landmark judgment rendered in the case of M/s Shambhu Investments Pvt. Ltd. Vs. CIT 263 ITR 143.
III. The appellant prays that the order of the CIT (Appeals) on the above grounds be set aside and that of the AO be restored."2 ITA No.4516/Mum/2010
M/s Electronic & Engineering Company
3. Facts of the case in brief are that during the course of assessment proceedings the A.O. noted that the assessee has shown income by way of rent under the head "business centre receipt". The assessee is a partnership firm and was engaged in the business of manufacturing of non- destructive equipments and allied quality control instruments in the past years. The business of the assessee has been closed down and the assessee firm has let out its office premises to sister concerns from whom the rent has been received which is credited to the Profit & Loss Account under the nomenclature of 'compensation' totalling to Rs. 13,92,500/- and Rs. 4,13,334/- as service charges in respect of rented property. The A.O. asked the assessee to explain as to why the rental income received on let out of the property of the assessee firm should not be taxed under the head "income from house property".
3.1 The assessee made detailed submission according to which it was in business since last 40 years and its main customers directly or indirectly are Government organisations. The nature of its business is highly technical and the firm is substantially dependent on its skilled workers. During the year 1996 some workmen and the union instigated to slow down the production, disobedience of lawful orders, sabotage and many other unfair labour practices. Consequently the production gradually came down and therefore it became difficult for the firm to survive in the competitive market. The non-cooperative attitude of the workmen and the labour problem resulted in delay in supply, loss of orders and hence finally loss of business. Such recurring losses eroded the capital and financial capacity of the assessee. Due to loss of order many workers were rendered surplus and were therefore retrenched. The workers went to the Court for reinstatement and the decision of the court is pending. Since the matter is sub judice and it is not possible for the assessee to carry on the manufacturing operations optimally and economically on a low scale, the assessee decided to temporarily suspend its manufacturing activities (but not the business).
3 ITA No.4516/Mum/2010M/s Electronic & Engineering Company However, it continues to hold all the assets in the form of machineries/equipments etc. Till the final decision of the court the assessee firm had decided to continue its business by commercially exploiting its assets. Therefore, the business of the assessee continues and has not ceased. Relying on a couple of decisions, the assessee submitted that though the manufacturing business of the assessee may be temporarily/momentarily dormant as long as there is some business carried on therefore, the intention is to carry on the manufacturing business and therefore the claim of expenses cannot be disallowed. It was further submitted that the business of the assessee continues and such intention to continue the business is manifest from the fact that in A.Y. 2004-05 and 2005-06, the assessee decided to exploit the assets i.e. the office premises along with the furnitures by temporary letting them out till it restructured/reorganised its business. It was argued that there was only a temporary lull in the business but no stoppage of business. It was accordingly submitted that the rental income should be assessed as business income and not as income from house property.
3.2 However, the A.O. was not satisfied with the explanation given by the assessee. He observed that the assessee during the relevant assessment year has no other income except from the sale of raw material and rent from leased property. According to him there is no element of carrying on of any business in terms of provisions of section 28 of the Act which can make the income of rent fall under the head of business income. Relying on the decision of Hon'ble Supreme Court in the case of East India Housing and Land Development Trust v. CIT [1961] 42 ITR 49 and in the case of Shabhu Investment Pvt. Ltd. Reported in 263 ITR 143 and the decision of Hon'ble Gujarat High Court in the case of CIT vs. New India Industries Ltd. Reported in 201 ITR 208 the A.O. treated the business centre receipts as income from house property as against business income declared by the assessee.
