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Income Tax Appellate Tribunal, “SMC” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)
All the appeals filed by the assessee are directed against the orders passed by Ld CIT(A)-4, Mumbai and they relate to the assessment year 2008-09 to 2011- 12. Since the issues urged in these appeals are identical in nature, these appeals were heard together and are being disposed of by this common order, for the sake of convenience. In all the four years, the grounds of appeal urged by the assessee give rise to following three issues:- (a) The head under which the lease income is assessable. (b) Disallowance of administrative expenses – Rs.5,62,026/- (c) Disallowance of head office expenses - Rs.6,79,319/-
The assessee company was incorporated in the year 1991. According to the assessee, it was carrying on trading business in textiles initially. Thereafter, it has started construction of a solvent extraction plant in Bhanpuri, Raipur. It was submitted that the assessee company was subjected to search on 05-08-
2 Golden Soya Limited 1999 and hence its plant construction activities got disrupted. The tax authorities observe that the plant was finally completed in 2004. Thereafter, it was given on lease for a period of five years with effect from 1st December, 2004 to a company named M/s Progressive Exim Ltd. As per the terms and conditions, the lessee has to maintain the plant in good working condition. It is seen that the assessee did not operate the plant on its own and it has been given on rent since the beginning. The Ld A.R submitted that the lease has been finally terminated in the year 2017.
The assessee did not file return of income for all these years. The information relating to receipt of rental income came to the notice of the AO through AIR information. Hence the assessing officer issued notices to the assessee for all these four years. The assessee offered the lease rental income under the head Income from business. The assessing officer was of the view that the lease rental income should be assessed under the head income from other sources. The assessee, however, object to the same on the following reasons:-
4.2 The assessee company has objected to such charging on rental income as 'income from other sources' inter alia on the following grounds:- i. The object clause No. 21 of the memorandum of Article provided for letting out of machinery to lease. ii. Only plant and machinery and not building/godown is given on rent therefore such lease rent on plant and machinery is to be taxed as business income. iii. The employees of the company are stationed at factory to over-see that the equipments are not damaged by the lessee. iv. Reliance is placed on the following court decisions for showing lease income from plant and machinery as business income:- a. CIT v. Shaan Finance P. Ltd. Supreme Court
3 Golden Soya Limited b. CIT v. Maharashtra Apex Corporation 254ITR 98 (SC) c. CIT v. Vinod Bhargava 169 ITR 549 (AP)
The assessing officer did not accept the contentions of the assessee and accordingly rejected the same with the following observations:-
4.3 The above submissions are considered but the same are not acceptable for the following reasons:- i. An activity mentioned in the object clause of the Memorandum of Article only legitimizes the activity to be under taken by the company vis-a-vis the outsiders. This does not in any way decides the taxation of a particular source of income under the specified head of income. ii. If only factory plant and machinery is let out then the same is taxable under the head ""Income from other Sources" whereas lease rent received towards owned factory building the same is taxable under the head "income from house property". iii. So far as employees of the company, being stationed at the factory to protect the interest of the lessor/assessee company is concerned, the same will not construe that the assessee company is undertaking systematic business activity. At the most such employee expenses can be allowed as direct expenses against lease income u/s 57(iii). iv. The case laws cited by the assessee company are not applicable to the facts of the assessee's case as the same are distinguishable. In the case laws cited by assessee, the parties concerned were financial companies and doing business of hiring of machineries. In the case of the assessee company it is its own factory plant and machinery which is let out for a total period of 5 years. None of the case law cited by the assessee company remotely concerns with the issue of taxing of such long term lease rent from factory plant and machinery as business income. v. In the assessee company's case the case laws cited are not applicable because various courts have decided that when the business activity has been stopped then if any remaining asset/property are leased out then the same are to be taxed either under the head 'income from house property' or 'income from other sources' but definitely not under the head 'business income'.
4 Golden Soya Limited vi. Reliance is placed on the decided cases for taxing of factory plant and machinery given on rent under the head "income from other sources" as under:- a) M/s. Garg Dyeing & Processing Industries V. ACIT ITA 319/2012 dated 22.11.2012 Delhi High Court, wherein it is held that rent received by the party towards plant and machinery is assessable as "income from other sources". b) M/s. Ocean City Traders P Ltd. reported at 124 lTD 413 (ITAT/Mum.), in which it was held that the assessee has failed to demonstrate that they were engaged in a systematic and organized manner. The Hon. Tribunal concluded that the Assessing Officer has rightly treated the income under the head 'income from other sources'. c) Further, the colorable device used by assessee to show the lease rental income as income from business and claiming unrelated expenditures against the same resulting in business los is not acceptable on the facts and circumstances of the case. The decision rendered in the case of McDowell & Co. v/s Vs. Commercial Tax Officer 154 ITR 148, 171(SC) (Constitution Bench) is directly applicable in assessee's case. In the said case it was held by the Hon. Supreme Court that tax planning may be legitimate provided it is within the parameters of law. Colorable devices cannot be part of tax planning. It is wrong to encourage or entertain the belief that, it is honorable to avoid the payment of tax by resorting to dubious methods. It is obligation of every citizen to pay the taxes honestly without resorting to subterfuges. d) Further reliance is placed on the following judicial decisions in this regard.
CIT V/s Universal Plats reported at 237 ITR 454 (SC) 2. Sultan Bros P Ltd. v/s CIT 51 ITR 353 (SC) 3. Narain Swadeshi Weaving Mills v/s CEPT
Further, the assessee had claimed various administrative expenses, being the expenses incurred at the plant and at the head office. The AO determined the expenses, which are related to the lease rental income and allowed the same. The AO also allowed depreciation claim. He accordingly
5 Golden Soya Limited disallowed the claim of remaining amount of expenses.
Before Ld CIT(A), the assessee contended that the lease rental income should be assessed under the head Income from business and further all the expenses should be allowed. The said contentions did not find favour with the Ld CIT(A) and accordingly he rejected the same in all the years. For the sake of convenience, I extract below the observations of ld CIT(A) made in AY 2011-12:-
3.3 I have considered the facts of the case, findings of the Assessing Officer, rival submission of appellant and have perused evidences on record I find that appellant company was incorporated in 1991 and was doing business of trading in textile goods. Later on, in 2004 it has installed "Solvent Extraction Plant" but no extraction activity was done. Subsequently, Plant and machinery was given on rent to M/s. Progressive Exim Ltd. Thus it is very obvious that appellant has never done any business related to "Solvent Extraction Plant'. The lease period was fixed for 5 years from 1st December 2004. As per term and conditions, lessee has to maintain the plant in good working condition. Thus it is very obvious that plant which was not started by the appellant was given on lease rent which is definitely not a business activity. When such plant has been installed and is given on rent, such income is 'income from other sources' and not from business activities.
3.4 It is also noteworthy that inspite of having rental income appellant had not filed return of income u/s. 139(1),hence after receipt of notice under section 148, return was to be filed accordingly and not under section 139(1) of the Income Tax Act. Ld. Assessing Officer has rightly made escapement assessment. The decisions relied upon by Ld. A.R. are not applicable to the facts of the case.
3.5 Therefore, I find merit in the findings of Assessing Officer. The arguments of Ld. AR that such plant and machinery was given on rent because there was search and Solvent Extraction was not started, is not convincing one because of the fact that search has taken place on 05/08/1999 whereas "Solvent Extraction Plant" was installed in 2004 and plant and machinery was simply given on rent. Therefore such rental income is income from other sources and not from any business activity. For this finding, reliance is placed in the case of CIT v. Ajmera Industries P. Ltd. (1976) 103 ITR 245 (Cal.). Further the above finding and approach is fortified with following decisions Sultan Bros. (Private)Ltd. v. CII, AIR 1964 SC 1389 : (1964) 51 ITR 353 (SC),reversing, (1960) 38 ITR 85 (Bom.): Addl. CIT v. Kanta Behan, (1982) 9 Taxman 24 : (1982) 27 CTR 40 : (1983) 140 ITR 187
6 Golden Soya Limited
(Del); Cf. : D.C. Shah and others v. CII, (1979) 1 Taxman 545 : (1979) 118 ITR 419 (Karn); Addl. CIT v. National Newsprint and Paper Mills Ltd., (1978) 114 ITR 398 (MP).
There are other decisions support the above findings: Income from the lease of machinery, which was purchased for the purpose of manufacturing but was never used for such purposes, was held to be other source income and not business income vide: Ambica Tobacco Co. (P.) Ltd. v. CIT (1988) 172 ITR 343 (AP): (1988) 36 Taxman 281.
Income from letting out printing machinery and distillery plant, on facts, was held to be other source income and not business income vide: Dharak Ltd. v. CIT, (1987) 163 ITR 734 (Karn) : (1986) 25 Taxman 196.
In facts of the case, rental income derived from letting out of part of office premises and godowns was held to be other source income and not business income vide: Baijnath Brijrnohan & Sons Pr. Ltd. v. CIT, (1986) 161 ITR 234 (Born): (1986) 52 CTR 266.
Lease rent received by the official receiver was held assessable as other source income vide: CIT v. S B. Sugar Mills (1992) 194 of the ITR 570 (All).
3.6 In light of the above discussion and judicial proposition, the rental income of Rs. 19,84.500/- assessed as income from other sources is sustained.
3.7 As regards disallowance of expenses of Rs. 13,85,819/- the findings of the Assessing officer is worth approval because u/s. 57(iii) of the Income Tax Act, 1961 the expenditure related to earning of such income is to be allowed Here in this case, such expenses has been claimed which are not at all related to earning of rental income, hence I find no infirmity in the reasoning of the Assessing Officer. Therefore disallowance of expenditure is sustained.
Aggrieved by the orders passed by Ld CIT(A), the assessee has filed these appeals.
The Ld A.R submitted that the assessee has completed the construction of building in the year 1998 itself. He submitted that the main objective of the assessee company is to deal in all kind of soyabean, soyameal, soyaoil, mustard, rice bran and all kinds of oil. Further clause 21 of the objects incidental to the main objects permits leasing out the undertaking. He further submitted that the 7 Golden Soya Limited assessee did not lease out entire undertaking and it has leased out only its plant. Accordingly he contended that the leasing of plant is part of its business activities and hence the lease rental income should be assessed as business income. The ld A.R placed his reliance on the following case laws to support his contentions:- (a) Universal Plast Ltd & Guntur Merchants Cotton Press Co. Ltd Vs. CIT (1999)(237 ITR 454)(SC)
(b) ITO Vs. Skipper Properties P Ltd (2008)(298 ITR (AT) 394)(Delhi)
The Ld A.R submitted that the above said case laws lay down the principle that, if the assets of the business are let out for a temporary period, the lease rental income should be assessed as business income. Only if the assets cease to be a business asset, then the lease rental income shall be assessed under other sources. He submitted that the Hon’ble Punjab & Haryana High Court considered the issue of leasing of manufacturing facility for a period of 10 years in the case of Maltex Malsters Ltd (2016)(76 taxmann.com 79) and held that lease income is to be regarded as business income when the assessee retained its interest in plant and machinery and further, the lessee had to continue its business operations with the employees of assessee. The ld A.R submitted that the assessee has leased out only Plant to the lessessee and other assets are under the control of the assessee. Hence it has employed staffs to maintain the other assets, which shows that the assessee has retained its business interests. Accordingly he contended that the lease rental income should be assessed under the head Income from business.
He further submitted the expenses at Raipur and head office have been incurred in connection with the business activities of the assessee. Accordingly he contended that all the expenses of the assessee should be allowed.
8 Golden Soya Limited
On the contrary, the ld D.R submitted that the assessee did not carry on solvent extraction business, since the beginning. After construction of plant, it has leased out the same till date. Accordingly he submitted that the leasing out cannot be considered to be for temporary period. The intention of the assessee from the beginning was to lease out the plant. Hence the various case laws relied upon by the assessee are not applicable to the facts of the present case. He submitted that the assessing officer has already allowed the expenses relatable to lease rental income as per the provisions of sec. 57 of the Act. Hence the remaining expenses claimed by the assessee have been rightly disallowed.
I heard the parties and perused the record. I notice that the assessee has not commenced the business of operating solvent extraction plant since the beginning. Though the ld A.R submitted that the disruption caused by the income tax search has forced the assessee not to commence commercial operation, yet as observed by Ld CIT(A), the time gap between the date of search, i.e. 5.8.1999 and the date of completion of construction of plant in 2004 militates against the claim of the assessee. The temporary period, contemplated in various case laws relied upon by the assessee relates to the cases of letting out business assets by stopping the business activities. However, in the instant case, the assessee did not commence the business operations in the solvent extraction plant and has started leasing out from the beginning itself. There should not be any doubt that the intention of the assessee at the time of letting out the asset determines the nature of income. If a business, already carried on by the assessee, has been let out, then it is required to be seen as to whether the assessee had intention to revive the business activities or not and further whether the letting out can be considered to be for a temporary period. The answer to the above said question would depend upon the facts and 9 Golden Soya Limited circumstances of each case. If the assessee had intention to revive the business activities on its own, then the letting out shall be considered as exploitation of business assets for a temporary period as held by Hon’ble Punjab and Haryana High Court in the case of Maltex Malsters Ltd (supra). Hence, I am of the view that the facts prevailing in each case would determine this issue and hence the assessee is not correct in drawing support from the case laws without showing parity of facts.
The Hon’ble Supreme Court has expressed the above said principle in the case of Universal Plast Ltd (supra) in the following words:- In the light of the above discussion, the propositions may be summarised as follows Page No : 0461
(1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease, amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head "Profits and gains of business or profession"
(2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out ;
(3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same;
(4) if only a few of the business assets are let out temporarily, while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business ; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.
In the instant case, the ld CIT(A) has observed that the business operations in solvent extraction plant has never started and I also notice that the assessee has 10 Golden Soya Limited leased out the plant since the beginning. Though the Ld A.R contended that the assessee did have intentions to resume the business operations of solvent extraction plant, yet the same was not supported with any material. Hence I am of the view that the facts and circumstances show that the assessee did not have intention to commence business operations in the solvent extraction plant and hence the question of resumption would not arise in the instant case. Hence, I am of the view that the leasing out of plant since 2004 cannot be considered as leasing out for a temporary period with the intention to revive the business activities. In this view of the matter, I am of the view that the tax authorities have rightly held that the lease rental income is assessable under the head Income from other sources. Accordingly I affirm the order passed by Ld CIT(A) on this issue in all the four years.
Now coming to the issue of expenses disallowed by the AO, I notice that the assessing officer has allowed expenses, which are relatable to the lease rental income. Other expenses, which were not considered to be relatable to lease rental income have been disallowed. I notice that neither the assessee nor the revenue has brought out the details of those expenses. In the case of other sources income, the deduction prescribed u/s 57 of the Act is allowable as deduction. I notice that the assessing officer has already allowed the same as per the workings furnished by the assessee.
In respect of remaining expenses, what can be allowed as deduction is those expenses, which are required to be incurred to maintain corporate structure of the assessee, since the assessee is a limited company. Since this aspect requires fresh examination, I set aside the orders passed by Ld CIT(A) on this issue in all the four years and restore them to the file of the AO for examining it afresh in all the four years.
11 Golden Soya Limited
In the result, all the appeals of the assessee are treated as partly allowed for statistical purposes. Order has been pronounced in the Court on 21.9.2017.