Income Tax Appellate Tribunal - Pune
M/S. Nutan Warehousing Co. P.Ltd.,, ... vs Assessee on 30 September, 2016
आयकर अपील य अ धकरण, पुणे यायपीठ "ए" पुणे म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
ी आर. के. पांडा, लेखा सद य
एवं ी वकास अव थी, या"यक सद य के सम#
BEFORE SHRI R.K. PANDA, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA Nos.1963 to 1968/PN/2013
"नधा%रण वष% / Assessment Years : 2000-01 & 02-03 to 06-07
M/s. Nutan Warehousing .......... अपीलाथ /
Company Pvt. Ltd., Appellant
1379, Krishi Bhavan,
Bhawani Peth, Pune - 411 042
PAN No.AAACH7084L
बनाम v/s
DCIT, Circle-2, Pune .......... यथ /
Respondent
आयकर अपील सं. / ITA No.2130/PN/2013
"नधा%रण वष% / Assessment Year : 2001-02
M/s. Nutan Warehousing .......... अपीलाथ /
Company Pvt. Ltd., Appellant
1379, Krishi Bhavan,
Bhawani Peth, Pune - 411 042
PAN No.AAACH7084L
बनाम v/s
ITO, Ward-1(3), Pune .......... यथ /
Respondent
आयकर अपील सं. / ITA No.361/PN/2014
"नधा%रण वष% / Assessment Year : 2008-09
M/s. Nutan Warehousing .......... अपीलाथ /
Company Pvt. Ltd., Appellant
1379, Krishi Bhavan,
Bhawani Peth, Pune - 411 042
PAN No.AAACH7084L
बनाम v/s
DCIT, Circle-2, Pune .......... यथ /
Respondent
Assessee by : Shri S.N. Doshi
Revenue by : Shri Rajesh Damor &
Shri Anil Kumar Chaware
2
ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 &
ITA No.361/PN/2014
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 01.08.2016 Date of Pronouncement:30.09.2016
आदे श / ORDER
PER R.K. PANDA, AM :
ITA Nos.1963 to 1966/PN/2013 filed by the assessee are directed against the common order dated 29-08-2013 of the CIT(A)-II, Pune relating to A.Yrs. 2000-01 & 2002-03 to 2004-05 respectively. ITA Nos. 1967 & 1968/PN/2013 filed by the assessee are directed against the common order dated 29-08-2013 of the CIT(A)-II, Pune relating to A.Yrs. 2005-06 & 2006-07 respectively. ITA No.2130/PN/2013 filed by the assessee is directed against the order dated 26-09-2013 of the CIT(A)-II, Pune relating to Assessment Year 2001-02. ITA No.361/PN/2014 filed by the assessee is directed against the order dated 09-12-2013 of the CIT(A)-II, Pune relating to Assessment Year 2008-09. Since common issues are involved in all these appeals, therefore, these were heard together and are being disposed of by this common order.
2. The first issue in the grounds of appeal that is common for all the years except for A.Y. 2000-01 relates to the order of CIT(A) in confirming the action of the AO in treating the lease rental as 'income from house property' as against 'business income' treated by the assessee.
3. First we take up ITA No.2130/PN/2013 for A.Y.2001-02 as the lead case. Facts of the case, in brief, are that the assessee is a Pvt. Ltd. Company and is engaged in the business of warehousing as per the license granted to it under the Bombay Warehousing Act, 1959. 3 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 The warehousing receipts with the lease charges were assessed as business income right from 1973-74 to 1999-2000. However, for the impugned assessment year, the AO assessed the lease charges as property income. In appeal the Ld.CIT(A) held that even the warehousing receipts are also to be assessed as property income. The Tribunal confirmed the order of the CIT(A). The assessee went in appeal before the Hon'ble Bombay High Court and the Hon'ble High Court vide order dated 18-02-2010 set aside the order of the Tribunal and directed the AO to decide the same in line with the following observation :
"Since the Tribunal has not considered this aspect of the case, we are of the view that it would be appropriate and proper to set aside the decision of the Tribunal and to remand the proceedings back to the Assessing Officer for a fresh determination and assessment in accordance with the law. We order accordingly. Upon remand, it is clarified that assessing officer shall not consider himself to be bound by the decision of Tribunal dated 19th of March 2001 for assessment year 1994-95, 1995-96, 1996-97, in view of the concession in those terms which has been made during these proceedings by the assessee. In order to facilitate a fresh exercise being carried out in terms of the order passed by this court, the impugned order of the Tribunal dated 31st of August 2006 is set aside. However, it is clarified that all the rights and contentions of the revenue on all aspects of the case on merit are kept open. The order of remand, it is clarified shall also be with respect to disallowance that have been effected under section 40A(ii) of the Income Tax Act, 1961. In view of the order of remand, it is not necessary for this court to express any view on any of our other on the question of law involved the appeal is accordingly disposed of. No costs."
4. In pursuance of the above direction of the Hon'ble High Court, the AO issued a notice to the assessee asking him to submit all the information/material to substantiate the claim that the warehousing activities are business activities and the resulting income as business income.
4ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
5. It may be pertinent to mention here that the assessment orders for A.Y. 2000-01 and 2002-03 to 2008-09 were set aside by the Tribunal to the file of the AO for fresh adjudication relying on the decision of the Hon'ble Bombay High Court in assessee's own case.
6. During the course of assessment proceedings the AO asked the assessee to submit the following documents/details :
1. Memorandum of Association and Articles of Association at the time of incorporation of the company and subsequent changes if any.
2. Bifurcation of gross receipts as warehousing charges, rent charges, other incidental receipts from the financial year 1998-99 to 2005-06.
3. Breakup of the area of owned warehouses and the leased warehouses.
4. Period of the let out of the warehouse for the relevant period.
5. Copy of warehousing/rental agreements for all the tenants/clients since financial year 1998-99 till financial year 2005-06.
6. Names, designations and roles of the persons employed by the assessee for warehousing activity.
7. The assessee inter alia submitted the following points which has been incorporated by the AO at Page 3 of his order and which can be summarized as under :
(a) The company was incorporated on 07-07-1972 with the main object of carrying on the business of warehousing, cold storage and refrigeration. The business of company is governed by the provisions of Bombay Warehousing Act, 1959. The company has obtained license under the said Act which is renewed from time to time. As per the Bombay Warehousing Rules, 1960 every warehouseman is required to submit the current rates of warehousing service charges and u/s 20(1), every warehouseman is required to insure the goods in the warehouse against the loss or damage by fire or burglary. That the company is complying these conditions.
(b) It was submitted that the assessee company is liable to pay service tax on the service of storage and warehousing and upon inclusion of the service of storage and warehousing as taxable service it has obtained certificate of registration from Central Excise Commissioner, Pune-1 on 9-9-2002, which means that the service tax cell of the custom and Central Excise Department recognizes the warehousing activity as services.5 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
(c) The assessee further submitted that the company is rendering services to its client on daily basis, excluding holidays from 9.30 a.m. to 5 O'clock, and no possession is given to the client as seen by the agreement and the warehouses are located in "Industrial Zone" as per zoning of the area by Govt. of Maharashtra.
(d) It was submitted that the Pune Bench of the Tribunal in assessee's own case for AY 1994-95 to 1996-97 has decided the appeal in its favour and held that even the lease rental received by it is incidental to the warehousing business carried out by the assessee company. Since there is no change in the facts about the assessee as well as the method of warehousing business carried out, the same should be followed.
(e) The assessee has also taken warehouses on lease from the other parties and given the same along with service facilities to his client. The warehousing of goods, their security, insurance, loading unloading etc. are managed by the assessee company.
(g) That out of the approximately 2,16,000 sq.ft. of warehouses let out by the assessee company to the various clients, only 70000 sq.ft. is owned by the assessee company and remaining 1,46,000 sq.ft. has been taken by assessee company on hire. The assessee has constructed the warehouses on the land taken on lease and these lease agreements are not perpetual lease.
(f) That the assessee is providing services like loading, unloading, transportation, security, maintenance, electricity etc. The assessee company has employed separate staffs to look after and maintain this activity of warehousing. The services provided by assessee make attractive for its customers to utilized his warehousing activity as a composite business proposition."
(g) That the assessee has been discriminated by the department in treating the income from warehousing derived by Maharashtra State Warehousing Corporation & Central Warehousing Corporation as business income while that of the assessee as income from house property.
(h) That the assessee company has incurred substantial expenses on providing various services to the clients which the company is contractually obliged to provide and these services are not such which are ordinarily provided by landlord to a tenant.
(i) That the expenses claimed by the assessee company are genuine and supported by documentary evidences. They have been incurred directly in connection with the services which the assessee is contractually required to provide to their client. Hence, the assessee company is legitimately untitled to claim the expenses as business expenses.
(j) That the Ld. CIT has passed an order u/s.264 in the case of Sajjad Hussain Gabrani, Prop. of Storewell Warehousing Corporation, Pune wherein he has held that income from warehousing activity is income from business.
6ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
(k) In Central Warehousing Act, Section 2(t) which says warehousing business has been defined as "warehousing business means the business of maintaining warehouses for the stores of goods and issuing negotiable warehousing receipts.
(l) That the Allahabad High Court, Luknow Bench in the case of CIT Vs. Goel Builders reported in 192 Taxman 28 has held that consistency has to be adopted by the department in accepting/challenging the decisions of the appellate authorities which has not been done in the case of the assessee.
(m) That the warehousing activity is incidental to leasing of warehouse carried out by the assessee company is an activity involving a property of the complexity and becomes a commercial asset and the assessee company is not simply renting out warehouse premises per se. Even the lease charges received are inextricably linked to the composite warehousing business activity and therefore the income there from would fall within the ambit of income from Business.
(n) It was further submitted that the AO while completing the assessment for the A.Y. 2001-02 has not considered the following decisions :
i. CIT Vs. National Storage Pvt. Ltd. reported in 66 ITR 596 ii. Karnani Properties Ltd. Vs. CIT reported in (1971) 82 ITR 547 (SC) iii. East India Housing & Land Development Trust Ltd. Vs. CIT West Bengal iv. V.N. Rukari & Sons Vs. ITO, Ward-3(7), Pune Various other decisions were also relied upon by the assessee.
8. However, the AO was not satisfied with the arguments advanced by the assessee. The para-wise comments of the AO to the various submissions made by the assessee are as under :
"a. The contention of the assessee that as per the Bombay Warehousing Act, 1959 the warehousing activity is 'business' is not acceptable' because the expression used in one statute cannot govern the meaning in another statute. The issue whether the lease rent/warehousing charges received by the assessee from letting out of the property will be taxed under which 'head of income' and the same, will have to be decided on the basis of the provisions of the Income-tax Act 1961 alone as much as warehousing charges are determined by the Warehousing Act, 1959. Same is applicable for the definition of warehousing given in the Central Warehousing Act. With respect to the argument of the assessee regarding applicability of the service tax the reason given above is equally applicable.7 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
b. With respect to rendering services on daily basis the contention of the assessee is not correct as far as the lease property to the Hindustan Liver Ltd is concerned. Further, location of the warehouse in industrial Zone cannot determine the head under which the income is to the taxed.
c. The contention of the assessee that out of 250000 lakhs sqft. of warehouses it owns only 70000 Sqft and remaining 180000 sq.ft have been leased is also not correct. Though the assessee has leased the land from its sister concerns, yet the constructions of the warehouses have been done by the assessee company by utilizing borrowed funds and deposit and these warehouses are shown as fixed assets in the Balance Sheet of the assessee and the assessee has been claiming depreciation. Hence for all practical purpose the assessee is the owner of these warehouses.
d. The contention of the assessee that it is providing services like loading unloading, transportation, security, maintenance, electricity are not relevant as for as the lease property is concerned and the question of composite charges does not arise.
e. The contention of the assessee that Hon'ble tribunal's decision for A.Y. 1994-95 to 1996-97 be followed for subsequent years as well as there is no change in facts as well as the business model of warehousing, is not acceptable because there is change in the facts. With the construction and long term lease of the factory to the Hindustan Liver Ltd for 10 years, the area of leased property has increased from merely 10,250 sq.ft to 68,000 sq.ft. i.e., from merely 5% to 31 % in terms of area let out and 35-45 % in terms of gross receipt. This by no stretch of imagination can be called as no change in facts. The order of the Hon'ble ITAT for 1994-95 to 1996-97 were not accepted in principle however, the appeal was not filled because of the tax effect being less than threshold limit for filling appeal. Since there was change in the facts , the Assessing Officer had correctly taxed the income derived from the leased property as Income from the House property.
f. With respect to the claim of the assessee that it has incurred substantial expenses on providing various services and that the expenses claimed by the assessee company are genuine and supported by documentary evidences, it is stated that the Income tax Act 1961 provides computation mechanism for each head of income. Once it has been decided that a particular receipt is to be taxed under a particular head of income, the computation mechanism provided for that head of income is to be followed for arriving at the taxable income and only the expenses allowable under the heads of income are allowed.
g. With respect to the claim of the assessee that the CIT-II Pune has passed u/s. 264 in the case of Sajjad Husain Gabrani, Prop of Storewell Warehousing Corporation Pune, and has held that income from warehousing activity is income from business, it is seen that the CIT-II in the said order has distinguished the facts from the case of the assessee, hence the same cannot be applied in the case of the assessee.8 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
h. With respect to the assessee's contention that consistency has not been maintained, it is mentioned that the facts have changed since March 2001, with the lease of the factory premised of 68000 sq ft to the Hindustan Liver Ltd. The department has shown remarkable consistency, by not contesting the decision of the ITAT dt.19-03-2001, when the facts were same. And the Department again accepted the order of the ITAT, Pune after the decision in the assessee's case for AY 2001-02 when the facts were changed.
i. With regard to the contention of the assessee that warehousing activity and the incidental leasing of warehouse carried out by the assessee company is complex commercial activity, it is stated that there is no complex activity involved as for as the leased property is concerned.
9. Having dealt with the issues raised by the assessee in its various submissions as above, the AO proceeded to decide the issue in hand, i.e. whether the income from warehousing activities carried out by the assessee are to be treated as 'Business Income' or 'Income from House property' or partly as 'Business Income' and partly as 'House Property' income and whether the lease rental constitutes the dominant part of the warehousing activity or is subservient to it. He observed that the Hon'ble High Court in order dt.18.02.2010 in the Income Tax Appeal No.1269 of 2007 in Para No.6 has observed as under:
"What has to be deduced is to letting out of the property constitutes a dominant aspect of the transaction or whether it was subservient to the main business of the assessee of carrying out warehousing activities".
10. Keeping the above in mind, the AO noted that the assessee is carrying out two types of activities.
(i) Leasing out of the custom made factory premises to the Hindustan Lever Limited for its 100% Export Oriented Unit engaged in manufacturing and blending of Tea and tea export.
(ii) Letting out of Warehouses having about 20 warehouses units (Galas) to different customers.
9ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
11. So far as the leasing out to Hindustan Lever Limited is concerned, he observed that the assessee had leased out about 10,250 sq.ft. warehouse to be used as factory to the client called Lipton Tea for storing, and blending of Tea in the year 1985. Subsequently, the Hindustan Lever Limited took over the business of Lipton Tea and expressed its need of a larger space for new factory for manufacturing and blending of tea for its 100% Export Oriented Unit. The assessee then constructed a factory on an area of 68,000 sq.ft. as per the requirement of Hindustan Lever Limited for Export Oriented Unit The new factory was constructed at total cost of Rs.4.99 Cr. out of which Rs 1.44 Cr was financed by the Hindustan Liver Ltd as security deposit and balance was financed out of bank loans. The Hindustan Lever Limited is carrying out the manufacturing and blending of tea in this factory since March 2000 by employing of about 400 employees and installing huge plant & machinery along with furniture and fixtures.
12. He analysed the lease agreement with Hindustan Lever Ltd. and noted that :
1. The lease was for a period of 10 years with effect from 01-11-
2000 for the premises comprising of a factory admeasuring 68,000 sq.ft. on a monthly rent of Rs.4,45,000/-.
2. That the lessee will pay the said monthly rent at the rate of Rs.4,45,000/- per month in advance on or before 21st day of each calendar month.
3. That the lessee (HLL) agreed to pay the assessee company (the lessor) Rs.144.00 lacs on taking possession, Rs.31.64 lacs at the beginning of the fourth year and Rs.39.65 lacs at the beginning of the seventh year as a security deposit.
4. That the assessee company (the lessor) agreed to allow the lessee (HLL) to possess and enjoy the 'demised premises', for carrying out the manufacturing activities including blending, processing, mixing and packing of tea and other items of food and beverages. 10 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
5. That as long as the lessee continued to pay the rent and observed and performed the terms and conditions of the lease agreement the lessee would have the right of peaceful possession and enjoy the 'demised premises' without any interruption or disturbance from the lessor.
6. That the machinery, furniture and fixtures, electrical equipment and other utilities installed or kept in the said premises which are owned by the lessee shall always belong to and be the property of the assessee.
7. That the lessee shall insure the machinery installation, stocks and other contents in the demised premises which are owned by the lessee.
8. That the lessee will pay for electricity, power and water charges during the tenancy on the basis of actual reading of the meter/sub- meter installed in the premises.
9. That the lessee will be entitled to construct at its cost in the said premises, partitions and such other fixtures as may be necessary for the lessee to carry on their industrial activities.
10. That the lease shall be renewable at the option of the lessee for such further period and such terms as may be mutually agreed between the lessee and the lessor.
13. In view of the above terms and conditions of the lease agreement, the AO held that the premises has been given on a lease of 10 years, construction has been as per the requirement of the lessee, furniture and fixers and plant and machinery are owned by the lessee, the HLL is carrying out manufacturing and blending of tea for its 10% export oriented unit, and the possession has been handed over to the lessee and the assessee has no active role whatsoever as far as this property is concerned. Hence, the income from the lease of this property can be taxed only as Income from House Property."
14. The AO further noted that the assessee has warehouses at two places, namely, Phursungi and Dhankawadi. At Phursungi approximate area of the warehouses, as explained by the assessee is about 2,16,000 sq.ft. Out of this, about 70,000 sq.ft. is owned by 11 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 the assessee company and the remaining of about 1,50,000 sq.ft. has been constructed by the assessee company on the land leased from the sister concerns, Directors and their relatives and about 30,000 sq.ft. area at Dhanakwadi, is leased by the assessee from M/s. Kamdhenu Chemicals, a sister concern. There are about 20 galas/Warehouse Units with independent entry/exit having separate shutters/doors which are let out or given on rent to the customers as per their requirements. The area of these Galas/Warehouse units varies from 650 sq.ft. to 5000 sq.ft. and the segment of let out during the year has varied from 6 months to 3 years.
15. The AO further observed :
a. that the company is rendering services to its client on daily basis excluding holidays from 9.30 am to 5 O' clock and that possession is not passed to the clients and the warehouses having double locking where in one key is kept with the customer and another with the assessee.
b. that the assessee has also taken warehouses on lease of about 30,000 sq.ft. from the other parties and given the same along with service facilities to his client.
c. that the assessee is providing services like loading, unloading, transportation, security maintenance electricity.
d. that the assessee has employed over 20 permanent and semi- permanent staff to look after and maintain these activities of warehousing. The services provided by assessee make attractive for its customers to utilize his warehousing activity as a composite business proposition.
e. that the assessee company has incurred substantial expenses on providing various services to the clients which the company is contractually obliged to provide and these services are not such which are ordinarily provided by landlord to a tenant.
f. that the warehousing activity carried out by the assessee company is an activity involving a property of the complexity and becomes a commercial asset and the assessee company is not simply renting out warehouse premises per se.
g. that the assessee has bus facility for transport of staff from warehouse to Swargate, Pune.12 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
h. that the agreement are made for a segment of three years and the clients may join at any time and the client and the assessee company can vacate/get it vacated by three months notice. Hence, it is claimed that the agreement is not for long term as in case of lease agreement.
i. that the assessee has installed a fire hydrant system with a capacity of 2 50,000/- liter to keep the warehouses fire proof.
16. The AO noted from the above that the assessee is actively involved in the warehousing activities and the warehouse is being commercially exploited on business lines so far as it related to pure warehousing activities. The Hon'ble High Court in the above referred order has observed that the Hon'ble Tribunal in the order dated 31- 08-2006 has not referred to any of the warehousing agreements of the assessee and has based the decision only on the lease agreement with Hindustan Lever Ltd and that no reason has been given for not following the Tribunal's own decision in the case of the assessee. Hence he held the warehousing activity carried out by the assessee as business and the income derived from is business income.
17. The AO further observed that the order of the Tribunal dated 12-03-2001 also cannot be applied in the A.Y. 2001-02 and subsequent years as facts of the case have changed. Till March, 2000 the Lipton tea was occupying approximately 30,000 sq.ft. out of which only 10,250 sq.ft. was for factory and 20,000 sq.ft. was for the warehousing. In such a situation the Hon'ble Tribunal was justified in holding that lease rental from merely 10,250 sq.ft. of property was only a minor part of total 1,50,000 sq.ft. of warehouses and subservient to the dominant activity of the warehousing.
18. However, with the construction and lease of the new factory having area 66,000 sq.ft. in March 2000, has changed the facts 13 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 drastically and the area of leased factory vis-à-vis warehouse has gone up from 5% to about 31% in terms of area and about 30-45% in terms of gross receipts. Hence the letting out of the property cannot be regarded as subservient to the warehousing activity by any stretch of imagination. In fact, keeping in view the overall warehousing activity where occupancy of the warehouses varies from 60-80% only and the uncertainly attached to it, the leased rentals constitutes the main stay of the assessee company.
19. In view of the above discussion the AO concluded that :
i. The lease rental received by the assessee from the lease of the 68000 sq.ft. of the factory to Hindustan Lever Ltd. as per the agreement dt.18-03-2001 for 10 years, wherein the Lessee has set up its 100% export oriented unit, is held to be 'income from House property'.
ii. The warehousing activities carried out by the assessee on the remaining warehouses are held to be business activities and the resulting income as 'income from Business and Profession'.
iii. The leased out property comprising of about 31% of the total warehouse area and about 30-45% total receipts are held as dominant and not subservient to the total warehousing activities. Hence, the lease rental will be assessed as 'income from House Property' and the warehousing activities as 'income from Business and Profession'.
The AO accordingly determined the taxable income at Rs.70,66,483/-
which comprised of income from house property at Rs.28,20,676/-
as business income at Rs.42,45,807/-.
20. Before CIT(A) the assessee reiterated the same submissions as made before the AO. It was submitted that the Tribunal in assessee's own case for A.Yrs.94-95, 95-96 and 96-97 has allowed the claim of the assessee in treating the lease rental income as 14 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 'income from business'. It was submitted that the warehouses provided for warehousing as well as those provided to M/s. HUL is one and the same activity and there is no scope for any segregation. Further on the entire receipts the company is subjected to service tax. It was submitted that the business of the assessee company is governed by the provisions of Bombay Warehousing Act, 1959. Referring to the Central Warehousing Act it was submitted that provisions of section 2(t) defines warehousing business as the business of maintaining warehouses for the storage of goods and issuing negotiable warehousing receipts. It was submitted that the dominant object is to carry on the warehousing activity as business activity and leasing is incidental and subservient to the warehouse and hence the same is also business activity. It was further submitted that the warehouses are commercial assets in case of the assessee. Relying on various decisions it was submitted that the income received by the assessee should be considered as business income.
21. Without prejudice to the above the assessee further submitted that when the entire bank loan was utilized for the construction of the warehouses leased out the AO was not justified in allowing only 31% of the bank interest as allowable deduction from the computation of income from house property. Since the entire loan obtained from Federal Bank, Pune has been utilized exclusively for the purpose of construction of the warehouse which has been leased out to M/s. HUL the AO was not justified in allowing only 31% of the interest on such bank loan out of such rental income which has been treated by the AO as income from house property. The disallowance of depreciation by the AO was also challenged before the CIT(A). 15 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
22. However, the Ld.CIT(A) was not satisfied with the explanation given by the assessee. Rejecting the submissions made before him and distinguishing the various decisions cited before him he held that the AO is fully justified in treating the lease rental income as 'income from house property'. He observed that the gross receipts of the leasing activity varies between 30 to 40% out of the total gross receipts of the assessee and consumed about 31% of the total area which clearly indicates that the leasing profit cannot be regarded as subservient to the warehousing activity by any stretch of imagination. According to him the essence of providing warehousing facilities comprised in providing space which is let out and therefore the same does not constitute business. He observed that in the instant case the assessee is the owner of godowns/warehouses which have been allowed to be used by M/s. HUL and it is clear that all the conditions specified u/s.22 of the I.T. Act, 1961 are present. He further noted that the lease agreement between the assessee and HUL clearly reveals that the only object and intention of the assessee while accepting the said property was to let out the property on a monthly rent and there was no complex commercial activity involved in the letting out of the property. Thus, the lease rent received by the assessee was only because of bare letting of the property and the said character cannot change and the income does not change or become income from business or profession merely because letting out included certain minor additional services provided to the lessee. Relying on various decisions he held that the activity of the assessee of leasing and letting activity cannot be termed as a business activity. He accordingly held that the lease rent received by the 16 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 assessee from HUL has rightly been assessed as income from house property.
23. As regards the contention of the assessee that the AO was not justified in allowing only 31% of the interest he held that the assessee could not conclusively establish the nexus between the utilization of the loan and the construction of the warehouse leased out to M/s. HUL. Since the AO has held that 31% of the area of the property, whose income is taxable under the head income from house property, therefore, the allowance of interest to the extent of 31% and disallowance of depreciation to the extent prima-facie appears to be reasonable. He accordingly dismissed the ground raised by the assessee before him.
24. Aggrieved with such order of the CIT(A) the assessee is in appeal before us with the following grounds :
"1. On the facts and in the circumstances of the case the order passed by the CIT(A) is bad in law as the CIT(A) having given a finding that appellant is engaged in warehousing business has failed in not appreciating and adopting the specific direction of the Hon'ble Bombay High Court to the effect that where the dominant activity is in the nature of business activity the income of the appellant has to be assessed as business income and hence CIT(A) has erred in taxing the leasing activity separately.
2. On the facts and in the circumstances of the case and without prejudice to the above the CIT(A) has erred in holding that considering the total lease charges received leasing activity is dominant and not subservient to the warehousing activity.
3. On the facts and in the circumstances of the case and without prejudice to the above the CIT(A) has erred in allowing only 31% of total interest on bank loan while computing the income from house property overlooking the fact that the entire bank loan is utilized only for the purpose of construction of leased warehouses.
4. On the facts and in the circumstances in the case, the CIT(A) has erred in disallowing 31% of the total depreciation holding that the same is attributable to the leased warehouses."17 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
25. The Ld. Counsel for the assessee strongly challenged the order of the CIT(A). He submitted that the assessee is a private limited company incorporated in the year 1973. Referring to the copy of Memorandum and Articles of Association, copy of which is placed at pages 182 to 193 of the paper book, he drew the attention of the Bench to the main objects of the company to be pursued on its incorporation which inter alia includes to carry on the business of warehousing, cold storage and refrigeration, to provide facilities and godowns for proper and safe storing of valuable agricultural and horticultural produce and to provide godowns and warehousing facilities for goods of all description of agricultural and allied products.
26. He submitted that the provisions of Bombay Warehousing Act, 1959 are applicable to the assessee company. Unless it obtains license under the said act it cannot proceed for any activity. He submitted that in the course of carrying on the warehouse activity some portion of the warehouses has been leased out to HUL right from 1982 which is being continued. The warehousing receipts with the lease charges have been assessed as business income right from A.Y. 1973-74 to A.Y. 1999-2000. He submitted that during A.Y. 94- 95 and 96-97 the AO for the first time assessed the lease charges as property income. Referring to pages 223 to 230 of the paper book he submitted that the Tribunal vide ITA No.1014/PN/1997, 01/PN/1998 and 02/PN/1998 order dated 19-03-2001 has held warehouse of the assessee was part and parcel of the warehousing activity of the assessee. Out of the many warehouses one had been leased out to a valuable customer who was also availing of the warehousing facilities and therefore the same is only the exploitation 18 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 of a commercial asset and there is hardly any basis for treating such lease rent on a different footing. Accordingly, the claim of the assessee for treating such lease rental as 'business income' was accepted. He submitted that the AO in A.Y. 2001-02 assessed the lease charges as property income. The Ld.CIT(A) held that even the warehousing receipts also be assessed as property income. The Tribunal confirmed the order of the CIT(A). On further appeal by the assessee the Hon'ble Bombay High Court vide order dated 18-02- 2010 set aside the issue and directed the AO to decide the same in line of the directions given therein. He submitted that the reassessment orders for A.Yrs. 2000-01 and 2002-03 to 2008-09 were also set aside by the Tribunal relying on the decision of the Hon'ble Bombay High Court with a direction to decide the issues accordingly. The Tribunal also directed the AO to decide the issue of validity of reopening for A.Yrs. 2000-01, 2002-03, 2003-04 and 2004-05.
27. The Ld. Counsel for the assessee drew the attention of the Bench to the observation of the Hon'ble High Court while setting aside the issue to the file of the AO and submitted that instead of examining the terms of the lease deed and decide as to whether the leasing profit is subservient to the warehousing profit or otherwise the AO has erroneously considered the area leased out of the total warehouse area. He drew the attention of the Bench to the Memorandum and Articles of Association of the company and the lease agreement executed with Hindustan Lever Ltd. Referring to the copy of the lease deed with Hindustan Lever Ltd. he submitted that the assessee has not merely leased out the 4 walls of the warehouse. It has provided essential and necessary services of supervisory, 19 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 loading and unloading, handling, security, transporting etc. to all the clients including Hindustan Lever Ltd. on daily basis during working hours. The assessee has incurred expenditure on Electricity, Maintenance, Staff etc. which proves that the leasing is a complex activity directly linked with the main warehousing activity. Therefore, it is subservient to the warehousing activity which is dominant.
28. He submitted that where the plots have been acquired on lease as well as plots owned by the assessee are used for constructing the warehouse that clearly proves the commercial use of the warehouse. He submitted that the leasing activity alongwith warehousing activity is being continued since 1984. In the year 1984 area admeasuring 10,250 sq.ft. was leased out to Hindustan Lever Ltd. vide lease agreement dated 12-12-1984, a copy of which is placed at pages 330 to 347 of the paper book. Assessments for several assessment years were completed u/s.143(3) accepting these lease charges as business income. Referring to the following decisions he submitted that the AO should have followed the rule of consistency in absence of any compelling reasons justifying the deviation :
i. Commissioner of Central Excise vs. M/s.Doaba Steel Rolling Mills SC vide Civil Appeal No.3400/2003 order dated July 6, 2011.
ii. State CBI Vs. Shashibala Subramanyam SC reported in 289 ITR 8 iii. Burger Paints India Ltd. vs. CIT reported in 266 ITR 99 (SC) iv. Radhasoami Satsang Vs. CIT reported in 193 ITR 321 (SC) v. CIT vs. Excel Industries Ltd. reported in 358 ITR 295 SC vi. CIT vs. J.K. Charitable trust reported in 220 CTR 105 VII. CIT vs. Goel Builders reported in 236 CTR 472 viii. Dr. Narendra Prasad Patna HC reported in 235 CTR 583 20 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
29. Referring to the recent decision of the Hon'ble Supreme Court in the case of M/s. Chennai Properties Vs. CIT vide Civil Appeal No.4494 of 2004 and 4491 to 4493 of 2004 order dated 09-04-2015 he submitted that the assessee in that case is a company incorporated under the Indian Companies Act. Its main object as stated in the memorandum of association is to acquire the properties in the City of Madras and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as 'income from business' in the return filed by the assessee. The AO refused to tax the same as 'business income' on the ground that since the income was received from let out of the properties, it was in the nature of rental income. He accordingly treated the same as 'income from house property'. In appeal the CIT(A) allowed the appeal filed by the assessee holding the same to be 'business income'. The Tribunal dismissed the appeal filed by the Revenue. The Revenue approached the Hon'ble High Court. The Hon'ble High Court upheld the order of the CIT(A) vide order dated 05-09-2002 holding that the income derived by letting out of the properties would not be 'income from business' but could be assessed only as' income from house property'. The assessee filed appeal before the Hon'ble Supreme Court and the Hon'ble Supreme Court allowed the appeal filed by the assessee holding that letting out of the properties is infact is the business of the assessee and therefore the assessee has rightly disclosed the income under the head 'income from business' and it cannot be treated as 'income from house property'. He submitted that since the main objects of the assessee company is to carry on the business of warehousing, cold storage and refrigeration in all its branches and activities and to 21 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 provide facilities and godowns for proper and safe storage of valuable agricultural and horticultural products and to provide goods and services of all kinds in connection there with and to provide warehousing godowns and warehousing facilities for goods of all description of agricultural and allied products, therefore, in view of the decision of Hon'ble Supreme Court the lease rental should be treated as 'business income'. He accordingly submitted that the order of the CIT(A) be set aside and the ground raised by the assessee be allowed.
30. So far as the disallowance of interest is concerned the Ld. Counsel for the assessee submitted that the entire bank loan has been utilised for construction of the property which has been let out to Hindustan Lever Ltd., therefore, the CIT(A) was not justified in upholding the order of the AO wherein the AO has allowed only 31% of the total interest on bank loan while computing the income from house property. Similarly, the disallowance of depreciation is also uncalled for.
31. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). He submitted that the Ld.CIT(A) has given justifiable reasons for treating the income from lease rental as income from house property. He accordingly submitted that the order of the CIT(A) be upheld and the grounds raised by the revenue on this issue be dismissed.
32. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute in the above grounds is 22 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 regarding the treatment of the lease income from Hindustan Lever Ltd. as 'income from house property' or as 'business income'. We find the Hon'ble High Court while setting aside the issue to the file of the AO has observed as under :
"The question as to whether the income which is received by the assessee from the transaction which has been entered into in respect of the immovable property in question should be treated as income from house property or as income from business would have to be resolved on the basis of the well settled tests laid down in the law in decided cases. What is material in such cases is the primary object of the assessee while exploiting the property. If the primary or the dominant object is to lease or let out property, the income which is derived from the property would have to be regarded as income from house property. Conversely if the dominant intention of the assessee is to exploit a commercial asset by carrying on a commercial activity, the income that is received would have to be treated as income from business. What has to be deduced is to whether the letting out of the property constitutes a dominant aspect of the transaction or whether it was subservient to the main business of the assessee of carrying out warehousing activities.
The first submission which has been urged on behalf of the assessee, to the effect that the decision of the Tribunal rendered on March 19, 2001 for the assessment years 1994-95, 1995-96 and 1996-97 ought to have been considered, but has not been considered by the Tribunal, cannot be brushed aside as without substance. Be that as it may, during the course of the hearing of these proceedings we have considered the earlier judgment of the Tribunal. Ex facie, a perusal of the earlier judgment would show that that the Tribunal has not made a reference to the detailed terms and conditions of the warehousing agreements entered into by the assessee or to the lease agreement by which the factory came to be leased out. Consequently, upon considering the position in this regard counsel appearing on behalf of the assessee has fairly stated that the assessee would not consider that the earlier decision of the Tribunal be regarded as binding. In so far as the decision which is impugned in these proceedings is concerned, the Tribunal has basically relied upon the lease agreement dated March 18, 2001, between the assessee and Hindustan Lever. It is on the basis of the terms of the lease agreement that the Tribunal arrived at a conclusion that the primary purpose of the assessee was to let out the factory and that the income that was derived therefrom could not consequently be regarded as income from business.
The submission of the assessee is that the terms on which the assessee entered into warehousing agreements have not been considered at all in the decision of the Tribunal. Now, a perusal of the decision of the Tribunal would show that the Tribunal noted two decisions of the Tribunal, the first in Vora Warehousing P. Ltd. v. Asst. CIT [1999] 70 ITO 518 (Mum) (SMC) where the rent which was realized from warehousing activity was held to be assessable as business income and the second in the case of V. N. Rukari v. ITO in ITA No. 84/PN/2001 in which the Tribunal held that the income which was realized from warehousing activity would be assess-able as income from house property. The 23 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 Tribunal followed a decision of the Madras High Court in CIT v. Indian Warehousing Industries Ltd. [2002] 258 ITR 93 and was of the view that the facts of that case were identical, in holding that the income received from the leasing of the ware-house was assessable as income from house property. Ex facie, therefore, the terms of the warehousing agreement were not considered by the Tribunal. Merely styling an agreement as a warehousing agreement would not be conclusive of the nature of the transaction since it is for the Tribunal to determine as to whether the transaction was a bare letting out of the asset or whether the assessee was carrying on a commercial activity involving warehousing operations.
Since the Tribunal has not considered this aspect of the case, we are of the view that it would be appropriate and proper to set aside the decision of the Tribunal and to remand the proceedings back to the Assessing Officer for a fresh determination and assessment in accordance with law. We order accordingly. Upon remand, it is clarified that the Assessing Officer shall not consider himself to be bound by the decision of the Tribunal dated March 19,2001 for the assessment years 1994-95, 1995-96 and 1996-97, in view of the concession in those terms which has been made during these proceedings by the assessee. In order to facilitate a fresh exercise being carried out in terms of the order passed by this court, the impugned order of the Tribunal dated August 31, 2006 is set aside. How-ever, it is clarified that all the rights and contentions of the assessee and the Revenue on all aspects of the case on the merits are kept open. The order of remand, it is clarified shall also be with respect to the disallowance that has been effected under section 40A(ii) of the Income-tax Act, 1961. In view of the order of remand, it is not necessary for this court to express any view one way or the other on the questions of law involved. The appeal is accordingly disposed of. No costs."
33. We find the AO after considering the submission of the assessee, which have already been narrated in the preceding paragraphs, treated the lease rental received by the assessee from the lease of 68,000 sq.ft of the factory to Hindustan Lever Ltd. as 'income from house property' and treated the warehousing activities carried out by the assessee on the remaining warehouses as 'business income' which has been upheld by the Ld.CIT(A).
34. It is the submission of the Ld. Counsel for the assessee that the main objects to be pursued as per the memorandum of association are construction of warehouses for storage of agricultural goods. Provisions of Bombay Warehousing Act, 1959 are applicable to the assessee company. It is also his submission that the AO was 24 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 required to examine the terms of the lease deed and decide whether leasing activity is subservient to the warehousing activity or not. Further, if going by the version of the AO, 69% of the total receipts/total area is meant for warehousing activity, in that case, the AO should have accepted that leasing activity is subservient to warehousing activity that being the dominant activity of the assessee.
35. From the various details furnished by the assessee in the paper book, we find the main objects to be pursued by the assessee company on its incorporation are as under :
"iii. Objects : The objects for which the Company is established are :
Main Objects Of the company to be pursued by the Company on its incorporation are :
A (1)(a) To carry on the business of Warehousing, cold storage and refrigeration in all its branches and activities and sphere.
(b) To carry on the business of storage of fertilizers, insecticides, quality seeds, agricultural and horticultural equipment, tools and machinery.
(c) To carry on the business of quality seeds and develop quality seeds, acquire suitable lands and carry on agriculture.
(d) To produce material and fertilizers and insecticides and acquire agency in the above lines and act as Commission Agents.
(e) To act as clearing and forwarding agents of the aforesaid products.
(f) To provide facilities and godowns for proper and safe storing of valuable agricultural and horticultural produce and to provide goods and services of all kinds in connection there with.
(g) To provide godowns and warehousing facilities for goods of all description of agricultural and allied products."
36. Similarly, the objects incidental or ancillary to the attainment of the main objects include the following :
"2. To purchase, erect, establish or otherwise acquire and equip warehousing godowns, additional cold storage plants or unit for the 25 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 business of the Company as may deem desirable and to build and erect the necessary structures or buildings to house the same.
................
................
18. To let on lease or on hire the whole or any part of the real and personal property of the Company on such terms as the Company shall determine, to enter into such arrangements as the Company may think proper with any public authority for buildings, chawls and tenements as the property of the Company or on the property of others or to let the same either to the employees of the Company or to others and upon such terms as the Company may think proper."
37. From the statement showing year-wise details of total receipts as per profit and loss account, warehousing charges and service charges from Hindustan Lever Ltd. etc. a copy of which is placed at page 212 of the paper book, we find the details are as under :
% of warehsg % of Lease Warehousing ch.
Total Rcpts as Warehousing Lease Rent Rent to charges Received
F.Y.
Per P&L charges From HLL Total received from HLL
Receipts from HLL to the total
warehsg
ch.
E= G=
A B=C+D C D F
(D/B)*100 (F/C)*100
2000 - 01 10,313,426.00 7,598,434.00 2,714,992.00 26.32 4,836,240.00 63.65
2001- 02 17,686,971.33 11,817,590.33 5,869,381.00 33.18 11,066,970.00 93.65
2002 - 03 19,580,172.66 13,910,172.66 5,670,000.00 28.96 11,390,112.00 81.88
2003 - 04 20,431,251.63 13,647,501.63 6,783,750.00 33.20 11,760,877.50 86.18
2004 - 05 19,776,426.00 12,858,926.00 6,917,500.00 34.98 12,279,750.00 95.50
2005 - 06 21,521,078.50 14,570,078.50 6,951,000.00 32.30 11,342,060.00 77.84
38. A perusal of the above break up of the lease rental income from Hindustan Lever Ltd and various other parties vis-à-vis the main objects of the assessee company show that warehousing activity is the dominant activity and leasing out being incidental is subservient.26 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
39. We find merit in the submission of the Ld. Counsel for the assessee that the assessee has constructed several sheds for industrial and warehouse purposes which proves that the leasing is done for exploitation of the commercial asset. We also find force in the submission of the Ld. Counsel for the assessee that the assessee has not merely leased out the 4 walls of the warehouse. It has also provided essential and necessary services of supervisory, loading and unloading, handling, security, transporting etc. to all the clients including the Hindustan Lever Ltd. on daily basis during working hours. The assessee has incurred expenditure on Electricity, Maintenance, Staff etc. which proves that leasing is a complex activity directly linked with the main warehousing activity.
Therefore, it is subservient to the warehousing activity. Further, since plots have been acquired on lease as well as plots owned by the assessee are used for constructing the warehouses the same clearly proves the commercial use of the warehouse. Further, the assessee is liable to pay service tax on the service of storage and warehousing since service of storage and warehousing has been included as taxable service.
40. We find an identical issue had come up before the Hon'ble Supreme Court in the case of M/s. Chennai Properties (Supra). In that case, the assessee company was incorporated under the Indian Companies Act. Its main object was to acquire the properties in the City of Madras and let out these properties. The assessee had let out the said properties and the rental income received therefrom was shown as income from business in the return filed by the assessee. However, according to the AO since the income was received from letting out of the properties it was in the nature of rental income. He 27 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 therefore treated the rental income as 'income from house property'. In appeal the Ld.CIT(A) allowed the appeal of the assessee by holding that such rental income is 'income from business'. The Tribunal upheld the action of the CIT(A). On further appeal by the revenue the Hon'ble High Court vide order dated 05-09-2002 allowed the appeal filed by the revenue holding that income derived by letting out of the properties would not be 'income from business' but can be assessed only as 'income from house property. The assessee filed appeal before the Hon'ble Supreme Court. The Hon'ble Supreme Court allowing the appeal filed by the assessee held that letting of the properties infact is the business of the assessee and therefore the assessee has rightly disclosed income under the head 'income from business'. The relevant observation of the Hon'ble Supreme Court read as under :
"From the aforesaid facts, it is clear that the question which is to be determined on the facts of this case is as to whether the income derived by the company from letting out this property is to be treated as income from business or it is to be treated as rental income from house property.
We have heard the learned counsel for the parties on the aforesaid issue. Before we narrate the legal principle that needs to be applied to give the answer to the aforesaid question, we would like to recapitulate some seminal features of the present case.
The Memorandum of Association of the appellant-company which is placed on record mentions main objects as well as incidental or ancillary objects in clause III. (A) and (B) respectively. The main object of the appellant company is to acquire and hold the properties known as "Chennai House" and "Firhavin Estate" both in Chennai and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. What we emphasise is that holding the aforesaid properties and earning income by letting out those properties is the main objective of the company. It may further be recorded that in the return that was filed, entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order.28 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
It transpires that the return of a total income of Rs.244030 was filed for the assessment year in question that is assessment year 1983-1984 and the entire income was through letting out of the aforesaid two properties namely, "Chennai House" and "Firhavin Estate". Thus, there is no other income of the assessee except the income from letting out of these two properties. We have to decide the issue keeping in mind the aforesaid aspects.
With this background, we first refer to the judgment of this Court in East India Housing and Land Development Trust Ltd.'s case which has been relied upon by the High Court. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls. In those facts, the question arose for consideration was:
whether the rental income that is received was to be treated as income from the house property or the income from the business. This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties.
Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P) Ltd., we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in 'Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal' [44 ITR 362 (SC)]. That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mining leases was shown as business income. Department took the position that it is to be treated as income from the house property. It would be thus, clear that in similar circumstances, identical issue arose before the Court. This Court first discussed the scheme of the Income Tax Act and particularly six heads under which income can be categorised / classified. It was pointed out that before income, profits or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under, another head. Thereafter, the Court pointed out that the deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel, House of Lords in England and US Courts were taken note of. The position in law, ultimately, is summed up in the following words: -29 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
"As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned."
After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd.'s case squarely applies to the facts of the present case. No doubt in Sultan Brothers (P) Ltd.'s case, Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: -
"We think 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. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature."
We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is for this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as 'income from the house property'. We, accordingly, allow this appeal and set aside the judgment of the High Court and restore that of the Income Tax Appellate Tribunal. No orders as to costs."
41. We find subsequent to the hearing of the appeal before us the Hon'ble Supreme Court in the case of M/s. Rayala Corporation Pvt. Ltd. Vs. ACIT vide Civil Appeal No.6437/2016 order dated 11-08-2016 following the decision in the case of M/s. Chennai 30 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 Properties (Supra) has decided an identical issue by holding that where the business of the company is to lease its property and to earn rent, such rental income has to be treated as income from 'profits and gains of business or profession'. The relevant observations of the Hon'ble Supreme Court reads as under :
"The appellant-assessee, a private limited company, is having house property, which has been rented and the assessee is receiving income from the said property by way of rent. The main issue in all these appeals is whether the income so received should be taxed under the head "Income from House Property" or "Profit and gains of business or profession". The reason for which the aforestated issue has arisen is that though the assessee is having the house property and is receiving income by way of rent, the case of the assessee is that the assessee company is in business of renting its properties and is receiving rent as its business income, the said income should be taxed under the Head "Profits and gains of business or profession" whereas the case of the Revenue is that as the income is arising from House Property, the said income must be taxed under the head "Income from House Property".
1.The learned counsel appearing for the assessee submitted that the issue involved in these appeals is no more res integra as this Court has decided in the case of Chennai Properties and Investments Ltd. v. Commissioner of Income Tax [2015] 373 ITR 673 (SC) that if an assessee is having his house property and by way of business he is giving the property on rent and if he is receiving rent fromthe said property as his business income, the said income, even if in the nature of rent, should be treated as "Business Income" because the assessee is having a business of renting his property and the rent which he receives is in the nature of his business income.
2.According to the learned counsel appearing for the assessee, the afore- stated judgment in the case of Chennai Properties (supra) has referred to all the judgments on the subject and more particularly, the judgment in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC) which has summed up as under:-
"As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned."
5. The learned counsel also submitted that the assessee is a private limited company and even as per its Memorandum of Association its business is to deal into real estate and also to earn income by way of rent by leasing or renting the properties belonging to the assessee company. 31 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
6. The learned counsel also drew our attention to the fact that the High Court and the authorities below had come to a specific finding to the effect that the assessee company had stopped its other business activities and was having only an activity with regard to the leasing its properties and earning rent therefrom. Thus, except leasing the properties belonging to the assessee company, the company is not having any other business and the said fact is not in dispute at all.
7. For the afore-stated reasons, the learned counsel submitted that the impugned judgment delivered by the High Court is not proper for the reason that the High Court has directed that the income earned by the appellant assessee should be treated as "Income from House Property".
8. On the other hand, the learned counsel appearing for the respondent- Revenue made an effort to justify the reasons given by the High Court in the impugned judgment. The learned counsel also relied upon the judgment delivered by this Court in the case of M/s. S.G. Mercantile Corpn. (P) Ltd. v. CIT, Calcutta (1972) 1 SCC 465. According to him, the important question which would arise in all such cases is whether the acquisition of property for leasing and letting out all the shops and stalls would be essentially a part of business and trading operations of the assessee. According to the learned counsel appearing for the Revenue, leasing and letting out of shops and properties is not the main business of the assessee as per Memorandum of Association and therefore, the income earned by the assessee should be treated as income earned from House Property. He, therefore, submitted that the impugned judgment is just legal and proper and therefore, these appeals should be dismissed.
9. Upon hearing the learned counsel and going through the judgments cited by the learned counsel, we are of the view that the law laid down by this Court in the case of Chennai Properties (supra) shows the correct position of law and looking at the facts of the case in question, the case on hand is squarely covered by the said judgment.
10. Submissions made by the learned counsel appearing for the Revenue is to the effect that the rent should be the main source of income or the purpose for which the company is incorporated should be to earn income from rent, so as to make the rental income to be the income taxable under the head "Profits and Gains of Business or Profession". It is an admitted fact in the instant case that the assessee company has only one business and that is of leasing its property and earning rent therefrom. Thus, even on the factual aspect, we do not find any substance in what has been submitted by the learned counsel appearing for the Revenue.
11. The judgment relied upon by the learned counsel appearing for the assessee squarely covers the facts of the case involved in the appeals. The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income.
12. In view of the law laid down by this Court in the case of Chennai Properties (supra) and looking at the facts of these appeals, in our opinion, the High court was not correct while deciding that the income of the assessee should be treated as Income from House Property. 32 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
13. We, therefore, set aside the impugned judgments and allow these appeals with no order as to costs. We direct that the income of the assessee shall be subject to tax under the head "Profits and gains of business or profession".
42. As mentioned earlier, the main objects of the assessee company is to carry on the business of warehousing, cold storage and refrigeration, to provide facilities and godowns for proper and safe storing of valuable agricultural and horticultural produce and to provide godowns and warehousing facilities for goods of all description of agricultural and allied products. Similarly, the other objects of the assessee company also provide to let on lease or hire the whole or any part of the real and personal property of the assessee company. We, therefore, respectfully following the above two decisions of the Hon'ble Supreme Court cited (Supra) hold that the lease income received by the assessee on account of let out of the warehouses/godowns as 'profits and gains from business or profession'. We therefore set aside the order of the CIT(A) and direct the AO to treat the lease rentals received by the assessee company from Hindustan Lever Ltd. as 'business income'.
43. Since the assessee succeeds on this issue the grounds of appeal No.3 and 4 by the assessee company become academic in nature and therefore are not being adjudicated.
44. Identical grounds have been taken by the assessee in the appeals for A.Yrs. 2002-03 to 2006-07 and 2008-09. Following the same reasonings, the grounds raised by the assessee in appeals for A.Yrs. 2002-03 to 2006-07 and 2008-09 on this issue are allowed. 33 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
45. The second issue raised by the assessee in the grounds of appeal which are common for A.Y. 2000-01 and 2002-03 to 2004-05 relates to reopening of the assessment u/s.147 in absence of any tangible material.
46. Facts of the case, in brief, are that the warehousing receipts with the lease charges were assessed as business income right from 1973-74 to 1999-2000. In A.Y. 1994-95 to 1996-97 for the first time, the AO assessed the lease charges only as property income. The tribunal however allowed the asseessee's appeal. Thereafter in the A.Y. 2001-02, the AO again assessed the lease charges as property income. The CIT(A) held that even the warehousing receipts also be assessed as property income. The Tribunal Confirmed the order of CIT(A) Assessee preferred appeal before Hon'ble Bombay High Court which by its order dated 18.02.2010 set aside the issue and directed the AO to decide the same in line with the directions mentioned therein. Meanwhile, the reassessment orders of A.Ys 2000-01, 2002- 03 to 2008-09 were also set aside by the Tribunal relying on the decision of the Hon'ble Bombay High Court and directing the AO to decide the issue accordingly. The tribunal also directed the AO to decide the issue of validity of reopening of A Y s of 2000-01, 2002-03, 2003-04 & 2004-05.
47. The AO, in order to assess the entire receipts both warehousing and lease charges as property income had issued the notices u/s. 148 for A.Y. 2000-01, 2002-03 to 2004-05. The AO provided the reasons for issuing the notices u/s 148. The assessee raised the objections for the reasons recorded. The AO rejecting the objections justified the reopening of the assessments on the ground 34 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 that the returns of all these assessment years were processed u/s. 143(1). AO relied on the decision of Supreme Court in the case of Rajesh Javeri Stock Brokers P Ltd. - 291 ITR 500. In appeal the Ld.CIT(A) upheld the action of the AO in reopening the assessments which were completed u/s.143(1).
48. The Ld. Counsel for the assessee submitted that all the details relating to warehousing receipts inclusive of lease charges have been truly and fully disclosed in the returns of income supported with the statutory and tax audit reports. According to him, the reasons are derived only from these particulars fully furnished with the return of income. Therefore, there is absolutely no fresh or new tangible material possessed by the AO to justify the issue of notice u/s. 148. Therefore, reopening is invalid. For the above proposition he relied on the decision of Hon'ble Supreme Court in the case of Kelvinator of India Ltd. reported in 320 ITR 561.
49. So far as the AO's reliance on the decision of Rajesh Javeri Stock Brokers is concerned he submitted that the same is misplaced. He submitted that the validity is not challenged on the ground of change of opinion but the ground that no new tangible material has been possessed by the AO. The Ld. Counsel for the assessee submitted that in following decisions, this proposition has been laid down by distinguishing the ratio decided in Rajesh Javeri Stock Broker's case :
1. H. V. Transmission Ltd. Vs. ACIT - ITA No.2230/Mum/2010 order dated 07-10-2011
2. Telco Dadajee Dhackjee Ltd. Vs. DCIT - ITA No.4613/Mum/2005
3. Parveen P. Bharucha Vs. DCIT and Another reported in 348 ITR 325 35 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
4. D.T.T.D.C. Vs. DCIT reported in - 350 ITR 216
5. Orient Craft - ITA No.555/2012 order dated 12-12-2012 Delhi High Court
50. The Ld. Departmental Representative on the other hand heavily relied on the order of CIT(A). He submitted that assessments for the above four years have been completed u/s.143(1). Therefore, in view of the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. reported in 291 ITR 500 the CIT(A) was justified in upholding the reassessment proceedings.
51. We have considered the rival arguments made by both sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessments for the A.Y. 2000-01 and 2002-03 to 2004-05 were completed u/s.143(1). The AO reopened the assessments u/s.148 on the ground that the entire receipts of warehousing of lease charges has to be assessed as income from property as against business income treated by the assessee. The assessee challenged the validity of the reassessment proceedings. The Ld.CIT(A) following the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. (Supra) upheld the reassessment proceedings initiated by the AO. It is the submission of the Ld. Counsel for the assessee that in absence of any tangible material available with the AO he cannot reopen the assessments since all material facts were already there on record. It is the submission of the Ld. Departmental Representative that the assessments for the above four years have been completed u/s.143(1). Therefore, in view of the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. reported 36 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 in 291 ITR 500 the CIT(A) was justified in upholding the reassessment proceedings.
52. We find merit in the arguments of the Ld. Counsel for the assessee that in the absence of any tangible material, the AO cannot reopen the assessment u/s.147 even when the assessment has been completed u/s.143(1). We find the Mumbai Bench of the Tribunal in the case of H.V. Transmission Ltd. (Supra) has held that reassessment proceedings initiated by the AO in absence of any tangible material before him is invalid even though the assessments have been completed originally u/s.143(1). The relevant observation of the Tribunal from Para 8 onwards read as under :
"8. We have considered the rival submissions and also perused the relevant material on record. It is observed that the assessment completed in this case originally u/s 143(1) was reopened by the AO for the following reasons recorded u/s 148(2) :
"From the Balance Sheet, Annexure 11, it is seen that assessee has incurred expenses towards Enterprise Resource Planning Software amounting to Rs.95,14,000/-.
In the accounts, the assessee has debited 25% of this amount i.e. 23,78,500/- whereas in the computation of income, the assessee has claimed entire amount of Rs.95,14,000/- as a deduction. The expense incurred by the assessee towards Enterprise Resource Planning Software is payment for acquisition of software which is capital in nature and hence the assessee's claim of the same as revenue expenses is not allowable."
As is clearly evident from the reasons recorded by the AO, there was no new material coming to the possession of the AO on the basis of which the assessment completed u/s 143(1) was reopened and this position has not been disputed even by the learned DR. Relying on the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), he, however, has contended that the reopening of assessment completed originally u/s 143(1) is permissible without there being any new material coming to the possession of the AO if the reasons recorded for reopening of the assessment are otherwise valid. The learned counsel for the assessee, on the other hand, has relied on Third Member decision of the Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) stating that a similar issue involved in the said case has been decided by the Third Member in favour of the assessee after taking into consideration the decision of Hon'ble Supreme Court in 37 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) relied upon by the learned DR. In the said case, the return, filed by the assessee was originally accepted u/s 143(1). In the said return the assessee had claimed deduction for payment of non-compete fees of Rs.75 lakhs which included payment of Rs.15 lakhs towards Directors. The assessee had also claimed depreciation of Rs.1,41,858/- on lease premises. The AO issued notice u/s 148 on the ground that these were not allowable expenses and income chargeable to tax had escaped assessment. He accordingly disallowed both the items in the reassessment order. When the matter reached to the Tribunal, the learned Judicial Member took the view that there was no fresh material to support the formation of the belief of the AO that income chargeable to tax had escaped assessment and in the absence of any fresh tangible material, he came to the conclusion that it was not permissible for the AO to reopen the assessment. The learned Accountant Member, however, took a different view relying on the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and the matter, therefore, was referred to a Third Member for resolving inter alia, the following point of difference:
" Whether on the facts and circumstances of the proceedings initiated by the AO u/s 147 is liable to be confirmed or quashed when there was no fresh material available with the AO and the assessment had been completed originally u/s 143(1)."
The Third Member agreed with the view taken by the learned Judicial Member relying mainly on the decision of Hon'ble Supreme Court in the case of Kelvinator of India Ltd. (supra) and Eicher Ltd. 320 ITR 561. It was held by the Third Member that section 147 applies both to section 143(1) as well as section 143(3) and, therefore, except to the extent that a reassessment notice issued u/s 148 in a case where the original assessment was made u/s 143(1) cannot be challenged on the ground of a mere change of opinion, still it is open to an assessee to challenge the notice on the ground that there is no reason to believe that income chargeable to tax has escaped assessment. As regards the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) cited by the Revenue and relied upon by the Accountant Member, the Third Member held that the same was applicable in cases where the return was processed u/s 143(1) but later on notice was issued u/s 148 and the assessee challenges the notice on the ground that it is prompted by a mere change of opinion. The Third Member then referred to the decision of Hon'ble Supreme Court in the case of CIT vs. Kelvinator of India (supra) wherein it was held that there should be "tangible material" to come to the conclusion that income had escaped assessment. Relying on the said decision, it was held by the Third Member that while resorting to section 147 even in a case where only an intimation had been issued u/s 143(1)(a), it is essential that the AO should have before him tangible material justifying his reason to believe that income had escaped assessment. Since there was no such tangible material before the AO from which he could entertain the belief that income of the assessee chargeable to tax had escaped assessment, the Third Member held that reassessment proceedings initiated by the AO were liable to be quashed on the ground that there was no tangible material before the AO even though the assessment was completed originally u/s 143(1). In our opinion, the Third Member decision of the 38 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) is squarely applicable in the present case and respectfully following the same, we hold that the initiation of reassessment proceedings by the AO itself was bad in law and the reassessment completed in pursuance thereof is liable to be quashed being invalid. We order accordingly and allow ground No.1 of the assessee's appeal.
9. As a result of our decision rendered above on the preliminary issue quashing/cancelling the assessment made by the AO u/s 143(3) read with section 147, the other issues raised in the appeals of the assessee and the Revenue in respect of additions made in the said assessment have become infructuous and we do not deem it necessary or expedient to decide the same.
10. In the result, the appeal of the assessee is allowed whereas the appeal of the Revenue is dismissed."
53. We find the Hon'ble Delhi High Court in the case of Orient Craft (Supra) has also decided an identical issue holding that in absence of any tangible material which came to the possession of the AO subsequent to the issue of intimation, reassessment proceedings initiated u/s.147 is bad in law. In that case also the assessee filed its return of income on 31-10-2012 declaring total income of Rs.45,35,395/-. Return was processed u/s.143(1) on 27-02-2002 by accepting the returned income. In the said return claim of Rs.8,74,20,642/- was made u/s.80HHC and Rs.13,35,65,316/- u/s.10B the assessee was a 100% Export Oriented Unit undertaking and was entitled to substantial amounts as Duty drawback DEPB Premium etc. which were declared in the profit and loss account. The AO issued a notice u/s.148 on 15-08-2005 on the ground that income chargeable to tax had escaped assessment. According to the reasons recorded for reopening of the assessment the assessee was wrong in treating the proceeds of sale of Quota as part of the export turnover for claiming deduction u/s.80HHC. In the opinion of the AO, the sale proceeds of the Quota cannot be considered as export turnover but represented business income covered u/s.28 (iv) and 39 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 had to be reduced to the extent of 90% from the business income as treated by Explanation (baa) to section 80HHC. Not doing so resulted in excessive allowance of deduction u/s.80HHC and consequently in escapement of income chargeable to tax. The assessee filed return in response to notice u/s.148. He also asked for the reasons and filed objections thereafter. The AO rejected such objections and completed the assessment by making certain additions. The assessee challenged the validity of the reassessment proceedings before CIT(A). The Ld.CIT(A) rejected the ground relating to validity of the reassessment proceedings but decided the appeal on merit in favour of the assessee. Both the assessee and revenue filed appeal before the Tribunal. The assessee challenged the jurisdiction of the AO to reopen the assessment u/s.147 and also certain issues on merit which was decided against it by the CIT(A). The Revenue filed appeal on the point on which the CIT(A) had given relief to the assessee. The Tribunal following the decision of Hon'ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd. reported in 320 ITR 561 held that since there was no tangible material available with the AO to form the requisite belief of escapement of income the reopening of the completed assessment is unsustainable in the eye of law. Accordingly, the same was cancelled. Since the assessee succeeded on this point the Tribunal did not examine the merit of the disallowances/additions made in the assessment year.
54. The Revenue approached the Hon'ble High Court with the following substantial question of law :
"Was the Tribunal right in law in holding that in the absence of any tangible material available with the Assessing Officer to form the requisite belief regarding escapement of income, the reopening of the assessment made under section 143(1) is bad in law?"40 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
55. The Hon'ble High Court after considering various decisions observed has as under :
"13. Having regard to the judicial interpretation placed upon the expression "reason to believe", and the continued use of that expression right from 1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation under Section 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Section 147; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(1). Therefore it is not permissible to adopt different standards while interpreting the words "reason to believe" vis-à-vis Section 143(1) and Section 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made under Section 143(3) cannot apply where only an intimation was issued earlier under Section 143(1). It would in effect place an assessee in whose case the return was processed under Section 143(1) in a more vulnerable position than an assessee in whose case there was a full-fledged scrutiny assessment made under Section 143(3). Whether the return is put to scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of proving valid reasons to believe could be circumvented by first accepting the return under Section 143(1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression "reason to believe" in cases where assessments were framed earlier under Section 143(3) and cases where mere intimations were issued earlier under Section 143(1) may well lead to such an unintended mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed.
14. Certain observations made in the decision of Rajesh Jhaveri (supra) are sought to be relied upon by the revenue to point out the difference between an "assessment" and an "intimation". The context in which those observations were made has to be kept in mind. They were made to point out that where an "intimation" is issued under section 143(1) there is no opportunity to the assessing authority to form an opinion and therefore when its finality is sought to be disturbed by issuing a notice under section 148, the proceedings cannot be challenged on the ground of "change of opinion". It was not opined by the Supreme Court that the strict requirements of section 147 can be compromised. On the contrary, from the observations (quoted by us earlier) it would appear clear that the court reiterated that "so long as the ingredients of section 147 are fulfilled" an intimation issued under section 143(1) can be subjected to 41 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 proceedings for reopening. The court also emphasised that the only requirement for disturbing the finality of an intimation is that the assessing officer should have "reason to believe" that income chargeable to tax has escaped assessment. In our opinion, the said expression should apply to an intimation in the same manner and subject to the same interpretation as it would have applied to an assessment made under section 143(3). The argument of the revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri (supra) would also appear to be self-defeating, because if an "intimation" is not an "assessment" then it can never be subjected to section 147 proceedings, for, that section covers only an "assessment" and we wonder if the revenue would be prepared to concede that position. It is nobody‟s case that an "intimation" cannot be subjected to section 147 proceedings; all that is contended by the assessee, and quite rightly, is that if the revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. In other words, the expression "reason to believe"
cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under section 143(3) and another applicable where an intimation was earlier issued under section 143(1). It follows that it is open to the assessee to contend that notwithstanding that the argument of "change of opinion" is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the assessee to challenge the reasons recorded under section 148(2) on the ground that they do not meet the standards set in the various judicial pronouncements.
14. In the present case the reasons disclose that the Assessing Officer reached the belief that there was escapement of income "on going through the return of income" filed by the assessee after he accepted the return under Section 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer, both strongly deprecated by the Supreme Court in CIT vs. Kelvinator (supra). The reasons recorded by the Assessing Officer in the present case do confirm our apprehension about the harm that a less strict interpretation of the words "reason to believe" vis-à-vis an intimation issued under section 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of the power conferred under section 147.
15. For the above reasons, we answer the substantial question of law framed by us in the affirmative, in favour of the assessee and against the Revenue. The appeal of the Revenue is accordingly dismissed. There shall be no order as to costs."
56. Since in the instant case also all material facts were already there on record and no tangible material was available before the AO, 42 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 therefore, respectfully following the above decisions cited (Supra) we hold that the reassessment proceedings initiated by the AO are bad in law. Accordingly, the grounds raised by the assessee on this issue for the above four assessment years are allowed.
57. Ground of appeal No.5 by the assessee reads as under :
"On the facts and in the circumstances of the case the Ld.CIT(A) has erred in disallowing the service charges of Rs.23,27,592/- made to Shri Industrial Services by invoking the provision of section 40A(2)(b) of the Act."
58. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that the assessee has paid services charges of Rs.27,02,000/- to Shri Industrial Suppliers which is the proprietary concern of Mr.G.M. Navlakha Director of the assessee company. He noted that the service charges has been paid for providing all the industrial services such as loading, unloading, security etc. The AO applying the provision of section 40A(2)(b) disallowed an amount of Rs.13,51,000/- being 50% of such service charges. In appeal the Ld.CIT(A) referring to the profit and loss account of Shri Industrial Suppliers found that it had earned net profit of Rs.23,61,629/- which works out to 87.42% of such receipts. Therefore, the CIT(A) held that there was no basis for payment of service charges. He treated the net profit at 10% and held that reasonable expenditure that the assessee can claim is only Rs.3,74,408/- as against Rs.13,51,000/- disallowed by the AO. He accordingly enhanced the disallowance by Rs.9,76,592/-.
59. Aggrieved with such order of CIT(A) the assessee is in appeal before us.
43ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014
60. The Ld. Counsel for the assessee submitted that this approach of the CIT(A) is devoid of any merit and law. The reasonability has to be decided on the basis of the fair market value of the goods and services etc and not on the basis of percentage of net profit of the party to whom the payment is made. No evidence has been brought on record by the AO or the CIT(A) to prove that the same should have been charged at lesser rate than what has been paid by the assessee. He accordingly submitted that this disallowance be cancelled.
61. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A).
62. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We find in the instant case the assessee has shown total service charges received at Rs.42,93,005/- from various companies against the services such as loading, unloading, handling, security services and transportation etc. Against the above income the assessee company has paid Rs.27,02,000/- to Shri Industrial Suppliers as handling charges which is the proprietary concern of the Director Mr. G.M. Navlakha. We find the AO following the provisions of section 40A(2)(b) disallowed an amount of Rs.13,51,000/- being 50% of such service charges. While doing so, he noted that Shri Industrial Suppliers is the proprietary concern of Shri G.M. Navlakha who is the Principal Director of the assessee company. Further, as against the receipt of Rs.27,02,000/- as service charges Shri Navlakha had incurred expenditure of Rs.3,40,371/- only which shows that he has shown net profit of 87.4% which is highly impossible and clearly shows that 44 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 the assessee company had paid huge amount to the proprietary concern of the Director for which no commensurate services were rendered by the proprietary concern. We find in appeal the Ld.CIT(A) enhanced such disallowance by Rs.9,76,592/-. It is the submission of the Ld. Counsel for the assessee that the AO has not brought on record any comparable case as what would have been the reasonable amount. Therefore, disallowance of 50% of such service charge is uncalled for. It is the submission of the Ld. Authorised Representative that instead of deleting the addition the Ld.CIT(A) has enhanced the same. We do not find any force in the above argument of the Ld. Counsel for the assessee. Admittedly, Shri Industrial Suppliers is the proprietary concern of Shri G.M. Navlakha who is the Principal Director of the assessee company. As against service charge received at Rs.42,93,005/- the assessee has paid an amount of Rs.27,02,000/- to Shri Industrial Suppliers as handling charges out of such handling charges. Mr. G.M. Navlakha has incurred only meager expenditure of Rs.3,40,371/- and thereby earned huge income of Rs.23,61,629/- which is 87.4% of the receipts. Since the Director of the assessee company is also the proprietor of Shri Industrial Suppliers and he is the key person for both the concerns, therefore, diversion of income of the assessee company to the proprietary concern of the Director is clearly visible and therefore the same in our opinion comes within the purview of section 40A(2)(b) of the I.T. Act. We therefore hold that the AO was justified in disallowing 50% of such payment as excess payment to the relatives as per provisions of section 40A(2)(b). However, the CIT(A) in our opinion is not justified in enhancing the same to Rs.23,27,592/- in the instant case only on the ground that Mr. 45 ITA No.2130/PN/2013, ITA Nos.1963 to 1968/PN/2013 & ITA No.361/PN/2014 Navlakha has incurred meager expenditure of Rs.3,40,371 out of the total receipt of Rs.27,02,000/-. There may be so many reasons for incurring of less expenditure by the Director. Considering the totality of the facts of the case, we are of the considered opinion that disallowance of 50% of the expenses as done by the AO in the instant case was the correct approach. We accordingly hold that disallowance of Rs.13,51,000/- u/s.40A(2)(b) is justified under the facts and circumstances of the case. Ground raised by the assessee is accordingly partly allowed.
63. In the result, the ITA No.2130/PN/2013 for A.Y. 2001-02 is partly allowed and the remaining appeals are allowed.
Order pronounced in the open court on 30-09-2016.
Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे Pune; दनांक Dated : 30th September, 2016. सतीश
आदे श क( )"त+ल प अ,े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु%त(अपील), / The CIT(A)-II, Pune
4. आयकर आय% ु त / The CIT-II, Pune
5.
(वभागीय +त+न,ध, आयकर अपील य अ,धकरण, "ए" पुणे / DR, ITAT, "A" Pune;
6. गाड0 फाईल / Guard file.
आदे शानस
ु ार/ BY ORDER,स या(पत
+त //True C
स या(पत +त //True Copy//
व2र3ठ +नजी स,चव / Sr. Private Secretary
आयकर अपील य अ,धकरण, पुणे / ITAT, Pune