M/S. KAILASH DWELLERS PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”: NEW DELHI BEFORE SHRI N.K.SAINI, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA No.3034 & 3035/Del/2014 (Assessment Year: 2010-11 &2011-12) Vs. Kailash Dwellers Pvt. Ltd, DCIT, C/o. M/s. RRA Taxindia, Central Circle-4, D-28, South Extension, Part-I, New Delhi New Delhi PAN:AACCK5224F (Appellant) (Respondent)

Assessee by : Dr. Rakesh Gupta, Adv Sh. Somil Aggarwal, CA Revenue by: Sh. Umesh Chand Dubey, Sr. DR Date of Hearing 12/01/2017 Date of pronouncement 28/03/2017 O R D E R PER N.K.SAINI, A. M. 1. These appeals filed by the assessee are directed against the consolidated order dated 23.01.2014 of the ld CIT(A)-XXIII, New Delhi. Common issues are involved in these appeals therefore the appeals were heard together and are being disposed off by this consolidated order for the sake of convenience and brevity. 2. First we will deal with the appeal in ITA No. 3034/Del/2014, following grounds have been raised in this appeal: “1. That having regard to the facts and circumstances of the case, Ld. C1T(A) has erred in not deleting the addition made despite there being no incriminating material found during search u/s 132 of the Income Tax Act, 1961. 2. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. A.O. in making disallowance of a sum of Rs.25,59,084/- on account of depreciation and computing the income under the head house property as against the claim of the claim of the appellant that such income be assessed under the head income from business and profession, more so when there was no incriminating material found during the course of search. 3. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making the impugned disallowance.

Page 2 of 10 4. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234B of the Income Tax Act, 1961. 5. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.” The main grievance of the assessee in this appeal relates to the sustenance 3. of the disallowance made by the AO and considering the income as income from house property instead of business income claimed by the assessee. 4. Facts of the case in brief are that a search and seizure operation u/s 132 of the Income Tax Act, 1961 (herein after ‘the Act’) was carried out on 21.01.2011 in M/s. Dharampal Satyapal Group of cases, which is leading business group in manufacturing and trading of chewing tobacco and premium pan masala besides other business. In response to the notice u/s 153A of the Act, the assessee filed its return of income on 27.01.2012 declaring loss of Rs. 1961190/- for the Assessment Year 2010-11. The AO, however, considered the rental income under the head ‘income from house property’ and allowed deduction u/s 24 of the Act @30% of the annual value while the assessee claimed the same as business income. The relevant finding has been given by the AO as under:- “3. The stated main objects of the assessee company are purchase, sale, exchange, lease, mortgage, hire, lands or immovable or movable property & real estate promotion. During the year, the assessee company has declared rental income of Rs. 6,32,000/-. The assessee has considered the rental income as income chargeable to tax under the head income from business or profession. As per the provision of section 22 of the Income Tax Act, the annual value of property consisting of any building of which the assessee is the owner, other than such portion of such property as the assessee may occupy for the purpose of any business or profession carried on by the assessee, the profit of which are chargeable to Income Tax, shall be chargeable to tax under the head income from house property. Therefore, the rental income received by the assessee company is chargeable to tax under the head income from house property and is taxed accordingly. 4. From the computation of income filed by the assessee, it is seen that the assessee company has also claimed depreciation in respect of the building, office equipment and furniture and fixtures conjointly giving rise to the rental income. Under the provision of section 24 of the Income Tax Act, the only deduction allowable in computing the income chargeable to tax under the head income from house property is 30% of the annual value provided under clause (a) of the said section. Since, no

Page 3 of 10 other deduction is allowable, claim of depreciation made by the assessee is not allowable and is accordingly disallowed. With the above remarks, the income of the assessee company is computed as under:- Income as per return (-) Rs.1961190/- Less: Rental income (to be considered separately) Rs.632000/- (-) Rs.2593190/- Add: Deprecation (-) Rs. 2559084/- Rs.34106/- Income from house property Rs.632000/- Less: Deduction u/s 24 Rs.189600/- Rs.442400/- Total income Rs. 4,08,294/- Rounded off Rs. 4,08,290/-

Being aggrieved the assessee carried the matter before the ld CIT(A), and 5. submitted as under:- “Ld. AO has disallowed depreciation amounting to Rs. 22,58,435/- on the wound that assessee is deriving rental income and, therefore, such rental income is to the assessed under the head house property and depreciation claimed in profit and loss account in respect such property cannot be allowed. Firstly, It is submitted with great that Ltd. AO made impugned disallowance in the proceedings u/s 153A which according to the appellant could not have been so made because there was no incriminating material found during the course of search. It has been held in following judicial decisions that jurisdiction to make any addition or disallowance can be assumed in proceedings u/s 153A only when there is incriminating material discovered during the course of search. Relevant judicial decisions are as under:- ALL CARGO GLOBAL LOGISTICS LTD vs. DCIT (2012) 18 ITR (Trib.) 106 (Mumbai) (SB) In assessments that are abated, the AO retains the original jurisdiction as well as jurisdiction conferred on him u/s l53A for which assessments shall be made for each of the six assessment years separately. In other cases, m addition to the income that has already been assessed, the assessment u/s 153A will be made on the basis of incriminating material, which in the context of relevant provisions means - (i) books of account, other documents, found in the course of search but not produced in the course of original assessment, and (ii) undisclosed income or property discovered in the course of search. Gurinder Singh Bawa v. DCIT[2012] 28 taxmann.com 328 (Mumbai - Trib.)

Page 4 of 10 Where in search assessment under section 153A all assessments pertaining to six immediately preceding assessment years were complete, Assessing Officer cannot make any addition there under unless there is any incriminating material recovered during search. Jai Steel India Vs ACIT 259 CTR 281 (HC) (Rajasthan) 29. The argument of the learned counsel that the AO is also free to disturb income, expenditure or deduction de hors the incriminating material, while making assessment under s. 153A of the Act is also not borne out from the scheme of the said provision which as noticed above is essentially in context of search and/or requisition. Kusum Gupta Vs DCIT, ITA Nos. 4873/Del/2009, (2005-06) 2510 (A.Y. 2003-04), 3312 (A.Y. 2004-05) 2833/Del/2011 (A.Y. 2006-07) 15. Since there is no change on this material fact that during all these assessment years no incriminating material was recovered or statement was recorded during the course of search suggesting non-genuineness of the claimed gifts or expenses etc. and no such addition/'disallowance was made in the original assessment which remained unabated, we following the decision on the issue hereinabove in the appeal preferred by the revenue for A. Y. 2002-03, hold that such addition/disallowance cannot be made m the assessment framed u/s 153A of the Act in these A.Ys in appeals. In result the issue is decided in favour of the assessee and against the revenue. In view of this finding the remaining grounds questioning the merits of additions/disallowances do not need adjudication as they have become infructuous and academic only. Consequently appeals preferred by the assessee for the A.Y. 2003-04, 2004-05, 2005-06 and 2006-07 are dismissed. "MGF Automobiles Ltd. Vs. ACIT, ITA Nos. 4212 & 4213/DEL/2011 In present case it is apparent that on the date of search be on 12/09/2007, the assessments for assessment year 2004-05 and 2005-06 were already completed. There was no incriminating material found during search for these years as is apparent from arguments of LD. AR and from records and Ld. Departmental Representative did not bring to our notice regarding any incriminating material having been found during search. Therefore, following the judicial precedents, we are of the opinion that though assessments for the above year were bound to be reopened but additions could be made only if some incriminating documents was found during search. M/s. Tar annum Zafar Khan Vs. ACIT, ITA Nos. 5888 to 5890/Mum/2009 18.3 One more reason is there that most of the additions have been made in the routine manner as the issue has not been discussed in right perspective in taking into consideration the submission and other evidences filed. It is also a matter of fact that no incriminating material was found during the course of search as only during the assessment proceeding, these expenses were found made through credit cards. In view of the above facts and circumstances of the case, we delete the addition of Rs. 9,057/-. Vee Gee Industrial Enterprises vs. ACIT ITA No. 1/DEL/2011 and IT A No. 2/DEL/2011 15. In view of the above, we agree with the contentions of assessee and allow ground no, I of the appeal. In respect of second ground of appeal regarding disallowance of telephone, car expenses etc we observe that no incriminating material was found in respect of such expenses which could enable the Assessing Officer to disallow a part of it during proceedings u/s 153A. This has been held in various pronouncements of various courts and the latest being by hon'ble Rajasthan High Court in the case of Jai Steels India vs. CIT in 259 CTR

Page 5 of 10 (Raj.) 281, where the Hon'ble Court has held that in case of assessment u/s 153A, the completed assessment can be tinkered only on the basis of incriminating material found during search. Therefore, in the present case without any incriminating material Assessing Officer was not justified in making disallowance. Therefore, ground no. 2 is also allowed." ACIT vs. Pratibha Industries Ltd. [2012] 28 taxmann.com 246 (Mumbai-Trib.) Second submission of the appellant is that the entire depreciation of Rs. 22,58,435/- is not in respect of property which has been let out as it would be evident from details of depreciation. Therefore, even if rental income is assessed as income from house property, though contested, such disallowance cannot exceed the amount of deprecation referable to the let out building. Without prejudice to above, it is submitted that appellant is in the business of real estate and the impugned rent is from letting out building, furniture and fixture, plant and machinery and equipment. Therefore, in view of the following judicial decisions, such income would be taxable under the head business only. Reliance is placed on the following judicial decision. Depreciation conditions precedent for grant-Ownership of asset and user for purposes of business- No requirement of usage of asset by himself-I.C.D.S Ltd. vs. CIT 350 ITR 527(SC)." All the written submission is similar for all Assessment Years.”

The ld CIT(A) after considering the submission of the assessee confirmed the 6. action of the AO by observing in para 4.3 of the impugned order as under:- I have considered the assessment order, written submission and arguments of Ld. AR during the appellate proceedings, The main arguments of the Ld. AR is that the addition u/s 153 A cannot be made without any incriminating evidence gathered as a result of search and seizure operation. He has relied upon various judicial pronouncements cited supra in para 4.2 of the order. I have considered these judicial pronouncement. Ld. AR has filed copy of acknowledgement for Return of income for impunged assessment year. It may be mentioned her that for A. Y 2011 -12 being search Assessment Year, the provisions of section 153A does not apply. Hence, the Assessing Officer has power to assess total income irrespective of the seized material. Further, for A.Y, 2010-11 also time barring date for issuance of notice u/s 143(2) has not expired. As due date for the filing return of income is September 2010 and search u/s 132(2) took place on 21-1-2013 against the assessee. Hence this assessment also cannot be considered as closed assessment. Therefore, the ruling of various judgment relied upon by the Ld. AR. are not applicable as these assessment is not closed assessments which cannot be disturbed without incriminating documents. Accordingly, jurisdictional ground against the addition are hereby dismissed.

Page 6 of 10 On merits, only issue to be decided whether rental income is assessable under the head "Income from House Property" or under the head 'Profits and Gains from Business or Profession." The ld. Assessing Officer has held that there is rental income from the building, office equipment and furniture and fixture and therefore, the rental income is assessable under the head "Income From the House Property. The Ld. Assessing Officer has allowed deduction under the head 'Income From House Property @ 30% of rental income u/s 24(a) of I.T. Act and disallowed depreciation u/s 32 on these assets. Ld. AR has argued that entire depreciation disallowed is not claimed on the property rented. Therefore, he argued that the disallowance of depreciation has to be restricted to the depreciation claimed on the assets whose income is assessable under the head 'Income From House Property". Without prejudice to the above ground, Ld. AR has argued that the appellant is in the business of real estate and rent is received from letting out buildings, furniture and fixture. P& M etc. Therefore, he argued that such income should be assessed under business head only. He relied upon the decision of Hon’ble Supreme Court in case of I.C.D.S. Ltd. Vs. CIT 350 ITR 527 (SC), that for granting depreciation there is no requirement of usage of asset by assessee himself. I have considered the arguments of Ld. AR. I agree in principle with the arguments of Ld. AR that disallowance of depreciation should be restricted to the depreciation as the property from which the rent is received. In the assessment order, details of property rented has not been discussed. Therefore. I direct the Ld. Assessing Officer to verify the claim of the appellant and restrict the disallowance of depreciation to the extent of the depreciation claimed on the properties which have rented out. This ground of appeal is partly allowed. I do not agree with the second argument of the Ld. Assessing Officer that the depreication is allowable as the appellant is in the business of real estate and rent is from building etc. It is established law that the rental income from the property is to be assessed under the head 'Income from House Property". In this regard, rely on the decision of hon'able jurisdictional High Court in the case of CIT Vs. Discovery Estates (P) Ltd, (2013) 356 ITR 0159 (Del.). In that case also, the assessee was engaged in the business of construction. Therefore, the facts are identical to the present case. The reliance of Ld. AR on the decision of hon'able Supreme Court in the case of l.C.D.S Ltd. cited supra is misplaced as the issue is not claim of depreciation but head of income under which rental income is to be assessed. Once it is decided that the rental income is assessed under the head 'income from house property', the deduction is allowed under that head only and, therefore, question of allowing depreciation u/s 32 being business head does not arise.” 7. Now the assessee is in appeal. The ld counsel of the assessee reiterated the submission made before the lower authorities. He further submitted that similar disallowance was made in the subsequent assessment years i.e. 2012- 13 and the addition made by the AO was deleted. Copy of the said order

Page 7 of 10 dated 29.01.2016 was furnished which is placed on record. It was also stated that department has not preferred any appeal against the said order passed by the ld CIT(A), therefore, on the principle of consistency the same course ought to have been adopted by the ld CIT(A) for the years under consideration. In this rival submission, the ld DR strongly supported the orders of the lower 8. authorities and reiterated the observations made in the assessment orders as well as the impugned orders passed by the ld CIT(A). We have considered the submission of both the parties and carefully gone 9. through the material available on record. In the present case it is noticed that the ld CIT(A) after considering the ratio laid down by the Hon'ble Supreme Court in the case of Chennai Property and Investment Ltd Vs. CIT, Central Circle-3, Tamil Nadu reported at (2015) 6 Taxman.com 456 held that lease rental raising from exploitation of commercial property which has several amenities attached with the property was to be considered as business income. He accordingly directed the AO to treat the lease rental as income from business and not under the head ‘income from house property’. The relevant finding has been given by the ld. CIT(A) in the order dated 29.01.2016 for the Assessment Year 2012-13 in para 5.4 which reads as under:- 5.4 I have carefully considered the assessment order, written submissions, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant, are discussed as under:- (i) In the return of income, the assessee has shown lease rent of Rs. 8,71,719/-, which has been received/earned on giving the furnished office premises on rent. For this purpose, the assessee has entered into a lease deed on 20.02.2010 with M/s, Dharampal Satyapal Ltd. for monthly rent of Rs. 72,000/-. (ii) It has been submitted by the appellant that in lieu of" monthly rent, they have provided not only the office space, but also the furniture and fixtures, office equipment and other ancillary services. Therefore, it is claimed that it is not a case of simple rent but the building owned by the appellant, has been commercially exploited. (iii) It has also been submitted by the appellant that in A.Y. 2010-11 & A.Y. 2011-12, they have shown the lease rent in the returns of income and the A.O. has not accepted. Therefore, the A.O. determined the lease rental under the head house property as against income from business. However, the arguments of the appellant did not find favour with the A.O. as well as before Ld. CIT(A) in A.Y, 2010-11 & A.Y, 2011- 12, and the main argument, were that the A.O. cannot make the addition u/s 153A/143(3), since no incriminating documents were found during search and seizure action u/s 132 on 21.01.2011.

Page 8 of 10 (iv) It has been submitted by the appellant that this issue involved here, is squarely covered by the ratio laid down in the case of M/s. Chennai Properties & Investments Ltd v. Commissioner of Income- tax, Central -III, Tamil Nadu, (2015) 6 taxmann.com 456 (SC). In the facts and circumstances of the case, I agree with the submission/argument of the appellant, since the issue involved, is covered by ratio laid down in the above Supreme Court decision (supra). Therefore, with due respect, I beg to differ from the decision of vide order dated 23.01.2014, Ld. CIT(A) in assessee's own case for A.Y, 2010-11 & A.Y. 2011-12, as at that time the above decision of the Hon'ble Supreme Court was not available: "11. 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 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." In view of the above, I hold that the lease rental received from exploitation of commercial property, which has several amenities attached with the property, is to be considered as business income. Therefore, the finding of the A.O. is erroneous, by treating the lease rental as income from house properly and the A.O. is directed to treat the lease rental, as income from business and also to allow all the expenses, including depreciation, as claimed by the Appellant. Accordingly, ground no. 3, is hereby allowed.” Since the facts in the years under consideration are identical to the facts 10. involved in the assessment year i.e. 2012-13 which has been decided by the ld CIT(A) in assessee’s favour by following the judgment of the Hon'ble Supreme Court in case of M/s. Chennai Property and Investment Ltd. Vs CIT reported at 373 ITR 673 (supra). In the present case the ld counsel for the assessee stated that department had not preferred any appeal against the order dated 29.01.2016 passed by the ld CIT(A) for the subsequent assessment year i.e. Assessment Year 2012-13, the said averment needs verification. We therefore deem it appropriate to set aside this issue back to the file of AO for verification of the facts and if the department accepted the rental income as business income in subsequent year 2012-13 then for the assessment years under consideration also, the same stand to be taken. It is also made clear that the judgment of the Hon'ble Supreme Court in the case

Page 9 of 10 of M/s. Chennai Properties and Investment Ltd which was not earlier available to the AO should also be considered while deciding this issue. In the result, the appeals of the assessee are allowed for statistical purposes. 11. Order pronounced in the open court on 28/03/2017. Sd/- Sd/- (SUDHANSHU SRIVASTAVA) (N.K.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28/03/2017 A K Keot Copy forwarded to