TaxTMI 
TaxTMI 
2006 (8) TMI 286
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....ervices 78,54,621 Disallowance Donation 27,216 Deemed Dividend 1,49,279 Proportional Depreciation on Bldg. 15,56,527 Depreciation on vehicles 489 43V disallowance 1,823 Disallowance out of interest payment 9,28,154 Payment made to Shree Indl. Services [40A(2)(b)] 13,51,000 40,14,488 Less : Allowable expenditure 1,18,69,109 Admn and establishment expenses 49,16,584 Depreciation 5,77,730 Lease rent paid : Kamadhenu Chem Ind. 6,00,000 Navlakhs N.N. 30,000 Navlakha Asha 30,000 National Agro Services 60,000 Shree Industrial Services 13,51,000 Warehousing charges paid 3,97,541 24,68,541 79,62,855 Income from warehousing 39,06,254 Income from business 39,06,254 ....
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....ing that the warehousing charges should be assessed under the head 'Income from house property' directed the AO to withdraw the deductions allowed in respect of various expenses which were not admissible in the computation of 'income from house property'. This direction of the CIT(A) resulted in the enhancement of income and has been challenged by the assessee through the ground Nos. 1 and 2. 6. In ground Nos. 3 and 4 it has been contended that the CIT(A) erred in confirming the AO's view that the lease rent received from Lipton India and from Hindustan Lever was taxable as 'income from house property' and not as 'income from business'. 7. The details of the total area being used by the assessee for leasing/warehousing are as under: Nature of use Area (Sq. ft.) From From From 1.4.2000 to 31.10.2000 01.11.2000 to 30.09.2001 01.10.2001 onwards Lease 33,900 1,01,900 68,000 Warehousing 1,14,660 1,14,660 1,48,560 Open area for Warehousing Scrap 3,615 3,615 3,615 Total area 1,52,175 2,20,175 2,20,175 8. In the assessment order the AO took the total gros....
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....€¢ That the whole of land on which warehouses were constructed did not belong to the assessee company but to its directors and relatives. • That the assessee rendered complex commercial services and the income received was more because of services rendered rather than for letting out of premise. • That letting out was incidental or subservient to the main business of the assessee. • That commercial asset was let out and therefore the exception provided in s. 22 was applicable. • That circumstances are provided in s. 56(2)(iii) where building let out with plant and machinery when the two are inseparable. • That reliance was placed on the decisions in the following cases: (i) CIT vs. National Storage (P) Ltd. (1963) 48 ITR 577 (Bom); (ii) CIT vs. National Storage (P) Ltd. (1967) 66 ITR 596 (SC); (iii) CIT vs. Shambhu Investment (P) Ltd. (2001) 168 CTR (Cal) 237 : (2001) 249 ITR 47 (Cal); (iv) Shambhu Investment (P)Ltd. vs. CIT (2003) 184 CTR (SC) 91 : (2003) 263 ITR 143 (SC); (v) CEPT vs. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC); (vi) CIT vs. New India....
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....ried 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." 13. The section employs the expression 'property consisting of any buildings or lands appurtenant thereto' and it specifically excludes from its scope, a property which the owner may occupy for the purposes of his own business or profession, the profits of which are chargeable to income-tax. The liability to tax under s. 22 is of the 'owner' of the buildings or lands appurtenant thereto. In the case of CIT vs. Podar Cement (P) Ltd. & Ors., it was held by the Supreme Court that, though under the common law 'owner' means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, the Registration Act, etc., in the context of s. 22 of the IT Act 1961, having regard to the ground realities and further having regard to the object of the IT Act, namely, to tax the income, 'owner' is a person who is entitled to receive income from the property in his own right. 14. The decisions of the High Courts and of the Supreme Court on the q....
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....ble from those in the present case before us. In the case of the present assessee mere factory sheds were given on lease to Lipton India and to Hindustan Lever on a monthly rent for the purpose of storing, blending, processing, mixing and packing of tea and other items of food and beverages. There was no complex commercial activity involved. The asset in the present case was mere factory shed (land and building) and the income is derived from bare letting of the property, by the exercise of the property rights, properly so-called. Therefore, in our humble opinion, the judgment of the Supreme Court in the case of National Storage (P) Ltd. is not applicable to the facts of the present case. 16. Shri. Karia, relying on the decision in the case of CIT vs. Shambhu Investments (P) Ltd., which was confirmed by the Supreme Court (2003) 263 ITR 143 (SC). submitted that the leasing of the property involved complex commercial activities and therefore the receipts from leasing should be assessed as 'business income'. In the case of Shambhu Investments (P) Ltd., the Calcutta High Court, after discussing the decisions of the Madras High Court, the Bombay High Court and Supreme Court, ....
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.... it is his investment in property or his ownership of property which brings income to him, that in such cases leasing of property itself is the activity and the transaction in leasing is quite different from the ordinary business activity of the assessee. In our opinion, this decision squarely supports the view taken by the AO and the CIT(A) in the present case. 20. In the case of East India Housing & Land Development Trust Ltd. vs. CIT (1961) 42 ITR 49 (SC), the assessee company was incorporated with the objects of buying and developing landed properties and promoting and developing markets. The question before the Court was whether the income realized by the assessee from the tenants of the shops and stalls was liable to be taxed as business income or as income from house property. The Court observed that the income derived from the shops and stalls was income received from the property and that the character of that income was not altered because it was received by a company formed with the object of developing and setting up markets. 21. In the case of CIT vs. Indian Warehousing Industries Ltd., which is a direct decision on the issue involved the present case, the assess....
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....ty or any portion thereof the same must be considered as income from house property. (v) The income derived from the shops and stalls was income received from the property and that the character of that income was not altered because it was received by a company formed with the object of developing and setting up markets. (vi) If the main intention of an assessee was to exploit his immovable property by way of his own complex commercial activities in that event alone it could be held as business income. (vii) Where 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 trading operations. (viii) In cases where the letting is only incidental and subservient to the main business of the assessee, the income derived from letting will not be the income from property. (ix) Where income is derived from house property by the exercise of property rights, properly so-called, the income falls under the head "income from property" . (x) If the income falls under the head 'In....
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.... And M/s Hindustan Lever Limited ... of the second part. Preamble Whereas the Lessor is seized and possessed or is otherwise well and sufficiently entitled to an estate comprising land admeasuring six and half acres, bearing Survey No. 157 (new 190), 5 to 8/2, Village Fursungi, Taluka Haveli, District Pune, which is outside the Pune Municipal Limits, on which land the Lessor has constructed several sheds for warehousing and/or industrial purposes. And whereas the Lessor at the request for the Lessee, to house their plant and machinery and office, has offered in the aforesaid land a factory building with an area of 68,000 sq.ft. along with the supporting area (hereinafter referred to as the "demised premises" and more particularly described in Annex. A) together with all the rights, easements and appurtenances and delineated by a red line on the plan annexed hereto. And whereas the Lessor is willing and desirous of letting out the said premises and has agreed to give on Lease to the Lessee the above mentioned demised premises along with fixtures and fittings as mentioned in Annex. 'A' and the lessee companies interested to ....
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....ee for such further period and such terms as may be mutually agreed between the lessee and the lessor. 27. Shri. Karia, the learned Authorised Representative, while making identical submissions and arguments with regard to the ground Nos. 1 to 4, repeatedly pointed out that the activity of warehousing was described as 'business' in the Bombay Warehousing Act, 1959. It is true that the expression used in the Bombay Warehousing Act, 1959 is 'business of warehousing', but in our opinion it is not quite relevant as to what expression is used in another statute, about the nature of an activity of the assessee. In the present case, the issue about the nature of the lease rent and warehousing charges received by the assessee from letting out of the property and the 'head of income' under which it has to be taxed, will have to be decided or the basis of the provisions of the IT Act 1961. In taking this view we are fortified by the decision of the Patna High Court in the case of Ram Ballabh Pd. Singh vs. State of Bihar (1986) AIR Patna 218. In this case the Court cautioned that in matters of construction similarity was not identity and no presumption could be safe....
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....A). In our considered opinion the issue, whether the warehousing charges received by the assessee should be assessed as 'income from house property' or as 'business income', has also to be decided against the assessee. The income from warehousing is derived from house property by the exercise of the property rights, properly so-called, and the said character is not changed and the income does not become 'income from business' merely because the hiring is inclusive of certain services, such as security, labour for loading and unloading, lighting, cleaning etc., which are incidental to the use and the occupation of the premises. In warehousing the dominant object is exploitation of house property and the other services that go with it are only incidental. In it no complex commercial activity is involved. 32. There are two decisions of the Tribunal (SMC) in which divergent views were taken with regard to the question whether income from warehousing activity should be assessed as 'income from house property' or as 'business income', In the case of Vora Warehousing (P) Ltd. vs. Asstt. CIT it was held that rent realized from warehousing activity....
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....ee advances and that the interest-free advances received from other parties where available for making interest-free non-business advances aggregating to Rs. 20,55,153/-. The CIT(A) has rejected this plea on the ground that the assessee had failed to substantiate it with a cash flow statement. In our considered opinion the assessee needs to be given one more opportunity to substantiate its claim and it will be in the interest of natural justice to do so. We, therefore, remit this issue back to the file of the CIT(A) with a direction that he should re-examine the claim and pass a fresh order on this point, after giving adequate opportunity of being heard to the assessee. The ground No. 6 is decided accordingly. Grounds Nos. 7 and 8 "The learned CIT(A) erred in confirming disallowance of Rs. 13,51,000/- out of service charges under s. 40A(2)(b)." "The learned CIT(A) erred in enhancing disallowance out of service charges under s. 40A(2)(b) by a sum of Rs. 9,76,592/-." 37. During the previous , year relevant to asst. yr. 2001-02 the assessee had collected Rs. 42,93,005/- for various services provided to its clients such as loading/unloading, handling, security, ....
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....his method is the cost incurred by the provider of the services in a transaction between related enterprises. This cost is increased by the gross profit mark up in the light of the services rendered and the market conditions, etc. The sum gives the arm's length price and we do not see any infirmity in this approach. 41. We have considered the rival submissions in the light of material on record. We are of the opinion that, on the facts of the case, the order of the CIT(A) cannot be found fault with. It was felt by the Government that sometimes the taxpayers artificially reduced their tax liability by diverting part of the business profit to relatives and associate concerns in the form of excessive payments for goods and services etc. In order to stop such evasion, s. 40A(2) was inserted by the Finance Act, 1968 with effect from 1st April, 1968. 42. The provisions of s. 40A have been declared to be of overriding nature because of the non obstante clause with which the s. 40A(1) starts. Under sub-s. (2) of the new s. 40A, the expenditure incurred in a business or profession, for which the payment has been made or is to be made to the assessee's relatives or associate co....