M/S. DIMEXON EXPORT PVT. LTD, MUMBAI V. THE ADDL CIT RG 5(1)*, MUMBAI

ITA 1908/MUM/2008

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2670 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2003-2004
• Appeal Filed On: 17-03-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANURAG PRASAD
• Assessee Lawyers: SAJJAN KUMAR TULSIYAN
• Keywords: Business income; Depreciation; Rule of consistency; Fair market value; Commercial expediency
• Section: 143(3); 143(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VP & SHRI R.K. PANDA, AM I.T.A. NO. 1908/MUM/2008 (ASSESSMENT YEAR 2003-04) M/S. DIMEXON EXPORTS PVT. LTD. 1202, PRASAD CHAMBERS, TATA ROAD NO. 2, OPERA HOUSE, MUMBAI-400 004 PAN: AAACD1882E VS. ASST. CIT, RANGE 5(1) 5 TH FLOOR, AAYAKAR BHAVAN M.K. ROAD, MUMBAI-400 020 APPELLANT RESPONDENT I.T.A. NO. 2554/MUM/2008 (ASSESSMENT YEAR 2003-04) ASST. CIT, CENTRAL CIRCLE 5 9 TH FLOOR, OLD CGO BLDG. ANNEXE, M.K. ROAD, MUMBAI-400 020 VS. M/S. DIMEXON EXPORTS PVT. LTD. 1202, PRASAD CHAMBERS, TATA ROAD NO. 2, OPERA HOUSE, MUMBAI-400 004 PAN: AAACD1882E APPELLANT RESPONDENT ASSESSEE BY: SHRI SAJJANKUMAR TULSIYAN REVENUE BY: SHRI ANURAG PRASAD O R D E R DATE OF HEARING: 14.09.2009 DATE OF ORDER: 11.12.2009 PER R.K. PANDA, AM: THESE ARE CROSS APPEALS, THE FIRST ONE FILED BY TH E ASSESSEE AND THE SECOND ONE FILED BY THE REVENUE AND ARE DIRECTED AG AINST THE ORDER DATED 31 ST MARCH, 2007 OF THE CIT(A), CENTRAL-II, MUMBAI, REL ATING TO ASSESSMENT YEAR 2003-04. 2. REVISED GROUNDS OF APPEAL NO. 1 BY THE ASSESSEE AND THE GROUNDS OF APPEAL NO. 1(I) AND 1(II) BY THE REVENUE IS DIRE CTED AGAINST THE ORDER OF THE CIT(A) WHEREIN HE HAS DIRECTED THE ASSESSING OF FICER TO RECOMPUTE THE INCOME FROM HOUSE PROPERTY BY ADOPTING THE ALV AT 8 .5% OF THE GROSS BLOCK OF THE FACTORY BUILDING (EXCLUDING THE PLANT AND MACHINERY) AS I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 2 AGAINST 15% OF THE GROSS BLOCK OF THE FACTORY BUILD ING AND PLANT AND MACHINERY ADOPTED BY THE ASSESSING OFFICER WHEREAS ACCORDING TO THE ASSESSEE ASSESSMENT OF ANY INCOME IN RESPECT OF THE SAID FACTORY BUILDING IS IN CONTRAVENTION OF PROVISIONS OF SECTION 22 OF THE I.T. ACT, 1961. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF IMPORTERS AND EXPORTERS AND MANU FACTURERS OF POLISHED DIAMONDS AND DIAMOND PROCESSORS. DURING THE COURS E OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT TH E ASSESSEE OWNED THE FACTORY AT COIMBATORE WHICH WAS GIVEN TO A COMPANY NAMELY, M/S COIMBATORE POLISHING WORKS P. LTD. (CPWPL) BY WAY O F AN AGREEMENT CHRISTENED AS CONDUCTING AGREEMENT DATED 1.5.2000. AS PER THE CLAUSES OF THE AGREEMENT, THE ASSESSEE WOULD GET THE FIRST PREFERENCE IN GETTING THE WORK DONE IN POLISHING WORK AND OTHER CONNECTED WORK OF DIAMONDS IN RESPECT OF SUCH JOB WORK OFFERED BY THE ASSESSEE . THE ASSESSEE USED TO UNDERTAKE THE JOB WORK OF CUTTING AND POLISHING THE ROUGH UNCUT DIAMONDS IN VARIOUS YEARS, FROM THE FOLLOWING CONCE RNS: 1. M/S. KIRTILAL KALIDAS DIAMOND EXPORTS. 2. M/S. MEHTA RATANSE EXPORT. 3. DIMEXON DIAMONDS LTD. 4. KIRTI ORNAMENTS. 4. THIS JOB WORK WAS TRANSFERRED BY THE ASSESSEE TO CP WPL FOR EXECUTION AT COIMBATORE. THIS YEAR THE ASSESSEE HA S RECEIVED JOB WORK CHARGES OF RS.7,79,18,125/-. AS PER THE AGREEMENT, CPWPL WAS TO CARRY ON THE MANUFACTURING IN DIAMONDS IN FACTORY NO. 1 A DMEASURING 20528 SQ. FT. CPWPL WOULD MAINTAIN THE FACTORY BUILDING ALON G WITH THE PLANT AND MACHINERY, FURNITURE AND FIXTURE AND THEY WERE AT L IBERTY TO BRING IN AND INSTALL THEIR OWN TOOLS AND PLANT AND MACHINERY TO EXPAND THEIR ACTIVITIES. NO OTHER MONETARY CONSIDERATION WAS PROVIDED IN THE AGREEMENT. THE LABOUR AND EMPLOYEES ARE BELONGING TO CPWPL AND NOT TO THE ASSESSEE. THE ASSESSEE SUBMITTED THE COPIES OF THE BILLS WITH REGARD TO THE RATES CHARGED BY THE ASSESSEE TO ITS CUSTOMERS AND IT WAS SUBMITTED THAT THE ASSESSEE DID NOT GET ANY CONCESSION IN THE RATES CH ARGED BY CPWPL AND I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 3 THAT THEY GET ONLY PRIORITY OVER OTHERS IN GETTING THEIR JOB DONE. ACCORDING TO THE ASSESSING OFFICER DESPITE THE REQUEST MADE B Y HIM, THE ASSESSEE DID NOT FURNISH THE COPIES OF THE BILLS CHARGED BY CPWPL TO ITS CUSTOMERS OTHER THAN THE ASSESSEE I.E., DIMEXON EXPORTS PVT. LTD. (DEPL). 4.1 THE ASSESSING OFFICER ALSO OBTAINED THE SHAREHO LDING PATTERN OF CPWPL AT COIMBATORE WHICH IS AS FOLLOWS: SR. NO. NAME OF THE SHAREHOLDER NO.OF SHARES FACE VALUE % OF HOLDING 1. SMT. MANIBEN KIRTILAL MEHTA 3,500 35,000 33.33% 2. SMT. NINA PANKAJ MEHTA 3,500 35,000 33.33% 3. SHRI T. SHANTAKUMAR 3,500 35,000 33.33% THE ASSESSING OFFICER OBSERVED THAT THE SHAREHOLDER NO. 1 AND 2 WERE THE WIVES OF THE DIRECTORS OF THE ASSESSEE AND THE OTHE R SISTER CONCERNS FROM WHOM THE ASSESSEE COMPANY RECEIVED THE JOB WORK CHA RGES. HOWEVER, DESPITE THE FACT THAT THE CPWPL WAS ONE OF THE PERS ONS COVERED U/S. 40A(2)(B) OF THE ACT, THE ASSESSEE OR ITS AUDITORS HAD NOT MENTIONED THAT FACT IN THE TAX AUDIT REPORT IN FORM NO.3CD FILED A LONG WITH THE RETURN OF INCOME. 4.2 COMING TO THE MERITS OF THE AGREEMENT THE ASSES SING OFFICER OBSERVED THAT THERE IS ABSOLUTELY NO BUSINESS PRUDE NCE INVOLVED IN THE AGREEMENT AND FAILS THE TEST OF PREPONDERANCE OF PR OBABILITY. THE WHOLE TRANSACTION OF THE SO CALLED CONDUCTING AGREEMENT, ACCORDING TO THE ASSESSING OFFICER, IS A MAKE BELIEVE, COLOURABLE AN D SELF SERVING ARRANGEMENT WHICH CANNOT BE RELIED UPON. ACCORDING TO THE ASSESSING OFFICER SINCE THE ASSESSEE HAS NOT RECEIVED ANY OTH ER MONETARY CONSIDERATION FROM THE COMPANY CPWPL IN RESPECT OF THE FACTORY AT COIMBATORE WHICH WAS HANDED OVER AND KEPT AT THE DI SPOSAL OF CPWPL BY THE ASSESSEE, AND SINCE THE ASSESSEE HAD STATED DUR ING THE ASSESSMENT PROCEEDINGS THAT IT HAD NOT RECEIVED ANY CONCESSION OR DISCOUNT IN RATES OR CHARGES FOR THIS POLISHING WORK UNDERTAKEN BY CP WPL, THEREFORE, SUCH HANDING OVER OF THE FACTORY BY WAY OF THIS CONDUCTI NG AGREEMENT IS I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 4 NOTHING BUT LEASE OF THE FACTORY TO THE COMPANY CPW PL. SINCE NO MONETARY CONSIDERATION WAS RECEIVED/RECEIVABLE BY T HE ASSESSEE AS PER THE AGREEMENT, HE ESTIMATED 15% OF THE TOTAL VALUE OF THE GROSS BLOCK OF THE FIXED ASSETS GIVEN TO CPWPL OF RS.6,07,74,638 A S THE ALV OF THE PROPERTY WHICH COMES TO RS.91,16,195/-. SINCE THE RATES AND TAXES ETC., WERE BEING PAID BY CPWPL THE ASSESSING OFFICER DID NOT ALLOW ANY DEDUCTION. FURTHER SINCE THE REPAIRS ETC., WERE AL READY CLAIMED BY THE ASSESSEE WHICH WAS ALLOWED UNDER THE HEAD BUSINESS, NO ALLOWANCE FOR REPAIRS ETC., WAS GIVEN BY HIM. THUS, HE TREATED T HE SAID RS.91,16,195/- AS THE INCOME OF THE ASSESSEE FROM THIS AGREEMENT OF L EASE AND ASSESSED THE SAME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. 5. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THERE IS NO MATERIAL OR EVIDENCE TO SUPPORT THE INFERENCE AND/OR CONCLUSION S OF THE ASSESSING OFFICER. SINCE THE ONLY BASIS FOR DISREGARDING THE TRANSACTION AND ASSESSING THE INCOME AS INCOME FROM HOUSE PROPERTY IS THE TRANSACTION BETWEEN THE RELATED PARTIES, IT WAS SUBMITTED THAT IN THE PAST THE TRANSACTIONS HAVE BEEN ACCEPTED BY THE INCOME-TAX D EPARTMENT. FURTHER THE ASSESSING OFFICER HAS ESTIMATED THE INCOME AT 1 5% OF GROSS BLOCK OF ASSETS. HOWEVER, THE BASIS OF ESTIMATING THE SAME AT 15% IS WITHOUT ANY BASIS/REASON. IT WAS ARGUED THAT INCOME CAN BE ASS ESSED AS INCOME FROM HOUSE PROPERTY ON THE BASIS OF RATEABLE VALUE OF T HE FACTORY BUILDING SINCE THE ALLEGATION OF THE ASSESSING OFFICER IS TH AT THE BUILDING HAS BEEN LET OUT. IT WAS ARGUED THAT IN CASE OF IMMOVABLE P ROPERTY ONE HAS TO FIND OUT WHAT IS THE EXPECTED RATE OF RETURN IN THE MARK ET. IN CASE OF COMPOSITE LETTING THE RETURN CANNOT BE ESTIMATED ON THE BASIS OF GROSS BLOCK. IT WAS ARGUED THAT THE ASSESSING OFFICER ON THE ONE HAND I S HOLDING THAT THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE CPWPL ARE NOT GENUINE AND THEREFORE, THERE IS A JUSTIFICATION FOR TAXING THE INCOME BY ESTIMATING THE SAME AS INCOME FROM HOUSE PROPERTY. HOWEVER, SIM ULTANEOUSLY THE INCOME DERIVED FROM CPWPL HAS BEEN TAXED. IT WAS S UBMITTED THAT THE FACTORY AND MACHINERY WHICH WAS HANDED OVER TO THE COMPANY CPWPL BY WAY OF CONDUCTING AGREEMENT WAS USED IN THE BUSINES S OF THE ASSESSEE SO I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 5 MUCH SO THAT BECAUSE OF THIS CONDUCTING AGREEMENT T HE ASSESSEE COULD GET THE PRIORITY IN ITS WORK TO BE DONE BY CPWPL. IT WAS SUBMITTED THAT IT WAS ONLY A FACTORY WITH PLANT AND MACHINERY WHICH C OULD NOT BE BROUGHT WITHIN THE SCOPE OF SECTION 22 OF THE ACT TO ESTIMA TE THE NOTIONAL ANNUAL LETTING VALUE (ALV) FOR THE SAID FACTORY AND PLANT AND MACHINERY. IT WAS SUBMITTED THAT ALL ALONG SINCE 1997-98 AND ONWARDS THE ASSESSEE HAS BEEN CLAIMING THE DEPRECIATION IN RESPECT OF THE FA CTORY AND THIS HAS BEEN ACCEPTED BY THE DEPARTMENT AND THEREFORE, IT COULD NOT BE TREATED AS HOUSE PROPERTY FOR THE PURPOSE OF ESTIMATION OF ALV AS HAS BEEN DONE BY THE ASSESSING OFFICER. 6. HOWEVER, THE VARIOUS SUBMISSIONS MADE BY THE ASSESS EE DID NOT CONVINCE THE CIT(A) FULLY WHO OBSERVED THAT THE OBJ ECTION OF THE ASSESSEE IS ONLY PARTLY ACCEPTABLE. ACCORDING TO HIM AS PER THE PROVISIONS OF SECTION 22 OF THE ACT ANY BUILDING CAN BE BROUGHT W ITHIN THE SCOPE OF INCOME FROM HOUSE PROPERTY ON A NOTIONAL BASIS. TH EREFORE, THE FACTORY EXCLUDING THE PLANT AND MACHINERY COULD BE BROUGHT WITHIN THE SCOPE OF BUILDING AS MENTIONED IN SECTION 22 OF THE ACT. IF THE ASSESSEE HAD RECEIVED ANY CONSIDERATION FROM THIS HANDING OVER O F THE FACTORY ALONG WITH THE PLANT AND MACHINERY THEN THERE SHOULD BE A POSSIBILITY OF SPLITTING THE SAID CONSIDERATION INTO TWO PARTS AND ASSESSING THE SAME UNDER TWO HEADS I.E., INCOME FROM HOUSE PROPERTY WHICH IS ATTRIBUTABLE TO THE FACTORY BUILDING AND INCOME FROM OTHER SOUR CES IN RESPECT OF PLANT AND MACHINERY. BUT IN THIS CASE THE ASSESSEE HAS NOT RECEIVED ANY CONSIDERATION AT ALL AS A RESULT OF THIS CONDUCTING AGREEMENT. THEREFORE, ACCORDING TO THE CIT(A) IN RESPECT OF THE BUILDING PORTION OF THE FACTORY, SECTION 22 OF THE ACT COULD BE INVOKED AS PER WHICH THE INCOME HAS TO BE BROUGHT TO TAX ON A NOTIONAL ALV FOR THE SAID FACTO RY BUILDING. FOR THIS PROPOSITION HE RELIED ON THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF BHAGWAN DASS JAIN VS. UNION OF INDIA REPORT ED IN 128 ITR 315 WHERE IN ASSESSMENT OF INCOME FROM HOUSE PROPERTY O N A NOTIONAL BASIS HAS BEEN CONFIRMED. HE OBSERVED THAT THE FACTORY, EVER SINCE IT WAS CONSTRUCTED, HAS NOT BEEN USED BY THE ASSESSEE IN I TS BUSINESS AND IT WAS I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 6 ENTRUSTED WITH CPWPL WITHOUT ANY CONSIDERATION AS E VIDENCED FROM THE SAID CONDUCTING AGREEMENT. THEREFORE, HE OBSERVED THAT THE LAND AND THE FACTORY BUILDING HAS TO BE SEPARATELY TREATED AS BU ILDING WITHIN THE MEANING OF SECTION 22 OF THE ACT. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE HE CALCULATED THE GROSS VALUE OF THE L AND AND BUILDING AT RS.2,78,30,142 AND THE VALUE OF PLANT AND MACHINERY AT RS.3,29,00,246. HE OBSERVED THAT IN RESPECT OF THIS PLANT AND MACHI NERY IT IS NOT POSSIBLE TO INVOKE THE PROVISIONS OF SECTION 22 OF THE ACT A ND SECTION 22 CAN BE APPLIED ONLY TO THE BUILDING VALUE OF RS.2,78,30,14 2. RELYING ON A COUPLE OF DECISIONS PARTICULARLY ON THE DECISION OF THE TR IBUNAL IN THE CASE OF CHEM MECH PVT. LTD. (83 ITR 427) AND OMPRAKASH & CO . (87 TTJ 183) (MUM) HE DIRECTED THE ASSESSING OFFICER TO RECOMPUT E THE INCOME FROM HOUSE PROPERTY ADOPTING THE ALV AT 8.5% OF RS.2,78, 30,142 BEING THE INVESTED COST OF THE BUILDING. 7. AS REGARDS THE CONTENTION OF THE ASSESSEE THAT THE PRINCIPLE OF CONSISTENCY SHOULD NOT BE DISTURBED HE OBSERVED THA T SOME OF THE ASSESSMENTS IN THE PAST HAVE BEEN DONE U/S. 143(1) AND SOME OF THEM WERE PASSED U/S. 143(3). FROM THE ASSESSMENTS MADE U/S. 143(3) IT IS EVIDENT THAT THE ASSESSING OFFICER HAS NOT APPLIED HIS MIND TO THE ISSUE OF ASSESSABILITY OF SAID FACTORY BUILDING U/S. 22 OF T HE ACT. HE OBSERVED THAT TO HIS SPECIFIC QUERY IT WAS REPLIED BY THE COUNSEL APPEARING FOR THE ASSESSEE THAT THE ISSUE OF ASSESSMENT U/S. 22 WAS N EVER CONSIDERED BY THE ASSESSING OFFICER IN THE EARLIER ASSESSMENTS. HE A CCORDINGLY OBSERVED THAT THE PRINCIPLE OF CONSISTENCY WOULD NOT STAND I N THE WAY OF ASSESSING THIS INCOME UNDER THE HEAD INCOME FROM HOUSE PROPE RTY. ACCORDING TO HIM UNLESS THIS WAS ORIGINALLY AGITATED, DISCUSSED AND ACCEPTED BY THE ASSESSING OFFICER ON THE SAME SET OF FACTS NO DIFFE RENT DECISION MIGHT BE POSSIBLE IN THE SUBSEQUENT YEARS WITHOUT ANY CONTRA RY JUDICIAL DECISIONS. HOWEVER, THIS ISSUE WAS NEVER DISCUSSED, RAISED OR ADJUDICATED IN THE EARLIER ASSESSMENTS. HE ACCORDINGLY CONFIRMED THE ACTION OF THE ASSESSING OFFICER IN ASSESSING THE INCOME UNDER THE HEAD INC OME FROM HOUSE PROPERTY BUT ONLY TO THE EXTENT OF THE FACTORY BUI LDING. I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 7 7.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) BOTH TH E REVENUE AND THE ASSESSEE ARE IN APPEAL BEFORE US. 8. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ARRANGEMENT WITH CPWPL STARTED IN THE YEAR 1991 AND THEREAFTER CONTINUED FROM YEAR TO YEAR. REFERRING TO THE ORDE RS PASSED U/S. 143(3) OF THE ACT, HE SUBMITTED THAT THE DEPARTMENT HAS AL L ALONG ACCEPTED THE CONDUCTING AGREEMENT ENTERED INTO BETWEEN THE ASSES SEE AND THE CPWPL. HOWEVER, DURING THIS YEAR THE ASSESSING OFF ICER QUESTIONED THE ARRANGEMENT. HE SUBMITTED THAT THE ASSESSEES BUSI NESS IS THAT OF CUTTING AND POLISHING OF DIAMONDS AT COIMBATORE AND THE ASS ESSEE RECEIVED CONSIDERATION IN THE SHAPE OF JOB RECEIPTS FOR SUCH WORK AND ALSO PAID JOB CHARGES AND IS CONSISTENTLY MAKING HUGE PROFITS BY THIS ARRANGEMENT. HE SUBMITTED THAT DURING THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAS REALISED JOB CHARGES OF RS.7.79 CRORES AND PAID JOB CHARGES OF APPROXIMATELY RS.7 CRORES AND EARNED MORE THAN 10% PROFIT ON SUCH JOB CHARGES. THE ASSESSING OFFICER IN THE PAST HAS ALL OWED DEPRECIATION TO THE ASSESSEE PRIOR TO THIS YEAR, THEREFORE, IT IS A COM MERCIAL ASSET WHICH HAS BEEN RECOGNISED CONSISTENTLY AND ACCEPTED THEREON B Y THE DEPARTMENT. HE SUBMITTED THAT WHEN THE ASSESSEE CONSTRUCTS A WE LL EQUIPPED FACTORY HE MAY EITHER USE IT BY ITSELF OR ENGAGE A CONTRACT OR TO DO ITS WORK. HE SUBMITTED THAT THE CAPACITY OF THE FACTORY WAS MORE THAN WHAT IS REQUIRED FOR THE ASSESSEE AND THEREFORE, TO REDUCE THE EXPEN DITURE BURDEN THE ASSESSEE ALLOWED THE CONTRACTOR TO DO JOB WORK FOR OTHERS ALSO BY USING THE IDLE CAPACITY. THIS ACT OF THE ASSESSEE WAS DO NE KEEPING IN VIEW THE COMMERCIAL EXPEDIENCY. HE SUBMITTED THAT THE CONTR ACTOR RECEIVED ABOUT RS. 13 CRORES OUT OF WHICH HE RECEIVED JOB CHARGES OF RS.7 CRORES FROM THE ASSESSEE. HE SUBMITTED THAT THE AGREEMENT WITH CPW PL IS A PURE AND SIMPLE ARRANGEMENT AND BY DOING THIS THE COST OF PR ODUCTION HAS GONE DOWN. HE SUBMITTED THAT MERELY BECAUSE THE FACTORY HAS BEEN LET OUT TO AN OUTSIDER THE ASSESSING OFFICER CANNOT BRING THE INCOME AS INCOME FROM HOUSE PROPERTY. I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 8 8.1 REFERRING TO THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. HINDUSTAN MACHINE TOOLS, HE SUBMITT ED THAT THE HONBLE COURT IN THE SAID CASE HAS HELD THAT WHEN AN ASSESS EE LEASED OUT INDUSTRIAL SHED TO ANCILLARY UNIT TO MANUFACTURE COMPONENTS RE QUIRED BY THE ASSESSEE, THE INCOME DERIVED FROM LETTING OUT THE S HEDS WAS NOT INCOME DERIVED FROM EXERCISE OF HOUSE PROPERTY RIGHTS ONLY BUT INCOME DERIVED FROM CARRYING OUT ASSESSEES OWN BUSINESS AND SHOUL D BE ASSESSED AS INCOME FROM BUSINESS. 8.2 REFERRING TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MODI INDUSTRIES REPORTED IN 210 ITR 1, HE S UBMITTED THAT WHEN THE ASSESSEE FOUND IT EXPEDIENT TO ALLOW ITS PROPERTIES TO BE OCCUPIED BY DIRECTORS AND MANAGING AGENTS TO FACILITATE PROPER SUPERVISION OF ASSESSEES BUSINESS THE INCOME TO BE COMPUTED IS I NCOME FROM BUSINESS AND ACCORDINGLY IT WAS HELD THAT THE ACTUAL EXPENSE S FOR REPAIRS AND DEPRECIATION WAS ALLOWABLE. 8.3 REFERRING TO THE DECISION OF THE HONBLE SUPREM E COURT IN THE CASE OF RADHASAOMI SATSANG VS. CIT, REPORTED IN 193 ITR 321 HE SUBMITTED THAT THE HONBLE SUPREME COURT IN THE SAID DECISION HAS HELD THAT STRICTLY SPEAKING RES JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS. THOUGH EACH ASSESSMENT YEAR BEING A UNIT, WHAT WAS DECIDED IN ONE YEAR MIGHT NOT APPLY IN THE FOLLOWING YEAR. WHERE A FUNDAMENT AL ASPECT PERMEATING THROUGH DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND A S A FACT ONE OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPRO PRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. 8.4 REFERRING TO THE DECISION OF HONBLE SUPREME CO URT IN THE CASE OF SA BUILDERS LTD., REPORTED IN 288 ITR 1, HE SUBMITT ED THAT IT HAS TO BE LEFT TO THE ASSESSEE AS TO HOW TO CONDUCT ITS BUSINESS A ND IT IS NOT FOR THE DEPARTMENT AS TO HOW THE ASSESSEE SHOULD HAVE CONDU CTED ITS BUSINESS. HE SUBMITTED THAT THE ASSESSEE MAY EXPLOIT ITS FACT ORY BUILDING AND I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 9 MACHINERY DIRECTLY OR INDIRECTLY OR THROUGH SECOND PARTY ACCORDING TO COMMERCIAL EXPEDIENCY/COMMERCIAL VIABILITY. HE SUB MITTED THAT IN THE INSTANT CASE THERE IS NEITHER LEAKAGE OF REVENUE NO R IT IS A COLOURABLE DEVICE TO AVOID TAX. SINCE THE DEPARTMENT HAS ACCE PTED THE CONDUCTING AGREEMENT IN THE PAST, THEREFORE, THERE SHOULD NOT HAVE BEEN ANY DEVIATION. HE ACCORDINGLY SUBMITTED THAT THE CIT(A ) WAS NOT AT ALL JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO ADO PT THE NOTIONAL ALV OF THE PROPERTY AT 8.5% ON THE TOTAL INVESTMENT OF RS.2,78 ,30,142. 8.5 WITHOUT PREJUDICE TO THE ABOVE HE SUBMITTED THAT IF ANY INCOME IS ASSESSABLE TO TAX UNDER THE HEAD INCOME FROM HOUSE PROPERTY THE PERCENTAGE OF INCOME WITH REFERENCE TO THE VALUE OF THE PROPER TY HAS TO BE TAKEN KEEPING IN MIND THE NATURE OF AGREEMENT AND THE BENEFIT DER IVED BY THE ASSESSEE IN THE COURSE OF CARRYING ON ITS BUSINESS, IN THE FORM OF GETTING PRIORITY TO HIS WORK AND FURTHER SUCH INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. FURTHER AGAINST SUCH INCOME STATUTORY DEDUCTION U/S . 24 OF THE ACT OUGHT TO HAVE BEEN GRANTED. IT MAY BE NOTICED THAT THE CASE OF THE ASSESSING OFFICER WAS THAT THE RATES AND TAXES ETC., WERE PAID BY CPW PL. HOWEVER, THE STATUTORY DEDUCTION CONTEMPLATED U/S. 24 IS MEANT T O TAKE INTO CONSIDERATION DEPLETION IN THE VALUE OF THE PROPERTY AND MEANT TO REPAIRS AND MAINTENANCE WORKS TO BE CARRIED OUT. THE STATUTE PROVIDES A ST ANDARD 30% DEDUCTION BEARING IN MIND THE OVER ALL EXPENDITURE TO BE INCU RRED FOR REPAIRS AND MAINTENANCE OF THE PROPERTY. 9. THE LEARNED DR, ON THE OTHER HAND, FOR THE REASONS RECORDED IN THE BODY OF THE ASSESSMENT ORDER SUPPORTED THE ORDER OF THE ASSESSING OFFICER. HE SUBMITTED THAT THE ASSESSING OFFICER W AS JUSTIFIED IN TAKING 15% OF THE GROSS BLOCK OF ASSETS OF THE FACTORY BUI LDING AND MACHINERY AT COIMBATORE AS THE ALV OF THE HOUSE PROPERTY AND THE CIT(A) WAS NOT AT ALL JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO ADO PT 8.5% OF THE FACTORY BUILDING FOR THE PURPOSE OF CALCULATING THE ALV. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSION MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 10 BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS CONSTRUCTED THE FACTORY BUILDING AND INSTALLED PLANT AND MACHINERY IN THE SAID FACTORY BUILDING FOR CARRYING OUT THE MANU FACTURING OF DIAMONDS WHICH INVOLVES PROCESSING OF ROUGH DIAMONDS AND CUT TING AND POLISHING OF THE SAME. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAD HANDED OVER THE FACTORY BUILDING ALONG WITH PLANT AND MACH INERY INSTALLED THEREIN TO M/S. CPWPL BY WAY OF A CONDUCTING AGREEMENT. WE FIND FROM CLAUSE 5 OF THE CONDUCTING AGREEMENT, A COPY OF WHICH IS PLA CED AT PAPER BOOK PAGES 43 TO 48, THAT IN CONSIDERATION OF THE PRODUC TION AND COMMERCIAL FACILITIES PROVIDED BY THE ASSESSEE TO THE CONDUCTO R, THE CONDUCTOR AGREES TO GIVE FIRST PREFERENCE TO TURN OUT THE GOODS SUPP LIED BY THE OWNER AS MUTUALLY AGREED UPON BETWEEN THE PARTIES FROM TIME TO TIME DEPENDING ON THE WORK PROVIDED AND THE CONDUCTOR SHALL GIVE P REFERENCE UP TO 80% OF THE TOTAL WORK ORDERS RECEIVED BY HIM. THERE IS ALSO NO DISPUTE TO THE FACT THAT CPWPL WAS DOING THE JOB WORK FOR THE ASSE SSEE AS WELL AS FOR OTHERS FROM THE SAID PREMISES. THERE IS ALSO NO DI SPUTE TO THE FACT THAT THIS TYPE OF ARRANGEMENT WAS ACCEPTED BY THE DEPART MENT IN ASSESSEES OWN CASE IN ORDERS PASSED U/S. 143(3) OF THE ACT. IT IS THE CASE OF THE REVENUE THAT SINCE THE ASSESSEE HAS NOT RECEIVED AN Y OTHER MONETARY CONSIDERATION FROM THE COMPANY CPWPL IN RESPECT OF THE FACTORY AT COIMBATORE WHICH WAS HANDED OVER AND KEPT AT THE DI SPOSAL OF THE CPWPL BY THE ASSESSEE AND SINCE IT WAS STATED DURIN G THE ASSESSMENT PROCEEDINGS THAT IT HAD NOT RECEIVED ANY CONCESSION OR DISCOUNT IN THE RATES OR CHARGES FOR THE POLISHING WORK UNDERTAKEN BY CPWPL SUCH HANDING OVER THE FACTORY BY WAY OF CONDUCTING AGREE MENT IS NOTHING BUT THE LEASE OF THE FACTORY TO THE COMPANY CPWPL. 10.1 IN OUR CONSIDERED OPINION, MERE NON RECEIPT OF RENT SHOULD NOT BE A CONCLUSIVE FACTOR TO HOLD THAT THE ACT OF PROVIDING THE BUILDING ALONG WITH PLANT AND MACHINERY TO CPWPL WOULD AMOUNT TO A LEASE TRAN SACTION AND INCOME THEREFROM IS ASSESSABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IN ORDER TO APPRECIATE AS TO WHETHER A BENEFIT ARISING OUT OF HANDING OVER OF THE I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 11 BUILDING AND PLANT AND MACHINERY IS ASSESSABLE TO T AX UNDER THE HEAD INCOME FROM HOUSE PROPERTY OR UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION HAS TO BE DETERMINED ON A CONSPICUOUS O F THE FACT OF THE CASE. IT IS RELEVANT HERE TO NOTE THE PRINCIPLES EVOLVED BY VAR IOUS COURTS ON THE ISSUE AS TO WHETHER EXPLOITATION OF A COMMERCIAL ASSET WOULD RESULT IN EARNING OF BUSINESS INCOME OR INCOME FROM HOUSE PROPERTY. 10.2 IN THE CASE OF HINDUSTAN MACHINE TOOLS (SUPRA), THE HONBLE KARNATAKA HIGH COURT OBSERVED THAT IN THE CASE OF A N ASSESSEE UTILISING THE HOUSE PROPERTY WITH THE MAIN INTENTION OF GAINING COMMERCIAL BENEFIT OUT OF IT, THE INCOME, IF ANY, THEREFROM HAS TO BE ASSESSE D UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. RELEVANT SHORT-N OTES FROM THE REPORTED DECISION IS EXTRACTED BELOW: (SHORT NOTES) THE QUESTION AS TO UNDER WHICH THE HEADS ENUMERATE D IN S. 14 OF THE I.T. ACT, 1961, A PARTICULAR INCOME FALLS HAS TO BE DECIDED HAVING REGARD TO THE FACTS AND CIRCUMSTANCE S OF THE CASE. SECTION 22 OF THE I.T. ACT, 1961, INDICATES THAT ME RELY BECAUSE A PERSON IS THE OWNER OF A PROPERTY IT DOES NOT FOL LOW THAT THE INCOME THEREFROM SHOULD BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IT EXCEPTS SUCH PORTION OF T HE PROPERTY AS MAY BE OCCUPIED FOR THE PURPOSES OF ANY BUSINESS OR PROFESSION CARRIED ON BY HIM, THE PROFITS OF WHICH ARE CHARGEABLE TO INCOME-TAX. THE GUIDANCE TO BE SOUGH T IS TO FIND OUT THE USER OF THE PROPERTY AND THE CHARACTER IN WHICH THAT PROPERTY IS USED. . . . . HELD, THAT INSTEAD OF THE ASSESSEE HIMSELF ENGAGING IN THE MANUFACTURE OF THE COMPONENTS THROUGH ITS OWN LABOU RERS, THE ANCILLARY UNITS WERE REQUIRED TO MANUFACTURE TH EM FOR ITS PURPOSES. THE BENEFIT WHICH THE ASSESSEE DERIVED W AS ALMOST DIRECT, NAMELY, CONTINUOUS SUPPLY OF COMPONENTS TO KEEP UP ITS OWN PRODUCTION AND MANUFACTURING OF COMPONENTS UNDER ITS OWN GUIDANCE AND SCRUTINY. THEREFORE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT T HE INCOME DERIVED BY THE ASSESSEE FROM THE SHEDS CONSTRUCTED AND LEASED OUT TO THE SEVERAL PERSONS ON A RENTAL BASIS WAS TO BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS. I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 12 10.3 SIMILARLY IN THE CASE OF MODI INDUSTRIES (SUPRA), T HE HONBLE DELHI HIGH COURT OBSERVATIONS, AS SUMMARISED IN THE SHORT -NOTE ARE AS UNDER: (SHORT NOTES) A BUNGALOW OWNED BY THE ASSESSEE-COMPANY WAS IN TH E OCCUPATION OF G AND K SINCE 1932 AS EMPLOYEES AND D IRECTORS FREE OF CHARGE. IN JULY, 1960, AFTER MANAGING AGEN TS WERE APPOINTED FOR THE COMPANY, G AND K WERE PERMITTED T O CONTINUE THE USER OF THE BUNGALOW BUT AS NOMINEE DI RECTORS OF THE MANAGING AGENTS ON PAYMENT OF NOMINAL RENT. TH E ASSESSEE-COMPANY EFFECTED REPAIRS TO THE BUNGALOW A ND ALSO PROVIDED MODERN AMENITIES INCLUDING AIR-CONDITIONER S. THE QUESTIONS WERE WHETHER THE INCOME FROM THE BUNGALOW WAS TO BE COMPUTED AS INCOME FROM BUSINESS AND WHETHER THE ASSESSEE WAS ENTITLED TO CLAIM ALLOWANCE FOR ACTUAL REPAIRS AND DEPRECIATION. THE APPELLATE TRIBUNAL FOUND THA T THE ASSESSEE COMPANY FOUND IT EXPEDIENT TO ALLOW THE BE NEFIT OF OCCUPATION OF THE PROPERTY BY NOMINEES OF THE MANAG ING AGENTS IN ORDER TO FACILITATE PROPER SUPERVISION BY THEM IN THE INTERESTS OF SMOOTH RUNNING OF THE BUSINESS OF THE ASSESSEE AND HELD THAT THE INCOME FROM THE BUNGALOW HAD TO B E COMPUTED UNDER THE HEAD INCOME FROM BUSINESS AND NOT UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND ALS O THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION OF THE ACTUA L REPAIRS AND DEPRECIATION. ON A REFERENCE: HELD (I) THAT IN VIEW OF THE FINDING OF FACT BY THE TRIBUNAL, OCCUPATION OF THE PROPERTY BY G AND K FOR THE PURPO SE OF EFFECTIVE DISCHARGE OF THEIR DUTIES VIS--VIS THE B USINESS OF THE ASSESSEE COMPANY AMOUNTED TO OCCUPATION BY THE ASSE SSEE FOR THE PURPOSE OF ITS BUSINESS AND THE INCOME THEREFOR E HAD TO BE ASSESSED AS INCOME FROM BUSINESS. (II) THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION OF ACTUAL REPAIRS AND DEPRECIATION. THE TERM OCCUPY APPEARING IN SECTION 22 OF THE IN COME-TAX ACT, 1961, REFERS TO OCCUPATION DIRECTLY BY THE ASS ESSEE OR THROUGH AN EMPLOYEE OR AN AGENT BUT SUCH OCCUPATION BY THE EMPLOYEE, ETC., MUST BE SUBSERVIENT TO AND NECESSAR Y FOR THE PERFORMANCE OF THE DUTIES IN CONNECTION WITH THE BU SINESS OF THE ASSESSEE. TO FALL WITHIN THE AMBIT OF THE EXEMPTION IN SECTIO N 22 IT IS NOT NECESSARY THAT THE PROPERTY MUST BE AS SUCH IN THE OCCUPATION OF THE ASSESSEE HIMSELF OR NECESSARILY U SED FOR CARRYING ON HIS BUSINESS ACTIVITY AND NOT USED FOR RESIDENTIAL PURPOSES. I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 13 WHEN A HOUSE PROPERTY IS OCCUPIED AS RESIDENCE BY E MPLOYEES OR DIRECTORS, ETC., OF THE ASSESSEE COMPANY, IF CON CERNED WITH THE PROMOTION OF THE BUSINESS OF THE ASSESSEE-COMPA NY, WHETHER ON PAYMENT OF RENT OR OTHERWISE, TO ENABLE THEM TO DISCHARGE THEIR FUNCTIONS EFFICIENTLY AND THE LETTI NG OUT OF THE PROPERTY IS SUBSERVIENT AND INCIDENTAL TO THE MAIN BUSINESS OF THE ASSESSEE, SUCH AN OCCUPATION AMOUNTS TO OCCUPAT ION AND USER OF THE PROPERTY BY THE ASSESSEE ITSELF FOR THE PURPOSE OF ITS BUSINESS, EVEN THOUGH NO BUSINESS IS ACTUALLY R UN IN SUCH PREMISES. 10.4 WE MAY ALSO REFER TO THE RELEVANT OBSERVATIONS OF T HE APEX COURT IN THE CASE OF RADHASAOMI SATSANG (SUPRA) WHEREIN THE COURT OBSERVED THAT THOUGH THE PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS, THEORY OF CONSISTENCY HAS TO BE FOLLOWED INASMUCH A S PARTIES ARE NOT PERMITTED TO TAKE FRESH LITIGATION BECAUSE OF NEW VIEWS/NEW V ERSIONS WHICH THEY MAY PRESENT. RELEVANT SHORT NOTES FROM THE REPORTED DE CISION AT PAGE 329 IS EXTRACTED BELOW: WE ARE AWARE OF THE FACT THAT STRICTLY SPEAKING, R ES JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS. AGAIN, E ACH ASSESSMENT YEAR BEING A UNIT, WHAT IS DECIDED IN ON E YEAR MAY NOT APPLY IN THE FOLLOWING YEAR BUT WHERE A FUNDAME NTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND P ARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT C HALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPROPRIATE TO AL LOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. 11. IN THE BACKDROP OF THE ABOVE VIEWS, WE SHALL NOW EX AMINE THE FACTS OF THE CASE. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAD THE BENEFIT OF PRIORITY IN THE MATTER OF GETTING THE JOB WORK DONE BY CPWPL ON PROVIDING THE FACTORY BUILDING ALONG WITH PLANT AND MACHINERY. T HERE IS ALSO NO DISPUTE TO THE FACT THAT THE SAID FACTORY BUILDING IS A COMMER CIAL PROPERTY AND CANNOT BE PUT TO ANY OTHER USE OTHER THAN FOR THE SPECIFIC WO RK IT WAS ALLOWED TO BE UTILISED BY CPWPL. NO DOUBT, ON A PROPERTY WORTH R S.6.07 CRORES, AS A PRUDENT BUSINESSMAN THE ASSESSEE COMPANY HAD TO DER IVE A REASONABLE MONETARY BENEFIT FOR ALLOWING CPWPL TO UTILISE THE PREMISES. THOUGH THE ASSESSEE INITIALLY CLAIMED THAT BY VIRTUE OF THE AG REEMENT THE GOODS SUPPLIED BY THE ASSESSEE WERE RETURNED TO IT ON A PREFERENTI AL BASIS BY ATTENDING THE JOB I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 14 WORK OF THE ASSESSEE BY GIVING FIRST PREFERENCE AND ALSO AT CONCESSIONAL RATE. HOWEVER, DURING THE COURSE OF ARGUMENTS, IT COULD N OT BE PROVED THAT THE ASSESSEE OBTAINED ANY CONCESSION IN GETTING THE JOB WORK DONE. IT IS NOTICED THAT THE TOTAL JOB RECEIPTS WORKED OUT TO RS.7.79 C RORES WHEREAS THE ASSESSEE PAID JOB CHARGES OF RS.7.09 CRORES AND THUS EARNED A PROFIT OF ABOUT 10% ON THE JOB RECEIPTS. HOWEVER, IT HAS NOT BEEN SHOWN A S TO WHAT IS THE REASONABLE PROFIT IN THIS LINE OF BUSINESS ON SUCH TURNOVER. FOR EXAMPLE, IF THE ASSESSEE SHOWED A TURNOVER OF RS.7.79 CRORES, THE NORMAL PRO FIT SHOULD BE EARNED IS RS. 20 LAKHS, BUT THE ASSESSEE EARNED PROFIT OF RS.79 L AKHS WHICH IS ATTRIBUTABLE TO GIVING THE PROPERTY UNDER THE CONDUCTING AGREEMENT WITHOUT CHARGING ANY EXTRA AMOUNT. IT CAN REASONABLE BE PRESUMED, IN SU CH AN EVENT, THAT THE ADDITIONAL PROFIT IS ATTRIBUTABLE TO THE BENEFITS D ERIVED BY THE ASSESSEE BY VIRTUE OF PERMITTING CPWPL TO CARRY ON ITS BUSINESS BY UTI LISING THE FACTORY BUILDING AS WELL AS THE PLANT AND MACHINERY. HOWEVER, IN TH E INSTANT CASE THE FACTS WERE NOT PROPERLY BROUGHT OUT. THE INITIAL BURDEN IS UPON THE ASSESSEE TO PROVE THAT BY VIRTUE OF PERMITTING THE CPWPL TO CON DUCT ITS BUSINESS FROM THE SAID PREMISES, THE ASSESSEE DERIVED SOME ADDITIONAL BENEFIT IN ITS MAIN BUSINESS. IT IS NOT DISPUTED THAT THE ASSESSEE HAD AVAILED SPECIAL TREATMENT WHILE GETTING THE JOB WORK DONE THROUGH CPWPL, THE INCOME, IF ANY, ATTRIBUTABLE TO GIVING THE PROFIT TO CPWPL IS ASSES SABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. HOW EVER, IN ORDER TO ASCERTAIN THE REASONABLE RECEIPTS ATTRIBUTABLE TO SUCH PROPER TY, THE ASSESSING OFFICER HAS TO TAKE INTO CONSIDERATION THE NORMAL PROFITS THAT CAN BE EARNED IN THIS LINE OF BUSINESS AND THE ADDITIONAL PROFIT, IF ANY, EARNED BY THE ASSESSEE BY VIRTUE OF CONDUCTING AGREEMENT AND THE DIFFERENCE AMOUNT IS F OUND TO BE LESS THAN THAT OF A REASONABLE RETURNS WHICH IS EXPECTED OF BY A B USINESSMAN WHILE PERMITTING THE COMMERCIAL PROPERTY TO BE UTILISED B Y THE PERSON DOING THE JOB WORK, ONLY SUCH DIFFERENCE SHOULD BE BROUGHT TO TAX UNDER CHAPTER IV OF THE INCOME-TAX ACT. UNDER THE CIRCUMSTANCES WE ARE OF T HE VIEW THAT THE DECISIONS OF THE ASSESSING OFFICER AS WELL AS THE CIT(A) IN T REATING THE BENEFIT OF ADDITIONAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY IS NOT IN ACCORDANCE WITH LAW. SINCE IN OUR OPINION, THE INC OME IS ASSESSABLE TO TAX UNDER CHAPTER IV THE MATTER REQUIRES TO BE RE-EXAMI NED BY THE ASSESSING I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 15 OFFICER. THE ASSESSEE SHALL BE GIVEN REASONABLE OP PORTUNITY OF BEING HEARD WHILE ADJUDICATING THE ISSUE AS TO WHAT SHOULD BE T HE INCOME ATTRIBUTABLE TO THE FACTORY AND PLANT AND MACHINERY, IN THE LIGHT OF OU R OBSERVATIONS ABOVE. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. THE G ROUNDS OF APPEAL ON THIS ISSUE BY THE ASSESSEE AS WELL AS THE REVENUE ARE AC CORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 12. GROUNDS OF APPEAL NO. 2 AND 2(A) BY THE ASSESSEE RE LATE TO THE DISALLOWANCE OF DEPRECIATION OF RS.27,90,438 ON THE FACTORY BUILDING AND PLANT AND MACHINERY OF THE ASSESSEE ON THE GROUND T HAT THE CONDITIONS RELATING TO USER OF THE ASSETS IN ITS BUSINESS WAS NOT FULFILLED. 13. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSING OFFICER TREATED THE HANDING OVER OF THE FACTORY AT COIMBATORE BY WAY OF CONDUCTING AGREEMENT AS THE LEASE ARRANGEMENT INCOME WHICH WAS ASSESSED BY HIM UNDER THE HEAD INCOME FROM HOUSE PROPERTY. HE TR EATED THIS FACTORY AS NOT UTILISED IN THE BUSINESS ACTIVITY OF THE ASSESS EE AND HENCE HE DISALLOWED THE DEPRECIATION ON THE FIXED ASSETS WHI CH WAS CLAIMED BY HIM UNDER THE HEAD INCOME FROM PROFITS AND GAINS OF BU SINESS. THE EXCESS DEPRECIATION CLAIMED BY THE ASSESSEE ON THE FIXED A SSETS WAS WITHDRAWN TO THE EXTENT OF RS.27,90,438/-. 14. BEFORE CIT(A) IT WAS SUBMITTED THAT THE ASSESSING O FFICER DISALLOWED THE DEPRECIATION WITHOUT BRINGING ANYTHI NG ON RECORD TO SHOW THAT THE TRANSACTION WAS NOT GENUINE OR WAS NOT ACT ED UPON. THE ASSESSING OFFICER IGNORED THE FACT THAT THE ASSESSE E HAD INVESTED HEAVILY IN THE PLANT AND MACHINERY AND FACTORY, ETC., INCOM E/EXPENDITURE AND RECEIPTS AND PAYMENTS WERE VERIFIABLE SO ALSO THE Q UANTITATIVE DETAILS. IT WAS SUBMITTED THAT MERELY BECAUSE OF RELATIONSHIP I T HAS BEEN ALLEGED THAT THE TRANSACTION IS MAKE BELIEVE. HOWEVER, THE ASSE SSING OFFICER HAS NOT DEALT WITH THE LEGAL ISSUE AS TO HOW THE INCOME CAN BE ASSESSED AS INCOME FROM HOUSE PROPERTY AND IN PARTICULAR WHERE CPWPL UTILISED THE FACTORY OR COMPOSITE FACILITIES. IT WAS SUBMITTED THAT DEP RECIATION IS DISALLOWED I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 16 ON THE GROUND THAT THE COMPUTATION IS MADE AS INCO ME FROM HOUSE PROPERTY. HOWEVER, AT THE SAME TIME THE BUSINESS INCOME DERIVED FROM LABOUR CHARGES HAS BEEN ASSESSED AS BUSINESS INCOME BUT DEPRECIATION WAS DISALLOWED. 14.1 HOWEVER, THE CIT(A) WAS NOT CONVINCED WITH THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE. RELYING ON A N UMBER OF DECISIONS HE CAME TO THE CONCLUSION THAT DEPRECIATION U/S. 32 OF THE ACT CAN BE ALLOWED TO THE ASSESSEE ONLY IF THE ASSESSEE FULFIL S THE FOLLOWING CONDITIONS: A. ASSETS SHOULD BE OWNED BY THE ASSESSEE CONCERNED; B. IT SHOULD BE PUT TO USE IN THE PREVIOUS YEAR RELEVA NT TO THE ASSESSMENT YEAR CONCERNED; AND C. THE SAID ASSET SHOULD HAVE BEEN PUT TO USE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 15. HOWEVER, IN THE INSTANT CASE, THE ASSESSEE HAS SAT ISFIED THE FIRST TWO CONDITIONS ONLY BUT HAS FAILED TO SATISFY THE T HIRD CONDITION I.E., USER OF THE ASSETS IN ITS OWN BUSINESS. HE ACCORDINGLY HEL D THAT THE ASSESSEE IS NOT ENTITLED TO DEPRECIATION AT ALL IN RESPECT OF T HE FACTORY AND PLANT AND MACHINERY. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) , THE ASSESSEE IS IN APPEAL BEFORE US. 16. WE HAVE HEARD BOTH THE SIDES. WE HAVE ALREADY ACCE PTED THE HANDING OVER OF THE FACTORY BUILDING AS FOR BUSINES S PURPOSES AND, THEREFORE, IN OUR OPINION, THE FACTORY BUILDING IN THE INSTANT CASE DOES NOT COME UNDER THE PURVIEW OF SECTION 22 OF THE ACT AND ACCORDINGLY NO NOTIONAL ALV CAN BE DETERMINED ON ACCOUNT OF SAID F ACTORY BUILDING. FURTHER THE ASSESSING OFFICER IN THE BODY OF THE AS SESSMENT ORDER HAS ACCEPTED THE BUSINESS INCOME AS DECLARED BY THE ASS ESSEE. THEREFORE, IN OUR OPINION, THE ASSESSEE IS ENTITLED TO DEPRECIATI ON. FURTHER DEPRECIATION WAS ALL ALONG ALLOWED IN THE PAST TO THE ASSESSEE. THEREFORE, FOLLOWING THE I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 17 RULE OF CONSISTENCY ALSO DEPRECIATION HAS TO BE ALL OWED. ACCORDINGLY THE GROUNDS OF APPEAL NO. 2 BY THE ASSESSEE IS ALLOWED. 17. REVISED GROUNDS OF APPEAL NO. 3 BY THE ASSESSEE AND REVISED GROUNDS OF APPEAL NO. 1(III) BY THE REVENUE RELATE TO THE ORDER OF THE CIT(A) IN RESTRICTING THE DISALLOWANCE U/S. 40A(2)( B) TO 5% OF THE LABOUR CHARGES PAID TO CPWPL AS AGAINST 10% ADOPTED BY THE ASSESSING OFFICER. 18. FACTS IN BRIEF ARE THAT THE ASSESSEE RECEIVED JOB-W ORK-CHARGES OF RS.7,79,18,125/- OUT OF WHICH A SUM OF RS.7.09 CROR ES WAS PAID TO CPWPL TOWARDS JOB CHARGES AND THE DIFFERENTIAL AMOUNT WAS OFFERED TO TAX AS GROSS PROFIT. IN THE OPINION OF THE ASSESSING OFFI CER, THE PAYMENT MADE TO CPWPL IS EXCESSIVE. SINCE MAJOR SHAREHOLDERS IN CP WPL ARE THE WIVES OF THE DIRECTORS OF THE ASSESSEE-COMPANY, THE A.O. INV OKING THE PROVISIONS OF SECTION 40(A)(II) OF THE ACT, CONCLUDED THAT EXCESS IVE JOB-WORK-CHARGES PAID TO CPWPL DESERVES TO BE DISALLOWED. HE ACCORD INGLY ESTIMATED 10% OF THE JOB-WORK-CHARGES AS EXCESSIVE WHICH WORKS OU T TO RS.70,90,000/-. UNDER THESE CIRCUMSTANCES THERE IS AN INCREASE OF G .P. TO THE EXTENT OF RS.70,90,000/- AND IN TURN THE PERCENTAGE OF PROFIT WORKS OUT TO ABOUT 20. 19. BEFORE CIT(A) IT WAS SUBMITTED THAT THE ASSESSING O FFICER HAS ACCEPTED THE PROCESSING CHARGES PAID BY THE ASSESSE E AS WELL AS BY THE REMAINING PARTIES TO BE AT SAME RATE. HE HAS NOT F OUND THE PAYMENT MADE BY THE ASSESSEE AS EXCESSIVE AS COMPARED TO PAYMENT CHARGES FOR OTHERS. IT WAS SUBMITTED THAT FOR THE PURPOSE OF DISALLOWAN CE U/S. 40A(2)(B) THE ASSESSING OFFICER MUST HAVE MATERIAL TO HOLD THAT T HE EXPENDITURE INCURRED IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES FOR WHICH THE PAYMENT IS MADE . HOWEVER, HE HAS NOT POINTED OUT AS TO HOW THE PAYMENT MADE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE LEGITIMATE NEEDS OF THE BUSINE SS OF THE ASSESSEE AND AS COMPARED TO PAYMENTS MADE BY OTHERS. NO MATERIA L WAS AVAILABLE WITH THE ASSESSING OFFICER TO HOLD THAT THE PROCESSING C HARGES PAID BY THE ASSESSEE WAS EXCESSIVE AT ALL. IT WAS SUBMITTED TH AT THE ASSESSEE HAS I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 18 RECEIVED PROCESSING CHARGES OF RS.7.79 CRORES AND P AID PROCESSING CHARGES OF RS.7.09 CRORES AND HAS EARNED A PROFIT M ARGIN OF MORE THAN 10%. THEREFORE, CONSIDERING THE ASSESSEE AS A COND UIT IS TOTALLY UNSOUND AND WITHOUT ANY BASIS. IT WAS FURTHER SUBMITTED BE FORE THE CIT(A) THAT ALTHOUGH THE DIRECTORS OF THE ASSESSEE COMPANY ARE RELATED TO THE DIRECTORS OF THE CPWPL WHO HAVE SUBSTANTIAL SHAREHO LDING YET THE CHARGES PAID COULD NOT BE SAID TO BE EXCESSIVE. 20. THE CIT(A) CALLED FOR THE DETAILS OF LABOUR CHARGES PAID BY THE ASSESSEE TO CPWPL AND THE LABOUR CHARGES CHARGED BY THE ASSESSEE FROM OTHER CONCERNS AND ALSO THE CHARGES CLAIMED BY CPWP L FROM PARTIES OTHER THAN THE ASSESSEE. FROM THE VARIOUS DETAILS SUBMIT TED BY THE ASSESSEE HE OBSERVED THAT THE POLISHING AND CUTTING CHARGES OF DIAMONDS DIFFER ON THE BASIS OF DIAMONDS OF DIFFERENT SIZES AND DIFFERENT QUALITIES. UNLESS AND UNTIL THE NATURE OF JOB AND THE QUALITY OF DIAMONDS SUPPLIED FOR DOING THAT LABOUR CHARGE IS THE SAME, IT IS NOT POSSIBLE TO FI ND OUT WHETHER DIFFERENTIAL RATES HAVE BEEN APPLIED BY DIFFERENT P ARTIES FOR DIFFERENT PARTIES. HE OBSERVED THAT THE DIAMOND CUTTING AND POLISHING WORK IS HIGHLY INTRICATE AND IT HAS TO BE DONE ON THE UNCUT DIAMONDS OF DIFFERENT SIZES AND DIFFERENT QUALITIES DRAWN FROM DIFFERENT LOTS. THE CHARGES WILL VARY FROM THE SIZE OF THE DIAMONDS AS WELL AS THE Q UALITY OF THE DIAMONDS. IT IS NOT POSSIBLE TO APPORTION THE RATE ON THE BAS IS OF THE TOTAL WEIGHT OF THE DIAMONDS BECAUSE THE SIZE OF A SINGLE PIECE OF DIAMOND MAY RANGE FROM THE WEIGHT OF 0.5 CENTS TO 10 CTS./12 CTS. EAC H AND THE QUALITY ALSO WILL VARY. THUS THERE IS A VARIETY AND MULTIPLICIT Y OF WEIGHT AND QUALITY IN THE DIAMONDS SUPPLIED TO THE JOB WORKER. THEREFOR E, IT IS NOT POSSIBLE TO FIX A STANDARDISED RATE FOR EACH OF THE DIAMOND. H E OBSERVED THAT THE HETEROGENEITY OF THE SIZES AND QUALITY OF DIAMONDS AND HETEROGENEITY IN THE TYPES AND NATURE OF WORK TO BE PERFORMED RENDER IT IMPOSSIBLE TO FIX THE STANDARD RATE WHICH IS ESSENTIAL TO MAKE A COMP ARISON. HE OBSERVED FROM THE COPIES OF THE BILLS FILED BEFORE HIM THAT THE CPWPL HAS CHARGED THE OTHER CONCERNS WHICH ARE ALSO THE SISTER CONCER NS OF THE ASSESSEE GROUP VIZ., (I) MEHTA RATANSE EXPORTS, (II) KIRTI O RNAMENTS PVT. LTD., (III) I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 19 KANTILAL KALIDAS DIAMOND EXPORTS AND (IV) DIMEXON D IAMONDS PVT. LTD. ON GOING THROUGH THE RATES CHARGED BY CPWPL TO THE ASSESSEE HE OBSERVED THAT RATES ARE IN THE ORDER OF RS. 343, RS .340, RS.306, RS.340 AND 343 FOR THE MONTHS OF OCTOBER AND NOVEMBER, 2002. HE OBSERVED THAT THERE ARE SOME BILLS WHEREBY THE ASSESSEE HAS PAID LESSER AMOUNTS BUT MAJORITY ARE IN THE RANGE OF MORE THAN WHAT THE CPW PL HAS CHARGED TO THEIR SISTER CONCERNS AS STATED ABOVE. THEREFORE, SINCE CPWPL IS ONE OF THE RELATED CONCERNS OF THE ASSESSEE WITHIN THE MEA NING OF SECTION 40A(2)(B) OF THE ACT, THE ASSESSING OFFICER IS JUST IFIED IN INVOKING THE PROVISIONS OF SECTION 40A(2)(B) FOR DISALLOWANCE OF THE PAYMENT OF LABOUR CHARGES AS UNREASONABLE AND EXCESSIVE. HOWEVER, SI NCE THERE WERE SOME PAYMENTS WHICH WERE LESSER THAN WHAT CPWPL HAS CHA RGED TO OTHERS, THEREFORE, HE HELD THAT 5% OF THE TOTAL PAYMENTS CA N BE HELD AS EXCESSIVE U/S. 40A(2)(B) AS AGAINST 10% DISALLOWED BY THE ASS ESSING OFFICER. HE ACCORDINGLY RESTRICTED THE DISALLOWANCE TO 50% OF T HE AMOUNT OF RS.70,90,000. THUS HE CONFIRMED THE DISALLOWANCE O F RS.35,45,000 U/S. 40A(2)(B) OF THE ACT. 21. AGGRIEVED WITH SUCH PART RELIEF THE ASSESSEE AS WEL L AS THE REVENUE ARE IN APPEAL BEFORE US. 22. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. THERE IS NO DISPUTE TO THE FACT THAT CPWPL IS RELATED PARTY OF THE ASSESSEE AS PER THE P ROVISIONS OF SECTION 40A(2)(B) OF THE ACT. THERE IS ALSO NO DISPUTE TO THE FACT THAT THERE WAS NO MENTION ABOUT THIS FACT IN THE AUDIT REPORT FURNISH ED ALONG WITH THE RETURN OF INCOME IN THE TAX AUDIT REPORT U/S. 44AB OF THE ACT. WE FIND THE ASSESSING OFFICER DISALLOWED 10% OF THE TOTAL LABOU R CHARGES BEING EXCESSIVE PAYMENTS U/S. 40A(2)(B) ON THE GROUND THA T THE ASSESSEE DID NOT SHOW ANY BILLS AND VOUCHERS OF CPWPL AND COMPAR ABLE INSTANCES. ACCORDING TO THE ASSESSING OFFICER THE ONUS TO PROV E THAT PAYMENT TO A GROUP CONCERN ARE NOT MADE IN EXCESS IS ON THE ASSE SSEE. SINCE THE I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 20 ASSESSEE FAILED TO PROVE THE REASONABLENESS OF PAYM ENT OF LABOUR CHARGES TO CPWPL THE ASSESSING OFFICER DISALLOWED 10% OF TH E LABOUR CHARGES AS EXCESSIVE. WE FIND ALTHOUGH THE CIT(A) VERIFIED FR OM SOME OF THE BILLS AND VOUCHERS PRODUCED BEFORE HIM AND OBSERVED THAT THER E ARE SOME BILLS WHEREBY THE ASSESSEE HAS PAID LESSER AMOUNT TO CPWP L THAN THE OTHER PARTIES AND ALTHOUGH HE OBSERVED THAT IT IS NOT POS SIBLE TO FIX A STANDARDISED RATE FOR EACH OF THE DIAMOND WHICH DEP ENDS ON THE SIZE AND QUALITY OF THE DIAMOND, HE SUSTAINED AN AMOUNT OF R S.35,45,000 OUT OF THE TOTAL DISALLOWANCE OF RS.70,90,000 MADE BY THE ASSE SSING OFFICER. IN OUR OPINION, TO ARRIVE AT THE REASONABLENESS OF THE PAY MENT, BILLS FOR EACH MONTH AND COMPARABLE JOB WORK CHARGES FOR OTHER PARTIES O N MONTH TO MONTH BASIS HAS TO BE EXAMINED. THIS EXERCISE HAS NOT BEEN DON E BY THE ASSESSING OFFICER OR THE CIT(A). HOWEVER, IN THE INSTANT CASE WE HAV E ALREADY RESTORED THE GROUNDS OF APPEAL NO. 1 BY THE ASSESSEE AND THE REV ENUE TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION WHERE THE ASSESSING OFFICER HAS BEEN DIRECTED TO DETERMINE THE REASONABLE PROFIT IN THIS LINE OF BUSINESS CARRIED ON BY THE ASSESSEE. THEREFORE, WE DEEM IT PROPER TO R ESTORE THIS ISSUE ALSO TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATIO N. IN OUR OPINION, EVEN IF JOB WORK CHARGES PAID BY THE ASSESSEE ARE FOUND TO BE E XCESSIVE, RESULTANT DISALLOWANCE, IF ANY, WILL SWELL THE GROSS PROFIT R ATIO. THE ASSESSING OFFICER SHALL KEEP IN MIND THIS ASPECT WHILE CONSIDERING TH E ISSUE IN GROUND NO. 1. WITH THESE OBSERVATIONS, WE RESTORE THIS ISSUE TO T HE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION. THE GROUNDS BY THE ASSESSEE AS WELL AS THE REVENUE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PUR POSES. 23. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE AS WELL AS THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED ON 11 TH DECEMBER, 2009. SD/- (D. MANMOHAN) VICE PRESIDENT SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI, DATED 11 TH DECEMBER , 2009 I.T.A. NOS. 1908 & 2554/MUM/08 M/S. DIMEXON EXPORT PVT. LTD. ======================= 21 COPY TO: (1) THE APPELLANT, (2) THE RESPONDENT, (3) THE CIT(A) CENTRAL-II, MUMBAI, (4) THE CIT, CENTRAL-I, MUMBAI, (5) THE DR, D BENCH, ITAT, MUMBAI. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI TPRAO