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Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI INTURI RAMA RAO
Per INTURI RAMA RAO, AM :
This is an appeal filed by the assessee-firm directed against the order of the ld.CIT(A), Hubli, dated 31/07/2015 for the assessment year 2012-13.
The assessee-firm raised the following grounds of appeal:
“1. The learned Assessing Officer had erred in passing the order in the manner passed by him and the learned Commissioner of Income Tax (appeals) has erred in confirming the Assessment Order, except for allowing credit for TDS.
ITA No.1286/Bang/2015 Page 2 of 9 2. The learned Assessing Officer has erred in making various disallowances/additions to the income returned and the Learned CIT(A) has erred in confirming the same. The additions/disallowances as done/confirmed being contrary to available facts and the law applicable are to be deleted and the income as returned by the appellant is to be accepted. 3.1 The Assessing Officer had erred in taxing the lease rentals received amounting to Rs. 1,20,37,126/- as income under the head profit and gains from income and profession, on the ground that the appellant is engaged in development of properties and the property from which lease rentals received is shown as stock in trade and the learned Commissioner of Income tax (Appeals) had erred in confirming the same. 3.2 The appellant has received lease rentals from a property and has rightly offered the same under the head income from house property and same is to be accepted without any variations and the action of the Assessing Officer (as confirmed by Commissioner of Income tax (Appeals) ) of taxing the rentals as Business Income is to be deleted. 3.3 On proper appreciation of facts and the law applicable the action of authorities below being erroneous on facts and law is to be disregarded. 4.1 The lower authorities have erred in disallowing the bad debts written off in the books of accounts of the appellant on the grounds that: i) the appellant has failed to prove the bad debt with documentary evidences ii)the appellant has failed to demonstrate the steps taken for recovery of such debt iii) the appellant has failed to show that the debt is barred by limitation 4.2 The reasonings given by the Assessing Officer making the addition and Commissioner of Income tax (Appeals) for sustaining the disallowance of bad debts written off are contrary to law applicable and erroneous on the facts of the case. 4.3 The Assessing Officer had also erred in holding that the appellant has written off the debt with a sole intention of reducing its income.
ITA No.1286/Bang/2015 Page 3 of 9 4.4 The appellant having written off the bad debts in the books of accounts, had rightly claimed the same as deduction and same is to be allowed without any variation. 5. The learned Assessing Officer has erred in disallowing a sum of Rs. 1,01,000/- being labour payments made by invoking the provisions of Section 40(a)(ia) of the I.T. Act, on the ground that the appellant has failed to deduct tax at source on the aforesaid payments and the learned CIT(A) has erred in confirming the same. On the facts and circumstances of the case, there being no liability to deduct Tax at Source, the provisions of section 40(a)(ia) of the I.T. Act, 1961 are not applicable, and hence the disallowance as done being erroneous is to be deleted. 6.1 The learned authorities below have erred in making adhoc disallowance of Rs.60,000/- out of various expenses on the ground that the payments are supported with self made vouchers only and the genuineness of the expenses are not verifiable. The conclusions drawn are against the facts of the case. The disallowance being adhoc, without basis and made on conjectures and surmises is to be deleted, especially when the expenditure are duly supported by vouchers and incurred exclusively for business purposes.
The appellant denies the liability to pay Interest U/s. 234A, 234B and 234C of the I.T. Act, 1961. The interest having been levied erroneously is to be deleted. 8. In view of the above and on other grounds to be adduced at the time of hearing, it is requested that the order passed be quashed or at least the various disallowances/additions made/sustained be deleted, income as returned by the appellant be accepted and interest levied be also deleted.
Briefly facts of the case are that the assessee, a partnership firm is engaged in the business of development of properties. Return of income for the assessment year 2012-13
ITA No.1286/Bang/2015 Page 4 of 9 was filed on 12/3/2013 declaring a total income of Rs.88,19,830/- The said return was processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] and subsequently the case was taken up for scrutiny assessment by issuing notice u/s 143(2) of the Act. Finally, the assessment was completed by the ACIT, Circle 1(1), Hubli [hereafter referred to as ‘AO’] under the provisions of section 143(3) of the Act at a total income of Rs.1,35,17,730/-. The disparity between returned income and assessed income is on account of several disallowances made by the AO. One of those disallowances is treating rental income from property leased to M/s.Kalyan Jewellers Rs.1,24,06,726/- as business income as against the claim of the assessee that it is ‘income from house property’. The AO also disallowed bad debts written off of Rs.9,50,000/- and made a disallowance of labour payments of Rs.1,01,000/-. For non-deduction of tax at source disallowed a total sum of Rs.60,000/- on account of construction expenditure in the absence of proper vouchers.
Being aggrieved by this assessment order, an appeal was filed before the ld.CIT(A), Hubli, who by impugned order partly allowed the appeal. As regards disallowance on account of write off of bad debts of Rs.9,50,000/- by the AO, the ld.CIT(A) confirmed the disallowance by holding that the assessee had failed to demonstrate steps taken for recovery of the amount. As
ITA No.1286/Bang/2015 Page 5 of 9 regards addition made of Rs.1,01,000/- made u/s 40(a)(ia) of the Act, the ld.CIT(A) held that in absence of proper explanation as to why provisions of sec.194 are not applicable to the impugned payments, disallowance came to be confirmed. As regards ad hoc disallowance made out of construction expenditure, the ld.CIT(A) confirmed the disallowance in view of failure of the assessee-firm to adduce evidence in support of the expenditure incurred. However, as regards the credit for TDS of Rs.12,03,714/- the issue was remitted back to the file of the AO for verification and granting of necessary credit if found correct on verification of details. Against this order of the ld.CIT(A) the assessee-firm is before us in the present appeal.
Ground Nos.1, 2 and 8 are general in nature and do not require any specific adjudication.
Ground No.3 challenges the direction of the ld.CIT(A) confirming the action of the AO treating the rental income from M/s.Kalyan Jewellers as income from house property on account of lease as income from business instead of income from house property. The learned AR of the assessee vehemently argued that it is not the business of the assessee-firm to derive only rental income from properties. The objects of the firm do not include the business of letting out the properties. He also submitted that lease agreement was entered by the assessee-firm with M/s.Kalyan Jewellers for a period of 12 years. The very fact
ITA No.1286/Bang/2015 Page 6 of 9 that the lease is for a longer period goes to prove the intention of the assessee-firm to derive only rental income from the said property. He further submitted that income earned by the assessee-firm from letting out the complex should be assessed as income from house property and not as business income. In support of this contention, he relied upon the Hon'ble jurisdictional High Court’s decision in the case of Mahesh Investments vs. ACIT (35 taxmann.com 185); Tektronics Engineering Development (India) Pvt. Ltd. vs. DCIT (41 taxmann.com 510), Hon’ble Bombay High Court decision in the case of CIT vs. Sane & Doshi Enterprises (58 taxmann.com 111)(Bom).
5.1 On the other hand, learned Departmental Representative relied on the orders of the lower authorities.
5.2 We heard the rival submissions and perused material on record. The only issue involved in this ground of appeal pertains to rental income received from the property situated at Station Road, Hubli to M/s.Kalyan Jewellers, assessed under the head ’income from house property’ or ‘income from business’. The property in question is undisputedly held as stock-in-trade in the books of account and the business of the assessee-firm does not include letting out of properties. From the perusal of the lease deed, it is clear that the lease was given for a period of 12 years to M/s.Kalyan Jewellers. The property leased out is held as stock-
ITA No.1286/Bang/2015 Page 7 of 9 in-trade. Therefore, it is a business asset in the hands of the assessee-firm. Exploitation of the business asset would yield only business income as held by the Hon’ble Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. (57 ITR 36), Universal Plasts Ltd. v. CIT (237 ITR 454), CIT Vs. Vikram Cotton Mills Ltd. (169 ITR 597). The assessee-firm has not produced any evidence rebutting the treatment given in the books of account to the building. In the absence of any evidence, it is difficult to hold that rental income is assessable as income from house property. The decisions relied upon by the assessee-firm are not applicable. Admittedly, in those cases, building was not shown as stock-in- trade in the books of account and treatment given in the books of account clearly demonstrates the intention of the assessee-firm in holding the asset as a business asset. As mentioned supra, income derived from business asset is always business income. Therefore, we uphold the order of the lower authorities in treating rental income received from M/s.Kalyan Jewellers as business income. In coming to this conclusion, we are also fortified by the fact that under the Indian Partnership Act, 1935, a partnership firm can be formed only for business purpose and not otherwise. Therefore, the dominant intention of the assessee-firm is only to exploit it as a commercial asset. Income received should be treated as ‘income from business’ as held in the following decisions:
ITA No.1286/Bang/2015 Page 8 of 9 i. Nutan Warehousing Co. P.Ltd. vs. DCIT (326 ITR 94)(Bom) ii. CIT vs. Goel Builders (331 ITR 344)(All.) iii. Haryana Warehousing Corporation vs. ACIT (328 ITR 28)(P&H) Consequently, ground No.3 of the assessee-firm is dismissed.
Ground No.4 relates to disallowance made on account of bad debts written off of Rs.9,50,000/-. The AO made disallowance for various reasons. One of the reasons is that the assessee-firm had failed to produce evidence to show that this advance was given only for business purpose which is a pre- condition for allowance of the same as a deduction in the year of write off of bad debt. Even though addition cannot be sustained for reasons of failure on the part of the assessee-firm to prove that the debt has really become bad, and steps taken for recovery of the same but for the fact that the assessee-firm had failed to demonstrate before us that the amount was advanced for business purpose only, on this ground, we are upholding the orders of the lower authorities.
Ground No.5 relates to disallowance of Rs.1,01,000/- made u/s 40(a)(ia) of the Act. The contention of the assessee- firm is that this amount was not claimed as a deduction under business head but only under the head ‘income from house property’. The contention of the assessee-firm is acceptable provided the assessee-firm conclusively proves that this expenditure was claimed as deduction under the head other than ‘income from business’. This information does not emanate from
ITA No.1286/Bang/2015 Page 9 of 9 record. Therefore, we restore this ground of appeal to the file of the AO for fresh adjudication to examine the claim under what head of income it was made. If it is not claimed as deduction under the head ‘profits and gains of business’, no disallowance is called for.
The next ground of appeal relates to ad hoc disallowance made out of construction expenditure. This ground of appeal is also restored to the file of the AO with a direction that the AO shall bring material on record in support of the conclusion that no expenditure is incurred on this account.
In the result, the appeal filed by the assessee-firm is partly allowed for statistical purposes.
Order pronounced in the open court on this 11th day of May, 2016
sd/- sd/- (GEORGE GEORGE K) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bangalore D a t e d : 11 /05/2016 srinivasulu, sps Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order Assistant Registrar Income-tax Appellate Tribunal Bangalore