4 ITA No.4516/Mum/2010M/s Electronic & Engineering Company 3.3 Before the ld. CIT(A) it was submitted that the A.O. has not appreciated the facts correctly while concluding that the business centre receipts are its income from house property. It was submitted that the assessee has never closed down or ceased its business as held by the A.O. Only the manufacturing activity of the assessee firm was temporarily closed down due to the inherent labour problems faced by the assessee. It was submitted that the civil suit filed against the assessee firm by the labour unions are still pending with the court, therefore, the assessee is not in a position to re-start its business. It was submitted that the premises were finally let out to associate sister concerns with an understanding that they would vacate the premises on demand once the court cases are resolved so that the assessee would be able to immediately start its business activity of manufacturing. It was submitted that since there was delay in decision of the court cases, the assessee decided temporarily to commercially exploit the premises as a business centre by letting it out to Jyoti Structures Engineering Services Pvt. Ltd. on leave and licence basis for a period of 11 months renewable for further two terms. The entire space available in their first floor and second floor of the building is held by the assessee for its own use. It was further submitted that in the preceding assessment years 2003- 04 and 2004-05 the business centre receipts has been accepted as "income from business" by the A.O. 3.4 The assessee distinguished the decision of Shambhu Investment Pvt. Ltd. (supra) relied on by the A.O. on the ground that in the said case the primary objective of acquiring the property was to exploit it and earn rental income. The premises has never been used as a commercial asset and had been let out since its acquisition. In the said case the entire cost of asset has been received by the assessee by way of deposits. However, in the case of the assessee the premises were constructed in the year 1973 and the said premises were being used continuously for its manufacturing business. The assessee had to temporarily suspend its manufacturing activities due the 5 ITA No.4516/Mum/2010 M/s Electronic & Engineering Company reasons explained above. Therefore, the temporary exploitation of its commercial assets by way of letting out the same to its sister concerns and earning composite leave and licence fees and service charges can never be considered as its "house property income". Similarly, distinguishing the decision of Hon'ble Supreme Court in the case of East India Housing & Land Development Trust Ltd. (supra) it was submitted that in that case the company itself was formed for letting out shops and stalls and such assets were never used for business purpose. So far as the reliance in the case of New India Industries Ltd. (supra) it was submitted that the assessee in that case had ceased to use the building as a commercial asset either himself or even through others and under those circumstances the Court held it taxable under the head "income from house property".
3.6 The assessee submitted that in case of the assessee, since the business was never discontinued, the temporary exploitation of its commercial assets should be considered as its income from business and accordingly the various expenses claimed should be allowed. Referring the decision of Hon'ble jurisdictional High Court in the case of Karsondas Ranchhoddass reported in 81 ITR 1 it was submitted that the court in the said case has held that there may be a long period of inactivity and still the business may continue. Referring to the case of the assessee it was submitted that the assessee during the financial year 2008-09 has started trading in the same line of business, therefore, it was a temporary lull in the business activity and it cannot be held that the assessee has discontinued its business never to revive it again. It was accordingly submitted that the business centre receipts should be treated as "business income".
3.7 Based on the arguments advanced by the assessee and relying on a couple of decisions, the ld. CIT(A) held that the business centre receipts of the assessee should be treated as business income. While doing so, he noted that the A.O. has missed certain vital facts for deciding the issue. He 6 ITA No.4516/Mum/2010 M/s Electronic & Engineering Company observed that due to certain labour problems the assessee had to suspend its manufacturing activities in the year 2002-03. To reduce its trading loss, the assessee has leased out portion of its factory premises primarily to its associate concerns for running a business centre on which it has received leave and licence fees and service charges. These leave and licence agreements are composite agreements for charging of rent and charging of various infrastructure facilities provided to the lessees. Since the Civil Suits filed against the assessee by the labour unions were pending in the courts, the assessee could not start its manufacturing activity. However, the assessee has maintained its entire block of fixed assets including plant and machinery. It has also undertaken business transaction i.e sale of its opening stock in trade, miscellaneous receipts on account of sundry balances written off, sale of scrap and incurring of day to day business and administrative expenses. All these facts which were available on record prove that the assessee has not discontinued its business. He noted that the A.O. has allowed similar income in the case of the assessee in the preceding 3 to 4 assessment years as its business income in the scrutiny assessments as well as under summary assessments. The business of manufacturing activity suspended by the assessee was for a temporary period with the expectation of its revival once the court cases are amicably settled. He accordingly found considerable merit in the arguments of the assessee that the A.O. was not justified in changing the method consistently followed in the preceding assessment years. For the principle of consistency, he relied on the decision of the Tribunal in the case of Shree Gopal Purohit reported in 29 SOT 117 (Mum).He further noted that since the assessee has started its trading activities in the same line of business i.e. importing these equipments for trading purposes and selling the same mostly to its old customers during financial year 2008-09, therefore, it is proved that the business was admittedly temporarily suspended by the assessee. Relying on the decision of Hon'ble Supreme Court in the case of CIT vs. Sri Lakshmi Silk Mills Ltd. reported in 20 ITR 451 (SC) and the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Golden Engineering 7 ITA No.4516/Mum/2010 M/s Electronic & Engineering Company Works reported in 256 ITR 774 (P&H) he held that the composite letting out income consisting of the compensation received or the rent received and the service charges received by the assessee are in the nature of its income from business and not in the nature of its income from house property. Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before us.
