ASIATIC STORES & SODA FOUNTAIN,MUMBAI vs. ITO 17(1)(2),

In all the appeals, a common substantive dispute is with regard to the nature of the income earned by the assessee from the Department store. As per the assessee, the income earned from the Department store is assessable as ‘business income’, whereas as per the Revenue, the income earned from letting out of the premises was assessable as ‘income from house property’. On this aspect, the facts and circumstances in each of the captioned years stand on an identical footing, therefore, the appeal of the assessee for Assessment Year 2010-11 is taken as the lead case in order to note the relevant facts and adjudication thereof.

The appeal in Assessment Year 2010-11 is directed against the order of the CIT(A)-28, Mumbai dated 10.11.2016, pertaining to the Assessment Year 2010-11, which in turn has arisen from the order passed by the Assessing Officer dated 28.03.2013 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).

The relevant facts are that the appellant is a partnership firm, and in terms of its Partnership Deed, a copy of which has been placed in the Paper Book at pages 1 to 7, its business is stated to be that of running of Department store in the name of “Asiatic Department Store”. On being asked to detail out its activities, assessee responded to the Assessing Officer and stated that it was engaged in conducting a Department store at Industrial Assurance Building, Ground floor, Veer Nariman Road, Opp. Churchgate Station, Mumbai 400 020 and Asiatic Polyclinic Building, Ground floor, V.N. Road, Mumbai 400 020. The assessee explained that it had allotted each department or counter to third parties to bring their material for sale and assessee was earning commission on sales made by each such department or counter in the Department store. The assessee also explained that it was collecting the sales proceeds as well as packaging and delivery were undertaken by the staff of the assessee. Assessee explained that it was also earning income by way of difference in the rate of foreign exchange currency received as sales collection. Assessee also asserted before the Assessing Officer that it has been running the Department store for almost last 40 years and that there was no change in the activities as compared to the earlier year.

The Assessing Officer considered the explanations furnished by the assessee and noted that assessee had received deposits from 23 counter-holders who were running their business, displaying their products, arranging the material for effecting purchase and sales through counters, etc. The Assessing Officer observed that assessee was involved in carrying out only a limited activity of receiving cash at the cash counter and delivery of goods and was paying the counter- holders at specified interval of 7 days after deducting its commission due. The Assessing Officer also observed that assessee had only cash counter staff and some other part-time staff, whereas the activities of the business were carried out by the counter-holders and it was their responsibility to procure orders and improve the sales. The Assessing Officer was of the view that the commission income earned by the assessee from the different counter-holders was, in effect, a compensation for allowing the use of the premises. It was also noticed by the Assessing Officer that the assessee was occupying the premises as a tenant of LIC of India for about 50 years. In sum and substance, the inference drawn by the Assessing Officer was that assessee had rented out the property to 23 different counter-holders and the income derived from such letting, may be in the shape of commission, was an income assessable under the head ‘income from house property’. The Assessing Officer not only viewed the arrangement with the counter- holders as giving rise to rental income assessable under the head ‘income from house property’, but also determined the quantum of such income based on the prevailing market rent. Therefore, while the assessee had shown gross receipts of Rs.1,53,32,830/- and expenditure of Rs.1,51,43,096/-, thereby showing net profit of Rs.89,734/- as ‘business income’, the Assessing Officer arrived at the quantum of income assessable under the head ‘income from house property’ at Rs.1,02,61,635/- based on the market rent of the property as reduced by the rent paid to LIC.

The assessment so made by the Assessing Officer was carried in appeal before the CIT(A) challenging the same on varied Grounds, on facts and in law. The CIT(A) has affirmed the conclusion of the Assessing Officer. The CIT(A) noted the invoking of Sec. 27(iiib) r.w.s. 269UA(f) of the Act. The CIT(A) noted that assessee has been in possession of the property as a tenant of LIC of India for more than 50 years and, therefore, on an application of Sec. 27(iiib) r.w.s. 269UA(f) of the Act, assessee was to be deemed as owner of the property for the purposes of taxation. Therefore, according to the CIT(A), the income derived by the assessee from the counter-holders was for allowing the use of the property and thus assessable as rental income under the head ‘income from house property’. Another aspect noted by the CIT(A) was that the agreement with LIC of India showed that the premises were usable by the assessee only for office/residential/garage purposes and, therefore, according to him, assessee was in no legal position to run a business in the said premises. For the aforesaid reasons, the CIT(A) concluded that the activity undertaken by the assessee was merely a sub-letting activity and was thus liable to be assessed under the head ‘income from house property’. Against such a decision of the CIT(A), the assessee is in further appeal before us.

Before us, the learned representative for the assessee has vehemently assailed the stand of the income-tax authorities to assess the income from running the Department store under the head ‘income from house property’ by pointing out that the past history of the case has been given a complete go-bye. It is the stand of the assessee that both on facts and in law the income from running the Department store is a ‘business income’ and that the gross receipts earned from running the Department store are to be reduced by the relevant expenditure and the balance is assessable under the head ‘income from business’. In the course of the hearing, the learned representative has taken us through the factual aspects of the manner in which the activity of running of Department store is being carried out by the assessee in order to demonstrate that it is not a case of receiving compensation for allowing use of the premises simpliciter, but it is a case where systematic and organised activities are being carried out with the object of earning profits.

On the other hand, the ld. DR appearing for the Revenue has defended the orders of the authorities below by reiterating the reasoning contained therein, which we have already noted in the earlier paragraphs and is not being repeated for the sake of brevity.

Having considered the rival stands and perusing the respective orders of the income-tax authorities as well as the relevant material on record, we proceed to adjudicate the controversy in the following manner. Pertinently, the issue as to whether an income is assessable under the head ‘income from house property’ or as ‘business income’ is a mixed question of law and facts, and each case has to be decided in the light of its own facts and the applicable principles of law. In the present case, the assessee is a Partnership firm whose object is to carry on the business of Department store. It is carrying on this business through different counter holders who own the goods that are sold whereas the assessee is responsible for collection of sales proceeds as well as packaging and delivery of goods. The assessee is earning income by way of Commission relatable to the quantum of sales effected by each of the counter holders apart from earning from the packaging of goods, as also the difference in rate of foreign exchange wherever the clients have paid for the sales in foreign exchange. The moot question is whether the aforesaid streams of income, which ostensibly are flowing from running of the Departmental store can be said to be assessable as ‘business income’, as contended by the assessee.

Before proceeding further, we may refer to the seminal features of the case which would have a bearing on the determination as to whether the aforesaid income derived by the assessee-firm is to be treated as income from business or it is to be treated as rental income from house property. At the time of hearing, it has been explained by the learned representative that the assessee-firm has entered into separate but similar agreements with the different counter holders and one such agreement was also placed before us in the Paper Book at page 1-4. A perusal of the said agreement, which is entered with one M/s. Rasool Enterprises dated 28.03.2006, reveals the manner in which the business of Department store is being carried out. In the recital of the said agreement, assessee is referred to as owner of ‘Asiatic Department Store’. The currency of the agreement is for a period of 12 months from 01.04.2006 to 31.03.2007. It is provided that the other party shall bring the goods/products for marketing and sale to the customers. It is also prescribed that in case any/all goods brought by the other party are unsalable or damaged or otherwise not fit for trading, the same would be removed from the premises of the assessee-firm or that of the customers at own cost by the party/counter holder. Clause (7) of the agreement prescribes that as and when the products/goods are sold by the counter holder, the sale proceeds shall be collected by the cash counter which is managed by the assessee-firm and the proceeds shall be paid to the counter holder at the end of every week after deduction of its Commission by the assessee-firm. It is also prescribed that the assessee will be entitled to deduct any other costs, charges and expenses payable by the counter holder. The necessary furniture required to display and sell the products shall be provided by the assessee-firm. It is further provided that the keys of the counters or the cupboards or racks where the products or goods brought in by the counter holder are kept for sale shall remain with the assessee-firm only. On the basis of the arrangement with the counter holders some factual inferences which can be drawn are as follows. That the assessee-firm is providing facilities to different persons for selling different commodities and services through different counters, which are provided and are furnished by the assessee; that the individual parties conduct the purchase and sale of the commodities at different counters in the Department store run by the assessee; that the agreement with each of the party is for a temporary period of 12 months; that the keys of the counters of the cupboards wherein the goods brought by the party are kept are in the possession of the assessee as per the terms of the agreement. One of the clauses in the agreement also specifies that the arrangement is for the sale of goods in the manner laid down in the agreement and it does not confer any right of tenancy or sub-tenancy on the counter holders. As per the agreement, it is the duty of the assessee to provide the necessary furniture at such place as is appropriate to run the Department store. Apart from the aforesaid features, the assessee also made a detailed note on the activities carried out by it, which have indeed been reproduced by the Assessing Officer in para 5.3 of his order. The relevant discussion therein reveals that the activities and responsibilities of the assessee in conducting the business of Department store; that the cash collection counters for receiving the sale proceeds was manned by the staff of the assessee; that the assessee was providing the facility for packing the goods and delivery; that the entire packaging material was being supplied by the assessee at its own cost; and, that the packaging facility is managed by the staff of the assessee. Assessee is also providing printed bill books to each of the counter holder at its own cost. Assessee is also providing the watch and ward facility, including opening and closing the Department store is done by its staff. The telephone facility is also provided by the assessee-firm. It is the staff of the assessee who records the entire sale collection and the expenditure incurred in managing the store in connection with each counter holder. The weekly statement of sales and the corresponding Commission payable to the assessee is tabulated by the assessee and provided to each of the counter holders. The sales proceeds after being collected are deposited in the bank by the staff of the assessee. The security as well as the Manager of the Department store is provided by the assessee at its own cost. Assessee is also hiring staff at its own cost to look after the facilities provided by the assessee- firm to the different counter holders to effect sales. The repairs and maintenance of the business are undertaken by the assessee at its own cost. The assessee-firm has arranged and installed the central air- conditioning facility in the Department store, which it is maintaining. All other amenities such as water supply, toilet facilities, maintenance of cleanliness, etc. are undertaken by the assessee at its own cost. The aforesaid features of the arrangement of the assessee with the counter holders have been duly noted by the lower authorities and are not in dispute.

In the above background, we may now touch upon some of the judicial pronouncements which would provide the necessary benchmark to decide as to whether in the instant facts and circumstances, the income earned by the assessee is to be treated as ‘business income’ or it is to be treated as ‘income from house property’. At the outset, we may refer to the judgment of the Hon'ble Supreme Court in the case of Karnani Properties Ltd., 82 ITR 547 (SC), which lays down certain tests in order to determine whether the services rendered by the assessee to its tenants are in the nature of business activity so as to assess the resultant income as business income or not? One of the essential factors laid down by the Hon'ble Supreme Court was that in case the services rendered by the assessee are the result of activities being carried out continually in an organised manner, with a set purpose and with a view to earn profits, the same would constitute business activities and the income arising therefrom is liable to be assessed as ‘business income’. In fact, we may also refer to the judgment of the Hon'ble Supreme Court in the case of Karanpura Development Co. Ltd., 44 ITR 362 (SC) wherein Hon'ble Supreme Court asserted that the deciding factor is not the ownership of the property in question, but the manner of activities carried out by the assessee and the nature of operations undertaken by the assessee in relation to the property. We may reproduce the following passage from the aforesaid judgment which has also been referred by the Hon'ble Supreme Court in its later judgment in the case of Chennai Properties & Investments Ltd., [2015] 56 taxmann.com 456 (SC) :

If one is to keep the aforesaid principles in mind, it would be evident that considering the activities undertaken by the assessee relating to the conduct of the business of Department store, the incomes earned by the assessee is liable to be treated as income from business and not as income from house property. Ostensibly, the professed and stated object of the assessee is to run the Department store, as is evidenced by its Partnership deed. The manner of carrying out its activities, and the nature in which it has dealt with the property in question clearly shows that it is not a case of exploiting the property simpliciter, but a case where the objective of earning profits by conducting of the Department store is merely facilitated by the use of the property. At this stage, we may also refer to two aspects which have been brought out by the learned representative before us. It has been pointed out that assessee earns income by way of Commission from various counter holders and such Commission is based on the actual sales effected by the different counter holders. For the year under consideration, the total Commission earned from the various counter holders was referred to, which shows that the amount of Commission is not consistent or constant across the counter-holders. Even the month-to-month Commission earnings of the assessee from the different counter holders are not constant, but it varies with the level of sales effected. It is a matter of common knowledge that in a typical rental arrangement, inconsistent level of compensation would be clearly missing. Therefore, in our view, the lower authorities erred in treating the income earned by the assessee from running the Departmental store as rental income assessable under the head ‘income from house property’.

One aspect which has been emphasised by the lower authorities is that the assessee was holding the property on rent from LIC of India for more than 50 years and, therefore, in view of Sec. 27(iiib) r.w.s. 269UA(f) of the Act, it is deemed to be the owner of the property for the purpose of taxation. Whether or not invoking of Sec. 27(iiib) r.w.s. 269UA(f) of the Act is correct in law, in our view, it is not determinative of the issue as to whether the income is to be treated as ‘business income’ or income assessable under the head ‘income from house property’. As laid down by the Hon'ble Supreme Court in the case of Karnani Properties Ltd. (supra) and Karanpura Development Co. Ltd. (supra), what is of importance is to examine the manner of its activities and the nature of its dealing with the property so as to determine the question of assessing the income under the head ‘house property’ or ‘business income’, and not merely the ownership of the property.

Another aspect which has been canvassed by the Assessing Officer is that the sale and purchase of the goods have been undertaken by the respective counter holders and not by the assessee. It has also been emphasised by the Assessing Officer that the income has been earned by the assessee essentially from letting the counter holders use the premises; thus, it is assessable as ‘income from house property’. In our considered opinion, it would be inappropriate to disregard the manner in which the assessee is carrying out the activities before deciding the issue. The view of the Assessing Officer that the sale and purchase has been undertaken by the counter holders is no ground to say the activities being undertaken by the assessee are not in the realm of business. In this context, we may refer to the judgment of the Hon'ble Bombay High Court in the case of Runwal Developers (P.) Ltd., [2011] 15 taxmann.com 196 (Bom.), wherein assessee was in the business of building and developing residential and commercial complexes and was also running a mall. It had constructed an area, part of which was sold to various persons and major portion of the remaining area was given on lease to persons who were running shops, cinema halls, eating places, etc. in the mall. The income streams of the assessee, inter-alia, included maintenance charges from the lessees, as also the persons to whom the premises were sold towards promotion and upkeep of the mall and such income was offered as ‘business income’. The Assessing Officer held that such income also originated from the property itself and, therefore, was to be taxed as ‘income from house property’. The Hon'ble High Court disagreed with the view of the Revenue and noted that the business conduct agreement showed that the maintenance charges collected by the assessee not only related to the open area/common areas, but related to repairs and maintenance of equipment, transformers, fire-fighting equipment, air-conditioning plant, etc. and other services in the common area of the complex like cost of security services and overall house-keeping of the common area. Considering the factual matrix, the Hon'ble High Court upheld the plea that the income was attributable to conduct of business activity of renting the mall and accordingly, the stand of the assessee for treating the receipts as ‘business income’ was not faulted. In the present case too, the fact that the assessee was not actually selling the goods or that it was undertaking a set of organised activities in support of the counter holders who were executing the sale and purchase of goods, would not distract from the fact that the receipts from the counter holders were business receipts liable to be assessed under the head ‘income from business’.

In our considered opinion, the lower authorities have erred in assessing the income earned by the assessee from running of Departmental store as ‘income from house property’ as against the claim of the assessee of treating it as ‘business income’. Thus, on this aspect, assessee succeeds.

In Assessment Year 2010-11, the only other issue is with regard to the validity of the initiation of proceedings u/s 147/148 of the Act, which has not been pressed and is accordingly dismissed.

Another issue in Assessment Year 2010-11 is manifested in Ground of appeal no. 4, which reads as under :-

Ground of appeal no. 5 raised by the assessee reads as under :-

The last Ground of appeal in this appeal, i.e. Ground of appeal no. 6 reads as under :-

In the result, appeal of the assessee for Assessment Year 2010-11 is partly allowed.

At the time of hearing, it was a common point between the parties that so far as the appeals of the assessee for Assessment Years 2007-08 to 2009-10 are concerned, the issues raised are similar to the appeal decided by us in the earlier paragraphs for Assessment Year 2010-11. Therefore, our decision therein shall apply mutatis mutandis in the said appeals also.

Insofar as appeal for the Assessment Year 2006-07 is concerned, herein also the primary dispute is with regard to the assessability of the income received by the assessee from running of Departmental store. That aspect of the matter is directed to be decided in the light of our decision in Assessment Year 2010-11.

Apart therefrom, in the Assessment Year 2006-07, the Assessing Officer disallowed a sum of Rs.1,97,414/- representing interest paid to Partners. On this aspect, we find that though there was a specific Ground raised by the assessee before the CIT(A), and thus no specific adjudication has been made. Similar is the situation with regard to Ground of appeal no. 5 raised by the assessee in this appeal, which reads as under :-

We find that even in the assessment order there is no specific finding on both the issues. Therefore, we deem it fit and proper to set- aside the two issues back to the file of the Assessing Officer who shall allow the assessee a reasonable opportunity of being heard and thereafter adjudicate the issues as per law.

In the result, appeal for the Assessment Year 2006-07 is also partly allowed.

Resultantly, the captioned appeals of the assessee are partly allowed.