J.B. Estates, Hyd, Hyderabad V. ITO, Ward-5(1), Hyderabad

ITA 1974/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66359 (ITAT-HYDERABAD)
• Duration Of Justice: 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 29-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMISHA S GUPT
• Assessee Lawyers: B SATYANARAYANA MURTHY
• Keywords: Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1974/ HYD/2011 : AS SESSMENT YEAR 2008-09 M/S. J.B.ESTATES, HYDERABAD [PAN - AAFFJ 2681M] V/S. INCOME TAX OFFICER, WARD 5(1), HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI B.SATYANARAYANA MURTHY RESPONDENT BY : SMT. AMISHA S.GUPT DATE OF HEARING 03.10.2012 DATE OF PRONOUNCEMENT 12.10.2012 O R D E R PER SANJAY ARORA, ACCOUNTANT MEMBER: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-V, HYDERABAD (CIT(A) FOR SHORT) DATED 17/10/2011, DISMISSING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT UND ER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (ACT HEREINAFTER) VIDE ORDER DATED 31/1 2/2010 FOR ASSESSMENT YEAR 2008-09, DETERMINING THE INCOME OF THE ASSESSEE AT RS.89,84, 921/-. 2. OPENING THE ARGUMENTS ON BEHALF OF THE ASSESSEE, IT WAS SUBMITTED BY THE LEARNED AUTHORIZED REPRESENTATIVE (AR), THAT THOUGH THE ASS ESSEE WAS AGGRIEVED BY THE ASSESSMENT AND, ACCORDINGLY, RAISED BOTH THE PRINCI PAL ISSUES ARISING OUT OF ITS ASSESSMENT BEFORE THE FIRST APPELLATE AUTHORITY, I.E., THE ASS ESSMENT OF RENTAL INCOME (RS.72.16 LAKHS) AS INCOME FROM HOUSE PROPERTY AS AGAINST BUSINESS I NCOME (ISSUE NO.1) AND DISALLOWANCE OF INTEREST PAID (RS.70.44 LAKHS) ON BORROWED CAPIT AL (ISSUE NO.2), IT IS NOT PURSUING THE ITA NO.1974/HYD/2011 J.B.ESTATES, HYDERABAD . 2 FIRST ISSUE BEFORE THE TRIBUNAL AND, ACCORDINGLY, G ROUNDS NO.2 TO 7 OF THE MEMORANDUM OF APPEAL ARE NOT PRESSED, MAKING AN ENDORSEMENT TO TH IS EFFECT IN THE APPEAL FILE (ORIGINAL), WITH GROUND NO.1 BEING GENERAL IN NATURE, WARRANTIN G NO ADJUDICATION. THE ONLY MAJOR ISSUE, THEREFORE, THAT SURVIVES IS THE ONE RAISED P ER GROUNDS NO.8 TO 10, I.E., QUA THE SECOND ISSUE SUPRA. 3. IT SHALL, AT THIS STAGE, BE RELEVANT TO RECOUNT THE FACTS OF THE CASE IN BRIEF. THE ASSESSEE IS A FIRM CONSTITUTED ON 01.4.2005, BY AND AMONG EIGHT PARTNERS, BESIDES ADMITTING A MINOR TO THE BENEFITS OF THE PARTNERSHI P. THE ASSESSEES PRINCIPAL BUSINESS, AS PER THE RECITAL IN THE PARTNERSHIP DEED (COPY ON RE CORD), IS IN REAL ESTATE BY WAY OF CONSTRUCTION OF RESIDENTIAL AND/OR COMMERCIAL COMPL EXES. TOWARD THE SAME, THE ASSESSEE TOOK ON LEASE ON 27.4.2005 LAND ADMEASURING 1070 SQ . YARDS AT MAHATMA GANDHI ROAD (BANDAR ROAD), LABBIPET, VIJAYAWADA FROM SHRI J.SUR YA PRAKASH, PARTNER, FOR A PERIOD OF NINE YEARS AT A LEASE RENTAL OF RS.2.50 LAKHS PER A NNUM. BORROWINGS WERE MADE FROM VARIOUS BANKS FOR THE CONSTRUCTION OF A COMMERCIAL COMPLEX THEREON, WHICH IS STATED TO HAVE BEEN COMPLETED BY MARCH, 2006. PORTIONS OF THE SAID BUILDING ARE, AGAIN, STATED TO HAVE BEEN LET OUT TO VARIOUS TENANTS FOR DIFFERENT PERIODS. IN ADDITION, THE ASSESSEE ACQUIRED PROPERTY AT WHITE HOUSE, BEGUMPET, HYDERABAD AND AN OTHER AT ADITYA ENCLAVE, AMEERPET, HYDERABAD, AND LAND AT GACHIBOWLI. RENTA L INCOME WAS RECEIVED FROM ALL THE THREE HOUSE PROPERTIES, I.E., EXCEPT THE LAND AT GA CHIBOWLI. THE ASSESSEE, RELYING ON THE DECISION IN THE CASE OF S.G. MERCANTILE CORPORATION PVT. LTD. V. CIT (1972) 83 ITR 700(SC), SOUGHT THE ASSESSMENT OF ITS ENTIRE INCOME , WHICH, BESIDES RENTAL INCOME, INCLUDED INTEREST INCOME (RS.4.89 LAKHS), COMPENSAT ION (RS.36 LAKHS) AND CAR PARKING CHARGES (RS.0.66 LAKHS), AS BUSINESS INCOME; AND RE TURNED A LOSS OF RS.3,25,060 FROM BUSINESS (VIDE RETURN OF INCOME FILED ON 30.9.2008) . THE AO, IN THE ASSESSMENT PROCEEDINGS, FOUND THAT ALL THE PROPERTIES WERE PUR CHASED BY SHRI J.SURYAPRAKASH, PARTNER, IN HIS OWN NAME, OF WHICH THE VIJAYAWADA PROPERTY W AS LEASED TO THE ASSESSEE, WHO WAS ITA NO.1974/HYD/2011 J.B.ESTATES, HYDERABAD . 3 THUS NOT THE OWNER BUT A LESSEE THEREOF. FURTHER, W HATEVER BE THE PRINCIPAL OBJECT OF THE FIRM, RENTAL INCOME FROM HOUSE PROPERTY WOULD ONLY STAND TO BE ASSESSED AS PER THE PROVISIONS OF THE ACT, I.E., U/S.22, AS INCOME FROM HOUSE PROPERTY. IN RESPECT OF LEASEHOLD PROPERTY AT VIJAYAWADA, NO LEASE RENTAL WAS PAID. T HE DECISION IN THE CASE OF S.G.MERCANTILE CORP. PVT. LTD . (SUPRA), WHICH IS IN FACT UNDER THE 1922 ACT, WAS NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE CA SE. HE, THEREFORE, RELYING ON THE DECISION IN THE CASE OF CIT V. BHOOPALAN COMMERCIAL COMPLEX AND INDUSTRIES P. LTD . (2003) 262 ITR 517(KAR), BROUGHT THE RENTAL INCOME TO TAX U/S. 22 OF THE ACT. FURTHER, THE INTEREST PAID (RS.70,43,823) TO BANKS (SBI AND AXIS BANK) WAS ONL Y ON OD ACCOUNTS IN THE NAME OF SH. J.SURYAPRAKASH, AND NOT QUA HOUSING LOANS. THE SAME, TAKEN BY THE PARTNER, AS AN OVERDRAFT FACILITY, COULD NOT BE TREATED AS HOUSING LOANS. FU RTHER, THERE IS NO PROOF OF THE BORROWED CAPITAL HAVING BEEN UTILIZED FOR THE PURPOSE OF CON STRUCTION. THE SAID PARTNER ONLY HAD CONSTRUCTED THE HOUSE PROPERTIES BY TAKING LOANS FR OM THE BANK/S. THE RENTAL INCOME WAS BEING OFFERED IN THE HANDS OF THE FIRM TO AVAIL OF THE TAX BENEFIT AS BUSINESS INCOME, I.E., BY SETTING OFF THE EXPENSES; THE FIRM REPORTING A LOSS . IT COULD NOT, THUS, BE ALLOWED DEDUCTION FOR INTEREST PAID. THE OTHER INCOMES, WHICH INCLUDE COMPENSATION AND INTEREST, WERE ONLY ASSESSABLE U/S. 56 OF THE ACT AS INCOME FROM OTHER SOURCES. THE SAME FOUND CONFIRMATION IN APPEAL AND FOR THE SAME REASON(S), WITH THE LD. CIT(A) RELYING ON SEVERAL DECISIONS, VIZ. SULTAN BROTHERS P. LTD V. CIT (1964) 51 ITR 353(SC); SHAMBHU INVESTMENTS PVT. LTD. V. CIT (2003) 263 ITR 143 (SC); CIT V. CHENNAI PROPERTIES AND INVESTMENTS LTD . (2004) 266 ITR 685(MAD); AND CIT V. PHABIOMAL AND SONS (1986) 158 ITR 773(AP) QUA THE FIRST ISSUE, I.E., THE HEAD OF INCOME UNDER WHICH RENTAL INCOME IS TO BE ASSESSED. AGGRIEVED, THE ASSESSEE IS IN APPEAL. 