4. The ld. D.R. heavily relied on the decision of the Hon'ble Supreme Court in the case of Shambhu Investment Pvt. Ltd. (supra).
5. The ld. Counsel for the assessee, on the other hand, reiterated the same submissions as made before the A.O. and the ld. CIT(A). He submitted that the property in question is partly let out to its sister concern from A.Y. 2002-03 onwards. During the impugned assessment year, a part of the same was also let out to M/s Jyoti Structures Engineering Services Pvt. Ltd. Since the court cases were pending, the assessee temporarily suspended its business activity. However, from assessment year 2008-09, the assessee has started its trading activity on the same line of manufacturing activity which was earlier carried out, by importing the equipments for trading purposes and selling the same mostly to its old customers. Therefore, it was only for a temporary period that the business was discontinued. Further during A.Y. 2004-05, the A.O. in scrutiny assessment passed u/s 143(3) on 14.11.2006 had accepted the business centre receipts as business income. In A.Y. 2002-03 and 2003-04 the same has been accepted u/s. 143(1) and no remedial measures have been taken by the A.O. by reopening the assessment.
5.1 Referring to the decision of Hon'ble Madhya Pradesh High Court in the case of CIT vs. Kohinoor Tobacco Products Pvt. Ltd. reported in 283 ITR 162, he submitted that the Hon'ble Madhya Pradesh High Court after considering the decision of Hon'ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. (supra) has held that income from 8 ITA No.4516/Mum/2010 M/s Electronic & Engineering Company temporary letting out of property used normally for business when there is no intention to close down business has to be assessed as income from business.
5.2 Referring to the decision of Hon'ble Supreme Court in the case of Shambhu Investment Pvt. Ltd. (supra) the ld. Counsel for the assessee submitted that the same is distinguishable on facts and not applicable to the facts of the present case. He submitted that the Hon'ble Supreme Court has upheld the decision of Hon'ble Calcutta High Court in the case of CIT vs. Shambhu Investment reported in 249 ITR 47. Referring to the facts of in the case of Shambhu Investment (supra) he drew the attention of the Bench to the full text of the decision placed at page No. 13 to 20 of the paper book and submitted that in that case the cost of the property was Rs. 5,42,443/-. A portion of the said property was used by the assessee itself for its own business purpose and the rest of the property was let out to various occupants. The assessee had recovered an amount of Rs. 4,25,000/- by way of interest free advance. Under these circumstances, it was held that the assessee was not exploiting the property for its commercial/business activities. The Hon'ble Court held that the prime objective of the assessee under the said agreement was to let out the portion of the said property to various occupants by giving them additional right of using the furniture and fixtures and other common facilities for which rent was being paid month by month in addition to the security free advance covering the entire cost of the said immovable property. However, in the instant case there was only temporary lull in the business activity and during such temporary lull a part of the premises was commercially exploited by the assessee to minimise its losses. Therefore, in view of the decision of the Hon'ble Madhya Pradesh High Court in the case of Kohinoor Tobacco Products Pvt. Ltd. (supra) which is similar to this issue, the business centre receipts of the assessee should be treated as business income and not as income from house property.
9 ITA No.4516/Mum/2010M/s Electronic & Engineering Company 5.3 He further submitted that since in the preceding assessment years, the A.O. has accepted the business centre receipt as business income, therefore, in view of the rule of consistency as propounded by the Hon'ble jurisdictional High Court in the case of CIT vs. Gopal Purohit reported in 336 ITR 287 the business centre receipt has to be treated as business income. He also relied on the decisions in case of the Scientific Instrument Co. Ltd. v. CIT vide I.T. Appeal No. 1 of 2003 dtd. 12.8.2011, the decision in the case of Karsondas Ranchhoddass v. CIT reported in 83 ITR 1.
6. We have considered the rival arguments made by both the sides, pursued the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. From the various details furnished by the assessee in the paper book we find it is the submission of the assessee that due to some labour dispute the assessee has temporarily let out a part of its premises to its sister concern and during the impugned assessment year the assessee has further let out a portion of the property to one M/s Jyoti Structures Engineering Services Pvt. Ltd. It is the case of the assessee that it has exploited its commercial asset during its temporary lull in the business activity which it has revived during A.Y. 2008-09. Further it is also case of the assessee that during A.Y. 2004-05 the A.O. in the scrutiny assessment has accepted the claim of business centre receipt as business income and during A.Y. 2002-03 and 2003-04 the same has been accepted in summary assessment. It is the case of the Revenue that in view of the decision of Hon'ble Supreme Court in the case of Shambhu Investment Pvt. Ltd. such business centre receipt has to be treated as income from house property and not as income from business centre.
6.1 We find the case of the assessee is squarely covered by the decision of Hon'ble Madhya Pradesh High Court in the case of Kohinoor Tobacco Products P. Ltd. (supra). In that case the assessee was a company which 10 ITA No.4516/Mum/2010 M/s Electronic & Engineering Company carried on bidi manufacturing business at the relevant time. It acquired property for its bidi business consisting of factory building, go-downs, officer/staff quarters etc. The properties were being used for the purpose of its business. However, due to labour problem and other circumstances, the assessee had to temporarily reduce its activities and consequently let out some of the properties which were not immediately required by it for the purpose of its business. The assessee showed rental income from the properties as business income which was treated as income from house property by the A.O. The Tribunal held the income was to be treated as business income. On a reference, the Hon'ble High Court held that the properties were temporarily let out to keep them in good condition so that they could be used and exploited again for the purpose of assessee's bidi manufacturing business and the assessee's intention was to increase its business gradually and not to close down its business. Accordingly rental income was held to be assessable as business income.
6.2 Now coming to the facts of the case we find the assessee had submitted before the A.O. that due to pending labour court cases and the huge recurring losses the assessee took a commercial decision to exploit its business assets. Due to loss of orders many workmen were rendered surplus and accordingly retrenched. They have gone to court for reinstatement and the decision of the Court is awaited. As the matter is subjudice and it is not possible for the assessee to carry on the manufacturing on lower scale, the assessee decided to suspend its manufacturing activity but not the business. Till the final decision of the court, the assessee firm has decided to continue its business by commercial exploitation of its business assets. Further the finding given in the order of the ld. CIT(A) that the assessee has started its trading activity by importing the equipments which it was manufacturing and had supplied to old customers could not be controverted by the ld. D.R. We, therefore find merit in the submission of the ld. Counsel for the assessee that the asset has been 11 ITA No.4516/Mum/2010 M/s Electronic & Engineering Company commercially exploited by the assessee firm during its temporary suspension of business activity. Therefore in view of the decision of the Hon'ble M.P. High Court in the case of Kohinoor Tobacco Products P. Ltd. (supra) such rental income, in our opinion, has to be treated as business income.
6.3 The decision in the case of Shambhu Investment Pvt. Ltd. (supra), in our opinion, does not apply to the facts of the present case. In that case the property which was purchased for a consideration of Rs. 5,42,443/- was partly utilised by the assessee for its own business and the balance portion was let out to various occupiers by accepting interest free security deposit of Rs. 4,25,000/-. Under these circumstances, the Hon'ble Calcutta High Court came to the conclusion that the entire cost of the property let out to those occupiers has already been recovered by way of interest free advance by the assessee. Hence, it cannot be said that the assessee is exploiting its property for its commercial business activities and such business activities are prime motive and letting out the property is secondary one. This decision of the Hon'ble Calcutta High Court has been upheld by the Hon'ble Supreme Court. However, in the instant case the property has been let out during the period of temporary suspension of the business activity and the company has started its business activity from A.Y. 2008-09 onwards. Therefore, this decision, in our opinion, is distinguishable on facts and not applicable to the facts of the case of the assessee.
6.4 So far as the decision relied on by the A.O. in the case of East India Housing and Land Development Trust Ltd. (supra) we find the same has already been considered by the Hon'ble Madhya Pradesh High Court in the case of Kohinoor Tobacco Products P Ltd. (supra). Similarly in the case of CIT v. New India Industries Ltd. Reported in 201 ITR 208 relied on by the A.O., the assessee in that case had ceased to use it as a commercial asset either himself or through others and under those circumstances the Hon'ble 12 ITA No.4516/Mum/2010 M/s Electronic & Engineering Company Court held the rental income under the head 'income from house property'. In view of the above and in view of the detailed reasons given by the ld. CIT(A) while treating the business centre receipt as business income, we do not find any infirmity in the same. We accordingly uphold the order of the ld. CIT(A) on this issue. The grounds raised by the Revenue are accordingly dismissed.
7. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 30.11.2011.
Sd/- sd/-
( D K AGARWAL ) ( R K PANDA )
Judicial Member Accountant Member
Place: Mumbai : Dated: 30.11.2011.
RK
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT, City -XI, Mumbai
4 CIT(A) -31, Mumbai
5 DR Bench H
6 Master File
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai