ITO 20(3)-1, MUMBAI V. ELECTRONIC & ENGINEERING CO., MUMBAI

ITA 5807/MUM/2010

• Counselvise Citation: 580719914 RSA 2010
• Duration Of Justice: 1 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 17-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 19-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Assessee Lawyers: MAYUR KISNADWALA PER R K
• Keywords: Business income
• Section: 28

Judgement Text

1 ITA NO.5807/MUM/2010 M/S ELECTRONIC & ENGINEERING COMPANY IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI H BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI D.K. AGARWAL, JM & SHRI R K PANDA, A M ITA NO. 5807/MUM/2010 (ASST YEAR 2006-07) INCOME TAX OFFICER 20(3), ROOM NO. 605,6 TH FLOOR, PIRAMAL CHAMBERS, LALBAUG, MUMBAI 400 012. VS M/S ELECTRONIC & ENGINEERING COMPANY, EEC HOUSE, PLOT NO. C-7, DALIA INDUSTRIAL ESTATE, NEW LINK ROAD, ANDHERI (WEST), MUMBAI 400 053. (APPELLANT) (RESPONDENT) PAN NO. AAAFE 0594M APPELLANT BY S HRI V.V. SHASTRI RESPONDENT BY SHR I MAYUR KISNADWALA PER R K PANDA, AM THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 04.05.2010 OF THE CIT(A)- 31, MUMBAI RELATING TO AS SESSMENT YEAR 2006-07. 2 THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER:- I. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW AN D IN THE CIRCUMSTANCES OF THE CASE IN DIRECTING THE ASSESSIN G OFFICER TO TREAT THE RENT COMPENSATION AND SERVICE CHARGES AS INCOME FROM BUSINESS INSTEAD OF INCOME FROM HOUSE PROPERTY AS A DOPTED BY THE ASSESSING OFFICER. II. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LA W AND IN THE CIRCUMSTANCES OF THE CASE IN NOT APPRECIATING THE F ACT THAT THIS ISSUE HAS BEEN SETTLED BY THE APEX COURT IN FAVOUR OF THE REVENUE IN ITS LANDMARK JUDGMENT RENDERED IN THE CASE OF M/ S SHAMBHU INVESTMENTS PVT. LTD. VS. CIT 263 ITR 143. III. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT (APPEALS) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO B E RESTORED. 2 ITA NO.5807/MUM/2010 M/S ELECTRONIC & ENGINEERING COMPANY 3. FACTS OF THE CASE IN BRIEF ARE THAT DURING THE C OURSE OF ASSESSMENT PROCEEDINGS THE A.O. NOTED THAT THE ASSESSEE HAS SH OWN INCOME BY WAY OF RENT UNDER THE HEAD BUSINESS CENTRE RECEIPT. THE A SSESSEE IS A PARTNERSHIP FIRM AND WAS ENGAGED IN THE BUSINESS OF MANUFACTURI NG OF NON-DESTRUCTIVE EQUIPMENTS AND ALLIED QUALITY CONTROL INSTRUMENTS I N THE PAST YEARS. THE BUSINESS OF THE ASSESSEE HAS BEEN CLOSED DOWN AND T HE ASSESSEE FIRM HAS LET OUT ITS OFFICE PREMISES TO SISTER CONCERNS FROM WHO M THE RENT HAS BEEN RECEIVED WHICH IS CREDITED TO THE PROFIT & LOSS ACC OUNT. THE A.O. ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE INCOME OF RENT RE CEIVED ON LET OUT OF THE PROPERTY OF THE ASSESSEE FIRM SHOULD NOT BE TAXED U NDER THE HEAD INCOME FROM HOUSE PROPERTY. 3.1 THE ASSESSEE MADE DETAILED SUBMISSIONS ACCORDIN G TO WHICH IT WAS IN BUSINESS SINCE LAST 40 YEARS AND ITS MAIN CUSTOMERS DIRECTLY OR INDIRECTLY ARE GOVERNMENT ORGANISATIONS. THE NATURE OF ITS BU SINESS IS HIGHLY TECHNICAL AND THE FIRM IS SUBSTANTIALLY DEPENDENT O N ITS SKILLED WORKERS. DURING THE YEAR 1996 SOME WORKMEN AND THE UNION INS TIGATED TO SLOW DOWN THE PRODUCTION, DISOBEDIENCE OF LAWFUL ORDERS, SABO TAGE AND MANY OTHER UNFAIR LABOUR PRACTICES. CONSEQUENTLY THE PRODUCTI ON GRADUALLY CAME DOWN AND THEREFORE IT BECAME DIFFICULT FOR THE FIRM TO S URVIVE IN THE COMPETITIVE MARKET. THE NON-COOPERATIVE ATTITUDE OF THE WORKMEN AND THE LABOUR PROBLEM RESULTED IN DELAY IN SUPPLY, LOSS OF ORDERS AND HENCE FINALLY LOSS OF BUSINESS. SUCH RECURRING LOSSES ERODED THE CAPITAL AND FINANCIAL CAPACITY OF THE ASSESSEE. DUE TO LOSS OF ORDER MANY WORKERS WE RE RENDERED SURPLUS AND WERE THEREFORE RETRENCHED. THE WORKERS HAVE GONE T O THE COURT FOR REINSTATEMENT AND THE DECISION OF THE COURT IS PEND ING. SINCE THE MATTER IS SUB JUDICE AND IT IS NOT POSSIBLE FOR THE ASSESSEE TO CARRY ON THE MANUFACTURING OPERATIONS OPTIMALLY AND ECONOMICALLY ON A LOW SCALE, THE ASSESSEE DECIDED TO TEMPORARILY SUSPEND ITS MANUFAC TURING ACTIVITIES (BUT NOT THE BUSINESS). HOWEVER, IT CONTINUES TO HOLD A LL THE ASSETS IN THE FORM OF MACHINERIES/EQUIPMENTS ETC. TILL THE FINAL DECISIO N OF THE COURT THE ASSESSEE 3 ITA NO.5807/MUM/2010 M/S ELECTRONIC & ENGINEERING COMPANY FIRM DECIDED TO CONTINUE ITS BUSINESS BY COMMERCIAL LY EXPLOITING ITS ASSETS. THEREFORE, THE BUSINESS OF THE ASSESSEE CONTINUES A ND HAS NOT CEASED. RELYING ON A COUPLE OF DECISIONS, THE ASSESSEE SUBM ITTED THAT THOUGH THE MANUFACTURING BUSINESS OF THE ASSESSEE MAY BE TEMPO RARILY/MOMENTARILY DORMANT, AS LONG AS THERE IS SOME BUSINESS CARRIED ON AND THE INTENTION IS TO CARRY ON THE MANUFACTURING BUSINESS, THEREFORE, THE CLAIM OF EXPENSES CANNOT BE DISALLOWED. IT WAS FURTHER SUBMITTED THA T THE BUSINESS OF THE ASSESSEE CONTINUES AND SUCH INTENTION TO CONTINUE B USINESS IS MANIFEST FROM THE FACT THAT IN A.Y. 2004-05 AND 2005-06, THE ASSESSEE DECIDED TO EXPLOIT THE ASSETS I.E. THE OFFICE PREMISES ALONG W ITH THE FURNITURES BY TEMPORARILY LETTING THEM OUT TILL IT RESTRUCTURED/R EORGANISED ITS BUSINESS. IT WAS ACCORDINGLY SUBMITTED THAT THE RENTAL INCOME SH OULD BE ASSESSED AS BUSINESS INCOME AND NOT AS INCOME FROM HOUSE PRO PERTY. 