ACIT 12(3), MUMBAI V. CLASSIQUE ASSOCIATES, MUMBAI

ITA 4575/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92699 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 02-06-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 10-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PERMANAND J
• Keywords: Reopening of assessment; Capital asset; Business income; Depreciation; Business expenditure; Question of law; Difference of opinion; Reason to believe; Change of opinion
• Section: 143(3); 147

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C, MUMBAI , ! ..'(),*!,+ BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER ITA NO.4575/MUM/2013 ASSESSMENT YEAR: 2006-07 ACIT, CIRCLE-12(3) R.NO.137, 1 ST FLOOR AAYAKAR BHAVAN 101, M.K. ROAD MUMBAI 400 020 / VS. M/S. CLASSIQUE ASSOCIATES 514, DALAMAL TOWER, 211, NARIMAN POINT MUMBAI 400 021 / APPELLANT / RESPONDENT P.A. NO. AADFC1412H ,- / REVENUE BY SHRI PERMANAND J. ,- / ASSESSEE BY SHRI CHETAN A. KARIA A/W SMT. SWATI H. PATRAWALA / DATE OF HEARING 2/6/2015 / DATE OF ORDER: 29/6/2015 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DATE D 08/03/2013 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI, BROADLY, ON THE GROUND WHETHER THE LD. COMMISSIONER OF M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 2 INCOME TAX (APPEALS) IS RIGHT IN TREATING THE INCOM E OF RS.1,51,95,578/- AS INCOME FROM BUSINESS AND PROFE SSION WHEN THE SAME WAS INCOME FROM HOUSE PROPERTY AS PER LEASE AND LICENCE AGREEMENT ENTERED BY THE ASSESSEE FIRM WITHOUT FOLLOWING THE DECISION IN SHAMBHU INVESTMENTS (263 ITR 143) (SC) AND FURTHER DELETING THE DISALLOWANCES OF EXPENSES OF RS.1,41,00,000/- ON PRO RATA BASIS AS EXPENSES ATTRIBUTABLE TO STOCK ON LEASE, WHICH CANNOT BE ALL OWED AS EXPENSES UNDER THE ACT. 2. DURING HEARING OF THIS APPEAL, WE HAVE HEARD SR I CHETAN A. KARIA ALONGWITH SMT. SWATI H. PATRAWALA, LD. COUNSEL FOR THE ASSESSEE. THE LD. DR, SHRI PREMANAN D J. ADVANCED HIS ARGUMENTS WHICH ARE IDENTICAL TO THE G ROUND RAISED BY FURTHER SUBMITTING THAT THE ADDITION WAS RIGHTLY MADE BY THE ASSESSING OFFICER. ON THE OTHER HAND, THE COUNSEL FOR THE ASSESSEE, EXPLAINED THAT THE ASSESS EE IS A PARTNERSHIP FIRM IS IN THE BUSINESS OF DEVELOPER. IT WAS CLAIMED THAT DEVELOPMENT WAS MADE BY THE ASSESSEE I TSELF AND CERTAIN UNITS WERE HOLD BY THE ASSESSEE AND FEW WERE LEASED TO LEMON BROTHERS. IT WAS CLAIMED THAT THE LEASE WAS MADE FOR TEMPORARY PERIOD SHOWING AS BUSINESS INCOM E BY CLAIMING THAT LEASING IS AN ANCILLARY ACTIVITY OF T HE ASSESSEE. RELIANCE WAS PLACED UPON A LATER DECISION FROM THE HONBLE APEX COURT IN M/S CHENNAI PROPERTIES VS CIT (CIVIL APPEAL NO.4494 OF 2004 ALONG WITH CIVIL APPEAL NOS. 4491-4 493 OF 2004). IT WAS CONTENDED THAT THE ASSESSEE DEALT WI TH AS A TRADER WHILE THE LEASING IS A BUSINESS INCOME. IT WAS ALSO CONTENDED THAT THE CASE OF ANSAL PROPERTY IS NOT AP PLICABLE M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 3 TO THE FACTS OF THE PRESENT APPEAL AND THE DECISION IN SHAMBHU INVESTMENT, WHEREIN, SULTAN BROTHERS WAS RE LIED UPON HAS BEEN DISTINGUISHED BY THE HONBLE APEX COU RT IN CHENNAI PROPERTIES. SO FAR AS, DISALLOWANCE OF EXP ENSES IS CONCERNED, IT WAS CONTENDED THAT IF IT IS TREATED A S BUSINESS INCOME, THEN IT BECOME IN-FRUCTUOUS AND IF IT IS DE CIDED AS INCOME FROM HOUSE PROPERTY, THEN OUR ATTENTION WAS INVITED TO PAGES 45 AND 46 OF THE PAPER BOOK. PLEA WAS RAI SED THAT THE ASSESSING OFFICER DISALLOWED THE EXPENSES AS HE TREATED AS BUSINESS INCOME. IN REPLY, THE LD. DR CONTENDED THAT IN CHENNAI PROPERTIES, THE FACTS ARE DIFFERENT AND GRO UND NO. 2 IS CONSEQUENTIAL TO THE ABOVE GROUND. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BEFORE CO MING TO ANY CONCLUSION, WE ARE REPRODUCING HEREUNDER THE RE LEVANT PORTION FROM THE CONCLUSION DRAWN BY THE LD. COMMIS SIONER OF INCOME TAX (APPEALS) FOR READY REFERENCE AND ANA LYSIS:- ON GOING THROUGH THE RETURN OF INCOME AND ASSESSME NT ORDER THEREOF IT IS SEEN THAT ASSESSEE HAS RECEIVED LICEN SE FEES FROM LEASED FLATS AMOUNTING TO RS. 1,51,95,578/ - WHICH IS TREATED AS BUSINESS INCOME. THE ASSESSEE HAS CLAIMED VARIOUS E XPENSES AND DEPRECIATION AGAINST IT. HOWEVER, THE SAME SHOULD H AVE BEEN OFFERED AS INCOME FROM HOUSE PROPERTY AS PER THE JU DGMENT OF SUPREME COURT IN THE CASE OF SHAMBU INVESTMENTS VIS . CIT 243 ITR 263 (SC). ACCORDINGLY, THE ASSESSEE HAS WRONGLY SHOWN RENT UNDER THE HEAD 'INCOME FROM BUSINESS' INSTEAD OF 'I NCOME FROM HOUSE PROPERTY'. THIS HAS RESULTED INTO UNDER ASSES SMENT OF RS. 1,06,36,905/-. SIMILARLY, THE ASSESSEE HAS WRONGLY CLAIMED DEPRECIATION OF RS. 11,14,982/ - IN RESPECT OF FURN ITURE, INTERIOR DECORATION, PLANT AND MACHINERY ETC. ON LEASED ASSE TS. M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 4 SIMILARLY, THE ASSESSEE HAS ALSO CLAIMED EXPENSES O N MATERIALS AMOUNTING TO RS.43,52,111/- AND EXPENSES AMOUNTING TO RS.1,16,62,315/- EXCLUDING RS.5,41,83,920/- ADDED B ACK TO BY THE ASSESSEE IN THE COMPUTATION. HOWEVER, THE REMAINING AMOUNT OF RS.1,60, 14,426/- [ RS.43,52, 111 + RS.1, 16,62,426 ] SHOULD FORM PART OF THE WIP ON PRORATA BASIS. THEREFORE, EVEN I F STANDARD DEDUCTION U/S.24 @30% OF RS.45,58,673/- IS ALLOWED ON THE RENTAL INCOME, THERE IS A EXCESS CLAIM OF EXPENSES BY RS.1, 14,55,753/-. THE ASSESSEE HAS CREDITED RS. 7,24,968/ - IN THE PR OFIT AND LOSS ACCOUNT AS INCOME- TAX REFUND. HOWEVER, THE ASSESSE E HAS NOT CREDITED ANY INTEREST RECEIVED ALONG WITH THE SAID REFUND, WHICH HAS ESCAPED ASSESSMENT. ' 3.1.2 VIDE LETTER DATED 30.08.2011 APPELLANT SUBMIT TED DETAILED REPLY OBJECTING THE RE OPENING AND REQUESTED ASSESS ING OFFICER TO DROP THE RE-ASSESSMENT PROCEEDINGS. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE APPELLANT AND PROCEEDED TO COMPLETE THE ASSESSMENT. 3.1.3 IN THIS RESPECT IN APPEAL PROCEEDINGS THE LD. A. R. HAS STATED THAT THE APPELLANT IS A REGISTERED FIRM ENGAGED IN THE BUSINESS OF CONSTRUCTION AND DEVELOPMENT OF PROPERTY SINCE INCE PTION. SINCE ITS INCEPTION THE FIRM HAS DEVELOPED NUMBER OF PROP ERTIES AND DEALT WITH IMMOVABLE PROPERTIES ONLY. SOME BUILDING S ARE CONSTRUCTED BY THE FIRM FOR SELLING THE PREMISES IN THE SAID BUILDINGS AND SOME ARE CONSTRUCTED PURELY FOR GIVIN G THEM ON LEASE. LEASE INCOME IN CASE OF BUILDINGS CONSTRUCTE D PURELY FOR GIVING THEM ON LEASE IS CONSIDERED AS INCOME FROM H OUSE PROPERTY AND SHOWN ACCORDINGLY. IN CASE OF BUILDING S CONSTRUCTED FOR SALE IF SOME UNITS ARE UNSOLD, THEN THEY ARE TEMPORARILY GIVEN ON LEASE AND INCOME FROM THE SAME IS CONSIDERED AS BUSINESS INCOME. 3.1.4 DURING THE YEAR THE FIRM HAS GIVEN SOME PREMI SES ON TEMPORARY LEASE AND HAS EARNED LEASE/LICENSE FEES F ROM THE SAME. LEASING OF PREMISES IS ALSO ONE MANNER OF COM MERCIAL UTILIZATION OF IMMOVABLE PROPERTY AND HENCE FORMS P ART AND PARCEL OF BUSINESS OF FIRM AND ,THEREFORE, INCOME F ROM TEMPORARY M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 5 LEASING OF PREMISES CONSTRUCTED FOR SALE IS TREATED AS INCOME FROM BUSINESS 3.1.5 FURTHER, IT IS SUBMITTED FOR THE APPELLANT T HAT THESE DETAILS ARE ALREADY AVAILABLE WITH THE BALANCE SHEET AND PR OFIT AND LOSS ACCOUNT FILED WITH RETURN OF INCOME AND THESE DETAI LS WERE VERIFIED BY THE ADDL (IT RANGE 12(3) BEFORE PASSING THE ORDER U/S 143(3), AND ADDL (IT RANGE 12(3) HAS IN PARA 3 OF H IS ORDER STATED THAT 'DURING THE YEAR UNDER CONSIDERATION AS SESSEE HAS SOLD FLATS OUT OF OPENING STOCK AND EARNED LEASE IN COME FROM THE LEASED FLATS'. 3.1.6 FROM THE ABOVE DETAILS IT CAN BE SEEN THAT AD DL (IT RANGE 12(3) HAS CLEARLY VERIFIED THAT LICENSE FEES WERE S HOWN UNDER THE HEAD BUSINESS INCOME AND FORMED HIS OPINION THAT IT SHOULD BE ASSESSABLE AS BUSINESS INCOME. 3.1.7 FIRM HAS CLAIMED DEPRECIATION OF RS.16,20,091 .40 ON BUSINESS ASSETS AND NOT (EASED ASSETS. FURTHER EXPE NSES ON MATERIAL AND OTHER EXPENSES CLAIMED BY FIRM ARE FOR PREVIOUSLY COMPLETED BUILDINGS AND ARE INCURRED FOR DAY TO DAY RUNNING OF BUSINESS.ALL THE EXPENSES FORMING PART OF WIP ARE A LREADY ADDED TO WIP BY THE FIRM. 3.1.8 FIRM HAS CREDITED RS.7,24,968/- IN PROFIT AND LOSS ACCOUNT AS INCOME TAX REFUND AND SINCE NO INTEREST WAS RECE IVED ON THE SAID REFUND THE QUESTION OF CREDITING INTEREST TO P ROFIT & LOSS ACCOUNT DOES NOT ARISE AT ALL. FURTHER THESE DETAIL S WERE VERIFIED BY THE ADDL CIT RANGE 12(3) BEFORE PASSING THE ORDE R U/S 143(3). 3.1.9 THE APPELLANT SUBMITTED THAT ALL THE FOUR ISS UES WERE EXAMINED IN EARLIER SCRUTINY ASSESSMENT PROCEEDINGS AS CAN BE SEEN FROM THE QUERIES RAISED DURING THE SAID PROCEE DINGS AND REPLIES FURNISHED BY THE APPELLANT AS WELL AS THE A SSESSMENT ORDER. 3.1.10 THE APPELLANT SUBMITS THAT REASONS FURNISHED DEMONSTRATE THAT THE SAME ARE DIFFERENT OPINION ON THE SAME SET OF FACTS CONSIDERED AND ADJUDICATED UPON IN THE EAR LIER ASSESSMENT PROCEEDINGS. POWER OF REOPENING U/S. 147 CANNOT BE EXERCISED MERELY ON ACCOUNT OF CHANGE OF OPINION BY THE M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 6 SUCCESSOR. IT HAS BEEN HELD BY HON'BLE SUPREME COUR T THAT EVEN AFTER AMENDMENT OF S. 147 IN THE YEAR 1987, THERE H AS TO BE REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMEN T AND MERE CHANGE OF OPINION CANNOT BE REASON TO BELIEVE AS RE QUIRED BY S. 147. THE APPELLANT SEEKS TO DRAW YOUR HONOURS ATTEN TION TO TWO JUDGMENTS OF THE HON'BLE SUPREME COURT LAYING DOWN THE SAID PROPOSITIONS IN KELVINATOR, 256 ITR 1 (DEL) (FB) AF FIRMED IN 320 ITR 561 (SC) AND ICICI SECURITIES PRIMARY DEALERSHI P LTD (REPORTED IN ITATONLINE.ORG), COPY ENCLOSED IN THE PAPER BOOK. 3.1.11 THE APPELLANT, THEREFORE, HAS SUBMITTED THAT THE ASSESSMENT ORDER U/S. 143(3) R. W.S. 147 ITSELF IS WITHOUT JURISDICTION AND BAD IN LAW AND THE APPELLANT PRAYE D THAT THE SAME MAY BE QUASHED. 3.1.12 WITHOUT PREJUDICE, THE APPELLANT SUBMITTED T HAT THE ASSESSING OFFICER ERRED IN PASSING THE ASSESSMENT O RDER WITHOUT FIRST DEALING WITH THE OBJECTIONS RAISED BY THE ASS ESSEE TO REOPENING AND THE ASSESSMENT PROCEEDINGS HAVE BEEN VITIATED AND LIABLE TO BE QUASHED. THE SAID PROCEDURE HAS BE EN LAID DOWN BY THE HON'BLE SUPREME COURT IN CASE OF GKN DRIVESH AFTS, 259 ITR 19 (SC). 3.1.13 I HAVE EXAMINED THE FACTS OF THE CASE AND FI ND THAT THE ASSESSING OFFICER HAS RIGHTLY EXERCISED HIS JURISDI CTION U/S. 147. THE ISSUE FOR WHICH ASSESSMENT PROCEEDINGS HAVE BEE N REOPENED WERE NOT EXAMINED IN EARLIER PROCEEDINGS AND IT CAN NOT BE SAID THAT IT IS MERE CASE OF CHANGE OF OPINION. 3.1.14 FOR THE PURPOSE OF ASSUMING JURISDICTION U/S .148 OF THE I.T. ACT, THE AO IS REQUIRED TO RECORD HIS REASONS FOR D OING SO AS LAID DOWN UNDER SUB SEC.2 OF SEC.148. THE ORDER SHOULD S ET OUT THE REASONS FOR FORMATION OF BELIEF OF THE AO THAT INCO ME HAS ESCAPED ASSESSMENT. THE 'REASONS TO BELIEVE' WOULD MEAN CAU SE OR JUSTIFICATION OF THE AO TO BELIEVE THAT THE INCOME HAS ESCAPED ASSESSMENT AND NOT THAT THE AO SHOULD HAVE FINALLY ASCERTAINED THE FACT BY LEGAL EVIDENCE OR REACHED A CONCLUSION, AS THIS IS DETERMINED AND DECIDED IN THE ASSESSMENT ORDER, WHI CH IS THE FINAL STAGE BEFORE THE AO. THE AO FOLLOWED THE DUE PROCEDURE OF LAW. M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 7 3.1.15 IN APPELLANT'S CASE THE BELIEF FORMED BY AO AND REASONS RECORDED ARE NOT VAGUE, IT IS BONAFIDE AND BASED ON SPECIFIC INFORMATION. DURING APPEAL, LD.AR HAS NEITHER SHOWN NOR ARGUED THAT THE REASONS, AS RECORDED, ARE NONEXISTENT; OR THAT THEY ARE FALLACIOUS OR HYPOTHETICAL; OR THAT THE REASONS AS RECORDED DO NOT HAVE ANY LIVE LINK OR CLOSE NEXUS TO THE DETERMINAT ION OF CORRECT INCOME OF THE APPELLANT; OR THAT THE REASONS ARE FA CTUALLY INCORRECT OR NOT BONAFIDE OR VAGUE; OR A MERE PRETE NCE OR NOT IN GOOD FAITH; OR A MERE SUSPICION OR IRRELEVANT; OR R EASONS ARE BASED ON CONJECTURES OR SURMISES; OR THAT ANY INCOM E HAS NOT ESCAPED ASSESSMENT, AS STATED IN THE REASONS RECOR DED OR THAT THE REASONS AS RECORDED ARE NOT GERMANE TO THE ESCA PEMENT OF ANY INCOME. IT IS NOT THE CASE OF THE APPELLANT THA T THE ADDITION MADE IN REASSESSMENT IS NOT GERMANE TO THE REASON R ECORDED. THEREFORE, IT IS HELD THAT THE REASONS RECORDED BY THE AO HAVE A LIVE LINK AND CLOSE NEXUS TO THE DETERMINATION OF A SSESSABLE INCOME AND INCOME THAT HAS ESCAPED ASSESSMENT. THER EFORE, THIS ARGUMENT THAT THERE EXISTS NO REASON TO INITIATE RE ASSESSMENT PROCEEDINGS IS MISPLACED AND HENCE DISMISSED. 3.1.16 HON'BLE BOMBAY HIGH COURT ALSO IN CASE OF IN DIAN HUME PIPE CO. LTD HAS UPHELD THE REOPENING OF ASSESSMENT AFTER 4 YEAR WHERE THE AO HAD FAILED TO APPLY HIS MIND TO THE MA TERIAL AVAILABLE BEFORE HIM DURING ORIGINAL ASSESSMENT AN D ALLOWED DEDUCTION U/S 54EC OF THE ACT WHEREAS THE SAME WAS NOT ADMISSIBLE HAD THE AO EXERCISED DUE DILIGENCE. NO N EW MATERIAL CAME TO THE KNOWLEDGE OF AO SUBSEQUENT TO ORIGINAL ASSESSMENT. 3.1.17 IN THE RESULT, GROUND RELATING TO CHALLENGE OF NOTICE U/S. 147 IS DISMISSED. 4. GROUND NO.2: 4.1 IN THIS GROUND APPELLANT CHALLENGED THE ACTION OF THE AO IN TAXING THE INCOME OF RS. 1,51,95,578/- UNDER THE HE AD INCOME FROM HOUSE PROPERTY. 4.1.1 THE APPELLANT IS ENGAGED IN THE BUSINESS OF C ONSTRUCTION AND DEVELOPMENT OF PROPERTY SINCE INCEPTION. SINCE ITS INCEPTION M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 8 THE FIRM HAS DEVELOPED NUMBER OF PROPERTIES AND DEA LT WITH IMMOVABLE PROPERTIES ONLY. SOME BUILDINGS ARE CONST RUCTED BY THE FIRM FOR SELLING THE PREMISES IN THE SAID BUILD INGS AND SOME ARE CONSTRUCTED PURELY FOR GIVING THEM ON LEASE. LE ASE INCOME IN CASE OF BUILDINGS CONSTRUCTED PURELY FOR GIVING THE M ON LEASE IS CONSIDERED AS INCOME FROM HOUSE PROPERTY AND SHOWN ACCORDINGLY. IN CASE OF BUILDINGS CONSTRUCTED FOR S ALE IF SOME UNITS ARE UNSOLD, THEN THEY ARE TEMPORARILY GIVEN O N LEASE AND INCOME FROM THE SAME IS CONSIDERED AS BUSINESS INCO ME. 4.1.2 DURING THE YEAR THE FIRM HAS GIVEN SOME PREMI SES ON TEMPORARY LEASE AND HAS EARNED LEASE/LICENSE FEES F ROM THE SAME. LEASING OF PREMISES IS ALSO ONE MANNER OF COM MERCIAL UTILIZATION OF IMMOVABLE PROPERTY AND HENCE FORMS P ART AND PARCEL OF BUSINESS OF FIRM AND THEREFORE INCOME FRO M TEMPORARY LEASING OF PREMISES CONSTRUCTED FOR SALE IS TREATED AS INCOME FROM BUSINESS. 4.1.3 THE COMMERCIAL REASONS FOR LEASE OF FEW DEVEL OPED UNITS INSTEAD OF SALE CAN BE BRIEFLY SUMMARIZED AS FOLLOW S: I) NOT WHOLE OF THE STOCK IS SOLD IMMEDIATELY AND I T MAKES COMMERCIAL SENSE TO LEASE OUT THE SAME TILL ITS SAL E. II) NORMALLY A DEVELOPER DOES MAKE SALES IN THE INI TIAL PERIOD OF DEVELOPMENT FOR RAISING FUNDS FOR THE PROJECT AND T HE PRICE REALIZATION IS LOWER AS THE PROJECT IS STILL TO BE FULLY DEVELOPED. AS THE BUILDING IS DEVELOPED AND UNITS ARE READY FOR P OSSESSION, PRICES IMPROVE. IT HAS BEEN THE EXPERIENCE OVER LAS T TWO DECADES IN CITY OF MUMBAI THAT PRICES INCREASE FURTHER AFTE R THE BUILDING IS OCCUPIED. THEREFORE, IT MAKES COMMERCIAL SENSE TO HOLD ON TO A SMALL PERCENTAGE OF DEVELOPED UNITS FOR SOME MORE YEARS T O REALIZE A STILL BETTER PRICE. III) DUE TO GLOBALIZATION OF THE ECONOMY, A FEW COM PANIES ARE FOLLOWING BEST INTERNATIONAL PRACTICE OF RENTING OF PREMISES RATHER THAN OF PURCHASE. TO CATER TO THIS HIGH END OF MARKET REQUIREMENT, A FEW UNITS ARE KEPT ASIDE FOR LEASING INSTEAD OF SALE IMMEDIATELY. IV) SINCE LAST FEW YEARS, THE REGULATORY BODIES ARE CONTEMPLATING APPROVING OF MUTUAL FUNDS IN REAL ESTATE, THAT IS T HOSE MUTUAL FUNDS WILL INVEST IN REAL ESTATE. EXPECTING SUCH A POSSIBILITY THE M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 9 APPELLANT FORESEES A HUGE DEMAND IN DEVELOPED UNITS WHICH ARE LEASED AS THE LEASE INCOME WOULD BE THE PRIMARY SOU RCE OF INCOME OF SUCH MUTUAL FUNDS, AS AND WHEN APPROVED. 4.1.4 THE APPELLANT SUBMITTED THAT FOLLOWING ASPECT S CLEARLY DEMONSTRATE THAT THE LEASED RENT HAS BEEN RECEIVED IN THE COURSE OF BUSINESS AS DEVELOPER: I) ALL THE UNITS LEASED HAVE BEEN DEVELOPED BY THE APPELLANT ITSELF. II) ONLY A SMALL PROPORTION OF TOTAL UNITS DEVELOPE D HAVE BEEN GIVEN OUT ON LEAVE AND LICENCE BASIS. III) LET OUT OF PREMISES ON LEAVE AND LICENCE BASIS IS ANCILLARY TO BUSINESS OF DEVELOPMENT. IV) ALL THE UNITS HAVE BEEN GIVEN ON LEAVE AND LICE NCE BASIS AND NONE OF THE LICENSE IS FOR A PERIOD EXCEEDING 33 MO NTHS. V) ON SUBSEQUENT SALE THE APPELLANT HAS OFFERED INC OME AS BUSINESS INCOME AND NOT AS LONG TERM CAPITAL GAIN C LAIMING COST INFLATION INDEX, WHICH WOULD BE ALLOWABLE IF LEASED UNITS ARE TREATED AS CAPITAL ASSET. IT IS SELF DEVELOPED UNIT S, BEING STOCK IN TRADE, WHICH HAVE BEEN LEASED OUT FOR TEMPORARY PER IOD .. V) THE APPELLANT SUBMITS THAT CLAUSE 14 OF LEASE AN D LICENSE AGREEMENT CLEARLY DEMONSTRATES THE COMMERCIAL INTEN T OF THE APPELLANT. THE SAID CLAUSE PROVIDES THAT THE APPELL ANT SHALL HAVE A RIGHT TO SELL THE LEASED PREMISES WITHOUT ANY OBJ ECTION FROM THE LESSEES EXCEPT THAT LEAVE LICENCE AGREEMENT SHALL C ONTINUE FOR THE BALANCE PERIOD. 4.1.5 SECTION 22 OF THE I. T. ACT, 1961, CHARGES TO TAX ANNUAL VALUE OF ANY BUILDING OR LAND APPURTENANT THERETO AS INCO ME FROM HOUSE 'PROPERTY EXCEPT FOR SUCH PORTION OF PROPERTY WHICH IS OCCUPIED FOR THE PURPOSE OF BUSINESS OR PROFESSION. AS SECTION 22 SPECIFICALLY PROVIDES FOR CHARGE OF RENT UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND SPECIAL PROVISIONS FOR COMP UTATION ARE PROVIDED, INCOME FOR HIRING OUT OF PROPERTY, IN MOS T CASES WOULD BE ASSESSABLE UNDER THE HEAD INCOME FROM HOUSE PROP ERTY. THE LAW ON THE SUBJECT HAS BEEN LAID DOWN BY THE HON'BL E SUPREME COURT IN THE CASE OF NATIONAL STORAGE PRO LTD., 66 ITR 596, AND IT WAS HELD THAT 'HOUSE OWNING, HOWEVER PROFITABLE, CA NNOT BE BUSINESS OR TRADE UNDER THE INCOME TAX ACT.' M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 10 4.1.6 HOWEVER, THE SAME VERY JUDGMENT FURTHER HOLDS THE CIRCUMSTANCES IN WHICH. INCOME FROM LETTING OUT OF IMMOVABLE PROPERTY IS ASSESSABLE AS INCOME. THE SAID JUDGMENT UPHELD THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT REPORTED IN 4 8 ITR 577 AND FOLLOWING PROPOSITIONS WAS LAID DOWN: I) IF INCOME FALLS UNDER THE HEAD 'INCOME FROM PROP ERTY', IT HAS TO BE TAXED UNDER THE SAID HEAD ONLY AND CANNOT BE ASS ESSED UNDER THE HEAD OF BUSINESS INCOME ON THE GROUND THAT THE BUSINESS OF THE ASSESSEE WAS TO EXPLOIT PROPERTY AND EARN INCOM E OR BECAUSE THE INCOME WAS OBTAINED BY A TRADING CONCERN IN THE COURSE OF ITS BUSINESS. II) HOUSE-OWNING, HOWEVER PROFITABLE, CANNOT BE A B USINESS OR TRADE UNDER THE INCOME TAX ACT. THUS, WHERE HOUSE P ROPERTY IS GIVEN ON LEASE OR LICENCE BASIS FOR EARNING INCOME THEREFROM, THE TRUE CHARACTER OF THE INCOME DERIVED IS INCOME FROM PROPERTY. THE SAID CHARACTER IS NOT CHANGED AND THE INCOME DO ES NOT BECOME INCOME FROM TRADE OR BUSINESS IF THE HIRING IS INCLUSIVE OF CERTAIN ADDITIONAL SERVICES SUCH AS HEATING, CLEANI NG, LIGHTING OR SANITATION, WHICH ARE RELATIVELY INSIGNIFICANT AND ONLY INCIDENTAL TO THE USE OF OCCUPATION OF THE TENEMENTS. III) IN CASES WHERE THE INCOME RECEIVED IS NOT FROM THE BARE LETTING OF THE TENEMENT OR FROM THE LETTING ACCOMPA NIED BY INCIDENTAL SERVICES OR FACILITIES, BUT THE SUBJECT HIRED OUT IS COMPLEX ONE AND THE INCOME OBTAINED IS NOT SO MUCH BECAUSE OF THE BARE LETTING OF THE TENEMENT BUT BECAUSE OF THE FACILITIES AND SERVICES RENDERED, THE OPERATIONS INVOLVED IN SUCH LETTING OF THE PROPERTY MAY BE OF THE NATURE OF BUSINESS OR TRADIN G OPERATIONS AND THE INCOME DERIVED MAY BE INCOME NOT FROM EXERC ISE OF PROPERTY RIGHTS ASSESSABLE UNDER THE HEAD INCOME FR OM HOUSE PROPERTY BUT INCOME FROM OPERATIONS OF A TRADING NA TURE FALLING UNDER THE HEAD BUSINESS INCOME. IV) IN CASES WHERE THE LETTING IS ONLY INCIDENTAL A ND SUBSERVIENT TO THE MAIN BUSINESS OF THE ASSESSEE, THE INCOME DE RIVED FROM THE LETTING WILL NOT BE INCOME FROM PROPERTY AND THE EX CEPTION MAY ALSO COME INTO OPERATION IN SUCH CASES. 4.1.7 SO IT IS NOT THAT IN EVERY CASE OF LETTING OU T OF IMMOVABLE PROPERTY THAT INCOME IS ASSESSABLE AS INCOME FROM H OUSE PROPERTY THOUGH IT IS TRUE IN MOST OF THE CASES. TH E TYPE OF LETTING M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 11 BEFORE THE HON'BLE SUPREME COURT IN NATIONAL STORAG E WAS OF COMPLEX SERVICES AND IT WAS HELD THAT IT IS BUSINES S INCOME. 4.1.8 ANOTHER CIRCUMSTANCE WHERE INCOME IS NOT ASSE SSABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY IS DEALT WITH BY THE HON'BLE SUPREME COURT IN SULTAN BROS, 51 ITR 353. S ECTION 56(2)(II) PROVIDES THAT INCOME FROM HIRING OUT PLAN T, MACHINERY, FURNITURE IS ASSESSABLE UNDER THE HEAD 'OTHER SOURC ES' IF THE SAME IS NOT CHARGEABLE UNDER THE HEAD 'BUSINESS INCOME'. FURTHER IF BUILDING IS ALSO LET OUT AND LETTING OUT OF BUILDIN G IS INSEPARABLE FROM LETTING OUT OF PLANT, ETC., THEN ALSO INCOME I S ASSESSABLE UNDER THE HEAD OTHER SOURCES IF IT IS NOT CHARGEABL E UNDER THE HEAD BUSINESS INCOME. SECTION 56(2)(III) APPLIES WH EN PLANT, ETC., IS LET OUT ALONGWITH BUILDING AND LETTING OUT OF BO TH IS INSEPARABLE. FURTHER, SUCH ACTIVITY SHOULD NOT BE I N NATURE OF BUSINESS OR TRADE AS IF IT IS IN NATURE OF TRADE, I T SHALL BE ASSESSABLE UNDER THE HEAD BUSINESS INCOME. WHAT CON STITUTES INSEPARABLE WAS CONSIDERED BY THE HON'BLE SUPREME C OURT IN SULTAN BROS. PRO LTD V. CIT (1964) 51 ITR 353 IN FO LLOWING WORDS: ' 'IT SEEMS TO US THAT INSEPARABILITY REFERRED TO IS AN INSEPARABILITY ARISING FROM THE INTENTION OF THE PARTIES. THAT INT ENTION MAY BE ASCERTAINED BY FRAMING THE FOLLOWING QUESTIONS: WAS IT THE INTENTION IN MAKING THE LEASE- AND IT MATTERS NOT W HETHER THERE IS ONE LEASE OR TWO, THAT IS, SEPARATE LEASES IN RE SPECT OF THE FURNITURE AND THE BUILDING-THAT THE TWO SHOULD BE E NJOYED TOGETHER? WAS IT THE INTENTION TO MAKE THE LETTING OF THE TWO PRACTICALLY ONE LETTING? WOULD ONE HAVE BEEN LET AL ONE AND A LEASE OF IT ACCEPTED WITHOUT THE OTHER? IF THE ANSW ERS TO FIRST TWO ARE IN AFFIRMATIVE, AND THE LAST IN NEGATIVE THEN, IN OUR VIEW, IT HAS TO BE HELD THAT IT WAS INTENDED THAT THE LETTIN G WOULD BE INSEPARABLE.' THE JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF SHAMBU INVESTMENTS DEALT WITH AN ISSUE OF INSEPARAB LE LETTING OUT. 4.1.9 THIRD CIRCUMSTANCE IN WHICH INCOME IS NOT ASS ESSABLE UNDER HEAD INCOME FROM HOUSE PROPERTY IS DEALT WITH BY TH E HON'BLE SUPREME COURT IN CASE OF UNIVERSAL PLAST, 237 ITR 4 54 AND THAT IS WHEN ASSET OTHERWISE USED FOR BUSINESS ARE LET OUT FOR A M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 12 TEMPORARY PERIOD DUE TO COMMERCIAL REASONS. IN UNIV ERSAL PLAST V. CIT (1999) 237 ITR 454 (SC), AT PAGE 460, THE HO N'BLE COURT CONSIDERED THE EARLIER DECISIONS AND LAID DOWN FOL LOWING TESTS FOR DETERMINATION OF THE ISSUE: '(1) NO PRECISE TEST CAN BE LAID DOWN TO ASCERTAIN WHETHER INCOME (REFERRED TO BY WHATEVER NOMENCLATURE, LEASE AMOUNT, RENTS, LICENCE FEE) RECEIVED BY AN ASSESSEE FROM LE ASING OR LETTING OUT- OF ASSETS WOULD FALL UNDER THE HEAD 'PROFITS A ND GAINS OF BUSINESS OR PROFESSION'; (2) IT IS A MIXED QUESTION OF LAW AND FACT AND HAS TO BE DETERMINED FROM THE POINT OF VIEW OF A BUSINESSMAN IN THAT BUSINESS ON THE FACTS AND IN THE CIRCUMSTANCES OF E ACH CASE INCLUDING TRUE INTERPRETATION OF THE AGREEMENT UNDE R WHICH THE ASSETS ARE LET OUT; (3) WHERE ALL THE ASSETS OF THE BUSINESS ARE LET OU T, THE PERIOD FOR WHICH THE ASSETS ARE LET OUT IS A RELEVANT FACTOR T O FIND OUT WHETHER THE INTENTION OF THE ASSESSEE IS TO G9 OUT OF BUSINESS ALTOGETHER OR TO COME BACK AND RESTART THE SAME. (4) IF ONLY A FEW OF THE BUSINESS ASSETS ARE LET OU T TEMPORARILY WHILE THE ASSESSEE IS CARRYING OUT HIS OTHER BUSINE SS ACTIVITIES THEN IT IS A CASE OF EXPLOITING THE BUSINESS ASSETS OTHERWISE THAN EMPLOYING THEM FOR HIS OWN USE FOR MAKING PROFIT FO R THAT BUSINESS; BUT IF THE BUSINESS NEVER STARTED OR HAS STARTED BUT CEASED WITH NO INTENTION TO BE RESUMED, THE ASSETS ALSO WILL CEASE TO BE BUSINESS ASSETS AND THE TRANSACTION WILL ONLY BE EXPLOITATION OF PROPERTY BY AN OWNER THEREOF, BUT N OT EXPLOITATION OF BUSINESS ASSETS. ' 4.1.10 THEREFORE, IN FOLLOWING CIRCUMSTANCES, THE G ENERAL RULE THAT RENT IS ASSESSABLE UNDER THE HEAD HOUSE PROPER TY IS NOT APPLICABLE, AND THOSE ARE: I) WHERE THE LETTING OUT IS PART OF COMPLEX SERVICE S RENDERED, II) WHERE LETTING OUT IS SUBSERVIENT AND INCIDENTAL TO MAIN BUSINESS CARRIED OUT BY THE ASSESSEE, III) WHERE PLANT AND PROPERTY ARE INSEPARABLY LET O UT, AND M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 13 IV) WHERE BUSINESS ASSETS ARE LET OUT FOR A TEMPORA RY PERIOD. THE CASE OF THE APPELLANT IS OF SECOND AND FOURTH C ATEGORY AND JUDGMENTS ON FIRST AND THIRD ISSUES WOULD NOT BE A PPLICABLE TO THE CASE OF THE APPELLANT. 4.1.11 THE JUDGMENT IN SHAMBHU INVESTMENTS, 263 ITR 143 (SC) RELIED ON BY THE AO AFFIRMS JUDGMENT OF HON'BLE CAL CUTTA HIGH COURT REPORTED IN 249 ITR 47. IN THE SAID CASE, AS SESSEE HAD LET OUT TABLE SPACE AND CLAIM WAS THAT LETTING OUT OF P REMISES AND TABLE IS INSEPARABLE, WHICH CLAIM WAS REJECTED. IN THE SAID CASE, ISSUE OF TEMPORARY LETTING OUT OF BUSINESS ASSETS W AS NOT INVOLVED AND, THEREFORE, FACTS ARE CLEARLY DISTINGUISHABLE. ALSO THE ISSUE OF LETTING OUT BEING SUBSERVIENT AND INCIDENTAL TO MAI N BUSINESS WAS ALSO NOT BEFORE THE HON'BLE SUPREME COURT IN TH E SAID CASE. 4.1.12 THE APPELLANT SUBMITS THAT THE FACTS AS NARR ATED ABOVE AND EVIDENCED BY PAPER BOOK CLEARLY DEMONSTRATE THA T LETTING OUT OF UNITS, BEING STOCK IN TRADE, IS FOR A TEMPOR ARY PERIOD AND IT IS SUBSERVIENT AND INCIDENTAL TO MAIN BUSINESS AS D EVELOPER OF PROPERTY. THEREFORE, INCOME EARNED FROM LETTING OUT IS ASSESSABLE AS BUSINESS INCOME AND NOT INCOME FROM HOUSE PROPER TY. 4.1.13 WITHOUT PREJUDICE TO ABOVE, ASSUMING WITHOUT ADMITTING, IF INCOME IS HELD TO BE ASSESSABLE UNDER THE HEAD H OUSE PROPERTY INCOME, THE APPELLANT SUBMITS THAT WHOLE OF THE REC EIPTS CANNOT BE ASSESSED AS HOUSE PROPERTY INCOME AS PART OF LIC ENSE FEES WOULD RELATE TO INCIDENTAL SERVICES AS WELL AS LETT ING OUT OF MOVABLE PROPERTY. THE APPELLANT SUBMITS THAT PART O F FEES RELATABLE TO OTHER SERVICES AND LET OUT OF MOVABLE GOODS WOULD BE ASSESSABLE AS BUSINESS INCOME AND EXPENSES DISALLOW ED WOULD BE ALLOWABLE AGAINST THE SAID INCOME. 4.1.14 I HAVE CONSIDERED THE ASSESSMENT ORDER. PASS ED BY THE AO, SUBMISSION MADE BY THE APPELLANT AND PERUSED THE MA TERIAL AVAILABLE ON RECORD. THE CASE OF THE ASSESSEE IS DI FFERENT FROM A NORMAL CASE OF LETTING OUT OF PREMISES. THE ASSESSE E HAS TREATED RENT RECEIVED FROM PREMISES DEVELOPED BY IT AS INCO ME FROM HOUSE PROPERTY AND ONLY IN RESPECT OF STOCK IN TRAD E LET OUT FOR TEMPORARY PERIOD, IT HAS CLAIMED THAT COMPENSATION IS BUSINESS M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 14 INCOME. FROM THE CHART FURNISHED IN THE PAPER BOOK , I FIND THAT FEW UNSOLD UNITS HAVE BEEN LET OUT AND THAT TOO FOR A PERIOD TILL THE TIME THE SAME ARE ULTIMATELY SOLD OFF. I ALSO F IND MERIT IN THE CONTENTION OF THE APPELLANT THAT IF TREATED AS INCO ME FROM HOUSE PROPERTY AND THE UNIT IS TREATED AS CAPITAL ASSET I NSTEAD OF STOCK IN TRADE THE ASSESSEE WOULD HAVE BEEN ENTITLED TO C LAIM HIGHER COST AS DEDUCTION AND ALSO BENEFIT OF LOWER TAX RAT E AS LONG TERM CAPITAL GAINS. THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY JUDGMENT OF THE HON'BLE SUPREME COURT IN UNIVERSAL PLAST AND IT IS A CASE OF UTILIZATION OF COMMERCIAL ASSET BY LET TING OUT FOR A TEMPORARY PERIOD AND THE COMPENSATION FOR LETTING O UT IS ASSESSABLE AS BUSINESS INCOME. IN VIEW THIS MATTER, I INCLINE TO ACCEPT THE CONTENTION OF THE APPELLANT. THIS GROUND IS ALLOWED. 5. GROUND NO.3: 5.1 IN THIS GROUND, APPELLANT HAS CHALLENGED ACTION OF THE AO IN DISALLOWING DEPRECIATION OF RS.11, 14,982/- ON FURN ITURE & FIXTURES ON LEASED ASSETS. AO DISALLOWED THE DEPREC IATION ON THE GROUND THAT RECEIPT FROM LEASING ACTIVITIES IS TAXA BLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND HENCE DEPRECIAT ION CANNOT BE ALLOWED. 5.2 THIS GROUND OF DEPRECIATION ON ASSETS LEASED IS CONSEQUENTIAL TO EARLIER GROUND AND AS THE INCOME IS HELD TO BE A SSESSABLE AS BUSINESS INCOME, DEPRECIATION ON LEASED MOVABLE ASS ET IS ALLOWABLE AS DEDUCTION. THIS GROUND IS ALLOWED. 6. GROUND NO 4: 6.1 IN THIS GROUND APPELLANT CHALLENGED THE' ACTION OF THE AO IN DISALLOWING PROPORTIONATE EXPENSES AMOUNTING TO RS. 1,41,00,0001 -. THE AO OBSERVED THAT INCOME FROM LE ASED OF PROPERTIES HAS BEEN ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND HENCE PART OF THE EXPENSES INCURRED IN CREATING BUILDING THIS STOCK CANNOT BE ALLOWED AS BUSINESS E XPENDITURE. 6.2 APPELLANT ON THE OTHER HAND STATED THAT THESE E XPENSES ARE INCURRED ON THE PROJECTS COMPLETED BY IT. APPELLANT ALSO SUBMITTED DETAILS OF THESE EXPENSES TOGETHER WITH N AMES AND M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 15 ADDRESSES OF THE VENDORS. FROM THE SAID STATEMENT I T IS SEEN THAT APPELLANT HAD TRANSFERRED CERTAIN AMOUNT TO PROFIT AND LOSS ACCOUNT AND BALANCE IS IN WIP ACCOUNT. APPELLANT AL SO FILED STATEMENT SHOWING TOTAL AREA DEVELOPED DIVIDED INTO SOLD AREA AND LEASED AREA AND STOCK IN HAND. FROM THE SAID CH ART IT IS SEEN THAT ALMOST 94% OF THE INCOME IS DERIVED FROM SALE OF FLATS BY THE APPELLANT AND BALANCE IS EARNED THROUGH RENTAL. APP ELLANT ON ITS OWN HAS BIFURCATED TOTAL EXPENSES INCURRED INTO REV ENUE EXPENSES AND EXPENSES THAT NEEDS TO BE CAPITALISED. AO HAS NOT, BROUGHT ANY MATERIAL ON RECORD TO SHOW THAT THE EXP ENSES INCURRED HAVE DIRECT NEXUS TO THE RENTAL INCOME TAX ED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IT IS NOT THE CASE OF THE AO THAT THESE EXPENSES ARE NOT BUSINESS EXPENSES. I' A M, THEREFORE, OF THE VIEW THAT AO WAS NOT RIGHT IN DISALLOWING EX PENSES INCURRED ON COMPLETED BUILDINGS. 6.3 FURTHER, AS I HAVE HELD THAT INCOME IS ASSESSAB LE AS BUSINESS INCOME, DISALLOWANCE ON THE GROUND PROPOSED BY ASSE SSING OFFICER IS NO MORE CALLED FOR AND THE DISALLOWANCE IS DIRECTED TO BE DELETED. THIS GROUND IS ALLOWED. 7. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. IF THE OBSERVATION MADE IN THE ASSESSMENT ORDER, LEADING TO ADDITION MADE TO THE TOTAL INCOME, CONCL USION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL, IF K EPT IN JUXTAPOSITION AND ANALYZED, WE NOTE THAT THE ASSESS EE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF DEVELOP MENT ACTIVITIES SINCE ITS INCEPTION, DECLARED INCOME OF RS.10,45,36,191/- IN ITS RETURN, FILED ON 30 TH OCTOBER, 2006. THE ASSESSING OFFICER PASSED ORDER U/S 143(3) OF TH E INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) ACCEPTING THE R ETURNED INCOME. THE ASSESSEE RECEIVED LICENCE FEE FROM LEA SED OUT FLATS AMOUNTING TO RS.1,51,95,578/- TREATING THE SA ME AS M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 16 BUSINESS INCOME. THE ASSESSEE CLAIMED VARIOUS EX PENSES AND DEPRECIATION. THE ASSESSEE WAS HAVING FEW UNSOL D UNITS WHICH WERE LET OUT FOR ASSESSING OFFICER TREATED TH E INCOME AS INCOME FROM HOUSE PROPERTY AND SUCH UNITS WERE T REATED AS CAPITAL ASSET INSTEAD OF STOCK IN TRADE. THE LD . COMMISSIONER OF INCOME TAX (APPEALS) RELYING UPON T HE DECISION FROM HONBLE APEX COURT IN UNIVERSAL PLAST , WHEREIN, UTILIZATION OF COMMERCIAL ASSET, BY LETTIN G OUT FOR A TEMPORARY PERIOD AS BUSINESS INCOME. WE FIND THAT THE MUMBAI BENCH OF THE TRIBUNAL IN ROMA BUILDERS PVT. LTD. VS JCIT (ITA NO.4118/MUM/2008), ORDER DATED 09/03/2011 , WHEREIN THE ASSESSEE WAS ENGAGED IN CONSTRUCTION OF RESIDENTIAL UNITS AND DEVELOPMENT ACTIVITIES, EARN ED SOME INCOME FROM LEASING ACTIVITY. DURING THE YEAR, THE ASSESSEE COMPANY GAVE SOME COMMERCIAL UNITS ON LEASE AND EAR NED SOME INCOME BY CLAIMING THE SAME AS COMMERCIAL UTIL IZATION OF IMMOVABLE PROPERTY BY PLACING RELIANCE UPON CERT AIN DECISIONS LIKE CIT VS KOHINOOR TOBACCO PVT. LTD. (2 005) 149 TAXMAN 620 (MP), CIT VS ANAND RUBBER & PLASTICS PVT . LTD. 178 ITR 301 (P & H), CIT VS AJMERA INDUSTRIES PVT. LTD. 169 ITR 597 (SC) ETC. AND HELD THAT SINCE IT WAS TEMPOR ARY COMMERCIALLY UTILIZATION OF THE IMMOVABLE PROPERTY, THEREFORE, INCOME DERIVED THEREFROM SHOULD BE ASSES SED AS INCOME FROM HOUSE PROPERTY FOR THE PURPOSES OF SECT ION 22 OF THE ACT. IN THE CASE OF CIT VS NEHA BUILDERS PVT . LTD (2008) 296 ITR 661, WHEREIN, IDENTICALLY, THE INCOM E WAS HELD TO BE ASSESSABLE AS BUSINESS INCOME. IN THE P RESENT APPEAL, ALL THE UNITS, LEASED OUTS, WERE DEVELOPED BY THE M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 17 ASSESSEE ITSELF AND ONLY SMALL PORTION OF THE TOTAL UNITS WERE LEASED OUT ON LEASE AND LICENCE BASIS, WHICH WERE H ELD AS STOCK IN TRADE. LET OUT THE PREMISES ON LEASE AND LICENCE BASIS IS THE ANCILLARY BUSINESS OF DEVELOPMENT AND THE RENT CONSTITUTE A SMALL PERCENTAGE OF TOTAL REVENUE/INCO ME EARNED BY THE ASSESSEE. THESE UNITS WERE SUBSEQUEN TLY SOLD OUT AND IN BETWEEN (WHEN REMAINED TO BE UNSOLD) WER E COMMERCIALLY EXPLOITED/UTILIZED. SUBSEQUENT TO SAL E OF SUCH UNITS, THE ASSESSEE OFFERED THE INCOME AS BUSINESS INCOME. IN THE PRESENT APPEAL, THE UNITS WERE LEASED OUT FO R TEMPORARY PERIOD FOR COMMERCIAL UTILIZATION OF THE UNSOLD UNITS. CLAUSE-14 OF THE LEASE AND LICENCE AGREEMEN T CLEARLY DEMONSTRATE THE COMMERCIAL INTENTION OF THE ASSESSE E BECAUSE THE CLAUSE PROVIDES THAT THE ASSESSEE SHALL HAVE THE RIGHT TO SALE THE LEASED PREMISES WITHOUT ANY OBJEC TION FOR THE LESSEE EXCEPT THAT LEASE AND LICENCE AGREEMENT SHALL CONTINUE FOR THE BALANCE PERIOD. WITHOUT GOING INTO MUCH DELIBERATION, WE FIND THAT IN A LATER LATEST DECISI ON DATED 09/04/2015 FORM HONBLE APEX COURT IN M/S CHENNAI PROPERTIES AND INVESTMENT LTD. VS CIT (CIVIL APPEAL NO.4494, 4491 TO 4493 OF 2004), THE HONBLE COURT CONSIDERED THE DECISIONS IN SULTAN BROTHERS (P.) LTD. AND ALSO KAR ANPURA DEVELOPMENT COMPANY LTD. HOLDING THAT MERE ENTRY OF THE OBJECT CLAUSE SHOWING A PARTICULAR OBJECT WOULD NOT BE THE DETERMINATIVE FACTOR TO ARRIVE AT A CONCLUSION WHET HER THE INCOME IS TO BE TREATED AS INCOME FROM BUSINESS AND SUCH QUESTION WOULD DEPEND UPON THE CIRCUMSTANCES OF EAC H CASE M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 18 I.E. WHETHER A PARTICULAR BUSINESS IS LETTING OR NO T. THE HONBLE COURT STATED IN FOLLOWING WORDS:- WE THINK EACH CASE HAS TO BE LOOKED AT FROM A BUSINESSMANS POINT OF VIEW TO FIND OUT WHETHER TH E LETTING WAS THE DOING OF A BUSINESS OR THE EXPLOITA TION OF HIS PROPERTY BY AN OWNER. WE DO NOT FURTHER THI NK THAT A THING CAN BY ITS VERY NATURE BE A COMMERCIAL ASSET. A COMMERCIAL ASSET IS ONLY AN ASSET USED IN A BUSINESS AND NOTHING ELSE, AND BUSINESS MAY BE CARRIED ON WITH PRACTICALLY ALL THINGS. THEREFORE, IT IS NOT POSSIBLE TO SAY THAT A PARTICULAR ACTIVITY IS BUSINESS BECAUSE IT IS CONCERNED WITH AN ASSET WITH WHICH TRADE IS COMMONLY CARRIED ON. WE FIND NOTHING IN THE CASES REFERRED TO SUPPORT THE PROPOSITION TH AT CERTAIN ASSETS ARE COMMERCIAL ASSETS IN THEIR VERY NATURE. IN THE LIGHT OF THE AFORESAID OBSERVATION, THE HON BLE COURT HELD THAT LETTING OUT OF PROPERTIES WAS RIGHT LY DISCLOSED AS INCOME UNDER THE HEAD INCOME FROM BUS INESS AND CANNOT BE TREATED AS INCOME FROM HOUSE PROPERTY , THUS, APPLYING THE RATIO LAID DOWN IN THE LATEST DECISION BY HONBLE APEX COURT IN THE CASE OF CHENNAI PROPERTIES (SUPRA ), UTILIZATION OF UNSOLD UNITS FOR LETTING OUT FOR COM MERCIAL UTILIZATION FOR TEMPORARY PERIOD IS ASSESSABLE AS BUSINESS INCOME. NORMALLY, THE INCOME DERIVED FROM PROPERTY WOULD BE TERMED AS INCOME FROM PROPERTY BUT IF THE PROP ERTY IS HELD AS STOCK IN TRADE, THEN THE SAID PROPERTY WOUL D BECOME OR PART TAKE THE CHARACTER OF STOCK AND THUS ANY IN COME M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 19 DERIVED THEREFROM WOULD BE INCOME FROM BUSINESS AND NOT INCOME FROM PROPERTY. IF BUSINESS OF THE ASSESSEE IS TO CONSTRUCT THE PROPERTY AND SALE IT OR TO CONSTRUCT AND LET OUT THE SAME THEN THAT WOULD BE THE BUSINESS INCOME. HO WEVER, RESPECTFULLY FOLLOWING THE LATEST DECISION FROM HON BLE APEX COURT IN M/S CHENNAI PROPERTIES, WE AFFIRM THE CO NCLUSION DRAWN BY THE LD. COMMISSIONER OF INCOME TAX (APPEAL S). THIS GROUND OF THE REVENUE, THEREFORE, IS HAVING NO MERIT, CONSEQUENTLY, DISMISSED. 3. THE NEXT GROUND PERTAINS TO DELETING THE DISALLOWANCES OF EXPENSES OF RS.1,41,00,000/- WHICH WERE ARRIVED AT PRO RATA BASIS BY THE ASSESSING OFFICER. THE LD. DR DEFENDED THE CONCLUSION ARRIVED AT IN THE ASSESS MENT ORDER, WHEREAS, THE LD. COUNSEL FOR THE ASSESSEE DE FENDED THE CONCLUSION ARRIVED AT IN THE IMPUGNED ORDER. 3.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE NOTE T HAT THE ASSESSING OFFICER OBSERVED THAT INCOME FROM LEASING OF PROPERTIES IS ASSESSED UNDER THE HEAD INCOME FROM H OUSE PROPERTY AND THUS PART OF EXPENSES INCURRED IN CREATING/BUILDING, THE STOCK CANNOT BE ALLOWED AS B USINESS EXPENDITURE. THE ASSESSEE DULY SUBMITTED THE DETAI LS OF EXPENSES ALONG WITH NAMES AND ADDRESSES OF THE VEND ORS. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) FOUND THAT THE ASSESSEE TRANSFERRED SOME AMOUNTS TO PROFIT AND LOSS ACCOUNT AND BALANCE IN WIP ACCOUNT. THE ASSESSEE A LSO M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 20 FILED STATEMENT SHOWING THE TOTAL AREA DEVELOPED WA S DIVIDED INTO SOLD AREA AND LEASED AREA AND STOCK IN HAND. IT WAS FOUND BY THE LD. COMMISSIONER OF INCOME TAX (APPEAL S) ALMOST 94% OF THE INCOME WAS DERIVED FROM SALE OF F LATS AND THE REMAINING THROUGH RENTALS. EVEN THE ASSESSEE BIFURCATED TOTAL EXPENSES SO INCURRED BY IT INTO RE VENUE EXPENSES AND THAT LEASED TO BE CAPITALIZED. IN VIE W OF THE FACTUAL FINDING RECORDED BY THE LD. COMMISSIONER O F INCOME TAX (APPEALS) AND THE REVENUE HAS NOT BROUGHT ANY CONTRARY MATERIAL IN THEIR SUPPORT, WE FIND NO INFI RMITY IN THE CONCLUSION DRAWN BY THE LD. COMMISSIONER OF INC OME TAX (APPEALS). EVEN OTHERWISE, WHILE DISPOSING OF THE AFORESAID GROUND WHETHER BUSINESS INCOME OR INCOME FROM HOUSE PROPERTY, SINCE WE HAVE AFFIRMED THE DECISION OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), FOLLOWING THE LATEST DECISION FROM HONBLE APEX COURT, WE AFFIRM THE STAND OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS). T HUS, THIS GROUND OF THE REVENUES IS ALSO DISMISSED. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LEARNED REPRESENTATIVES FROM BOTH THE S IDES AT THE CONCLUSION OF THE HEARING ON 02 ND JUNE 2015. SD/- SD/- ( N.K. BILLAIYA ) (JOGINDER SINGH) *! / ACCOUNTANT MEMBER ! / JUDICIAL MEMBER MUMBAI; !' DATED : 29/06/2015 F{X~{T? P.S / #$ M/S. CLASSIQUE ASSOCIATES ITA NO.4575/MUM/2013 21 ,0 123241 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. % % & ( ) / THE CIT, MUMBAI. 4. % % & / CIT(A)- , MUMBAI 5. )*+ # , % # - , / DR, ITAT, MUMBAI 6. +. / / GUARD FILE. / BY ORDER, ) //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI