E M C PROJECTS PVT. LTD.,KOLKATA vs. D.C.I.T., CIRCLE - 7(1), KOLKATA, KOLKATA

The assessee has taken seven grounds of appeal, which are not in consonance with Rule 8 of the Income Tax Appellate Tribunal Rules, 1963. They are descriptive and argumentative in nature. In brief, the issue in dispute is whether rental income earned by the assessee deserves to be assessed as house property income or business income?

Brief facts of the case are that the asseessee has filed its return of income on 15.12.2014 for A.Y. 2014-15 declaring total income of Rs.6,93,13,140/-. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) was issued on 04.09.2015. The ld. Assessing Officer has passed a scrutiny assessment under section 143(3) on 28.12.2016. He accepted the stand of the assessee that rental income is to be assessed as a house property income. The copy of this assessment order is available on pages no. 1 to 14 of the paper book. On page 14, ld. Assessing Officer has made the computation of taxable income. He determined income from house property as per the return at Rs.7,32,44,667/-. The business income declared by the assessee was at a loss of Rs.39,31,532/-. This has been reduced by the ld. Assessing Officer to Rs.16,59,079/-. In other words, the ld. Assessing Officer did not disturb the claim of house property income made by the assessee in the return.

The ld. CIT perused the assessment record and formed an opinion that alleged house property income ought to have been (A.Y. 2014-2015) EMC Projects Pvt. Limited assessed as a business income and he took action under section 263 of the Income Tax Act. After hearing the assessee, he passed an order under section 263 on 15.03.2019, copy of this order is available on pages no. 20 to 25 of the paper book. The ld. CIT took cognizance of the judgment of the Hon’ble Supreme Court in the case of Chennai Properties & Investment Limited -vs.- CIT reported in (2015) 373 ITR 673 (SC). He set aside the assessment order and directed the ld. Assessing Officer to re-adjudicate this issue. The conclusion of the ld. CIT in this order reads as under:- “6. After having considered the position of law and facts and circumstances of the instant case, the assessment order passed by the AO is found to be erroneous and prejudicial to the interest of revenue in accordance with the Explanation 2 below section 263(1) of the Act. As a result, the assessment order passed by the AO is set aside in respect of only the point stated in para 2 above. The Assessing Officer is directed to initiate fresh assessment proceedings and carry out necessary verification and take action accordingly after verificat4ion of the correctness of the claim of the assessee. The Assessing Officer must also provide reasonable opportunity to the assessee company to produce documents & evidences which it may choose to rely upon for substantiating its own claim. Thereafter a fresh assessment order may be passed in accordance with the relevant provisions of law”.

The assessee did not file appeal against the order of ld. Commissioner and it attained finality.

In compliance of the order passed under section 263, the ld. Assessing Officer has passed the impugned assessment order. He did not take into consideration the past history of this income and simply followed the order of ld. Commissioner without considering the issues much. This impugned order of the ld. Assessing Officer is running into four pages, out of which on page no. 4 is the 3 (A.Y. 2014-2015) EMC Projects Pvt. Limited computation of income. In page no. 1, he has narrated the facts and the observations of the ld. CIT in the order passed under section 263. His contribution in considering this issue is available only in paragraphs no. 4 & 5, which reads as under:- “4. Thereafter notice u/s 142(1) was issued on 22.08.2019 and on 11.09.2019, and duly served upon the assessee. The assessee furnished its response which was received in this office on 17.09.2019 and 04.12.2019 which has been duly perused. 5.(i) From the submission of the assessee it appears that as per Memorandum of Association, the main objective clauses of the assessee company are: "To carry on the business of all kinds of engineering products including financing, manufacturing, selling or in any other form. To undertake estimation, survey, design, manufacture, construct, supply of material for dams, generating stations, transmission lines, sub-stations and plants of all description and their ancillaries. To carry on the business of electric light and power company in all its branches and, in particular, to generate, accumulate, transmit, distribute and supply electricity for all purpose for which electric energy can be employed and to manufacture and deal in all apparatus and things required for or capable of being used in connection with the generation, distribution, supply, accumulation and utilization of electricity. ” (ii) Though during the AY 2014-15, total gross receipt of the company was Rs. 10,81,48,305/-, out of which rental income was to the tune of Rs. 10.56.30.000/-, which is about 98% of the total gross receipt and the rental income was offered under the head “Income from House Property.” Moreover, during the year the assessee had no income from the sale of engineering products which was its primary business. (iii) In the case of Chennai Properties & Investments Limited the Hon’ble Supreme Court held its decision by placing reliance on the decision in the case of Karanputra Development Co. Limited, wherein it had held that the deciding factor was not the ownership of land or leases, but nature of activity of the operations in the relation to the same.

(A.Y. 2014-2015) EMC Projects Pvt. Limited (iv)It is also evident from the judgment of Hon’ble Supreme Court in the case of Chennai Properties and Investment Ltd. Vs CIT (2015) 56 Taxmann.com 456 that the entire income was through letting out of the two properties namely, "Chennai House" and "Firhavin Estate"and there is no other income except the income from letting out of these two properties, which is similar in the case of the assessee also, as the assessee has also mainly rental income from letting out of properties situated at Gaziabad. (v) Therefore, after considering the decision of Hon’ble Supreme Court in the case of Chennai Properties & Investment Ltd. and submission of the assessee, it is clear that the only income of the assessee was income from let out property to management institutions and collected rent as well as service charges for the same. Thus rental income is hereby treated as “Income from Business & Profession” instead of “Income from House Property” as claimed by the assessee.

Appeal to the ld. CIT(Appeals) did not bring any relief to the assessee.

While impugning the orders of revenue authorities, ld. Counsel for the assessee raised many folds of submission. In his first fold of submission, he contended that reliance placed by the ld. Commissioner on the judgment of the Hon’ble Supreme Court in the case of Chennai Properties & Investment Limited is an erroneous construction of the judgment of the Hon’ble Court. He took us through the judgment of the Hon’ble Supreme Court in the case of Chennai Properties & Investment Limited, whose copy has been placed on page no. 17 of the case laws paper book. In that case, the assessee was a Company incorporated under the Indian Companies Act. Its main objective as stated in the Memorandum of Association was to acquire the properties in the city of Madras and to let out those properties. The assessee had declared such rental income received from there as income from business in the 5 (A.Y. 2014-2015) EMC Projects Pvt. Limited return filed by it. The ld. Assessing Officer however refused to take the same as a business income and assessed it as a house property income. The appeal to the ld. CIT(Appeals) brought relief to the assessee and income was assessed as a business income.

The Revenue took the issue before the Tribunal, who concurred with the ld. CIT(Appeals) and dismissed the appeal. The Hon’ble Madras High Court had reversed the orders of ITAT as well as ld. CIT(Appeals) and held that income of the assessee is to be assessed as a house property income and not a business income.

The assessee, in this background took the matter before the Hon’ble Supreme Court, who set aside the judgment of the Hon’ble Madras High Court. The Hon’ble Supreme Court has propounded that the main business of the assessee was letting out of the property, which was conducted in an organized manner. The case of the assessee from the beginning was that it is in the business of letting out of the property and earning rental income as a business activity. This explanation of the assessee was accepted by the Hon’ble Court and held that rental property in that case deserves to be assessed as a business income.

The ld. Counsel for the asseessee submitted that ld. CIT took this judgment as if in every case, wherever rental income earned by an assessee, then such would be assessed as a business income. The ld. CIT lost sight that there is a distinction between earning of house property income, vis-à-vis earning income as a business income. It depends upon the facts and circumstances of (A.Y. 2014-2015) EMC Projects Pvt. Limited each case, if the activity is being carried out in an organized manner with a motive to earn business profit, then it is to be assessed as a business income. In the case of assessee, no such objectives are there in the Memorandum of Association. In the ancillary activities, it is one of the objectives. He took us through the observations of the ld. Assessing Officer, wherein the activities required to be undertaken by the assessee in its Memorandum were being noticed. According to the ld. Counsel for the assessee, the main objective of the assessee-company was to carry on the business of all kinds of engineering products including financing, manufacturing, selling or in any other form. Thus, according to him, basically ld. Commissioner ought to have not taken cognizance under section 263.

Ld. Counsel for the assessee further contended that this judgment of the Hon’ble Supreme Court in the case of Chennai Properties & Investment Limited has been subsequently considered by the Hon’ble Supreme Court itself. In the case of Raj Dadarkar & Associates -vs.- ACIT, Central Circle-46 reported in [2017] 394 ITR 592 (SC) and the Hon’ble Supreme Court has itself propounded the distinction as to how this judgment is not applicable under all the facts and circumstances. He relied upon this judgment.

In his next fold of submission, he contended that in A.Y. 2012-13, the assessee has offered rental income under the head “house property income’. The return of the assessee was selected for scrutiny assessment and this stand of the assessee was (A.Y. 2014-2015) EMC Projects Pvt. Limited accepted by the ld. Assessing Officer. Copy of the assessment order dated 16.03.2015 passed under section 143(3) in A.Y. 2012-13 is placed at page no. 226 of the paper book. The computation of income is available on page no.230 of the paper book. The ld. Assessing Officer has accepted the house property income declared by the assessee at Rs.4,53,00,60,000/-. In the next assessment year, i.e. A.Y. 2013-14, again assessment order was passed under section 143(3) on 28.03.2016. The ld. Assessing Officer has accepted the stand of the assessee that rental income is to be assessed as a house property income and not a business income. The copy of this assessment order has been placed at page no. 183 of the paper book. In A.Y. 2014-15, originally ld. Assessing Officer has accepted the stand of the assessee and that assessment order has been set aside by the ld. Commissioner. In A.Y. 2015-16, again assessee has declared house property income which has been accepted, though there was no scrutiny assessment but under section 143(1), the stand of the assessee has been accepted. Thus on the strength of Hon’ble Supreme Court’s decision in the case of Radhasoami Satsang Saomi Bagh, Agra -vs.- CIT reported in 193 ITR 321 (SC), he submitted that principle of consistency ought to have been followed. He also relied upon the judgment of the Hon’ble Supreme Court in the case of CIT -vs.- M/s. PFH Mall & Retail Management Private Limited (SLP No. 19720 of 2011] vide order dated 04.09.2012, wherein Hon’ble Supreme Court has again affirmed the Rule of Consistency.

The ld. D.R., on the other hand, relied upon the orders of revenue authorities and submitted that the assessee has not (A.Y. 2014-2015) EMC Projects Pvt. Limited challenged the order of ld. CIT passed under section 263. Therefore, in pursuance of that order, ld. Assessing Officer has to assess this income as a business income.

We have duly considered the rival contentions and gone through the record carefully. Before adverting to the main issue, let us first deal with the submission of the ld. Sr. D.R. We have taken note of the order passed by the ld. Commissioner under section 263. A perusal of section 263 would indicate that it authorizes the ld. Commissioner to either himself determine the taxable income of an assessee or relegate the issue for further inquiry to the ld. Assessing Officer. In the present case, the ld. Commissioner did not exercise the first option. He simply set aside the issue to the ld. Assessing Officer for re-consideration. Therefore, even if that order was not challenged, it has not resolved the issue. The ld. CIT kept the issue open for adjudication by the ld. Assessing Officer. Therefore, this argument of the ld. D.R. that in pursuance of the ld. CIT’s order, ld. Assessing Officer has to assess the income as a business income is concerned, it is an incorrect argument at the end of the revenue. The ld. CIT has not categorically decided the issue for assessing the house property income as a business income.

Now we take the main issue i.e. whether rental income of the assessee has to be assessed as a house property income or a business income. As far as the issue is concerned, we deem it appropriate to take note the judgment of the Hon’ble Jurisdictional High Court in the case of Shambhu Investment Pvt. Limited (A.Y. 2014-2015) EMC Projects Pvt. Limited reported in 263 ITR 143. Hon’ble Court, however, considering the judgment of the Hon’ble Supreme Court in the case of Sultan Brothers Pvt. Limited -vs.- CIT [1964] 51 ITR 353 (SC), has propounded certain tests. We deem it appropriate to take note the discussion made by the Hon’ble Court on this issue, which reads as under:- “11. In the light of the above, let us now apply such test in the present case. From the copy of the agreement produced before us it appears that the assessee has let out the furnished office at a monthly rent payable month by month by the respective occupants. The services rendered to the various occupants according to the said agreement are not separately charged and the monthly rent payable is inclusive of all charges to the assessee.

To decide this issue we cannot overlook the fact that the cost of the property was Rs.5,42,443. A portion of the said property is used by the assessee himself for his own business purpose. The rest of the said property has been let out to the various occupiers as stated hereinbefore. It further appears that the assessee had already recovered a sum of Rs. 4,25,000 as and by way of security free advance from three occupants. Hence, the entire cost of the property let out to those occupiers has already been recovered as and by way of interest-free advance by the assessee. Hence, it cannot be said that the assessee is exploiting the property for its commercial business activities and such business activities are prime motive and letting out the property is a secondary one.

Let us approach the problem from another angle by applying the lest suggested by the five judges' Bench in the case of Sultan Brothers Pvt. Ltd. The three questions framed by the apex court are applied in the instant case as follows (page 363) : (A) Was it the intention in making the lease-and it matters not whether there is one lease or two, i.e., separate leases in respect of the furniture and the building-that the two should be enjoyed together? In the instant case there is no separate agreement for furniture and fixtures or for providing security and other amenities. The only intention, in our view, was to let out the portion of the premises to the respective (A.Y. 2014-2015) EMC Projects Pvt. Limited occupants. Hence, the intention in making such agreement is to allow the occupants to enjoy the table space together with the furniture and fixtures. Hence, this question should be answered in the affirmative. (B) Was it the intention to make the letting of the two practically one letting (page 363) : From a plain reading of the agreement, it appears that the intention of the parties to the said agreement is clear and unambiguous by which the first party has allowed the second party to enjoy the said table space upon payment of the comprehensive monthly rent. Hence, this question should be answered in the affirmative. (C) Would one have been let alone, and a lease of it accepted, without the other (page 363)? As we have discussed hereinbefore that it is composite table space let out to various occupants, the amenities granted to those occupants including the user of the furniture and fixtures are attached to such letting out and the last question, in view of the same, must be answered in the negative.

Applying the said test we hold that by the said agreement the parties have intended that such letting out would be an inseparable one.

Hence, we hold that the prime object of the assessee under the said agreement was to let out the portion of the said property to various occupants by giving them additional right of using the furniture and fixtures and other common facilities for which rent was being paid month by month in addition to the security free advance covering the entire cost of the said immovable property.

In view of the facts and law discussed above we hold that the income derived from the said property is an income from property and should be assessed as such.

In the light of our aforesaid discussion we answer question No. 1, in the negative, i.e., in favour of the Revenue and against the assessee. In fact there was a relationship of landlord and tenant between the assessee and the persons who hired the office accommodation.

Similarly, we have noticed the facts in the judgment of Chennai Properties & Investment Ltd., which has been heavily relied upon by the ld. Commissioner. It is pertinent to note that in that case, the main objective of the assessee in the Memorandum of Association was to enter into a business for earning rental income. This activity was taken as a venture in the business. Those are not the facts in the present case in hand. The ld. Commissioner in the proceeding under section 263 construed the modus operandi of the assessee as if it is in the business of earning rental income. It is a change made by the ld. Commissioner in his observation, which has been adopted by the ld. Assessing Officer. It is pertinent to observe that judgments are to be construed for the proposition laid down in them and not to infuse the facts in the case, which is before the authority. In the efforts at the end of the ld. Commissioner, which has been further adopted by the ld. Assessing Officer is to draw inference of facts, as if those facts are the facts of the assessee’s case. On the strength of the percentage of income declared by the assessee, he changed the characteristic of the business activities of the assessee, which is not a right approach permissible under the law. The judgment of the Hon’ble Supreme Court in the case of Chennai Properties & Investment Limited has fallen for consideration before the Hon’ble Supreme Court in the subsequent decision, i.e. Raj Dadarkar & Associates.

Both these judgments of the Hon’ble Supreme Court are authored by Hon’ble Justice A.K. Sikri and the Hon’ble Supreme Court has pointed out a distinction as to how the adjudicating authority ought to have adopted a particular approach for deciding the issue. This aspect has subsequently been considered by the ITAT, Chennai in the case of ACIT -vs.- S.N. Damani Infra (P) Limited reported in [2022] 96 ITR (T) 707, wherein ITAT has observed that whether an assessee carried out systematic and organized activities by providing service to occupiers of premises or a mere let out of property on rent has to be decided on facts of a particular case.

Apart from the above, it is pertinent to note that in earlier years, the rental income declared by the assessee has been accepted as a house property income in two scrutiny assessments, i.e. A.Ys. 2012-13 & 2013-14. In subsequent years, such income has been accepted under section 143(1). It suggests that in the ITA No. 1063/KOL/2024 (A.Y. 2014-2015) EMC Projects Pvt. Limited earlier years as well as in subsequent years, the stand of the assessee has been accepted. It was accepted by the ld. Assessing Officer in the present A.Y. also, in the first round but in the second round of proceeding on the strength of the order passed under section 263, ld. Assessing Officer did not accept. The principle of consistency is fully applicable in the present case. To buttress ourselves, we deem it appropriate to take note of the observations of the Hon’ble Supreme Court in the case of Radhasoami Satsang Saomi Bagh-vs.- CIT as well as in the case of CIT -vs.- PFH Mall & retail Management Pvt. Limited. The observation of the Hon’ble Supreme Court in the case of CIT -vs.- PFH Mall & Retail Management Pvt. Limited in Special Leave to Appeal (Civil) No. 6756 /2009, judgment dated 29.01.2008 in of 2007 reads as under:- “From the records, we find that for the earlier assessment year 2001-2002, the Income Tax Appellate Tribunal (for short, ‘ITAT’] has taken the view that income in question is business income. This view has been upheld by the High Court in these cases. In Civil Appeal arising out of S.L.P. (C) No. 6756 of 2009, no ground has been taken to challenge the decision of the High Court on its finding concerning assessment year 2001-2002. Applying the rule of consistency, these civil appeals filed by the department are dismissed with no order as to costs”.

The observation of the Hon’ble Supreme Court in the case of Radhasoami Satsang Saomi Bagh (supra) was also worth to note, which reads as under:- “13. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained (A.Y. 2014-2015) EMC Projects Pvt. Limited by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter- and if there was not change it was in support of the assessee- we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12 of the Income Tax Act of 1961.

In the light of above discussion, we are of the view that rental income declared by the assessee deserves to be assessed as an income from house property. The finding of the ld. Assessing Officer that such income is to be assessed as a business income is vacated. The ld. Assessing Officer is directed to treat such income as an income from house property and determine the taxable income of the assessee.

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 20/08/2024.