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Income Tax Appellate Tribunal, B/“SMC” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
1. This appeal is filed by the assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-2, Chennai dated 31.03.2016 pertaining to assessment year 2007-08.
The assessee raised the following grounds for adjudication.
The appellate order dated 31-3-2016 in (A)-2/2009-10 passed by the Commissioner of Income-tax (Appeals) 2, Chennal, is erroneous, opposed to law and facts of the appellant’s case.
2. The learned Commissioner of Income-tax (Appeals) erred in confirming the finding of the Assessing Officer in the assessment order for assessment year 2007-08 that the income earned by the appellant is to be assessed under the head “Income from House Property” and not under the head “Business”. 3. The learned Commissioner of Income-tax (Appeals) failed to note that the receipts shown under the head “Business consideration received” was not exclusively the rent for the building, but included charges for several other services which the appellant was providing to the BSS Hospital. 4. The learned Commissioner (Appeals) erred in confirming the disallowance of expenses made by the Assessing Officer overlooking the fact that such expenses were genuinely incurred or earning the income which had been offered for assessment. 5. The learned Commissioner of Income-tax (Appeals) failed to note that the object of forming the partnership firm, as can be seen from the deed of partnership, itself was to establish and run a hospital or clinic providing comprehensive health care in the various branches of medicine, including medical research dealing with all kinds of medicines, drugs, equipments or other items of business as the partners mutually agreed upon, and the building in question had itself been constructed to suit the requirements of a health care centre / hospital. 6. The learned Commissioner of Income-tax (Appeals) therefore erred in her finding that the purpose of bringing into existence the partnership firm was only to minimize the tax incidence.
7. The learned Commissioner of income-tax (Appeals) erred in referring to the decision of the apex Court in Mc Dowell & Co. Ltd., vs CTO, 154 ITR 148 (SC), to draw a conclusion that the appellant had attempted to avoid income-tax by admitting the “business consideration received” as income under the head business.
On perusing the appeal, we find that the assessee had filed the appeal with delay of 46 days. The assessee has submitted an Affidavit dated 19.07.2016 seeking condonation of delay and the assessee stated in his petition that the delay of 46 days in filing the appeal before this Tribunal is on account of mixing up of the order of Ld.CIT(A) in his office and it took time to locate the same and as soon as he traced the records, he filed the appeal on 19.07.2016. I have heard the ld. Representative and the ld. DR. I find that there was sufficient cause for not filing the appeal within the stipulated time.
Therefore, I condone the delay and admit the appeal.
The brief facts of the case are that the Assessee is a partnership firm with two partners viz. Smt.A.Muthulakshmi and Dr. Harish Somasundram incorporated vide partnership deed dated14.12.1982 for the purpose of establishing and running a hospital or clinic providing comprehensive health care centre. For the A.Y. 2007-08, the Assessee had furnished a Return of Income on 27.07.2007 admitting a total income of `1,20,060/- under the head income from business. For assessment year 2007-08, the assessee has offered income earned by letting ut of property situated at 179/200, R.K.Mutt Road, Chennai-28 to Dr.B.S.Ayyappan, Proprietor of M/s.BSS Hospital, who is husband of Smt. A.Muthusakshmi and father of Dr.Harish Somasundaram. The assessee firm has taken this property on lease from one of its partners, Dr.Harish Somasundaram, who is the owner of the property.
4.1 During the assessment proceedings, the AO found that a single property is being leased out and sub-leased within the family members claiming expenses of similar nature in their individual hands in respect of the leased out property so as to avoid payment of tax.
Further, the ld. Assessing Officer was of the opinion that the assessee has been in the practice of admitting the rental income as business consideration and deduct expenses under various head at around 90% of the income, which resulted in refund of tax deducted at source. The ld. Assessing Officer pointed out that there was no name board by the name M/s.Sabari Enterprises at No.22/45, Bishop Garden, Greenways Road, Mandaveli, Chennai-28 which is the residence of Dr.Ayyappan whose family members are the partners in the firm. Further, it was noticed by ld. Assessing Officer that the bills/vouchers of telephone expenses and EB charges claimed by the firm were in the name of Dr.Ayyappan. Therefore, the ld. Assessing Officer passed the assessment order u/s.143(3) of the Act on 30.12.2009, treating the income received by the Assessee as “Income from House property” instead of “Income from Business”, thereby disallowing several items of expenditure. The AO restricted the deduction of expenditure to 30% statutory deduction (`3,27,1761- ) u/s. 24 of the Income Tax Act and corporation taxes paid (`49,412/-) and completed the assessment determining the total income at `7,63,412/-. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A).
