TODI INDUSTRIES PRIVATE LIMITED,MUMBAI vs. INCOME TAX OFFICER - 8(3)(2), MUMBAI, MUMBAI

The assessee declared total income of Rs.1,14,81,360/- on 01/10/2016 which was revised to Rs. 3,97,690/- on 31/01/2017. The ld. AO noted that assessee had declared income of Rs.3,93,48,376/- from letting of various properties owned by it, however, the income derived from the said premises was offered for taxation as business income. The ld. AO required M/s. Todi Industries Private Limited the assessee to explain as to why the rental income should not be treated as ‘income from house property’ u/s.22. The assessee’s contention was that the income relating to industrial estate had always been offered as business income since many decades alongwith other trading activity and all the expenses have been treated as business expenses while computing income of the year since beginning / inception of company and same was accepted in all the assessments. However, ld. AO rejected assessee’s contention holding that when specific head of charge is provided for ‘income from house property’ then any income in the form of other income cannot be brought to tax under any head. After referring to the judgment of the Hon’ble Supreme Court in East India Housing & Land Development Trust Ltd vs. CIT reported in 42 ITR 49(SC), he held that the ultimate test for assessing the head of income is one of dominant intention. If the primary or dominant object is to lease or let out property and derive mere rental income, such income should be assessed under this section. Conversely, if the dominant intention of the assessee is to exploit a commercial asset, the income received should be treated as income from business. The assessee has not shown that its dominant intention was to exploit the asset commercially. He further referred to the case of M/s Shambhu Investment (P) Ltd.(249 ITR 47), and held that although the occupiers were allotted table space in effect the right given to this occupiers were to enjoy furnished accommodation in the said immovable property. The other amenities like providing watch and ward staff, electricity and M/s. Todi Industries Private Limited water were consequential to the principal right given to those occupiers under the said agreement. Hence, the income derived from the assed property by way of realization of the license fees assessed as rental income and not as business income.

Ld. AO held that the only object and intention of the assessee while exploiting the said property was to let out the property on a monthly rent and there was no complex commercial activity involved in the letting out of the property. Thus the lease rent received by the assessee was only because of bare letting of the property. The receipts being rent from property cannot change the character of income and the income does not change or become income from business merely because the property is a commercial property. Thus, he opined that in his considered opinion this activity cannot be termed as a business activity as contended by the assessee and hence the rent received by the assessee shall be assessed as income from House Property. Thus, AO held that the rent of Rs. 3,93,48,376 received by the assessee is treated as its income from House property u/s 22 of the Act.

The ld. CIT (A) has also confirmed the said addition after observing as under:- Decision: I have considered the submission of the appellant and gone through the AO's observation & decision in assessment order. It is emerged from the submission of the appellant that it had claimed that their treatment of rental income as business income is supported by decision of Hon'ble Supreme Court in case of Chennai Properties & Investments Ltd. Vs. CIT reported at 373 ITR 673. But the said claim is misconceived and unacceptable in M/s. Todi Industries Private Limited as much the said case is totally distinguished from the present case. In the said case, its main objective, as stated in the Memorandum of Association, is to acquire the properties in the city of Madras (now Chennai) and to let out those properties whereas in the present case the appellant has been owner of a property on a lease hold land which was constructed in early sixties. Therefore principal objective of the appellant is, not to exploit the single leasehold property commercially, but to use some portion for its own business and some portion was let out on rent as stated by the appellant itself. The appellant is unable to bring any cogent material to prove beyond doubt that the receipt of rent was incidental to business. Also the appellant is unable to establish any commercial exploitation have been made from the majority portion of the property.

Before us ld. Counsel for the assessee submitted that first of all here in this case, ‘principle of consistency’ should be followed, because, since beginning the rental income has been consistently been offered to tax as profits and gains from business or M/s. Todi Industries Private Limited profession and accepted by the Department. In support he also filed various assessment orders from A.Ys.1998-99 till A.Y.2015- 16, wherein this income offered as ‘business income’ has been accepted. Since, there is no change in facts or change in law therefore, principle of consistency should be followed and in support he relied upon the following decisions:-  Radhasoami Satsang v. CIT [1991] 193 ITR 321 (SC)  H.A. Shah & Co. v. CIT [1955] 30 ITR 618 (Bombay HC)  CIT v. Neo Poly Pack (P) Ltd.[2000] 245 ITR 492 (Delhi HC)  CIT v Goel Builders [2010] 331 ITR 344 (Allahabad HC)  Shibani S. Bhojwani v. DCIT [2017] 166 ITD 488 (Mumbai Trib)  Samir Bhojwani v. ACIT (ITA No. 331/M/2015) (Mumbai Trib.)  ITO v. Rasiklal & Co. (P) Ltd. [2008] 119 ITD 61 (Mumbai Trib.) 7. Ld. Counsel submitted that the principle laid down by the Hon’ble Supreme Court in the case of Sultan Brothers (P.) Ltd. v. CIT [1964] 51 ITR 353 (SC) (being the decision of Constitutional Bench of Supreme Court) should be followed. Since this is a case of composite/ inseparable letting, the income ought to be taxed as business income or at worst income from other sources. Income from composite/ inseparable letting cannot in law be treated as income from house property.

During the course of hearing, ld. Counsel also filed sample agreements and various other documents that the income is derived from very composite and inseparable letting which consisted of host of services and ammenities. He narrated the M/s. Todi Industries Private Limited following facts in his written submission dated 10/06/2024 which is as under:- “The Assessee is a private limited company incorporated in the year 1962. The Assessee is engaged in the business of trading of fabrics and shares, as well as the renting of galas, all of which are treated as operational activities in the accounts of the Assessee Refer page no. 17 of the Factual Paper Book "FPB"]. The Assessee constructed an industrial building in the year 1962 on the lease hold land at Sun Mill Compound, Lower Parel which is popularly known as the "Todi Estate". The industrial building is a four-storey building, admeasuring about 1,50,000 square feet. The Assessee is presently using around 6,000 square feet of its building for its fabric and share trading business and the balance is used for its business of renting of galas to various parties. Major among these includes What's On India, JSM Corporation, Nykaa E-Retail, Tattva & Mittal, Metropolis, etc. Further, the Assessee states that in 1960's the industrial building was constructed, keeping in mind its utilisation by industrial occupants. It features large luggage lifts, wide staircases, flooring designed to support heavy loads, specialized electric connection to support industrial use, fire fighting facilities, etc. In addition, common amenities and services such as housekeeping, security, car parking, plumbing, civil contractors, electricians, etc. are also being provided by the Assessee to the occupants on an ongoing basis. During the financial year 2015-16, the Assessee had about forty five galas admeasuring about 700 to 10,000 square feet. These galas were rented to various occupants from time to time. Further, where the occupants demanded certain additions/alterations based on their "working requirements, the galas were customized and altered according to the specific requirements of the occupants. Such additions/alterations interalia include the construction of various types of cabins with furniture, installation of air conditioners, construction of mezzanine levels and wooden steps, construction of toilets and washrooms as per the requirements of the customers, installation of workstations and M/s. Todi Industries Private Limited electrical fittings as per requirements of the customers, provision of uninterrupted power supply, etc. Furthermore, the Assessee has exclusively handling the upkeep and maintenance of the industrial building, including all necessary repairs. For all these works, the Assessee has incurred large sum of money from time to time which is capitalised under the "Industrial Gala" i.e. Fixed Asset or expensed out to the Profit and Loss Account of the Assessee. To substantiate the aforementioned points, the Assessee hereby submits the below mentioned details:

Further, he also drew our attention to various amenities agreement and the facts which were brought on record before the authorities below, which for sake of reference are summarized as under:- a. First of all, he drew our attention to the amenities agreement between the Appellant Assessee and Metropolis Healthcare Limited. He stated that in page 2 of Annexure 1, the Assessee is referred to as the "service provider" Thereafter, he brought our attention to page 7 and 8, wherein it has been mentioned that the service provider has provided the furniture, electrical fixtures, etc. (as detailed in Annexure A to this agreement). Annexure A (page 12 to 15 of Annexure 1) specifies that various furnishings such as chairs, sofas, spotlights, white boards, workstations, light fittings, air conditioners, etc., were provided by the Assessee for various areas such as cabins, cafeteria, rest rooms, etc in the gala leased to Metropolis Healthcare Limited. b. Thereafter, the Ld. AR drew our attention to the memorandum of understanding between the Appellant Assessee and What's On India Private Limited [He referred to page no. 25 to 27-Annexure 1 to the written submission made on June 10, 2024] On page 26, it has been stated that all renovation cost for the premises shall be borne by the Appellant Assessee Furthermore, on page 27, it is mentioned that the premises should be fully furnished with 80 M/s. Todi Industries Private Limited workstations, 3 cabins, 1 conference room, 1 pantry, 2 washrooms, free reserved parking, central air conditioning, ample lightning, etc. The Id. AR also stated that What's On India Private Limited is one of the largest tenants of the Assessee, occupying approximately 10,000 square feet of the total 1,50,000 square feet area of the industrial building. c. The Id. AR then drew our attention to the email communication received from one of the tenants, JSM Corporation, requesting modifications to the structure of the premises, specifically with respect to the construction of a toilet as per the proposed layout. d. He also referred Annexure 3 (page 31) and Annexure 4 (page 32) of the written submission made on June 10, 2024, which details the expenses incurred by the Appellant Assessee for renting the galas to the tenants. These expenses have been either capitalized under "Industrial Gala" i.e. Fixed Asset or debited to Profit and Loss Account. The nature of expenses includes expenses on electricians, painters, carpenters, repairs and other works. Indeed, this is a reflection of the fact that the Appellant Assessee is not merely exploiting its property as a landlord but is carrying out a systematic organised activity since last more than 7 decades as an activity of providing facilities, amenities and services to the occupants of the industrial estate. e. He further stated that Assessee operates as an industrial estate, leasing built up spaces, referred to as "galas" along with associated amenities to its tenants. Consequently, the income derived from composite letting of these galas should be taxed as M/s. Todi Industries Private Limited "Profits and gains from business or profession" and not "income from house property.

Further, he also relied upon the following judicial pronouncements:- Decision of Hon'ble Karnataka High Court in case of CIT v. Information Technology Park Ltd. [2014] 46 taxmann.com 239 (Karnataka HC), “26 If the intention is to exploit commercial property by putting up construction and letting it out for the purpose of getting rental income. then notwithstanding the fact that the furniture and fittings are provided to the lessee, the income from the building fall under the head income from house property But if the assessee is in the business of taking land. putting up commercial buildings thereon and letting out such buildings with all furniture as his profession or business, then notwithstanding the fact that he has constructed a building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the heading of income from house property. Therefore, firstly what is the intention behind the lease and secondly what are the facilities given along with the buildings and documents executed in respect of each of them is to be seen. Thirdly it is to be found out whether it is inseparable or not. If they are inseparable and the intention is to carry on the business of letting out the commercial property and carrying at complex commercial activity and getting rental income therefrom, then such a rental income falls under the heading of profits and gains of business or profession.

On the other hand, ld. DR relying upon the order of the ld. AO and ld. CIT(A) submitted that once the income has been derived by letting out of the properties, then income has to be assessed as income from house property and not of business income.

During the course of hearing we had asked the parties to address on the principles laid down by the Hon’ble Supreme Court in the case of Raj Dadarkar & Associates vs. DCIT (2017) 394 ITR 592 which was rendered on this issue. In the case before Hon’ble Supreme, the assessee having obtained a property on lease, constructed various shops and stalls on it and gave the same to various persons on sub-licensing basis. It was found as a matter of fact by the Tribunal that assessee was not engaged in systematic or organized activity of providing service to occupiers of shops/stalls, therefore income from sub-licensing was to be taxed as income from house property and not as business income. The questions before the Hon’ble Supreme Court were as under:- (1) Whether in the facts and circumstances of the case, and in law, the Tribunal erred in holding that the appellant was owner of the shopping centre within the meaning of Section 22 read with Section 27 of the Income Tax Act, 1961? (2) Whether in the facts and circumstances of the case, and in law, the Tribunal was right in holding that the income earned by the appellant from the shopping centre was required to be taxed under the head "income from House Property" instead of the head "Profits and Gains from the Business or Profession" as claimed by the Appellant?

Ergo, on these facts, the Hon’ble Supreme Court held that the judgment of Hon’ble Supreme Court in the case of Chennai Properties and Investments Ltd. vs. CIT (2015) 373 ITR 673 and Rayala Corporation (P) Ltd vs. Asstt. CIT (2016) 386 ITR 500 would not be applicable. In this regard the observation and finding of the Hon’ble Supreme Court reads as under:- “19. Reliance placed by the appellant on the judgments of this Court in Chennai Properties & Investments Ltd. (supra) and Rayala Corporation (P) Ltd. (supra) would be of no avail. In Chennai Properties & Investments Ltd. (supra) where one of us (Sikri, J.) was a part of the Bench found that the entire income of the appellant was through letting out of the two properties it owned and there was no other income of the assessee except the income from letting out of the said properties, which was the business of the assessee. On those facts, this Court came to the conclusion that judgment of this Court in Karanpura Development Co. Lid. v. CIT [19621 44 ITR 362 (SC) was applicable and the judgment of this Court in East India Housing & Land Development Trust Lid. v. CIT [1961] 42 ITR M/s. Todi Industries Private Limited 49 (SC) was held to be distinguishable. In the present case, we find that situation is just the reverse. The judgment in East India Housing and Land Development Trust Ltd. (supra) which would be applicable which is discussed in para 8 of Chennai Properties & Investments Ltd. case (supra) and the reproduction thereof would bring home the point we are canvassing. "8. With this background, we first refer to the judgment of this Court in East India Housing and Land Development Trust Ltd. case [East India Housing and Land Development Trust Ltd. v. CIT, [1961] 42 ITR 49 (SC)) which has been relied upon by the High Court. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls. In those facts, the question which arose for consideration was: whether the rental income that is received was to be treated as income from the house property or the income from the business? This Court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The Court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties."

In Rayala Corporation (P) Ltd. (supra) fact situation was identical to the case of Chennai Properties & Investments Ltd. (supra) and for this reason, Rayola Corporation (P) Ltd. (supra) followed Chennai Properties & Investments Ltd. (supra) which is held to be inapplicable in the instant case.

One very important principle which has been reiterated by the Hon’ble Supreme Court in the aforesaid case is that facts of the case has to be seen while applying the test for determining the real nature of the income whether particular income will fall as income from ‘house property’ or ‘business income’. The Hon’ble Supreme Court held that under certain circumstances where income may have derived from letting out of the premises, it can still be treated as ‘business income’. If the letting out of the business premises itself for the business of the assessee, then it is to be treated as ‘business income’. Their Lordships even referred to the Constitutional Bench decision of the Supreme Court in the case of Sultan Brothers Ltd. vs. CIT (1964) 51 ITR 353 and the relevant portion is reproduced as under:- “7…..We think 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. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature."

Taking cue from the aforesaid judgment and the principle laid down by the Hon’ble Supreme Court, what is required to be seen is, whether the assessee has been carrying out any M/s. Todi Industries Private Limited systematic / organized activity of business by letting out of the premises. As noted above, in the facts of the present case, the assessee is not simply maintaining the property and letting out to the occupants, albeit, it is providing host of services and customizing the premises as per the requirement of the occupants for letting the office. Assessee is incurring huge expenditure by way of furniture and fixtures and other services as noted in various amenity agreements. This really shows that the intention was always to earn business income from such activities. The facts of this case are clearly distinguishable from the facts in the case of Raj Dadarkar & Associates (supra) as in that case the Tribunal has given a finding of fact which has been confirmed by the Hon’ble Supreme Court that assessee could not establish that he was engaged in a systematic / organized activity of providing services to the occupiers.

On the contrary, here in this case we have found that assessee is providing very systematic activity for providing services to the occupants in all-encompassing manner. Here the income derived from letting out the properties is not simply rental income derived from house property albeit it is derived from systematized and structured business activity. Further, one has to understand the commercial aspect which is in vogue in the current scenario where an enterprise or entity or persons are has developing huge commercial/ official paraphernalia and customizing the infrastructure by putting fixtures and furniture, work stations, pantry services, including services to the users / occupants either on temporary basis, hourly basis or for a long M/s. Todi Industries Private Limited term and charging occupancy user. Such systematic and organised activity is nothing but services by a service provider and not simply leasing out the property. Here in the present case as noted above assessee is providing much more than the service and in fact customizing the needs of users / occupants to give the holistic services for running of the office. Thus, under these circumstances, we hold that like in the earlier years, income has to be assessed under the head ‘income from profits and gains’. Accordingly, this issue is allowed in favour of the assessee.

Ground No.2 is with regard to disallowance of various expenses amounting to Rs.2,00,47,569/-. The ld. AO after going through the details of rental income and expenses claimed, noted that activity of the assessee is mixed bag and there are huge expenses which relate to renting of the property. Since ld. AO was of the view that assessee has earned income from rent and therefore, these expenses cannot be allowed and assessee has not bifurcated the expenses form other activities. Accordingly, he has bifurcated the expenses relating to rental income in the following manner:- 1 Lease rent 28,800 2 Insurance 169285 3 Repair and maint. 45,01 1 4 Security charges 20,62,770 5 Property expenses 17,51,878 Accordingly, he disallowed the said expenditure.

The ld. CIT (A) has confirmed the said disallowance.

Since we have already held that the income earned by the assessee from letting of the premises is a very systematic and organized activity for which it has incurred various expenses, therefore any expenses attributable for earning of such income cannot be disallowed. It is seen that ld. AO has apportioned the expenditure of Rs.2 Crores and disallowed u/s.37, holding that these expenditure cannot be held to have been incurred wholly and exclusively for the purpose of earning business receipts from trading of shares and fabrics and therefore, he held that such expenses have to be disallowed because income has to be assessed under the head ‘income from house property’. As we have already held that the income has to be assessed under the head ‘business income’ therefore, these expenses have to be allowed. Accordingly, ground No.2 is allowed.

The ld. AO has disallowed 100% of salary and wages and 50% of Director’s remuneration on the presumption that services of employees are not required for assessee’s other two businesses namely trading of shares and fabrics. Thus, one cannot attribute the entire salary expenses to the other trading activity.

When the expenditure has been incurred for composite business not only for trading of shares and fabrics but also for carrying out organized activity of renting the premises, then expenditure cannot be segregated. Once letting out of the premises has been treated as business income, the expenditure debited to the profit and loss account even for this activity has to be allowed. Accordingly, we direct the ld. AO to allow such expenditure. Accordingly, ground No.3 is allowed.

The ld. AO disallowed depreciation amounting to Rs.22,08,520/- which includes depreciation on both the opening written down value and the additions made during the year. The disallowance was made on the ground that the assessee failed to furnish evidence of installations i.e., put to use certificates. The ld. CIT (A) has upheld the action of the ld. AO.

Before us Ld. Counsel for the assessee submitted that- i. The Id. AO disallowed depreciation even on the opening written down value of the fixed assets i.e., the additions to fixed assets relating to prior years which were already accepted by the Ld. AO during the assessment proceedings of last year, to this extent the Id. AO Id. CIT(A) are anyway not justified in their stand; ii) In the reply letter dated December 28, 2018, in response to the notice dated December 26, 2018 issued u/s. 142(1) of the Act, the assessee had already submitted sample invoices of fixed assets capitalised during the captioned year. iii) The addition to the fixed assets includes water closet, flush tank, wall mixer, aluminum pipes, wash basins, panel lights, etc which do not constitute big plant or machineries requiring a commencement certificate from engineers. In normal course, M/s. Todi Industries Private Limited these expenses are incurred simultaneously with the acquisitions/ installations of these small items. Considering the nature of expenses, it can fairly be presumed that the date of incurring the expenses is the date of put to use.

First of all from the perusal of the order it is seen that the ld. AO has even disallowed depreciation on the opening WDV and for the additions made during the year he has made disallowance on the ground that assessee has failed to furnish evidences of installations. From the perusal of the records, it is seen that assessee had furnished sample invoices and details of fixed assets capitalised during the year and all these details have also been placed from pages 199 to 295 of the paper book, which clearly shows that the assessee had bought fixed assets which has been capitalised; and in relation to various other fixed assets it is seen that, these assets include various items like water closet, flush tank, wall mixer, aluminum pipes, wash basins, panel lights, etc., which do not constitute big plant or machineries requiring a commencement certificate from an engineer. The acquisition of such small assets and installation of small items does not require commencement proof. It is sufficient that they are installed or fixed and has to be reckoned as expenses being incurred and put to use. Thus, the reason given by the ld. AO to disallow the depreciation cannot be upheld, accordingly, the addition/disallowance is deleted.

Ground No.5 & 6 relate to disallowance of expenditure incurred by way of compensation paid for surrender of tenancy M/s. Todi Industries Private Limited rights amounting to Rs. 1,18,66,667/- and Ground No. 6- Allowance of depreciation on compensation paid for surrender of tenancy rights amounting to Rs. 5,93,333/-.

The Ld. AO disallowed expenditure incurred by way of compensation paid for surrender of tenancy rights amounting to Rs. 1,18,66,667, relying on the assessment order of AY 2015-16, where similar disallowance was made.

The Ld. CIT (A) upheld the action of the ld. AO of disallowance of expenditure incurred by way of compensation paid for surrender of tenancy rights amounting to Rs. 1,18,66,667/ stating that the expenses have been capitalised in the books of accounts and the claim has been made by way of a revised return filed after the stipulated period of tax audit i.e. September 27, 2019, which emerges as after thought of the assessee.

The brief facts and background as submitted by the assessee on this issue before us are as under:- i. During the captioned year, the Appellant Assessee paid compensation of Rs. 1.18,66,667- to its existing tenants for surrendering their tenancy rights. The breakup of the same is as under: Name of the tenant Compensation paid M/s. Dawn Apparels Private 1,00,00,000 Limited M/s. Sanatkumar 18,66,667 Engineering Works Total 1,18,66,667 M/s. Todi Industries Private Limited ii. The last month's rent received from the said parties was approximately Rs. 6,957/- from M/s. Dawn Apparels Private Limited and Rs. 1,446/- from M/s. Sanatkumar Engineering Works. The said tenants were irregular in making payment of rent and incidental charges like municipal taxes, water charges, etc. iii. The Appellant Assessee had filed a suit in September 2007 & in 2015 for order of injunction against these tenants to restrain them from creating any third-party rights on the basis of discussion and information received regarding intention of the said tenants to sell or transfer their rights in the said premises. Due to the filing of the suit, the said tenants approached the Appellant Assessee for settlement. Considering the situation and the fact that rent has increased substantially in the vicinity, the Appellant Assessee decided to regain possession of the premises from the old tenants through the consent terms of Court of small cases, Mumbai Refer page no. 157 to 162 of FPB] Based on the consent terms, the aforementioned compensation was paid to the old tenants. iv. Soon thereafter, the Appellant Assessee was able to find new tenants, who agreed to pay substantially higher rents. The summary of the same is as under:-

The ld. Counsel in support has also relied upon various decisions that expenditure incurred by way of paying lump sum compensation to existing tenant with a view to earn higher rental income from new tenants is allowable on account of commercial expediency. i. CIT v. Auto Distributor Ltd. (1995) 210 ITR 222 (Calcutta HC) ii. Shyam Burlap Co. Ltd. v. CIT (2016) 380 ITR 15 (Calcutta HC) iii. Commr. Of Agri I.T. v. Bombay Burmah Trading Corporation Ltd. (1981) 131 ITR 154 (Kerala HC) 35. After hearing both the parties and on perusal of the material placed on record, it is seen that assessee has paid compensation of Rs.1,18,66,667/- to the existing tenants for surrendering the tenancy rights. The assessee had filed a suit against these tenants to restrain them from creating any third party rights and the tenant had approached the assessee for settlement and based on this consent terms assessee had to pay the compensation to other tenants. We find that this issue is covered by the decision of Hon’ble Calcutta High Court in the case of Shyam Burlap Co. Ltd. v. CIT (supra) wherein it was held that rental income earned by the assessee was taxable as M/s. Todi Industries Private Limited business income, then compensation paid by the assessee to existing tenants to obtain vacant possession of building so as to earn higher rental income by letting out to new tenants was to be regarded as business expenditure allowable u/s.37(1). In para 14 & 15 of the Judgment the Hon’ble High Court held as under:- The Assessing Officer and the Tribunal had rejected the assessee's claim for treating the rental income as income from business as assessee in the preceding years had declared it as income from house property and there was no change in the facts of the case in this assessment year Then the issue is whether in the earlier assessment years whether assessee had declared the rental income as business income and was it considered in the light of the Memorandum The answer is in the negative Though as noted in earlier assessment years the assessee had shown rental income as income from house property however, in relevant assessment year it has claimed rental income as business income in view of the object as set out in clause 4 of the memorandum Though before the Tribunal the Memorandum was relied on to put forward the case that the income was part of the business and payment of compensation was to earn higher income, it was not at all considered. Since in relevant assessment year the assessee had claimed rental income as business income and as previously there was no adjudication or decision considering the Memorandum, and as being the owner of the premises, payment of compensation ie the expenditure was wholly and exclusively for commercial expediency, in the said circumstances the principle of consistency cannot be made applicable. Again, the Assessing Officer and the Tribunal had rejected the claim of the assessee as there was no change in the facts of the case during the relevant assessment year Though the assessee had claimed that the rental income earned by it was assessable under the head business and the compensation was paid by it for obtaining possession from lessee/tenant so as to earn a higher M/s. Todi Industries Private Limited income, as an admissible revenue deduction in spite of Memorandum permitting the assessee to carry on business by letting out properties, the Assessing Officer and the Tribunal ruled otherwise. Since the object in the Memorandum permitted the assessee to carry on business in letting out properties and as 85 per cent of the income of assessee was by way of deriving rent and lease rentals, income from rent constituted the business income of the appellant Since compensation was paid by the appellant, the landlord of the premises, to obtain possession from the lessee/tenant so as to earn a higher rental income, it had arisen out of business necessity and commercial expediency. Since there was no question of acquiring a property it cannot be said that the payment made was for having a benefit of enduring nature. Rather the compensation was paid to the existing tenants to have their portions vacated to have new tenants with higher rent and thus to have a higher rental income which was a business activity permitted by the Memorandum. [Para 14] 36. Similar view has been reiterated by the Hon’ble Kerala High Court as relied upon by the ld. Counsel. Since, no contrary judgment has been brought on record before us therefore, respectfully following two decisions of Calcutta High Court in the case of CIT v. Auto Distributor Ltd.; Shyam Burlap Co. Ltd. v. CIT and Hon’ble Kerala High Court judgment, we allow this issue in favour of the assessee and held that the compensation paid to the existing tenant for surrendering of tenancy rights is allowable u/s. 37(1).

Ground No. 7-Incorrect computation of book profit u/s. 115JB of the Act.

It has been stated that the said amount is excess provision of AY 2015-16 which has been written back during AY 2016-17 and credited to Profit and Loss Account. The said amount was not claimed as an expense under the head "Profits and gains from business or profession" during AY 2015-16.

When the said provision was not claimed as a deduction in the year in which in Profit and Loss Account was debited, its reversal resulting in credit to the Profit and Loss Account in the current year cannot be charged to tax. This is clear from the plain reading of clause (i) of Explanation 1 to section 115JB of the Act. Accordingly, we direct the ld. AO to examine the aforesaid contention, whether the excess provision for A.Y.2015- 16 has been retained back in the F.Y.2016-17 and credited to the profit and loss account. If it is found that this amount has not been claimed as expenses under the head profits and gains from business or profession in the earlier year, that is, the provision has not been claimed as deduction in the year in which it was debited, its reversal resulting to the credit of profit and loss account in the current year cannot be charged to tax. Ld. AO is directed to verify the same and allow in accordance with law.

Thus, on all the aforesaid grounds AO is directed to examine this contention and allow it after verification and in accordance with law.

Ground No.12 relates to interest u/s.234B of the Act amounting to Rs.18,40,872/- which is consequential in nature.

In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced on 21st August, 2024.