M/s. Khivraj Tech Park Ltd., CHENNAI v. ACIT, CHENNAI

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B CHENNAI (BEFORE SHRI ABRAHAM P. GEORGE ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN JUDICIAL MEMBER) ..... I.T.A. NO. 2127 / MDS/2010 ASSESSMENT YEAR : 2006-07 M/S KHIVRAJ TECH PARK LTD. NO.617 ANNA SALAI CHENNAI - 600 006. PAN : AACCK4418P (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX COMPANY CIRCLE II(4) CHENNAI - 600 034. (RESPONDENT) APPELLANT BY : DR. ANITHA SUMANT RESPONDENT BY : SHRI P.B. SEKARAN O R D E R PER ABRAHAM P. GEORGE ACCOUNTANT MEMBER : IN THIS APPEAL ASSESSEE ASSAILS ORDER DATED 27.10 .2010 OF COMMISSIONER OF INCOME TAX CHENNAI-I PASSED UNDER SECTION 263 OF THE INCOME-TAX ACT 1961 (HEREINAFTER CALLED AS TH E ACT). ACCORDING TO ASSESSEE TWIN CONDITIONS STIPULATED IN SECTION 263 OF THE ACT WAS NOT SATISFIED. 2. ASSESSMENT FOR THE IMPUGNED ASSESSMENT YEAR OF THE ASSESSEE ENGAGED IN THE BUSINESS OF RUNNING A TECHN OLOGY PARK WAS COMPLETED ON 19.11.2008 AFTER SCRUTINY UNDER SE CTION 143(3) OF I.T.A. NO. 2127/MDS/10 2 THE ACT. THE LOSS CLAIMED BY THE ASSESSEE WAS ACCE PTED. THE CIT ON 28.9.2010 ISSUED A NOTICE UNDER SECTION 263 OF T HE ACT AS PER WHICH THE ASSESSING OFFICER HAD FAILED TO CONSIDER WHETHER THE INCOME FROM BUILDING TAKEN ON LEASE AND LET OUT WAS TO BE RECKONED AS BUSINESS INCOME OR NOT. REPLY OF THE ASSESSEE W AS THAT IT HAD TAKEN TWO PROPERTIES NAMELY ALPHA REALTY LOCATED AT NORTH USMAN ROAD T. NAGAR AND LORDS-I LOCATED AT JAWAHARLAL NE HRU ROAD GUINDY FOR VARIOUS I.T. COMPANIES. AS PER ASSESSE E TWO SOFTWARE COMPANIES WHICH HAD BOOKED ITS SPACE IN ITS NEW OLY MPIA TECHNOLOGY PARK WERE GIVEN SUCH ACCOMMODATION AFTE R FITTING THE ABOVE PREMISES WITH ALL NECESSARY EQUIPMENT. HENCE IT WAS ONLY A TEMPORARY ARRANGEMENT DURING INCUBATION PERIOD OF O LYMPIA TECHNOLOGY PARK AND INCOME DERIVED FROM SUCH ACTIVI TY WAS RIGHTFULLY CLAIMED AS BUSINESS INCOME. NEVERTHELESS THE CIT W AS OF THE OPINION THAT ASSESSING OFFICER HAD NOT EXAMINED THE ISSUE BUT SIMPLY ACCEPTED THE LOSS RETURNED BY THE ASSESSEE WITHOUT ANY DISCUSSION/EXAMINATION. AS PER THE CIT ACCEPTING THE CLAIM OF THE ASSESSEE WITHOUT EXAMINATION OR VERIFICATION WOULD RENDER THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE I NTEREST OF THE REVENUE. HE THEREFORE DIRECTED THE A.O. TO PASS A FRESH ORDER AFTER EXAMINATION OF THE MATTER RELATING TO THE HEAD UNDE R WHICH LEASE RENT RECEIVED BY THE ASSESSEE WAS TO BE ASSESSED. I.T.A. NO. 2127/MDS/10 3 3. NOW BEFORE US THE LEARNED A.R. SUBMITTED THAT T HE OBSERVATION OF THE CIT REGARDING ASSESSING OFFICER HAVING NOT M ADE PROPER ASSESSMENT IN THE CASE OF THE ASSESSEE WAS INCORREC T. PLACING RELIANCE ON THE NOTICE DATED 21.11.2008 ISSUED UND ER SECTION 142(1) OF THE ACT BY THE A.O. THE LEARNED A.R. SUBMITTED THAT ALL INFORMATION REQUIRED THEREIN WERE FURNISHED. SPECIFIC REFERENC E WAS MADE TO LETTER DATED 1 ST DECEMBER 2008 ADDRESSED TO THE ASSESSING OFFICER WHICH GAVE DETAILS OF THE INCOME RECEIVED FROM OCCU PANTS OF THE TWO PREMISES. FURTHER AS PER THE LEARNED A.R. IT HAD GIVEN A DETAILED NOTE TO THE ASSESSING OFFICER ON THE INCOME FROM AL PHA REALTY AND LORDS AS ALSO TEMPORARY SPACE PROVIDED TO HEWITT AS SOCIATES AT PROJECT SITE. IT WAS ARGUED BY THE LEARNED A.R. TH AT LD. A.O. HAD COME TO A CONCLUSION ON THE NATURE OF RECEIPTS AFTER CO NSIDERING THE REPLIES OF THE ASSESSEE AND HAD TAKEN A JUDICIOUS VIEW THAT THE RENTAL INCOME RECEIVED BY IT FROM THE LEASE OF THE PREMISES WAS N OTHING BUT BUSINESS INCOME. THEREFORE ACCORDING TO LEARNED A .R. THE LOSS WAS RIGHTFULLY ALLOWED AND THE CIT WAS TRYING TO SUBSTI TUTE HIS VIEW TO A LAWFUL VIEW TAKEN BY THE A.O. 4. PER CONTRA THE LEARNED D.R. STRONGLY SUPPORTED THE ORDER OF THE CIT. ACCORDING TO HIM THE ASSESSMENT ORDER PASSED BY A.O. CLEARLY I.T.A. NO. 2127/MDS/10 4 REFLECTED A NON APPLICATION OF MIND SINCE THERE WAS NO DISCUSSION REGARDING HOW THE RECEIPTS FROM LEASE RENT WERE TO BE TREATED. 5. WE HAVE PERUSED ORDER OF THE CIT AS WELL AS RIVA L SUBMISSIONS. AS PER THE CIT THE HEAD UNDER WHICH ASSESSEES INC OME OF LEASE SRENT SHOULD HAVE BEEN RECKONED WAS NOT CONSIDERED BY THE A.O. IN THE COURSE OF ASSESSMENT. THIS RENDERED THE ORDER OF THE A.O. ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE. NO DOUBT WE FIND THAT ORDER OF THE A.O. IS CRYPTIC AND THERE IS NOTHING THEREIN REGARDING THE HEAD UNDER WHICH THE LEASE RENT SHOWN BY THE ASSESSEE WAS TO BE CONSIDERED. BUT NEVERTHELESS WE FIND THAT THE A.O. ON 21.11.2008 HAD REQUIRED THE ASSESSEE TO FUR NISH VARIOUS DETAILS FOR SUPPORTING ITS RETURN OF LOSS AND ASSES SEE HAD PURSUANT TO SUCH REQUIREMENTS FILED A DETAILED LETTER REGARDIN G THE REASON WHY IT HAD LEASED OUT ALPHA REALTY AND LORDS-I AFTER EQUIP PING WITH NECESSARY FITTINGS TO TWO COMPANIES WHO HAD BOOKED SPACE IN ITS OLYMPIA TECHNOLOGY PARK WHICH WAS IN PROGRESS. THE RELEVANT PART OF THE REPLY GIVEN BY THE ASSESSEE TO THE A.O. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS IS REPRODUCED HEREUNDER:- TO ACCOMMODATE THE PROSPECTIVE TENANTS AS A PART OF ITS CONTRACTUAL OBLIGATIONS IN SECURING THE LONG TERM O CCUPANCY FROM IT COMPANIES VIZ. VERIZON ABN AMRO AND HEWITT ASSOCIATES FOLLOWING THREE PREMISES WERE MADE READY AS AN INCUBATION SPACE VIZ.: I.T.A. NO. 2127/MDS/10 5 ALPHA CENTRE (TAKEN ON LEASE) LORDS (TAKEN ON LEASE) AND CAR PARKING VIZ. STILT I OF OLYMPIA TECHNOLOGY PA RK (COMPANY OWNED BUT TEMPORARILY CONVERTED INTO AN IT FACILITY) THE FIRST TWO PROPERTIES WERE NOT OWNED BY THE COMP ANY BUT TAKEN ON LEASE AND FITTED OUT BY US FOR MAKING IT FULLY A N IT ENABLED OFFICE AND THE THIRD PORTION I.E. THE CAR PARKING OF OLYMPIA AS THE BUILDING WAS IN PROGRESS AND M/S HEWITT ASSOCIATES REQUIRED IMMEDIATE SPACE FOR 200 SEATS; ONLY THEN THEIR NEE D FOR A 1000 SEATER OFFICE IN OLYMPIA COULD TAKE OFF. AS THE CO MPANY DID NOT WANT TO TAKE ANY FURTHER RISK IN LEASING OUT THE OU TSIDE SPACE AND IT HAD CONVERTED ITS CAR PARKING SPACE TEMPORARILY FOR THE USE OF M/S HEWITT ASSOCIATES. ALL THESE THREE PREMISES WERE FITTED OUT WITH NETWO RK CABLING UPS COMPUTER WORKSTATIONS AND OTHER ITEMS LIKE SPE CIALIZED ELECTRICAL LIGHTING SPECIALIZED NOISE REDUCTION FA LSE CEILING CARPETS ETC. ALL ITEMS LIKE AIR CONDITIONERS WORKSTATIONS AND C HAIRS WHICH COULD BE RE-USED BY US WERE CAPITALIZED UNDER THE R ESPECTIVE HEADS AND ITEMS LIKE FALSE CEILING CARPETS PAINTING OF WALLS PARTITIONS ETC WHICH ARE PURELY OF TEMPORARY ERECTIONS IN NATU RE AND WHICH COULD NOT BE RE-USED HAD BEEN WRITTEN OFF. THE WRITING OFF OF ALL THESE ITEMS WERE ON ACCOUNT OF TWO COUNTS : (1) THEY WERE PURELY OF TEMPORARY ERECTION AND (2) THOUGH THE LEASE WAS TAKEN FOR THE PREMISES FOR A LONG TERM H OWEVER OUR LEASE TO OUR OCCUPANTS ARE FOR A VERY VERY SHORT TE RM. IT WAS ONLY AN INTERIM ARRANGEMENT AND A PART OF THE LARGER DEA L IN WHICH WE HAVE LEASED VERIZON ABN AMRO HEWITT ASSOCIATES WI TH LARGE SPACE IN OLYMPIA TECHNOLOGY PARK. IN CONCLUSION ITEMS WHICH WERE PURELY OF TEMPORARY NATURE AND WHICH COULD NOT BE RE-USED HAVE BEEN WRITTEN OFF AN D ITEMS WHICH WERE POSSIBLE FOR US TO RE-USE HAD BEEN CAPITALIZED . THE EXAMPLES OF THESE ARE: THE AIR CONDITIONERS WHICH WE PROVID ED TO M/S HEWITT ASSOCIATES HAVE BEEN RE-USED BY US IN THE FO OD COURT AND I.T.A. NO. 2127/MDS/10 6 THEY ARE PART OF THE CAPITALIZED AMOUNT. CARPETS I NSTALLED BY US FOR M/S HEWITT ASSOCIATES NET WORK CABLING DONE FO R THEM COULD NOT BE RE-USED AND HENCE WRITTEN OFF. SIMILARLY W ITH LORDS AND ALPHA CENTRE WHERE ALL ITEMS WHICH ARE MOVABLE IN N ATURE HAVE BEEN CAPITALIZED AND BALANCE HAVE BEEN TREATED AS P URELY TEMPORARY ERECTIONS AND HAVE BEEN WRITTEN OFF. OUR RENT RECEIPTS ARE FROM THE FOLLOWING PARTIES. PLACE NAME OF THE PARTY AMOUNT IN RS. ALPHA REALTY VERIZON DATA SERVICES (INDIA) P. LTD. 2 83 50 000 LORDS I ABN AMRO BANK 1 19 00 903 OLYMPIA TECHNOLOGY PARK HEWITT ASSOCIATES 40 39 294 OLYMPIA TEHCNOLOGY PARK OTHERS 99 000 TOTAL 4 43 89 197 HEWITT ASSOCIATES HAVE OCCUPIED 24 625 SQ.FT AT OLYMPIA TECHNOLOGY PARK ITSELF AND THEY HAVE PAID RENT FRO M 12.12.2005 AT RS.45/- PER SQ. FT PER MONTH. THEY HAVE OCCUPIED THE OLYMPIA TECHNOLOGY PARK WHICH IS AN I.T. PARK APPROVED UNDER SECTION 80 IA OF THE INCOME TAX. WE ARE ENCL OSING A COPY OF DETAILED NOTE EXPLAINING HOW INCOME FROM I.T.PAR K IS NOT INCOME FROM HOUSE PROPERTY AND IS ONLY INCOME FROM BUSINES S; WHICH WAS FURNISHED TO YOU EARLIER FOR YOUR READY REFERENCE. HENCE INCOME REALIZED FROM HEWITT ASSOCIATES IS ONLY A BUSINESS INCOME. ALPHA REALTY IS A PROPERTY WHICH IS LEASED BY US AS A BARE SHELL AND HAS BEEN PROVIDED TO M/S VERIZON DATA SERVICES (INDIA) P. LTD. AS AN INCUBATION CENTRE. (IE A FA CILITY FOR THEM TO INSTALL A FEW OF THEIR STAFF TILL THE PORTIONS IN O LYMPIA TECHNOLOGY PARK INDENTED BY THEM IS MADE READY FOR THEIR OCCUPATION AFTER INSTALLING FIT-OUTS TO THEIR SPECI FICATION). ALL THE FIT-OUTS HAS BEEN PROVIDED AND INSTALLED BY US TO E NABLE THE TENANT TO OCCUPY AS AN I.T. COMPANY. IN THE SAME MANNER LORD I IS PROVIDED TO ABN AM RO BANK AS INCUBATION SPACE WHO ALSO HAVE INDENTED SPACE IN O LYMPIA TECHNOLOGY PARK AS THESE TWO TENANTS HAVE BEEN FURNISHED WITH FIT-O UTS FOR IT COMPANIES AS INCUBATION SPACE RELATED TO THE I.T.PA RK THE INCOME I.T.A. NO. 2127/MDS/10 7 FROM THEM IS ALSO PART OF BUSINESS OF THE I.T.PARK AND HENCE HAS BEEN TREATED AS I.T.PARK. THESE INCUBATION CENTRES HAS BEEN INSTALLED WITH FI T-OUTS TO THE SPECIFICATIONS OF THE OCCUPANTS. THESE TRANSACTION S ARE PART AND PARCEL OF BUSINESS ACTIVITIES OF KHIVRAJ TECHPARK PRIVATE LIMITED AND HENCE THE INCOME FROM THEM HAS BEEN OF FERED AS BUSINESS INCOME. 6. THUS ASSESSEE HAD PLACED BEFORE THE A.O. ALL RE LEVANT DETAILS REGARDING ITS CLAIM WHY THE AMOUNTS RECEIVED FROM T HE TWO COMPANIES WERE SHOWN UNDER THE HEAD AS INCOME FROM BUSINESS . IN OUR OPINION JUST BECAUSE THE ASSESSMENT ORDER DID NOT MENTION ANYTHING REGARDING THE NATURE OF INCOME OF THE ASSESSEE WOU LD NOT BY ITSELF DILUTE THE CLAIM OF THE ASSESSEE THAT THERE WAS PRO PER INVESTIGATION CONDUCTED BY THE A.O. WHEN THE ASSESSMENT PROCEEDI NGS WERE ON THE A.O. HAD ISSUED NOTICE UNDER SECTION 142(1) OF THE ACT AND ASSESSEE RESPONDING THERETO HAD GIVEN DETAILED WHY ITS CLAIM OF LEASE RENTALS WERE SHOWN UNDER THE HEAD INCOME FRO M BUSINESS. THUS A.O. HAD CALLED FOR NECESSARY INFORMATION AND ASSESSEE HAD FURNISHED THE SAME. NO DOUBT ORDER OF THE ASSESSI NG OFFICER IF IT HAD BEEN WITHOUT APPLICATION OF MIND WOULD HAVE BEEN ER RONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE AND MERE ACCEPTANCE OF AN ENTRY IN A STATEMENT OF ACCOUNT IN THE ABSENCE OF S UPPORTING MATERIAL WOULD HAVE IMPLIED NON APPLICATION OF MIND AS HELD BY HON'BLE APEX COURT IN THE CASE OF MALABAR INDUSTRIES CO. LTD. V. CIT (2000) 243 ITR I.T.A. NO. 2127/MDS/10 8 83 (SC). NEVERTHELESS AS ALREADY MENTIONED BY US JUST BECAUSE ORDER OF THE A.O. WAS CRYPTIC WE CANNOT COME TO A CONCLUSION THAT THERE WAS NO APPLICATION OF MIND. IT IS NOT NECESS ARY FOR AN A.O. TO MENTION AND ELABORATE ON EACH AND EVERY ITEM OF INC OME AND CLAIM OF EXPENSES OF AN ASSESSEE EVEN WHERE HE FINDS THAT T HESE HAVE BEEN MADE IN ACCORDANCE WITH LAW. WHAT IS TO BE SEEN IS WHETHER THE RECORDS SHOW A PROPER APPLICATION OF MIND. IN OUR VIEW HERE ASSESSEE WAS CALLED UPON TO FILE NECESSARY DETAILS ASSESSEE HAD FILED SUCH DETAILS AND THE A.O. WAS IN POSSESSION O F ALL THE RELEVANT PARTICULARS REGARDING THE LEASE INCOME OF THE ASSES SEE WHICH WAS A STOP GAP ARRANGEMENT. IN SUCH A SITUATION WE CANN OT SAY THAT THE ORDER OF THE A.O. WAS ONE WITHOUT APPLICATION OF MI ND. A.O. THUS HAVING COME TO A LAWFUL VIEW AFTER CONSIDERING THE DETAILS SUBMITTED BY THE ASSESSEE WE ARE OF THE OPINION THAT THE CIT WAS TRYING TO SUBSTITUTE HIS VIEW TO THE LAWFUL VIEW TAKEN BY THE A.O. WHEN TWO VIEWS ARE POSSIBLE AND THE A.O. HAS TAKEN ONE VIEW WE CANNOT SAY HIS ORDER IS ERRONEOUS AS HELD BY HON'BLE APEX COUR T IN THE CASE OF CIT V. MAX INDIA LTD. (2007) 295 ITR 282 (SC). THI S IS NOT A CASE WHERE A.O. REMAINED PASSIVE IN THE FACE OF THE RETU RN FILED BY THE ASSESSEE BUT ON THE OTHER HAND HAD MADE FURTHER E NQUIRIES AND PASSED THE ASSESSMENT AFTER OBTAINING THE REPLY OF THE ASSESSEE. WE ARE OF THE OPINION THAT IN THESE CIRCUMSTANCES CIT FELL IN ERROR IN I.T.A. NO. 2127/MDS/10 9 INVOKING PROVISIONS OF SECTION 263 OF THE ACT THE TWIN CONDITIONS FOR INVOKING SUCH POWERS HAVING NOT BEEN SATISFIED. 7. IN THE RESULT ORDER OF THE CIT IS QUASHED AND A PPEAL FILED BY THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AFTER CONCLUSION OF HEARING ON THE FIRST DAY OF FEBRUARY 2011. SD/- SD/- (GEORGE MATHAN) (ABRAH AM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI DATED THE 1 ST FEBRUARY 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT CHENNAI-I CHENNAI (4) D.R. (5) GUARD FILE