Shri Pankaj Goel, Itarsi V. Assistant Commissioner of Income Tax Circle Itarsi, Itarsi

ITA 75/JAB/2019

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 9641 (ITAT-JABALPUR)
• Duration Of Justice: 3 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2022
• Appeal Filed By: Assessee
• Order Result: DismissedAllowedDismissed
• Bench Allotted: DB
• Next Hearing Date: 20-07-2022
• Assessment Year: 2013-2014
• Appeal Filed On: 22-09-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Search and seizure
• Section: 28; 143(3); 201; 208; 48; 22

Judgement Text

1 | P a g e IN THE INCOME TAX APPELLATE TRIBUNAL JABALPUR BENCH, JABALPUR BEFORE SHRI SANJAY ARORA, HON‟BLE ACCOUNTANT MEMBER & SHRI MANOMOHAN DAS, HON'BLE JUDICIAL MEMBER I.T.A. No. 75/JAB/2019 (Asst. Year: 2013-14) Appellant by : Shri Sapan Usrethe, Advocate Respondent by : Shri Ravi Mehrotra, Sr. DR Date of hearing : 21/07/2022 Date of pronouncement : 29/09/2022 O R D E R Per Sanjay Arora, AM: This is an appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-1, Bhopal („CIT(A)‟ for short) dated 28/06/2019, dismissing the assessee‟s appeal contesting his assessment under section 143(3) of the Income Tax Act, 1961 („the Act‟ hereinafter) dated 25/03/2016 for Assessment Year (AY) 2013-14. 2. The sole issue arising in the instant appeal is the head of income under which the rental from his house property let by the assessee to M.P. Warehousing and Logistics Ltd. for storage purposes is assessable to tax under the Act. While the assessee claims it to be business income, in the view of the Revenue, it is income from house property, assessable u/s. 22. The issue, which appears to be primarily legal, is, as we shall presently see, a mixed question of fact and law. It Pankaj Goel, Seventh Lane, Itarsi (MP) [PAN : AHEPG 5844 K] vs. Asst. CIT, Circle Itarsi, Itarsi. (Appellant) (Respondent) ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 2 | P a g e would accordingly be proper to first dwell on the law in the matter, which only could then be applied to the facts and circumstances of a particular case. The law 2.1 Section 22 of the Act reads as under: Income from house property. 22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property." 2.2 Income under the Act is to be assessed under any of the 6 (now 5) heads of income, as explained by the Apex Court time and again, as in East India Housing & Land Development Trust Ltd. vs. CIT [1961] 42 ITR 49 (SC). We extract from its observations therein, one of the earliest by it, as under, to bring home the point: „Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in s. 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in s. 6, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head.‟ [emphasis, ours] The head of income under which a particular income is assessable under the Act is, thus, to be determined with reference to it‟s source. Ownership of house property is itself recognized as a source of income under the Act, which is irrespective of whether the same is let or not. This, apparent from s. 22, becomes abundantly clear from s. 23, deeming the annual value, i.e., the measure with reference to which the income is to be determined, as the sum for which the property might reasonably be let from year to year. The only exception qua house property being the source of income is where the same is occupied by the assessee for the purpose of any business or profession being carried on by him, income from which is chargeable to tax u/s. 28. Further, as clarified, the direct, or more so, source would determine ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 3 | P a g e the head of income, and not one under which the income may indirectly fall. The issue as to the head of income qua house property would thus have to in each case be decided on the basis of this framework. Letting, per se, as explained in CIT v. National Storage (P.) Ltd. [1963] 48 ITR 577 (Bom) (since affirmed in [1967] 66 ITR 596 (SC)), which thus becomes a means of realizing the annual value of a house property and, thus, is integral to it‟s ownership, is not „business‟ under the Act. The proposition, as we shall presently see, remains undiluted to date. Even if therefore the exploitation of property is one of the objects for which a company is formed, it may not, as clarified in East India Housing & Land Development Trust Ltd. (supra), be assessable as business income. That the property being exploited is being used for commercial purposes would again matter little. This stands reiterated in Sultan Brothers (P.) Ltd. v. CIT [1964] 51 ITR 353 (SC), a constitution bench decision by the Apex Court; it holding as: (pg. 358) “We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think 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 that certain assets are commercial assets in their very nature.” (emphasis, ours) The issue raised and the principal argument before the Apex Court in that case, and which did not find favour with it, was that letting out of a commercial asset – a fully equipped hotel building in that case, is a business. The decisions in CIT v. New India Industrial Ltd. [1993] 201 ITR 208 (Guj) and CIT vs. Vikram Cotton Mills Ltd. [1997] 106 ITR 829 (All), relied upon before the ld. CIT(A) (PB pg.7), wherein this argument, i.e., that the rental income is assessable as business income as the property let is a commercial property, is thus to no moment. The Apex Court has abundantly clarified the user of the property to be of no consequence, as no ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 4 | P a g e property could be regarded as commercial by its very nature. The decision in New India Industrial Ltd. (supra) is without reference to the decisions in East India Housing & Land Development Trust Ltd. (supra) and Sultan Bros. (P.) Ltd. (supra). The decision in Vikram Cotton Mills Ltd. (supra) is a case of letting of a Mill, i.e., of a inseperable letting of land and building as well as plant and machinery, income from which would be assessable either u/s. 28 or u/s. 56, even as clarified in Sultan Bros. (P.) Ltd. (supra) and, accordingly, stands upheld in [1988] 169 ITR 597 (SC). There is, it needs to be appreciated, nothing in the statutory language of section 22 to draw any distinction on the basis of the user to which the house property let is put; letting itself being not an essential ingredient for determining the annual value. No wonder the said argument did not find favour with the Hon'ble Court in CIT v. Indian Warehousing Inds. Ltd. [2002] 258 ITR 93 (Mad), relied upon by the Tribunal in Nutan Housing Society Pvt. Ltd. v. ITO [2007] 106 TTJ 137 (Pune), relied upon by the AO. 2.3 There may, however, be a case where letting of property (real estate) is itself being carried on by the assessee as his business, i.e., letting amounts to business? This assumes significance as in that case, ownership becomes incidental and integral to the business, which thus becomes the immediate source of income. Implicit in the concept, and an incident, of business, is a set of activities, i.e., something more and beyond letting, which is an incident of ownership alone, so that the provision of property is a part of or an incidence of that business. That the house property is fully equipped, viz. with furniture, electrical fittings, lifts, etc., as was the case in Sultan Bros. (supra), would only be a case of a composite letting, in which case the rent from building and that from other assets as business income. Subject of course to the lettings being not inseparable, in which latter case, for which the Hon‟ble Court devised a test, the entire rent would be assessable either as business income or as income from other sources. Then, is the case where the property is not being exploited as a capital asset, but it‟s value is realized by way of sale or lease as a business. That is, the income ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 5 | P a g e derived is not from the exercise of property rights only, but is derived from carrying on an adventure or concern in the nature of trade. The aspect stands explained by the Apex Court in Karanpura Development Co. Ltd vs. CIT [1962] 44 ITR 362 (SC), which observations stand also extracted in it‟s recent decision in Rayala Corp. Pvt. Ltd. v. Asst. CIT [2016] 386 ITR 500 (SC): „As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.‟ (pg. 377) It‟s observations in the following para, at pages 377-378, are as under: „Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" (s. 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee-company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter.‟ [emphasis, ours] The larger bench decisions by the Hon‟ble Apex Court in East India Housing & Land Development Trust Ltd. (supra); Karanpura Development Co. Ltd. (supra); and Sultan Brothers Pvt. Ltd. (supra), which are in agreement, sum up, to our mind, the law in the matter, which is then to be applied to the facts of the case at hand. The only exception to the income by way of letting of his house property by the assesee being assessable as income from house property is thus where it is by way of an inseparable letting along with other assets, which exception is carved by the statute itself, or where the income derived is from carrying on an adventure or ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 6 | P a g e concern in the nature of trade, again, a matter of fact. This explains both – our observation at the beginning of the discussion that the matter is a mixed question of fact and law (para 2), as well as the varying decisions in different cases. This understanding of law gets also vindicated by the reiteration of law, after a review of judicial precedents, by the Apex Court per its recent decision in Raj Dadarkar & Associates v. Asstt. CIT [2017] 394 ITR 592 (SC). The findings by the Tribunal in Nutan Housing Society Pvt. Ltd. (supra), reproduced at para 1.8 (pg.3) of the assessment order, also project largely this understanding of law. As clarified by the Apex Court, leasing/letting could be undertaken as a business, so that all that needs to be seen is whether the leasing of the house property is in the capacity of a trader, as was found in Chennai Properties & Investments Ltd. (supra) and Rayala Corp. Pvt. Ltd (supra), as against exploiting the property, commercial or otherwise, as its owner, as was found in East India Housing & Land Development Trust (supra); Sultan Bros. (supra); and Raj Dadarkar & Ass. (supra). 2.4 The law, simply put, therefore is that income from letting is per se assessable u/s. 22. Where, however, the activity of letting is being carried on as a business activity i.e., not in the capacity of the property owner, but in the capacity of a trader, to turn it into account, whether by way of sale or lease, the same would qualify to be a trading receipt of the said business, assessable u/s. 28. In the latter case, the income is derived is not from the exercise of property rights only, but is derived from carrying on an adventure or concern in the nature of trade, again, a matter of fact. In such a case, it is the „business‟ which must answer the question, of fact, as to the immediate source of the income, and not the ownership of the property or it‟s letting. The decision, one way other the other, is to be arrived at in the conspectus of the case; the form assumed being irrelevant. We may at this stage also consider the decision in Indian Warehousing Industries Ltd. (supra), relied upon by the Tribunal in Nutan Housing Society (supra). In the facts of the case, warehouses were let to FCI by a company, one whose objects was to build ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 7 | P a g e warehouses and let out the same. The Hon'ble Court, distinguishing the decision in Karanpura Development Co. Ltd. (supra), relied upon by the Tribunal, and relying on East India Housing and Development Trust Ltd. (supra), held the income to be from house property as the source of income was letting. The difference as to whether the rent is realized from the same occupant or a shifting class of occupants was found by it, again, relying on East India Housing and Development Trust Ltd. (supra), as irrelevant. Providing for ancillary services, viz. upkeep & maintenance, cleanliness, water and electricity charges, etc., may though by itself not alter the character of the receipt as from a business, as found by the Tribunal in Nutan Housing Society (supra), and as indeed in Raj Dadarkar & Ass. (supra). The facts and their analysis 3.1 We may next advert to the facts of the case, on which, i.e., given the law, the decision in a particular case must turn on. To begin with, the warehousing receipt is from a single warehouse which, as it appears from the balance-sheet as on 31/03/2013 (PB pgs.42-44), is the only warehouse and, further, completed during the relevant year. Further, there is nothing to show if the warehouse is anything more than house property simpliciter. For example, if any equipment/s is installed therein; temperature regulators, etc. which would make it a special purpose vehicle (building), as an auditorium or a factory, to be used only for a defined purpose, or to make it a case of a composite letting, i.e., where the land and building and the plant and machinery are let together, as was found in Sultan Bros. (supra). No such assets are referred to in the hire agreement (PB pgs. 29-41) or even found in the assessee‟s balance-sheet. Further, though the hire agreement does point to sanitation and security services to be provided by the assessee, as Sh. Usrethe, the ld. counsel for the assessee, would emphasize before us, no such services stand provided by the assessee, as apparent from it‟s profit & loss account (PB pg.43), also pointed out by the ld. CIT(A), whose finding remains un-rebutted even before us. Even otherwise, it would remain to be seen if the same would ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 8 | P a g e change the character of the receipt, i.e., from being a letting income from house property in the main, or to it being only incidental or subservient to the letting of house property. That is, it is the dominant object which must prevail. Activity/s is essential to a business, which activity would itself demonstrate if the same is carried on. The common strand, as would be noted, in all the decisions referred to, is if any business activity was carried in the earning of income, or the same had arisen principally on account of ownership of the house property. How could, under the circumstances, i.e., in absence of any activity, the assessee be regarded as carrying a business, the very essence of which is a regular, systematic activity, with a view to generate profit, even a explained in Raj Dadarkar & Associates (supra). The income in the instant case is principally a passive income, earned by the assessee in his capacity as the owner of the property. That the agreement does not provide for annual rent and, further, it is open to the tenant to, upon notice, terminate the agreement, would not alter the nature of the income received. This is akin to saying that where the employer does not allow an annual, but a monthly salary and, further, the employment agreement is liable to be terminated, it would change the character of the receipt as not salary income! As explained in Indian Warehousing Industries (supra), it is irrelevant whether the rent is realized from a single tenant or from a shifting class of tenants. Clause (c) of sec. 23(1) itself factors in the fall in the annual value of the house property on account of it being not let throughout the year. That is to say, much less any activity of value, which may change the character of the entire receipt to one derived from business, there is no supportive activity, which would not change this character as principally from letting of house property, as observed by the Tribunal in Nutan Housing (supra). As explained in many a decision by the Tribunal, in such a case, i.e., provision of ancillary services, there is scope for income from such services, where in the nature of adding value, being computed separately. No occasion for the same arises in the instant case in the absence of any supportive services. ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 9 | P a g e Other Arguments 4.1 Shri Usrethe also relied on sec. 35AD(8)(c), defining „specified business‟, which includes „setting up and operating a warehouse facility for storage of agricultural produce‟. The provision, he would explain, though being in relation to a capital allowance, yet, inasmuch as it regards the letting of a warehousing as business income, makes it clear that the law regards the warehouse letting income as business, with indeed codes being allotted to different businesses, i.e., by the Department itself, to be used while filing the return of income (PB pgs. 49-50). The argument, though persuasive, would not be of assistance to the assessee. „Business‟ stands defined in s. 2(13) in an inclusive manner, case law on which is legion. The common thread, even as apparent from the bare language of the defining provision, as also explained by the Bench during hearing, is the conduct of activity of trade, commerce or manufacture or in the nature thereof. In the present case, however, the element of operating a warehousing facility, as found as a fact, is completely missing/absent; the assessee being unable to exhibit provision of even a single service, or undertaking any activity, i.e., apart from the letting of house property simpliciter, much less undertaking a business. That is, the assessee‟s claim of a business gets defeated on facts. 4.2 The business code allotted by the Revenue is under the head „Real estate and renting services‟, defining further areas of activity falling thereunder. That which corresponds to the assessee‟s case is: „Operating of real estate of self-owned buildings (residential and non-residential)‟. We have already clarified that it could in the facts and circumstances of a case be that the assessee is undertaking real estate business, as was found in Chennai Properties & Investments Ltd. (supra) and Rayala Corporation (supra), as against pure letting (which would also include leasing) in the capacity of the owner, assessable u/s. 22, as was found in East India Housing and Development Trust (supra); Raj Dadarkar & Ass. (supra); and Indian Warehousing Industries (supra), so that nothing by itself turns on the allotment of ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 10 | P a g e a business code by the Revenue. Why, the hire charges income in the instant case qualifies as „rent‟ for tax deduction purposes u/s. 194-I, but that would not by itself make it assessable u/s. 22. The question in each case must be answered w.r.t. facts, and on the basis if the ownership of house property alone, i.e., the exercise of property rights per se, or the business or trade being carried on by the assessee, that is the source of income. That is, it is the law as explained by the Apex Court that must govern and guide our decision. Needless to add, the same would necessarily require taking into account the entirety of facts. 4.3 We may next consider the assessee‟s reliance on his assessment for the following year, i.e., AY 2014-15, wherein the warehousing receipt hire charges stand assessed u/s. 143(3) as business income (PB pgs. 45-46). The said reliance, we are afraid to say, is misplaced. To begin with, it is not the assessment for an earlier, but a succeeding year. It is, therefore, rather, the earlier assessment, i.e., for the current year, which should have guided and prevailed with the AO, on whom it was incumbent to have considered and followed the order for the earlier year. That is, unless found distinguishable on facts or in view of the changed position of law. There is, it needs to be appreciated, no estoppel against law. Needless to add, there is no such finding; not even a whisper to the earlier assessment, nor indeed any finding in the matter in the order for AY 2014-15. Being, thus, sans any finding and sub silentio on this aspect, how could the same, then, bind the AO for the current year, whose finding/s, rather, stands since merged with that by the first appellate authority. Further, being without any finding in the matter, explaining the reason for a change in stand in the assessment for AY 2014-15, given the definite finding in the immediately preceding year, would make it per incuriam. In CIT vs. Kohinoor Tobacco Products Pvt. Ltd. [1998] 234 ITR 785 (MP), the Hon'ble jurisdictional High Court regarded an assessment of letting income from warehousing as business income, i.e., instead of as house property income, without enquiry, as per se erroneous and prejudicial to the interests of the Revenue. That is to say, the assessment (for AY 2014-15), relied upon, is itself erroneous and ITA No. 75/JAB/2019 (AY: 2013-14) Pankaj Goel v. Asst. CIT 11 | P a g e prejudicial to the interests of the Revenue. The same does not assist the assessee‟s case in any manner. Decision 5. We, in view of the foregoing, have little hesitation in upholding the claim of the Revenue of the warehouse hire income as assessable as income from house property in the instant case. Though the assessee has placed certain orders by the Tribunal in his paper-book, the same were not referred to during hearing, to form part of the record nor any other argument made. The matter is principally factual, i.e., given the law in the matter, and has accordingly been decided issuing findings of fact. The issue arising is rather covered by the decisions in Indian Warehousing Industries (supra) and Nutan Housing Society (supra), which were not distinguished before us, as indeed the decisions in Sultan Bros. (supra); East India Housing and Development Trust (supra); and Raj Dadarkar & Ass. (supra), all of which find place in the assessee‟s paper-book. We decide accordingly. 6. In the result, the assessee‟s appeal is dismissed. Order pronounced in open Court on September 29, 2022 Sd/- S d/- (Manomohan Das) (Sanjay Arora) Judicial Member Accountant Member Dated: 29/09/2022 vr/- Co p y to: 1. The A pp el la nt: Pankaj Goel, Seventh Lane, Itarsi (MP) 2. The R es po nd en t: Asst . CI T, C irc le I tar si (M P) 3. The Pri nc ip al CI T-1, Bh op al 4. The C IT (App ea ls)-1, Bh op al 5. The S r. D .R., IT A T , J ab al pu r. 6. Gu ard Fil e. By order (VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Jabalpur.