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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ : NEW DELHI
Before: SHRI L.P. SAHU & SHRI KULDIP SINGH
ASSESSEE BY : Shri Rohit Jain, Advocate and Ms. Deepashree Rao, CA REVENUE BY : Shri Rajesh Kumar, Senior DR Date of Hearing : 05.10.2016 Date of Order : 25.10.2016
O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : The aforesaid appeal filed by the assessee as well as cross appeal filed by the revenue are being disposed off by way of consolidated order to avoid repetition of discussion.
The Appellant, M/s. Modi Industries Limited (hereinafter referred to as ‘the assessee’) in and the Appellant, Deputy Commissioner of Income-tax, Central Circle 19, New Delhi (hereinafter referred to as ‘the revenue’) in ITA No.733/Del/2013 by filing the aforesaid cross appeals sought to set aside the impugned order dated 22.11.2012 passed by the Commissioner of Income-tax (Appeals)-XXXIII, New Delhi qua the assessment year 2007-08 on the grounds, inter alia, that :-
GROUNDS OF APPEAL
FILED BY THE ASSESSEE (ITA NO.788/DEL/2013)
1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in affirming the action of the assessing officer in assessing rental income of Rs.20,83,413, derived from letting out of Corporate office and quarters under the head 'business income' as against the same being declared under the head 'income from house property'.
1.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the Corporate office and quarters were let out to the sister concerns of the appellant on a temporary basis and, therefore the rental income so derived was assessable to tax under the head 'business income'.
1.2 That the Commissioner of Income-tax (Appeals) erred on facts and in law in disallowing statutory deduction @ 30% of the annual value under section 24 of the Act, against the rental income received by the appellant, after treating the rental income from office and quarters as 'business income'.
2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in treating the rental income of Rs.4,20,000 received from letting out of M.D. Office (soap unit merged with M.D. Office) as 'income from other sources' instead of 'income from house property' declared by the appellant.
2.1 That the Commissioner of Income-tax (Appeals) failed to appreciate that the rental income from M.D. Office (soap unit merged with M.D. Office) was not received only for letting out of land alone but for land and building appurtenant thereto.
2.2 That the Commissioner of Income-tax (Appeals) erred on facts and in law in disallowing statutory deduction @30% of the annual value under section 24 of the Act, against the rental income received by the appellant, after treating the rental income from (soap unit merged with M.D. Office) as 'income from other sources'.
3. Without prejudice, that the Commissioner of Income-tax (Appeals) erred on facts and in law in assessing rental income of Rs.4,20,000 as 'income from other sources' and not as 'business income' of the appellant.”
GROUNDS OF APPEAL
FILED BY THE REVENUE ( )
5. On the facts and in the circumstances of the case, the CIT (A) has erred in directing the AO to bifurcate the income and assess the same under different heads.
6. On the facts and in the circumstances of the case, the CIT (A) has erred in not appreciating the observation of the AO and issued directions to the AO to bifurcate the income and assess the same under different heads.
7. The order of the CIT (A) is erroneous and is not tenable on facts and in law.
8. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”
Briefly stated the facts of this case are : assessee filed the return of income at nil after adjusting brought forward losses and unabsorbed depreciation, which was subjected to scrutiny and consequently, notices under section 143 (2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) along with questionnaire were issued and in response thereto, Shri P.C. Gupta, DGM with Shri A.P.S. Saini, Company Secretary attended the proceedings and filed required details.
Assessee company is into the business of manufacturing of sugar, spirit/liquor paints and varnishes, electrodes and industrial gases, trading of industrial gases, welding machines and accessories and welding filter metals and vanaspati. Assessee company has reflected income form house property at Rs.1,81,00,528/- after claiming 30% deduction u/s 22 of the Act shown from the quarters owned by the company forming part of the fixed assets and all incidental expenses like repair, maintenance and depreciation has been claimed and allowed. Assessing Officer called upon the assessee to explain as to why any income out of the quarters is to be treated as business income and is not chargeable u/s 22 to which the assessee company filed comprehensive reply.
However, AO has not accepted the plea taken by the assessee company on the ground that these quarters are for the fixed assets and incidental expenses like repair, maintenance and depreciation had been claimed and allowed on them and as such, any income arising out of quarters is to be treated as business income and it is not chargeable u/s 22 of the Act and assessed the income of the assessee as under :-
“ Accordingly, I hold that the rental income shown by the assessee is to be assessed as business income which is not eligible to be assessed as income from house property. Accordingly, the deduction claimed by assessee u/s 22 to the tune of Rs.8,46,690/- is disallowed. I. Business income declared by the assessee Rs.(-)12,92,79,410 Add: Rent received from buildings considered as business income as discussed above Rs. 2,58,57,897 II. Income from other sources Rs. 12,48,000 Total income Rs.(-)10,21,73,513 Taxable income Rs.(-)10,21,73,513”
Assessee carried the matter before the ld. CIT (A) by way of filing the appeal who has partly allowed the appeal. Feeling aggrieved, the assessee company as well as revenue filed cross appeals before the Tribunal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1, 1.1 & 1.2 OF GROUNDS NO.5, 6 & 7 OF
From the grounds of appeal raised by the assessee company as well as revenue, the first question arises for determination is :-
“as to whether rental income of Rs.20,83,413/- derived by the assessee company by way of letting out of corporate office and quarters is to be treated as “business income” or “income from house property”?
Undisputedly, the assessee company has derived rental income of Rs.20,83,413/- by way of letting out of sheds/quarters owned by the company and residential quarters to third party/sister concern and shown the income under the head “Income from house property” by claiming standard deduction @ 30% on such amount.
The ld. AR for the assessee challenged the impugned order on the ground of consistency by arguing that the property in question has been let out by the assessee company about 30 years back and has been consistently declaring rental income under the head “Income from house property” and took shelter u/s 22 of the Act.
For ready perusal, provisions contained u/s 22 of the Act are reproduced as under :-
“22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".
A bare perusal of the provisions contained u/s 22 of the Act apparently goes to prove that rental income from unused portion of any business premises owned by the assessee is to be treated as income from house property. In the case at hand, undisputedly, when the property in question consisting of buildings and land appurtenant thereto i.e. in the shape of corporate office and quarters is owned by the assessee company and is on rent pursuant to the lease agreement dated 07.06.2007, the same has to be treated as income from house property. It does not matter if the property in question is rented out to the third party or its sister concern because sister concern is otherwise treated as a separate entity for all intents and purposes.
Even otherwise, the assessee company has come up with the lease agreement dated 07.06.2007 which describes the entire land and structure thereon having been rented out by the assessee company to the third party or its sister concern and the issue of renting out the land and structure thereon owned by the assessee company is duly covered u/s 22 of the Act.
Ld. CIT (A) has proceeded on the basis of whims and fancies by holding that the portion of the property in question has been rented out by the assessee company to its sister concern is on temporary basis and could be taken back at any point of time by the assessee company for its business purposes. When the property in question has been rented out on the basis of lease agreement dated 07.06.2007, the sister concern becomes statutory tenant of the assessee company and the word “temporary basis” cannot be imported to interpret the lease agreement (supra).
However, so far as observations returned by ld. CIT (A) that depreciation has been claimed by the assessee company on business assets as far as rental income of Rs.21,49,943/- is concerned, the same need to be strictly interpreted under the provisions contained u/s 22 of the Act.
At the same time, we are of the considered view that the rental income derived by the assessee company by way of letting out the quarters to the employees of its company, who undisputedly works for conducting the business of the company, has to be treated as business income and cannot be treated as income from house property by any stretch of imagination u/s 22 of the Act. So, ld. CIT (A) has rightly directed the AO to find out the bifurcation of the rental income and assessed the same under different heads.
So, the appeal of the revenue challenging the order passed by ld. CIT (A) directing the AO to bifurcate the income is not sustainable. Consequently, grounds no.1, 1.1 & 1.2 of filed by the assessee are partly determined in favour of the assessee and grounds no.5, 6 & 7 of ITA No.733/Del/2013 filed by the revenue are decided against the revenue.
GROUNDS NO.2, 2.1, 2.2 & 3 OF
From the grounds raised by the assessee company, the first question arises for determination is :-
“as to whether the rental income of Rs.4,20,000/- derived by the assessee company by way of letting out of MD Office (soap unit merged with MD Office) is to be treated as “income from other sources”, “income from house property” or “business income” ?”
Ld. CIT (A) treated the rental income of Rs.4,20,000/- as income from other sources on the sole ground that the said rental income was derived from leasing out of the vacant plot of the soap unit and, therefore, was not income from house property.
Perusal of the lease agreement dated 07.06.2007, minutely perused by the ld. CIT (A), is enough to describe the property in question as total land area of 1584 sq. mtr. Having industrial shed of covered area of 733 sq. mtr. It is also subject matter of the lease agreement that the lessee has requested the lessor to renovate and reconstruct the existing constructed building as the said structure is quite old and is not suitable for lease for use of manufacture warehouse, storage of goods and offices etc. When the lease agreement is categoric enough to lease out the land and structure thereon, the same cannot be disbelieved without getting the same verified by the ld. CIT (A) and no such verification/remand report is there on the file. So, we are of the considered view that the rental income of Rs.4,20,000/- was derived by the assessee company by letting out the land and structure thereon.
Now, the next question arises for determination in this case is :-
“as to whether rental income of Rs.4,20,000/- is to be treated as “income from house property” or “income from other sources” or “business income” ?”
When it is not in dispute that the regular rental income of Rs.4,20,000/- is being derived by the assessee company from the land and structure thereon from M/s. Weld Excel India Limited on the basis of lease agreement dated 07.06.2007 @ Rs.35,000/- per month on permanent basis, it has become regular business income of the assessee company. So, we are of the considered view that AO as well as ld. CIT (A) have erred in treating the rental income of Rs.4,20,000/- as income from other sources. So, the same is ordered to be treated as business income of the assessee company. So, grounds no.2, 2.1 & 2.2 are determined against the assessee and ground no.3 is determined in favour of the assessee.
In view of our findings on the above grounds, filed by the assessee is partly allowed. Order pronounced in open court on this day 25th of October, 2016.