Income Tax Appellate Tribunal - Agra
Meeraj Estate & Developers, Agra vs Assessee on 22 July, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
AGRA BENCH, AGRA
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
SHRI A.L. GEHLOT, ACCOUNTANT MEMBER
ITA Nos. 182 & 292/Agra/ 2012
Assessment Years: 2006-07 & 2008-09
M/s. Meeraj Estate & Developers, Vs. D.C.I.T. - 4(1),
B-23, Kamla Nagar, Aaykar Bhawan,
Agra. Agra.
(PAN - AALFM 8035 C)
(Appellant) (Respondent)
Appellant by : Shri Mahesh Agarwal, C.A.
Respondent by : Shri S.D.Sharma, Jr. D.R.
Date of hearing : 22.07.2013
Date of pronouncement : 14.08.2013
ORDER
PER A.L. GEHLOT,ACCOUNTANT MEMBER:
Both these appeals have been filed by the assessee against two different orders dated 23.01.2012 & 27.03.2012 passed by the learned CIT(A)-II, Agra for A.Ys. 2006-07 & 2008-09 respectively.
2. The effective grounds raised in these appeals are reproduced as below:- ITA No. 182/Agra/2012 by the Assessee for A.Y. 2006-07:-
"1. Because under the facts & circumstances of the case and in law, the authorities below have grossly erred in holding that appellant's receipts from lease charges Rs.8,98,512/- and from furnishing charges Rs.8,38,619/- was taxable under the head "House Property" and receipt from maintenance charges Rs.9,81,692/- was taxable under the head "Other Sources".2 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09
2. Because under the facts & circumstances of the case and in law, the authorities below have grossly erred in holding that the income earned by the appellant firm from furnishing, providing and maintaining a commercial space, according to the requirements of the occupier, is to be assessed as income from "House Property" and income from "Other Sources" and not under the head "income from business" as claimed by the him.
3. Because one having deliberated and consciously holding, in the AY 2005-06, that the aforesaid income is taxable under the head "income from business" and the facts and circumstances remaining same, the Ld. AO was precluded and has erred in law in assessing the said income under the head "House Property" and other Sources".
4. Because after having made the assessment u/s 143(3) in the status of "Firm", the authorities below were not justified to change the head of income from "income from business" to "house property" or "other sources".
5. Because the appellant denies levy of interest U/s 234B of the Income Tax Act.
6. Because the order appealed against is contrary to the facts, law and principals of natural justice."
ITA No. 292/Agra/2012 by the Assessee for A.Y. 2008-09:-
"1. BECAUSE, on due consideration of the facts and in the circumstances of the case 'CIT(A)' before deciding appeal against the 'appellant' ought to have allowed further opportunity of hearing to the 'appellant' as Notice if, at all issued fixing the date of hearing did not reach the 'appellant'.
2. (a)BECAUSE, on due consideration of the facts and in the circumstances of the case authorities below were not justified in rejecting the claim of the 'appellant' that income derived by 'appellant' Firm is business income.
(b) Because, while doing so the learned authorities below were unjustified in ignoring the decision of learned Additional Commissioner of Income Tax, Range-4, Agra who in the year of inspection of the activities A.Y. 2005-2006 after enquiry 3 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 approved the claim of the 'appellant' and held the receipts to be assessable under the head 'Business income'.
(c) Because, principles of consistency required that without showing that there is any material change in the facts, circumstances or the legal position of the case, the Assessing authorities cannot keep on changing there findings in respect of the same assessee on yearly basis.
3(a) Because, on the facts and in the circumstances of the case the learned authorities below were not justified in taxing receipts from lease charges of Rs.10,31,052/- as income from House Property ignoring the fact that 'appellant' firm enjoys only the "Right of enjoyment" and not "Right of Sale" over the property.
(b) Because, whiled doing so, the learned authorities below had not appreciated the intention/prime object of the 'appellant' Firm which stood reduced into writing on the instrument of Partnership dated 01.11.2004 which also stood brought on records before the learned 'AO'.
(c) Because, after having fairy held that "it is very difficult to define the business the learned 'AO' could not have arbitrarily held that receipts are to taxed under the head income from house property merely by an exercise of pick and choose of few words from the statement of one of the partner isolated from the context in which it was given.
4(a) Because, on the facts and in the circumstances of the case the learned authorities below were not justified in taxing 'Receipts from Furnishing' of Rs.10,81,248/- as 'income from House Property' ignoring the facts of the case.
(b) Because, while doing so the learned authorities below had not been able to assign any specific reason for not allowing the claim of the 'appellant'.
5(a) Because, on the facts and circumstances of the case the learned authorities below were not justified in taxing 'Receipts from maintenance charges' of Rs.10,04,016/- as 'Income from Other Sources' ignoring the facts of the case.
(b) Because, in arriving of the conclusion the learned authorities below had taken a very rigid and conservative completed under 4 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 section 143(3) could not have been denied in the year unless the operation of the assessment order is suspended/stayed.
6. Because, the claim of set off of brought forward of losses as found allowable in A.Y. 2005-06 in assessment completed under Section 143(3) could not have been denied in the year unless the operation of the assessment order is suspended/stayed.
7. Because, on the facts and circumstances of the case the learned 'AO' was not justified in disallowing the claim of interest on partners capital account amounting to Rs.11,57,542/-.
8. Because, after having made assessment under section 143(3) in the status of Firm, as claimed by the assessee the authorities below were not justified in making the change in the heads of income as there can be no valid partnership to share either 'House Property Income' or 'Income from Other Sources'.
9. Because, while making the assessment the learned authorities below made various observations/conclusions which are contrary to facts available on records. Cases has been referred and relied without showing as to how it applies to the facts of the case in hands. While making the addition submission made and evidences filed have been rejected arbitrarily.
10. Because, the appellant denies levy of interest under section 234B of the 'Act'.
11. Because, the order appealed against is contrary to the facts, law and principles of natural justice.
The appellant reserves his right to add, delete, modify, alter or substitute any or all the grounds of appeal."
3. The ld. Authorized Representative submitted that grounds of appeal in both the appeals are pertaining to the same assessee for different Assessment Years 2006-07 and 2008-09. The ld. Authorized Representative submitted that the facts lead to the ground of appeal in A.Y. 2006-07. It is also submissions that grounds of appeals are argumentative but effective ground of appeal is only on whether 5 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 income is assessable as income from house property or income from business. The ld. Authorised Representative has argued accordingly.
4. The brief facts of the case are that return showing loss of Rs.10,95,190/- was filed on 12.06.2006. The case was picked up under compulsory scrutiny in terms of para no.3 of the C.B.D.T. Instructions from obtaining approval of CCIT, Kanpur. The notice u/s 143(2) was issued on 18.06.2007 of the I.T. Act, 1961 for 25.06.2007 but no compliance was made. Again notice u/s 143(2) along with notice 142(1) with questionnaire dated 08.07.2008 were sent to the assessee, in response to which Shri Anurag Sinha, Advocate attended from time to time and furnished replies on various queries. The case has been discussed with them. The A.O. noticed that the assessee had entered into three separate agreements with the GAIL, which is a Government of India undertaking. In the first agreement, the assessee (lessor) has let out the 6436 sq. ft. carpet area (vacant floor) at Padam Deep Tower, Sanjay Place on 30.11.2004. This agreement is termed as lease agreement and annual receipt of Rs.11,58,480/- were shown as lease receipt. In the second agreement executed on 14.12.2004, whereby lessor, the assessee firm, was agreed to furnish 3rd floor as per the requirement of GAIL. The assessee firm has furnished the said floor with Air Condition System and other miscellaneous amenities. The A.O. noticed that in the second agreement which is in fact consequence of the first agreement, the entire receipt of Rs.10,81,248/- is termed as receipts against furnishing. The third agreement executed on 6 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 16.12.2004, where assessee will have to maintain and upkeep the premises to the satisfaction of the GAIL and the entire annual receipts of Rs.10,04,016/- were termed as maintenance receipt. The A.O. noticed that all these three receipts were claimed as business receipt by the assessee. The entire income was claimed to be taxed under the head "income from business & profession".
5. The A.O. noticed that in fact this is the case where assessee entered into the three separate agreements with the same person. All the three agreements, their terms and conditions, their receipts, their rights and obligations can be easily separated. At the very outset, it is clarified that it is not the case of composite rent, where rent is received on account of letting out the property and the service charges for various facilities along with the properties like lift, electricity, water, gas, air conditioner etc. In the case of composite rent, the rent is divided and the portion of rent attributable to letting of the premises shall be assessable in one head. The other portion of the composite rent received for rendering services shall be assessable under different head. The A.O. was of the view that this is the case where agreements are separate and their treatment should also be separate. This is also not the case where letting out is subservient of any business activity. It is a clear-cut case where three agreements are separate and income arisen from them should be treated separately. The A.O. vide order sheet entry dated 25.08.2008 7 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 asked the assessee to justify its claim as a business income, why this income should not be treated as income from other sources or income from house property as against income from business & profession claimed by it. The assessee vide its reply dated 08.09.2008 stated that the main object of business of the firm is business of real estate and alike activities like giving properties on lease or sublease providing annual maintenance for any type of faculties etc. The A.O. was of the view that the Partner might have constituted with the business objective to let out the properties but it cannot decide the head of income to which it falls as specified in Income Tax Act. The A.O. noticed from the reply of the assessee vide paragraph no.6 wherein the assessee stated "Your honour would appreciate that it requires continuous efforts on the part of the assessee firm to earn income. Assessee firm, apart from providing floor area to them, is also providing services of generator, Air conditioner etc. and repair & maintenance of the same. Assessee is also required to provide furniture and fixtures, lift maintenance, all upkeep and maintenance of the portion including its half yearly painting, furnishing and to ensure that the office premises is maintained as per the requirement of the GAIL. All these facts taken together conclusively establish the assessee's claim of business income". Vide paragraph no.9, the assessee stated that the same question arose in A. Y. 2005-06 and was accepted in the relevant year. The A.O. noticed that as regards, paragraph nos.5 & 6 of its reply, dated 08.08.2008, it has been already clarified in the foregoing 8 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 paragraphs that the instant case is not the case of composite rent, where rent is received on account of letting out the properties and services provided to lessee. This is the case where receipts are clearly identifiable and attributable to certain things, so, the issue raised by the ld. Counsel vide paragraph nos. 5 & 6 are not applicable in this case. As regards paragraph no.9, it is stated that the doctrine of Res-judicata or Estoppels does not apply to the Income-tax proceedings. They provided one more opportunity vide order sheet entry dated 18.09.2008 and the ld. Counsel stated that "receipts are to be treated as business income as submitted in details vide reply dated 08.09.2008. The A.O. noted that Hon'ble Supreme Court in the case of Shambhu Investment Pvt. Ltd. vs. C1T (2003) 129 Taxman 70 has stated the yard stick to decide the treatment of income i.e. whether it is to be taxed under the head "Income from Business & Profession" or income from "house property" is "the prime object or the intention of the assessee". The A.O. to ascertain the intention of the assessee, statement of partner Shri Prakhar Garg was recorded on 10.09.2008.
6. The A.O. found that it is unequivocally clear that the prime object of the assessee was to let out the property. The A.O. noted that the treatment of assets is to be seen while deciding the head to which any income falls. In the instant case, the assessee has taken land, building, furniture, fixture, Air Conditioner as capital assets and not at current assets and claimed the depreciation thereon, 9 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 meaning thereby, assessee has taken land, building, furniture & fixture in fixed assets and not in inventories or closing stock as in case of current assets. The treatment of the assets as capital assets also strengthens the view that income should be taxed under the head income from House Property. The A.O. further noted that it is also to be seen, why did GAIL enter in to three separate agreements instead of one composite agreement. First & Second agreement once executed cannot be changed; the relation of lessor and lessee will remain same. In the case of third agreement, if the lessee is not satisfied with the services rendered by the lessor, it can easily change the lessor and work of up- keeping and maintenance of building, furniture can be given to some body else. So, treatment has to be seen in the light of agreements, which are sacrosanct, intention of the assessee, facts of the cases, entries made in the books of accounts. The A.O. discussed every agreement separately as under:-
First agreement i.e. Lease agreement:
7. The A.O. noticed that in this agreement, the assessee has let out 6436 sq. ft. vacant floor. Bare letting out the vacant floor by no stretch of imagination can be treated as business income. However, it is very difficult to define the business but it can be safely stated that business is the continuous & systemic activity carried on by a person with the view to earn profit. In this agreement, the assessee company has let out the vacant floor as per the agreement and it was not supposed 10 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 to provide any day-to-day services or incurs and day-to-day expenses to receive the lease rent receipt. To ascertain whether any day-to-day services have been provided or any day-to-day expenses have been incurred by the assessee, the books of account were also examined and the cash book of the assessee is placed on the file. Upon perusal of the cash book, the A.O. noticed that it is clear that assessee in the head of "lease rent receipts" did not incur any kind of expense and did not provide any kind of services to the lessee. The A.O. after considering the intention/prime object of the assessee, legal position as per the Income Tax Act and as per the agreement and finally on examination of books of account found that it is clearly established that the receipt under first agreement i.e. lease agreement receipts are to be taxed under income from "house property" not as "income from business & profession" claimed by the assessee.
Second agreement
8. The A.O. noticed that in the second agreement the assessee has agreed to furnish the said third floor of the said building as per the requirement of GAIL. Thereby, the assessee has furnished and finished a vacant floor, installed Air Conditioner System and converted it into the office. The receipt against furnishing and finishing of Rs.10,81,248/- was treated as income from business & profession by the assessee firm. The second agreement was in fact consequence of first agreement and was executed after 14 days of first agreement. To 11 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 examine how this income fall under the head income from business & profession, the books of account were examined by the A.O. and the statement of partner Shri Prakhar Garg was also recorded on 10.09.2008.
9. The books of accounts were examined by the A.O. with a view that any day- to-day services were provided by the assessee and any expenses were incurred by the assessee. From perusal of books of account, the A.O. found that it is clear that no expenses in this head were incurred by the assessee. The agreement was also perused by the A.O. The A.O. noticed that it is clearly mentioned that "the major repair in the said furniture etc. provided by the first party to the second party if requires to be done by the first party."
10. The A.O. found that the assessee was not involved in any kind of recurring activity to treat the receipts as Business Receipts. Moreover, furniture was installed once and nothing more was required from the lessor. So, by no stretch of imagination the receipt under this head can be treated as income from business & profession. Therefore, The A.O. held that it is clearly established that the net receipt under this head should be treated as income from "house property". The A.O. accordingly recalculated the total income as under:-
"Total Receipt 22,39,728/- (Total Receipt From 1st & 2nd Agreements) Less: rent & taxes 16,380/-
Total annual value 22,23,348/- 12 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 Deduction u/s 24 30% of deduction 6,67,004/- Interest Bank 12,00,349/- Interest paid on unsecured 1,53,769/- 20,21,149/-
-------------------------------------------
Net Income 2, 02,199/-"
11. The A.O. did not allow the interest of partner's capital amounting to Rs.6,57,458/-. The A.O. was of the view that the partners and the partnership firm are of inseparable and income under house property u/s. 24(3) talks about the interest on borrowed capital not in the interest on own funds. The allowability of interest on partner's capital falls in Section 40(b), which pertains to the head income from business & profession not as income from house property.
Third Agreement:
12. The A.O. noticed that third agreement relates to maintenance and up-
keeping of building, floor, furniture & fixtures and other equipments installed in the said premises. On perusal of books of account, the A.O. noticed that under this head, the assessee has deputed only one person to look after the premises and the said income should be treated as income under the head income from other sources. The A.O. in support of his view relied upon CIT vs. Kanak Investments (Pvt.) Ltd. (1974) 95 ITR 419 (Cal.). The A.O. computed the income from other sources as under:-
13 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 "Total receipt 10,04,016/-
Less: Allowable expenditure:
1. Printing & Stationery 530/-
2. Bank Charges & Commi. 5210/-
3. Audit Fee 6673/-
4. Postage exp. 200/-
rd 1/3 of 12,613/- = 4,204/-
5. Conveyance 3,900/-
6. Building upkeep/ Nil maintenance exp. is reduced to Nil as it is deemed to have been allowed u/s 24 of I.T. Act,
7. Salary 42,000/-
8. Diesel Exp. 61,654/- 1,07,554/- 1,11,758/-
Total income under business head 8,92,258/-
Income from H.P. 2,02,199/-
i.e 10,94,457/-
Rounded of 10,94,460/-"
13. The assessee's claim of set off of brought forwarded loss of A.Y. 2005-06 amounting to Rs.20,13,103/- was not accepted by the A.O. observing that the same issue was involved in the A.Y. 2005-06.
14. The CIT(A) confirmed the order of the A.O. as under:- (Page Nos. 17 & 18) "2.2 I have gone through the assessment order and the submissions made by the appellant. As regards the first agreement, it is a simple case of renting a vacant property on rent/lease. As per provisions of section 22, the chargeability of income from house property is subject to the following conditions:
The property shall consist of any building or land appurtenant thereto;
(i) the assessee shall be the owner of the property and
(ii) the property shall not be used for business or profession 14 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 carried on by the owner, the profit.
In the assessee's case regarding first two conditions there is no doubt that same are satisfied. Only dispute is with regard to condition no.3 as the appellant is claiming the rental income under the head business. As no other services have been provided like charges for electric current for the use of lifts, for the supply of hot and cold water, watch and ward facilities and no activities were to be carried out continuously in an organized manner, therefore, the lease rentals received cannot partake the character of business income. Even no expenses were incurred as pointed out by the AO to earn the lease rentals. As regards 2nd agreement also the facts are similar as the assessee has given third floor of the building on lease after furnishing and finishing and installed air-conditioning system. As per this agreement also no day today operations were carried out by the appellant. Therefore, income from the 2nd agreement also has rightly been assessed by the AO under the head income from house property. As regards the 3rd agreement relating to upkeep of the premises, in this regard only one person was employed by the assessee that itself goes to show as to what kind of organized and continuous assessee itself goes to show as to what kind of organized and continuous activity was carried on by the assessee to claim the receipts from third CIT(A)-II, Agra agreement as business receipts. Therefore, I hold that the AO has rightly assessed the same under the head other sources. I would also like to deal with the contention of the ld. AR that the rental income was accepted as business income on the preceding assessment year hence the AO should have done the same for the year under consideration also. It is trite that principle of res-judicata does not apply to income tax proceedings. As regards rule of consistency the ITAT, Mumbai in the case of Morgan Stanley Asset Management Inc. Vs. DCIT (2010) 39 DTR (Mumb) 240 held as under:
"If the assessee has claimed deduction in one year or claimed a particular treatment to an item of income, which has been accepted, then unless there is change in factual or legal position, ordinarily the Revenue should not disturb such finding in the succeeding year. But this principle cannot be stretched beyond the context. If the AO has done something patently wrong in a year, then the principle of consistency cannot be dragged to compel the AO to go on repeating such patent mistakes in future also. No principle of consistency can bind the 15 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 assessee or the Revenue to go on repeating mistakes, once committed.""
15. The ld. Authorised Representative reiterated the submissions made before Revenue authorities and submitted that assessee firm came into existence vide Instrument of partnership dated 01.11.2004 (A.Y. 2005-2006) being into business as defined in Para-4 of Partnership Deed which is clear terms specifies the intention of the partners forming the partnership Firm and object of formation of Partnership. He submitted that the main object and the business of the Firm shall be to venture into business of real-estate and alike activities like giving properties on lease or sub-lease, providing annual maintenance contract for any type of facilities, providing generators on hire and providing invertors on hire etc. The ld. Authorised Representatives submitted that assessment for the first assessment year (A.Y.2005-06) of business came to be completed under section 143(3) of the Act by the Additional Commissioner of Income Tax, Range-4, who vide Assessment Order dated 28.12.2007 completed the assessment on loss as was returned by the appellant mentioning full details regarding the business of the appellant and after making due enquiry into the matter regarding assessee's nature of business, examination of partners on oath regarding nature of business, activities carried out and its treatment as business income. Thus, the A.O. framing the assessment was fully alive of the issue and therefore, there is no gainsaying that Assessment Order was passed in ignorance of facts of the case or in ignorance of law over the issue. 16 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 Even otherwise, the assessment so framed stood final as no action either under section 263 or under section 148 of the Act was found warranted by the superior reviewing authorities. The ld. Authorised Representative submitted that the A.O. was highly unjustified in rejecting the claim of the appellant that the receipts constitute Business Income in the hands of the assessee Firm. Therefore, in the year of inception itself it was held by the A.O. that income being earned by the appellant is assessable under the head business which at the cost of repetition being submitted has not been held to be perverse or erroneous or even prejudicial to the interest of Revenue by the superior authorities reviewing the assessment. Thereafter, in subsequent year, without there being any change in the set of facts, circumstances terms and conditions of Lease Deeds' which continues to be the same as was in existence in the preceding assessment year. The A.O. was highly unjustified to review the decision of Additional CIT and holding otherwise. The ld. Authorised Representative submitted that in the facts and circumstances, the A.O. has chosen to conveniently ignore the effect emanating from the earlier assessment order on the pretext that doctrine of resjudicata or estoppels does not apply to Income Tax proceedings.
16. The ld. Authorised Representative submitted that the A.O. has fallen in error of fact and in law in holding so, without being alive of the authorities available on the issue. The ld. Authorised Representative submitted that the rule of consistency 17 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 is a facet of rule of res-judicata but broader in concept than res-judicata rule. The well-settled principle of consistency has been uniformly followed by Courts in the country to hold that the view adopted by the A.O. on a particular issue be it or either fact or that being issue in a case or cases for a year or years should not be deviated from the same case or in other cases in subsequent proceedings unless there is change in the circumstances, justifying departure there from. The ld. Authorised Representative submitted that partners of the assessee firm came together and joined hands to do business and this intention of the assessee finds due mention in the partnership deed. The ld. Authorised Representative submitted that on perusal of Balance Sheet, Capital Account and Profit & Loss books of accounts of the assessee may reveal that assessee has undertaken the activities as a business, and fulfills all the conditions as are required to be fulfilled in order to get the income assessed under the head business. It is requested that statement of the partners were recorded by the Additional CIT, Range-4, during the course of assessment proceedings for Assessment year 2005-06, those statements are vital for adjudication of the issue under consideration and may kindly be seen. It also needs due consideration that the Commercial Complex as acquired by the assessee and construction expenses incurred thereon were largely met by borrowed funds. This also goes to prove that the transaction was a business transaction. The ld. Authorised Representative in support of his contention relied upon the following orders/judgments:-
18 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09
1. Vikram Golecha Vs. DCIT 123 ITD 438 (JP),
2. Balaji Enterprises Vs. CIT 225 ITR 471 (Karn)
3. Karnani Properties Ltd Vs. CIT 82 ITR 547 (S.C.)
4. S.G. Mercantile Corporation (P) Ltd. Vs. CIT 83 ITR 700 (S.C.)
5. Commissioner of Income Tax Vs. Mithila Properties Publication & Contractor Enterprises (P) Ltd. 192 TAXMAN 401 (Pat)
6. CIT Vs. Goel Builders 331 ITR 344 (All)
7. ITAT Agra bench in the case of M/s. Romsons Scientific & Surgical Ind. (P) Ltd. Vs. DCIT 4(1), Agra (ITA No.275/Agra/2009)- order dated 21.04.2011.
8. ITAT Delhi Bench in the case of Dinex Hotels (P) Ltd (ITA No. 2499/Del/2012)--Order dated 09.08.2012
9. Arihant Builders, Developers & Investors (P) Ltd. Vs. ITAT 277 ITR 239 (MP)
10. Parashuram Pottery works Co. Ltd 106 ITR 1 (SC)
11. Radha Soami Satsang Vs. CIT 193 ITR 321 (S.C.) 12 CIT Vs. Godavari Corporation Ltd. 156 ITR 835 (MP) 13 A.R.J. Security Printers 264 ITR 276 (Del)-- (2004) 266 ITR (St) 4
14. DCIT Vs. Sulabh International Social Service Organisation 350 ITR 189 (Patna)
15. Hon'ble Allahabad High Court in the case of CIT Vs. Divya Investment (P) Ltd. order dated 01.12.2009
17. The ld. Departmental Representative, on the other hand, relied upon the order of CIT(A) particularly page no.17 of CIT(A)'s order and submitted that only one employee has been employed, thus cannot be said that the assessee firm was running business. The ld. Departmental Representative submitted that in income tax each year is independent year and in each year correct income is to be assessed under the correct head. He further submitted that if mistake is committed in one year that cannot be allowed to continue.
19 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09
18. We have heard the ld. Representatives of the parties, perused the records and gone through the decisions cited. The crux of the matter to be examined in the case under consideration whether under the facts and circumstances income is assessable under the head income from business or income from house property or income from other sources. The contention of the assessee on the issue has got two aspects, first one is that the A.O. has already taken a view while completing assessment under section 143(3) for A.Y. 2005-2006 that income is assessable under the head income from business, therefore, to maintain consistency a different view cannot be taken in the year under consideration and second aspect of the contention is merit of the case. So far as to examine first aspect of the contention of the assessee i.e. "consistency", we would like to refer certain judicial pronouncements which are as under:-
C.K. GANGADHARAN & ANR. vs. COMMISSIONER OF INCOME TAX (2008) 304 ITR 61 (SC) - The relevant abstracts of the judgment are as under:-
(Pages 63 to67) "In Bharat Sanchar Nigam Ltd. & Anr. vs. Union of India & Ors. (2006) 201 CTR (SC) 346 : (2006) 3 SCC 1, it was noted as follows :
"20. The decisions cited have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar Courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The Courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why Courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of 20 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 precedent or the precedential value of the earlier pronouncement.
Where facts and law in a subsequent assessment year are the same, no authority whether quasi judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a co-ordinate Bench which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a bench of superior strength or in some cases to a bench of superior jurisdiction.
22. A decision can be set aside in the same lis on a prayer for review or an application for recall or under Art. 32 in the peculiar circumstances mentioned in Hurra vs. Hurra (2002) 4 SCC 388. As we have said overruling of a decision takes place in a subsequent lis where the precedential value of the decision is called in question. No one can dispute that in our judicial system it is open to a Court of superior jurisdiction or strength before which a decision of a Bench of lower strength is cited as an authority, to overrule it. This overruling would not operate to upset the binding nature of the decision on the parties to an earlier lis in that lis, for whom the principle of res judicata would continue to operate. But in tax cases relating to a subsequent year involving the same issue as an earlier year, the Court can differ from the view expressed if the case is distinguishable or per incuriam. The decision in State of U.P. vs. Union of India (2004) 190 CTR (SC) 569: (2003) 3 SCC 239 related to the year 1988. Admittedly, the present dispute relates to a subsequent period. Here a co-ordinate Bench has referred the matter to a Larger Bench. This Bench being of superior strength, we can, if we so find, declare that the earlier decision does not represent the law. None of the decisions cited by the State of U.P. are authorities for the proposition that we cannot, in the circumstances of this case, do so. This preliminary objection of the State of U.P. is therefore rejected."
In State of Maharashtra vs. Digambar (1995) 4 SCC 683, the position was highlighted by this Court as follows:
"16. We are unable to appreciate that objection raised against the prosecution of this appeal by the appellant or other SLPs filed in similar matters. Sometimes, as it was stated on behalf of the State, the State Government may not choose to file appeals against certain 21 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 judgments of the High Court rendered in writ petitions when they are considered as stray cases and not worthwhile invoking the discretionary jurisdiction of this Court under Art 136 of the Constitution, for seeking redressal therefore. At other times, it is also possible for the State, not to file appeals before this Court in some matters on account of improper advice or negligence or improper conduct of officers concerned. It is further possible, that even where SLPs are filed by the State against judgments of High Court, such SLPs may not be entertained by this Court in exercise of its discretionary jurisdiction under Art. 136 of the Constitution either because they are considered as individual cases or because they are considered as cases not involving stakes which may adversely affect the interest of the State. Therefore, the circumstance of the non-filing of the appeals by the State in some similar matters or the rejection of some SLPs in limine by this Court in some other similar matters by itself, in our view, cannot be held as a bar against the State in filing an SLP or SLPs in other similar matters where it is considered on behalf of the State that non-filing of such SLP or SLPs and pursuing them is likely to seriously jeopardise the interest of the State or public interest."
In Government of West Bengal vs. Tarun K. Roy & Ors. (2004) 1 SCC 347 reference was made to the judgment in Digambar case (supra) and State of Bihar & Ors. vs. Ramdeo Yadav & Ors. (1996) 3 SCC 493. It was noted as follows :
"28. In the aforementioned situation, the Division Bench of the Calcutta High Court manifestly erred in refusing to consider the contentions of the appellant on their own merit, particularly, when the question as regard difference in the grant of scale of pay on the ground of different educational qualification stands concluded by a judgment of this Court in Debdas Kumar 1991 Supp (1) SCC 138 (supra). If the judgment of Debdas Kumar (supra) is to be followed and finding of fact was required to be arrived at that they are similarly situated to the case of Debdas Kumar (supra) which in turn would mean that they are also holders of diploma in engineering.
They admittedly being not, the contention of the appellants could not be rejected. Non-filing of an appeal, in any event, would not be a ground for refusing to consider a matter on its own merits. (See State of Maharashtra vs. Digambar (1995) 4 SCC 683.
22 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09
29. In State of Bihar & Ors. vs. Ramdeo Yadav & Ors. (1996) 3 SCC 493 wherein this Court noticed Debdas Kumar (supra) holding :
'Shri B.B. Singh, the learned counsel for the appellant contended that though an appeal against the earlier order of the High Court has not been filed, since larger public interest is involved in the interpretation given by the High Court following its earlier judgment, the matter requires consideration by this Court. We find force in this contention. In the similar circumstances, this Court in State of Maharashtra vs. Digambar (1995) 4 SCC 633 and in State of West Bengal vs. Debdas Kumar (1991) Suppl. SCC 138, had held that though an appeal was not filed against an earlier order, when public interest is involved in interpretation of law, the Court is entitled to go into the question'."
In Ramdeo's case (supra) reference was made to State of West Bengal vs. Debdas Kumar 1991 Suppl. (1) SCC 138, wherein it was observed at para 5 as follows :
"5. It is then contended that ss. 3(2) and (3) make distinction between the employees covered by those provisions and the employees of the aided schools taken over under s. 3(2). Until the taking over by operation of s. 3(4) recommendation is complete, they do not become the employees of the Government under s. 4 of the Act. The Government in exercise of the power under s. 8 constituted a committee and directed to enquire and recommend the feasibility to take over the schools. On the recommendation made by them, the Government have taken decision on 13th Jan., 1981 by which date the respondents were not duly appointed as the employees of the taken over institution. Therefore, the High Court cannot issue a mandamus directing the Government to act in violation of law."
In CCE vs. Hira Cement (2006) 2 SCC 439 at para 24 the position was reiterated.
In Chief Secretary to Government of Andhra Pradesh & Anr. vs. V.J. Cornelius & Ors. (1981) 2 SCC 347 it was observed that equity is not relevant factor for the purpose of interpretation.
It will be relevant to note that in Karamchari Union vs. Union of India & Ors. (2000) 159 CTR (SC) 148 : (2000) 243 ITR 143 (SC) 23 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 and Union of India vs. Kaumudini Narayan Dalal (2001) 168 CTR (SC) 3 : (2001) 249 ITR 219 (SC) this Court observed that without a just cause Revenue cannot file the appeal in one case while deciding not to file appeal in another case. This position was also noted in CIT vs. Shivsagar Estate (2002) 177 CTR (SC) 107 : (2004) 9 SCC 420.
The order of reference would go to show that same was necessary because of certain observations in Berger Paints India Ltd. vs. CIT (2004) 187 CTR (SC) 193 : (2004) 12 SCC 42. The decision in Union of India & Ors. vs. Kaumudini Narayan Dalal & Anr. (supra) was explained in Hemalatha Gargya vs. CIT & Anr. (2003) 182 CTR (SC) 107 : (2003) 9 SCC 510 at para 14. It has been stated in the said case that the fact that different High Courts have taken different views and some of the High Courts are in favour of the Revenue constituted "just cause" for the Revenue to prefer an appeal. This Court took the view that having not assailed the correctness of the order in one case, it would normally not be permissible to do so in another case on the logic that the Revenue cannot pick and choose. There is also another aspect which is the certainty in law.
If the assessee takes the stand that the Revenue acted mala fide in not preferring appeal in one case and filing the appeal in other case, it has to establish mala fides. As a matter of fact, as rightly contended by the learned counsel for the Revenue, there may be certain cases where because of the small amount of revenue involved, no appeal is filed. Policy decisions have been taken not to prefer appeal where the revenue involved is below a certain amount. Similarly, where the effect of decision is revenue neutral there may not be any need for preferring the appeal. All these certainly provide the foundation for making a departure.
In answering the reference, we hold that merely because in some cases the Revenue has not preferred appeal that does not operate as a bar for the Revenue to prefer an appeal in another case where there is just cause for doing so or it is in public interest to do so or for a pronouncement by the higher Court when divergent views are expressed by the Tribunals or the High Courts."
24 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 BHARAT SANCHAR NIGAM LTD. & ANR. vs. UNION OF INDIA & ORS. (2006) 282 ITR 273 (SC) The relevant abstracts of the judgment are as under:-
(Pages 282 to 287) "The State respondents have raised a preliminary objection and contended that the plea of BSNL and the other petitioners including the Union of India is barred by res judicata because the issue has been decided by this Court inter parties in State of UP vs. Union of India (supra).
The plea has been resisted by the petitioners on three grounds, viz., (i) that the issue of the legislative competence of States to impose sales-tax under Entry 54 of List II on transactions which are purely rendition of services, was not raised in that case, (ii) that the decision was without jurisdiction because of Art. 131 of the Constitution, and
(iii) that every assessment year gave rise to a fresh cause of action.
According to the petitioners in any event the decision requires reconsideration.
In State of UP vs. Union of India & Anr. (supra), the two learned Judges of this Court had construed the definition of 'business', 'dealer', 'goods' and 'sale' under ss. 2(aa), (c), (d) and
(h) of the U.P. Trade Tax Act, respectively, to come to the conclusion that the DoT was a 'dealer' under the U.P. Act. This Court also held that a telephone communication and other accessories which gave access to the telephone exchange with or without instruments were 'goods' and that transferring the right to use the telephone instrument/apparatus and the whole system fell within the extended meaning of "sale" under cl. (h) of s. 2 of the U.P. Act.
A consideration of the correctness of this conclusion would arise only if we reject the preliminary objection of the State of UP that we are precluded from reopening the issues so concluded by reason of the principles of res judicata. Several decisions have been cited in support of their contention.
In Amalgamated Coalfields Ltd. vs. Janapada Sabha 1962 (1) SCR 10 tax was claimed in respect of coal by the respondents therein. Notices of demand were sent to the appellant. The validity of these notices was challenged by the appellant by filing a writ petition before this Court. The writ petition was dismissed and it was held that the notices served on the appellant were valid. Notices of demand were 25 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 again served on the appellant in respect of a subsequent period. The appellant filed another writ petition this time before the High Court, challenging the validity of these notices. The High Court held that the appellant's claims were barred by res judicata by reason of the earlier decision of this Court. Challenging the decision of the High Court the appellants approached this Court under Art. 136. In Amalgamated Coalfields Ltd. vs. Janapada Sabha (1963) Supp. 1 SCR 172 [referred to hereafter as Amalgamated Coalfields No. 2], the issue was whether the doctrine of res judicata applied to writ petitions filed under Art. 226 or to petitions under Art. 32. The Court noted that the judicial view was that even petitions filed under Art. 32 were subject to the general principle of res judicata. The Court then considered whether the principle would apply to tax cases when the earlier decision was in respect of a different period and said :
"In a sense, the liability to pay tax from year-to-year is a separate and distinct liability; it is based on a different cause of action from year-to-year, and if any points of fact or law are considered in determining the liability for a given year, they can generally be deemed to have been considered and decided in a collateral and incidental way."
After considering various earlier authorities on the issue, it was held that :
"If for instance, the validity of a taxing statute is impeached by an assessee who is called upon to pay a tax for a particular year and the matter is taken to the High Court or brought before this Court and it is held that the taxing statute is valid, it may not be easy to hold that the decision on this basic and material issue would not operate as res judicata against the assessee for a subsequent year. That, however, is a matter on which it is unnecessary for us to pronounce a definite opinion in the present case. In this connection, it would be relevant to add that even if a direct decision of this Court on a point of law does not operate as res judicata in a dispute for a subsequent year, such a decision would, under Art. 141, have a binding effect not only on the parties to it, but also on all Courts in India as a precedent in which the law is declared by this Court. The question about the applicability of res judicata to such a decision would thus be a matter of merely academic significance."
(Emphasis, italicised in print, ours) 26 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 After refraining from expressing any final opinion on the applicability of res judicata to assessment orders for successive years, the Court was quite unequivocal in expressing an opinion on the applicability of the principles of constructive res judicata.
"In our opinion, constructive res judicata which is a special and artificial form of res judicata enacted by s. 11 of the CPC should not generally be applied to writ petitions filed under Art. 32 or Art.
226. We would be reluctant to apply this principle to the present appeals all the more because we are dealing with cases where the impugned tax liability is for different years."
It was held that in any event :
"....... the appellants cannot be precluded from raising the new contentions on which their challenge against the validity of the notices is based."
The question in Radhasoami Satsang vs. CIT (1991) 100 CTR (SC) 267 : 1992 (1) SCC 659 (also cited by the State of U.P.) was whether the Tribunal was bound by an earlier decision in respect of an earlier assessment year that the income derived by the Radhasoami Satsang, a religious institution, was entitled to exemption under ss. 11 and 12 of the IT Act, 1961. The Court said :
"We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year, unless there was any material change justifying the Revenue to take a different view of the matter."
Amalgamated Coalfields case No. 2 (supra) was distinguished in the case of Devi Lal Modi vs. STO 1965 (1) SCR 86 in which the challenge was to assessment proceedings under the Madhya Bharat Sales-tax Act, 1950. The writ petition was dismissed by the High 27 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 Court. The Special Leave Petition was also dismissed. The same order of assessment was challenged by filing a second writ petition before the High Court. This was also dismissed by the High Court. The question, before this Court was whether it was open to the appellant to challenge the validity of the same order of assessment twice by two consecutive writ petitions under Art. 226. The Court acknowledged that in regard to the orders of assessment for different years, the position may be different and said :
"Even if the said orders are passed under the same provisions of law, it may theoretically be open to the party to contend that the liability being recurring from year-to-year, the cause of action is not the same; and so, even if a citizen's petition challenging the order of assessment passed against him for one year is rejected, it may be open to him to challenge a similar assessment order passed for the next year. In that case, the Court may ultimately adopt the same view which had been adopted on the earlier occasion; but if a new ground is urged, the Court may have to consider it on the merits, because, strictly speaking the principle of res judicata may not apply to such a case. That, in fact, is the effect of the decision of this Court in the Amalgamated Coalfields Ltd. & Anr. vs. Janapada Sabha, Chhindwara (1963) Supp. 1 SCR 172.........In our opinion, the said general observations must be read in the light of the important fact that the order which was challenged in the second writ petition was in relation to a different period and not for the same period as was covered by the earlier petition."
But as far as a challenge to the same assessment order is concerned, it was held :
"that if constructive res judicata is not applied to such proceedings a party can file as many writ petitions as he likes and take one or two points every time. That clearly is opposed to considerations of public policy on which res judicata is based and would mean harassment and hardship to the opponent. Besides, if such a course is allowed to be adopted, the doctrine of finality of judgments pronounced by this Court would also be materially affected. We are, therefore, satisfied that the second writ petition filed by the appellant in the present case is barred by constructive res judicata."28 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 Rupa Ashok Hurra vs. Ashok Hurra (2002) 4 SCC 388 considered whether this Court can set aside its earlier decision inter partes under Art. 32. In para 14, the Court said :
"On the analysis of the ratio laid down in the aforementioned cases, we reaffirm our considered view that a final judgment/order passed by this Court cannot be assailed in an application under Ar 32 of the Constitution of India by an aggrieved person, whether he was a party to the case or not.
Nevertheless, we think that a petitioner is entitled to relief ex debito justitiae if he establishes (1) violation of the principles of natural justice in that he was not a party to the lis but the judgment adversely affected his interests or, if he was a party to the lis, he was not served with notice of the proceedings and the matter proceeded as if he had notice, and (2) where in the proceedings a learned Judge failed to disclose his connection with the subject-matter or the parties giving scope for an apprehension of bias and the judgment adversely affects the petitioner."
To a similar effect is the case of Junior Telecom Officers Forum & Ors. vs. Union of India & Ors (1993) Supp. 4 SCC 693 where the appellants had intervened in earlier proceedings. After the controversy was decided in those proceedings the appellants sought to reagitate the same issues in respect of the same matter contending that they had no opportunity of being heard. The submission was rejected and it was held that the second round was impermissible.
The decisions cited have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar Courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The Courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why Courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the 29 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a co-ordinate Bench which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction.
In our opinion, the preliminary objection raised by the State of UP therefore, rests on a faulty premise. The contention of the petitioners/appellants in these matters is not that the decision in State of UP vs. Union of India (supra) for that assessment year should be set aside, but that it should be overruled as an authority or precedent. Therefore, the decisions in Devi Lal Modi vs. STO (supra) and in Hurra vs. Hurra (supra) are not germane.
A decision can be set aside in the same lis on a prayer for review or an application for recall or under Art. 32 in the peculiar circumstances mentioned in Hurra vs. Hurra (supra). As we have said overruling of a decision takes place in a subsequent lis where the precedential value of the decision is called in question. No one can dispute that in our judicial system it is open to a Court of superior jurisdiction or strength before which a decision of a Bench of lower strength is cited as an authority, to overrule it. This overruling would not operate to upset the binding nature of the decision on the parties to an earlier lis in that lis, for whom the principle of res judicata would continue to operate. But in tax cases relating to a subsequent year involving the same issue as an earlier year, the Court can differ from the view expressed if the case is distinguishable or per incuriam. The decision in State of UP vs. Union of India (supra) related to the year 1988. Admittedly, the present dispute relates to a subsequent period. Here a co-ordinate Bench has referred the matter to a larger Bench. This Bench being of superior strength, we can, if we so find, declare that the earlier decision does not represent the law. None of the decisions cited by the State of UP are authorities for the proposition that we cannot, in the circumstances of this case, do so. This preliminary objection of the State of UP is therefore rejected." RADHASOAMI SATSANG vs. COMMISSIONER OF INCOME TAX (1992) 193 ITR 321 (SC) The relevant abstracts of the judgment are as under:-
30 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 (Pages 328 & 329) "One of the contentions which learned senior council for the assessee-appellant raised at the hearing was that, in the absence of any change in the circumstances, the Revenue should have felt bound by the previous decisions and no attempt should have been made to reopen the question. He relied upon some authorities in support of his stand. A Full Bench of the Madras High Court considered this question in T.M.M. Sankaralinga Nadar & Bros. vs. CIT (1929) 4 ITC226. After dealing with the contention, the Full Bench expressed the following opinion:
"The principle to be deducted from these two cases is that where the question relating to assessment does not vary with the income every year but depends on the nature of the property or any other question on which the rights of the parties to be taxed are based, e.g., whether a certain property is trust property or not, it has nothing to do with the fluctuations in the income; such questions, if decided by a Court on a reference made to it would be res judicata in that the same question cannot be subsequently agitated."
One of the decisions referred to by the Full Bench was the case of Hoystead vs. Commissioner of Taxation (1926) AC 155 (PC). Speaking for the Judicial Committee, Lord Shaw stated :
"Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions as to what should be a proper apprehension by the Court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle--namely, that of a setting to rest rights of litigants, applies to the case where a point, fundamental to the decision taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken."
These observations were made in a case where taxation was in issue.
31 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 This Court in Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC) stated :"At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity."
Assessments are certainly quasi-judicial and these observations equally apply.
We are aware of the fact that, strictly speaking, res judicata does not apply to IT proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
One these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter--and, if there was no change, it was in support of the assessee--we do not think the question should have been reopened and contrary to what had been decided by the CIT in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under ss. 11 and 12 of the IT Act of 1961."
Commissioner of Income-tax vs. British Paints India Ltd. [1991] 188 ITR 0044 (SC) The relevant abstracts of the judgment are as under:-
"The brief facts of the case are that the respondent, a company engaged in the manufacture and sale of paints, had, as a consistent practice, valued its goods-in-process and finished products 32 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 exclusively at cost of raw materials totally excluding overhead expenditure. The justification for the practice, according to the respondent, was that the goods being paints had limited storage life and, if not quickly disposed of, were liable to lose their market value. For the assessment years 1963-64 and 1964-65, the Income-tax Officer held that there was no justification to recognise a practice of valuing stock otherwise than in accordance with the well-recognised principle of accounting which required the stock to be valued at cost (viz., raw material plus expenditure) or market price, whichever was lower. He, therefore, calculated the value of the opening and closing stocks by adding the overhead expenditure. The Appellate Assistant Commissioner confirmed that order. On appeal, the Appellate Tribunal held that there was no evidence to show that the goods in stock deteriorated in value and that there was no justification for excluding the overhead expenditure in valuing the stock; and, if it was in the interest of the business to value stock solely with reference to cost of raw materials and without including overhead expenditure, such valuation was not appropriate to the computation of income chargeable under the Income-tax Act.
The High Court, on a reference, reversed the decision of the Tribunal holding that, having regard to the consistent practice of the respondent; the Tribunal was not justified in rejecting the respondent's method of valuation of its stock-in-trade.(emphasizes by us) On appeal to the Supreme Court held reversing the decision of the High Court, (i) that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the Income-tax Act, 1961, to consider whether the correct profits and gains could be deduced from the accounts so maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Income-tax Act, 1961.
(ii) That any system of accounting which excluded, for the valuation of stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, was likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system might produce a comparatively lower valuation of the opening stock and the closing 33 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 stock, thus showing a comparatively low difference between the two.
In a period of rising turnover and rising prices, such a system was apt to diminish the assessment of taxable profit of a year. The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self- contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the respondent was found to be such that income could not properly be deduced there from. It was, therefore, not only the right but the duty of the Income-tax Officer to act in exercise of his statutory power for determining what, in his opinion, would be the correct income.
The question to be determined by the Assessing Officer in exercise of his power under section 145 is whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the Officer and the income has been computed in accordance with the method regularly employed by the assessee. What is to be determined by the Officer is a question of fact, i.e., whether or not income chargeable under the Act can properly be deduced from the books of account, and he must decide the question with reference to the relevant material and in accordance with the correct principles. It is not only the right, but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say that the Officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the Officer is not bound by the method followed in the earlier years.
It is a well-recognised principle of commercial accounting to enter in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower.
Where the market value has fallen before the date of valuation and, at that date, the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of the goods. Valuation of the stock-in-trade at cost or market value, 34 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 whichever is the lower, is a matter entirely within the discretion of the assessee. But whichever method he adopts, it should disclose a true picture of his profits and gains. If, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of a reserve, declaration of dividends, planning and the like, it is the duty of the Assessing Officer to adopt such method of computation as he deems appropriate for proper determination of the true income of the assessee. Section 145 confers sufficient power upon the Assessing Officer--nay, it imposes a duty upon him--to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient administration of the business, it is the duty of the Assessing Officer to determine the taxable income by making such computation as he thinks fit.
What is the profit of a trade or business is a question of fact and it must be ascertained, as all facts must be ascertained, with reference to the relevant evidence, and not on doctrines or theories." 18.1 From above judicial pronouncements, we find that it is well settled that the principle of resjudicata or estoppel, which applies to decision of civil courts, has no application to decisions of income-tax authorities so as to preclude the determination of a question in a previous assessment order from being reopened in proceedings relating to a subsequent assessment. The reasons are that the purpose and the subject-matter of the proceedings in a subsequent year are not the same as those in a previous year. Because as a general rule the principle of res judicata is not applicable to decisions of Income-tax authorities, an assessment for a particular year is final and conclusive between the parties only in relation to that year. 35 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 Decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year.
18.2 In the case under consideration, let us see what the order of A.O. is for A.Y. 2005-2006 on which the assessee relied upon to follow by Revenue on principle of consistency. To appreciate the facts, we reproduce relevant abstract of the A.O.'s order for A.Y. 2005-2006 as under:-
"4. This is the first year of business of the assessee firm which was constituted through partnership deed dated 01.11.2004. The assessee firm stated it is engaged in the business venturing into real estate and alike activities like giving properties on lease or sub-lease providing annual maintenance contract for any type of facilities, providing generators on hire and providing invertors on hire etc.
5. During the year the assessee has acquired (taken on long lease) a property G10/8 Padam Deep Tower Sanay Place Agra admeasuring 6925 sq. feet which it has leased to M/s Gas Authority of India Ltd., Agra for a monthly sum of Rs.96,540 per month.
6. Partners of the firm produced necessary documents in support of their returned financial statements. After considering the facts and circumstances of the case and details/explanations submitted by the assessee, total loss returned at Rs.20,13,103/- is accepted.
7. Assessed accordingly u/s 143(3) of the IT Act, 1961 on total loss of Rs.20,13,100/-. Issue notice of demand and Chillan."
18.3 On perusal of the order of the A.O. for A.Y. 2005-2006, we find that the A.O. has accepted claim of the assessee without examining the relevant records and without recording facts of the issue. The order of the A.O. for A.Y. 2005-2006 36 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 is not in accordance with law. Merely accepting assessee's clam without examining records and material, it cannot be said that the order of the A.O. to be followed in subsequent year. The principle of consistency suggests that if any authority after examining records and material and after recording facts come to conclusion or taken a particular view on the issue by a speaking order in accordance with law only such view is to be followed on account of principle of consistency. A blind order, not taking any view, not examining records and material, such order is not required to be followed on principle of consistency. If anything was going wrong in the past that wrong thing need not to be followed in subsequent year. The wrong thing has to be corrected on notice of the same. The law laid down by the Apex Court in the case of Commissioner of Income-tax vs. British Paints India Ltd. [1991] 188 ITR 0044 (SC) is clearly applicable to the facts of the case under consideration. In that case the assessee, British Paints India Ltd., was following a wrong method of valuation of stock in the past. The High Court, on a reference, reversed the decision of the Tribunal holding that, having regard to the consistent practice of the respondent; the Tribunal was not justified in rejecting the respondent's method of valuation of its stock-in-trade. On appeal to the Supreme Court reversing the decision of the High Court, held that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the Income-tax Act, 1961, to consider whether the correct profits and gains could be deduced from the accounts so 37 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Income-tax Act, 1961.
18.4 The question in Radhasoami Satsang vs. CIT (Supra) was whether the Tribunal was bound by an earlier decision in respect of an earlier assessment year that the income derived by the Radhasoami Satsang, a religious institution, was entitled to exemption under sections 11 & 12 of the Act. The Court held that they are aware of the fact that strictly speaking res-judicata does not apply to income- tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year, unless there was any material change justifying the Revenue to take a different view of the matter. If we consider the facts of the case under consideration in the light of above judgment, we find that there were sufficient materials and changes before the A.O. for the year under consideration to decide the issue. The A.O. examined the relevant agreements and noted relevant clauses of the agreements which are as under:-
38 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 18.5 Lease agreement dated 30.11.2004, copy which has been placed in Paper Book page nos.50 to 55. (Page no.51 Paper Book) "C. The lessor hereby confirms and declares that the said premises is free from all encumbrances and the lessee shall be entitled to use the said premises without any let and hindrance and without there being any interference from any person/persons in any manner whatsoever.
Pursuant to the offer submitted by the lessor and same being considered and approved by the lessee. The Lessee hereby agrees to take on Lease the said Premises enabling it to run and operate its business for GAIL (India) Limited on the following mutually agreed terms and conditions, which the parties desire to record." .................................
"2. The period of this agreement is 10 (Ten) years with effect from the date of actual possession of the Lessee. There shall be a lock in period of 72 months, commencing from the date of signing of this agreement or date of occupancy of the premises whichever is later. During the lock in period neither the Lessor can get the premises vacated nor can the Lessee vacate the premises, unless mutually agreed in writing for termination. The Lease can however be extended for further period after 10 years on mutually agreed Terms & conditions."
Page no.52 Paper Book
6. ii) The Lessee shall pay to the Lessor on or before the 15th of the next month, the lease rent of Rs.96,540/- (Rupees Ninety Six Thousand Five Hundred Forty Only). The rental shall be subject to an escalation of 20% every after 48 months.
iii) Payments of monthly rental to be made under this agreement shall be made by cheque on a monthly basis and shall be subject to applicable tax deduction."
18.6 Similar relevant clause of agreement dated 14.12.2004, copy which has been placed at Page Nos.56 to 58 of the assessee's paper book. The relevant clause of the said agreement are reproduced as below :-
39 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 Page no.57 Paper Book "(2) The period of this Agreement is 10 (Ten) years with effect from the date of actual possession of the furniture etc. by the Second Party.
There shall be a lock in period of 72 months, commencing from the date of signing of this agreement or date of possession of the furniture etc. whichever is later. During the lock in period none of the parties can terminate the agreement unless mutually agreed in writing for termination. The Agreement can however be extended for further period after 10 years on mutually agreed Terms & conditions. (4) That the second party will pay to the first party a sum of Rs.90,104/- (Rupees Ninety Thousand One Hundred Four only) per month as hiring charges of furniture etc. which shall be payable latest by 15th of next month. The charges shall be subject to an escalation of 20% every after 48 months. Payment of monthly charges shall be made by cheque and shall be subject to applicable tax deduction." 18.7 The relevant clause of partnership, of which copy has been placed at page nos.12 to 18, are reproduced as below:- (Page No.14 Paper Book) "4. That main object and the business of the firm shall be to venture into business of real estate and alike activities like giving properties on lease or sub lease, providing annual maintenance contract for any type of facilities, etc. However, all the partners shall have the liberty to step into new line of activities as may be mutually decided by all the three partners. Meaning thereby, the nature of business may be altered/amended with the mutual consent of all the parties to this deed."
18.8 Not only that the A.O. noted above material facts but it has also been noted by the A.O. that the partner of the assessee firm clearly admitted that the property taken on lease for the purpose of giving rent to GAIL.
"Q.4 why did you purchase the property in question?40 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 Ans. This property of at Padam Deep Tower was purchased for the project of GAIL. The property was completed as required by the GAIL i.e. putting AG, DG set, different plant & machineries, furniture and fixtures. The above property was purchased to let out on rent to the GAIL"
Vide question no. 9 & 10 of the statement recorded on 10.09.2008, it was specifically asked-
"Q.9 What is this receipts against furnishing & finishing?
Ans. The scope of work was laid out by the GAIL such as fittings. fixtures & partitions which were provided by us.
Q.10 Do you provide day-to-day services in this head and as you incur any expenditure on daily basis ?
Ans. Yes, we provide day to day services in this head but it is very hard to decide that services are a part of agreement. I will give the details of incurring expenditure on daily basis after consulting the books of accounts."
18.9 In the light of above material ,changes in facts and under the facts and circumstances, we are of the considered view that Revenue authorities are correct in not following the order of the A.O. for A.Y. 2005-2006. Even otherwise also we are not binding by the order of AO for A.Y. 2005-06. In our independent view the orders revenue authorities under year consideration are in accordance with law. 18.10 Now we are coming to second aspect of the matter, merit of the case. To examine this aspect of the matter, we would like to have discussions regarding the scheme of the Act. For the purpose of calculation of tax on income it is necessary to decide the head under which the income is assessable. Income from profits and 41 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 gains of business or profession is assessable under Chapter IV-D. Section 28 provides that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year are assessable under the head profits and gains of business or profession. Income from house property is assessable under Chapter IV-C. Section 22 provides that the annual value of property consisting of any buildings or land appurtenant thereto of which the assessee is the owner, other than such portion of such property as he may occupy for the purpose of any business or purpose carried on by him the profits of which are chargeable to income tax, shall be chargeable to income tax under the head "Income from house property". Income from other sources provides under chapter IV-F. Section 56 provides that income of every kind which is not to be excluded from the total income under this Act shall be chargeable to Income Tax under the head "Income from other sources", if it is not chargeable to Income Tax under any of the heads specified in section 14 items A to E. We find that the scheme of the Act is that income is to tax under appropriate heads of income as provided in the Act. The Apex Court in the case Commissioner of Income Tax vs. V. MR. P. Firm [1965] 56 ITR 67 (SC) had pointed out that the doctrine of "approbate and reprobate" is only a species of estoppel; it applies only to the conduct of parties. As in the case of estoppel, it cannot operate against the provisions of a statute. If a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; 42 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the Income-tax Officer has no power to impose tax on the said income. Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in the Act indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in section, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head.
18.11 To appreciate the issue, we would like to refer certain judicial pronouncements which are as under:-
Commissioner of Income-tax vs. Chennai Properties & Investments Ltd., 266 ITR 685 [2004]/136 TAXMAN 202 (MAD.) The relevant facts of the case and finding of the Court are as under:-
"4. The Tribunal, relying on those objects, held that letting out space in the building owned by the assessee is the business of the assessee and, therefore, the income derived from such letting is business income in respect of which expenses incurred by it for the purpose of letting are deductible.43 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 Learned senior counsel for the Revenue submitted that the view taken by the Tribunal is unsustainable having regard to the law laid down by the Apex Court and this Court.
A Constitution Bench of the Supreme Court, in the case of Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 while approving the decision rendered by the three-Judge Bench in the case of East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 has held thus :
"The object of the appellant-company no doubt was to acquire land and buildings and to turn the same into account by construction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling the same. The activity contemplated in the aforesaid object of the company, assuming it to be a business activity, would not be itself turn the lease in the present case into a business deal. That would follow from the decision of this Court in East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC) where it was observed that 'the income derived by the company from shops and stalls is income received from property and falls under the specific head described in section 9. The character of that income is not altered because it is received by the company formed with the object of developing and setting up markets'." (p. 358) In the case of Sultan Bros. (P.) Ltd. (supra), the assessee had leased out the building fully equipped and furnished to be used as a hotel, and the matter in issue was as to whether the income derived under that lease was taxable as business income or income from property, or income from other sources more specifically under sub-section (4) of section 12 of the Income-tax Act, 1922, which dealt with composite income in the case of letting out of furniture with building. The Court held that lease was a composite one and therefore, income so collected was to be dealt with under section 12(4). While so holding the Court observed that :
"Because of the composite character of the income it becomes a new kind of income not covered by section 9, i.e., income not from ownership of the building alone, but, income which though arising from building would not have been arising if the plant and machinery and furniture had also not been let along with it."44 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 Prior to the decision of the Constitution Bench, but, subsequent to the decision in East India Housing & Land Development Trust Ltd.'s case (supra) a three-Judge Bench of the Supreme Court in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 considered the case of an assessee which held a mining lease for coal and received rental income from sub-lessees to whom portions of the leased area had been sub-leased. The principal object of that assessee was to acquire mining leases for coal, develop them as coalfields and then sub-lease the same to collieries and other companies. In the context of the facts of that case, the Court held that :
"Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation." (p. 363) The Constitution Bench in the case of Sultan Bros. (P.) Ltd. (supra) did not refer to the case of Karanpura Development Co. Ltd. (supra), but, specifically referred to and approved the reasoning in the case of East India Housing & Land Development Trust Ltd. (supra ). The law laid down in East India Housing & Land Development Trust Ltd.'s case (supra) is, therefore, required to be regarded as being entitled to the same weight as that of decision of Constitution Bench. It is of the interest to note that Hidayathulla, J., as he then was, a member of the Bench in all the three cases.
In the case of Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 a two-Judge Bench of the Supreme Court considered the question as to whether rendering of service to tenants by the company which owned a building and whose object was to own and let out building, by supplying electric current, hot and cold water, maintaining lifts and providing other amenities would constitute business activity of the assessee and, therefore, assessable under section 10 of the Income-tax Act, 1922. The building owned by the assessee in that case was situated on Park Street, Calcutta, and consisted of numerous residential flats and over a dozen shops. Those tenants in addition to paying rents, had to make separate payments which included charges for electric current, for use of lifts, for supply of hot and cold water, for arrangement for scavenging, for providing watch and ward and 45 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 other amenities. The Apex Court proceeded on the basis that the assessee had two sources of income, one by way of rental income and the other from service charges. The service charges collected by the assessee was held by the Court to be income from business. The law laid down in the case of Karnani Properties Ltd. (supra) thus, was that rent derived from letting would be assessable as income from property. That decision is clearly in accordance with the decision of the Constitution Bench in the case of Sultan Bros. (P.) Ltd. (supra) which had approved the decision of the three Judge Bench in the case of East India Housing & Land Development Trust Ltd. (supra).
S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) was a case of an assessee-company which had obtained a market place on lease and sublet portions of the same to different tenants, decided by a four Judge Bench. The Court did not regard the law laid down in East India Housing & Land Development Trust Ltd.'s case (supra ) as being applicable to the case of the assessee before it in that case, who was a tenant and not the owner. The observations made in that decision, therefore, are not to be regarded as having laid down the law with regard to the manner in which the rental income derived by the owner from letting out of the building owned by it is to be treated whether as income from business, or income from property. In the case of Universal Plast Ltd. v. CIT [1999] 237 ITR 4541 (SC), a three Judge Bench considered the question as to whether income received by the owner of a factory by letting out the factory was assessable as income from business. The Court, after referring to the cases in Sultan Bros. (P.) Ltd. case (supra), CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 5972 (SC), CEPT v. Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC), CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 (SC) and Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765 (SC) culled out the following proposition :
". . . (1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rent or licence fee) received by an assessee from leasing or letting out of assets would fall under the head 'Profits and gains of business or profession'; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out; (3) where all the assets of the business are let 46 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 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 go out of business altogether or to come back and restart the same; (4) if only a few of the business assets are let out temporarily, while the assessee is carrying on his other business activities, then it is a case of exploiting the business asset otherwise than employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets." (p. 454) On the facts of the case before it, the Court affirmed the findings of the High Court that income received by the assessee from the properties was not business income.
This Court in the case of CIT v. V. Shanmugham [1984] 147 ITR 6921 on the facts of the case before it and without reference to any of the decisions of the Apex Court or this Court held that income derived by way of charges received from the changing body of occupants in lodging houses was to be assessed as business income. It was held that running of lodging house, on the facts of that case was not as owner of the property.
In the case of Anaikar Traders & Estates (P.) Ltd. v. CIT [1990] 186 ITR 1752 this Court, after referring to the decision of the Apex Court in East India Housing & Land Development Trust Ltd.'s case (supra) as also the case of Lakshmi Silk Mills Ltd. (supra) and United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 held that the income derived from the letting out of buildings owned by the assessee whose object was acquisition and possession of property with the incidental object of selling or leasing the same was not income from business but income from property. Similar view has been taken by this Court, in the case of CIT v. Smt. P. Andal Ammal [2000] 243 ITR 715, Indian Overseas Bank Ltd. v. CIT [2000] 246 ITR 206 (Mad.) and CIT v. Indian Warehousing Industries Ltd. [2002] 258 ITR 93 (Mad.). Learned counsel for the Revenue invited our attention to two decisions one rendered by Andhra Pradesh High Court and another by Kerala High Court. In the case of CIT v. George Oommen & Co.47 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 [2001] 247 ITR 5743 (Ker.) it was held that earning from letting out property and receiving income from investments do not amount to carrying on business. In the case of CIT v. Veerabhadra Industries [1999] 240 ITR 54 (AP) it was held that the single act of constructing godown and letting out does not constitute business. These two decisions were rendered in the context of registration of firms and do not really answer the question as to how income from building owned by the company whose object is to acquire and hold buildings is to be assessed.
Learned counsel for the assessee further submitted that the very head under which this income is sought to be assessed does not permit the income being treated as income of that nature. In the Income-tax Act, 1961, classification of income is under different heads. Section 14 refers to "income from house property". It is also the caption of Part C, Chapter IV of the Act as also of section 22 of the Act. Further section 24 also refers to deductions from income from house property.
It is true that there is a difference in the classification of income between the 1922 Act and 1961 Act. Section 6 of the 1922 Act classifies income under the heads 'Salaries, Interest on securities, Income from property, Profits and gains from business, Income from other sources and Capital gains'. The 1961 Act, while substantially retaining those heads of income, modified the head "income from property" which was the description given in the 1922 Act to "Income from house property". However, section 22 of the Act does not refer to "House Property" despite it's caption. The language employed in the section shows that the income referred to therein is not necessarily income from houses. It is income from property 'consisting of any building or hands appurtenant thereto of which the assessee is the owner'.
The word "building" is not confined in its scope only to dwelling houses. "House" is defined in the Oxford Dictionary of English 10th Edition as : a building for human habitation especially one that is lived in by a family or by a small group of people consisting of ground floor and one or more number of storeys. The word 'house' in association with other words also has many other meanings. But, a commercial building is not regarded as a house. That, however, 48 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 would not take the income from such buildings out of the ambit of section 22. Though it is not clear from the context as to why the Act describes income from property as income from house property, the substantive provision of law which creates the charge and obligates the person who receives such income to have it assessed under that head does not confine its application only to house property, but extends to all buildings whether such buildings is used as dwelling house or for other purposes.
It has been held by the Supreme Court uniformly in all cases where the issue was the head under which the rental income from buildings is to be assessed, that such income is to be assessed under the head 'Income from properties/Income from house properties'. The earliest of these decisions is in the case of East India Housing & Land Development Trust Ltd. (supra), which received the approval of the Constitution Bench in the case of Sultan Bros. (P.) Ltd. (supra). Though the decision rendered by the Bench in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra) appears to strike a different note, the judgment itself clarifies that the law declared in East India Housing & Land Development Trust Ltd.'s case (supra) was in no way altered by that ruling. The case of East India Housing & Land Development Trust Ltd. (supra) was distinguished on the ground that that case pertained to a owner of a building while the assessee S.G. Mercantile Corporation was not the owner but was the lessee of the building. In that case, the Court made the following observation with reference to the provisions of the Income-tax Act, 1922 :
"Section 9 of the Act deals with income from property. According to that section, the tax shall be payable by an assessee under the head 'Income from property' in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, subject to certain allowances which are mentioned in that section but with which we are not concerned. It is noteworthy that the liability to tax under section 9 of the Act is the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under the above provision even if the object of the assessee in purchasing the landed property was to 49 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 promote and develop market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting up markets thereon. The income derived by such a company from the tenants of the shops and stalls constructed on the land for the purposes of setting up market would not be taxed as 'business income' under section 10 of the Act, to which a more detailed reference would be made hereafter, but under section 9 of the Act. A concrete instance of this type is afforded by the case EastIndia Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC). . . ." (p.
704) After referring to the case of Karanpura Development Co. Ltd. (supra), which was a case of a lessee receiving rental income from its sub-lessee, the lease and sub-lease being coal mining leases, the Court observed thus :
"So far as such assessees are concerned, who as part of their essential trading activity take lease of property and sublet parts thereof with a view to make profits, the dictum laid down above, in our opinion, would hold good and the profits would have to be treated as business income."
Although it was held by the Constitution Bench in the case of Sultan Bros. (P.) Ltd. (supra) that whether a particular letting is business has to be decided in the circumstances of each case and that each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner, in all the cases which have come before the Court involving commercial or residential buildings owned by the assessee it has been held that the income realised by such owners by way of rental income from a building, whether commercial building or residential house, is assessable under the head 'Income from house property'. The only exceptions are cases where the letting of building is inseparable from the letting of the machinery, plant and furniture. In such cases, it has been held that the rental would not have been realised but for the letting out of the machinery, plant or furniture along with such building and, therefore, the rental received for the building is to be assessed under the head 'Income from other sources'.
On the facts of this case, it is clear that the assessee, as owner of the building, was only exploiting the property as owner by leasing out the 50 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 same and realising income by way of rent. Such rental income is liable to be assessed under the head 'Income from house property'. The Tribunal was in error in holding otherwise.
The first question referred to us is, therefore, answered in favour of the Revenue. Having regard to that answer the second question is also required to be and is answered in favour of the Revenue." Universal Plast Ltd. vs. Commissioner of Income-tax, 237 ITR 454 [1999]/103 TAXMAN 493 (SC).
The facts of the case and finding of the Court are as under:-
"In this case due to loss for two years, the assessee-company entered into a 'leave and licence' agreement with one 'L' for a period of 7 years. The licensee 'L' was to pay licence fee of Rs. 24 lakhs and twenty per cent of the net profit of factory. For the first three months for the assessment year 1977-78, the assessee received only licence fee of Rs. 6 lakhs as no profit was earned by the licensee. The assessee showed the said amount as part of the business income which was negatived by the Assessing Officer. However, the appellate authority as well as the Tribunal upheld the claim of the assessee. On reference, the High Court referred to the various clauses of the agreement and held that it could very well be presumed that at the time the licence agreement was entered into the intention of the ultimate outright sell- out was already there. The assessee was already committed to the licensee for such a sell-out at the licensee's pleasure and there was no means of the assessee falling back from that commitment. Therefore, it could very reasonably be inferred that the assessee in the case decided to go out of business as far as this particular factory was concerned. . . .
The lease agreement was in fact a veiled agreement for lease- cum- sale. . . . The licensing not meant to be a temporary stop gap exploitation of commercial assets. It could not be in the contemplation of the assessee at the time it entered into the licence agreement to retain the assets any more as a commercial asset. Therefore, the High Court held that the licence fee could not be assessed as business income.51 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 On appeal to the Supreme Court, it w\s held as under:-
"6. The question whether the amount earned by an assessee by leasing out the assets of the business would be an income from business carried on by it, has been the subject-matter of consideration by this Court as well as by various High Courts and it would be useful to refer to the judgments of this Court bearing on the issue.
7. In CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC), the assessee-company was carrying on the business of manufacturing silk cloth and dyeing silk yarn. Due to lack of supply of silk yarn during the relevant period while keeping idle other plant and machinery, it let out dyeing plant for five months. The question which came up for consideration before this Court was whether the rent received from letting out the dyeing plant would fall under the head 'Income from business' or 'Income from other sources'. If it was 'Income from business', it would have been chargeable to excess profits tax; if not, the liability would not arise. Mahajan, J., speaking for the Court, observed that no general principle could be laid down which was applicable to all cases and each case had to be decided on its own circumstances. It was held that it was part of the normal activities of the assessee's business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it and for that reason, the dyeing plant had not ceased to be a commercial asset of the assessee, so the sum representing the rent for five months received from the lessee by the assessee was income from business and was chargeable to excess profits tax.
8. In Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765, a Constitution Bench of this Court considered a similar question which also arose under the Excess Profits Tax Act, 1940. In that case, the assessee-firm was carrying on manufacturing business. A public limited company was incorporated to takeover the business from the assessee-firm. The company purchased the building of the assessee- firm and took over from it the plant and machinery on lease at an annual rent. One of the questions that fell for consideration there was whether the lease money obtained by the assessee from the company could be legally treated as business profit liable to excess profits tax. Distinguishing - Shri Lakshmi Silk Mills' case (supra), it was pointed 52 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 out that only a part of the business of the assessee therein, namely, dyeing silk yarn, was temporarily stopped owing to difficulty in obtaining silk yarn on account of war so that part of the assets did not cease to be commercial assets of that business and, accordingly, the income from the assets would be the profit of the business irrespective of the manner in which that asset was exploited by the company. Noticing the facts in the case before the Court that the assessee had already sold land and building to the company; it was not having any manufacturing, trading or commercial activity; and let out the plant and machinery on an annual rent of Rupees forty thousand and applying the common sense principle to the facts, this Court found that the transaction of lease was quite apart from the ordinary business activity of the company, so it was impossible to hold that the letting out of the plant and machinery, etc., was at all a business operation when its normal business activity had come to a close.
9. In CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 (SC), the case arose under the Excess Profits Tax Act. The assessee was a banking company. It owned a six-storeyed building of which only a part was under its occupation and the rest was let out to tenants. The question was whether the rent received from the tenants of the building was the business income of the company. The majority opinion was that realisation of rental income of the assessee was in the course of its business being in prosecution of one of its objects in its memorandum and was liable to be included in its business profits and was assessable to excess profits tax. That conclusion was reached on the premise that the term 'business' as defined in that Act was wider than the definition of that term under the Act. The minority, however, took a contrary view.
10. In Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 (SC), the assessee constructed a building, fitted it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease amount provided separately for running of the building and hire charges for furniture and fixtures. The question that fell for consideration was whether the rent income was business income taxable under the Indian Income-tax Act, 1922. It was held that as the assessee never carried on any business of a hotel in the premises let out or otherwise at all and there was nothing to show that it intended to carry on a hotel business itself in the same building, the 53 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 letting of the building did not amount to the carrying on of a business, so the income under the lease could not be assessed as income from business. The Constitution Bench formulated the principle, thus :
"Whether a particular letting is business has to be decided in the circumstances of each case. Each case has to be looked at from the businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. . . ." (p. 354)
11. In New Savan Sugar & Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC), the appellant-company was carrying on business of crushing sugarcane and gur refining. The building, machinery and plant of the factory mill were leased out initially for a period of five years with three options to renew for similar periods on the part of the lessee. The assessee had, however, the option to terminate the lease after first two years which option was not exercised. The question was whether the income which arose to the assessee for the assessment year 1955-56 from the lease was assessable as income from business or income from other sources ? It was held, on interpretation of the terms of the lease deed, that the intention of the appellant-assessee was to part with the machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as commercial asset during the subsistence of the lease; the intention of the appellant was found to go out of business altogether, therefore, the income was not assessable as business income.
12. CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597/ 36 Taxman 1 (SC) is again a case arising under the Indian Income-tax Act, 1922. One of the creditors filed a petition in the High Court for winding up. The Industrial Financial Corpn., took possession of fixed assets under an English mortgage of those assets. The assessee-company had gone into losses and had stopped its manufacturing activity. Under the scheme evolved by the High Court under the Companies Act, the business assets were let out for ten years with an option for renewal for another ten years. The management of the company was transferred to a Board of Trustees approved by the High Court. The question which fell for determination was whether the rental income 54 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 was assessable in the relevant assessment years as business income ? The findings of the Tribunal were that on account of financial crisis, the company found it advantageous to let out the machinery on hire for a temporary period and the company was able to liquidate its liability at the end of the lease period and regained possession of its assets; the company did not sell or otherwise dispose of its assets; there was nothing on record to show that the company was formed to let out plant and machinery on hire. The Tribunal came to the conclusion that the maintenance of the assets meant that the company had an intention to re-start the business and that the intention of the company in letting out its assets was to exploit the commercial assets for the purpose of its business and, therefore, the rental income was assessable as business income. On reference, that conclusion was upheld by the High Court. On appeal to this Court, while affirming the decision of the High Court, it was noted that all relevant facts were correctly considered from the standpoint of an ordinary prudent businessman by the Tribunal and it was also pointed out that the stoppage of the business by the company was a temporary suspension of business for a temporary period with the object of tiding over the crisis condition and there was never any act indicating that the company intended to carry on the business in future.
In the light of the above discussion, the propositions may be summarised as follows :
(1)no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head 'Profits and gains of business or profession';
(2)it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out; (3)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 go out of business altogether or to come back and restart the same;
(4)if only or a few of the business assets are let out temporarily while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing 55 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.
13. Now adverting to the facts of UPL case, the High Court referred to the findings of the Tribunal that the leasing out of the factory was not a sequel to the assessee's decision to go out of the business in respect of the subject factory and that it was just a make-shift transient alternative means of commercial exploitation of the commercial assets, so income from such letting could not be treated as the fruits of ownership simplicitor of the asset. The High Court also referred to various clauses in the agreement, particularly clauses 1, 2, 4, 7, 19, 20, 21 and 22 and concluded that 'licensee exercising its vested right of option to purchase the licenced premises, the assessee stands completely out in the cold'. The High Court recorded the following findings :
"Therefore, it can very well be presumed that at the time the licence agreement was entered into, the intention of the ultimate outright sell out was already there. The assessee was already committed to the licensee for such a sell-out at licensee's pleasure and there is no means of the assessee falling back from that commitment. Therefore, it can very reasonably be inferred that the assessee in the case decided to go out of business as far as this particular factory was concerned. . . .
The lease agreement is in fact a veiled agreement for lease-cum- sale . . . . We are of the opinion that the licensing is not meant to be a temporary stop gap exploitation of commercial assets. It could not be in the contemplation of the assessee at the time it entered into the licence agreement to retain the assets any more as a commercial asset."
It was contended by Mr. Verma that the High Court did not consider clauses 2(ii), 3(v ), 4, 7, 15 and 16 of the agreement. The clauses read thus:
"2(ii) The 25 per cent of the net profit, if any, within 60 days of the accounts of licensee being adopted and passed by the shareholders.56 ITA Nos.182 & 292/Agra/2012
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3. The licensee hereby agrees and covenants :
(v) to permit the licensor on reasonable previous notice in writing to enter the UPL factory premises and inspect the premises, plants, machinery, etc., with or without their agent, inspector, engineer and other personnel and provide all necessary facilities to them;
4. The licensee shall use the said UPL factory for the purpose of business of manufacturing; provided always that the licensor shall not in any way be responsible for any debt or responsibility incurred by the licensee during the subsistence of this Agreement including that in respect of expenses, such as working expenses, rates and taxes in respect of property, except of capital nature insurance premia, interest on all advances, depreciation on newly acquired assets, bonus and gratuity to employees nor for any liability in respect of Sales Tax or tax on incomes, profits and gains made by the licensee so far as they relate to the licensee's part of the income from the UPL factory and the licensee hereby indemnified the licensor against all such debts, liabilities, costs, charges and expenses in respect thereof.
7. The licensee shall be liable for payment of retrenchment/retirement compensation, if any, to the workmen in case such workmen are retrenched or retired by the licensee. However, the licensor shall be liable for payment of retrenchment/retirement compensation, if any, in case of workmen retrenched or retired after the termination of the licence :
Provided, however, that on the termination of the licence, the licensee shall be liable for any retrenchment compensation payable to workmen on account of removal by them of any plant and machinery acquired and installed by the licensee.
15. In the event of the licensee committing a breach of any of the terms of this Agreement or making default in payment as provided in clause 2(ii) of any two quarterly instalments, the licensor shall be entitled to terminate this agreement upon the expiry of the period of one month from the service of notice in writing by the licensor to the licensee to remove the breach or to make payment, 57 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 as the case may be,m if the licensee fail to remove the breach or to make payment, as the case may be, within the said period.
16. If the licensee pass a resolution for winding up or are ordered to be wound up (except for the purpose of amalgamation or reconstruction) or if the licensee shall do or cause to be done or permit or suffer any act or thing whereby the licensor's right in the UPL factory and in the building, plant, machinery and equipment therein may be prejudiced or put in jeopardy, the licensor may without any notice determine this agreement and the licence and it shall thereupon be lawful for the licensor to enter upon and retake possession of the UPL factory."
From a plain reading of the clauses noted above, what is clear is that they deal with a situation arising out of the breach of the terms of the agreement, entitling the licensor to terminate the agreement on the expiry of the period of one month from the service of the notice to the licensee. Clause 16 deals with a situation of the licensee being wound up in which situation, the licensor reserved his right to determine the agreement and retake the possession of the factory. These clauses do not whittle down the conclusion arrived at by the High Court with reference to the rights of the assessee-lessor coming to an end on the exercise of option by the lessee under clause 19 of the agreement. Applying the aforementioned tests, we are clear in our mind that the High Court has reached the correct conclusion which does not warrant interference.
14. So far as Guntur Merchants Cotton Press Co. Ltd.'s case (supra) isconcerned, the agreement of lease is not placed on record and there is no challenge that in recording its findings the Tribunal and in answering the question the High Court has ignored any vital clause of the agreement. The Tribunal recorded the findings as follows :
"The assessee stopped its business of ginning cotton in 1964 for the sole reason of non-availability of cotton and that it did not start the same even in 1977; there was nothing to show that the non- availability of cotton continued or could continue for such a long period; the godowns of the assessee were let out to a tobacco merchant and the assessee could not be said to be carrying on the 58 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 business of cotton with godowns so let out; the assessee could be said to have only exercised his right as an owner of the property in the leasing out its properties; the machinery remained idle for a very long period and the assessee had separated the machinery from the godown and let out the pressing factory to a metal pressing factory; the assessee did not continue its business for an unusual long time and give out its godown to different business than the one which the assessee was carrying on; the conduct of the assessee did not support that it was using the godown and machinery as business asset and not as the owner of the property."
15. On considering these findings, the High Court answered the question referred to it in favour of the revenue. On the face of these findings, it cannot but be concluded that the assessee had dismantled its business never to return back to it. Applying the aforesaid principles, it has to be held that the answer recorded by the High Court to the question referred to it is correct in law.
16. In the result, we hold that both the High Courts were right in answering the questions referred to them, in favour of the revenue and against the assessee. These appeals are, therefore, dismissed with costs."
Commissioner of Income-tax vs. Shambhu Investment (P.) Ltd. 249 ITR 47 [2001]/116 TAXMAN 795 (CAL.) The facts of the case and finding of the Court are as under:-
"In this case the assessee, owner of certain furnished premises, let out the same to various persons or firms or organisations. Under the agreement, the assessee was to provide services like watch and ward staff, electricity, water and other common amenities. The income derived by the assessee from the said office premises was offered for taxation as business income and the same was assessed, accordingly, by the Assessing Officer. Subsequently, the Commissioner, invoking section 263, passed the assessment order and after giving hearing to the assessee, held that the same was erroneous and prejudicial to the interest of revenue and, therefore, remanded the matter to the 59 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 Assessing Officer with a direction to assess the said income as property income. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal and the Tribunal held that the order of the Assessing Officer was not erroneous and prejudicial to the interest of the revenue and, therefore, cancelled the impugned order. The questions before the court were-.
"1. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that there was no relationship of landlord and tenant between the assessee and the persons who hired office accommodation from the assessee is based on any relevant evidence or arbitrary ?
2. Whether, the finding of the Tribunal that considering the services and facilities offered by the assessee to the hirers of the office space the income should be assessed as business income is based on any relevant evidence or arbitrary ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessment made by the Income-tax Officer was not erroneous and prejudicial to the interest of the revenue and thereby cancelling the order under section 263 of the Income-tax Act, 1961 passed by the Commissioner ?"
On reference the court held as under:
"Before taking a decision on the issue let us first deal with the decisions cited by Mr. Murarka.
(i ) Sultan Bros. (P.) Ltd.'s case (supra) : 5 Judges' Bench of the Apex Court herein has considered a case wherein the assessee constructed a building and filled it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent for the building and a hire charge for the furniture and fixtures.
Dealing with the said case, the Apex Court held that the letting out of the said building did not amount to carrying on of a 60 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 business and the income under the lease would not, therefore, be assessed as income from business. The Apex Court directed the said income to be assessed accordingly.
To decide such an issue the Apex Court gave a guideline that to come to a conclusion one has to find out answer on three issues, namely; (A) Was it the intention in making the lease - and it matters not whether there is one lease or two, i.e., separate leases in respect of furniture and the building - that the two should be enjoyed together? (B) Was it the intention to make the letting of the two practically one letting ? (C) Would one have been let alone, and a lease of it accepted without the other ?
If the answers to the first two questions are in the affirmative and last in the negative, then it has to be held that the lettings would be inseparable.
(ii) National Storage (P.) Ltd.'s case (supra) : Three Judges' Bench of the Apex Court herein decided a case where the assessee had set up a film laboratory wherein the first floor had several vaults which were licensed to various film distributors for keeping the film negatives. The ground floor of the same building would be used only for the purpose of examination, cleaning, washing and rewinding of the films. The key of each vault was retained by the respective vault-holders. However, the key to the main gate was in the exclusive possession of the assessee. The fire alarm charges and other maintenance were paid by the assessee.
While deciding the case, the Apex Court held that although it is a case of letting out such letting out was a 'complex one' and the return received by the assessee was not an income derived from exercise of the property rights only but was income received from carrying on an adventure or concern in the nature of trade and as such, such income is a business income.
(iii) Admiralty Flats Motel's case (supra) : Here income of a partnership firm carrying on business of 'lodging house keepers' has been directed to be assessed as business income by the Division Bench of the Madras High Court.
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(iv) Associated Building Co. Ltd.'s case (supra) : In this case, the assessee being the owner of the building was carrying on similar nature of business by providing office accommodation to various persons like the present case up to a certain period and allowed its income to be assessed under the head 'Income from other sources'. Subsequently, an auditorium was constructed in the basement of a building and the assessee had set up air condition plant not only for providing cool air to the auditiorum but also to the entire office premises. There had been other facilities given by the assessee attached to such office accommodation and other portions of the building.
The Bombay High Court deciding this case held that the nature of business subsequent to setting up of the air condition plant and construction of auditorium became an activity of a complex nature and held that those activities amount to business and income should be assessed accordingly.
(v) K.L. Puri (HUF)'s case (supra) : In the instant case, there had been two separate agreements one for rent for accommodation and the other for hire charges of the furniture and fixtures. The Division Bench of the Delhi High Court held that since the agreement for providing furniture and fixtures done by a separate agreement, the rent realized pursuant to such agreement referable to furniture and fixtures should not be treated as income from property.
(vi) Saswad Mali Sugar Factory Ltd.'s case (supra) : In this case, the Bombay High Court has held that the income from student hostel should be taxed as business income.
(vii) Halai Nemon Association's case (supra) : A building completely furnished including microphone fittings, fixtures, etc., and letting out for limited period for marriage ceremony and other social functions has been considered by the Madras High Court as business and not letting out.
(viii) Mukherjee Estate (P.) Ltd.'s case (supra) : In this case, the Court has directed assessment of income from display of signboards as income from 'other sources'.
Taking a sum total of the aforesaid decisions it clearly appears that merely because income is attached to any immovable property 62 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 cannot be the sole factor for assessment of such income as income from property. What has to be seen is what is the primary object of the assessee while exploiting the property. If it is found applying such test that the main intention is for letting out the property or any portion thereof, the same must be considered as rental income or income from property. In case it is found that the main intention is to exploit the immovable property by way of complex commercial activities, in that event it must be held as business income.
In the light of the above, let us now apply such test in the present case. From the copy of the agreement produced before us it appears that the assessee has let out the furnished office at monthly rent payable month by month by the respective occupants. Services rendered to the various occupants according to the said agreement are not separately charged and the monthly rent payable is inclusive of all charges to the assessee.
To decide this issue we cannot overlook the fact that the cost of the property was Rs. 5,42,443. A portion of the said property is used by the assessee himself for his own business purpose. The rest of the said property has been let out to the various occupiers as stated hereinbefore. It further appears that the assessee had already been recovered a sum of Rs. 4,25,000 as and by way of security free advance from three occupants. Hence, the entire cost of the property let out to those occupiers has already been recovered as and by way of interest free advance by the assessee. Hence, it cannot be said that the assessee is exploiting the property for its commercial business activities and such business activities are primary motto and letting out the property is a secondary one.
7. Let us approach the problem from another angle by applying the test suggested by the 5 Judges' Bench in the case of Sultan Bros. (P.) Ltd. (supra). The three questions framed by the Apex Court are applied in the instant case as follows :
(A) Was it the intention in making the lease - and it matters not whether there is one lease or two, i.e., separate leases in respect of furniture and the building - that the two should be enjoyed together ?63 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 In the instant case, there is no separate agreement for furniture and fixtures or for providing security and other amenities. The only intention, in our view, was to let out the portion of the premises to the respective occupants. Hence, the intention in making such agreement is to allow the occupants to enjoy the table space together with the furniture and fixtures. Hence, this question should be answered in affirmative.
(B) Was it the intention to make the letting of the two practically one letting ?
From a plain reading of the agreement it appears that the intentions of the parties to the said agreement are clear and unambiguous by which the first party has allowed the second party to enjoy the said table space upon payment of the comprehensive monthly rent. Hence, this question should be answered in the affirmative.
(C )Would one have been let alone and a lease of it accepted, without the other ?
As we have discussed hereinbefore that it is composite table space let out to various occupants, the amenities granted to those occupants including the user of the furniture and fixtures are attached to such letting out and the last question, in view of the same, must be answered in the negative.
Applying the said test we hold that by the said agreement the parties have intended that such letting out would be an inseparable one.
8. Hence, we hold that the prime object 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.
In view of the facts and law discussed above we hold that the income derived from the said property is an income from property and should be assessed as such.
9. In the light of our aforesaid discussion we answer question No. 1 in negative, i.e., in favour of the revenue and against the assessee. In 64 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 fact there was a relationship of landlord and tenant between assessee and persons who hired office accommodation.
10. We answer question No. 2 also in the negative, i.e., in favour of the revenue and against the assessee.
11. Question No. 3 also, we answer in negative, that is, in favour of the revenue and against the assessee."
18.12 Hon'ble Delhi High Court in the case of R. Dalmia vs. CIT (1982) 137 ITR 665 (Del.) held that to determine the nature of transaction the dominant intention of the assessee has to be seen. If the intention is to embark or venture in nature of trade as distinguish from capital investment it would make no difference even if the transaction is single or isolated one. In this regard, we may refer a judgment of Hon'ble Supreme Court in the case of Rajputana Textiles (Agencies) Ltd. vs. CIT (1961) 42 ITR 743 (SC.).
18.13 Hon'ble Allahabad High Court in the case of RTO Vs. Rani Ratnesh Kumari (1980) 123 ITR 343 (All.) held that the dominant or even sole intention to resell is a relevant factor and arises a strong presumption, but by itself is not a conclusive proof. The initial intention in conjunction with the subsequent conduct of the assessee and other circumstances should all be looked into with a view to determine the real character of the transaction.
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A.Ys. 2006-07 & 2008-09 18.14 In the case under consideration the case of the assessee is that the receipts is business receipts and, therefore, assessable under the head income from business. Now question is what is business? Meaning of business defines in Section 2(13), "business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The word "business" postulates the existence of certain elements in the activity of an assessee which would invest it with the character of business. In each case the question whether or not the assessee carried on business must necessarily be approached in the light of intention of the assessee, having regard to the legal requirements which are associated with the concept of business. In taxing statutes, the word "business" is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. Whether or not a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive. Such motive must pervade the whole series of transactions effected by the person in the course of his activity. To infer from a course of transactions that it is intended thereby to carry on business ordinarily the characteristics of volume, frequency, continuity and regularity 66 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 indicating an intention to continue the activity of carrying on the transactions must exist. But no test is decisive of the intention to carry on the business. In such cases general line of enquiry is to see whether a transaction that is said to have given rise to a taxable profit bears any of the "badges of trade". The Royal Commission sought to identify these "badges of trade" as follows (160 ITR page
77) -
"(1) The subject-matter of the realization. While almost any form of property can be acquired to be dealt in, those forms of property such as commodities or manufactured articles, which are normally the subject of trading are only very exceptionally the subject of investment. Again property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does.
(2) The length of the period of ownership, Generally speaking, property meant to be dealt in is realized within a short time after acquisition. But there are many exceptions to this as a universal rule.
(3) The frequency or number of similar transactions by the same person. If realizations of the same sort of property occur in succession over a period of years or there are several such realizations at about the same date, a presumption arises that there has been dealing in respect of each.
(4) Supplementary work on or in connection with the property realized. If the property is worked up in any way during the ownership so as to bring it into a more marketable condition; or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. For, when there is an oganised effort to obtain profit, there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way.
(5) The circumstances that were responsible for the realization. There may be some explanation, such as a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase.67 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 (6) Motive. There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realized clearly that it can be inferred from surrounding circumstances in the absence of direct evidence of the seller's intentions and even, if necessary, in the face of his own evidence."
18.15 The word "business" postulates the existence of certain elements in the activity of an assessee which would invest it with the character of business. In each case the question whether or not the assessee carried on business must necessarily be approached in the light of the intention of the assessee, having regard to the legal requirements which are associated with the concept of business. As observed in State of Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 19 STC 1 (SC), in taxing statutes, the word "business" is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. Whether or not a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive. Such motive must pervade the whole series of transactions effected by the person in the course of his activity. To infer from a course of transactions that it is intended 68 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 thereby to carry on business ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transactions must exist. But no test is decisive of the intention to carry on the business. In the light of all the circumstances and inference that a person desires to carry on the business may be raised. This decision, which was rendered in the context of the sales tax law, was relied upon and referred to in the context of the income-tax law in a judgment of the Supreme Court in Sole Trustee, Loka Shikshana Trust vs. Commissioner of Income-tax [1975] 101 ITR 234, 243-244.
18.16 Where the subject of letting out is the tenements, etc., as tenements, the income derived is from house property and is assessable under section 22. But if the subject matter of hiring out is a complex one, being not mere tenements as tenements but added with certain other articles, rights, asserts, etc., the question arises whether the income derived is from house property, business or other sources. After an exhaustive review of authorities on the subject, the following conclusions were arrived at by the Hon'ble Bombay High Court in the case of CIT vs. National Storage Pr. Ltd. (1963) 48 ITR 577, 593 (Bom), the case having been later, affirmed in (1967) 66 ITR 596 (SC).
"1. Income-tax is a single tax levied on the total income classified and chargeable under the various heads and not an aggregate of the distinct taxes levied separately on each head of income.69 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09
2. That the heads of income in section 6 of the Act are specific heads, which are exclusive and exhaustive.
3. The income which falls under any of these specific heads has got to be computed under that head only in the manner specified in the following sections 7 to 12.
4. If the income falls under the head "income from property", which is chargeable under section 9, it has to be taxed under section 9 only and cannot be taken to section 10 on the ground that the business of the assessee was to exploit property and earn income or because the income was obtained by a trading concern in the course of its business.
5. House-owning, however profitable, cannot be a business or trade under the Income-tax Act. Where income is derived from house property by the exercise of property rights properly so called, the income falls under the head "income from property" chargeable under section 9. It is the nature of the operations and not the capacity of the owner that must determine whether the income is from property or from trade. Where the operations involved in the activity of earning income from house property are not different from those of an ordinary house-owner turning to profitable account the property of which he is the owner, the income derived is income from property chargeable under section 9 irrespective of whether the operations are carried on by a company one of whose objects or even the sole object is to indulge in the activity of earning income from house property. Thus, where house property is given on lease or licence basis for earning income therefrom, the true character of the income derived is income from property falling under section 9. The said character is not changed and the income does not become income from trade or business if the hiring is inclusive of certain additional services such as heating, cleaning, lighting or sanitation, which are relatively insignificant and only incidental to the use and occupation of the tenements.
6. In cases where the income received is not from the bare letting of the tenement or from the letting accompanied by incidental services or facilities, but the subject hired out is a complex one and the income obtained is not so much because of the bare letting of the tenement but because of the facilities and services rendered, the operations involved in such letting of the property may be of the nature of business or trading operations and the income derived may be income not from exercise of property rights properly so 70 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 called so as to fall under section 9 but income from operations of a trading nature falling under section 10 of the Act; and
7. In cases where the letting is only incidental and subservient to the main business of the assessee, the income derived from the letting will not be the income from property falling under section 9 and the exception to section 9 may also come into operation in such cases"
18.17 Hon'ble Allahabad High Court in the case of Rampur Industries Ltd. vs. CIT (1971) 82 ITR 23 (All), rental income from certain unused godowns derived by a company doing rice-milling business has been held to be income from property.
18.18 House owning and letting out property do not normally constitute business, and income from such property is taxable as income from house property. Hon'ble Patna High Court in the case of S.C. Mazumdar vs. CIT, (1947) 15 ITR 484, 493 (Pat), Hon'ble Calcutta High Court in the case of Bengal Jute Mills Co. Ltd. vs. CIT (1949) 17 ITR 308 (Cal), East India Prospecting Syndicate Vs. CIT, (1951) 19 ITR 571 (Cal). Also see, Ezra Proprietary Estates Ltd. vs. CIT, (1950) 18 ITR 762 (Cal.). Where a company was formed for the purchase and sale of land and buildings and constructing houses and letting them out, etc., it was held that the rental income was assessable as "Income from house property" and, therefore, no question of allowing depreciation, etc., in respect thereof could arise. Hon'ble Calcutta High Court in the case of Indian City Properties Ltd. Vs. CIT, 71 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 (1965) 55 ITR 262 (Cal), Hon'ble Madras High Court in the case of parry & Co. Ltd. Vs. CIT (1951) 20 ITR 504 (Mad) and Hon'ble Andhra Pradesh High Court in the case of Tripurasundari Cotton Press Co. Ltd. Vs. CIT, (1966) 62 ITR 193 (AP).In the facts of Gupta Bros. Vs. CIT (1994) 76 Taxman 129, 131 (Cal), the Tribunal was held justified in holding that the assessee was not carrying on any business as the assessee's only activity was to collect rent. 18.19 For the purpose of income to be of revenue nature it must arise from the various sources which have been given under the Act. One of such sources is business income, there may be other sources of income like salary, other sources, etc., but the volume, frequency, continuity, regularity and the intention of the assessee to carry on business income. When the business itself has not come into existence, it cannot be considered to be a business income and, therefore, cannot be a revenue receipt. Hon'ble Rajasthan High Court in the case of CIT Vs. Official Liquidator, Golecha Property, (1994) 207 ITR 576, 578 (Raj). In that case, the assessee-company took on lease a property for construction of a cinema theatre. Without completing the work of construction of the cinema theatre, the assessee- company went into liquidation due to financial difficulties. The official liquidator was pressed by the creditors of the company to surrender the plot of land along with the incomplete structure to the lessor. Apart from other payments, the assessee received to a certain sum for loss in respect of surrender of the lease right 72 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 of the assessee to exhibit the films. The Tribunal held that, since the business itself had not come into existence, the said sum received by the assessee could not be assessed as revenue receipt. The Tribunal's view was upheld by the High Court. Applying the aforesaid principles to the facts of that case (201 ITR 208, 248 (Guj), the Gujarat High Court was of the opinion that the transaction of leasing out one building only to a third party was in no way connected with or ancillary to the business activity of the assessee. The assessee never wanted to exploit the asset as commercial asset for any commercial gain. It acted like a prudent owner of the property. On closure of the business, instead of permitting the building to lie idle, it leased out the same with a view to earning rental income. The Tribunal was, therefore, right in holding that the rental income was "Income from house property'.
18.20 The question whether the amount earned by an assessee by leasing out the assets of the business would be income from business carried on by it, has been the subject-matter of consideration by the Supreme Court as well as by various High Courts and it would be useful to refer to the judgment of the Apex court bearing on the issue. The Hon'ble Supreme Court, after considering various judgments, laid down certain guidelines. The relevant discussion and guidelines laid down in Universal Plast Ltd. vs. Commissioner of Income-Tax, 237 ITR 454 (SC) are as under :-
73 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 "In CEPT vs. Shri Lakshmi Silk Mills Limited [1951] 20 ITR 451 (SC), the assessee company was carrying on the business of manufacturing silk cloth and dyeing silk yarn. Due to lack of supply of silk yarn during the relevant period while keeping idle other plant and machinery, it let out the dyeing plant for five months. The question which came up for consideration before this court was whether the rent received from letting out the dyeing plant would fall under the head "Income from business" or "Income from other sources". If it was "income from business", it would have been chargeable to excess profits tax; if not, the liability would not arise. Mahajan J., speaking for the court, observed that no general principle could be laid down which was applicable to all cases and each case had to be decided on its own circumstances. It was held that it was a part of the normal activities of the assessee's business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it and for that reason the dyeing plant had not ceased to be a commercial asset of the assessee, so the sum representing the rent for five months received from the lessee by the assessee was income from business and was chargeable to excess profits tax.
In Narain Swadeshi Weaving Mills vs. CEPT [1954] 26 ITR 765, a Constitution Bench of this court considered a similar question which also arose under the Excess Profits Tax Act, 1940. In that case, the assessee-firm was carrying on manufacturing business. A public limited company was incorporated to take over the business from the assessee-firm. The company purchased the building of the assessee-firm and took over from it the plant and machinery on lease at an annual rent. One of the questions that fell for consideration there was whether the lease money obtained by the assessee from the company could be legally treated as business profit liable to excess profit tax, Distinguishing Shri Lakshmi Silk Mills' case [1951] 20 ITR 451 (SC), it was pointed out that only a part of the business of the assessee therein, namely, dyeing silk yarn, was temporarily stopped owing to difficulty in obtaining silk yarn on account of war so that part of the assets did not cease to be commercial assets of that business and accordingly, the income from the assets would be the profit of the business irrespective of the manner in which that asset was exploited by the company. Noticing the facts in the case before the court that the assessee had already sold the land and building to the company ; it was not having any manufacturing, trading or commercial activity ; and let out the plant and machinery on an annual rent of rupees forty thousand and applying the common sense principle to the facts, this court found that the transaction of lease was quite apart from the 74 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 ordinary business activity of the company, so it was impossible to hold that the letting out of the plant and machinery, etc., was at all a business operation when its normal business activity had come to a close.
In CIT vs. Calcutta National Bank Limited [1959] 37 ITR 171 (SC), the case arose under the Excess Profits Tax Act. The assessee was a banking company. It owned a six-storeyed building of which only a part was under
its occupation and the rest was let out to tenants. The question was whether the rent received from the tenants of the building was the business income of the company. The majority opinion was that realisation of rental income of the assessee was in the course of its business being in prosecution of one of its objects in its memorandum and was liable to be included in its business profits and was assessable to excess profits tax. That conclusion was reached on the premise that the term "business" as defined in that Act was wider than the definition of that term under the Income-tax Act. The minority, however, took a contrary view.
In Sultan Brothers Private Ltd. vs. CIT [1964] 51 ITR 353 (SC), the assessee constructed a building, fitted it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease amount provided separately for running of the building and hire charges for furniture and fixtures. The question that fell for consideration was whether the rent income was business income taxable under the Indian Income-tax Act, 1922 ? It was held that as the assessee never carried on any business of a hotel in the premises let out, or otherwise at all, and there was nothing to show that it intended to carry on a hotel business itself in the same building, the letting of the building did not amount to the carrying on of a business, so the income under the lease could not be assessed as income from business. The Constitution Bench formulated the principle thus "Whether a particular letting is business, has to be decided in the circumstances of each case. Each case has to be looked at from the businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner...". In New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC), the appellant- company was carrying on the business of crushing sugarcane and gur refining. The building, machinery and plant of the factory mill were leased out initially for a period of five years with three options to renew for similar periods on the part of the lessee. The assessee had, however, the option to terminate the lease after the first two years which option was not exercised. The question was whether the income which arose to the assessee for the 75 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 assessment year 1955-56 from the lease was assessable as income from business or income from other sources ? It was held, on an interpretation of the terms of the lease deed, that the intention of the appellant-assessee was to part with the machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease; the intention of the appellant was found to go out of the business altogether, therefore, the income was not assessable as business income.
CIT vs. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC), is again a case arising under the Indian Income-tax Act, 1922. One of the creditors filed a petition in the High Court for winding up. The Industrial Finance Corporation took possession of the fixed assets under an English mortgage of those assets. The assessee-company had gone into losses and had stopped its manufacturing activity. Under the scheme evolved by the High Court under the Companies Act, the business assets were let out for ten years with an option for renewal for another ten years. The management of the company was transferred to a board of trustees approved by the High Court. The question which fell for determination was whether the rental income was assessable in the relevant assessment years as business income ? The findings of the Tribunal were that on account of financial crisis, the company found it advantageous to let out the machinery on hire for a temporary period and the company was able to liquidate its liability at the end of the lease period and regained possession of its assets ; the company did not sell or otherwise dispose of its assets ; there was nothing on record to show that the company was formed to let out plant and machinery on hire. The Tribunal came to the conclusion that the maintenance of the assets meant that the company had an intention to restart the business and that the intention of the company in letting out its assets was to exploit the commercial assets for the purpose of its business and, therefore, the rental income was assessable as business income. On a reference, that conclusion was upheld by the High Court. On appeal to the court, while affirming the decision of the High Court, it was noted that all relevant facts were correctly considered from the standpoint of an ordinary prudent businessman by the Tribunal and it was also pointed out that the stoppage of the business by the company was a temporary suspension of business for a temporary period with the object of tiding over the crisis condition and there was never any act indicating that the company never intended to carry on the business in future.76 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 In the light of the above discussion, the propositions may be summarised as follows:
(1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease, amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head "Profits and gains of business or profession" ; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out ;
(3) 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 go out of business altogether or to come back and restart the same ;
(4) if only a few of the business assets are let out temporarily, while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business,; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets."
18.21 In the light of above discussions, if we consider the facts of the case under consideration, we notice that the admitted facts of the case are that the assessee is the owner of the property. The partner of the assessee firm admitted that the property was purchased to let out on rent to GAIL. These admitted facts have been noted from question nos.4, 9 & 10 of the statement recorded on 10.09.2008 of which abstract has been reproduced in this order in Para no18.8. The relevant clauses of different agreements of which abstract have been reproduced above in this order in Para no18.5 to 18.7. We notice that the intention of the assessee was 77 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 to let out the property to earn the rent. The assessee has claimed that income is assessable under the head "income from business" but the assessee has failed to discharge the onus by furnishing evidence and material that the assessee was doing business. No systematic set up has been established for doing business activities. The assessee has failed to point out the volume, frequency, continuity and regularity of the transactions of purchase and sale in clause of goods. On perusal of income and expenditure account for the year ended 31.03.2006 of which copy has been reproduced below, we are not satisfied about the claim of the assessee that the assessee was doing any activities of which income is assessable under the head "income from business". The ld. Authorised Representative submitted that the assessee has employed only one person. From the income & expenditure account, we notice that the assessee has claimed expenditure under salary head only Rs.42,000/-.
"INCOME AND EXPENDITURE ACCOUNT for the period ended 31st March, 2006
-----------------------------------------------------------------------------------------------------------------------
PARTICULAR AMOUNT Rs. PARTICULARS AMOUNT. Rs.
-----------------------------------------------------------------------------------------------------------------------
EXPENDITURE INCOME
Printing & Stationary 530.00 Lease Charges Receipts (net) 898,512.00
Conveyance Expenses 3,900.00 Maintenance Charges Receipts (net) 981,652.00
Bank Charges/Commission 5,210.18 Receipts against furnishings (Net) 838,619.00
Building Upkeep/Maintenance 124,649.50 (+) TDS on all receipts 529,992.00
Bank Interest paid 1,200,349.00
Insurance Expenses 26,716.00 Net Loss Carried over to Balance 1,095,188.80
Late possession Fee 64,875.00 Sheet
Diesel Expenses 61,654.00
Audit Fee 6,673.00
78 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09
Interest paid on Unsecured Loans 1,53,796.00
Salaries Paid 42,000.00
Postage Expenses 200.00
Rats & Taxes 16,380.00
Interest on Partners Capital 657,458.00
Depreciation Written off 1,979,573.00
------------------ ----------------
TOTAL Rs. 4,343,963.80 TOTAL Rs. 4,343,963.80
----------------- ----------------"
18.22 Further we notice that the assessee has claimed depreciation of
Rs.19,79,573/- out of which depreciation of Rs.7,33,425/- was on account of land and building. The relevant depreciation chart is reproduced as under :-
Description of Assets W.D.V. Description W.D.V.
As At Additions Disposal Total As at Rate For the As at
01.04.2005 during year during 31.03.2006 % year 31.03.2006
year
LAND & BUILDING
Leasehold Building 7,329,250.00 5,000.00 -- 7,334,250.00 10.00% 733,425.00 6,600,825.00
FURNITURE &
FIXTURES
Generator 393,750.00 --- --- 393,750.00 15.00% 59,062.50 334,687.50
Air Conditioning & Jigs 3,815,463.75 --- --- 3,815,463.75 15.00% 572,319.56 3,243,144.19
FURNITURE &
FIXTURES
Fittings, Fixtures & Jigs 6,131,406.54 16,254.00 --- 6,147,660.54 10.00% 614,766.05 5,532,894.49
TOTAL Rs. 17,669,870.29 21,254.00 -- 17,691,124.29 1,979,573.12 15,711,551.17
On perusal of financial statements we find that the assessee has claimed the rent received as income from business to get the benefit of deprecation whereas in accordance with law the assessee is not entitle because income is assessable as income from house property.79 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09 18.23 From the following bifurcation of the rent, we find that the dominant intention of the assessee was to earn the rent of property and not to earn profit by running a business.
(a) Lease Receipts 90104/- per month Rs.10,81,248/-
(b) Maintenance Receipts 96540/- per month Rs.11,58,480/-
(c) Furnishing Receipts 83668/- per month Rs.10,04,016/-
Rs.32,43,744/-
Plus Rs. 5,031 TDS on Diesel
Rs.32,48,775/-as shown
18.24 The facts of the case under consideration are identical to the facts of the
judgment of Hon'ble Bombay High Court in the case of Mangla Homes (P) Ltd. vs. Income Tax Officer, 325 ITR 281 (Bom.). The facts of Mangla Homes (P) Ltd. vs. Income Tax Officer, 325 ITR 281 (Bom.) are that the assessee is a Private Limited Company incorporated with the object of dealing in properties. The main object of the company as contained in the memorandum of association was to carry on business of dealing and investment in properties, flats, warehouses, shops, commercial and residential houses. The ancillary object was to carry on business of leasing, hire purchase, renting, selling, re-selling or otherwise dispose of all forms of movable or immovable properties and assets including buildings, godowns, warehouses and real estate of any kind. The assessee purchased flats for trading purposes at the cost of Rs.4 crores. At the time of purchase the building needed major repairs and according to the assessee as it expected that the prices of flats would go up after completion of repairs, it made the purchases. It is then 80 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 claimed by the assessee that the flat could not be sold because of recession in the market and hence it let out the flats on license basis for temporary period and earned monthly rental income as license fees. The assessee treated the said rental income as income from the business. The authorities below have concurrently found in favour of the revenue that the rental income cannot be treated as income from business and treated it as "income from house property" under section 22 of the Income-tax Act.
18.25 The question thus raised is as to whether the Tribunal is right in concluding that the rental income is an income from house property. While reaching the said conclusion the Tribunal has relied on a judgment in the case of East India Housing & Land Development Trust Ltd. vs. CIT [1961] 42 ITR 49 (SC). Hon'ble Bombay High Court held that in the said judgment in an identical set of facts with the assessee-company having objects amongst others was (i) To buy and develop landed properties and (ii) To promote and develop markets the Supreme Court held that the income derived by the Company from shops and stalls is income received from property and falls under the specific head described in section 9 being income from the property under the Income-tax Act, 1922. While reaching the said conclusion the Supreme Court has relied upon its earlier judgment in the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 wherein the Apex Court had explained after exhaustive review of authorities that 81 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 under the scheme of Income-tax Act the heads of income, profits and gains enumerated in the different clauses are mutually exclusive and each specific head covering items of income arising from a particular source. Reliance was then placed on a judgment in the case of Commercial Properties Ltd. v. CIT ILR 55 Cal. 1057 wherein it was held that income derived from rentals by a company whose sole object was to acquire lands, built houses and let them to tenants and whose sole business was management and collection of rents from the said properties, was held assessable under section 9 and not under section 10 of the Income-tax Act, 1922. It was observed in that case that merely because the owner of the property was a company incorporated with the object of owning property, the incidence of income derived from the property owned could not be regarded as altered, the income came from directly and specifically under the head "Property" than income from business. Relying upon the said judgments the authorities below have found that the income received by the appellant-assessee from the shop is indisputably an income from property and hence concluded that character of the income is not altered merely because the flat is temporarily leased out. The object of the company would not be relevant while determining the levy of taxes. The learned counsel for the appellant has questioned the correctness of the said finding by placing reliance on a judgment in the case of S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) wherein assessee company was dealing in property development and sub-letting of shops and stalls and the question arose as to 82 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 whether income from sub-letting is a business income or otherwise. While holding that the income earned from the property is a business income it noted the reasons for the same. The principal reason was that since the appellant-company was not owner of the property or any part thereof there was no question of making the assessment under section 9 of the Act. It was held that the liability of tax under section 9 of the Income-tax Act of 1922 would be of the owner of the building or land appurtenant thereto. It is also held that in case the assessee is the owner of the building or land appurtenant thereto he would be liable to be taxed under section 9 even if the object of the assessee in purchasing the landed property was to promote and develop the market estate. Thus it can be seen even from the judgment relied upon by the appellant that distinguishing feature in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra) was that the assessee was not the owner of the property in question. In the case in hand it is an admitted position that the assessee is owner of the property. The next judgment relied upon by the assessee is in the case of CEPT v. Shri Laxmi Silk Mills Ltd. [1951] 20 ITR 451 (SC). In the said case the assessee who was engaged in manufacture of silk cloth and dyeing silk yarn was unable to operate the dyeing plant on account of difficulty in obtaining silk yarn and hence had let out the dyeing plant temporarily. It was found that such letting out is part of usual activity of the business. In the facts of the said case the Supreme Court held that the plant does not cease to be commercial asset when let out temporarily and the income earned from such letting out is business income. It 83 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 is thus clear that what was let out was a commercial asset and the same was used for the same business purpose. It is held that the yield of income by commercial asset is profit of the business. It was also held that the income earned was from the normal activity of the assessee's business. Hence this judgment does not advance the case of the appellant any further. Hon'ble Bombay High Court was of the view that the assessee's case is squarely covered by the judgment in the case of East India Housing & Land Development Trust Ltd [1961] 42 ITR 49 (SC) on which reliance has been rightly placed by the authorities below in reaching the conclusion that the rental income earned by the assessee was an income from the house property. Hon'ble Bombay High Court held that there being no merit in the appeal same stands dismissed.
18.26 In the case under consideration the A.O. has examined all the agreements and found that the first agreement i.e. lease agreement clearly shows that the property was obtained to give on rent. On examination of the second agreement, the A.O. noticed that this second agreement was in fact consequence of the first agreement and was executed after 14 days of first agreement. On perusal of books of account, the A.O. noticed that the assessee did not provide day-to-day services as no such expenses have been found incurred by the assessee. The A.O. found that the assessee did not involve in any kind of recurring, systematic and in organized manner business activities. From the third agreement, the A.O. noticed 84 ITA Nos.182 & 292/Agra/2012 A.Ys. 2006-07 & 2008-09 that this agreement was in respect of maintenance and up-keeping of the building, floor, furniture & fixtures for which the assessee has deputed only one person to look after the premises. We notice that the CIT (A) has also examined the relevant provisions of section 22 of the Act and their conditions considering facts of the case under consideration. The CIT (A) found that the material on record itself goes to show so as to what kind of organisation and continuous activity was carried on by the assessee to claim the receipt as business receipt. The CIT (A) has also rejected assessee's contention to follow the order of A.O. for earlier year on the ground that if the A.O. committed a patent mistake, no principle of consistency can bind the assessee or Revenue to go on repeating the same mistake once committed. The assessee has failed to furnish any material to controvert the facts noted by the revenue authorities. After considering totality of the facts of the case and orders of the Revenue Authorities and contention of the assessee, we find that the CIT(A) has rightly confirmed the action of the A.O in treating rental income assessable as income from house property and services receipts as income from other sources. Order of CIT (A) is confirmed on the issue. The AO is directed to give consequential effects and calculate total taxable income in accordance with law.
19. The other effective ground raised in the appeal is in respect of charging of interest under section 234B of the Act which is mandatory and consequential in nature. The A.O. is directed accordingly.
85 ITA Nos.182 & 292/Agra/2012
A.Ys. 2006-07 & 2008-09
20. As regards the ITA No.292/Agra/2012 appeal filed by the assessee for A.Y. 2008-09, the ld. Representatives of the parties submitted that the facts of the case for A.Y. 2008-09 are identical to the facts of the case for A.Y. 2006-07. Following the detailed discussions made in A.Y. 2006-07, we dismiss the grounds raised by the assessee in this year also i.e. 2008-09.
21. In the result, both the appeals filed by the assessee are dismissed.
(Order pronounced in the open court)
Sd/- Sd/-
(BHAVNESH SAINI) (A.L. GEHLOT)
Judicial Member Accountant Member
Amit/
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT (Appeals) concerned
4. CIT concerned
5. D.R., ITAT, Agra Bench, Agra
6. Guard File. By Order
Sr. Private Secretary
Income Tax Appellate Tribunal, Agra
True Copy