DCIT, COIMBATORE vs. SAKTHI SUGARS LTD., COIMBATORE

आदेश / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

2.0 The Department has raised the following grounds in appeal:

3.0 The Departmental appeal is related to the assessment of rental income received by the assesse company of Rs.54,96,033/- under the head income from property. Facts of the case extracted from the order of the CIT(A) as under:

The gross receipts include the following items:

Rent for Amount (Rs.) Employees Quarters 33,70,946-00 Bank Building, Post Office Bldg. Co-op Stores Bldg. 7,75,087-00 Telephone Exchange and rent from premises situated in the sugar mill compound Flat Park Revenue 90,000-00 Industrial Shed 3,00,000-00 Corporate Office Building 9,60,000-00 Total 54,96,033-00

The assessee has constructed the quarters on adjacent properties and let out the same to the staff members of the company and substantial part of rent around 33.71 Lakhs has been received from employees residential quarters Apart from the employees residential quarters, the other properties were originally intended for housing of offices/factories of Sakthi Sugars Limited (such as Division Office, Corporate Office, Guest House etc.) to take care of its vast business requirements of office space/guest house space and factory building. With this intent, the above properties were held by the company for its own use. Nevertheless, the company could not use the above assets on its own for the time being on various business competitions. So in order to exploit the business asset (property), in the meanwhile, the company has let these properties on rent to others.

& 430/Mds/2015 :- 3 -:

The appellant company let out part of its corporate office building along with services of security, lift facilities, water and electricity, telecommunications facilities, common maintenance facility to M/s. ABT Limited for an composite rent of Rs.9,60,000/-. In the case of M/s. Karnani Properties Ltd Vs CIT 82 ITR 547 (SC), the Hon’ble Supreme Court has held that services rendered by the assessee with a said purpose and with a view to earn profits are business activities and taxable u/s.28. The Assessing Officer in an arbitrary manner held that the rental income received by the Company is assessable under the head “Income from House Property” and not as “Income from Business” as offered in the return of income. The company had been offering the rental income from the above said properties under the head “Income from Business” and such position had subsisted for the previous years. In all the previous years’ scrutiny assessments, up to AY 2007-08 which have been completed u/s 143(3), the Assessing Officer had accepted the Company’s stand that income originating from these properties would be assessable under the head “Income from Business” only. It is further stated here that the appellant company had grouped all the aforesaid properties, under the block of “Buildings” for the purpose of Income Tax depreciation and Companies Act and depreciation as per Income Tax Act, 1961 has been claimed in all the years at applicable rates and accepted by the Assessing Officer. The company further submits that, all of a sudden coming to a different conclusion on same set of facts, the Assessing Officer has not followed the rule of consistency.

3.1 The assessee admitted the rent receipts as a business income and the AO assessed the same as income from property. The assesse went on appeal before the Ld.CIT(A) and the Ld.CIT(A) allowed the appeal of the assesse and therefore, the Department is in appeal before this Tribunal.

3.2 Appearing for the Revenue Ld.DR argued that the assesse is owner of the property and has received the rents from the property let out to various tenants and the rents received required to be assessed as income from property as per Sec.22 of Income Tax Act. On the other hand, the Ld.AR submitted that the rent received was directly linked to the business activity of the assessee company and the assessee company is consistently offered the rent receipts under the head income from business for the past several years. The stand taken by the assessee was also accepted by the department in all the earlier year scrutiny & 430/Mds/2015 :- 4 -: assessments after verifying the facts. However, while completing the assessment for the AY 2008-09 and AY 2009-10, on the same set of facts the assessing officer has come to different conclusion. This is not permissible under the Law as held by Hon’ble Rajasthan High court in the case of National Bearings Ltd.208 ITR 872 that judicial propriety requires consistency.

The assessee relied on ITAT ‘B’ Bench decision in the assessee’s own case for the AY 2008-09 in & ITA No.867/Mds/2012 dated 30.01.2015.

4.0 We heard the rival submissions and perused the material placed on record.

The assessee has let out the property and receiving the rents and offered the income under the head business and the same was accepted by the department and assessed as business income for the earlier years.

The assesse stated that the properties are let out along with services of security, lift, etc. The income was accepted as business income in the earlier years and the Department has accepted the income from property is assessable as business income. There is no change in the character of the asset and the Tribunal in the assesse’s own case for the AY 2008-09 cited supra held it as business income as under:

10. The second issue in appeal of the Revenue is rental receipts being treated as ‘business income’. The assessee during the relevant period received rental income of ` 55,20,726/- and offered the same as business income. Rental income includes, income & 430/Mds/2015 :- 5 -:

from letting out of staff quarters to its employees and directors, income from letting out of corporation office building, industrial shed etc. The assessee for the past several years has been consistently showing rental income under the head ‘income from business’. For the first time in the impugned assessment year, the Assessing Officer objected to treating of rental income as business income. A perusal of the records show that the assessee has been receiving rental income from letting out of 14 ITA 614 & 867/12 commercial/business assets. Substantial part of rental income ` 33,11,438/- is received from letting out of staff quarters and the remaining rental income is from commercial buildings like industrial shed, corporate office etc. It is a trite law, that any income from exploiting commercial/business asset is a business income. This view is fortified by the judgments rendered in the case of CIT vs. VST Motors P. Ltd. (supra), Scientific Instruments Co. Ltd. vs. CIT (Supra), CIT vs. Elnet Technologies Ltd. (supra) and the decision of the co-ordinate Bench in the case of M/s. Sakthi Finance Ltd. (supra). The ld. Counsel for the assessee has also placed reliance on Board Circular No.10/14/66-IT(AI) dated 12/12/1966 in support of his submissions that quarters built by employers for the accommodation of their employees must be regarded as business assets. The same is reproduced herein below: “Attention is invited to the Board’s letter No.F.10/97/63-IT(AI) dated the 29th February, 1964, addressed to the Commissioner of Income-tax in which instructions were issued, inter alia, that development rebate should not be allowed on air- 15 ITA 614 & 867/12 conditioners and fans given by an employer for the personal use of the employees or directors at their residence, on the ground that the said plant and machinery were not wholly used for the purpose of the assessee’s business.

& 430/Mds/2015 :- 6 -:

Since there is no change in the facts of the case, following rule of constituency we hold that rental income is to be assessed as income from business and confirm the order of the Ld.CIT(A). This ground of Revenue’s appeal is dismissed.

5.0 Assessees’ appeal:

6.0 In the assessee’s appeal, Ground Nos.1 & 10 are general in nature which do not require specific adjudication.

7.0 Ground No.2 is related to the claim of depreciation amounting to Rs.1,16,14,703/-. The assessee has claimed the depreciation of Rs.1,16,14,703/- in respect of Shiva Ganga Beverage Unit. During the assessment proceedings the assessing officer found that there was no production or commercial activity in the unit, hence the Assessing Officer disallowed the depreciation since the asset was not put to use. The AO relied on the decision of Dy.CIT vs.Yellamma Dasappa Hospital [(2007)

159 Taxmann 58/290 ITR 353 (Kar) (HC)]. The Ld.CIT(A) confirmed the addition made by the AO as per following discussion.

It is also to be considered that the Beverages Division although a separate unit of M/s. Sakthi Sugars Ltd., the line of business is completely different. It is also a fact that for each unit of the business, separate block of assets and Profit & Loss A/c are prepared by the appellant. It is only when preparing consolidated accounts of the physical accounts are merged to arrive at the computation of the total income. In the case of the appellant, the beverage unit has not started commercial production in spite of installation of several plant and machinery. It is not a case of the appellant that the factory was functioning and the machinery could not be put to use. The beverage unit has not started its commercial production for the last five years and there was no business activity going on. Taking these facts into consideration, I agree with the Assessing Officer in disallowing the depreciation claimed amounting to Rs.1,16,14,703/-. These grounds of appeal are DISMISSED.

7.1 Aggrieved by the order of the Ld.CIT(A), the assesse is in appeal before us. & 430/Mds/2015 :- 7 -:

7.2 Appearing for the assessee, the Ld. Senior Counsel argued that the trial run was completed in this case and the assets are ready for use. The Ld.AR further argued that after the concept of introduction of Block of assets in the statue, it is enough to the assessee to show that the assessee is carrying on the production/business activity during the year.

The assesse also relied on the ITAT’s Order in the assessee’s own case for the AY 2008-09 in dated 30/01/2015. The Co- ordinate Bench of this tribunal allowed the depreciation as per the following discussion:

“4.7 From the orders of the lower authorities, we find that the trial run is not disputed by the lower authorities, however, the Commissioner of Income Tax (Appeals) recorded in the impugned order that the trial run was not done during the period relevant to the assessment year under consideration but during the earlier years and thereafter no commercial production was started. On the record, it is established that the assessee undertook the trial run of the Beverages Division, raw material was consumed and production during the trial run was sent for analysis and found suitable for marketing purposes. Thus, it is clear beyond any doubt that the Beverages Division was ready for commencement of commercial production but due to unavoidable circumstances which were beyond the control of the assessee, the commercial production did not commence. When the assessee completed all the required formalities for start of commercial production, then, merely because the commercial production could not commence due to the circumstances for which the assessee is not responsible, the claim of depreciation cannot be denied solely on the basis. In the case of ACIT vs. Chennai Petroleum Corporation Ltd (supra), this Tribunal vide its majority decision has held that, even though the assets in question were not actually put to use in the relevant previous year but kept ready for full use for the purpose of business, the assessee is entitled to get depreciation. So in order to get depreciation u/s.32, it is not necessary that the machinery in question should have been actually used in the relevant previous year for the purpose of business and it is sufficient if the same is kept ready for use during the relevant previous year, though not actually used due to circumstances beyond the assessee’s control.

4.8 In case of M/s. Swati Synthetics Ltd Vs. ITO supra, the Mumbai Benches of this Tribunal has held that depreciation is allowable on entire block of assets even if some of the assets of the block have not been used. Existence of individual asset in the block of assets itself amounts to use for the purpose of the business. Therefore, after the amended provisions of the Act, the scheme of depreciation on block assets fully supports the claim of depreciation on the entire block irrespective of the fact that an individual asset is used or not for business purpose during the previous year.

4.9 In the case in hand, there is no ambiguity and doubt about the trial run of the Beverages Division and, therefore, the same was ready for commercial production. The assessee has not started or commenced new business but has only established a new Division in his old on-going business. Therefore, undisputedly, the Beverages Division becomes a part of block assets and was also treated so by the assessee in the book of accounts. Hence, the decisions referred supra are applicable on the facts of the present case. Accordingly, by following the decision of Co-ordinate Bench of this Tribunal (supra), we decide this issue favour of the assessee and against the Revenue. The assessee is, therefore, entitled for depreciation on Beverages Division.”

& 430/Mds/2015 :- 8 -:

In view of the facts of the case and the decision of co-ordinate Bench in assessee’s own case for earlier assessment years, we allow the ground raised by assessee in its appeal.

7.3 In view of the facts of the case and the decision of co-ordinate bench in assessee’s own case for earlier assessment year, we allow the ground raised by the assessee in its appeal.

8.0 Ground No.6 is disallowance u/s.14(A) of Income Tax Act and this ground is not pressed by the Ld.AR and hence this ground is dismissed.

9.0 Ground Nos.7 & 8 are related to the disallowance of Rs.50,18,93,388/-. The AO during the assessment proceedings found that the assesse has written off all the loans/advances given to the Cane Growers to the extent of Rs.155,55,46,433/-. No details such as name and address of the persons to whom the loans/advances given and the relevant evidence were not furnished before the AO. Therefore, the AO made the addition of Rs.155,55,46,433/- to the returned income. The assesse went on appeal before the CIT(A) and the Ld.CIT(A) called for Remand Report from the AO. The AO has verified the genuineness of the payment with the procedures, sugar control act, the method and mode of payment, etc. and submitted the Remand Report. On the basis of the AO’s Remand Report, the Ld.CIT(A) allowed the relief to the extent of Rs.105.51 Cr. The remaining amount of Rs.50.18 Cr. was confirmed by the Ld.CIT(A) as per the observation made in Para No.23 of the Ld.CIT(A) orders which is reproduced for the sake of convenience as under: & 430/Mds/2015 :- 9 -:

In the case of the appellant, in its own case in for the Asst. Year 2006- 07, the Hon’ble ITAT had allowed the claim after going through the claim of the appellant. Since the payments made to the farmers are genuine and are for business purpose, the expenditure is allowable. The Assessing Officer is directed to ALLOW the claim of the appellant. Regarding the balance amount of Rs.50,18,93,388/-, the appellant could not furnish the exact details of advances given to farmers. The Authorized Representative submitted that advances were given to Dhenkanal Water Users Society for improving the irrigation facilities to get adequate supply of sugarcane. The company was making payments to these societies for the purpose of operation of those irrigation facilities in the hope of recovering such payments from the bills of the agriculturists who supply cane to the company. The scheme did not turn out to be fruitful from the company’s angle and many of the ryots/cane growers defaulted in supplying the promised quantity of sugarcane to the company. The company has written-off in the books of account as “irrecoverable advances”. Similarly, SDF Loan Disbursement (Sugar Development Fund) involves the loan taken from the Sugar Development Fund for undertaking of scheme for development of sugarcane areas. The company submitted that it has disbursed the loans to the sugarcane growers out of the loan availed from Sugar Development Fund set up by Central Government. These loans and advances outstanding in Sakthinagar Sugar Unit and Sivaganga Sugar Unit have been written off in the books due to the fact that the recoverable amounts from each individual farmers are very small. On examination of the unit-wise, year-wise details, it is found that the appellant submitted that the loans were given from the year 1993-94 to 2007-08. The appellant also furnished the amounts given to Cuttack Water Users Society and Bhavani Cane Growers Association. Regarding the advances / loans given to Dhenkanal Water Users Society, Cuttack Water Users Society and Bhavani Cane Growers Association, the appellant company could not furnish the full details regarding the year of giving advances and also any confirmation from these societies regarding the loans received by them. Further, the loans & advances from Sugarcane Development Fund also could not be proved with any evidence. The appellant could not furnish the details of farmers, mode of payment and the business exigency for the loans/advances to the Water Users’ Society. In view of this the disallowance of Rs.50.18 Crores is CONFIRMED. This ground of appeal is PARTLY ALLOWED.

9.1 The Ld.AR appearing for the assesse, filed additional evidence in the form of Memorandum for Registration of society, Rules regulations of Shakthi Sugar cane Gowers Rural Development and Water users’ Society, Dhenkanal and Note on Dhenkkanal Water users’ Society and requested for admission of additional evidence and submitted that at the time of the assessment and first appeal, the assesse could not furnish the evidence to support his claim since the same was not made available. Since the additional evidence produced by the assessee proves the existence of the society and it’s members the A.R. requested for remitting the matter back to the file AO/Ld.CIT(A) for verification of the assessee’s claim. & 430/Mds/2015 :- 10 -:

9.2 On the other hand, the Ld.DR argued that the additional evidence produced by the assessee is no way helpful since, it does not contain any evidence or proof regarding the amounts given to the farmers and the claim made by the assessee. The Ld.DR further argued that out of the total claim made by the assessed regarding the write off of Rs.155.00 Cr. the Department has allowed the maximum relief to the extent of Rs.105.51 Cr and for the balance the assessee has not furnished any evidence before the Ld.CIT(A) and the ITAT also therefore, he contended that no fruitful purpose will be served even if the case is remitted back to AO without the supporting evidence in the form of confirmations, pro- notes agreements entered with the relevant societies and borrowers of the company.

9.3 We heard the rival submissions and admit the additional evidence.

We have gone through the additional evidence produced by the assessee and heard the both the parties. The assessee has produced the copies of Memorandum for Registration of society, Rules regulations of Shakthi Sugar cane Gowers Rural Development and Water users’ Society, Dhenkanal and Note on Dhenkkanal Water users’ Society which evidences the existence of society but it does not prove the genuineness of the claim made by the assessee. No other evidence was produced by the assesse in the form of details of payment made, party wise confirmations, copies of agreements details of security and security documents, the details of borrowers name-wise, amount of advance and mode of payment, etc. In & 430/Mds/2015 :- 11 -: the absence of any evidence regarding the genuineness and purpose of advance/loans and confirmations from the borrowers or recipients of the amounts, we do not find any reason to remit the matter back to the CIT(A) and confirm the order of the Ld.CIT(A). The appeal of the assessee on this ground is dismissed.