Income Tax Appellate Tribunal - Delhi
Acit vs Lavish Apartments (P) Ltd. on 21 June, 2004
Equivalent citations: [2005]92ITD58(DELHI), (2005)98TTJ(DELHI)1100
ORDER
T.N. Chopra, Accountant Member
1. This appeal is filed by the revenue against the order of the CIT (Appeals) dated 19.6.1998 for assessment year 1995-96. The revenue has raised the following grounds :
"On the facts and in the circumstances of the case the CIT (A) has erred both on facts and in law :
(i) in holding that the rental income of Rs. 5,58,035/- constituted business income of the assessee and that the assessee was eligible to set off its b/f business losses against such income despite the fact that such rental income is to be assessed under the head "Income from House Property" as held by the Supreme Court in East India Housing and Land Development Trust v. CIT (42 ITR 49) and also by the Calcutta High Court for CIT v. Bengal Jute Mills (165 ITR 63);
(ii) in holding that the amount of Rs. 6,92,220/- represented business income of the assessee and that the assessee was eligible to set off its b/f business losses against such income despite the fact that the A.O. had clearly established that such income was to be assessed under the head 'Income from other sources."
2. Briefly stated the facts are that the assessee company filed the return for assessment year 1995-96 wherein brought forward business loss for assessment year 1994-95 has been set off against income from house property as well as income from other sources. In the assessment order, Assessing Officer has elaborately brought out the relevant facts of the case having a bearing on the claim of set off of brought forward business loss against property income and income from other sources by the assessee. Perusal of profit and loss account showed that the assessee company had received rental income of Rs. 8,11,544/- and income from house property has been computed at Rs. 6,49,235/-. The assessee has further shown an income of Rs. 5,78,220/- under the head other income. According to the Assessing Officer, since the business of the assessee is sale and purchase of properties, brought forward business loss cannot be adjusted as per provisions of Section 72 (1) against income from house property or income from other sources. When called to explain the reasons for claim of set off of the brought forward business loss, the assessee stated vide its letter dated 20.8.1997 as under:
"The assessee company is carrying on the business of leasing, selling and renting of real-estate properties, inter alia, others. Renting is also the main object of the company. Under the circumstances, the rental income is also profit and gain of the business carried on by the assessee although assessed under the head "income from house properties". The carried forward business losses are, therefore, eligible to be set off against the income under the head 'income from house properties".
Details of other income of the assessee is enclosed. This income is also the business income of the assessee."
With regard to rental income, Assessing Officer has reproduced details of rent received as filed by the assessee as per the page 3 of the assessment order as under:
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Particulars Period Per Amount Remarks
Month In Rs.
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Union Bank of India, April, 94 - 47,840/- 574080/- Bldg. construction HS-32, Kailash March, 95 completed in 1989-90 Colony, New Delhi.
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15% rent increased July, 94 - 7,176/- 64584/- HS-32, Kailash March, 95 Colony (UBI)
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HS-28, Kailash May, 94 - 5,200/- 57200/- Bldg. Construction Colony March, 95 completed in April, 94 Smt. Bimla Devi Jhunjhunwala
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Tulika Advt. & Makt. April, 94 - 9,500/- 114000/- Service charges Pvt. Ltd., 389, Masjid March, 95 received Moth, NDSE-II, New Delhi.
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Ram Swamp Anand, April, 1994 - 140/- 1680/- Bldg. Purchased in HS-28, Kailash March, 95 1984 and Ram Swarup Colony, N. Delhi was already tenant.
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In the backdrop of the above facts, Assessing Officer held that income from house property cannot be set off against brought forward business losses. The elaborate reasons given by the Assessing Officer at page 3 and 4 of the assessment order are reproduced hereunder:
"From the above details, it is seen that the rental income is basically from two properties only i.e. HS-28, Kailash Colony and HS-32, Kailash Colony, New Delhi. The building construction of HS-32, Kailash Colony was completed in 1989-90 when the property was let but to Union Bank of India. Since then, the assessee company is receiving annual rent from Union Bank of India from this property. The building at HS-28, Kailash Colony was purchased in 1984. Part of this building was already in occupation of Mr. Ram Swarup Anand as tenant. Further construction was completed in April, 1994 and which was subsequently let out to one Smt. Bimla Devi Jhunjhunwala. The assessee company has also shown a sum of Rs. 1,14,000/- being received from M/s. Tulika Advertising & Marketing (P) Limited as 'service charges'. No details of such service charges have however been filed.
2.3 From the above facts, it is clear that it is not the assessee's case that it is the owner of a number of properties which are being rented out to different people and the assessee company's job is merely to collect rent from such tenants. The assessee company is earning income from two properties only, i.e. HS-28 and HS-32, Kailash Colony, New Delhi. Nor is this a case where there is a continuous change of tenants of various properties where one tenant leaves, whose place is taken by another tenant and so on. The assessee is earning rental income from properties at HS-32, Kailash Colony since 89-90 and from HS-28, Kailash Colony since 1994 and there has been no change in the tenants of either of the properties. These facts clearly show that the assessee company carries on the business of sale and purchase of properties and not the business of renting out of properties. There is a clear difference between the sale and purchase of properties and between renting out of properties. Therefore, on this reasoning alone, the assessee's claim of its 'rental income' being its 'business income' cannot be allowed and the b/f business losses cannot be allowed to be set off against the rental income which is assessable under the head 'house property' since as per the provisions of Section 72(1) of the IT Act, the b/f business loss can be adjusted against business income only."
In support of his conclusion, Assessing Officer placed reliance on the decision of Supreme Court in the case of National Storage (P.) Limited 66 ITR 596 and observed that once the income has been computed under the head income from house property and has been assessed accordingly, there is no occasion for treating such income as business income for the purpose of claiming benefit of set off of business losses by the assessee under Section 72(1). Assessing Officer further placed reliance on the decision of Calcutta High Court in CIT v. Bengal Jute Mills Co. Ltd. 165 ITR 63.
3. Similarly, with regard to other income, details of such income as furnished by the assessee vide letter dated 24.10.1997 are as under:
Particulars Amount
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Car hire recd. From Tulika 114000/-
Advt. @ Rs. 9500/- p.m.
Car hire charges recd. From 102000/-
Integra Products (P) Ltd.
@ Rs. 8500/- p.m.
Computer hire charges recd.
From Tulika Advt. @ Rs. 9800/- p.m. 117600/-
Commission received from Tulika
Advt. for procuring business to them 244620/-
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578220/-
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Assessing Officer observed in the assessment order that the business of the assessee is admittedly dealing in sale and purchase of the properties and the letter head of the assessee described the assessee company as Builders, Promoters and Developers, the aforesaid income by way of other receipts are liable to be assessed under the head income from other sources. According to the Assessing Officer, no business of hiring out cars, computers as an organised systematic business activity has been carried out and, therefore, income is liable to be assessed under the head other sources as shown by the assessee in the return,
4. Aggrieved, the assessee carried the matter before the CIT (A). CIT (A) observed that since the properties let out have been shown in the balance sheet as stock-in-trade, these are trading asset and, therefore, rental income even if assessed under the head income from house property is to be treated as business income and set off of brought forward losses has been rightly claimed by the assessee. Regarding other sources, CIT (A) treated the receipts as attributable to business activity and held that set off of business loss under Section 72(1) against such income, even if the same has been assessed under the head other income is allowable. In support of his conclusion, ld. CIT (A) has placed reliance on the following decisions :
(i) Karnani Properties Ltd. 88 ITR 547 (SC)
(ii) Karapura Development Co. Ltd. v. CIT 44 ITR 362 (SC)
(iii) O.RM.M.SP.SV. Firm v. CIT 63 ITR 404 (SC)
(iv) S.R. Mercantile Corporation (P) Ltd. v. CIT 83 ITR 700 (SC)
(v) Western States Trading Co. Ltd. v. CIT 80 ITR 21 (SC)
5. The revenue is aggrieved and has come up in appeal before us.
6. We have carefully considered the rival submissions and also gone through the orders of the tax authorities below. The unending array of judicial authorities cited on behalf of the revenue as well as on behalf of the assessee company has also been perused by us. It appears to us that the key focus of the entire dispute centers around Section 72 of the Income-tax Act which provides for set off carry forward business losses. The undisputed facts emerging from the orders of the revenue authorities below are that income from house property as well as income from other sources have been assessed for the assessment year 1995-96 under reference on the basis as shown by the assessee. There is no dispute that income has been assessed by the Assessing Officer under the heads as shown by the assessee. The dispute involved in the present appeal may be divided in two limbs - (1) Whether income assessed under the head income from house property can be set off against the brought forward business losses? and (2) whether income assessed under the head other sources can be set off against the brought forward business losses?
7. In so far as, the first limb of controversy is concerned, the facts have been duly indicated by us hereinbefore on the basis of the orders of the Assessing Officer as well as the CIT (A) and, there is substantially no dispute with regard to these facts. Rental income has been derived by the assessee mainly from the two properties, HS-28, Kailash Colony, New Delhi and HS-32, Kailash Colony, New Delhi. The assessee constructed the property HS-32, Kailash Colony in the year 1989-90 and the same was let out to Union Bank of India. Since then, the assessee company is receiving annual rent from Union Bank of India. The second property being HS-28, Kailash Colony was purchased by the assessee company in 1988. A part of this building was already in occupation of Mr. Ram Swamp as tenant. Further construction was completed in April, 1994 and the same was let out to one Smt. Bimla Devi Jhunjhunwala. The assessee company has also shown a sum of Rs. 1,14,000/- as service charges from M/s. Tulika Advertising and Marketing. Assessing Officer observed in the order that no details of such service charges have been filed. Assessing Officer has assessed the amount of Rs. 1,14,000/- as income from other sources. Before the CIT (A), however, it is stated that a part of the office space at 23, Community Centre, East of Kailash, New Delhi has been sub-let and rent of Rs. 1,14,000/- had been received. Vide para 4.1, CIT (A) has observed that the said office space includes telephone connection, electricity and office furniture.
8. Section 22 of I.T. Act deals with the income from house property and essential condition for assessing the income under the head 'income from house property' is that the assessee is the owner of the property and further that property used for purposes of business, profits of which are chargeable to tax shall not be included under Section 22 of the Income-tax Act. Now, in the instant case, proviso to Section 22 are satisfied inasmuch as the property, namely, HS-28, Kailash Colony, New Delhi and HS-32, Kailash Colony, New Delhi, owned by the assessee has been let out and is not being used for purposes of business. In fact, the assessee company itself has shown income from such property under Section 22 of the Income-tax Act. Once the assessee company has shown the income from house property which has been assessed by the Assessing Officer on the said basis, the only inference which can be drawn is that the property in question owned by the assessee represents the property which is not being used for business purposes. Regarding office space sub-let to M/s. Tulika Advertising, rental income received Rs. 1,14,000/- has rightly been brought to tax under the head "income from other sources" since this office space is not owned by the assessee and, therefore, income therefrom cannot be assessed as income from house property. Now, in so far as Section 72 is concerned, the section provides in express and unequivocal language that brought forward business losses can be set off against profits and gains of any business carried on by the assessee for any assessment year. Obviously, income from house property cannot be treated as business income in view of the scheme of taxation as indicated under the Income-tax Act. The fact that immovable properties in question owned by the assessee have not been used for the purposes of business stands eloquently admitted and acknowledged by the assessee itself while disclosing the rental income as income from house property under Section 22 of the Income-tax Act. It is necessary to mention here that Section 22 brings to tax income from house property by adopting notional basis. Income from the property for purposes of Section 22 is to be computed on the basis of annual value of the property. The contention of the assessee is that it is carrying on the business of renting of properties and further that renting is the main object of the company. It appears to us that the contention is factually erroneous inasmuch as no business of leasing out properties as a business activity has been carried out by the assessee company. Rental income from the two properties, as discussed above, have been received by the assessee but these facts do not indicate carrying out of any business activity by the assessee for leasing of properties. The word business indicates some real, substantial and systematic or organised course of activity or conduct with a set purpose. The business activity is characterised by features of continuity, frequency, application of effort and skill coupled with the profit motive. Mere letting out of immovable property in exercising right of ownership of the property would not imply carrying out of a business of letting out of the properties. In the instant case, rental income received by the assessee has been brought to tax under a specific head "income from house property" as claimed by the assessee and assessed by the Assessing Officer. The assessee, therefore, cannot backtrack from the accepted factual and legal position and claim set off of brought forward losses by invoking the provisions of Section 72. Section 72 would not apply for setting of carried forward business losses against income from house property assessed under Section 22 of the Income-tax Act.
9. The contention has been raised on behalf of the assessee that the properties in question have been shown as stock-in-trade and no depreciation thereon has been claimed. According to the assessee, rental income from the properties is liable to be treated as business income since rental income has been received as a part of the business activity. We are not inclined to accept the submission. The facts of the case, as elaborately referred above, indicate that properties in question have been leased right since purchase thereof or after the completion of construction thereof These properties are not stock-in-trade of the assessee on the basis of facts and circumstances of the case. In any case, the very conduct of the assessee in showing the income as income from house property under Section 22 of the Act eloquently establishes that these properties are not business assets of the assessee since Section 22 specifically exclude properties used for purposes of business.
10. Now, we come to the second limb of the controversy i.e. income from other sources. Particulars of income assessed under the head other sources have already been indicated above by us as borne out from the orders of the tax authorities below. Assessee has shown income from car hire and computer hire as well as commission received from M/s. Tulika Advertising under the head "other sources". After showing car hire and computer hire and receipt from M/s. Tulika Advertising under the head other sources, the assessee cannot be allowed to turn back and claim such income as business income for the purposes of set off against brought forward business losses under Section 72 of the Income-tax Act. Obviously, hiring of cars and computers, which are business asset of the assessee cannot be treated as business of the assessee. Such income has been rightly shown by the assessee under the head "other sources" and the same has been assessed by the Assessing Officer under the head "other sources". There is, therefore, no occasion for the assessee to claim that this income represent profits and gains for the purposes of availing of the benefit of set off against brought forward business losses. The contention is stated to be rejected.
11. The view taken by us above is amply fortified by the judicial authorities relied upon by the revenue in the grounds of appeal reproduced hereinbefore. On behalf of the revenue, reliance has been placed on the decision of the Supreme Court in East India Housing and Land Development Trust limited v. CIT 42 ITR 49. The facts of the case are that the appellant company, which was incorporated with the objects of buying and developing landed properties and promoting and developing markets, purchased 10 bighas of land in the town of Calcutta and set up a market therein. The question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income" under Section 10 of Income-tax Act or as income from property under Section 9. The Supreme Court observed that the income derived by the company from shops and stalls was income received from property and fell under the specific head described in Section 9. The character of that income was not altered because it was received by a company formed with the object of developing and setting up markets. Nor because of the fact that the company was required to obtain a licence from the Calcutta Municipality to maintain sanitary and other services and for that purpose had to maintain a staff and to incur expenditure did the income become "profits or gains from business" within the meaning of Section 10. Nor was the character of the income altered merely because some stalls were occupied by the same occupants and the remaining stalls were occupied by a shifting class of occupants. The primary source of income from the stalls was the occupation of the stalls, and it was a matter of little moment that the occupation which was the source of the income was temporary. The decision supports the view being taken by us above.
12. The next decision relied upon by the revenue has been rendered by Calcutta High Court in CIT v. Bengal Jute Mills Company Limited 165 ITR 631. In this case, the Tribunal had earlier held that though the income from letting out of the godowns is chargeable under the head "income from house property" as the godowns have been shown and treated as commercial assets of the company, loss from business carried over could be set off against the income from the godowns. The High Court reversed the finding of the Tribunal with the following observations reported at page 645 of the report:
"The Tribunal held that the income from the godowns is chargeable under the head "Income from house property" and yet the Tribunal has directed that the carried forward business loss could be adjusted against such income. The assessee has not challenged the finding of the Tribunal that the income of the godowns is "income from house property" and such finding is now final. The direction of the Tribunal allowing the assessee to set off its carried over business loss from the income of the godowns, in our view, appears to be clearly erroneous."
The decision again supports the case of the revenue against set off of carry forward business losses against income from house property.
13. We may also deal with various decisions cited by the ld. CIT (A) in support of his view. After carefully going through these decisions, we find that propositions laid down by the Hon'ble Supreme Court as well as various High Courts in these decisions cited by the ld. CIT (A) do not in any manner advance the case of the assessee. The principles enunciated in these decisions rather support the case of the revenue against setting off brought forward business losses against income from house property and income from other sources. We may deal with these decisions now.
14. CIT (A) has relied upon the decision of the Supreme Court in the case of O.RM.M.SP.SV. Firm 63 ITR 404. This decision dealt with the issue regarding claim of relief under Section 25 (3) of the Income-tax Act, 1922. At page 410 of the report, the Court held that there was no reason to restrict the condition of the applicability of exemption under Section 25(3) only to income on which tax was payable under the head profits and gains of business, profession or vocation. According to the Supreme Court, the exemption under Section 25(3) is general and, therefore, the assessee firm was entitled to the same. This decision is entirely distinguishable on facts and issues involved and does not help the assessee.
15. Reliance has next been placed on the decision of Supreme Court in Western States Trading Co. Ltd. 80 ITR 21. In this decision, the point in issue was whether dividend income was to be taken as profits of business and set off against business losses brought forward from earlier years under Section 24(2) of the Income-tax Act, 1922. The undisputed facts in this case were that shares were held as part of trading assets of the assessee. The facts of the instant case before us are distinguishable inasmuch as rental income from the property has been shown by the assessee as income from house property obviously on the ground that property is not being used for purposes of business. As we have already discussed above, Section 22 would be applicable only in respect of properties which are not used by the assessee for the purposes of business. Therefore, in view of the provisions of Section 22 as well as 72 of the Income-tax act, 1961 and the facts of the case before us, the ratio of Western States Trading Co. Ltd. (supra) is not applicable.
16. The next decision relied upon on behalf of the assessee and cited by the ld. CIT (A) is S.G. Mercantile Corporation (P) Ltd. 83 ITR 700. The propositions enunciated by the Hon'ble Supreme Court in the context of Section 9 of Income-tax Act, 1922, which deals with income from house property, and Section 10 of the said Act, which deals with income from business, clearly run contrary to the view taken by the ld. CIT (A). The Supreme Court observed at page 704 of the report as under:
"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 of 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 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 purpose of setting up market would not be taxed as "business income" under Section 10 of the Act, to which a more details reference would be made hereafter, but under Section 9 of the Act." (underlined for emphasis) The Supreme Court further held that taking of the property on lease and sub-letting operations thereof and the activity of setting off a market and letting shops and stalls in the market may be treated as business activity. The said decision rendered in the context of individual facts of the case would not support the case of the assessee for availing of the benefit of set off under Section 72 of the Income-tax Act.
17. Reliance has next been placed on the decision of Supreme Court in CIT v. National Storage Pvt. Ltd. 66 ITR 596. In this case, the assessee company purchased a plot of land and constructed thereon godowns for the storage of films. Films were stored in vaults which were licensed to film distributors. The Supreme Court in the facts of the case held that the subject which is hired out is complex one and the income arising from licensing the vaults to vaults holder is liable to be assessed under Section 10 of the Income-tax Act, 1922 and not Section 9. The decision has been rendered in the context of entirely different set of facts which are distinguishable from the fact of the case of the assessee. This is a mere case of letting out of the property by the assessee as owner of the property. Rental income is derived by the assessee before us merely from the exercise of the property rights as owner only. The decision, therefore, does not advance the case of the assessee.
18. Reliance has next been placed on the decision of the Supreme Court in CIT v. Cocanada Radhaswami Bank Ltd. 57 ITR 306. In this case, the assessee company, which carried on banking business held securities as part of the trading assets of his assets. The Supreme Court held that since the securities are part of trading assets, the brought forward business losses can be set off against interest on securities. The decision is clearly distinguishable and is not applicable. In the case of the assessee, immovable has been let out not as a part of the business activity of the assessee. Further computers and cars used by the assessee for its business are hired out not during the course of normal business of hiring of computers and cars and income from such hiring has also been shown by the assessee as income from other sources. Such income, therefore, is not liable to be treated as business income and set off under Section 72 cannot be allowed.
19. For the aforesaid reasons, we hold that order of the CIT (A) in allowing set off of income from house property and income from other sources against brought forward business losses is contrary to the provisions of Section 72 of the Income-tax Act, 1961 and we, therefore, reverse the same.
20. Before parting with this order, we may state that we have gone through the various judicial pronouncements cited before us by the ld. representatives as also by the Assessing Officer and the CIT (A) in their respective decisions even though all these decisions may not be specifically discussed by us above.
21. The appeal of the revenue is allowed.