M/s. R.P.Usha Enterprises, CHENNAI v. ITO, CHENNAI

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH A : CHENNAI [BEFORE SHRI HARI OM MARATHA JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER] I.T.A.NO.2039/MDS/2010 ASSESSMENT YEAR : 2007-08 M/S R.P.USHA ENTERPRISES 39 HABIBULLAH ROAD T. NAGAR CHENNAI 600 017 VS THE ITO BUSINESS WARD II(3) CHENNAI [PAN - AAIFR0955R] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI V.S.JAYAKUMAR RESPONDENT BY : SHRI SHAJI P. JACOB O R D E R PER HARI OM MARATHA JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE FOR ASSESS MENT YEAR 2007-08 IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-VI CH ENNAI DATED 30.9.2010. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT T HE ASSESSEE-FIRM ADMITTED NIL INCOME FOR ASSESSMENT YEAR 2007-08 IN ITS RETURN FILED ON 31.10.2007. BUT THE ITO BUSINESS WARD II PASSED ORDER U/S 143(3) ON 31.12.2009 AND COMPUTED TOTAL INCOME AT ` 27 05 885/- AFTER ADJUSTING CARRY FORWARD LOSS OF ` 16 66 775/-. UNDER THE HEAD ITA 2039/10 :- 2 -: PROPERTY A SUM OF ` 1 27 21 049/- HAS ALSO BEEN COMPUTED AND THEREFROM AN AMOUNT OF ` 38 16 314/- @ 30% HAS BEEN DEDUCTED TOWARDS STANDARD DEDUCTIONS AND HAS ALSO ALLOWED IN TEREST ON BORROWED CAPITAL AMOUNTING TO ` 45 32 075/-. THE FIRST ISSUE TAKEN VIDE GROUND NO.2(A) TO 2(F) IS IN RELATION TO INCOM E RECEIVED UNDER A LEASE DEED AGREEMENT FROM M/S FREUDENBERG NONWOWENS INDIA PVT. LTD. WHICH THE ASSESSEE HAS CLAIMED AS ITS BUSINE SS INCOME AGAINST WHICH THE ASSESSING OFFICER HAS COMPUTED THE SAME U NDER THE HEAD INCOME FROM PROPERTY. THE ASSESSEE HAD LEASED O UT ITS FACTORY AND WAREHOUSE TO THE ABOVE NAMED CONCERN WHICH IS A WHO LLY OWNED SUBSIDIARY OF FREUDENBERG BETILIGUNGS GMBH GERMA NY. AS PER THE AGREEMENT BETWEEN THE ASSESSEE AND ITS TENANT IT W AS NOTICED THAT THE FACTORY AND THE WAREHOUSE ALONGWITH CERTAIN FAC ILITIES LIKE EQUIPMENTS OF FIRE FIGHTING SYSTEM COMPRESSOR ELE CTRIC PANELS/TRANSFORMER ETC. WERE GIVEN ON RENT. THE AS SESSEE-FIRM HAS CLAIMED INCOME RECEIVED FROM THIS PARTY AS BUSINES S INCOME AS AGAINST PROPERTY INCOME. ACTUALLY THERE WERE T WO AGREEMENTS EXECUTED BY THE ASSESSEE WITH THIS TENANT ONE AGR EEMENT IS DATED 4.3.2005 WHICH IS GIVEN A HEADING LEASE DEED AND THE SECOND IS DATED 5.3.2005 WHICH IS NAMED AS SECURITY DEPOSIT- CUM-AMENITIES AGREEMENT. THE ASSESSEE HAS BOOKED THE RECEIPTS I N TWO PARTS ITA 2039/10 :- 3 -: ` 9 34 371/- AS LEASE RENT; AND ` 5 48 435/- AS AMENITIES. THE ASSESSEE HAS SHOWN 13 ITEMS TO HAVE BEEN LET OUT AN D THE RENT HAS BEEN FIXED PER SQ FT. IN THIS REGARD A CHART HAS BEEN DRAWN BY THE ASSESSING OFFICER AT PAGE 2 OF HIS ORDER. AS PER T HE ASSESSING OFFICER IN THE AGREEMENT THERE IS NO MENTION OF SPECIFIC S ERVICES TO BE RENDERED BY THE ASSESSEE WHICH ARE TO BE CALLED AS AMENITIES BUT THE RENT CONSIST OF TWO ELEMENTS ONE RELATING TO FACT ORY AND WAREHOUSE AND THE OTHER TO OPEN SPACE. WHEN CALLED TO EXPLAI N THE ASSESSEE VIDE LETTER DATED 24.12.2009 DETAILED THE AMENITIES SO PROVIDED INCLUDING THE AMENITIES CHARGES INCURRED BY THE AS SESSEE. AS PER THE ASSESSING OFFICER IN THE AGREEMENT THE FACTORY AN D WAREHOUSE HAVE BEEN SHOWN AS TWO DIFFERENT SHADES WITH DIFFERENT D IMENSIONS AND THE AREA TOTALED TO 30360 SQ FT. A RATE OF ` 8/- PER SQ FT HAS BEEN ADOPTED FOR AMENITIES WHICH COMES TO ` 2 42 880/- PER MONTH TOWARDS AMENITIES AND @ ` 5/- PER SQ FT TOWARDS LEASE RENT WHICH COMES TO ` 10 51 800/- PER MONTH. AFTER ANALYZING THE ISSUE THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT THE ASSESSEE HA S BIFURCATED THE RECEIPTS ONLY WITH THE SOLE INTENTION TO AVOID TAX LIABILITY BY PUTTING MORE RECEIPTS UNDER THE HEAD AMENITIES AND BY CLA IMING IT AS BUSINESS INCOME. THE ASSESSEE HAS ALSO RECEIVED SEPARATELY ` 1 71 072/- TOWARDS FIRE FIGHTING SYSTEM. FOR OPEN SPACE ALSO THE ITA 2039/10 :- 4 -: ASSESSEE HAS CHARGED ` 1.75 PER SQ FT BOTH FOR AMENITIES AND LEASE RENT. FOR THESE RATES THE ASSESSING OFFICER FOUND NO BASIS. HE HAS TREATED THE ENTIRE INCOME AS RENTAL INCOME AND HAS TAXED THE SAME UNDER THE HEAD INCOME FROM PROPERTY. ON THIS SI MILAR ISSUE THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS CHE NNAI PROPERTIES & INVESTMENTS LTD 266 ITR 685(MAD) HAS TAKEN A VIEW THAT SUCH RENTAL INCOME HAS TO BE TAXED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. BY RELYING ON THIS HON'BLE JURISDICTIONAL HIGH COUR T DECISION THIS FINDING OF THE ASSESSING OFFICER WAS ALSO CONFIRMED BY THE LD. CIT(A). THE ASSESSEE IS FURTHER AGGRIEVED. 3. AFTER HEARING BOTH SIDES AND IN VIEW OF THE FAIR SU BMISSION OF THE LD.AR WHO HAS ALSO FILED A CHART DETAILING THE GROU NDS AND HIS ARGUMENTS FOR ALL THE ISSUES IT IS NOTICED THAT TH IS ISSUE STANDS FULLY COVERED BY THE ABOVE NOTED DECISION WHICH HAS ALSO BEEN FOLLOWING BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 IN I.T.A.NO. 954/MDS/2008 ORDER DATED 6.3.2009. THER EFORE BY RESPECTFULLY FOLLOWING THE HON'BLE HIGH COURTS ORD ER AS WELL AS THE TRIBUNAL ORDER WE ALSO HOLD THAT THIS INCOME HAS T O BE TREATED AS RENTAL INCOME TO BE TAXED UNDER THE HEAD INCOME FROM PROPERTY AND NOT AS BUSINESS INCOME. GROUND NOS.2(A) TO 2(F) THEREFORE STAND DISMISSED AND DECIDED AGAINST THE ASSESSEE. ITA 2039/10 :- 5 -: 4. GROUND NOS. 2(G) AND 2(H) ARE IN RELATION TO THE CO NNECTED ISSUE OF PROVIDING AMENITIES AS PER THE ALLEGED AMENITIES AGREEMENT. IN THIS REGARD ALSO RELIANCE WAS PLACED BY THE LD.AR ON TH E ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA) WHEREIN TH E TRIBUNAL HAS RESTORED THE ISSUE REGARDING BIFURCATION OF A PORTI ON OF THE RENTAL RECEIPTS REGARDING ALLEGED AMENITIES. THE LD.DR HA S DRAWN OUR ATTENTION TO PAGE 4 OF ASSESSING OFFICERS ORDER IN WHICH ACCORDING TO HIM HE HAS MENTIONED THAT NO AMENITIES HAVE BEEN P ROVIDED SO RELIEF CANNOT BE GRANTED AS HAS BEEN PRAYED FOR. BUT AFTE R COGITATING THE RIVAL STANDS WE FIND THAT THE TRIBUNAL HAS ALSO TA KEN A DECISION IN THIS REGARD BY OBSERVING THAT THIS ISSUE NEEDS TO BE RES TORED TO THE FILE OF THE ASSESSING OFFICER. IN THIS REGARD PARA 7 OF TH E TRIBUNAL ORDER NEEDS TO BE EXTRACTED AS BELOW: 7. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED THE FACTS AND MATERIAL ON RECORD. AS REGARDS THE TREATMENT OF RENTAL INCOME WE FIND THAT THE MATTER IS NOW SETTLED AGAINST THE ASSESSEE IN VIEW OF THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS CHENNAI PROPERTIES AND INVESTMENTS LTD (2004) (266 TR 685)(MAD). AS REGARDS THE CHARGES COLLECTED FOR AMENITIES WE FIND THAT THE MADRAS HI GH COURT IN THE CASE OF A.R. COMPLEX VS INCOME TAX OFFICER(2007) 292 ITR 615(MAD) HAS RESTORED THE MATTER BACK TO THE ASSESSING OFFICER WITH THE DIREC TION TO CONSIDER THE CLAIM OF THE ASSESSEE AND TO BIFURC ATE A PORTION OF THE RENTAL RECEIPTS RELATING TO SERVIC E CHARGES UNDER THE HEAD INCOME FROM OTHER SOURCES OR UNDER THE HEAD INCOME FROM BUSINESS AND PASS ORDERS IN ACCORDANCE WITH LAW AFTER GIVING OPPORTUN ITY ITA 2039/10 :- 6 -: TO THE ASSESSEE. RESPECTFULLY FOLLOWING THE DECISI ON OF JURISDICTIONAL HIGH COURT IN THE CASE OF A.R. COMPL EX SUPRA WE ARE RESTORING THE ISSUE OF BIFURCATION OF AMENITIES CHARGES TO THE FILE OF THE ASSESSING OFFI CER FOR FRESH DECISION IN ACCORDANCE WITH LAW AS DIREC TED BY THE HON'BLE HIGH COURT AFTER GIVING EFFECTIVE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 5. IN VIEW OF THE ABOVE AND BY RESPECTFULLY FOLLOWING THE TRIBUNAL ORDER (SUPRA) WE RESTORE THE ISSUE TAKEN VIDE GROU ND NOS.2(G) AND 2(H) TO THE FILE OF THE ASSESSING OFFICER TO GIVE E FFECT TO THE RATIO OF THE HON'BLE JURISDICTIONAL HIGH COURT DECISION IN ITS L ETTERS AND SPIRIT AS HAS BEEN DIRECTED BY THE TRIBUNAL IN ASSESSMENT YEAR 20 04-05. THEREFORE GROUND NOS.2(G) AND 2(H) ARE ALLOWED FOR STATISTICAL PURPOSES ONLY. 6. GROUND NO.3(A) AND 2(B) OF THIS APPEAL RELATE TO SET OFF OF LOSSES. THESE GROUNDS READ AS UNDER: (A) THE CIT(A) ERRED IN ENHANCING THE ASSESSMENT THEREBY DENYING THE CARRIED FORWARD BUSINESS LOSS WHICH WAS SET OFF AGAINST THE INCOME EARNED BY THE APPELLANT. (B) THE CIT(A) FAILED TO APPRECIATE THAT THE INCOME IN QUESTION IS BUSINESS INCOME ONLY AND SO THE SET OFF OF LOSS CLAIMED WAS PROPER. 7. APPARENTLY AND OBVIOUSLY THESE GROUNDS CANNOT BE AL LOWED IN VIEW OF OUR FINDING THAT THE INCOME EARNED BY THE A SSESSEE IN QUESTION ITA 2039/10 :- 7 -: IS NOT A BUSINESS INCOME. HENCE WE DECIDE THESE I SSUES AGAINST THE ASSESSEE AND DISMISS THE GROUNDS RAISED. 8. THE NEXT ISSUE HAS BEEN RAISED VIDE GROUND NOS.4(A) TO 4(E). THE GIST OF THESE GROUNDS IS THAT THE ASSESSEE HAS BORROWED CAPITAL AND PAID INTEREST THEREON WHICH HAS BEEN CLAIMED AS ALLOWABLE DEDUCTION. CONTRARY TO THIS CLAIM THE ASSESSING O FFICER HAS TAKEN THE STAND THAT THIS CLAIM CANNOT BE ALLOWED BECAUSE THE ASSESSEE HAS DIVERTED ITS FUNDS TO ITS SISTER CONCERN. THE CASE OF THE ASSESSEE IS THAT IT HAD ADEQUATE LIQUID FUNDS WHICH WERE AVAILA BLE FOR GIVING LOANS TO ITS SISTER CONCERNS AND THE BORROWED FUNDS HAS N OT BEEN DIVERTED AT ANY POINT OF TIME. THE ASSESSEE WANTED THE ASSESSI NG OFFICER TO LINK THE NEXUS BETWEEN THE AMOUNTS BORROWED AND THE AMOU NTS LENT TO THE SISTER CONCERNS WITH THE HELP OF THE DECISION OF HO N'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS LTD. THE LD. CIT(A) HA S ALSO CONFIRMED THE FINDING OF THE ASSESSING OFFICER BECAUSE HE HAS ALS O FOUND THAT WHEN THERE IS NO BUSINESS ACTIVITY THERE IS NO COMMERCI AL EXPEDIENCY. 9. BEFORE US IT WAS CLAIMED THAT IN ANY CASE THE ASSE SSING OFFICER SHOULD HAVE CONSIDERED THE CLAIM U/S 24 OF THE ACT EVEN IF THIS INCOME IS TREATED AS INCOME FROM PROPERTY. THIS CLAIM O F THE ASSESSEE SEEMS TO BE JUSTIFIED. THEREFORE WE RESTORE THIS ISSUE TO THE FILE OF THE ITA 2039/10 :- 8 -: ASSESSING OFFICER TO CONSIDER THE SAME ANEW AFTER H EARING THE ASSESSEE. THE ASSESSING OFFICER SHALL TAKE HIS IND EPENDENT DECISION IN THE LIGHT OF THE PROVISIONS AND PRECEDENTS RELIED O N BY THE ASSESSEE BEFORE HIM IF THE ASSESSEE DEEMS IT APPROPRIATE TO DO SO. BUT IN ANY CASE THE ASSESSING OFFICER SHALL GIVE OPPORTUNITY OF HEARING TO THE ASSESSEE. THE GROUNDS RAISED BY THE ASSESSEE STAND ALLOWED FOR STATISTICAL PURPOSES ONLY. 10. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 4.2.2011. SD/- SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 4 TH FEBRUARY 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR