M/S Y.D. SOLUTIONS,CHANDIGARH vs. ITO, CHANDIGARH

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH ‘B’, CHANDIGARH

BEFORE MS.DIVA SINGH, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA No.435/Chd/2017 (Assessment Year : 2013-14) Y.D. Solutions, Vs. The Income Tax Officer, 2133, Sector 38-C, Ward 4(1), Chandigarh. Chandigarh. PAN: AABFY0386N (Appellant) (Respondent)

Appellant by : Shri Rakesh Marwaha, CA Respondent by : Shri Akhilelsh Gupta, Addl.CIT Date of hearing : 09.05.2018 Date of Pronouncement : 06.08.2018 ORDER PER ANNAPURNA GUPTA, A.M. :

This appeal has been preferred by the assessee against

the order of Ld. Commissioner of Income Tax (Appeals)-2,

Chandigarh dated 2.12.2016 relating to assessment year

2013-14.

determination of the head under which the rental income

earned by the assessee during the year is assessable

whether under the head ‘income from business’ as returned

by the assessee thereby claiming deduction of all expenses

against the same or under the head ‘income from house

property’ as assessed by the Revenue Authorities allowing

only claims admissible under the said head of income as per

law resulting in the income being assessed at

Rs.30,25,045/-.

ITA No.435/Chd/2017 2 A.Y.2013-14

a partnership firm constituted vide partnership deed dated

11.4.2011. During the financial year 2011-12, relevant to

assessment year 2012-13, assessee had purchased one

industrial Plot No. C-82, Phase-7, Mohali measuring 5000

sq. yards with three storey building (basement, ground plus

two floors) from M/s Spray Engineering Devices Limited

through an 'Agreement to Sell' dated 26.7.2011 for a total

consideration of Rs.28,00,00,000/-. This property was

earlier owned and occupied by M/s Spray Engineering

Devices Limited. A portion of said property was let out by

M/s Spray Engineering Devices Limited to M/s Dishnet

Wireless Limited for a monthly rent of Rs.17,50,000/-. After

the purchase of the property, the assessee started receiving

rent from M/s Dishnet Wireless Limited in continuation of

the earlier lease agreement with the initial owner by virtue

of a tripartite agreement in this regard. The balance portion

of the property was let out to M/s Spray Engineering

Devices Ltd, (the previous owner). The assessee had shown

the rent received from the above parties as business Income

claiming expenses incurred against the same . Before the

AO the assessee justified its stand of treating the rental

income earned as business income ,contending that as per

its partnership deed, the business of the assessee was

mentioned as “nature of the business of the partnership shall

be to provide, deal, offer, development, run, sell, Outsource

Information, Technology, clients need based I.T. Solutions and

its activities, space solutions or to do such business or

ITA No.435/Chd/2017 3 A.Y.2013-14

businesses as may be decided mutually by the parties from

time to time.” The assessee contended that the meaning of

'space solution' mentioned in the partnership deed related to

the business of providing space solutions to the parties and

while doing so, the firm was providing furnished space to the

parties as per their requirement with the furniture, I.T.

equipments etc. and submitted that this being the business

of the assessee the Income from space rentals had been

shown as earned from business . However the Assessing

Officer did not agree with the contention of the assessee

and assessed the rentals under the head income from House

property at Rs.30,25,045/- after allowing standard

deduction @ 30% and interest on loan.

Ld.CIT(Appeals) who dismissed the assessee’s appeal.

appeal before us raising following grounds:

“i) That the Ld. CIT (A i has erred on law and facts in confirming the assessing of Rental income from Commercial Complex of the appellant under the head "Income from House Property instead of income1 under the head "Income from Business" The conclusion drawn is based on surmise. Hence it is prayed that such income of the appellant be assessed under the head "Income from Business". ii) That the Ld. CIT (A) has erred in law by confirming the additions of Rs.67,99,990/- being the difference between expenses claimed by the appellant as per Audited Profit & Loss account and expenses allowed by the Ld. AO u/s 24. (Rs.3,25,74,945 minus Rs.2,57,74,955 allowed u/s 24). Hence, it is prayed that the addition of Rs.67,99,990/- be deleted. iii) That the Ld. CIT (A) has erred on law and facts in confirming Rs.2,88,00,000/- as the Annual value of

ITA No.435/Chd/2017 4 A.Y.2013-14

the property where as the actual amount of rent accrued during this period as per the Audited P & L A/c was Rs.2,70,50,000/-. Hence it is prayed that addition made on this account be deleted. iv) That the Appellant reserves the right to alter, add or delete any grounds of appeal at the time of hearing.”

contention of the Ld. counsel for the assessee was that its

act of letting out property to M/s Dishnet Wireless Limited

and M/s Spray Engineering Devices Limited, was in

pursuance of its stated object for which the partnership firm

was formed and, therefore, had been rightly returned under

the head” Income from House Property”. Heavy reliance was

placed on the decision of the Hon'ble Apex Court in this

regard in the case of Chennai Properties & Investment td.

Vs. CIT (SC) Civil Appeal No.4494 of 2004 dated 9.4.2015

and the decision of the Hon'ble Apex Court in the case of

Rayala Corporation (P) Ltd. Vs. ACIT, Civil Appeal No.6437

to 6441 of 2016 dated 11.8.2016. To substantiate its

contention the Ld. counsel for assessee drew our attention to

the copy of the partnership deed dated 11.4.2011, placed at

page Nos.16 and 17 of the Paper Book, by virtue of which the

assessee entity came into existence and specifically to the

objects mentioned therein for which it was formed mentioned

at clause 3 thereof as under:

“3. That the nature of the business of the partnership shall be to provide, deal, offer, develop, run, sell, outsource, Information, Technology, clients need based I.T. solutions and its related activities, space solutions or to do such business or businesses as may be decided mutually, by the parties from time to time.”

ITA No.435/Chd/2017 5 A.Y.2013-14

pointed out that the assessee firm was formed to provide

Information Technology (IT) related services which included

providing space solutions. The Ld. counsel for assessee

pointed out that for the attainment of this object it had

entered into an agreement to purchase a fully operational

multi storied commercial complex No.C-82, Phase 7, Mohali

from M/s Spray Engineering Devices Limited for a

consideration of Rs.28 crores. It was pointed out by the Ld.

counsel for assessee that the original owner i.e. M/s Spray

Engineering Devices Limited had let out 1s t and 2nd floors of

complex on lease to M/s Dishnet Wireless Ltd., a company

engaged in the business of providing wireless internet excess

and cellular mobile telephony services which lease was

assigned in favour of the assessee on purchase of the said

asset. Further the ground floor of the complex had been

rented out to M/s Spray Engineering Devices Limited at

monthly rent of Rs.6.5 lacs from November, 2011 onwards

after taking the possession of the complex on 31.10.2011.

The Ld. counsel for assessee pointed out that since inception

it had been engaged in providing space solutions to IT

related parties and no other activity and that the words

“space solutions” mentioned in the object clause did not

particularly mean providing only web services/hosting or

space on web to its clients. The Ld. counsel for assessee

stated that if that was the object, the assessee would have

invested in IT related equipments for the same but had not

done so. Thus the object of providing space solutions,

ITA No.435/Chd/2017 6 A.Y.2013-14

Ld.Counsel for the assessee contended, meant simply letting

out the premises to other for I.T. related purposes only. Our

attention was drawn to the following documents, placed in

the Paper Book and referred to by the Ld. counsel for

assessee in the course of its submissions:

assessment year when the rental income was first returned

and assessment framed u/s 143(3) of the Act, the Assessing

Officer had accepted and assessed the same under the head

‘business & profession’ only. Our attention was drawn to the

assessment order for the preceding assessment year i.e.

assessment year 2012-13, placed at Paper Book page Nos.78

to 80 in this regard.

ITA No.435/Chd/2017 7 A.Y.2013-14

on the orders of the authorities below. Referring to the

contention of the Ld. counsel for assessee that its stated

object was to let out properties on rent for Information

Technology related activities, the Ld. DR stated that the

word “space solutions” mentioned in the object for which the

assessee firm was formed, was to be read with the whole

clause and not in isolation as done by the assessee and

when read as a whole it implied that the assessee would

provide web servicing/hosting or space on web to its clients.

The Ld. DR pointed out that the assessee had acquired a

commercial property in an I.T. Zone and had been

transferred the said plot on 99 years leasehold basis for the

manufacture of I.T. industries only. Our attention was drawn

to the documents issued by the Punjab Small Industries &

Corporation Ltd.(hereinafter referred to as PSIEC) placed at

P.B.25, with regard to the transfer of the said plot to the

assessee for M/s Spray Engineering Devices Ltd. mentioning

the said facts as under:

“Subject: Transfer of Industrial Plot No. C-82 Phase VII, Indl. Focal Point at Mohali. Reference application dated 27.12.11 from M/s Spray Engineering Devices Ltd., 25, Indl. Area, Phase-II, Chandigarh Allottee, seeking transfer of the said plot in your favour. Transfer of plot No.C-82, Phawse VII, in industrial focal point, Mohali measuring 5000, Sq.yds. in your favour on 99 years Lease-hold basis for the manufacture of IT Industries.” 10. The Ld. DR pointed out that the assessee had

canvassed its object as being I.T. related activities before the

ITA No.435/Chd/2017 8 A.Y.2013-14

PSIEC for the purpose of acquiring the plot and, therefore,

the reference to a space solution in the object has to be read

in that context only. The Ld. DR stated that having so

canvassed before the PSIEC and thus acquired the plot I.T.

related activities, the assessee is now canvassing a totally

different object before the revenue authorities for treating

the said income as ‘income from business & profession’. The

Ld. DR pointed out that if the meaning ascribed to “space

solution” as renting out of property for I.T. related activities,

stated by the Ld. counsel for assessee, was its actual object,

the plot could not have been allotted to the assessee in the

first place since the said plot was in an I.T. Zone and could

have been acquired only for I.T. related purposes. The Ld.

DR, therefore, stated that the assessee was taking different

stands before the different government authorities for its

own purposes & benefit, which could not be allowed. Thus,

the Ld. DR contended that the letting out of the property was

not in pursuance to its stated object and, therefore, could

not be treated as income from business & profession.

Alternatively, the Ld. DR contended that the assessee had

not let out a commercial property which was evident from

the agreement entered into with two lessees. The Ld. DR

pointed out from the assessment order that the Assessing

Officer had gone through the agreement entered into with

the two lessees and had found nothing therein which

indicated that the assessee had given facilities as per the

requirement of the lessee for I.T related services. The Ld. DR

pointed out that one of the lessees M/s Dishnet Wireless

ITA No.435/Chd/2017 9 A.Y.2013-14

Ltd. was already in occupation in rented accommodation and

had been provided facilities as per its requirement by the

earlier landlord and the agreement with the assessee only

brought out what would be the conditions for the tenant and

the rent to be received. There was nothing in the agreement

regarding the assessee being engaged in the business of

rental income and providing facilities to their tenants as per

their requirements. The same was the case with the

agreement entered into with M/s Spray Engineering Devices

Limited also, it was contended by the Ld. DR. Our attention

was drawn to the relevant findings of the Assessing Officer

at paras 5.2 to 5.2.2 of the order. The Ld. DR further stated

that even the third party verification, done by the Assessing

Officer in this regard, from the two lessees had revealed that

the nature of payment made by them was office rent and TDS

has been deducted on the same by them. The Ld. DR further

pointed out that during assessment proceedings the

statement of Shri Gurwinder Singh Chadha, person

responsible and working as Head (Accounts & Finance) in

M/s Spray Engineering Devices Limited was recorded u/s

131 of the Act who had categorically stated that his company

was paying rent to the assessee and no extra facility was

provided by the assessee except the already existing

building. Our attention was drawn to the findings of the

Assessing Officer in this regard at para 5.3 of the order. The

Ld. DR further drew our attention to the findings of the

Assessing Officer at para 5.4 of the order pointing out there

from that even the Financials of the assessee firm revealed

ITA No.435/Chd/2017 10 A.Y.2013-14

no activity being carried on for providing any service to the

tenants as contended by the assessee. The Ld. DR pointed

out that in fact as per the P & L Account, the assessee was

carrying on no activity except of earning rental income and

the expenses incurred were the normal organizational

expenses and not related to any activity in respect of

providing any service to its tenants. The Ld. DR, therefore,

contended that clearly the rental income earned by the

assessee was not in pursuance to its stated objects and the

property let out was not a commercial property but bare

premises let out and, therefore, the rental income earned

from the same had been rightly assessed under the head

‘income from house property’. The Ld. DR contended that as

a consequence the assessee had been rightly allowed

deduction only of expenses allowable under the said head

and the balance income of Rs. 30,25,045/-, therefore, had

been rightly assessed to tax.

of the authorities below and gone through the documents

referred to before us.

determining the head under which rental income received by

the assessee is to be assessed whether” business and

profession” or under the head “income from house property”.

The contention of the Revenue that the property let out was

not a commercial property and no extra facility was provided

by the assessee except the premises, we find, the Ld.Counsel

ITA No.435/Chd/2017 11 A.Y.2013-14

for the assessee has been unable to controvert. Ld.DR has

pointed out that the lease agreements nowhere mentioned

letting out of commercial property, third party confirmations

from lessees also stated rentals received as office rent, and

even one of the persons responsible and working for M/s

Spray Engineering Devices Limited stated in his statement

that his company was paying rent and no extra facility was

provided by the assessee. None of the above contentions

have been controverted by the Ld.Counsel for the assessee.

Ld.Counsel for the assessee has been unable to point out

any clause in the lease agreement showing that premises

alongwith IT related facilities was let out .No other evidence

was also brought to our notice to show letting out of

commercial property. Therefore we hold that the property let

out was not a commercial property.

contention of the Ld.Counsel for the assessee that the rental

income earned by it was in the nature of its business income

since it had been earned in pursuance to its stated object of

letting out its property. We have noted the proposition laid

down by the Hon'ble Apex Court in the case of Chennai

Properties & Investment Ltd. (supra) and Rayala Corporation

(P) Ltd. (supra) that the rental income earned in the course

of carrying out the business of letting out property is to be

assessed under the head ‘income from business &

profession’. Undoubtedly, the assessee firm was formed for

the object of carrying out I.T. related services which

ITA No.435/Chd/2017 12 A.Y.2013-14

included providing space solutions also. While the assessee

has stated that the meaning of the word ‘space solution’ has

to be taken literally and in isolation with other objects of

providing I.T. related service and is to be taken to mean as

letting out property for I.T. related activities, the contention

of the Revenue, on the other hand, is that the meaning has

to be derived by writing the word ‘space solution’ in

conjunction with the other objects of the assessee firm and

can only mean providing space solution by way of web

services/hosting or space on web to its clients i.e. space

solution in I.T. terms and not literally. The issue therefore

narrows down to the meaning to be ascribed to the words”

providing space solutions” mentioned in the objects of the

assessee firm.

the Ld.Counsel for the assessee to the said words . In our

view the meaning of the words “providing space solutions”

has to be derived from the meaning ascribed to it by PSIEC

while granting approval to the transfer of the said property

to the assessee for the purposes of carrying out manufacture

of IT Industry. As pointed out to us by the Ld. DR the

approval letter issued by PSIEC on transfer of plot to the

assessee clearly mentions that the same was being

transferred in favour of the assessee for the manufacture of

I.T. Industry (emphasis supplied by us). It is obvious from

the same that the assessee could have used the property

only for IT Industry purposes. Ld.Counsel for the assessee

ITA No.435/Chd/2017 13 A.Y.2013-14

has not demonstrated how letting out of property could be

treated as IT industry related activity. We therefore find no

force in the argument of the Ld.Counsel for the assessee

letting out property was its object for which the assessee

firm was formed and therefore the rental income earned by

it was in the nature of business income.

that in the preceding year the rental income earned had been

accepted by the Revenue as assessable under the head

Business and profession in scrutiny assessment ,we find no

merit in the same. We have gone through the order passed in

the preceding year u/s 143(3) and find that the income

returned by the assessee was accepted as such with no

discussion on the issue of head under which the rental

income was assessable. Even the Ld.Counsel for the assessee

has been unable to point out with evidence that the issue

was inquired into during assessment proceedings. Therefore

we hold that no benefit can be derived by the assessee from

the order passed u/s 143(3) in the preceding year to the

effect that the rental income had been accepted as

assessable under the head business and profession.

In view of the above, ground Nos.(i) & (ii) raised by the

assessee are dismissed

as Rs.2,88,00,000/- as against the actual receipts shown in

the Profit and Loss account of the assessee at

Rs.2,70,50,000/-.

ITA No.435/Chd/2017 14 A.Y.2013-14

“6.1 As discussed above the assessing officer has assessed the income from the rentals of property under the head income from house property and the annual value was taken as per the agreements with the tenants. Appellant submitted that the value of the rental properties have been taken arbitrarily at Rs.2,88,00,000/- and the gross amount of rent as per the books of accounts be taken as the basis of assessment. 6.2 Submission of the appellant have been considered. As the assessing officer has assessed the rental income under the head ‘Income from House Property’, the annual value of the properties has been taken as per section 23 of the Act on the basis of agreements with the tenants. The same is upheld and the ground of appeal No.3 is dismissed.” 18. The Ld. counsel for assessee has not pointed out any

infirmity in the above order of the Ld.CIT(Appeals). We,

therefore, see no reason to interfere in the same. Ground of

appeal No.iii raised by the assessee is also dismissed.

Order pronounced in the Open Court.

Sd/- Sd/- (DIVA SINGH) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 6th August, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR

Assistant Registrar, ITAT, Chandigarh