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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER
ITA No.2025/Bang/2018
Assessment year : 2010-11
M/s Vectra Advanced Engineering Vs. The Dy. Commissioner of Income- Pvt. Ltd., tax, Vectra House No.15, 1st Main Road, Circle -7(1)(2), 6th Cross, Gandhinagar, Bengaluru. Bengaluru-500 009. PAN – AABCV 1355 K ASSESSEE REVENUE
Revenue by : Shri Sankarganesh K, JCIT (DR) Assessee by : Shri Nitish Ranjan, CA
Date of hearing : 05.01.2022 Date of Pronouncement : 05.01.2022
O R D E R Per Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order of the CIT(A) dated 8/3/2018 for the asst. year 2010-11.
The assessee raised following grounds :- “The Appellant prefers the present appeal on the below mentioned grounds which are mutually exclusive and without prejudice to one another:
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That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming order passed by Ld. Assessing Officer, in treating the rental income earned from building amounting to Rs. 3,24,24,272 as 'income from other source' instead of "income from house property" as claimed by the Appellant! Assessee and deciding the issue raised by Appellant in favour of revenue, without appreciating the true facts and circumstances of the case.
Without prejudice to Ground of Appeal 1, that on the facts and circumstances of the case and in law, if at all, rental income earned from building amounting to Rs. 3,24,24,272 be treated as 'income from other sources', deduction of expenses incurred by Appellant for earning the rental income ought to have been allowed as deduction under section 57 of the Act.
That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not issuing a clear direction to the Ld. AO to delete the disallowance of depreciation amounting to Rs. 2,53,790 and instead remitting the issue back to the Ld. AO to verify whether the gain claimed is a realized gain or notional gain, despite all necessary facts were duly placed before Ld. CIT(A).
That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the disallowance made by Ld. AO towards bad debts and advances written off amounting to Rs. 63,81,315.
All of the above Grounds of Appeal are independent of and without prejudice to one another. Furthermore, the Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the foregoing grounds of appeal at or before the hearing, and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”
At the time of hearing, the assessee has not pressed ground No.3 and the same is dismissed as not pressed.
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With regard to treating the rental income earned from building as ‘income from other sources’ and ‘income from house property’, it was submitted that similar issue has been considered by this Tribunal in the assessee’s own case for the asst. years 2005-06, 2006-07, 2007-08, 2012-13 and 2013-14 vide order dated 1/4/2021, wherein, it is held as under:-
“9. We have heard rival submissions and perused the material on record. The Hon’ble Madras High Court in the case of CIT v. Chennai Properties and Investments Ltd. [(2004) 266 ITR 685 (Mad.)] after referring to the Hon’ble Apex Court judgment in the case of Sultan Brothers Private Limited v. CIT [(1964) 51 ITR 353 (SC)] has observed as under:- “Although it was held by the Constitution Bench in the case of Sultan Brothers (1964) 51 ITR 353 (SC) that whether a particular letting is business has to be decided in the circumstances of each case and that each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner, in all the cases which have come before the courts involving commercial or residential buildings owned by assessees it has been held that the income realized by such owners by way of rental income from a building, whether a commercial building or residential house, is assessable under the head “Income from house property”. The only exceptions are cases where the letting of the building is inseparable from the letting of the machinery, plant and furniture. In such cases, it has been held that the rental would not have been realized but for the letting out of the machinery, plant or furniture along with such building and therefore the rental received for the building is to be assessed under the head “Income from other sources”.
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9.1 In the light of the above dictum, let us examine the facts of the instant case. For the assessment years 2005-2006 to 2006-2007, the assessee had considered the entire rental income as business income. However, from assessment year 2007-2008, the rental income from property was offered to tax by the assessee as “income from house property”. Whereas, the rental income from equipment was considered as “income from other sources” by the assessee. The A.O., however, reclassified the rental income from property as “income from other sources” and disallowed standard deduction claimed u/s 24(a) of the I.T.Act for the following two reasons, namely, (i) the assessee is not the owner of the property but only a tenant and it had sublet the property, (ii) the assessee had let out the equipment along with the property. The CIT(A) accepted the contention of the assessee and it was the owner of the factory building. The CIT(A), however, after examining the lease deed, came to the conclusion that the rental income from letting out of factory building and rental income received from letting out of equipment is a composite transaction and inseparable.
9.2 The details of tenants, the rental income earned from property and rental income earned from leasing of equipment for assessment years 2005-2006 to 2007- 2008, 2012-2013 and 2013-2014 are as follows:-
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9.3 The lease agreements entered between the assessee and various sub-lessees are placed on record at pages 54 to 102 of the paper book. On a perusal of the lease agreements, it is seen that the description of entire property is given in the first schedule. The description of portion of factory premises which was let out for sub-lease is mentioned in the second schedule of the lease agreement. The description of the equipment leased out is given in the third schedule. The fourth schedule of the lease agreement gives the break up of lease rentals. For the entire period concerning assessment year 2005-2006, there is only one sub- lessee, namely, M/s.Terex Vectra Equipment (Private) Limited. All the lease agreements entered by the assessee with other lessee’s for other A.Y.’s are identical. It is clearly seen from the perusal of the lease agreements that the rental income, both from property as well as equipment let out by the assessee, are separately identifiable in the lease agreements. It is also clear that the letting out of building as well as letting out of equipment are separable. The leasing of factory premises have given rise to major receipt of rental income and leasing of equipment is only
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incidental and both are clearly separable. Almost 85% of the total rent receipts is on account of leasing factory premises and leasing of equipment is only of minor items such as Cranes, Aircompressor, power generator etc. It is relevant to quote provisions of section 56(2)(iii) of the I.T.Act, which reads as follow:-
“where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the building is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head “Profits and gains of business or profession.”
9.4 The provisions of section 56 of the I.T.Act states that in case the property and equipment are let out and if the rent receivable are inseparable, then only the rent shall be taxable as “income from other sources”. In other words, if letting out of property is separable from letting out of other assets, as in the instant case, then the rent for house property is taxable u/s 22 of the I.T.Act, whereas, rent for other assets is taxable either u/s 28 of the I.T.Act as profits and gains of business or profession or u/s 56 of the I.T.Act as income from other sources, as the case may be.
9.5 The Hon’ble jurisdictional High Court in the case of D.R.Puttanna Sons Private Limited v. CIT [(1986) 162 ITR 468 (Kar.)] was considering a case of an assessee who had taken a land for lease for 30 years. The assessee thereafter put up a building thereon and the same was let out on rent. The Revenue contended that the assessee being the owner of the property for 30 years, rental income was assessable under the head `income from property’ and not as business income, as claimed by the assessee. The Hon’ble jurisdictional High Court decided the issue in favour of the Revenue and held that it is clear and as long as the assessee is the owner of the structure built by it, the income derived
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from the property will have to be assessed under the head income from house property and not business.
9.6 The Hon’ble Apex Court in the case of Shambhu Investment Private Limited. v. CIT [(2003) 263 ITR 143 (SC)] had held that where from an agreement between two parties, it is clear that the primary object was to let out the portion of the property with additional rights of use of furniture and fixture and other common facilities, income derived from said property was income to be assessed u/s 22 of the I.T.Act.
9.7 In view of the aforesaid reasoning and the judicial pronouncements, cited supra, we hold that the rental income earned by the assessee from letting out of property is taxable under the head income from house property and not income from other sources, for the following reasons :- (i) the assessee is the owner of the property in terms of section 22 of the I.T.Act. (ii) the rental income on lease of factory premises is taxable under the head house property in view of the ITA No.1325/Bang/2017 & Ors. M/s.Vectra Advanced Engineering Pvt.Ltd. . 10 judgment of the Hon’ble jurisdictional High Court in the case of D.R.Puttanna Sons Private Limited v. CIT (supra).
(iii) the rental income earned by the assessee from property and from equipment are separable in the facts of the given cases. Accordingly, the provisions of section 56 is not applicable in respect of income received from leasing of property, namely, factory building.”
In our opinion, the issue is squarely covered by the above order of the Tribunal. Accordingly, we decide this issue in favour of the assessee by placing reliance on the above order of co- ordinate bench. This ground of appeal of the assessee is allowed.
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The ground No.2 is infructuous in view of our findings in ground No. 1 and accordingly, ground No.2 is dismissed.
Last ground with regard to disallowance of bad debts of Rs.63,81,315/-. The assessee claimed the below mentioned amount as bad debts.
The lower authorities observed that to allow the amount as bad debt, it should be written off in the books of account as well as it must have gone into computation of income of the assessee. According to the lower authorities, the assessee has not fulfilled the condition laid down in sec.36(1)(vii) r.w.s 36(2) of the Act. 9. Before us, the AR submitted that most of these debts are mentioned in the above referred table are relating to sales and the sale transaction had already gone into the computation of income of the assessee and to the extent, he prayed that the ground of appeal to be allowed.
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On the other hand ld.DR relied on the order of the lower authorizes.
We have heard both the parties and perused the materials on record. In this case, certain deposits have been written off and claimed by the assessee as bad debts. However, these deposits are not in the revenue field. On the contrary, they are in capital field. The writing off of these deposits cannot be allowed as bad debt. However, the debts relating to the accounted sales, which are to be allowable as bad debts on writing off of the same. Accordingly, we remit this issue to the file of the AO to examine that whether these debts, which have gone into computation of income either in earlier asst. years or in this asst. year under consideration and to that extent allow the claim of the assessee as bad debts on writing off of the same in the books of account of the assessee. This grounds of assessee is remitted to the file of the AO for re-examination with the direction to see compliance of the provision of sec.36(1)(vii) r.w.s 36(2) of the Act.
In the result, assessee’s appeal is partly allowed for statistical purposes. Order pronounced in the open court on 5th January, 2022. Sd/- Sd/- (BEENA PILLAI) ( CHANDRA POOJARI) Judicial Member Accountant Member Bangalore, Dated, 5th January, 2022
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/ vms /
Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.
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Date of Dictation ……………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order ……………………………………………..