Appeal Details
Counselvise Citation
[2011] 140 COUNSELVISE.COM (IT) 52154 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
11 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
15-12-2011
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
12-10-2011
Assessment Year
2007-2008
Appeal Filed On
23-12-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL B' BENCH, CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER] I.T.A.NO.2168/MDS/2010 ASSESSMENT YEAR : 2007-08 THE DY. CIT COMPANY CIRCLE I(1) CHENNAI VS M/S ADYAR GATE HOTEL LTD 132, TTK ROAD CHENNAI 600 018 [PAN - AAACA9041L ] (APPELLANT) (RESPONDENT) I.T.A.NO. 2010/MDS/2010 & C.O.NO.16/MDS/2011 [IN I.T.A.NO. 2168/MDS/2010] ASSESSMENT YEAR : 2007-08 M/S ADYAR GATE HOTEL LTD 132, TTK ROAD CHENNAI 600 018 VS THE DY. CIT COMPANY CIRCLE I(1) CHENNAI ( APPELLANT/CROSS OBJECTOR) (RESPONDENT) DEPARTMENT BY : SHRI K.E.B RENGARAJAN, JR. STANDING COUNSEL ASSESSEE BY : SHRI SURESH VIRMANI DATE OF HEARING : 12.10.2011 DATE OF PRONOUNCEMENT : 15.12.2011 ITA 2010 & 2168/10 CO 16/11 :- 2 -: O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THE ABOVE CAPTIONED CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 24.9.2010 PASSED BY THE LD. CIT(A)-III, CHENNAI, PERTAINING TO ASSESSMENT YEAR 2007-08. THE ASSESSE E HAS, IN ADDITION, ALSO FILED CROSS OBJECTION AGAINST THE DISALLOWANCE OF ` 50,000/- UNDER SECTION 14A OF THE ACT. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THA T THE ASSESSEE- COMPANY FILED ITS RETURN OF INCOME FOR ASSESSMENT Y EAR 2007-08 ON 26.10.2007 DECLARING A TOTAL INCOME OF ` 33,30,97,980/-. THIS RETURN WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 196 1 (HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT). SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY AND REGULAR ASSESSMENT WAS MADE U/S 1 43(3) VIDE ORDER DATED 15.12.2009. THE ASSESSEE-COMPANY HAD RECEIVE D AN AMOUNT OF ` 7,92,84,480/- AS RENT FROM THE LET OUT OF ITS BUIL DING KNOWN AS SAI REAL TECH PARK DURING THE RELEVANT YEAR. THIS REN TAL INCOME HAS BEEN TREATED AND OFFERED BY THE ASSESSEE-COMPANY AS ITS BUSINESS INCOME. THE ASSESSING OFFICER WAS OF THE OPINION THAT THIS RECEIPT HAS TO BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY . THE ASSESSING OFFICER HAD INVITED OBJECTION, IF ANY, FR OM THE ASSESSEE- COMPANY AGAINST HIS PROPOSED ACTION TO ASSESS THIS RECEIPT UNDER THE ITA 2010 & 2168/10 CO 16/11 :- 3 -: HEAD INCOME FROM HOUSE PROPERTY. THE COMPANY HAD OBJECTED TO THE SAME ON THE BASIS OF THE FOLLOWING REASONING: (A)THE BUILDING RENTED OUT IS A SPECIALIZED BUILDI NG PROVIDING INFRASTRUCTURE FOR INFORMATION TECHNOLOGY COMPANIES AND HAS BEEN BUILT IN ACCORDANCE WITH THE SPECIAL GUIDELINE S NOTIFIED BY THE GOVERNMENT. (B) THE INCOME FROM THE LET OUT OF THE PROPERTY I NCLUDES INCOME FROM SPECIALIZED SERVICES SUCH AS HIRE CHARGES FOR SPECIALIZED FACILITIES INCLUDING CAFETARIA, COVERED AND OPEN CA R PARKING, CENTRALIZED AIRCONDITIONING, DIESEL GENERATOR SET W ITH CAPACITY OF 4000 KVA, 12 LIFTS, FIRE FIGHTING EQUIPMENTS, FIRE ALARMS, SMOKE DETECTORS, ELECTRICAL INSTALLATION AND EQUIPMENT, M ASS COMMUNICATION SYSTEM AND COMMUNICATION DISH. (C) HIRING OF THE BUILDING AND FACILITIES IS A COMPLEX ONE SINCE THE SERVICES AND FACILITIES PROVIDED ARE OF SPECIAL IZED NATURE MEANT ONLY FOR INFORMATION TECHNOLOGY PURPOSES. (D) THE MEMORANDUM OF ASSOCIATION OF THE COMPANY UN DER THE MAIN OBJECTS PERMITS THE COMPANY TO CARRY ON REAL E STATE BUSINESS. (E) RELIANCE WAS PLACED ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT VS. NATIONAL STORAGE PRIVATE LIMITED (6 6 ITR 596). 3. AFTER CONSIDERING THE ABOVE SUBMISSION IN THE LIGHT OF LEASE AGREEMENTS BETWEEN THE PARTIES, THE ASSESSING OFFI CER FOUND THAT THE ASSESSEE-COMPANY HAD PURCHASED THE BUILDING FROM M/ S REAL VALUE PROMOTERS PVT. LTD., WHICH WAS EARLIER LEASED OUT TO M/S TATA CONSULTANCY SERVICES LTD (TCS). THE SELLER COMPANY HAD ENTERED INTO AN AGREEMENT OF LEASE OF THIS PROPERTY AND HAD ALSO EXECUTED A FACILITY PROVIDER AGREEMENT, BOTH, ON 18.2.2005, WITH M/S T CS. THE ITA 2010 & 2168/10 CO 16/11 :- 4 -: ASSESSEE-COMPANY PURCHASED THE LEASED PREMISES FROM M/S REAL VALUE PROMOTERS PVT. LTD THROUGH A SALE DEED DATED 1.7.20 05. THE ASSESSEE HAD ADMITTEDLY CONVEYED THE CHANGE OF OWNE RSHIP AND ALSO MADE ITS INTENTION KNOWN TO M/S TCS, MENTIONING TH AT IT WOULD CONTINUE THE LEASE IN TERMS OF THE LEASE AGREEMENT AND THE FACILITY PROVIDER AGREEMENT ALREADY EXECUTED BETWEEN M/S RE AL VALUE PROMOTERS PVT. LTD AND M/S TCS. MEANING THEREBY, T HE ASSESSEE- COMPANY SUBSTITUTED M/S REAL VALUE PROMOTERS PVT. L TD IN BOTH THE AGREEMENTS; AND EXCEPT FOR THAT ALL THEIR TERMS AND CONDITIONS REMAINED THE SAME. AS PER THE ORIGINAL AGREEMENTS, THE ASSESSEE RECEIVED ` 50,05,200/- PER MONTH AND IN LIEU OF FACILITY PRO VIDER AGREEMENT, IT RECEIVED ` 16,01,840/- PER MONTH, THE BREAK-UP OF WHICH IS AS UNDER: OFFICE A & OFFICE B HIRE CHARGES ` 10,01,040 P.M. CAFETARIA ` 4,36,800 P.M. CAR PARK ` 1,64,000 P.M. 4. FROM THESE FACTS, THE ASSESSING OFFICER HAS COME T O THE CONCLUSION THAT THE MAIN OBJECT OF THE ASSESSEE-CO MPANY IS TO LET OUT THE PROPERTY IN QUESTION ON RENT ALONGWITH ADDITIO NAL RIGHT TO USE THE COMMON FACILITIES INCLUDING THE CAFETERIA, WHICH HE CULLED OUT FROM THE AGREEMENTS DATED 18.2.2005. THE ASSESSING OFFICER, WITH REFERENCE TO ITA 2010 & 2168/10 CO 16/11 :- 5 -: THE DECISION OF THE HON'BLE MADRAS HIGH COURT RENDE RED IN THE CASE OF CHENNAI PROPERTIES LTD VS CIT, 266 ITR 685 AND THE DECISION OF HON'BLE APEX COURT RENDERED IN THE CASE OF SHAMBU I NVESTMENTS PVT. LTD VS CIT, 263 ITR 143, HAS TREATED THIS RECEIPT A S ASSESSABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IT HAS BEE N HELD IN THE ABOVE CASES THAT THE MAIN/PRIMARY OBJECT OF THE ASSESSEE WHILE EXPLAINING OF THE PROPERTY HAS TO BE CONSIDERED TO ANSWER THE QUE STION AS TO WHETHER THE RECEIPT HAS TO BE ASSESSED AS INCOME F ROM HOUSE PROPERTY OR INCOME FROM BUSINESS AND IF IT IS FO UND THAT THE MAIN INTENTION IS TO LET OUT THE PROPERTY OR ANY PORTION THEREOF, IT HAS TO BE CONSIDERED AS RENTAL INCOME OR INCOME FROM PROPERT Y. IN CASE IT IS FOUND THAT THE MAIN INTENTION IS TO EXPLOIT THE IMM OVABLE PROPERTY BY WAY OF COMPLEX COMMERCIAL ACTIVITIES, IN THAT EVENT , IT MUST BE HELD AS BUSINESS INCOME. THE ASSESSING OFFICER HAS FURTH ER APPLIED THE TESTS SUGGESTED BY THE FIVE JUDGES BENCH IN THE CASE OF S ULTAN BROTHERS PVT. LTD, 51 ITR 353(SC) TO DETERMINE WHETHER RENTAL IN COME IS ASSESSABLE UNDER THE HEAD BUSINESS OR UNDER THE HEAD INCOME FROM HOUSE PROPERTY. HE HAS EXTRACTED THE RELEVANT PORTION O F THE DECISION WHICH READS AS UNDER: ITA 2010 & 2168/10 CO 16/11 :- 6 -: LET US APPROACH THE PROBLEM FROM ANOTHER ANGLE BY APPLYING THE TEST SUGGESTED BY THE FIVE JUDGES BENCH IN THE CASE OF SULTAN BROTHERS PVT. LTD. [1964] 51 ITR 353 (SC). THE THREE QUESTIONS FRAMED BY THE APEX COURT ARE APPLIED IN T HE INSTANT CASE AS FOLLOWS: (A) WAS IT THE INTENTION IN MAKING THE LEASE AND IT MATTERS NOT WHETHER THERE IS ONE LEASE OR TWO, I.E., SEPARA TE 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 AM ENITIES. THE ONLY INTENTION, IN OUR VIEW, WAS TO LET OUT THE POR TION OF THE PREMISES TO THE RESPECTIVE OCCUPANTS. HENCE, THE I NTENTION IN MAKING SUCH AGREEMENT IS TO ALLOW THE OCCUPANTS TO ENJOY THE TABLE SPACE TOGETHER WITH THE FURNITURE AND FIXTURE S. HENCE, THIS QUESTION SHOULD BE ANSWERED IN THE AFFIRMATIVE . (B) WAS IT THE INTENTION TO MAKE THE LETTING OF THE TWO PRACTICALLY ONE LETTING: FROM A PLAIN READING OF THE AGREEMENT IT APPEARS TH AT THE INTENTION OF THE PARTIES TO THE SAID AGREEMENT IS C LEAR AND UNAMBIGUOUS BY WHICH THE FIRST PARTY HAS ALLOWED TH E SECOND PARTY TO ENJOY THE SAID TABLE SPACE UPON PAYMENT OF THE COMPREHENSIVE MONTHLY RENT. HENCE, THIS QUESTION S HOULD BE ANSWERED IN THE AFFIRMATIVE. (C) WOULD ONE HAVE BEEN LET ALONE, AND A LEASE OF I T ACCEPTED, WITHOUT THE OTHER? AS WE HAVE DISCUSSED HEREINBEFORE THAT IT IS COMPOS ITE TABLE SPACE LET OUT TO VARIOUS OCCUPANTS, THE AMENITIES G RANTED TO THOSE OCCUPANTS INCLUDING THE USER OF THE FURNITURE AND FIXTURES ARE ATTACHED TO SUCH LETTING OUT AND THE LAST QUEST ION, IN VIEW OF THE SAME, MUST BE ANSWERED IN THE NEGATIVE. APPLYING THE SAID TEST WE HOLD THAT BY THE SAID AGR EEMENT THE PARTIES HAVE INTENDED THAT SUCH LETTING OUT WOULD B E AN INSEPARABLE ONE. HENCE, WE HOLD THAT THE PRIME OBJECT OF THE ASSESSE E UNDER THE SAID AGREEMENT WAS TO LET OUT THE PORTION OF TH E SAID PROPERTY TO VARIOUS OCCUPANTS BY GIVING THEM ADDITI ONAL RIGHT OF ITA 2010 & 2168/10 CO 16/11 :- 7 -: USING THE FURNITURE AND FIXTURES AND OTHER COMMON F ACILITIES FOR WHICH RENT WAS BEING PAID MONTH BY MONTH IN ADDITIO N TO THE SECURITY FREE ADVANCE COVERING THE ENTIRE COST OF T HE SAID IMMOVABLE PROPERTY. 5. ACCORDINGLY, HE HAS APPLIED THE TESTS LAID DOWN AS ABOVE TO THE FACTS OF THIS CASE AND HAS CONCLUDED THAT THE PRIMA RY OBJECT OF THE ASSESSEE-COMPANY AS REVEALED BY AGREEMENTS IS TO LE T OUT THE BUILDING AND PROVIDE THE LESSEE WITH CERTAIN ADDITIONAL COM MON FACILITIES, WHICH ARE THE SUBJECT MATTER OF FACILITY PROVIDER AGREEM ENT, AND ARE SUMMARIZED AS UNDER: (A) COVERED CAR PARKING (205 NOS.) IN THE STILT FLO OR (B) OPEN CAR PARK (110 NOS.) (C) TWO WHEELER PARKING (565 NOS.) (D) CAFETARIA WITH PERMANENT FIXTURES (31,200 SQ.FT .) (E) LIFTS 12 NOS. (F) TRANSFORMERS 2 NOS. (G) DG SET (4000 KVA) 1 NO. (H) CENTRALISED AIR CONDITIONING (I) FIRE ALARMS & SMOKE DETECTORS (J) COMMUNICATION DISH ON THE TERRACE 6. WITH REFERENCE TO ABOVE FACILITIES, HE HAS OBSERV ED THAT THESE ARE NORMAL FACILITIES WHICH ARE USUALLY PROVIDED IN ANY BUILDING. ACCORDING TO HIM, PARKING FACILITY, LIFTS, FIRE ALA RMS AND SMOKE DETECTORS ARE BASIC FACILITIES WHICH ARE MANDATORY AS PER THE BUILDING CONSTRUCTION NORMS SET OUT BY THE GOVERNMENT WHICH ONLY MEANS THAT THEY CANNOT BE CATEGORIZED AS SPECIALIZED SERVICES/ AMENITIES. TO ITA 2010 & 2168/10 CO 16/11 :- 8 -: DESCRIBE CAFETERIA, HE HAS OBSERVED THAT THIS A PAR T OF PERMANENT FIXTURES OF THE BUILDING. ALTHOUGH HE HAS AGREED T HAT CENTRALIZED AC, DG SET AND COMMUNICATION DISH, HE HAS MENTIONED THA T THESE ARE ADDITIONAL AND EXTRA FACILITIES, YET THESE CAN BE T REATED ONLY INCIDENTAL TO THE LETTING OF BUILDING. AT THE END, HE HAS CON CLUDED THAT THE CLAIM OF THE ASSESSEE, THAT IT HAS PROVIDED SPECIALIZED S ERVICES TO THE LESSEE, IS DEVOID OF MERITS. ULTIMATELY, HE HAS APPLIED T HE TEST LAID DOWN IN THE CASE OF SULTAN BROTHERS PVT. LTD (SUPRA) IN THE FOLLOWING WAY: (A) WAS IT THE INTENTION IN MAKING THE LEASE AND IT MATTERS NOT WHETHER THERE IS ONE LEASE OR TWO, I.E. SEPARAT E LEASES IN RESPECT OF THE FURNITURE AND THE BUILDING THAT TH E TWO SHOULD BE ENJOYED TOGETHER? IN THE INSTANT CASE, THERE ARE TWO SEPARATE AGREEME NTS ONE FOR LETTING OUT OF BUILDING AND THE OTHER FOR OTHER AMENITIES. THE ONLY INTENTION COULD BE TO LET OUT THE PREMISES AND ALLOW THE LESSEE TO ENJOY ADDITIONAL F ACILITIES IN THE FORM OF AIRCONDITIONING, CAFETERIA, ETC. HENCE , THIS QUESTION SHOULD BE ANSWERED IN THE AFFIRMATIVE. (B) WAS IT THE INTENTION TO MAKE THE LETTING OF THE TWO PRACTICALLY ONE LETTING : IT IS DEFINITELY ONE LETTING SINCE THE SERVICES OR AMENITIES PROVIDED COULD BE ENJOYED ONLY ALONG WITH THE BUILD ING. HENCE THIS QUESTION SHOULD BE ANSWERED IN THE AFFIR MATIVE. (C) WOULD ONE HAVE BEEN LET ALONE, AND A LEASE OF I T ACCEPTED, WITHOUT THE OTHER? AS DISCUSSED ABOVE, THE LETTING OF BUILDING AND THE AMENITIES IS A COMPOSITE ONE AND THE AMENITIES GRANTED ARE AT TACHED TO SUCH LETTING. THEREFORE, THE QUESTION MUST BE A NSWERED IN THE NEGATIVE. ITA 2010 & 2168/10 CO 16/11 :- 9 -: 7. FINALLY, HE HAS SUMMED UP THAT THE LETTING OF THE B UILDING AND THE SERVICES PROVIDED ARE INSEPARABLE AND THE PRIME OBJECT OF THE ASSESSEE IS ONLY TO LET OUT THE PROPERTY AS SUCH AN D TO PROVIDE THE LESSEE ONLY AN ADDITIONAL RIGHT TO USE THE VARIOUS AMENITIES AND COMMON FACILITIES PROVIDED THEREIN. HE HAS ALSO RE JECTED THE CONTENTION OF THE ASSESSEE THAT THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CHENNAI PR OPERTIES (SUPRA) SUPPORTS ITS CLAIM. THE ASSESSING OFFICER HAS MENT IONED AS UNDER: THE ASSESSEES CONTENTION THAT ITS MEMORANDUM OF A SSOCIATION PERMITS IT TO DO REAL ESTATE BUSINESS AND THEREFORE , THE RENTAL INCOME IS BUSINESS INCOME IS NOT LEGALLY TENABLE IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT OF MADRAS IN THE CASE OF CHENNAI PROPERTIES REPORTED IN (266 ITR 685) WHEREI N IT WAS HELD THAT EVEN IN THE CASES OF COMPANIES ENGAGED IN THE BUSINESS OF PROPERTY DEVELOPMENT, IF THE INCOME DER IVED IS THAT OF RENTAL INCOME, THEN THE SAME IS ASSESSABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IN THE CASE OF MANGA LA HOMES P LTD. VS. CIT (182 TAXMAN 55) (BOM), THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF HOU SE PROPERTIES. DUE TO RECESSION IN THE MARKET, IT HAD TO LET OUT ITS PROPERTIES FOR RENT. THE HONOURABLE BOMBAY HIGH CO URT HELD THAT SUCH RENTAL INCOME IS ASSESSABLE UNDER THE HEA D INCOME FROM HOUSE PROPERTY 8. HE HAS ALSO DISTINGUISHED THE DECISION OF CIT VS NA TIONAL STORAGE PVT. LTD, 66 ITR 596, ON WHICH RELIANCE WAS PLACED ON BEHALF OF THE ASSESSEE. BY REFERRING TO THE DECISION OF HON'BLE CALCUTTA HIGH COURT RENDERED IN THE CASE OF SHAMBU INVESTMENT PVT. LTD (SUPRA), HE HAS FINALLY TREATED THE IMPUGNED RECEIPT AS RENTAL INCO ME DERIVED FROM ITA 2010 & 2168/10 CO 16/11 :- 10 - : LETTING OUT OF THE BUILDING NAMELY, SAI REAL TECH PARK AMOUNTING TO ` 7,92,84,480/- AND HE HAS ASSESSED THE SAME UNDER TH E HEAD INCOME FROM HOUSE PROPERTY. HE HAS, RESULTANTLY ALSO DIS ALLOWED THE FOLLOWING EXPENSES CLAIMED IN RESPECT OF ALLEGED BUSINESS IN COME: ` MUNICIPAL TAXES 35,24,879 INSURANCE 5,81,987 INTEREST 4,20,62,426 DEPRECIATION 6,01,55,137 MISCELLANEOUS ___2,00,000 TOTAL 10,65,24,429 9. THE FACTS APROPOS OTHER ADDITION ARE THAT THE ASS ESSEE HAD MADE INVESTMENTS IN SHARES OF VARIOUS COMPANIES INC LUDING IN ITS SUBSIDIARY COMPANIES. A SUM OF ` 1,45,93,889/- HAS BEEN INVESTED AS CAPITAL IN A PARTNERSHIP FIRM NAMED PARMA LAKSHMI RESTAURANT IN WHICH THE ASSESSEE IS ALSO A PARTNER. THE INVESTME NT IN SHARES OF COMPANIES AND IN THE CAPITAL OF THE PARTNERSHIP ARE SHOWN AT ` 7,18,78,302/- AS ON 31.3.2007 AND ` 7,12,59,585/- AS ON 31.3.2006. SINCE THE PROFITS ON INVESTMENT IN SHARES IN THE FORM OF DIVIDEND ,AND PROFITS FROM THE PARTNERSHIP FIRM ARE EXEMPT FROM T AX U/S 10(34) AND 10(2A) OF THE ACT AND THE ASSESSEE HAVING RECEIVED ONLY AN AMOUNT OF ` 5,630/- AS DIVIDEND DURING THE RELEVANT PERIOD, EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING AN EXEMPT INCOME HAS NOT BEEN ALLOWED IN RE THE TAXABLE PROFITS IN THE LIGHT OF THE PROVISI ONS OF SECTION 14A OF THE ACT. THE ASSESSEE HAS CLAIMED THE ENTIRE DIV IDEND INCOME AS ITA 2010 & 2168/10 CO 16/11 :- 11 - : EXEMPT BUT HAS NOT ATTRIBUTED ANY PORTION OF THE EX PENDITURE BY DEBITING IT TO THE PROFIT & LOSS ACCOUNT. THE ASSE SSING OFFICER HAS FOUND THAT THE ASSESSEE HAS INCURRED ONLY ROUTINE EXPENDITURE THAT TOO TO MAINTAIN ITS ESTABLISHMENT AND TOWARDS ADMINIST RATION. BUT WITH REFERENCE TO RULE 8D, TREATING THIS RULE AS RETROSP ECTIVE IN NATURE, HE HAS WORKED OUT TOTAL DISALLOWANCE UNDER THIS HEAD A S UNDER: ` (I) DIRECT EXPENDITURE RELATING TO EXEMPT INCOME NIL (II) INTEREST RELATING TO EXEMPT INCOME 6,36,59,109 X 7,50,68,944 187,81,62,211 25,44,414 (III) 1/2% OF INVESTMENTS YIELDING EXEMPT INCOME (1/2% OF RS.7,50,68,944/-) 3,75,345 ________ TOTAL DISALLOWANCE U/S 14A 29,19,759 ` ` INTEREST DEBITED TO P&L A/C NOT DIRECTLY RELATED TO A PARTICULAR INCOME OR RECEIPT 6,36,59,109 TOTAL ASSETS AS PER BALANCE SHEET AS ON 31.03.2007 189,42, 24,995 AS ON 31.03.2006 189,42, 24,995 AVERAGE 187,81,62,211 INVESTMENT YIELDING EXEMPT INCOME AS ON 31.03.2007 AS ON 31.03.2006 7,88,78,302 7,12,59,585 AVERAGE 7,15,68,944 ITA 2010 & 2168/10 CO 16/11 :- 12 - : 10. ACCORDINGLY, HE HAS ASSESSED THE TOTAL INCOME OF TH E ASSESSEE AS UNDER: ` ` INCOME FROM BUSINESS (AS ADMITTED) 33,24,74,443 LESS: RENTAL INCOME TREATED AS HOUSE PROPERTY (AS DISCUSSED) 7,92,84,480 INCOME FROM BUSINESS 25,31,89,963 ADD: (1) U/S 14A (AS DISCUSSED) (2) EXPENSES CLAIMED UNDER RENTAL INCOME (AS DISCUSSED) 29,19,759 10,65,24,429 __________ BUSINESS INCOME 36,26,34,151 INCOME FROM HOUSE PROPERTY 7,92,84,480 LESS: MUNICIPAL TAXES PAID __35,24,879 7,57,59,601 LESS: DEDUCTION U/S 24 @ 30% _2,27,27,880 5,30,31,721 LESS: INTEREST PAID _4,20,62,426 _1,09,69,295 37,36,03,446 11. BEING AGGRIEVED, THE ASSESSEE WENT IN FIRST APPEAL BEFORE THE LD. CIT(A), WHO HAS TREATED THE IMPUGNED RECEIPT A S ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES UNDER SECTION 56 TREATING IT ELIGIBLE FOR DEDUCTION U/S 57 OF THE ACT BY ACCEPT ING ALTERNATE PLEA OF THE ASSESSEE. HE HAS ALSO GIVEN PART RELIEF OUT OF OTHER ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF EXPENSES U/S 14A OF T HE ACT. RESULTANTLY, BOTH THE PARTIES ARE NOW AGGRIEVED. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL: ITA 2010 & 2168/10 CO 16/11 :- 13 - : 1. THE ORDER OF THE LEARNED COMMISSIONER OF INC OME-TAX (APPEALS) IS CONTARY TO THE LAW AND FACTS OF T HE CASE. 2. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ASSE SS THE RENTAL INCOME UNDER THE HEAD 'INCOME FROM OTHER SOURCES' U/ S.56 AND ALLOW THE PERMISSIBLE DEDUCTION U/S.57 OF THE ACT. 2.1 IT IS SUBMITTED THAT THE CIT(A) WHILE CONSIDE RING THE AMOUNT OF RS.7,92,84,480 HAS DIRECTED TO CONSIDER I T AS INCOME FROM OTHER SOURCES U/S.56 OF THE ACT INSTEAD OF HOUSE PROPERTY INCOME. HE HAS ALSO RECOMMENDED FOR AN ALL OWANCE OF ALL PERMISSIBLE DEDUCTION U/S.57. THE CIT(A) HAS ERRED IN RELYING ON THE DECISION OF THE CONSTITUTION BENCH O F THE HON. SUPREME COURT IN THE CASE OF SULTAN BROTHERS(51 ITR 353) SINCE VERY MANY DECISIONS HAVE SUPERSEDED EITHER BY THE HON. SUPR EME COURT OR OTHER HIGH COURTS. 2.2 IT IS FURTHER SUBMITTED THAT IN THE INSTANT CAS E, THE AGREEMENTS FOR THE PAYMENT OF RENT WAS OF TWO TYPES VIZ., LEASE AGREEMENT AND FACILITY PROVIDER AGREEMENT AND THE PRIME OBJECT OF THE ASSESSEE UNDER THE ABOVE SAID A GREEMENT IS TO LET OUT THE PROPERTY ON RENT AND GIVE THEM AD DITIONAL RIGHT OF USING THE FACILITIES INCLUDING THE CAFETARIA. TH E DECISION OF THE HON. MADRAS HIGH COURT IN THE CASE OF CHENNAI P ROPERTIES LTD.(266 ITR 685) AND THE DECISION OF THE HON.SUPRE ME COURT IN THE CASE OF SHAMBU INVESTMENTS PVT. LTD. VS. CIT (263 ITR 143) WHICH AFFIRMED THE DECISION OF THE HON. CALCUT TA HIGH COURT (249 ITR 47) WHICH SAYS THAT THE INCOME DERIV ED FROM THE LET OUT OF A BUILDING IS TO BE ASSESSED UNDER ' INCOME FROM HOUSE PROPERTY' ONLY AND NOT UNDER THE HEAD 'BUSINE SS'. 2.3 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED T HAT THE DECISION OF THE HON. SUPREME COURT IN THE CASE OF M/S.SHAMBU INVESTMENTS PVT. LTD., SUPERSEDES THE DE CISION OF M/S. SU ITAN BROTHERS PVT. LTD., AND IN THE CASE OF FORMER THE DECISIONS WERE MADE ONLY AFTER ANALYSING ALL THE PR EVIOUS JUDGEMENTS OF VARIOUS COURTS INCLUDING THE HON. SUP REME COURT. THE HON. HIGH COURT OF CALCUTTA WHILE DISCUS SING THE CASE OF SHAMBU INVESTMENT PVT. LTD. HAS MADE A TEST CHECK THAT WAS SUGGESTED BY THE FIVE JUDGE BENCH IN THE C ASE OF SULTAN BROTHERS PVT LTD. ITA 2010 & 2168/10 CO 16/11 :- 14 - : 2.4 IT IS SUBMITTED THAT IN THE CASE OF M/S.ADAYAR GATE HOTEL LTD,., THE LD. CIT HAS NOT CONSIDERED THE DECISION OF THE HON. SUPREME COURTS IN THE CASE OF SHAMBU INVESTMENTS AT ALL IN WHICH THE TEST CHECK WHICH WAS DISCUSSED IN DETAIL BY THE AO HIMSELF IN THE ASSESSMENT ORDER. THEY ARE (A) WAS I T THE INTENTION IN MAKING THE LEASE AND IT MATTERS NOT WH ETHER THERE IS ONE LEASE OR TWO AND IF TWO SHOULD IT BE ENJOYED TOGETHER? (B) WAS IT THE INTENTION TO MAKE THE LETTING OF THE TWO PRACTICALLY ONE LETTING: (C) WOULD ONE HAVE BEEN LE T ALONE, AND A LEASE OF IT ACCEPTED, WITHOUT THE OTHER / . FOR THE FIRST QUESTION THE INTENTION IN MAKING SUCH AGREEMENT IS TO ALLOW THE OCCUPANTS TO ENJOY THE TABLE SPACE TOGETHER WITH TH E FURNITURE AND FIXTURES AND FOR THE SECOND QUESTION THE FIRST PARTY HAS ALLOWED THE SECOND PARTY TO ENJOY THE TABLE SPACE U PON PAYMENT OF COMPREHENSIVE MONTHLY RENT. FOR THE THIR D QUESTION THE TABLE SPACE TO BE LET OUT INCLUDING TH E FURNITURE AND FIXTURES ONLY. IN THE INSTANT CASE THE ASSESSEE COMPANY HAS NOT PROVIDED ANY FURNITURE OR FIXTURES INSIDE T HE BUILDING WHICH WAS LET OUT. THEREFORE, THE ASSESSEE'S CLAIM THAT IT HAS PROVIDED SOME SPECIALISED SERVICES TO THE LESSEE WA S DEVOID OF MERITS. 2.5 THE RELIANCE OF THE LD. CIT(A) ON THE DECISION OF THE SUPREME COURT IN THE CASE OF SULTAN BROTHERS PVT. L TD. IN THE INSTANT CASE AND THE DECISION THAT 'WE MUST, THEREF ORE, HOLD THAT WHEN A BUILDING AND PLANT, MACHINERY OR FURNIT URE ARE INSEPARABLY LET, THE ACT, CONTEMPLATES THE RENT FRO M THE BUILDING AS A RESIDUARY HEAD OF INCOME', IS NOT LEG ALLY TENABLE. RATHER, ON THE OTHER HAND, HE BASIC FACILITIES WHIC H ARE MANDATORY AS PER THE BUILDING CONSTRUCTION NORMS SE T OUT BY THE GOVT, WHICH ONLY MEANS THAT THEY CANNOT BE CATE GORISED AS SPECIALISED SERVICES/AMENITIES. IT CAN BE SAID T HAT THE LETTING OF THE BUILDING AND THE SERVICES ARE INSEPA RABLE AND THE PRIME OBJECT OF THE ASSESSEE WAS ONLY AN ADDITIONAL RIGHT TO USE THE VARIOUS AMENITIES AND COMMON FACILITIES PRO VIDED THEREIN. ON THE ABOVE BASIS, IT IS UNACCEPTABLE TO DEVIATE FROM THE STAND TAKEN IN THE ASSESSMENT ORDER MADE BY THE AO, THAT THE INCOME SHOULD BE TAKEN AS 'INCOME FROM HOUSE PR OPERTY'. 3. THE LEARNED CIT(A) HAS ERRED IN RESTRICTING THE DIS ALLOWANCE U/S.14A R.W.RULE 8D TO RS.50,000/- AS AGAINST RS.29 ,19,759/- 3.1 THE LD.CIT(A) HAS ERRED IN DISALLOWING OF ADDITION MADE BY THE AO TO THE EXTENT OF RS.29,19,759/- U/S.14A RELI ED ON THE DECISION OF THE JUDGEMENT OF SPECIAL BENCH IN THE C ASE OF DAGA ITA 2010 & 2168/10 CO 16/11 :- 15 - : CAPITAL FROM WHERE THE LEAD MATTER WAS TAKEN BY THE HON. BOMBAY HIGH COURT IN THE CASE OF M/S.GODREJ & BOYCE MFG. CO. LTD WAS DECIDED, IN WHICH, IT IS SAID THAT THE PROV ISION OF RULE 8D OF THE IT RULES WHICH HAVE BEEN NOTIFIED WITH EFFEC T FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM A.Y.2008-09 . BUT IN THE SAME CASE OF DAGA CAPITA I (117 ITD 169( MUM) } THE SPECIAL BENCH STATED THAT WHERE IT HAS BEEN HELD THAT SECTI ON 14A(2) & (3) AND RULE 8D ARE PROCEDURAL IN NATURE AND HAVE R ETROSPECTIVE EFFECT AND THE MATTER WAS REMANDED BACK TO THE AO F OR RE- COMPUTING THE DISALLOWANCE. 3.2 IT IS SUBMITTED THAT SECTION 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BUSINESS EXP ENDITURE INCURRED TOWARDS TAX FREE INCOME COULD NOT BE DISAL LOWED AND IN CORPORATE AN IMPLICIT THEORY OF APPORTIONMENT OF EX PENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME. ONCE A PROX IMATE CAUSE FOR DISALLOWANCE WAS ESTABLISHED - WHICH IS T HE RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME- A DISALLOWANCE U/S.14A OF THE ACT HAS TO BE AFFECTED. MOREOVER, WHERE RULE 8D DOES NOT AP PLY, THE AO WILL HAVE TO DETERMINE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO ALL FACTS A ND CIRCUMSTANCES. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUC ED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) BE SET ASIDE A ND THAT OF THE ASSESSING OFFICER BE RESTORED. 12. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND IN ITS APPEAL: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) ERRED I N FACT AND IN LAW IN HOLDING THAT THE INCOME FROM LET TING OF BUILDING AND HIRE CHARGES FOR PLANT AND MACHINERY A ND OTHER FACILITIES FROM INFORMATION TECHNOLOGY PARK K NOWN AS SAI REAL TECH PARK UNDER TWO SEPARATE AGREEMEN TS BUT INSEPARABLY LET, IS ASSESSABLE AS INCOME FROM O THER SOURCES AND NOT AS INCOME FROM BUSINESS AS CLAIMED BY THE ASSESSEE-COMPANY. ITA 2010 & 2168/10 CO 16/11 :- 16 - : 13. IN ITS CROSS OBJECTION, THE ASSESSEE HAS RAISED THE FOLLOWING GROUND: THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) CHENNAI ERRED IN FACT AND IN LAW IN UPHO LDING DISALLOWANCE OF ` 50,000 UNDER SECTION 14A OF THE INCOME- TAX ACT, 1961. IN ANY CASE THE DISALLOWANCE IS UNC ALLED FOR AND IS EXCESSIVE AND NEEDS TO BE DELETED. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE C AREFULLY PERUSED THE ENTIRE RECORD. AFTER COGITATING THE R IVAL STANDS IN THE LIGHT OF THE AVAILABLE EVIDENCE ON RECORD, WE HAVE TO ADJ UDICATE THE COMMON ISSUE INVOLVED IN REVENUES APPEAL AS WELL A S IN ASSESSEES APPEAL WHICH PERTAINS TO THE NATURE OF RECEIPT ARIS ING FROM GIVING THE SO CALLED SAI REAL TECH PARK BUILDING + PLANT AN D MACHINERY AND EXTRA FACILITIES. AS PER THE ASSESSEE, THIS IS A BUSINESS RECEIPT AND HAS TO BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION; ACCORDING TO THE ASSESSING OFFICER, THIS RECEIPT HA S TO BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY; ACCORD ING TO THE LD. CIT(A), THIS RECEIPT HAS TO BE ASSESSED UNDER THE H EAD INCOME FROM OTHER SOURCES. SECTION 22 OF THE ACT DEALS WITH I NCOME FROM HOUSE PROPERTY WHICH READS AS UNDER: INCOME FROM HOUSE PROPERTY. 1 6 22. 17 THE ANNUAL VALUE OF PROPERTY CONSISTING OF ANY BUILDINGS 18 OR LANDS APPURTENANT 18 THERETO OF WHICH THE ASSESSEE IS THE OWNER 18 , OTHER THAN SUCH PORTIONS OF SUCH ITA 2010 & 2168/10 CO 16/11 :- 17 - : PROPERTY AS HE MAY OCCUPY 18 FOR THE PURPOSES OF ANY BUSINESS OR PROFESSION CARRIED ON BY HIM THE PROFIT S OF WHICH ARE CHARGEABLE TO INCOME-TAX, SHALL BE CHARGEABLE T O INCOME-TAX UNDER THE HEAD INCOME FROM HOUSE PROPER TY. 15. SECTION 28 DEALS WITH PROFITS AND GAINS OF BUSINESS OR PROFESSION. THIS SECTION READS AS UNDER: PROFITS AND GAINS OF BUSINESS OR PROFESSION. 39 28. 40 THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME- TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION, ( I ) THE PROFITS AND GAINS 41 OF ANY BUSINESS OR PROFESSION 41 WHICH WAS CARRIED ON BY THE ASSESSEE AT ANY TIME DURING THE P REVIOUS YEAR ; ( II ) ANY COMPENSATION 41 OR OTHER PAYMENT DUE TO 41 OR RECEIVED BY 41 , ( A ) ANY PERSON, BY WHATEVER NAME CALLED, MANAGING THE WHOLE OR SUBSTANTIALLY THE WHOLE OF THE AFFAIRS OF AN INDIAN COMPANY, AT OR IN CONNECTION WITH THE TERMINATION OF HIS MANAGEMEN T OR THE MODIFICATION OF THE TERMS AND CONDITIONS RELATING T HERETO; ( B ) ANY PERSON, BY WHATEVER NAME CALLED, MANAGING THE WHOLE OR SUBSTANTIALLY THE WHOLE OF THE AFFAIRS IN INDIA OF ANY OTHER COMPANY, AT OR IN CONNECTION WITH THE TERMINATION O F HIS OFFICE OR THE MODIFICATION OF THE TERMS AND CONDITIONS RELATI NG THERETO ; ( C ) ANY PERSON, BY WHATEVER NAME CALLED, HOLDING AN AGENCY IN INDIA FOR ANY PART OF THE ACTIVITIES RELATING TO TH E BUSINESS OF ANY OTHER PERSON, AT OR IN CONNECTION WITH THE TERMINAT ION OF THE AGENCY OR THE MODIFICATION OF THE TERMS AND CONDITI ONS RELATING THERETO ; 42 [ (D ) ANY PERSON, FOR OR IN CONNECTION WITH THE VESTING IN THE GOVERNMENT, OR IN ANY CORPORATION OWNED OR CONTROLL ED BY THE GOVERNMENT, UNDER ANY LAW FOR THE TIME BEING IN FOR CE, OF THE MANAGEMENT OF ANY PROPERTY OR BUSINESS ;] ( III ) INCOME DERIVED BY A TRADE, PROFESSIONAL OR SIMILA R 43 ASSOCIATION FROM SPECIFIC SERVICES 43 PERFORMED FOR ITS MEMBERS ; 44 [( IIIA ) PROFITS ON SALE OF A LICENCE GRANTED UNDER THE IM PORTS (CONTROL) ORDER, 1955, MADE UNDER THE IMPORTS AND EXPORTS (CO NTROL) ACT, 1947 (18 OF 1947) ;] 45 [( IIIB ) CASH ASSISTANCE (BY WHATEVER NAME CALLED) RECEIVE D OR RECEIVABLE BY ANY PERSON AGAINST EXPORTS UNDER ANY SCHEME OF T HE GOVERNMENT OF INDIA ;] 46 [( IIIC ) ANY DUTY OF CUSTOMS OR EXCISE RE-PAID OR RE-PAYAB LE AS DRAWBACK TO ANY PERSON AGAINST EXPORTS UNDER THE CUSTOMS AND CE NTRAL EXCISE DUTIES DRAWBACK RULES, 1971 ;] ITA 2010 & 2168/10 CO 16/11 :- 18 - : 47 [( IIID ) ANY PROFIT ON THE TRANSFER OF THE DUTY ENTITLEMEN T PASS BOOK SCHEME, BEING THE DUTY REMISSION SCHEME UNDER THE E XPORT AND IMPORT POLICY FORMULATED AND ANNOUNCED UNDER SECTIO N 5 OF THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 199 2 (22 OF 1992);] 48 [( IIIE ) ANY PROFIT ON THE TRANSFER OF THE DUTY FREE REPLE NISHMENT CERTIFICATE, BEING THE DUTY REMISSION SCHEME UNDER THE EXPORT AND IMPORT POLICY FORMULATED AND ANNOUNCED UNDER SECTIO N 5 OF THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 199 2 (22 OF 1992) ;] 49 [( IV ) THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHER C ONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXERCISE OF A PROFESSION ;] 50 [( V ) ANY INTEREST, SALARY, BONUS, COMMISSION OR REMUNE RATION, BY WHATEVER NAME CALLED, DUE TO, OR RECEIVED BY, A PARTNER OF A FIRM FROM SUCH FIRM : PROVIDED THAT WHERE ANY INTEREST, SALARY, BONUS, COMMISSION OR REMUNERATION, BY WHATEVER NAME CALLED, OR ANY PART THEREOF HAS NOT BEEN ALLOWED TO BE DEDUCTED UNDER CLAUSE ( B ) OF SECTION 40, THE INCOME UNDER THIS CLAUSE SHALL BE ADJUSTED TO THE E XTENT OF THE AMOUNT NOT SO ALLOWED TO BE DEDUCTED ;] 51 [( VA ) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CASH OR KIND, UNDER AN AGREEMENT FOR ( A ) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS; OR ( B ) NOT SHARING ANY KNOW-HOW, PATENT, COPYRIGHT, TRA DE-MARK, LICENCE, FRANCHISE OR ANY OTHER BUSINESS OR COMMERC IAL RIGHT OF SIMILAR NATURE OR INFORMATION OR TECHNIQUE LIKELY T O ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OR PROVISION FOR SERVICES: 16. SECTION 56 DEALS WITH INCOME FROM OTHER SOURCES, WHICH READS AS UNDER: INCOME FROM OTHER SOURCES. 91 56. (1) INCOME OF EVERY KIND WHICH IS NOT TO BE EXCLU DED FROM THE TOTAL INCOME UNDER THIS ACT SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD INCOME FROM OTHER SOURCES, IF IT I S NOT CHARGEABLE TO INCOME-TAX UNDER ANY OF THE HEADS SPE CIFIED IN SECTION 14 , ITEMS A TO E. (2) IN PARTICULAR, AND WITHOUT PREJUDICE TO THE GEN ERALITY OF THE PROVISIONS OF SUB-SECTION (1), THE FOLLOWING INCOME S, SHALL BE ITA 2010 & 2168/10 CO 16/11 :- 19 - : CHARGEABLE TO INCOME-TAX UNDER THE HEAD INCOME FRO M OTHER SOURCES, NAMELY : ( I ) DIVIDENDS ; 92 [( IA ) INCOME REFERRED TO IN SUB-CLAUSE ( VIII ) OF CLAUSE ( 24 ) OF SECTION 2 ;] 93 [( IB ) INCOME REFERRED TO IN SUB-CLAUSE ( IX ) OF CLAUSE ( 24 ) OF SECTION 2 ;] 94 [( IC ) INCOME REFERRED TO IN SUB-CLAUSE ( X ) OF CLAUSE ( 24 ) OF SECTION 2 , IF SUCH INCOME IS NOT CHARGEABLE TO INCOME-TAX UN DER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION ;] 95 [( ID ) INCOME BY WAY OF INTEREST ON SECURITIES, IF THE I NCOME IS NOT CHARGEABLE TO INCOME-TAX UNDER THE HEAD PROFITS AN D GAINS OF BUSINESS OR PROFESSION ;] ( II ) INCOME FROM MACHINERY, PLANT OR FURNITURE BELONGI NG TO THE ASSESSEE AND LET ON HIRE, IF THE INCOME IS NOT CHAR GEABLE TO INCOME-TAX UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION; ( III ) WHERE AN ASSESSEE LETS ON HIRE MACHINERY, PLANT O R FURNITURE BELONGING TO HIM AND ALSO BUILDINGS, AND THE LETTIN G OF THE BUILDINGS IS INSEPARABLE FROM THE LETTING OF THE SA ID MACHINERY, PLANT OR FURNITURE, THE INCOME FROM SUCH LETTING, I F IT IS NOT CHARGEABLE TO INCOME-TAX UNDER THE HEAD PROFITS AN D GAINS OF BUSINESS OR PROFESSION; 96 [( IV ) INCOME REFERRED TO IN SUB-CLAUSE ( XI ) OF CLAUSE ( 24 ) OF SECTION 2 , IF SUCH INCOME IS NOT CHARGEABLE TO INCOME-TAX UN DER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR UNDER THE HEAD SALARIES;] 97 [( V ) WHERE ANY SUM OF MONEY EXCEEDING TWENTY-FIVE THOU SAND RUPEES IS RECEIVED WITHOUT CONSIDERATION BY AN INDI VIDUAL OR A HINDU UNDIVIDED FAMILY FROM ANY PERSON ON OR AFTER THE 1ST DAY OF SEPTEMBER, 2004 98 [BUT BEFORE THE 1ST DAY OF APRIL, 2006], THE WHOLE OF SUCH SUM : 17. BEFORE DEALING WITH THE PRESCRIPTION OF THESE SECT IONS AND APPLYING THEM TO THE FACTS OF THE CASE IN HAND, WIT H REFERENCE TO THE RELEVANT PRECEDENTS THERETO, WE WOULD LIKE TO CULL OUT THE CORRECT AND FULL FACTS WHICH LED TO THE IMPUGNED RECEIPT. THE ASSESSEE-COMPANY IS ITA 2010 & 2168/10 CO 16/11 :- 20 - : OPERATING HOTELS AT VARIOUS PLACES. THE ASSESSEE H AS RECEIVED AN AMOUNT OF ` 7,92,84,480/- AS RENT FROM THE LET OUT OF ITS BUIL DING KNOWN AS SAI REAL TECH PARK DURING THE RELEVANT Y EAR. THIS RENTAL INCOME HAS BEEN OFFERED BY THE ASSESSEE-COMPANY UND ER THE HEAD INCOME FROM BUSINESS. TO SUPPORT ITS STAND, THE CONTENTION OF THE ASSESSEE IS THAT THE BUILDING RENTED OUT IS A SPECI ALIZED BUILDING PROVIDING INFRASTRUCTURE FOR INFORMATION TECHNOLOGY COMPANIES AND HAS BEEN BUILT IN ACCORDANCE WITH THE SPECIAL GUIDE LINES NOTIFIED BY THE GOVERNMENT. THE RECEIPT FROM THIS LET OUT OF THE P ROPERTY INCLUDES INCOME FROM SPECIALIZED SERVICES SUCH AS HIRE CHARG ES FOR SPECILIASED FACILITIES INCLUDING CAFETERIA, COVERED AND OPEN CA R PARKING, CENTRALIZED AIR CONDITIONING, DIESEL GENERATOR SET WITH CAPACIT Y OF 4000 KVA, 12 NUMBER OF LIFTS, FIRE FIGHTING EQUIPMENTS, FIRE ALA RMS, SMOKE DETECTORS, ELECTRICAL INSTALLATION AND EQUIPMENT, MASS COMMUNI CATION SYSTEM AND COMMUNICATION DISH. FURTHER CONTENTION OF THE ASSE SSEE TO SUBSTANTIATE ITS CLAIM IS THAT THE BUILDING IN QUES TION BEING A COMPLEX ONE, IN WHICH SPECIALIZED SERVICES AND FACILITIES A RE PROVIDED AND WHICH IS ONLY FOR INFORMATION TECHNOLOGY PURPOSES, IT CAN BE HIRED BY SPECIFIED PERSON/ENTITIES ONLY. AS PER THE ASSESSE E, THE MEMORANDUM OF ASSOCIATION PERMITS THE COMPANY TO CARRY ON REAL ESTATE BUSINESS AND THEREFORE, IN THE LIGHT OF THE RATIO OF THE DEC ISION OF THE HON'BLE ITA 2010 & 2168/10 CO 16/11 :- 21 - : SUPREME COURT RENDERED IN THE CASE OF CIT VS NATION AL STORAGE PVT. LTD, 66 ITR 596, THIS RECEIPT HAS TO BE TREATED AS INCOME FROM BUSINESS ONLY. IN FACT, THE ASSESSEE-COMPANY HAD PURCHASED THIS BUILDING AS IS WHERE IS BASIS, FROM M/S REAL VALUE PROMOTERS PVT. LTD. PRIOR TO ITS PURCHASE BY THE ASSESSEE-COMPANY, M/S REAL VALUE PROMOTERS PVT. LTD HAD ALREADY LEASED OUT THIS PRO PERTY TO M/S TCS. M/S REAL VALUE PROMOTERS PVT. LTD. HAD ALREADY LEAS ED OUT THIS PROPERTY UNDER LEASE AGREEMENT AND A CONNECTING FAC ILITY PROVIDER AGREEMENT WHICH WERE EXECUTED ON 18.2.2005 IN FAVOU R OF M/S TCS, THE LESSEE. MEANING THEREBY, THE ASSESSEE HAD PUR CHASED THE LEASED PREMISES THROUGH A SALE DEED DATED 1.7.2005. AS A SEQUEL TO THIS CHANGE OF OWNERSHIP, THE LESSEE COMPANY WAS INFORME D ABOUT THIS CHANGE AND ALSO EXPRESSED ITS INTENTION TO CONTINUE THE LEASE WITH THEM WITH SAME TERMS AND CONDITIONS AND THEREBY ENT ERING INTO THE SHOES OF M/S REAL VALUE PROMOTERS PVT. LTD IN SO FA R AS BOTH THESE AGREEMENTS ARE CONCERNED. THE LESSEE HAD NO OBJEC TION REGARDING THIS AND RATHER ACCEPTED THIS POSITION. WE HAVE GO NE THROUGH THE LEASE AGREEMENT AND FACILITY PROVIDER AGREEMENT WHI CH WERE EXECUTED BY M/S REAL VALUE PROMOTERS PVT. LTD AND NOW THEY R ELATE TO THE ASSESSEE-COMPANY IN THEIR LETTERS AND SPIRIT. AS P ER THE LEASE AGREEMENT, THE ASSESSEE HAS TO RECEIVE ` 50,05,200 PER MANSION AS ITA 2010 & 2168/10 CO 16/11 :- 22 - : BASE RENT. AS PER THE FACILITY PROVIDER AGREEMENT , THE ASSESSEE HAS TO RECEIVE ` 16,01,840/- PER MANSION TOWARDS HIRE CHARGES OF OF FICE A&B, CAFETERIA AND CAR PARKING, THE BREAK-UP OF WHICH W E HAVE ALREADY PROVIDED WHILE NARRATING THE FACTS OF THE CASE. TH E FACILITIES WHICH ARE PROVIDED IN THE SAI REAL TECH PARK CAN BE EXPLAIN ED BY THE FOLLOWING CHART WHICH IS ENCLOSED AT PAGE 4 OF THE PAPER BOOK : SAI REAL TECH PARK FACILITIES A.Y. 2007-08 (F.Y. 2006-07) CALCULATION OF DEPRECIATION AS PER INCOME TAX ACT, 1961 NAME OF ASSETS RATE OF DEP. ADDITION 2005-06 DEPRE- CIATION 2005-06 WDV AS ON 31.03.06 DEPRE- CIATION 2006-07 WDV AS ON 31.03.07 CENTRAL AC REFRIGERATION 15% 48,380,328 7,257,049 41,123,279 6,168,492 34,954,787 DIESEL GENERATOR 15% 30,117,290 4,517,594 25,599,696 3,839,954 21,759,742 ELECTRICAL INSTALLATION & 15% 37,804,964 5,670,745 32,134,219 4,820,133 27,314,086 FIRE FIGHTING EQUIPMENT 15% 2,974,398 446,160 2,528,238 379,236 2,149,002 LIFT 15% 11,576,000 1,736,400 9,839,600 1,475,940 8,363,660 TOTAL (A) 130,853,980 19,627,948 111,225,032 16,683,755 94,541,277 NAME OF ASSETS RATE OF DEP. ADDITION 2005-06 DEPRE- CIATION 2005-06 WDV AS ON 31.03.06 DEPRE- CIATION 2006-07 WDV AS ON 31.03.07 BUILDING 10% 483,015,353 48,301,535 434,713,818 43,471,382 391,242,436 LAND 128,055,470 - 128,055,470 - 128,055,470 TOTAL (B) 611,070,823 48,301,535 562,769,288 43,471,382 529,297,906 GRAND TOTAL (A+B) 741,9233,803 67,929,483 673,994,320 60,155,137 613,839,183 ITA 2010 & 2168/10 CO 16/11 :- 23 - : 18. SCHEDULE I APPENDED TO THE FACILITY PROVIDER AGREEM ENT IS BEING EXTRACTED HEREIN BELOW SO THAT ONE CAN EASILY UNDER STAND THE EXACT NATURE OF BUILDING AND FACILITIES PROVIDED THEREIN: SCHEDULE - I THE LAND AND BUILDING KNOWN AS SAI REAL TECH PARK , WITH A TOTAL SUPER BUILT UP AREA OF 2,50,260 SQ. FT. (STIL T + FOUR FLOORS) BEARING S.NO. 165/1A, 2&4, WITH AN EXTENT OF 1,01,196.5 SQ. FT OR THEREABOUTS OF VELACHERY VILLAGE, SITUATE IN VELACHERY TARAMANI 100 FT. ROAD, VELACHERY, CHENNAI 42, IN THE REGISTRATION SUB-DISTRICT OF V ELACHERY AND REGISTRATION DISTRICT OF SOUTH CHENNAI BOUNDED ON THE:- NORTH BY : LAND GIFTED TO CMDA FOR O.S.R. S.NO.147, & PRIVATE LANDS. SOUTH BY : VELACHERY-TARAMANI (100) ROAD AND PRIVA TE LANDS EAST BY : 24 FEET WIDE ROAD AND S.NO.149. WEST BY : S.NO.147, 24 WIDE ROADS & PRIVATE LANDS ANNEXURE I BUILDING NAME : SAI REAL TECH PARK PROPERTY ADDRESS : S.NO.165/1A, 2&4, VELACHERY-TARA MANI 100 FT. ROAD, VELACHERY, CHENNAI 600 042. PLOT AREA : 1,01,196.5 SQ. FT. FRONTAGE OF THE PLOT : 21,164.32 M PLOT COVERAGE : 54.68% PROPOSED TIME OF COMPLETION FOR FIT OUT : OFFICE A 1 ST APRIL 2005 OFFICE B 1 ST JULY 2005 BUILDING TYPE : INFORMATION TECHNOLOGY PARK HEIGHT OF BUILDING : 49.25 FEET / 15 METRES NO. OF ACCESS TO THE BUILDING : FIVE NO. OF FLOORS : STILT + FOUR FLOORS TOTAL SUPER BUILT UP AREA : 2,50,260 SQ. FT. FLOOR PLATE SIZE - OFFICE A OFFICE B COMBINED S INGLE FLOOR LEVEL 1 28,685 SQ. FT. 33,000 SQ. FT. 61,685 SQ. FT . LEVEL 2 28,685 SQ. FT. 33,000 SQ. FT. 61,685 SQ. FT . LEVEL 3 29,340 SQ. FT. 33,725 SQ. FT. 63,075 SQ. FT . LEVEL 4 29,785 SQ. FT. 34,030 SQ. FT. 63,815 SQ. FT. 1,16,495 SQ. FT. 1,33,765 SQ. FT. 2,50,260 SQ. FT. ITA 2010 & 2168/10 CO 16/11 :- 24 - : CAR PARKING (COVERED) : 205 NOS. (IN THE STILT FLOO R) OPEN CAR PARK : 110 NOS. TWO WHEELER PARKING : 565 NOS. CAFETERIA (WITH PERMANENT FIXTURES) : 31,200 SQ. FT . OR AS APPLICABLE. : GLAZING & NATURAL BRICK TILED WALLS OFFICE A DOUBLE GLAZING EXTERNAL EXTERNAL FINISH GLAZING OFFICE B SINGLE GLAZING LOAD BEARING CAPACITY : 400 KG / SQ. M. LIVE LOAD : SELF WEIGHT + 200 FOR FLOOR FINISH TYPE OF CONSTRUCTION : FLAT SLAB LIFTS NO. & CAPACITY OF THE LIFTS : 20 PASSENGERS 8 NOS. PASSENGER : 8 PASSENGERS 4 NOS. FREIGHT : ONE TONNE CAPACITY 2 NOS. MAKE OF THE LIFT : OTIS TECHNICAL POWER HT LT : : 3200 KVA (DEPOSITS BY TCSL) BUS BAR TILL EACH FLOOR TOTAL CAPACITY INSTALLED : 3000 KVA NO. OF TRANSFORMERS INSTALLED FOR THE BUILDING : 2 NOS. POWER ALLOTTED PER FLOOR (INCLUDING COMMON) : 600 WATTS PER 100 SQ. FT. TOTAL POWER AVAILABLE : 4000 KVA (1000 KVA X 4) BACK POWER FOR EACH FLOOR (INCLUDING COMMON) : 600 WATTS PER 100 SQ. FT. DG SET CAPACITY : 4000 KVA MAKE OF THE DG SET : CATERPILLAR / CUMMINS PLACE WHERE THE DG SET IS KEPT : ADJACENT TO THE RO AD FUEL TANK CAPACITY : 4 X 990 LITRES. FUEL TANK : 10 K. LITRES IN 1 OR 2 TANKS IN ADDITIO N DG SET SOUND PROOF : YES, AS PER GUIDELINES OF TCSL AC AVAILABILITY TYPE OF AC : CENTRALISED, CHILLERS & AHUS AC CAPACITY : 1000 TONES MAKE OF THE AC PLANT : BLUE STAR UPGRADING POTENTIAL : YES PLACE WHERE AC UNITS ARE INSTALLED : TERRACE FIRE STANDARDS & WET RISER (AS PER THE TCSL FIRE ADVISORS INSTRUCTIONS) NO. OF FIRE EXITS : 3+2 MAIN EXITS ROOD HEIGHT : DOGLEGGED, 11 FEET FIRE STAIRCASE LANDING : OUTSIDE THE BUILDING FIRE HYDRANTS : YES TO BE MODIFIED AS PER THE ADVIC E ITA 2010 & 2168/10 CO 16/11 :- 25 - : OF TCSL PLACE WHERE FIRE PUMP & EMERGENCY DIESEL PUMP INSTALLED : GROUND FLOOR FIRE ALARMS : YES SMOKE DETECTORS : YES SPRINKLERS : NO. MASS COMMUNICATION SYSTEMS : YES BUILDING MANAGEMENT SYSTEMS : NO CEILING HEIGHT SLAB TO SLAB : 11 FEET FLOOR TO SLAB BOTTOM CLEAR : 11 FEET TOILETS (PER FLOOR) AS PER STANDARDS PRESCRIBED BY THE TCSLS ARCHITECT MALE : AS REQUIRED BY TCSL FEMALE : AS REQUIRED BY TCSL TOILET FLOOR FINISH : VITRIFIED TILES / CERAMIC TIL ES FLOORING IN THE LOBBY : GRANITE / MARBLE / VITRIFIED TILES STAIR CASE : TILES / GRANITE / MARBLE INSIDE THE SHELL (COMMON AREAS) : VITRIFIED TILES COMMUNICATION LOCATION OF THE COMMUNICATION ROOMS : STILT FLOOR COMMUNICATION DISH : ON THE TERRACE NOTE: COMMON AREAS, EXTERIOR OF THE BUILDING, LANDS CAPING, AC UPTO AHU, TNEB POWER CO-ORDINATION, POWER BACK UP AND THE SIG NAGE & NAMING RIGHTS BY THE FACILITY PROVIDER. 19. IN SO FAR AS THE LEASE AGREEMENT AND FACILITY PROVI DER AGREEMENTS ARE CONCERNED, THERE IS NO DISPUTE BETWE EN THE FACTS CONTAINED THEREIN. THE CASE OF THE ASSESSEE IS THA T OUT OF ITS MAIN OBJECTS, OBJECT NO.7 IS STATED TO BE RELEVANT FOR T HE ADJUDICATION OF IMPUGNED ISSUE. OBJECT NO.7 READS AS UNDER: ITA 2010 & 2168/10 CO 16/11 :- 26 - : 7. TO SUBSIDISE, ASSIST AND GUARANTEE THE PAYMEN T OF MONEY BY OR BY THE PERFORMANCE OF, ANY CONTRACT, ENGAGEMENT OR OBLIGATION BY ANY PERSONS OR COMPANIE S, AND IN PARTICULAR, CUSTOMERS, OF THE COMPANY OR ANY PER SONS OR COMPANIES WITH WHOM THE COMPANY MAY HAVE OR INTEND TO HAVE, BUSINESS RELATIONS. 20. WITH REFERENCE TO THE ABOVE, IT WAS ARGUED THAT TO TAKE ANY PROPERTY ON LEASE, THE COMPANY HAS PURCHASED THIS P ROPERTY AND GIVEN THE SAME ON LEASE IN FURTHERANCE OF ITS OBJECTS. T HE LD.AR ALSO INVITED OUR ATTENTION TOWARDS OBJECT NOS.13,14 & 15 TO SUPP ORT HIS ABOVE CONTENTION. OBJECT NOS.13,14 & 15 READ AS UNDER: 13., TO MANAGE LANDS, BUILDINGS, AND OTHER PROPERT Y SITUATE AS AFORESAID, WHETHER BELONGING TO THE COMPANY OR NOT AND TO COLLECT RENTS AND INCOME AND TO SUPPLY TO TENANTS A ND OCCUPIERS AND OTHERS, REFRESHMENTS, ATTENDANCE, MESSENGERS, L IGHT, WAITING ROOMS, READING ROOMS, MEETING ROOMS, LAVATO RIES, LAUNDRY CONVENIENCES, ELECTRIC CONVENIENCES, STABLE S AND OTHER ADVANTAGES. 14. TO ACQUIRE AND TAKE OVER ANY BUSINESS OR UNDER TAKING CARRIED ON, UPON, OR IN CONNECTION WITH ANY LAND OR BUILDING WHICH THE COMPANY MAY DESIRE TO ACQUIRE AS AFORESAI D OR BECOME INTERESTED IN, AND THE WHOLE OR ANY OF THE A SSETS AND LIABILITIES OF SUCH BUSINESS OR UNDERTAKING, AND TO CARRY ON THE SAME, OR TO DISPOSE OF REMOVE OR PUT AN END THERETO , OR OTHERWISE DEAL WITH THE SAME AS MAY SEEM EXPEDIENT. 15. TO ESTABLISH AND CARRY ON, AND TO PROMOTE THE ESTABLISHMENT AND CARRYING ON, UPON ANY PROPERTY IN WHICH THE COMPANY IS INTERESTED, OF ANY BUSINESS WHICH MAY B E CONVENIENTLY CARRIED ON, UPON OR IN CONNECTION WITH SUCH PROPERTY AND THE ESTABLISHMENT OF WHICH MAY SEEM CA LCULATED TO ENHANCE THE VALUE OF THE COMPANY'S INTEREST IN SUCH PROPERTY, OR TO FACILITIES THE DISPOSAL THEREOF. ITA 2010 & 2168/10 CO 16/11 :- 27 - : 21. WITH THE HELP OF THESE DOCUMENTS, THE LD.AR CONVASS ED THAT THIS RECEIPT IS ONLY ASSESSEES BUSINESS RECEIPT AND HAS TO BE TAXED UNDER THE HEAD INCOME FROM BUSINESS. 22. ON THE OTHER HAND, THE CASE OF THE REVENUE IS THAT THE ASSESSEE-COMPANY HAS GIVEN THE PROPERTY IN QUESTION ON RENT AS THE PRIME OBJECT UNDER THE AGREEMENTS IN QUESTION IS TO LET OUT THE PROPERTY ON RENT AND GIVEN THEM ADDITIONAL RIGHT OF USING THE FACILITIES INCLUDING THE CAFETERIA ETC. THE LD.DR HEAVILY REL IED ON THE DECISION OF HON'BLE HON'BLE SUPREME COURT AS WELL AS HIGH COURT S WHICH ARE MENTIONED IN THE GROUNDS OF APPEAL WHICH WE HAVE EX TRACTED HEREIN ABOVE. IN THE LIGHT OF THIS SUBMISSION, IT WAS INS ISTED THAT THIS IMPUGNED RECEIPT HAS TO BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY ONLY. THE LD.DR HAS ALSO DISPUTED THE FINDING OF THE LD. CIT(A) WHEN HE HAS GIVEN A DIRECTION TO THE ASS ESSING OFFICER TO ASSESS THE IMPUGNED RECEIPT UNDER THE HEAD INCOME FROM OTHER SOURCES U/S 56 AND ALSO HOLDING IT ELIGIBLE FOR DE DUCTION U/S 57 OF THE ACT. 23. SO, PRIMARILY, THE PRAYER OF THE LD.AR IS THAT THE IMPUGNED RECEIPT SHOULD BE TREATED AS BUSINESS RECEIPT AND I N THE ALTERNATIVE, HE HAS VEHEMENTLY SUBMITTED THAT IN ANY WORST CASE, TH IS RECEIPT HAS TO ITA 2010 & 2168/10 CO 16/11 :- 28 - : BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURC ES TO WHICH SECTIONS 56 & 57 OF THE ACT ARE APPLIED. FOR READY REFERENCE, WE CAN EXTRACT PARA 4.2 OF THE ORDER APPEALED AGAINST WHIC H CONTAINS THE DETAILED WRITTEN SUBMISSION FILED BEFORE THE LD. CI T(A), HEREIN BELOW: 4.2 THE APPELLANT HAS SUBSEQUENTLY GIVEN FURTHER DETAILS REGARDING THE IMPUGNED PROPERTY AND THE FACILITIES AND THE REASONS AS TO WHY THE INCOME DERIVED THEREFROM SHOU LD BE CONSIDERED AS BUSINESS INCOME. THE SUBMISSION OF T HE APPELLANT IS AS UNDER: '2. THE MEMORANDUM OF ASSOCIATION OF THE COMPANY AL LOWS THE COMPANY TO ACQUIRE AND CARRY OUT REAL ESTATE BU SINESS. THE COMPANY ACQUIRED AN INFORMATION TECHNOLOGY PARK FROM REAL VALUE PROMOTERS (PRIVATE) LID DURING THE PREVI OUS YEAR RELATING TO ASSESSMENT YEAR 2006-07 AT A TOTAL COST OF RS 74.19 CRORES COMPRISING OF LAND AT RS. 12.8 CRORES, BUILDING AT RS 48.30 CRORES AND PLANT AND MACHINERY AT RS 13 .09 CRORES . THE INCOME FROM THE INFORMATION TECHNOLOGY PARK IS NOT ASSESSABLE AS INCOME FROM HOUSE PROPERTY. INFORMATI ON TECHNOLOGY PARKS ARE INFRASTRUCTURE UNDERTAKINGS WH ICH ARE NOT COVERED UNDER SECTION 22 OF THE INCOME TAX ACT. THESE INFORMATION TECHNOLOGY PARKS ARE IN THE NATURE OF DEVELOPMENT INFRASTRUCTURE FACILITIES ENCOURAGED BY THE CENTRAL GOVERNMENT AND INCLUDE DEVELOPMENT OF INFRASTRUCTURE TO PROMOTE EXPORTS OF SOFTWARE. THE STATUTE PROVIDES TAX INCENTIVES AS DETAILED IN SECTION 80 I A OF THE INCOME TAX ACT 1961 WHERE THE DEVELOPMENT IS IN ACCORDANCE WITH THE INDUSTRIAL PARK SCHEME 2002 NOT IFIED UNDER NOTIFICATION NUMBER SO 354 (E) DATED 1-4-2002 . THE OBJECTIVES OF THE INDUSTRIAL PARK SCHEME INCLUDES A N INDUSTRIAL PARK FOR THE DEVELOPMENT OF INFRASTRUCTU RAL FACILITIES OR BUILT UP SPACE WITH COMMON FACILITIES IN AN AREA ALLOTTED OR EARMARKED FOR THE PURPOSE OF INDUSTRIAL USE SPECIFI ED IN EXPLANATION TO PARAGRAPH 6 SUB CLAUSE (C) OF THE SC HEME. INFRASTRUCTURE DEVELOPMENT MEANS AIR CONDITIONING, ROADS (INCLUDING APPROACH ROADS) WATER SUPPLY AND SEWERAG E, COMMON EFFLUENT TREATMENT FACILITY, TELECOM NETWORK , GENERATION AND DISTRIBUTION OF POWER AND SUCH OTHE R FACILITIES FOR THE COMMON USE FOR INDUSTRIAL ACTIVITY THAT ARE PROVIDED ON COMMERCIAL TERMS. ITA 2010 & 2168/10 CO 16/11 :- 29 - : 4. THE INFORMATION TECHNOLOGY PARK OWNED AND OPERAT ED BY THE ASSESSEE, IS OCCUPIED BY TCSL 100% EXPORT ORIENTED UNIT UNDER THE SOFTWARE TECHNOLOGY PARK OF INDIA SC HEME AND THE PREMISES IS RECOGNIZED BY THE CUSTOM~ AS A BONDED MANUFACTURING UNIT CARRYING OUT 100% EXPORT UNIT. T HE NECESSARY APPROVALS UNDER THE SOFTWARE TECHNOLOGY P ARK SCHEME AND THE CUSTOMS OBTAINED BY TCSL ARE ENCLOSE D HEREWITH FOR YOUR READY REFERENCE. 5. THE ASSESSEE ACQUIRED THE INFORMATION TECHNOLOGY PARK DURING CONSTRUCTION PERIOD BETWEEN AUGUST 5, 2004 T O JULY 1, 2005 AND DURING CONSTRUCTION PERIOD, TWO AGREEMENTS BOTH DATED FEB 18, 2005 WERE ENTERED INTO WITH TATA CONS ULTANCY SERVICES LIMITED (TCSL), THE COUNTRY'S LARGEST SOFT WARE COMPANY. THESE AGREEMENTS ARE (I) LEASE AGREEMENT A ND (II) FACILITY PROVIDER AGREEMENT. THE RENT UNDER TH ESE AGREEMENTS COMMENCED FROM JULY 1, 2005 FOR BUILDING KNOWN AS 'OFFICE A ' AND FROM SEPTEMBER 5, 2005 FOR BUILDING KNOWN AS 'OFFICE B '. THIS IS THE FIRST LE TTING. THE ABOVE TWO AGREEMENTS ARE INSEPARABLE. PLEASE SEE PA GE 5 OF THE FACILITY PROVIDER AGREEMENT PARAGRAPH 3 WHIC H READS AS '3. THE PARTIES HERETO AGREE THAT THE PERIOD OF THIS AGREEMENT SHALL BE CONCURRENT TO AND COTERMINOUS WI TH THE LEASE AGREEMENT DATED 18TH DAY OF FEBRUARY, 2005 IN RESPECT OF THE 'DEMISED PREMISES' EXECUTED BY THE F ACILITY PROVIDER IN FAVOR OF TCSL. THIS FACILITY PROVIDER A GREEMENT CANNOT BE TERMINATED WHEN THE SAID LEASE AGREEMENT IS IN EFFECT. THE TERMS AND CONDITIONS OF THIS AGREEMENT ARE IN ADDITION TO THE TERMS CONTAINED IN THE SAID LEASE A GREEMENT. IN THE EVENT OF TERMINATION OF THIS AGREEMENT, TCSL MAY, AT ITS DISCRETION, ADJUST! APPROPRIATE THE SECURITY DE POSIT AGAINST THE HIRE PAYABLE FOR SUCH BALANCE PERIOD OF NOTICE OF TERMINATION TO THE FACILITY PROVIDER, AS SET OUT IN THE LEASE AGREEMENT.' LEASE AGREEMENT - UNDER THE LEASE AGREEMENT THE MONTHLY RENT PAYABLE BY TCS IS RS. 20/- PER SQ. FT. FOR 250 ,260 SQ. FT. AGGREGATING TO RS. 50,05,200 (RUPEES FIFTY LAKHS FI VE THOUSAND AND TWO HUNDRED ONLY) PER MONTH AND RS. 6,00,62,400 (RUPEES SIX CRORES SIXTY TWO THOUSAND F OUR HUNDRED ONLY) PER ANNUM. THE INTEREST FREE REFUNDAB LE SECURITY DEPOSIT IS AT RS. 4,00,41,600 (RUPEES FOUR CRORES FORTY ONE THOUSAND AND SIX HUNDRED ONLY). ITA 2010 & 2168/10 CO 16/11 :- 30 - : FACILITY PROVIDER AGREEMENT - UNDER THIS AGREEMENT HIRE CHARGES PAYABLE BY TCSL IS AT RS. 16,01,840/- (RUPE ES SIXTEEN LAKHS ONE THOUSAND EIGHT HUNDRED AND FORTY) PER MONTH OR RS. 1,92,22,080 (RUPEES ONE CRORE NINETY T WO LAKHS TWENTY TWO THOUSAND AND EIGHTY ONLY) PER ANNU M. THE INTEREST FREE SECURITY DEPOSIT IS AT RS. 1,28,14,72 0/ ( RUPEES ONE CRORE TWENTY EIGHT LAKHS FOURTEEN THOUSAND SEVE N HUNDRED AND TWENTY ONLY). ANNEXURE I OF THE AGREEME NT PROVIDES THE DETAILS OF THE FACILITIES PROVIDED. AS STATED ABOVE THE COMPANY HAS LET OUT THE ENTIRE INDUSTRIAL PARK TO TCSL AND THAT COMPANY IS ENGAGE D IN THE BUSINESS OF MANUFACTURING SOFTWARE (AN INDUSTRIAL A CTIVITY) AS A HUNDRED PERCENT EXPORT UNIT RECOGNIZED BY THE GOVERNMENT OF INDIA. THE FACT THAT AN INDUSTRIAL PA RK HAS BEEN DEFINED TO MEAN A PROJECT IN WHICH PLOTS OF DE VELOPED SPACE OR BUILT UP SPACE OR COMBINATIONS WITH COMMON FACILITIES AND QUALITY INFRASTRUCTURE FACILITIES AR E DEVELOPED AND MADE AVAILABLE TO UNITS FOR INDUSTRIAL OR COMME RCIAL ACTIVITIES WHICH INCLUDE DEVELOPMENT OF SOFTWARE WO ULD SHOW THAT NO ORDINARY SERVICES OR FACILITIES OR ACTIVITI ES ARE BEING RENDERED BY THE COMPANY AND THE INFERENCE DRAWN BY THE ASSESSING OFFICER THAT THE SERVICES PROVIDED ARE O RDINARY SERVICES, IS WRONG AND MISPLACED AND DESERVES ONLY TO BE REJECTED. THE COMPANY PROVIDES QUALITY INFRASTRUCTU RE SERVICES TO TCSL AND WOULD HAVE ALSO QUALIFIED FOR RECOGNITION UNDER THE INDUSTRIAL PARK SCHEME AND WO ULD HAVE BEEN ELIGIBLE FOR DEDUCTION UNDER 80LA BUT FOR THE CRITERIA THAT THERE MUST BE MINIMUM NUMBER OF 30 UN ITS AND THAT NO INDUSTRIAL UNIT SHOULD OCCUPY MORE THAN 25% OF THE ALLOCABLE AREA WHICH THE APPELLANT COMPANY IS UNABL E TO MEET AS THE. ENTIRE PREMISES ARE OCCUPIED BY TCSL. THIS FAILURE TO MEET THE REGULATIONS WOULD ONLY MEAN THA T THE COMPANY IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80 IA AND CANNOT BE INTERPRETED TO MEAN THAT THE COMPANY DOES NOT CARRYON BUSINESS OR THAT THE INCOME IS ASSESSAB LE UNDER THE HEAD HOUSE PROPERTY. 6. THE ASSESSING OFFICER WRONGLY APPLIED THE DECISI ONS OF CIT VERSUS SHAMBU INVESTMENTS PRIVATE LTD 249 ITR 4 7 ( AFFIRMED BY THE SUPREME COURT IN 263 ITR 143), CHEN NAI PROPERTIES AND INVESTMENTS LTD 266 ITR 685 (MAD) AN D DECISION OF THE SUPREME COURT IN THE CASE OF SULTAN BROTHERS 51 ITR 353. THESE CASES ARE DISTINGUISHABLE ON FACT S AND DO NOT APPLY TO INFORMATION TECHNOLOGY PARKS AND ARE N OT APPLICABLE FOR REASONS STATED HEREUNDER. ITA 2010 & 2168/10 CO 16/11 :- 31 - : A) IN THE CASE OF CIT VS. SHAMBU INVESTMENTS P. LT D. SUPRA THE ASSESSEE HAD LET OUT A PORTION OF THE PREMISES TO OCCUPANTS AND THERE WAS NO SEPARATE AGREEMENT FOR U SE OF FURNITURE AND FIXTURES OR OTHER AMENITIES. THE INTE NTION WAS TO ALLOW OCCUPANTS TABLE SPACE TOGETHER WITH FURNITURE S AND FIXTURES AND OTHER FACULTIES AND AMENITIES. THE ASS ESSEE HAD TAKEN AS SECURITY THE ENTIRE COST OF PROPERTY. ON T HESE FACTS, THE HIGH COURT HELD THAT THE INCOME WAS ASSESSABLE AS INCOME FROM HOUSE PROPERTY. THE HONORABLE HIGH COUR T SAID (SEE PAGE 52) 'TAKING A SUM TOTAL OF THE AFORESAID DECISIONS IT C LEARLY APPEARS THAT MERELY BECAUSE INCOME IS ATTACHED TO A NY IMMOVABLE PROPERTY THAT CANNOT BE THE SOLE FACTOR F OR ASSESSMENT OF SUCH INCOME AS INCOME FROM PROPERTY. WHAT HAS TO BE SEEN IS WHAT WAS THE PRIMARY OBJECT OF TH E ASSESSEE WHILE EXPLOITING THE PROPERTY. IF IT IS FO UND APPLYING SUCH TEST THAT THE MAIN INTENTION IS FOR LETTING OU T THE PROPERTY OR ANY PORTION THEREOF THE SAME MUST BE CONSIDERED AS RENTAL INCOME OR INCOME FROM PROPERTY. IN CASE IT IS FOUND THAT THE MAIN INTENTION IS TO EXPLOIT THE IMMOVABLE PROPERTY BY WAY OF COMPLEX COMMERCIAL ACTIVITIES IN THAT EVENT IT MUST BE HELD AS BUSINESS INCOME.(EMPHASIS SUPPLIED)... TO DECIDE THIS ISSUE WE CANNOT OVERLOOK THE FACT THAT THE COST OF THE PROPERTY WAS RS.5,42,443. A PORTION OF THE S AID PROPERTY IS USED BY THE ASSESSEE HIMSELF FOR HIS OW N 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 RECOV ERED A SUM OF RS.4,25,000 AS AND BY WAY OF SECURITY FREE ADVANCE FROM THREE OCCUPANTS. HENCE, THE ENTIRE COS T 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 ASSESSE E IS EXPLOITING THE PROPERTY FOR ITS COMMERCIAL BUSINESS ACTIVITIES AND SUCH BUSINESS ACTIVITIES ARE PRIME M OTIVE AND LETTING OUT THE PROPERTY IS A SECONDARY ONE'(EMPHASIS SUPPLIED) (B) IN THE CASE OF CHENNAI PROPERTIES AND INVESTMEN TS LTD (MAD) 266 ITR 685 THE FACTS WERE THAT THE ASSESSEE COMPANY OWNED TWO BUILDINGS IN THE CITY OF CHENNAI, 'CHENNAI HOUSE' AND FIRHAVAN ESTATES'. FOR THE ASSESSMENT HERE 197980, 1983 84 AND 1984-85, THE ASSESSING OFFICER DECLINED TO ASSESS THE RENTAL INC OME ITA 2010 & 2168/10 CO 16/11 :- 32 - : UNDER THE HEAD BUSINESS AND ASSESSED THE INCOME UN DER THE HEAD HOUSE PROPERTY. THE INCOME WAS ASSESSED BO TH BY THE COMMISSIONER AND THE ITA T AS INCOME FROM BUSINESS. THE HONORABLE HIGH COURT REVERSED THE DECISION OF T HE ITAT AND HELD THE INCOME WAS ASSESSABLE AS INCOME FROM HOUSE PROPERTY. THE COURT FOUND ON FACTS THAT THE ASSESSEE WAS EXPLOITING THE PROPERTY AS OWNER BY LEASING OUT THE - SAME AND A REALIZING INCOME BY WAY OF RENT. THE HONORABLE HJGH COURT HELD ' ALTHOUGH IT WAS HELD BY THE CONSTITUTION BENCH IN THE CASE OF SULTAN BROTHERS [ 1964] 51 ITR 353 C SC) THAT WHETHER A PARTICULAR LETTING IS BUSINESS HAS TO BE DECIDED IN THE CIRCUMSTANCES OF EACH CASE AND THAT EACH CASE HAS TO BE LOOKED AT FROM A BUSINESSMAN'S POINT OF VIEW TO FIND OUT WHETHER THE LETTING WAS T HE DOING OF A BUSINESS OR THE EXPLOITATION OF HIS PROPERTY BY AN OWNER, IN ALL THE CASES WHICH HAVE COME BEFORE THE COURTS INV OLVING COMMERCIAL OR RESIDENTIAL BUILDINGS OWNED BY ASSESS EES IT HAS BEEN HELD THAT THE INCOME REALIZED BY SUCH OWNE RS BY WAY OF RENTAL INCOME FROM A BUILDING, WHETHER A COMMERCIAL BUILDING OR RESIDENTIAL HOUSE, IS ASSESSABLE UNDER THE HEAD 'INCOME FROM HOUSE PROPERTY'. THE ONLY EXCEPTIONS ARE CASES WHERE THE LETTING OF THE BUILDING IS INSEPARABLE FROM THE LETTING OF THE MAC HINERY, PLANT AND FURNITURE. IN SUCH CASES, IT HAS BEEN HEL D THAT THE RENTAL WOULD NOT HAVE BEEN REALIZED BUT FOR THE LETTING OUT OF THE MACHINERY, PLANT OR FURNITURE AL ONG WITH SUCH BUILDING AND THEREFORE THE RENTAL RECEIVED FOR THE BUILDING IS TO BE ASSESSED UNDER THE HEAD 'INCOME F ROM OTHER SOURCES':(EMPHASIS SUPPLIED) AGAIN THE ABOVE CASE IS NOT THE CASE OF AN INFORMAT ION TECHNOLOGY PARK AND IS A CASE OF BARE LETTING AND THEREFORE DISTINGUISHABLE ON FACTS. IT WILL BE PERTINENT TO NOTE THAT IN SUBSEQUENT YEARS FOR AY 2000-01 AND 2001-02 THE HONORABLE HIGH COURT OF MADRAS HAS ASSESSED THE AMENITY CHARGES AS INCOME FOR OTHER SOURCES AND NOT AS HOUSE PROPERTY. PLEASE SEE 303 ITR 33 (C) IN THE CASE OF SULTAN BROTHERS PVT. LTD., A PRI VATE COMPANY CONSTRUCTED AND LET OUT ON LEASE A FULLY EQ UIPPED HOTEL WITH FURNITURE, FIXTURES AND FITTINGS. THE LE ASE PROVIDED FOR A MONTHLY RENT OF RS. 5,950/- AND HIRE OF RS. 5,000/- FOR FURNITURE AND FIXTURES. UP TO THE PERIOD COMMENCING FROM DEC 1,1946 TO ASSESSMENT YEAR 195253 THE INCOME DER IVED FROM LETTING OF THE BUILDING AND THE FURNITURE AND FIXTURES WAS BEING COMPUTED UNDER SECTION 12 (CORRESPONDING TO S ECTION 56 OF THE PRESENT ACT) OF THE INCOME TAX ACT 1922. THE ITA 2010 & 2168/10 CO 16/11 :- 33 - : INCOME TAX OFFICER FOR ASSESSMENT YEAR 1953 -- 54 C OMPUTED THE INCOME FROM PROPERTY LEASED UNDER SECTION 9 (CORRESPONDING TO SECTION 22 OF THE PRESENT ACT) AND THE INCOME DERIVED FROM HIRING OF FURNITURE AND FI XTURES UNDER SECTION 12 (CORRESPONDING TO SECTION 56 OF THE PRES ENT ACT) INCOME TAX ACT 1922. AT NO TIME THE ASSESSEE HAD TO CONTENDED BEFORE THE INCOME TAX OFFICER THAT THE AS SESSEE COMPANY WAS CARRYING ON BUSINESS. (PLEASE SEE THE STATEMENT OF THE CASE 38 ITR 85 AT PAGE 87 AND ONLY AN ALTERNATE PLEA WAS TAKEN THAT IF THE INCOME CANNOT BE COMPUTED WHOLLY UNDER SECTION 12 THEN IT SHOULD BE WHOLLY COMPUTED UNDER SECTION 10 AS MUCH AS 'LETTING OUT T OTALITY OF THE ASSETS' IS THE ASSESSEE'S BUSINESS AND THE BUIL DING THAT IS LEASED IS USED FOR THE PURPOSE OF THAT BUSINESS. THE HONORABLE SUPREME COURT ON FACTS FOUND THAT THE TWO LEASES WERE INSEPARABLE AND THAT THE ASSESSEE NEVER CARRIED OUT HOTEL BUSINESS AND HAD NO INTENTION TO CARRY ON SUCH BUSINESS. ON SUCH FACTS, THE SUPREME COURT HELD THA T THE INCOME FROM HIRE OF FURNITURE & FIXTURES AND BUILDI NG WAS ASSESSABLE AS INCOME FROM OTHER SOURCES AND NOT INC OME FROM HOUSE PROPERTY OR INCOME FROM BUSINESS. THIS C ASE DOES NOT ADVANCE THE CASE OF THE ASSESSING OFFICER THAT INCOME FROM LETTING OF AN INFORMATION TECHNOLOGY PA RK IS ASSESSABLE AS INCOME FROM HOUSE PROPERTY. ' 24. BEFORE MOVING FURTHER, LET US FURTHER DISCUSS THE D ECISION OF HON'BLE JURISDICTIONAL HIGH COURT RENDERED IN THE C ASE OF CHENNAI PROPERTIES AND INVESTMENTS LTD, 266 ITR 685. IN TH AT CASE, THE ASSESSEE-COMPANY OWNED TWO BUILDINGS IN THE CITY OF CHENNAI, CHENNAI HOUSE AND FIRHAVAN ESTATES. FOR ASSESS MENT YEARS 1979- 80, 1983-84 AND 1984-85, THE ASSESSING OFFICER DECL INED TO ASSESS THE RENTAL INCOME UNDER THE HEAD BUSINESS AND ASSESSE D THE INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. AS AG AINST WHICH THE LD. CIT(A) AS WELL AS THE TRIBUNAL HELD THAT RECEIPT AS INCOME FROM ITA 2010 & 2168/10 CO 16/11 :- 34 - : BUSINESS. THIS FINDING OF THE TRIBUNAL WAS REVERS ED BY THE HIGH COURT WHEN IT FOUND THAT THE ASSESSEE WAS EXPLOITING THE PROPERTY AS OWNER BY LEASING OUT THE SAME AND REALIZING INCOME BY WAY OF RENT. IN DOING SO, THE HON'BLE HIGH COURT HAS OBSERVED THE DECISIO N OF CONSTITUTION BENCH OF HON'BLE SUPREME COURT RENDERED IN THE CASE OF SULTAN BROTHERS, 51 ITR 353 THAT WHETHER A PARTICULAR LETT ING IS BUSINESS HAS TO BE DECIDED IN THE CIRCUMSTANCES OF EACH CASE AND THAT EACH CASE HAS TO BE LOOKED AT FROM A BUSINESSMANS POINT OF V IEW TO FIND OUT WHETHER THE LETTING WAS THE DOING OF A BUSINESS OR THE EXPLOITATION OF HIS PROPERTY BY AN OWNER, IN ALL THE CASES WHICH HA VE COME BEFORE THE COURTS INVOLVING COMMERCIAL OR RESIDENTIAL BUILDING S OWNED BY ASSESSEES IT HAS BEEN HELD THAT THE INCOME REALIZED BY SUCH OWNERS BY WAY OF RENTAL INCOME FROM A BUILDING, WHETHER A COM MERCIAL BUILDING OR RESIDENTIAL HOUSE, IS ASSESSABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE HON'BLE SUPREME COURT AS WELL AS THE HON'BLE MADRAS HIGH COURT HAVE CERTIFIED THAT THE ONLY EXCEPTION ARE CASES WHERE THE LETTING OF THE BUILDING IS INSEPARABLE FROM THE LET TING OF THE MACHINERY, PLANT AND FURNITURE. IN SUCH CASES, IT HAS BEEN HE LD THAT THE RENTAL WOULD NOT HAVE BEEN REALIZED BUT FOR THE LETTING OU T OF THE MACHINERY, PLANT OR FURNITURE ALONG WITH SUCH BUILDING AND THE REFORE, THE RENTAL RECEIVED FOR THE BUILDING IS TO BE ASSESSED UNDER T HE HEAD INCOME ITA 2010 & 2168/10 CO 16/11 :- 35 - : FROM OTHER SOURCES. AS IS CLEAR, IN THE CASE OF C HENNAI PROPERTIES AND INVESTMENTS LTD (SUPRA), THE ASSET GIVEN ON LEASE W AS NOT AN INFORMATION TECHNOLOGY PARK AND WAS A SIMPLE CASE O F LETTING. SO, IN OUR CONSIDERED OPINION, THE FACTS ARE DISTINGUISHAB LE. THE HON'BLE MADRAS HIGH COURT, WHILE DEALING WITH SUCH RENTAL C ASES, HAS ORDERED TO ASSESS THE AMENITY CHARGES AS INCOME FROM OTHER SOURCES AND NOT AS INCOME FROM HOUSE PROPERTY WHILE DECIDING THE CASE OF CIT VS CHENNAI PROPERTIES & INVESTMENTS LTD, 303 ITR 33, P ERTAINING TO ASSESSMENT YEAR 2001-02. 25. IN THE CASE OF SULTAN BROTHERS PVT. LTD (SUPRA), A PRIVATE COMPANY CONSTRUCTED AND LET OUT ON LEASE A FULLY EQ UIPPED HOTEL WITH FURNITURE FIXTURES AND FITTINGS. THE LEASE DEED PR OVIDED FOR A MONTHLY RENT OF ` 5950/-AND HIRE OF ` 5000/- FOR FURNITURE AND FIXTURES. UPTO THE PERIOD COMMENCING FROM 1.12.1946 TO ASSESSMENT YEAR 1952-53, THE INCOME DERIVED FROM LETTING OF THE BUILDING AND THE FURNITURE AND FIXTURES WAS BEING COMPUTED U/S 12 (CORRESPONDING T O SECTION 56 OF THE PRESENT ACT). THE ASSESSING OFFICER, IN THAT C ASE, ASSESSED THE INCOME FROM PROPERTY LEASED UNDER SECTION 9 (CORRES PONDING TO SECTION 22 OF THE PRESENT ACT). IN THAT CASE AT NO POINT O F TIME, THE ASSESSEE- COMPANY HAD CONTENDED BEFORE THE ITO THAT THE ASSES SEE-COMPANY WAS CARRYING ON BUSINESS. ON THE OBTAINING FACTS O F THAT CASE, THE ITA 2010 & 2168/10 CO 16/11 :- 36 - : HON'BLE SUPREME COURT FOUND THAT THE TWO LEASES WER E INSEPARABLE AND THE ASSESSEE NEVER CARRIED OUT HOTEL BUSINESS A ND HAD NO INTENTION TO CARRY ON SUCH BUSINESS. ON SUCH FACTS, THE HON' BLE SUPREME COURT HELD THAT THE INCOME FROM HIRE OF FURNITURE AND FIX TURES AND BUILDING WAS ASSESSABLE AS INCOME FROM OTHER SOURCES AND N OT INCOME FROM HOUSE PROPERTY OR INCOME FROM BUSINESS. 26. IN SHORT, THE CASE OF THE LD.AR IS THAT THE INCOME FROM BUILDING AND PLANT AND MACHINERY WHICH IS INSEPARABLE LET OU T IS ASSESSABLE AS INCOME FROM BUSINESS. IN SUPPORT OF HIS CONTENTION HE HAS RELIED ON THE DECISION OF HON'BLE SUPREME COURTS RENDERED IN THE CASE OF SG MERCANTILE COMP. P. LTD VS CIT, 83 ITR 700, AND THA T OF KARNANI PROPERTIES LTD VS CIT, 82 ITR 547. FURTHER RELIANC E WAS PLACED ON THE FOLLOWING CASES: CIT VS NATIONAL STORAGE PVT. LTD 66 ITR 596(S.C) CIT VS ASSOCIATED BUILDING CO. LTD 137 ITR 339 (BO M.) CIT VS K.L.PURI (HUF) 233 ITR 43 (DELHI) CIT VS HALAI NEMON ASSOCIATION 243 ITR 439 (MAD) CIT VS ADMIRALTY FLATS MOTEL 133 ITR 895(MAD) SULTAN BROTHERS PVT. LTD VS CIT 51 ITR 353(S.C) 27. FURTHER RELIANCE WAS PLACED ON THE DECISION OF HON' BLE SUPREME COURT RENDERED IN THE CASE OF UNIVERSAL PLAST LTD V S CIT, 237 ITR 454 AND THAT OF HON'BLE ALLAHABAD HIGH COURT RENDERED I N THE CASE OF CIT VS GOEL BROTHERS, 331 ITR 344. THESE DECISIONS CLE ARLY SAY THAT ITA 2010 & 2168/10 CO 16/11 :- 37 - : SECTION 22 DOES NOT APPLY TO COMMERCIAL ASSETS. FURTHER RELIANCE WAS PLACED ON THE DECISION OF HON'BLE ORISSA HIGH COURT RENDERED IN THE CASE OF CIT VS M.P.BAZAZ & OTHERS, 200 ITR 131. TH E RATIO OF THE ABOVE DECISION IS THAT INTENTION OF THE PARTIES IS TO BE SEEN. TO SUPPORT THE LD. CIT(A)S FINDING, THE LD.AR HAS REL IED ON THE DECISION OF HON'BLE MADRAS HIGH COURT RENDERED IN THE CASE OF O RIENT HOSPITAL LTD VS DY. CIT, 315 ITR 422 IN WHICH IT HAS BEEN HELD A S UNDER: HELD, DISMISSING THE APPEAL, THAT INCOME DERIVED OU T OF THE LEASE OF PROPERTY AND FURNITURE AS IN THIS CASE COULD NOT BE TREATED AS INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE FINDING GIVEN BY THE T RIBUNAL THAT THE INCOME WAS INCOME FROM OTHER SOURCES WAS CORRECT. 28. FURTHER RELIANCE HAS BEEN MADE ON THE DECISION OF C HENNAI PROPERTIES & INVESTMENTS LTD, WHICH HAS FOLLOWED AN OTHER DECISION IN THE CASE OF TARAPORE AND CO. VS CIT, 259 ITR 389, T HE RATIO OF THESE DECISIONS IS THAT WHEN THE LETTING OF BUILDING IS I NSEPARABLE FROM THE LETTING OF PLANT AND MACHINERY AND FURNITURE, THE R ECEIPT OF SUCH LEASING HAS TO BE ASSESSED UNDER THE HEAD INCOME F ROM OTHER SOURCES. 29. SECTION 22 WHICH WE HAVE EXTRACTED IN THE FORMER PA RT OF THIS ORDER SIMPLY TALKS ABOUT ANNUAL VALUE OF LETTING OF THE PROPERTY ITA 2010 & 2168/10 CO 16/11 :- 38 - : CONSISTING OF ANY BUILDING OR LAND APPURTENANT THER ETO OF WHICH THE ASSESSEE IS THE OWNER WHICH EXCLUDES PORTIONS OF SU CH PROPERTY AS HE MAY OCCUPY FOR THE PURPOSES OF ANY BUSINESS OR PROF ESSION CARRIED ON BY HIM THE PROFITS OF WHICH SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IN OUR CONS IDERED OPINION, THIS SECTION DOES NOT DIRECTLY APPLY TO THE FACTS O F THE GIVEN CASE. 30. AGAIN SECTION 28 PRESCRIBES ABOUT THE PROFITS AND G AINS FROM BUSINESS OR PROFESSION. SO, IF IT IS FOUND THAT TH E RECEIPT IN QUESTION IS IN FURTHERANCE OF THE OBJECTS OF THE ASSESSEE WHICH FORM PART OF ITS BUSINESS THEN ONLY THE INCOME CAN BE ASSESSED UNDER THIS SECTION. IN OUR OPINION, THE FINDINGS OF THE LD. CIT(A) AND THE REASONING GIVEN BY HIM THAT RECEIPT CANNOT BE TREATED AS ASSESSEES BU SINESS INCOME ARE CORRECT AND WE UPHOLD THE SAME. IN THIS REGARD, WE WOULD LIKE TO INCORPORATE PARA 4.4 OF THE LD. CIT(A)S ORDER HERE IN BELOW: 4.4 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE SUBMISSIONS OF THE ID. AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE AO AND AR. I HAVE ALSO P ERUSED THE LEASE AGREEMENTS AND OTHER DOCUMENTS SUBMITTED BY T HE APPELLANT. THE AO HAS TREATED THE RENTAL INCOME AS INCOME FROM HOUSE PROPERTY BY MAINLY RELYING ON THE DECISI ON OF THE MADRAS HIGH COURT IN THE CASE OF CHENNAI PROPERTIES (SUPRA) AND THE DECISION OF THE SUPREME COURT IN THE CASE O F SHAMBU INVESTMENTS (SUPRA). THE APPELLANT, ON THE OTHER HA ND, HAS RELIED ON THE SPECIFIC NATURE OF THE BUILDING (ITP) AND THE DECISION OF THE SUPREME COURT IN THE CASE OF SG MER CANTILE COMPANY PVT. LTD, KARNANI PROPERTIES, NATIONAL STOR AGE PVT. LTD, ASSOCIATED BUILDING COMPANY LTD, K.L. PURI, HA LAI NEMON ASSOCIATION AND ADMIRALTY FLATS MOTEL (SUPRA). AFTE R CONSIDERING THE FACTS OF THE CASE AND THE PRECEDENT S RELIED ON ITA 2010 & 2168/10 CO 16/11 :- 39 - : BY THE AO AND AR, I AM OF THE OPINION THAT THE INCO ME FROM THE BUILDING AND THE- FACILITIES CANNOT BE CONSIDER ED AS 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. AS PER S. 14 OF THE ACT, ALL INCOME, FOR THE PURPOSES OF CHARGE OF INCOME-TA X AND COMPUTATION OF TOTAL INCOME, ARE CLASSIFIED UNDER T HE FOLLOWING HEADS OF INCOME: (I) SALARIES, (II) INCOME FROM HOU SE PROPERTY, (III) PROFITS AND GAINS OF BUSINESS OR PROFESSION, (IV) CAPITAL GAINS AND (V) INCOME FROM OTHER SOURCES. THE VARIOU S HEADS AND THE PROVISIONS OF ACT APPLICABLE TO THESE VARIO US HEADS ARE MUTUALLY EXCLUSIVE. WHERE AN ITEM FALL SPECIFIC ALLY UNDER ONE HEAD IT HAS TO BE CHARGED UNDER THAT HEAD AND N O OTHER. THE METHOD OF BOOK KEEPING FOLLOWED BY THE ASSESSEE WILL NOT DECIDE UNDER WHICH HEAD A PARTICULAR INCOME WILL FA LL. THE HEADS OF INCOME MUST BE DECIDED FROM THE NATURE OF THE INCOME BY APPLYING PRACTICAL NOTIONS AND NOT BY REF ERENCE TO AN ASSESSEE'S TREATMENT OF THE INCOME. IT IS TO BE DECIDED ACCORDING TO THE COMMON NOTIONS OF A PRACTICAL MAN. THE FOLLOWING CONDITIONS SHOULD BE SATISFIED IN ORDER F OR AN INCOME TO BE CHARGED UNDER 28(I) I.E. THE PROFITS AND GAI NS OF ANY BUSINESS (I) THERE SHOULD BE PROFIT AND GAINS; (II) THE PROFITS AND GAINS SHOULD BE OF ANY BUSINESS OR PROFESSION; (III ) THE BUSINESS OR PROFESSION SHOULD BE CARRIED ON; (IV) T HE BUSINESS OR PROFESSION SHOULD BE CARRIED ON BY THE ASSESSEE AND (V) THE BUSINESS OR PROFESSION SHOULD BE CARRIED ON DURING THE PREVIOUS YEAR. AS PER CLAUSE (13) OF SECTION 2, BUS INESS INCLUDES ANY TRADE, COMMERCE OR MANUFACTURE OR ANY ADVENTURE OR CONCERN IN THE NATURE OF TRADE, COMMER CE OR MANUFACTURE. ESSENTIAL FEATURES OF A BUSINESS INCLU DE REGULARITY OF TRANSACTIONS AND CONTINUITY OF ACTIVI TIES. THE OBJECTIVE SHOULD BE TO EARN PROFIT. THE ACTIVITY SH OULD BE REAL, SUBSTANTIAL, SYSTEMATIC AND ORGANIZED [CIT V. DISTR IBUTORS (BARODA) PVT. LTD, 83 ITR 377 (SC)]. THE GUJARAT HI GH COURT IN THE CASE OF CIT V. SMT. MEENAL RAMESHCHANDRA, 167 I TR 507 (GUJ) HELD THAT BUSINESS ACTIVITY OR TRANSACTION NE CESSARILY IMPLIES THE ACTIVITY WITH AN OBJECT TO EARN PROFIT. LARGER THE RISK, GREATER THE MARGIN OF THE PROFIT. UNCERTAINTY ABOUT THE RETURN TO BE RECEIVED FROM THE INVESTMENT MADE IN THE BUSINES S, ALSO THE FACING OF MANY IMPONDERABLES AND EVEN THE RISK OF LOSING THE CAPITAL INVESTED, ARE INHERENT IN ACTIVITY CALL ED 'BUSINESS'. RISK, UNCERTAINTY, FORESIGHTEDNESS TO VISUALIZE THE IMPONDERABLES AND CAPACITY TO OVERCOME THE UNFORESE EN HURDLES ARE THE ESSENTIAL REQUISITES FOR BUSINESS A CTIVITY. 31. BUT WE ARE IN AGREEMENT WITH THE LD.AR THAT THE LET TING OUT OF PLANT AND MACHINERY, FURNITURE AND FIXTURES AS PROV IDED IN FACILITY ITA 2010 & 2168/10 CO 16/11 :- 40 - : PROVIDER AGREEMENT IS IN FACT INSEPARABLE FROM LETT ING OUT OF BUILDING UNDER THE LEASE AGREEMENT, INCOME OF SUCH LETTING, BOTH BUILDING AND PLANT AND MACHINERY, FURNITURE, FIXTURES ETC, IS RE QUIRED TO BE ASSESSED AS INCOME FROM OTHER SOURCES AND THE ASSESSEE IS ENTITLED TO DEDUCTIONS ON ACCOUNT OF DEPRECIATION U/S 57 AND AL SO OTHER EXPENSES SUCH AS INTEREST, PROPERTY TAX PAID INSURANCE ETC. IN THIS REGARD, DECISION OF HON'BLE SUPREME COURT RENDERED IN THE C ASE OF SULTAN BROTHERS PVT. LTD (SUPRA) IS VERY MUCH RELEVANT AND SUPPORTS OUR ABOVE CONCLUSION. 32. THUS, THE ALTERNATE SUBMISSIONS OF THE LD.AR IS CORRECT AND HAS TO BE ALLOWED. THE INDUSTRIAL PARK BUILDINGS ARE S PECIALIZED BUILDINGS TO PROVIDE INFRASTRUCTURE TO INFORMATION TECHNOLOGY COMPANIES. THIS COMPANY HAS LET OUT THE ENTIRE BUILDING TO A SINGLE TENANT AND THERE IS NO DISPUTE REGARDING THIS FACT. TWO AGREEMENTS ARE COMPLEMENTARY TO EACH OTHER AND ARE MADE WITH THE SAME LESSEE SO IN EFFECT, BOTH THESE AGREEMENTS ALTHOUGH EXECUTED SEPARATELY, HAVE TO BE READ CONJOINTLY BECAUSE SAME PARTIES HAVE ENTERED INTO THE AGREEMEN TS RELATING TO THE SAME PROPERTY. THE LETTING OUT THROUGH TWO SEPARAT E AGREEMENTS IN THIS CASE, IS DEFINITELY INSEPARABLE AND BOTH THE A GREEMENTS HAVE TO BE CARRIED SIMULTANEOUSLY WITHOUT AVAILING ONE AGREEME NT THE OTHER AGREEMENT WOULD BECOME USELESS. GIVEN THE FACTS TH AT THE COST OF ITA 2010 & 2168/10 CO 16/11 :- 41 - : BUILDING BEING 48.30 CRORES AND THAT OF THE PLANT AND MACHINERY BEING 30.09 CORES AND FOR THEM SUBSTANTIAL RENT PER MANSI ON BEING RECEIVED WOULD GO TO SUGGEST NECESSARILY THAT NO PRUDENT MAN WOULD KEEP ANY OF THESE TWO IDLE AND THESE CANNOT BE GIVEN ON LEAS E/HIRE TO DIFFERENT ENTITIES, THEREFORE, THE SUBJECT OF BOTH THE AGREEM ENTS ARE INSEPARABLE. BOTH THE AGREEMENTS ARE COMPLIMENTARY TO EACH OTHER AND CANNOT BE SEPARATED. NO SAME PERSON OR ENTITY WOULD TAKE THE ENTIRE BUILDING ON RENT WITHOUT THE FACILITIES IN QUESTION. RATHER I T WOULD NOT BE POSSIBLE TO CARRY ON THE BUSINESS OF INFORMATION TECHNOLOGY FROM A PLACE WITHOUT SUCH FACILITIES. 33. IN REGARD TO THE PRIMACY OF THE LETTING OUT OF THE MACHINERY AND PLANT VIS--VIS THE BUILDING, THE HON'BLE SUPRE ME COURT IN THE CASE OF SULTAN BROTHERS PVT. LTD (SUPRA) HAS OBSERVED AS UNDER: 'IF WE ARE RIGHT IN OUR VIEW, AS WE THINK WE ARE, THAT THE LETTING OF A BUILDING CAN NEVER BE INCIDENTAL TO THE LETTIN G OF FURNITURE CONTAINED IN IT, THEN IT MUST BE HELD THAT NO -CONS IDERATION OF PRIMARY OR SECOND LETTINGS ARISES IN CONSTRUING THE SECTION FOR WHAT MUST APPLY WHEN FURNITURE IS LET AND ALSO BUIL DING MUST EQUALLY APPLY WHEN PLANT AND MACHINERY ARE LET AND ALSO BUILDINGS.. WE THINK ALL THAT SUBSECTION (4) OF SE CTION 12 CONTEMPLATES IS THAT THE LETTING OF MACHINERY, PLAN T OR FURNITURE SHOULD BE INSEPARABLE FROM THE LETTING OF THE BUILD INGS.' 34. THE HON'BLE SUPREME COURT, THUS HELD THAT THE SECTI ON CONTEMPLATES INSEPARABLE LETTING AND NOT PRIMARY OR SECONDARY LETTINGS. IN SUCH SITUATIONS, HAS LAID DOWN A JUSTIFIABLE LAW THAT THE RENT ITA 2010 & 2168/10 CO 16/11 :- 42 - : RECEIVED FROM SUCH BUILDING HAS TO BE ASSESSED UND ER THE HEAD INCOME FROM OTHER SOURCES. THE COURT WENT ON OBS ERVING AS UNDER: 'WHAT, THEN , I S INSEPARABLE LETTING? IT WAS SUGGESTED ON BEHALF OF THE RESPOND E N T C OMMISSIONER THAT THE SUB-SECTION C ONTEMPLATES A CASE WHERE THE MA C HINERY, PLAN T OR FURNITURE ARE BY THEIR NATURE INSEPARABLE FROM A BUILDING SO THAT I F THE MACHINER Y, PLA N T OR FURNITURE ARE LET, TH E BUILD I NG HAS AL SO NECESSARILY TO BE LET ALONG W I TH I T . TH E RE ARE TWO OBJECT I ON S TO THI S ARGUMENT . IN THE FIRST PLACE , IF THIS WAS THE INTENT IO N , THE SECTION MIGHT WELL HAVE PROVIDED THAT WHERE MACHINE RY, PLANT OR FURN I TURE ARE IN S EP A RABLE FROM A BUILDIN G AND BOTH ARE LET , ETC . THE LANGUAGE HOWEVER I S NOT T HAT TH E T WO MU S T BE INSEPARABL Y CONNE C TED W HEN LET BUT THAT THE LETTIN G OF ONE IS T O BE INSEPARABLE FROM THE LETTING OF THE OTHER. THE NEXT OBJECTION IS THAT THERE CAN BE NO CASE IN WHICH ONE CANNOT BE SEPARATED FROM THE OTHER. IN EVERY CASE THAT WE CAN CONCEIVE OF, IT MAY BE POSSIBLE TO DISMANTLE THE MACHINERY OR PLANT OR FIX TURES FROM WHERE IT WAS IMPLANTED OR FIXED AND SET IT UP IN A NEW BUILDING. AS REGARDS FURNITURE, OF COURSE, THEY SIMPLY REST O N THE FLOOR OF THE BUILDING IN WHICH IT LIES AND THE TWO INDEED AR E ALWAYS SEPARABLE. WE ARE UNABLE, THEREFORE, TO ACCEPT THE CONTENTION THAT INSEPARABLE IN THE SUB-SECTION MEANS THAT THE PLANT, MACHINERY OR FURNITURE ARE AFFIXED TO A BUILDING. IT SEEMS TO US THAT THE INSEPARABILITY REFERRED TO IN SUB-SE CTION (4) IS AN INSEPARABILITY ARISING FROM THE INTENTION OF THE PARTIES. THAT INTENTION MAY BE ASCERTAINED BY FRAMING THE FO LLOWING QUESTIONS: WAS IT THE INTENTION IN MAKING THE LEASE --AND IT MATTERS NOT WHETHER THERE IS ONE LEASE OR TWO, THAT IS, SEPARATE LEASES IN RESPECT OF THE FURNITURE AND THE BUILDING --THAT THE TWO SHOULD BE ENJOYED TOGETHER? WAS IT THE INTENTION TO MAKE THE LETTING OF THE TWO PRACTICALLY ONE LETTING? WOULD O NE HAVE BEEN LET ALONE AND A LEASE OF IT ACCEPTED WITHOUT THE OT HER? IF THE ANSWERS TO THE FIRST TWO QUESTIONS ARE IN THE AFFIR MATIVE, AND THE LAST IN THE NEGATIVE THEN, IN OUR VIEW, IT HAS TO B E HELD THAT IT WAS INTENDED THAT THE LETTINGS WOULD BE INSEPARABLE. TH IS VIEW ALSO PROVIDES A JUSTIFICATION FOR TAKING THE CASE OF THE INCOME FROM THE LEASE OF A BUILDING OUT OF SECTION 9 AND PUTTING IT UNDER SECT ION 12 AS A RESIDUARY HEAD OF INCOME. IT THEN BECOMES A NEW KIND OF INCOME, NOT COVERED BY SECTION 9, THAT IS, INCOME N OT FROM THE OWNERSHIP OF THE BUILDING ALONE BUT AN INCOME WHICH THOUGH ARISING FROM A BUILDING WOULD NOT HAVE ARISEN IF THE PLANT, MACHINERY AND FURNITURE HAD NOT ALSO BEEN LET ALO NG WITH IT. ITA 2010 & 2168/10 CO 16/11 :- 43 - : 35. THUS, THE ASSESSEE-COMPANY HAS GIVEN ON RENT (BY ST EPPING INTO THE FOOTING OF THE EARLIER COMPANY REAL VALUE PROMO TERS PVT. LTD) THE BUILDING NAMELY SAI REAL TECH PARK TO M/S TCS, B OTH THE AGREEMENTS ARE WITH THE SAME ENTITY. THE ONLY INFERENCE WHICH CAN BE DRAWN FROM THE FACTS OF THIS CASE ARE THAT THE PARTIES INTENT ION TO EXECUTE THESE TWO AGREEMENTS ON THE SAME DATE WERE THAT BOTHTHE A GREEMENT HAD TO BE ENJOYED TOGETHER. FURTHER MORE, M/S TCS IS E NGAGED IN SOFTWARE/INFORMATION TECHNOLOGY BUSINESS FOR WHICH A BUILDING SIMPLICITOR WITHOUT FACILITIES IN QUESTION WOULD BE USELESS. MOREOVER, BOTH THESE ITEMS I.E BUILDING AND THE FACILITIES CA NNOT BE SEPARATELY USED FOR ANY PURPOSE AND THEY HAVE TO BE JOINTLY US ED. IN CASE THE BUILDING ALONE IS GIVEN ON LEASE, IT WILL BECOME US ELESS WITHOUT THE FACILITIES IN QUESTION. MOREOVER, IF THE FACILITIE S ARE GIVEN ON RENT ALONE THESE CANNOT BE UTILIZED WITHOUT THE BUILDING. THE ARGUMENT OF THE LD.DR THAT MOST OF THE FACILITIES ARE SUCH FACILITI ES WHICH ARE USUALLY GO WITH A BUILDING TO GIVE THE SAME ON RENT WOULD NOT APPLY IN THE GIVEN CASE WHERE THE PROPERTY ITSELF IS MEANT FOR A SPECI FIED UTILITY I.E SOFTWARE AND INFORMATION TECHNOLOGY. SO, THE INTEN TION OF BOTH THE PARTIES WAS TO USE BOTH BUILDING AND FACILITIES ALT HOUGH SEPARATE AGREEMENTS WERE DRAWN, MAY BE FOR QUANTIFYING THE A MOUNT OF LEASE/HIRE CHARGES. THEREFORE, IT IS A CASE WHERE THE BUILDING AND ITA 2010 & 2168/10 CO 16/11 :- 44 - : FACILITIES CANNOT BE SEPARATELY LET OUT, THE TOTAL BUILT-UP AREA IS 2,50,260 SQ FT CONSISTING OF FOUR LEVELS. THE ENT IRE SPACE HAS BEEN LET OUT TO M/S TCS. WHEN THE ASSESSEE-COMPANY HAS INCU RRED SUCH HUGE COSTS IT CANNOT AFFORD TO EITHER KEEP THE BUILDING OR THE FACILITIES IDLE. M/S TCS BEING THE LARGEST SOFTWARE COMPANY OF INDIA , IT CANNOT AFFORD TO ALLOW ANY OTHER COMPETITOR IN THE SAME BUILDING OR TO ENJOY THE FACILITIES FOR THAT MATTER. THUS, FOR M/S TCS IT WO ULD NOT BE POSSIBLE TO CONDUCT ITS BUSINESS IN THE BUILDING WITHOUT ALL TH E FACILITIES REQUIRED IN CASE OF A SOFTWARE COMPANY. THUS, THE FACT THAT B OTH THE BUILDING AS WELL AS THE FACILITIES WERE LET OUT TOGETHER AND NO T SEPARATELY IS ESTABLISHED FROM THE FACTS OF THE CASE. THEREFORE, WE CAN SAFELY HOLD THAT LETTING OUT OF THE BUILDING IS INSEPARABLE FRO M LETTING OUT OF THE FACILITIES. THE DECISION OF HON'BLE SUPREME COURT RENDERED IN THE CASE OF SULTAN BROTHERS PVT. LTD (SUPRA) APPLIES ON ALL FOURS TO THE FACTS OF THE GIVEN CASE. THEREFORE, THE ALTERNATE PLEA OF T HE ASSESSEE HAS TO BE ALLOWED AND CONFIRMED AS THE LD. CIT(A) HAS ALRE ADY TAKEN SIMILAR VIEW. WITH OUR ABOVE OBSERVATIONS, THE GROUNDS RAI SED BY THE REVENUE AND THE ASSESSEE IN THIS REGARD IN THEIR RE SPECTIVE APPEALS, STAND DISMISSED. 36. THE OTHER ISSUE RAISED BY THE REVENUE IS AGAINST RESTRICTING THE DISALLOWANCE U/S 14A R.W. RULE 8D TO ` 50,000/- AS AGAINST ` ITA 2010 & 2168/10 CO 16/11 :- 45 - : 29,19,759. THE ASSESSEE HAS FILED CROSS OBJECT ION AGAINST THE DISALLOWANCE OF ` 50,000/-. 37. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSE E HAS RECEIVED AN AMOUNT OF ` 5,630/- AS DIVIDEND DURING THE RELEVANT PERIOD. T HE ASSESSEE ITSELF SUBMITTED THROUGH ITS LD.AR THAT NO EXPENDITURE WAS INCURRED IN EARNING THIS EXEMPT INCOME. BUT THE AS SESSING OFFICER DID NOT ACCEPT THIS CONTENTION AND APPLIED RULE 8D BY R ELYING ON THE DECISION OF THE ITAT SPECIAL BENCH, MUMBAI IN THE C ASE OF CIT VS DAGA CAPITAL MANAGEMENT PVT. LTD, 117 ITD 169(AT) (MUM). THERE IS NO FINDING BY THE ASSESSING OFFICER THAT ANY EXPENDITU RE HAS BEEN INCURRED FOR THE PURPOSE OF MAKING SUCH INVESTMENTS WHICH IS TAX FREE. IN THE ABSENCE OF SUCH A FINDING NO AMOUNT OF INTER EST CAN BE DISALLOWED. FROM THE RECORDS, IT IS CLEAR THAT SHA RE CAPITAL, RESERVES AND THE PROFIT WERE AVAILABLE FOR MAKING INVESTMENT S AND SUCH AMOUNTS WERE SUBSTANTIAL AND IN NO CASE IT CAN BE S AID THAT THERE WAS ANY DIVERSION OF BORROWED FUNDS. AT THE SAME TIME, THE ASSESSING OFFICER HAS ACCEPTED THAT INTEREST OF ` 4,20,62,426/- WAS PAYABLE IN REFERENCE TO AMOUNT BORROWED FOR THE PURCHASE OF IN FORMATION TECHNOLOGY PARK. THUS, THIS AMOUNT OF INTEREST COU LD NOT HAVE BEEN INCLUDED IN THE COMPUTATION OF DISALLOWANCE. THE I NVESTMENTS MADE IN EQUITY SHARES OF WHOLLY OWNED SUBSIDIARIES WERE MAD E IN THE FINANCIAL ITA 2010 & 2168/10 CO 16/11 :- 46 - : YEAR 1995-96 AND 1998-99 AND THEREFORE, THERE IS NO QUESTION OF ANY BORROWED MONEY HAVING BEEN INVESTED IN THE IMPUGNED INVESTMENTS. THE INVESTMENTS IN EQUITY SHARES IS VERY SMALL I.E ` 42,234/- AND THAT TOO WAS MADE IN EARLIER YEARS AS COMPARED TO WHICH THE PROFITS OF THE COMPANY ARE VERY HIGH AND RUNNING IN CRORES. SO, I T SHOWS THAT THE COMPANY HAD SUFFICIENT SOURCES FOR ITS OWN TO MAKE SUCH INVESTMENTS. THE ONLY NEW INVESTMENT DURING THE YEAR IS IN BALAJ I ENTERTAINMENT PVT. LTD I.E OF ` 60,45,458/- AND IN THE CAPITAL OF THE PARTNERSHIP FIRM OF ` 1,45,93,889/- WHICH HAVE BEEN MADE OUT OF BORROWED FUNDS AS CONTRAST TO WHICH PROFITS FOR THE YEAR ENDED 31.3.2 007 ARE 35.02 CRORES, ARE SUFFICIENT ENOUGH TO MAKE SUCH INVESTME NTS. LIKEWISE, INVESTMENT IN THE CAPITAL GAIN BONDS OF RURAL ELECT RIFICATION CORPORATION LTD AMOUNTING TO ` 70,00,000/- HAS BEEN MADE FROM SALE PROCEEDS OF EQUITY SHARES WHICH IS TAXABLE AS CAPITAL GAINS. T HUS, IN THE GIVEN FACTS, NO DISALLOWANCE CAN BE MADE OF INTEREST U/S 14A. THE APPLICATION OF RULE 8D IS NOT PERMISSIBLE IN THE A BSENCE OF SUCH A FINDING. MOREOVER, THE DECISION OF BOMBAY HIGH COU RT RENDERED IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD VS DY. CIT IN I .T.A.NO. 626 OF 2010, ORDER DATED 12.8.2010, HAS ALSO DECIDED THE S PECIAL BENCH DECISION OF THE TRIBUNAL RENDERED IN ITO VS DAGA CA PITAL (SUPRA) BY HOLDING THAT PROVISIONS OF RULE 8D WHICH HAVE BEEN NOTIFIED WITH EFFECT ITA 2010 & 2168/10 CO 16/11 :- 47 - : FROM 24.3.2008 SHALL APPLY WITH EFFECT FROM ASSESSM ENT YEAR 2008-09. PRIOR TO THAT THE ASSESSING OFFICER HAS TO REACH A FINDING WITH CERTITUDE TO ASCERTAIN THE EXPENDITURE WHICH HAS BEEN INCURRE D TO EARN AS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE YEAR. THE ASSESSMENT YEAR UNDER APPEAL IS 2007-08, OBVIOUSLY, THE PROVISIONS OF RULE 8D WOULD NOT APPLY IN VIEW OF THE ABOVE UNCONT ROVERTED DECISIONS. THE ASSESSEE-COMPANY HAS EARNED DIVIDEN D INCOME OR ` 5630/- ONLY. THE LD. CIT(A) HAS, HOWEVER, SUSTAIN ED THE LUMP SUM ADDITION OF ` .50,000/- AND HAS DELETED THE REMAINING AMOUNT ADDE D IN THIS ACCOUNT BY ASSESSING OFFICER, AFTER CONSIDERIN G THE FACT THAT THE MONITORING OF THE INVESTMENTS AND TRACKING OF THE M UTUAL FUNDS, ETC. FOR WHICH SOME AMOUNT HAS TO BE SPENT TOWARDS THE I NVOLVEMENT OF SOME MANPOWER IN WHICH TREASURY DEPARTMENT IS ALSO INVOLVED. ON THAT PREMISE, HE HAS SUSTAINED AN ADDITION OF A SUM OF ` 50,000/- BY DISALLOWING THE SAME AND HAS DELETED THE REMAINING DISALLOWANCE FOR WHICH THE REVENUE IS AGGRIEVED. 38. IN OUR CONSIDERED OPINION, ACTION OF THE LD. CIT(A) IS VERILY JUSTIFIABLE AND CANNOT BE FALTERED WITH. THE FACTS APROPOS TO THIS ISSUE ARE THAT THE ASSESSEE MADE INVESTMENTS IN THE SHARE S OF VARIOUS COMPANIES. IT HAS INVESTED A SUM OF ` .1,45,93,889/- AS CAPITAL, IN A PARTNERSHIP FIRM NAMED M/S.PARMA LAKSHMI RESTAURANT , IN WHICH THE ITA 2010 & 2168/10 CO 16/11 :- 48 - : ASSESSEE IS A PARTNER. AS ON 31.03.07 THE INVESTME NT IN SHARES OF VARIOUS COMPANIES STAND AT ` .7,18,78,301/-; AND AS ON 31.03.06 IN THE FIRM TOWARDS CAPITAL INVESTMENT STANDS AT ` .7,12,59,585/-. THESE INVESTMENTS ARE SUBJECTED TO EXEMPT PROVISION CONTA INED IN SECTIONS 10(34), (FOR INVESTMENT IN SHARES IN THE FORM OF DI VIDENDS) AND IN SECTION 10(2A) FOR PROFITS FROM PARTNERSHIP FIRM. THE ASSESSEE HAS RECEIVED A SUM OF ` .5,630/- AS DIVIDEND DURING THIS YEAR. AS PER SECTION 14A, NO EXPENDITURE INCURRED FOR THE PURPOS E OF EARNING AN EXEMPT INCOME CAN BE ALLOWED AGAINST TAXABLE PROFIT S. THE ASSESSEE HAS CLAIMED THE AMOUNT OF ` .5,630/- AS EXEMPT BEING DIVIDEND INCOME AND HAS NOT ATTRIBUTED ANY PORTION OF THE EXPENDITU RE DEBITED TO THE PROFIT AND LOSS ACCOUNT TOWARDS THE SAME. IN THE O PINION OF THE ASSESSING OFFICER THE ASSESSEE INCURS ROUTINE EXP ENDITURE TO MAINTAIN ITS ESTABLISHMENT AND ALSO TOWARDS ADMINISTRATION, SO A PORTION OF THIS EXPENDITURE CAN BE ATTRIBUTED TOWARDS INVESTMENTS I N SHARES, AND TOWARDS CAPITAL IN FIRM. ON THE SAME REASONING, SO ME PORTION OF THE REMUNERATION PAID TO DIRECTORS AND MANAGERS HAS BEE N ATTRIBUTED TOWARDS THE ABOVE INVESTMENTS. THEREAFTER, BY INVO KING RULE 8D BROUGHT TO LIFE WITH EFFECT FROM 01.04.2007 VIDE TH E FINANCE ACT, 2006, WHICH ALLOWS SUCH APPORTIONMENT OF EXPENSES, THE AS SESSING OFFICER HAS WORKED OUT THE IMPUGNED DISALLOWANCE AS UNDER: ITA 2010 & 2168/10 CO 16/11 :- 49 - : ` (I) DIRECT EXPENDITURE RELATING TO EXEMPT INCOME NIL (II) INTEREST RELATING TO EXEMPT INCOME 6,36,59,109 X 7,50,68,944 187,81,62,211 25,44,414 (III) 1/2% OF INVESTMENTS YIELDING EXEMPT INCOME (1/2% OF RS.7,50,68,944/-) 3,75,345 ________ TOTAL DISALLOWANCE U/S 14A 29,19,759 ` ` INTEREST DEBITED TO P&L A/C NOT DIRECTLY RELATED TO A PARTICULAR INCOME OR RECEIPT 6,36,59,109 TOTAL ASSETS AS PER BALANCE SHEET AS ON 31.03.2007 189,42, 24,995 AS ON 31.03.2006 189,42, 24,995 AVERAGE 187,81,62,211 INVESTMENT YIELDING EXEMPT INCOME AS ON 31.03.2007 AS ON 31.03.2006 7,88,78,302 7,12,59,585 AVERAGE 7,15,68,944 THEREAFTER, INVOKING RULE 8D OF THE RULES IN CONJUN CTION WITH SEC.14A(1), 14A(2) & (3), AND RELYING ON THE DECISI ON OF ITAT CHENNAI BENCH RENDERED IN THE CASE OF M/S.MGM DIAMOND BEACH RESORTS P. LTD. VS. DCIT ORDER DATED 13.06.2008 IN ITA NO.217 3/MAD/2005 A.Y. 2002-03, IN WHICH IT HAS BEEN HELD THAT EVEN IF NO INCOME WAS EARNED, ITA 2010 & 2168/10 CO 16/11 :- 50 - : EXPENDITURE IS STILL ALLOWABLE, THE ASSESSING OFFIC ER HAS HELD THAT DISALLOWANCE U/S.14A CAN EXCEED THE EXEMPT INCOME A CTUALLY RECEIVED DURING THE YEAR. ACCORDINGLY, HE HAS ADDED ` .29,19,759/- U/S.14A OF THE ACT. 39. THE LD. COMMISSIONER OF INCOME TAX(A) HAS HELD THAT DAGA CAPITALS CASE HAS SINCE BEEN REVERSED BY HONBLE B OMBAY HIGH COURT WHO HAS HELD THE PROVISIONS OF RULE 8D TO BE APPLIC ABLE ONLY WITH EFFECT FROM A.Y. 2008-09. THE ASSESSMENT YEAR UNDE R CONSIDERATION BEING 2007-08, THIS PROVISION WOULD NOT APPLY. HE HAS FOUND THAT THE INVESTMENT IN ASSETS GIVING RISE TO EXEMPT IN CASE IS ONLY ` .7,15,31,444/-, WHICH ARE COVERED BY CASH PROFIT AN D THE RESERVES AND SURPLUS FUNDS. THEREFORE, ACCORDING TO HIM NOT INT EREST U/S.14A CAN BE DISALLOWED. BUT ON ACCOUNT OF MONITORING OF INVEST MENT, ETC., HE HAS SUSTAINED A SUM OF ` .50,000/- IN LUMP-SUM. NOW BOTH PARTIES ARE AGGRIEVED. THE REVENUE HAS RAISED A GROUND IN ITS APPEAL AGAINST DELETION OF MAJOR ADDITION AND THE ASSESSEE IS BEFO RE US THROUGH CROSS- OBJECTION. 40. THE CASE OF THE REVENUE AS PUT FORTH BEFORE US IS T HAT APPORTIONMENT OF EXPENSES FOR COMPOSITE BUSINESS IN CURRED TOWARDS TAX-FREE INCOME HAS TO BE DONE AS PER RULE 8D, PART ICULARLY WHEN A ITA 2010 & 2168/10 CO 16/11 :- 51 - : PROXIMATE CLAUSE FOR DISALLOWANCE I.E. THE RELATION SHIP OF THE EXPENDITURE WITH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, DOES NOT EXIST IN THE GIVEN CASE. IT WAS FURTHER A RGUED THAT LEAVE ALONE THE APPLICABILITY OF RULE 8D, SECTION 14A SUP ERSEDES THE GENERAL RULE THAT BUSINESS EXPENDITURE NOT INCURRED TOWARDS TAX-FREE INCOME CANNOT BE DISALLOWED, AND THE ASSESSING OFFICER SH ALL DETERMINE THE QUANTUM OF SUCH DISALLOWABLE EXPENDITURE BY FOLLOWI NG A REASONABLE METHOD. PER CANTRA, LD. A.R. HAS ARGUED THAT RULE- 8D IS NOT APPLICABLE IN THIS ASSESSMENT YEAR AND THAT THE ASSESSING OFFI CER HAS NOT APPLIED A REASONABLE METHOD TO DETERMINE THE QUANTUM OF DIS ALLOWABLE EXPENDITURE. AFTER CONSIDERING RIVAL STANDS, WE HA VE FOUND THAT RULE- 8D IS NOT APPLICABLE DURING THIS YEAR. THIS IS SUCH A ISSUE FOR WHICH ONLY GUESS-WORK, BASED ON INDIVIDUAL PRUDENCE, IS T HE ANSWER. WHEN THE ASSESSEE HAS DECLARED THAT NO EXPENDITURE WAS I NCURRED TO EARN THIS INCOME, IT HAS TO BE ACCEPTED AS THE ASSESSEE IS THE BEST MASTER OF ITS AFFAIR. BUT FISCAL LAW IN SUCH CIRCUMSTANCE S LAY DOWN SOME PROVISIONS WHICH HAVE TO BE ADHERED TO EVEN IF THEY ARE AGAINST THE RULE OF TWO PLUS TWO IS EQUAL TO FOUR. TO CUT LONG STORY SHORT, OUR CONSISTENT STAND IS THAT UNDER SECTION 14A ONLY 2% OF THE GROSS DIVIDEND EARNED CAN BE TREATED AS EXPENDITURE RELAT ABLE TO EARNING OF THIS EXEMPT INCOME. THIS VIEW WAS TAKEN IN THE CAS E OF SUNDARAM ITA 2010 & 2168/10 CO 16/11 :- 52 - : FINANCE LTD. VS. DCIT IN ITA NOS.8425, 8426 & 8427/ MDS/ VIDE ORDER DATED 02.12.2002, BY CHENNAI BENCH OF THE ITAT. TH EREFORE, RESPECTFULLY FOLLOWING THIS DECISION, WE DIRECT TH E ASSESSING OFFICER TO RE-COMPUTE THE IMPUGNED RELATABLE EXPENDITURE TO EA RNING OF THE INCOME OF RS.5630/- AS DIVIDEND INCOME BY INVOKING 20% OF GROSS DIVIDEND EARNED. ACCORDINGLY, THIS GROUND OF THE C ROSS-OBJECTION IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 41. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE AND THE ASSESSEE STAND DISMISSED WHERE AS CROSS OBJECTION OF THE ASS ESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH DECEMBER,2011. SD/- SD/- (ABRAHAM P GEORGE) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 15 TH DECEMBER, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR
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