4.2 On appeal, the Ld.CIT(A) observed that apart from the major consideration of minimizing tax incidence, no other concrete purpose seems to have been served by bringing into existence, the partnership i.e. M/s.Sabari Enterprises. The only activityof substance is the running of the BSS Hospital, which is being handled by Dr.B.S.Ayyappan, the only professional among all these entities.
According to Ld.CIT(A), the assessee firm is a not a charitable entity to offer its services free of cost. Hence, the Ld.CIT(A) observed that income of assessee is correctly assessed under the head :income from house property”, not under the head “income from business” by the ld. Assessing Officer as the only income received by the firm is the rental income paid by Dr.B.S.Ayyappan. Against the order of Ld.CIT(A), now the assessee is in appeal before us.
Before us, the ld.A.R submitted that the firm had taken on lease a piece of land owned by Dr. Harish Somasundaram, who is one of the partners of the firm, and constructed a building thereon after availing a loan from the Indian Bank. In the year 1985, the building was leased out to Dr. Ayyappan, proprietor of BSS Hospital, for being used by him as a hospital. As per a Memorandum of Understanding between Dr. Ayyappan and the appellant firm, the firm was to take charge of the maintenance of the hospital, including recruitment and provision of staff and payment of salary to them. The appellant was paid by Dr. Ayyappan, a consolidated amount titled as ‘business consideration’ towards the rent for the building and towards provision of other services. The appellant has been filing regular returns, supported by profit and loss, balance sheet and various connected schedules. The net income from the above activities was admitted as appellant’s income under the head business in the returns filed year after year and the said returns had been accepted in the past.
5.1 Further, ld.A.R submitted that the assessee claimed various expenses such as Salaries & Bonus paid, Repairs & Maintenance- others, lease rent paid, interest paid, etc. claimed to be incurred towards provision of the service to BSS Hospital and also the interest paid on the bank loan totaling `10,19,940/-. It was submitted that there was a total non-appreciation of the facts of the case by the Assessing Officer. At the outset, the business of the assessee is leasing and provision of services. The building has been specially designed and constructed to suit the convenience of a hospital. As already submitted above, the land on which the building was constructed belonged to one of the partners, Harish Somasundram, the building was constructed by the appellant from funds borrowed by it from Indian Bank, and the building was let out to Dr. Ayyappan, who runs BSS Hospital, another entity. Legally therefore all the three are independent taxable entities with totally distinct and independent activities. While leasing out the building to Dr. Ayyappan there was a clear understanding that the appellant would be paid a consolidated amount towards the lease and towards provision of other services.
The Assessing Officer is in error in her understanding that a single property is being leased out and sub-leased within the family members claiming expenses of similar nature in their individual hands. She failed to note that the expenses which are claimed in the P & L account of the appellant are the expenses incurred by the appellant, which inter alia includes lease rent for the land on which the building was constructed, paid to Harish Somasundaram, and interest paid to Indian Bank for the loan availed for construction of the building. She also wrongly presumed that the expenses claimed by the assessee in its P & L account are being claimed also by other parties, which is nothing but a travesty of truth.
5.2 The ld.A.R submitted a copy of Assessment Order in the case of Dr. B.S. Ayyappan, prop. , M/s B.S.S. Hospital for AY 1987-88 which shows that with respect to the claim of payment of Rs. 2,50,000/- under the head ‘business consideration’, which is nothing but the rent paid to M/s Sabari Enterprises, i.e. the assessee, the Assessing Officer has held that the payment of rent is excessive and has disallowed `70,000/- out of the said `2,50,000/-, u/s. 40A(2b).
5.3 A copy of the order of the Deputy commissioner (Appeals) in the case of Dr.B.S, Ayyappan for AX. 1987-88 & 1988-89 dt.
11.1.1990, has also been produced before me by ld.A.R. It was submitted that the disallowance of excess rent paid under the head ‘Business Consideration’ made by the ITO by invoking section 40A(2)(b) of the Act for the both the years in question, has been deleted, holding that no specific material has been brought on record by the ITO, such as normal rent payable for similar types of buildings in that area and also regarding the valuation of the building, to support the ITO’s estimate of the rent of `2/- per sq.ft. in respect of this building i.e. the hospital building. Hence, the ld.A.R pleaded that the receipts shown under the head “Business consideration received” was not exclusively the rent for the building, but included charges for several other services which the assessee was providing to the BSS Hospital.
On the other hand, ld.D.R submitted that Dr. B.S. Ayyappan has been claiming the payment made towards rent for the hospital premises, under the head ‘Business Consideration’. Similarly, the appellant, M/s Sabari Enterprises also offered the income, which is nothing but rental income, under the head Income from Business, terming it as “Business Consideration received” and has claimed deduction/set off of numerous items of expenditure totaling to `10,19,940/-. Ld.D.R submitted that as seen from the copy of the partnership deed dt. 14.12.1982, constituting the firm Sabari Enterprises., it is seen that originally, the following four persons were the partners:
i. Shri B.S. Somasundaram, Father of Dr. B.S. Ayyappan ii. Smt. Thangammal, W/o Shri B.S. Somasundaram iii. Mrs. Mirlani Muthulakshmi, W/o Shri B.S. Ayyappan iv. Minor Harish Somasundram, Sb Shri B.S. Ayyappan, then aged about 8 years, represented by his mother as natural guardian. 6.1. As per Clause 5 of the partnership deed, the main business of the partnership shall be to establish and run a hospital or clinic providing comprehensive health care in various branches of medicine, including medical research, dealing with all kinds of medicines, drugs, equipments or other items of business, as the partners mutually agreed upon.
6.2 As per clause 6, the capital of the firm shall be equally contributed by all the four partners of `2500/- each. As per clause 7, the net profit of the business shall be divided between the parties equally and loss of the business shall be divided between the first, second and third parties only, since the fourth party (Minor Harish Somasundaram) is minor, and therefore he is not liable for the losses.
6.3 The next few clauses vest all the powers such as operating bank accounts, inspecting books of accounts, representing before authorities, etc. in the first party viz. Shri B.S. Somasundram, father of Dr.B.S. Ayyappan. Hence, the ld.DR submitted that as seen on the date of formation of partnership deed, one of the present full- fledged partners, viz. Harish A. Somasundaram was only about eight years old and hence was hardly in a position to take any conscious decision regarding setting up of the firm, its objects etc. Being a minor, he was also not in a position of contributing the capital of ` 2500/-. Apparently all decisions on his behalf were taken by his mother Smt. Mrinalini Muthulakshmi.
6.4 The ld.D.R submitted that the firm later went on to take on lease, a piece of land owned by Dr.Harish Somasundaram and constructed the BSS hospital, after availing loan from Indian bank. As mentioned earlier, Dr. Ayyappan has claimed the rent paid to the appellant, M/s Sabari Enterprises, under the head ‘Business Consideration’. It is therefore obvious that as against the income from the hospital, which must have been reflected in the credit side of the P & L account as ‘Business Income’, Dr. Ayyappan must have claimed various expenses relating to running of the hospital, such as salaries, staff welfare expenses, repairs & maintenance, electricity charges, depreciation etc. In such a scenario, it is not at all clear, as to how the firm M/s Sabari Enterprises, could also claim various items of expenses totaling `10,19,940/-, claimed to be incurred mainly towards provision of services to BSS Hospital, and set off the same against the rental income, which it has termed as “Business consideration received.
6.5 According to ld.D.R, this brings us to the question of the intention behind forming the partnership firm i.e. the appellant M/s Sabari Enterprises in 1982, in the first place. It is not difficult to comprehend that one of the main considerations while forming the firm, must have been, to plan the affairs in such a way as to minimize the tax incidence in the hands of the various parties viz, the firm M/S Sabari Enterprises, BSS Hospital headed by Dr. B.s. Ayyappan, who is none other than the husband/father of Smt. A. Muthulakshmi/Dr.
Harish Somasundram, the two partners of the appellant- firm respectively, as well as to minimize the tax incidence in the individual hands of the two partners. In fact, apart from this major consideration of minimizing tax incidence, no other concrete purpose seems to have been served by bringing into existence, the partnership i.e. MIs Sabari Enterprises. The only activity of substance is the running of the BSS Hospital, which is being handled by Dr. B.S. Ayyappan, the only professional among all these entities.
6.6 Further, ld.D.R submitted that the assessee-firm M/s Sabari Enterprises has not offered any income whatsoever, from the rendering of various services such as recruitment of staff etc. for BSS Hospital. The ld.D.R submitted that that the assessee is not a charitable entity to offer its services free of cost. In fact, as mentioned earlier, the only income received by the firm is the rental income paid by Dr. B.S. Ayyappan.
6.7 As against the rental income, by setting off numerous expenses, the firm has successfully brought down its taxable/total income from `11,40,000/- to `1,20,060/-. Ld.D.R placed reliance in the judgement of the Supreme Court in the case of Mc Dowell & Co., Ltd Vs., CTO, 154 ITR 148 (SC),wherein held that so far as the contention that it is open to every One to so arrange his affairs to reduce the brunt of taxation to the minimum was concerned, the tax planning may be legitimate provided it is within the framework of lawn Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the tax honestly without resorted to subterfuges 6.8 Finally, the ld.D.R submitted that the Assessing Officer has rightly disallowed the expenses under various heads claimed by the assessee , rejecting the claim that the income from rent is taxable as business income, and bringing to tax the same under the head Income from House property and relied on the order of Ld.CIT(A).
I have heard both the parties and perused the material on record. In the present case, the assessee has been assessed to tax from the assessment year 1987-88 and it is also brought on record by the assessee that in the assessment year 1987-88, the income of assessee from the same property has been assessed by the Department under the head income from business and there was no scrutiny of the return and there is no change in the head of income. It is an admitted fact that the assessee has taken on lease a piece of land owned by Dr.Harish Somasundaram, who is one of the partners of the firm and constructed a building thereon after availing a loan from the Indian Bank. The building was constructed for the purpose of running the hospital where the assessee provided facilities as required for the purpose of running hospital and leased to one Dr.Ayyappan, proprietor of BSS Hospital. There was a memorandum of understanding between Dr.Ayyappan and the assessee firm has not only just letting out the property, but also undertaken the maintenance of the hospitals, which is seen from the various expenditure claimed by assessee in its P&L A/c placed at page 60 of the paper book. The assessee has incurred expenditure like staff welfare, Repairs & Maintenance, telephone charges, lease rent paid, interest paid, licenses, rates and taxes and conveyance allowance to staff, etc. In other words, the assessee exploited the building as a business asset and earned income from it. This has been followed by the assessee from assessment year 1987-88 and the Department has also accepted the same in subsequent assessment years 2008- 09, 2009-10 & 2010-11. There was no change of head of income by the Department. In my opinion, as seen from the facts of the case, if there is letting out properties and earning income was main object of the assessee, the income derived from such property is to be treated as business income. This view of the Bench is fortified by the judgemnet of Supreme Court in the case of Chennai Properties & Investments Ltd. Vs. CIT reported in 373 ITR 673 wherein held that:-
“10. No doubt in Sultan Brothers (P.) Ltd.'s case, a Constitution Bench judgment of this court has clarified that merely an entry in the objects clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words :
"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 busi ness or the exploitation of his property by an owner. We do not fur ther 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." 11. … in this case, letting of the properties is in fact is 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"
7.1 Further, the jurisdictional High Court in the case of M/s.Elnet Technologies Ltd., reported in 89 DTR 442 wherein held that when an assessee company takes a loan with an object of constructing IT company with all infrastructure facilities as per its Memorandum of Association, income from these rentals would be assessable as business income in the hands of the assessee. Further, the Department has accepted the income under the head “income from business: since the assessment year 1987-88, the Department has precluded from change of head after following the same principle in 20 years. There should be a consistency in the income tax proceedings from year to year as held by the jurisdictional High Court in the case of CIT Vs. L. G. Ramamurthi reported in [1977] 110 ITR 453 (Mad), which was subsequently followed in the case of Lakshmi Vilas Bank LTD. Vs. CIT in [2006] 284 ITR 93 (Mad). Being so, I am of the opinion that income declared by the assessee to be considered as income from business only, not from income from house property.