4.1 THE LD. AR WOULD, BEFORE US, SUBMIT THAT ALL T HE PROPERTIES THOUGH PURCHASED AND REGISTERED IN THE NAME OF SHRI J. SURYA PRAKASH, PA RTNER, ARE SO HELD ONLY FOR AND ON BEHALF OF THE FIRM, DULY REFLECTED IN ITS ACCOUNT AND, THU S, ITS BALANCE SHEET AS AT THE YEAR-END ITA NO.1974/HYD/2011 J.B.ESTATES, HYDERABAD . 4 UNDER THE HEAD FIXED ASSETS (COPY ON RECORD/PB PA GES 23 TO 40). IT IS WELL SETTLED THAT A PARTNER CAN HOLD THE PARTNERSHIP PROPERTY IN HIS NA ME; THE FIRM HAVING NO LEGAL EXISTENCE, SEPARATE AND DISTINCT FROM THE PERSONS CONSTITUTING IT FOR THE TIME BEING. SIMILARLY, THE LOANS ASSUMED, THOUGH AGAIN IN THE NAME OF THE SAID PARTNER, ARE IN EFFECT AND SUBSTANCE LIABILITIES OF THE ASSESSEE-FIRM. THE SAME HAD BEEN SO ASSUMED, AS THESE ARE ON THE SECURITY OF THE SAID PARTNERS (AN ERSTWHILE NRI) PERSONAL F DRS WITH THE LENDER BANKS, WHICH ENTAIL A LOWER RATE OF INTEREST, I.E., VIS-A-VIS THE HOUSI NG LOANS/COMMERCIAL LOANS FOR PROPERTY. FURTHER, THE CAPITAL BORROWED HAS ONLY BEEN UTILIZED TOWARD ACQUISITION OF THE PROPERTY(IES), WHICH IS EVEN OTHERWISE PATENT FROM THE ASSESSEES BALANCE SHEET, REFLECTING, SIMILARLY, ALL THE LOANS. HOWEVER, WHEN IT WAS POINTED OUT TO HIM BY THE BENCH THAT THE ASSESSEES BALANCE SHEET ALSO REFLECTED C URRENT ASSETS AND DEBIT BALANCE IN THE PROFIT & LOSS ACCOUNT, I.E., AT RS.411.10 LAKHS A ND RS.51.22 LAKHS RESPECTIVELY (PB PAGE 23), SO THAT CAPITAL TO THAT EXTENT WAS DEFINITELY NOT UTILIZED FOR ACQUIRING OR CONSTRUCTING HOUSE PROPERTY(IES), HE FAIRLY CONCEDED TO THE SAME , STATING THAT THE MATTER WOULD, THEREFORE, NEED TO BE REMITTED BACK TO THE FILE OF THE AO FOR DETERMINING THE EXTENT OF THE RELEVANT UTILIZATION OF THE BORROWED CAPITAL. 4.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE (DR), O N THE OTHER HAND, RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IALS ON RECORD. 5.1 THE FIRST THING THAT WE OBSERVE IS THE INH ERENT CONTRADICTION IN THE REVENUES STAND, EVEN THOUGH THE SAME IS RENDERED AS OF LITTLE CONSE QUENCE IN VIEW OF THE ASSESSEE RELINQUISHING ITS CLAIM QUA THE RENTAL INCOME BEING ASSESSABLE U/S. 28 OF THE ACT, AND CONCEDING TO IT BEING SO AS INCOME FROM HOUSE PROP ERTY. THIS IS AS IT HOLDS THE ASSESSEE- FIRM AS BEING NOT THE OWNER OF THE RELEVANT HOUSE P ROPERTIES, BUT BELONGING TO THE PARTNER, SHRI J.SURYA PRAKASH, IN HIS PERSONAL (INDIVIDUAL) CAPACITY. OWNERSHIP OF PROPERTY IS A PRE- REQUISITE FOR THE ASSESSMENT OF THE RENTAL INCOME T HEREFROM (OR ITS ANNUAL VALUE) U/S. 22 OF ITA NO.1974/HYD/2011 J.B.ESTATES, HYDERABAD . 5 THE ACT. IN FACT, EVEN THE ASSESSEE, WE OBSERVE, AD OPTS AN INCONSISTENT STAND. IF THE DIFFERENT HOUSE PROPERTIES, OR AT LEAST VIJAYAWADA PROPERTY, IS THE PROPERTY OF THE FIRM, WHERE IS THE QUESTION OF IT BEING LEASED TO IT BY T HE PARTNER (OWNER) OR OF THE FIRM HOLDING LEASEHOLD RIGHTS IN ITS RESPECT. SCHEDULE D TO THE BALANCE SHEET, I.E., FIXED ASSETS (PB PAGE 35) CLEARLY DEPICTS LEASE-HOLD BUILDING, CONTR ADICTING THE ASSESSEES CLAIM/S. FURTHER ON, THE LEASEHOLD LAND, I.E., ON WHICH THE SAID BUI LDING STANDS CONSTRUCTED, IS, UNDER SUCH CIRCUMSTANCES, AN OFF THE BALANCE SHEET ITEM AND, T HUS, NOT ACCOUNTED FOR, REFURBISHING THE FACT OF IT BEING ONLY A LEASE-HOLD ASSET AS FAR AS THE ASSESSEE-FIRM IS CONCERNED. THE ASSESSEE, AS AFORE-STATED, HAS CONCEDED TO THE RENT AL INCOME AS BEING ASSESSABLE U/S. 22 OF THE ACT AND, FURTHER HAS NEITHER PAID ANY LEASE REN T ON THE LEASED PROPERTY FOR THE YEAR; NOR INCURRED ANY LIABILITY IN ITS RESPECT, THAT IS, GOI NG BY THE BALANCE SHEET AS AT THE END OF THE YEAR, WHICH PURPORTS TO REFLECT TRULY AND FAIRLY IT S STATE OF AFFAIRS. FURTHER, THE REVENUE, WITH REFERENCE TO THE ORDER IN THE CASE OF ITO V. SUSEELARAM ENTERPRISES (2002) 83 ITD 372 (HYD), AND WHICH FURTHER DRAWS ON THE DECISION IN THE CASE OF D.R . PUTTANA SONS PVT. LTD. V. CIT (1986) 162 ITR 468 (KAR), HOLDS THAT EVEN QUA A LEASED ASSET (LAND), SO THAT THE ASSESSEE ONLY HAS LEASEHOLD RIGHTS THEREIN; IT HAS TO BE CONSIDERED AS THE OWNER OF THE BUILDING CONSTRUCTED THEREON BY IT AND, ACCORDINGLY , INCOME DERIVED BY WAY OF RENT FROM SUCH BUILDING IS ASSESSABLE AS INCOME FROM PROPERTY AND NOT AS BUSINESS INCOME. THE SAID DECISION ALSO CONSIDERS AND IN FACT RELIES ON THAT IN THE CASE OF S.G.MERCANTILE CORP. PVT. LTD . (SUPRA). IN VIEW OF THE FOREGOING, THE STAND OF T HE ASSESSEE AND THAT OF THE REVENUE, DESPITE THEIR INHERENT CONTRADICTIONS, CONVERGING, THE RENTAL INCOME FROM THE HOUSE PROPERTY, INCLUDING THE LEASED BUILDING AT VIJAYAWA DA, IS ASSESSABLE U/S. 22 OF THE ACT, AS INCOME FROM HOUSE PROPERTY. 5.2 THIS, THUS, LEAVES US WITH ONLY THE SECOND PRIN CIPAL ISSUE, I.E., THE VALIDITY OF THE ASSESSEES CLAIM QUA DEDUCTION OF INTEREST ON BANK LOANS U/S. 24 OF THE ACT, AND TOWARD WHICH THE ASSESSEE HAS AGAIN FAIRLY CONCEDED FOR RE MISSION. WE FIND MUCH MERIT IN THE ITA NO.1974/HYD/2011 J.B.ESTATES, HYDERABAD . 6 ASSESSEES STAND. THIS IS AS FIRSTLY THE REVENUES STAND IS AMBIVALENT AND, THEREFORE, CANNOT BE ACCEPTED. ONCE THE HOUSE PROPERTY, THE ANNUAL VA LUE OF WHICH IS SUBJECT TO TAX U/S. 22 R/W S. 23, INTEREST ON CAPITAL BORROWED, WHERE UTIL IZED FOR ACQUISITION, CONSTRUCTION, REPAIR, RENEWAL OR RECONSTRUCTION OF THE PROPERTY, HAS TO B E ALLOWED AS DEDUCTION UNDER SEC. 24 IN COMPUTING THE INCOME UNDER THE HEAD INCOME FROM HO USE PROPERTY. THE ONLY RIDER WOULD BE THAT THE ACQUISITION, CONSTRUCTION, ETC. STANDS COMPLETED DURING THE RELEVANT PREVIOUS YEAR, AS THE INTEREST FOR THE PERIOD PRIOR THERETO WOULD STAND TO BE ALLOWED ONLY IN FIVE EQUAL INSTALLMENTS, BEGINNING WITH THE YEAR OF SUCH COMPLETION, AND THE FOUR IMMEDIATELY SUCCEEDING YEARS. THE MATTER, THUS, INSOFAR AS THE INSTANT CASE IS CONCERNED, WORKS DOWN TO RETURNING A FINDING AS TO THE EXTENT OF SUCH UTI LIZATION, RATHER THAN ON THE QUALIFICATION FOR DEDUCTION OF THE INTEREST PAID BY THE ASSESSEE ON SUCH CAPITAL. THE FACT OF THE CAPITAL BORROWED, WHICH WE FIND TO HAVE BEEN CATEGORIZED BY THE ASSESSEE UNDER THE HEADS SECURED LOANS AND UNSECURED LOANS, AS WELL AS I TS UTILIZATION TOWARD HOUSE PROPERTY(IES), IS BORNE OUT BY THE ASSESSEES ACCOUNTS, THE FINANC IAL POSITION AT THE YEAR-END FINDING REFLECTION PER THE BALANCE SHEET DRAWN AT THAT DATE (PB PAGES 23 TO 40). AS THE LOANS/BORROWINGS WOULD ONLY HAVE BEEN ASSUMED/MADE AT DIFFERENT TIMES, AND UTILIZATION ALSO PRESUMABLY THROUGH A COMMON POOL OF FUNDS, I.E ., INCLUDING THOSE FLOWING BY WAY OF CURRENT LIABILITIES, WHICH ARE PRIMARILY IN THE FOR M OF ADVANCE RENT, ACCUMULATED/ROUTED, THROUGH A CURRENT ACCOUNT/S WITH A BANK/S, THE MATT ER WOULD NECESSARILY REQUIRE BEING RESTORED BACK TO THE FILE OF THE AO FOR DETERMINING THE AMOUNT OF INTEREST IN RELATION TO THE BORROWED CAPITAL UTILIZED TOWARD THE RELEVANT HOUSE PROPERTY(IES). THE AO SHALL ADJUDICATE THE SAME BY RENDERING DEFINITE FINDINGS OF FACT; TH E MATTER BEING PURELY FACTUAL, WITH THE QUALIFYING INTEREST AMOUNT SUBJECT TO VARIATION FRO M YEAR TO YEAR. WE DECIDE ACCORDINGLY. 6. NO SPECIFIC ARGUMENT WAS ADVANCED BY THE LD. AR QUA THE ASSESSEES GROUND NO.11, EXCEPT BY REITERATING WHAT IS STATED THEREIN , I.E., THAT THE INTEREST AND OTHER INCOMES ASSESSABLE U/S. 56 WOULD REQUIRE BEING ADJUSTED AGA INST THE INTEREST PAYABLE BY THE FIRM. ITA NO.1974/HYD/2011 J.B.ESTATES, HYDERABAD . 7 WE FAIL TO SEE HOW ? THESE ARE SEPARATE INCOMES, AND DO NOT IN ANY MA NNER IMPACT THE INTEREST PAYABLE ON THE BORROWED CAPITAL UTILIZED F OR/TOWARD HOUSE PROPERTY/S AND, THUS, DEDUCTIBLE U/S. 24 OF THE ACT. ONLY THE SUMS SPECIF IED U/S. 57, WHERE SHOWN SO TO QUALIFY, WOULD STAND TO BE DEDUCTED AGAINST INCOME ASSESSABL E U/S. 56. THE SAID GROUND IS ACCORDINGLY DISMISSED. 7. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (SAKTIJIT DEY) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER DT/- OCTOBER 12 , 2012 COPY FORWARDED TO: 1. MS. J.B.ESTATES, C/O. M/S. VENUGOPAL & CHENOY, CHAR TERED ACCOUNTANTS, DOOR NO.4-1-889/16/2, TILAK ROAD, HYDE RABAD 500 001. 2. 3. 4 5. ASST. COMMISSIONER OF INCOME-TAX, WARD 5(1), HYDERA BAD COMMISSIONER OF INCOME-TAX(APPEALS)-V, HYDERABAD COMMISSIONER OF INCOME-TAX -IV, HYDERABAD DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S.