3.2 THE A.O. FURTHER NOTED THAT THE ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR HAS NO OTHER INCOME EXCEPT FROM THE SALE OF RAW MATERIAL AND RENT FROM LEASED PROPERTY. ACCORDING TO HIM TH ERE IS NO ELEMENT OF CARRYING ON OF ANY BUSINESS IN TERMS OF PROVISIONS OF SECTION 28 OF THE ACT WHICH CAN MAKE THE INCOME OF RENT FALL UNDER THE HE AD OF BUSINESS INCOME. 3.3 HOWEVER, THE A.O. WAS NOT SATISFIED WITH THE EX PLANATION GIVEN BY THE ASSESSEE. FOLLOWING HIS ORDER FOR A.Y. 2005-06 THE A.O. TREATED THE BUSINESS CENTRE RECEIPT AS INCOME FROM HOUSE PROPERTY. IN AP PEAL THE LD. CIT(A) FOLLOWING HIS ORDER FOR A.Y. 2005-06 ACCEPTED THE P LEA OF THE ASSESSEE AND DIRECTED THE A.O. TO TREAT THE BUSINESS CENTRE RECE IPT AS BUSINESS INCOME. AGGRIEVED WITH SUCH ORDER OF THE LD. CIT(A), THE RE VENUE IS IN APPEAL BEFORE US. 3.4 AFTER HEARING BOTH THE SIDES WE FIND IDENTICAL ISSUE HAD COME UP BEFORE US IN ASSESSEES OWN CASE FOR A.Y. 2005-06 A ND VIDE ORDER OF EVEN 4 ITA NO.5807/MUM/2010 M/S ELECTRONIC & ENGINEERING COMPANY DATE WE HAVE DECIDED THE ISSUE IN FAVOUR OF THE ASS ESSEE AND DISMISSED THE APPEAL FILED BY THE REVENUE BY HOLDING AS UNDER:- 6. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PURSUED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE IN THE PAPER BOOK WE FIND IT IS THE SU BMISSION OF THE ASSESSEE THAT DUE TO SOME LABOUR DISPUTE THE ASSESS EE HAS TEMPORARILY LET OUT A PART OF ITS PREMISES TO ITS SISTER CONCER N AND DURING THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAS FURTHER L ET OUT A PORTION OF THE PROPERTY TO ONE M/S JYOTI STRUCTURES ENGINEERIN G SERVICES PVT. LTD. IT IS THE CASE OF THE ASSESSEE THAT IT HAS EXPLOITE D ITS COMMERCIAL ASSET DURING ITS TEMPORARY LULL IN THE BUSINESS ACTIVITY WHICH IT HAS REVIVED DURING A.Y. 2008-09. FURTHER IT IS ALSO CASE OF THE ASSESSEE THAT DURING A.Y. 2004-05 THE A.O. IN THE SCRUTINY ASSESSMENT H AS ACCEPTED THE CLAIM OF BUSINESS CENTRE RECEIPT AS BUSINESS INCOME AND DURING A.Y. 2002-03 AND 2003-04 THE SAME HAS BEEN ACCEPTED IN S UMMARY ASSESSMENT. IT IS THE CASE OF THE REVENUE THAT IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SHAMBHU INVEST MENT PVT. LTD. SUCH BUSINESS CENTRE RECEIPT HAS TO BE TREATED AS I NCOME FROM HOUSE PROPERTY AND NOT AS INCOME FROM BUSINESS CENTRE. 6.1 WE FIND THE CASE THE CASE OF THE ASSESSEE IS SQ UARELY COVERED BY THE DECISION OF HONBLE MADHYA PRADESH HIGH COURT I N THE CASE OF KOHINOOR TOBACCO PRODUCTS P. LTD. (SUPRA). IN THAT CASE THE ASSESSEE WAS A COMPANY WHICH CARRIED ON BIDI MANUFACTURING B USINESS AT THE RELEVANT TIME. IT ACQUIRED PROPERTY FOR ITS BIDI B USINESS CONSISTING OF FACTORY BUILDING, GO-DOWNS, OFFICER/STAFF QUARTERS ETC. THE PROPERTIES WERE BEING USED FOR THE PURPOSE OF ITS BUSINESS. H OWEVER, DUE TO LABOUR PROBLEM AND OTHER CIRCUMSTANCES, THE ASSESSE E HAD TO TEMPORARILY REDUCE ITS ACTIVITIES AND CONSEQUENTLY LET OUT SOME OF THE PROPERTIES WHICH WERE NOT IMMEDIATELY REQUIRED BY I T FOR THE PURPOSE OF ITS BUSINESS. THE ASSESSEE SHOWED RENTAL INCOME FR OM THE PROPERTIES AS BUSINESS INCOME WHICH WAS TREATED AS INCOME FROM HOUSE PROPERTY BY THE A.O. THE TRIBUNAL HELD THE INCOME WAS TO BE TREATED AS BUSINESS INCOME. ON A REFERENCE, THE HONBLE HIGH COURT HEL D THAT THE PROPERTIES WERE TEMPORARILY LET OUT TO KEEP THEM IN GOOD CONDI TION SO THAT THEY COULD BE USED AND EXPLOITED AGAIN FOR THE PURPOSE O F ASSESSEES BIDI MANUFACTURING BUSINESS AND THE ASSESSEES INTENTION WAS TO INCREASE ITS BUSINESS GRADUALLY AND NOT TO CLOSE DOWN ITS BU SINESS. ACCORDINGLY RENTAL INCOME WAS HELD TO BE ASSESSABLE AS BUSINESS INCOME. 6.2 NOW COMING TO THE FACTS OF THE CASE WE FIND THE ASSESSEE HAD SUBMITTED BEFORE THE A.O. THAT DUE TO PENDING LABOU R COURT CASES AND THE HUGE RECURRING LOSSES THE ASSESSEE TOOK A COMME RCIAL DECISION TO EXPLOIT ITS BUSINESS ASSETS. DUE TO LOSS OF ORDERS MANY WORKMEN WERE RENDERED SURPLUS AND ACCORDINGLY RETRENCHED. THEY H AVE GONE TO COURT FOR REINSTATEMENT AND THE DECISION OF THE COURT IS AWAITED. AS THE 5 ITA NO.5807/MUM/2010 M/S ELECTRONIC & ENGINEERING COMPANY MATTER IS SUBJUDICE AND IT IS NOT POSSIBLE FOR THE ASSESSEE TO CARRY ON THE MANUFACTURING ON LOWER SCALE, THE ASSESSEE DECI DED TO SUSPEND ITS MANUFACTURING ACTIVITY BUT NOT THE BUSINESS. TILL THE FINAL DECISION OF THE COURT, THE ASSESSEE FIRM HAS DECIDED TO CONTINU E ITS BUSINESS BY COMMERCIAL EXPLOITATION OF ITS BUSINESS ASSETS. FU RTHER THE FINDING GIVEN IN THE ORDER OF THE LD. CIT(A) THAT THE ASSES SEE HAS STARTED ITS TRADING ACTIVITY BY IMPORTING THE EQUIPMENTS WHICH IT WAS MANUFACTURING AND HAD SUPPLIED TO OLD CUSTOMERS COU LD NOT BE CONTROVERTED BY THE LD. D.R. WE, THEREFORE FIND ME RIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSET HAS BEEN COMMERCIALLY EXPLOITED BY THE ASSESSEE FIRM DURING ITS TEMPORARY SUSPENSION OF BUSINESS ACTIVITY. THEREFORE IN VIEW OF THE DECISION OF THE HONBLE M.P. HIGH COURT IN THE CASE OF KOHINOOR TOB ACCO PRODUCTS P. LTD. (SUPRA) SUCH RENTAL INCOME, IN OUR OPINION, HA S TO BE TREATED AS BUSINESS INCOME. 6.3 THE DECISION IN THE CASE OF SHAMBHU INVESTMENT PVT. LTD. (SUPRA), IN OUR OPINION, DOES NOT APPLY TO THE FACT S OF THE PRESENT CASE. IN THAT CASE THE PROPERTY WHICH WAS PURCHASED FOR A CONSIDERATION OF RS. 5,42,443/- WAS PARTLY UTILISED BY THE ASSESSEE FOR ITS OWN BUSINESS AND THE BALANCE PORTION WAS LET OUT TO VARIOUS OCCU PIERS BY ACCEPTING INTEREST FREE SECURITY DEPOSIT OF RS. 4,25,000/-. U NDER THESE CIRCUMSTANCES, THE HONBLE CALCUTTA HIGH COURT CAME TO THE CONCLUSION THAT THE ENTIRE COST OF THE PROPERTY LET OUT TO THO SE OCCUPIERS HAS ALREADY BEEN RECOVERED BY WAY OF INTEREST FREE ADVANCE BY T HE ASSESSEE. HENCE, IT CANNOT BE SAID THAT THE ASSESSEE IS EXPLO ITING ITS PROPERTY FOR ITS COMMERCIAL BUSINESS ACTIVITIES AND SUCH BUSINES S ACTIVITIES ARE PRIME MOTIVE AND LETTING OUT THE PROPERTY IS SECOND ARY ONE. THIS DECISION OF THE HONBLE CALCUTTA HIGH COURT HAS BEE N UPHELD BY THE HONBLE SUPREME COURT. HOWEVER, IN THE INSTANT CAS E THE PROPERTY HAS BEEN LET OUT DURING THE PERIOD OF TEMPORARY SUSPENS ION OF THE BUSINESS ACTIVITY AND THE COMPANY HAS STARTED ITS BUSINESS A CTIVITY FROM A.Y. 2008-09 ONWARDS. THEREFORE, THIS DECISION, IN OUR O PINION, IS DISTINGUISHABLE ON FACTS AND NOT APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. 6.4 SO FAR AS THE DECISION RELIED ON BY THE A.O. IN THE CASE OF EAST INDIA HOUSING AND LAND DEVELOPMENT TRUST LTD. (SUPR A) WE FIND THE SAME HAS ALREADY BEEN CONSIDERED BY THE HONBLE MAD HYA PRADESH HIGH COURT IN THE CASE OF KOHINOOR TOBACCO PRODUCTS P LTD. (SUPRA). SIMILARLY IN THE CASE OF CIT V. NEW INDIA INDUSTRIE S LTD. REPORTED IN 201 ITR 208 RELIED ON BY THE A.O., THE ASSESSEE IN THAT CASE HAD CEASED TO USE IT AS A COMMERCIAL ASSET EITHER HIMSELF OR THRO UGH OTHERS AND UNDER THOSE CIRCUMSTANCES THE HONBLE COURT HELD THE PENA L INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IN VIEW OF THE ABOVE AND IN VIEW OF THE DETAILED REASONS GIVEN BY THE LD. CIT(A) WHILE TREATING THE BUSINESS CENTRE RECEIPT AS BUSINESS INCOME, WE DO NOT FIND A NY INFIRMITY IN THE SAME. WE ACCORDINGLY UPHOLD THE ORDER OF THE LD. C IT(A) ON THIS ISSUE. THE GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY D ISMISSED. 6 ITA NO.5807/MUM/2010 M/S ELECTRONIC & ENGINEERING COMPANY 4. FOLLOWING THE SAME RATIO, THE ORDER OF THE LD. C IT(A) IS UPHELD AND THE GROUNDS RAISED BY THE REVENUE IS DISMISSED. 5. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30.11.2011. SD/- SD/- ( D. K. AGARWAL ) JUDICIAL MEMBER ( R K PANDA ) ACCOUNTANT MEMBER PLACE: MUMBAI : DATED: 30.1.2011. RK COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT, CITY -XI, MUMBAI 4 CIT(A) -31, MUMBAI 5 DR BENCH H 6 MASTER FILE /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI