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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI H.S.SIDHU & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the assessee against the order of the ld CIT (A)-XI, New Delhi dated 20.12.2013 for the Assessment Year 2006-07. 2. The assessee has raised the following grounds of appeal:- “1. That the learned Commissioner of Income Tax (Appeals) erred both on facts and in law in sustaining the assessment made by the assessing officer at Rs. 69,.96,800/- as against return of income filed showing total income of Rs. 35,96,255/- without properly considering the facts and submissions made by the assessee.
2. That the learned Commissioner of Income Tax (Appeals) erred both on facts and in law in sustaining the finding of the assessing officer that the assessee derived income only from house property and did not carry on any business.
3. That the learned Commissioner of Income Tax (Appeals) erred both on facts and in law in sustaining the finding of the assessing officer that the assessee did not carry on any business and that administrative expenses and depreciation were not admissible without considering the fact that: i) The assessee had not discontinued its old business and the business was in suspended animation for some time; and ii) Administrative and other expenses were being incurred wholly and exclusively to keep the business active and alive, and iii) A part of the premises was being utilized for own business use of the assessee company.
4. That the learned Commissioner of Income Tax (Appeals) erred both on facts and in law in holding that the composite receipt, on account of letting out of property and letting out of furniture and fixture and provision of services, was taxable as income from house property.
5. That the ld Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining the charging interest under sections 234B of the Act, which is not leviable on the facts of the appellant company.”
Brief facts of the case are that the assessee is engaged in the business of owners, colonizers, developers, promoters etc. The assessee filed its return of income for Assessment Year 2006- 07 on 30.11.2006 of Rs. 3596255/-. The assessment u/s 143(3) of the Act was passed on 12.12.2008 determining total income of Rs. 6996800/-. Assessee has offered income from house property of Rs 6996793/- and loss of income from business of Rs 3400538/-. The ld AO has computed the income from house property as its is but did not consider the business loss as eligible for set of against the income from house property holding that assessee is not engaged in any business. The ld AO noted that as the assessee earning only income from house property does not eligible to claim deduction of various expenses which are administrative in nature. He therefore, held that as the assessee has not carried out any business its income is chargeable to tax under the head “income from house property” and not as business income.
4. The assessee aggrieved with the order of the ld AO preferred appeal before the ld CIT(A) who vide order dated 20.12.2013 confirmed the order of the ld AO. He further held that there are no business activities of the company during the year except rental income. Further, the repairs and maintenance expenses are on account of the property of the assessee. The composite rent does not change character of the rental income. As the properties have not been sold, the argument of the assessee that let out properties fetch good sale value is not appreciated. Aggrieved by the order of the ld CIT (A) the assessee is in appeal before us. 5. The ld AR submitted a detailed written submission which is as under:- I. The Appellant company has been incorporated vide certificate of incorporation dated 04.08.2000. As per the Memorandum of Association, the Main objects of the company are to carry on the business as Real Estates Builders, Developers, colonizers, promoters of residential, commercial or industrial construction and to sell, deal, alienate or otherwise dispose the same. II. The return of income for A. Y. 2006-07 was filed on 31.11.2006 declaring total income of Rs. 35,96,255/- (page 27 of paper book) . That during the year, as per the profit and loss account, the assessee mainly has income for rent amounting to Rs. 1,02,62,919/- apart from certain interest on funds, (page 35 & 28 of paper-book). III. In the computation of the income filed with the return the appellant has offered the said rental income under the head “income from house property” on which deduction on account of property tax and the statutory deduction u/s 24 has been claimed at Rs. 29,98,626/- which has also been allowed by the Assessing Officer vide Assessment Order dated 12.12.2008. IV. In the computation of the income filed with the return the appellant had additionally claimed a loss from business at Rs. 34,00,538/- which was sought to be set off with the income from house property. It is on this issue that the A.O. held that as the assessee Company has not carried out any business during the year therefore the claim of business expenditure could not be allowed as for such allowability the expenditure must have been incurred for the purpose of business, which is in existence in the year under consideration. That consequently the claim of business loss of Rs. 34,00,538 has not Page | 2 been allowed to be set off against the income from house property, by the A.O. V. The above order of the A.O. was contested in appeal before the Learned CIT (A) on the ground that the A.O. has erred in facts and in law in disallowing the claim of the appellant of administrative and other expenses which had been incurred by the company to keep the business of development and sale of the units, (constructed at commercial/ industrial property at G-6, Block -B- 1, Mohan Cooperative Industrial Estate New Delhi) active and alive, which was held by the appellant as its stock in trade, for the purpose selling the same. That the only reason the revenue has disallowed such business expenses is on the ground that the assessee did not carry on any business of sale of such units during the year under consideration. The plea of the assessee has been that as during the period, this property in the nature of stock in trade was vacant and the company was meanwhile looking for prospective buyers, therefore meanwhile the property was let out on lease on which rental income was earned. That the purpose of the rental lease was twofold that is to attract prospective buyers / investors to purchase the pre-leased property, which has a natural propensity to fetch higher premium in the market and also in the process earn renal income in the interim period from the unsold, vacant property. VI. The Learned CIT appeal in para 8.3 (page 13 of the order) of the appellate order did note the fact that as per the Memorandum of Association, the business object of the Company is to be the owner, developer, colonizer, promoter etc. of the properties. That however in order to know the intention of the Company as to whether the property is to be treated as stock in trade or as investment of the Company, the lease agreement dated 23.02.2003, 20.07.2005 and have to be examined. Referring to the various clauses in the lease deeds the Ld. CIT(A) has returned the finding that the appellant has never treated the properties as stock in trade and that the lease deed have been written keeping in mind the long term benefits without indicating any intention of the lessor to sell them in due course. The Ld. CIT(A) goes on to observe that as no property has been sold till date, the appellant had never intended to treat the property as stock in trade. The accordingly the A.O. is justified in disallowing the expenses claimed by the appellant. Submission before the Hon'ble ITAT 1. From the main objects of the appellant Company is its Memorandum of Association dated 02.08.2000, (page 1 of paper-book) it is matter of record that the business of the incorporated company is to promote, buy sell, construct, develop building, shops, offices and to sub divide, sell or otherwise dispose of the same.
It is in pursuance to the main objects that the appellant Company purchased a piece of land having area 2078 Square Yard at Bl-G-6, Mohan Cooperative Industrial Estate New Delhi, for a consideration of Rs. 70 lacs as appearing in its stock in trade as on 31.03.2002 (page 83 of the paper book). Subsequently commercial construction was carried out on this property with a view to sell the same. The cost of land and the construction of commercial property thereon has been treated by the appellant as its stock in trade for A.Ys. 2003-04, 2004-05, 2005-06 & assessment year 2006-07.
3. That consequently the business as a Real Estate Developer, in terms of the Memorandum of Association, had commenced since assessment year 2003-04 itself.
That the Memorandum of Association is the basic document from which the intention of the assessee to carry out the business as property developer is gathered and the same cannot be over looked by the revenue in face of the fact that the purchase of land and construction of commercial property thereon has been treated in the regular books of accounts as stock in trade, right from assessment year 2003-04 for which the appellant has filed return of income. Reliance in this regard is also placed on the decision of Hon’ble Supreme Court in case of Chennai Properties and Investment Ltd. Vs. CIT (56 taxmann.com 456) dated 09.04.2015 wherein the Hon’ble Court has taken note of the main object as stated in the Memorandum of Association, to hold that in the facts of that case the letting of properties is the business of the assessee.
That the appellant has been filing its return of income for A.Ys. 2003-04 to A.Ys. 2006-07 (copy of acknowledgment of return and computation in income filed in the paper-book) and in all these years the assessee has claimed the business expenses incurred for up keep and over all maintenance of the commercial complex and other administrative expenses necessary for effecting the sale of the constructed units. These expenses have been allowed by the department as a business loss to be set off against the income of house property arising out of letting out these properties till the time they could put to sale. Thus since there is no change in facts which remain the same for assessment year 2003-04 to 2005-06 therefore the rule of consistency is applicable to the facts of Page | 3 the case and there is no occasion on part of the revenue to hold that business of the appellant has not commenced and therefore none of the necessary business expenses are allowable to set off. Reliance in this regard is placed on the decision of Hon’ble High Court of Delhi in CIT Vs. Dalmia Promoter (P) Ltd. 151 Taxman 202 dated 17.01.2006 wherein upon referring to the decision of Hon’ble Supreme in Radhasoami Satsang Vs. CIT 193 ITR 321, the Court held that “where a fundamental aspect permeating through different assessment years has been found as a fact one wav or the other and parties have allowed that position to be sustained by not challeneing the order. it may not be appropriate to allow that position to be changed in a subsequent year.
6. Now in facts of the present case the fact that business as property developer has commenced and the expenses relating thereto have been allowed by the revenue in the past assessment years is the fundamental aspect in this case and though the assessment for these years have not been finalized u/s 143(3) of the Act, but they have been processed as such by the department, which necessarily means that the proposition made by the assessee has been accepted in the past. There has been no reopening of the assessments either for which there was sufficient time and opportunity and therefore it can be concluded that the department has accepted the business expenses of the assessee in past years, which is also the correct position in law. Reliance in this regard is also placed on the decision of High Court of Delhi in case of CIT Vs. Orient Craft Ltd. 354 ITR 536 wherein para 13 Jhereof the Court has observed that “whether a 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. Applying the same principle to the Rule of consistency as evolved by the Hon’ble Court it is submitted that the same would equally apply whether a return of assessment year is accepted u/s 143(1) or is subject to scrutiny u/s 143(3).
7. Reliance is also placed on the decisions of High Court of Gujarat in CIT Vs. Saurashtra Cement and Chemical Industrial Ltd. 91 ITR 170 and in Prem Conductors (P) Ltd. Vs. CIT 108 ITR 654 to submit that in facts of the case the business of the appellant company had commenced and therefore both the Ld. A.O. and CIT (A) have erred in holding that since the business had not commenced or is not in existence therefore the necessary expenses incurred for the business or not allowable.
Reliance is placed on the decision in case of Inder Chand Hari Ram Vs. CIT 23 II K 437 (High Court of Allahabad) wherein the following has been held:- “A company may not obtain or be able to execute a single business contract for months and yet it may be deemed to carry on its business if during the period of lull and in activity it is kept alive, retains its registered office and holds meetings etc. It is not necessary that a business to be in existence should have work all the time. There may be long intervals of inactivity and a concern may still be a going concern though it may, for some time, be quiet and dormant. The mere fact that businessman has not been able to obtain a contract and the business has for some time been, in that sense, dormant would not mean that it has ceased to exist if the assessee continues to maintain an establishment and incur expenses in the expectation that work would come and the business will be successful. How long he shall remain in hope and in what manner he must carry on his work to gain success is primarily his own concern. The mere fact that for some time he is not able to secure a contract or do the work which he set out to do should not disqualify him from pleading that the expenditure that he had incurred “was expended for the purposes of his business.”
The Ld. CIT (A) has on perusal of the lease rental agreement taken a view that the lease deeds have been written keeping in mind the long term benefits without indicating any intention of the lessors to sell them in due course. It is submitted that the above observation of the CIT (A) is based on selective reading of the lease deeds as in the lease deed dated 23.02.2003 (page 103 of paper- book para 8) there is an explicit clause that in case the lessor sells and transfer the said premises during the lease period or extension thereof the terms and conditions of this lease shall be binding on such purchaser/ transfree. The lessor shall intimate the lease and arrange to set an undertaking from the transfree for the said intend and purpose. Similar clause for attornment exists in the lease rental agreement dated in clause 9.9 (on page 115 of the said agreement).
Thus from these pre-lease agreement the intention of the appellant to sell the properties as and when they get a buyer is apparent. That it is also a market practice that it is easier to dispose off pre-leased commercial properties because of the Return on Investments which the same offers to the investors.
To conclude, all expenses debited to the trading and profit and loss account are necessary for carrying out the business (page 35, 38 and 39 of the paper-book) and therefore are allowable business expenses which need to be set off with the income from house property for A.Y. 2006-07, as allowed by the department in the past assessment years. • Lease deeds are always finalized keeping lessee's concern as paramount so far as extention clause is concerned esp. in a commercial property and not the comfort of the lessor. Particularly the term of lease has to be tilted in favour of the lessee. ** Apportionnment clause is there in the lease rental deeds which shows the intention of sale at any point, on part of the lessor. ### The A.0. has completely glossed over/ignored the Memorandum of Association and the objects therein and has solely based the finding on the extension clause in lease rent agreement .”
The ld DR relied upon the orders of the lower authorities and submitted that assessee is not engaged in the business of renting out properties, as there is no clause of rental income in the memorandum of the association submitted. He further submitted that decision cited the ld AR of Chennai Properties Ltd, Dalmia Promoters Pvt. Ltd do not apply on the facts of the case.
We have carefully considered the rival contention and perused the orders of the lower authorities. The assessee company incorporated as the main object of the company to carry on the business of real estate agents and dealers thereof. It has also the object of hiring of the real estate. During the year that appellant company has filed its return of income showing income from business of Rs. (-) 3400538/- and shown income from rental under the income from house property of Rs. 6996793/-. Thereby, the assessee has shown the net taxable income of Rs. 3596254/- after inter head adjustment of loss from business and income from house property. The ld Assessing Officer disallowed the claim of the loss of the assessee of Rs. 3400538/- holding that assessee is not carrying on any business as the only income of the assessee is rental income. On looking at the profit and loss account of the assessee the assessee has shown rental income of Rs. 10262919/- which is shown by the assessee as income from house property as per computation of total income at page NO. 28 of the paper book. However, during the year assessee has addition to the already existing closing stock of inventory of Rs. 2455024/- and shown the item in the stock in trade. In view of this, it is apparent that assessee is carrying on the business of purchase and sale of real estate. In its written submission also in para No. 2 assessee has given the brief description of the business activities. These business activities are also shown at page No. 41 of the paper book. The opening stock of the real estate was Rs. 22886575/- and addition thereto during the year was made of Rs. 2455024/- resulting into a closing stock of Rs. 25341599/-. In view of this, it cannot be said that assessee is not carrying on business of real estate. It is apparent that Page | 5