TaxTMI 
TaxTMI 
2006 (8) TMI 286
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....; 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 Total lease rent received from Lipton India Ltd. 34,98,552 Total lease rent received from Hindustan Lever Ltd. 35,68,863 70,67,415 1/4 Repair 17,66,853....
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....hancement 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 gross receipts in respect of lease rent and warehousing charges at Rs. 70,67,415/- and Rs. 78,54,621/- respectively, as mentioned in the computation reproduced in para 2 above whereas according to the assessee these receipts were Rs. 18,19,567/- and 52,47,828/- respectively. In the report submitted by the AO vide letter 28th Feb., 2005 these receipts were shown after verificatio....
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....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 Industries Ltd. (1992) 106 CTR (Guj) 374 : (1993) 201 ITR 208 (Guj); (vii) Sultan Brothers (P) Ltd. vs. CIT (1964) 51 ITR 353 (SC); (viii) Vora Warehousing (P) Ltd. vs. Asstt. CIT (2001) 71 TTJ (Mumbai) 361: (1999) 70 ITD 518 (Mumbai). 10. Shri. Atul Pranay the learned Departmental Representative placed reliance on the decision of the CIT(A) and vehemently argued saying that his order needed to be upheld. His arguments are summarized below: * That the dictionary meaning of warehouse was 'a building where large quantities of goods are stored'.....
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....s 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 question whether the income from letting out an asset under different situations was to be assessed as 'business income' or as 'income from house property' in relation to the facts of the present case are discussed in the following paragraphs. 15. Shri Karia, the learned Authorised Representative, placed heavy reliance on the decision of the Bombay High Court in the case of CIT vs. National Storage (P) Ltd., which was affirmed by the Supreme Court in CIT vs. National Storage (P) Ltd. In this case the assessee company was promoted/floated by the members of the Indian Motion Picture Distributor's Association, because the Cinematograph Film Rules, 1948 promulgated by the Government requir....
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....lying 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, observed that what was to be seen was the primary object of the assessee while exploiting the property, that if the main intention was to let out the property or any portion thereof, the same must be considered as 'income from house property', and that if it was found that the main intention was' to exploit the immovable property by way of complex commercial activities in that event it must be held as business income. It is manifest from the lease agreement in the present case that the lease rent received from Lipton India and from Hindustan Lever was from bare letting of the property and that there was no complex commercial activity involved. Therefore, the decision of the Supreme Court in the case....
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....able 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 assessee had received income by way of rent from the Food Corporation of India which had taken the warehouses belonging to the assessee on lease. The Madras High Court, relying on the judgment of the Supreme Court in the case of East India Housing & Land Development Trust Ltd. vs. CIT held that the income received from the renting out of the warehouses to the Food Corporation of India was assessable as 'income from house property'. We find that the facts in the case of Indian Warehousing Industries Ltd. and those in the present case before us, are identical and therefore the grounds Nos. 1 to 4 are squarely covered against the assessee by this judgment of Madras High Court. 22. In the case of CIT vs. Chennai Propertie....
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....ons. (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 'Income from property', which is chargeable under s. 22, it has to be taxed under s. 22 only and cannot be taken to s. 28 on the ground that the business of the assessee was to exploit property and earn income or because the income was obtained by a trading concern in the course of its business. (xi) If the dominant object of leasing/letting out is only incidental to and for the purposes of the assessee's own business, the income would be business income. What has to be discovered is whether the letting of the property is subservient with the main business of the assessee or vice versa. (xii) Where house property is given on lease or licence basis for earning income therefrom, the true character of the income derived is 'income from house property' falling under s. 22. The sai....
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....y 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 take on lease the said property for the purpose of storing original teas and other materials and for carrying out the manufacturing activities including blending, processing, mixing and packing of teas and other items of food and beverages and for purposes consequential and incidental thereto on the terms given". 26. The lease agreement further says as under: * That the lease was for a period of 10 years w.e.f. 1st Nov., 2000 for the premises comprising of a factory building admeasuring 68,000 sq. ft. on a monthly rent of Rs. 4,45,000/-. * That the lessee will pay the said monthly rent at the rate of 4,45,000/- per month in advance on or before 21st day of each calendar month. * That the lessee (HLL) agreed to pay the assessee company (the lessor) Rs. 144.00 lacs on taking possession, Rs. 31.64 lacs at the beginning of the forth year and Rs. 39.65 lacs at the beginnin....
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....he 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 safely inferred with regard to the purported policy of different statutes. 28. The learned Authorised Representative submitted that the assessee was carrying on the business of warehousing since 1972 and that the leasing of the property to Lipton India and to Hindustan Lever was part of the assessee's business of warehousing. He stated that the assessee leased three units, called 'gala', from its vast warehousing complex to HLL and simultaneously obtained warehousing business from HLL. 29. He argued that 'warehousing' was not only mere exploitation of a house property but it involved complex commercial activities including storage of goods, security, issue of goods on the instructions of the clients, insurance of goods, etc. He placed heavy reliance on the decisions in the cases of National Storage (P) Ltd. and in the case of Shambhu Investments (P) Ltd. 30. It is seen from the lease agreement between the assessee company and Lipton India and with Hindustan Lever, as ....
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....sed 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 was assessable as 'business income'. And, in the case of V.N. Rukari & Sons vs. ITO in ITA No. 84/Pn/2001 for asst. yr. 1996-97 dt. 28th June, 2002, a contrary view was taken, saying that the income from warehousing activity were assessable as 'income from house property'. We find that the Madras High Court, in the case of CIT vs. Indian Warehousing Industries Ltd., on identical facts, held that the income from leasing of the warehouses was assessable as 'income from house property'. The Madras High Court, following the judgment of the Supreme Court in the case East India Housing & Land Development Trust Ltd. vs. CIT, held as under: "....... The source of the income being the warehouses, it matters little as to who the lessee for the time being is, whether it is the same. lessee continuing over a period of time or a shifting class of lessees who occupied the space for shorter periods and paid rental for such use," 33. In view of the facts and circumstances of the case ....
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....02 the assessee had collected Rs. 42,93,005/- for various services provided to its clients such as loading/unloading, handling, security, transport, etc. out of which Rs. 27,02,000/- was paid to M/s Shree Industrial Suppliers. Since M/s Shree Industrial Suppliers was a proprietary concern of Shri G.L. Navlakha, one of the director's of the assessee company, the AO invoked the provisions of s. 40A(2)(b) of the Act and disallowed 50 per cent of the said claim and made an addition of Rs. 13,51,000/-. The CIT(A) not only confirmed the addition of Rs. 13,51,000/- but also enhanced the disallowance by ,a further sum of Rs. 9,76,592/-. The order of the CIT(A) has been challenged by the assessee in the present appeal. 38. Shri Chetan Karia, the learned Authorised Representative, reiterated the arguments which were put forward on behalf of the assessee before the AO and the CIT(A). The submissions made by him are summarized below: * That the AO and the CIT(A) did not have any evidence to justify the action of disallowing a legitimate business expenditure. * That the AO and the CIT(A) did not have any comparable instance to justify the disallowance/enhancement. * That while provid....
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.... is to be made to the assessee's relatives or associate concerns, is liable to be disallowed in computing the profits of business or profession, to the extent the expenditure is considered to be excessive or unreasonable. 43. The crucial words in s. 40A(2)(a) are 'fair market value of the goods, services or facilities'. The reasonableness of any expenditure is to be judged having regard to the 'fair market value of the goods, services or facilities' for which the payment is made or the legitimate needs of the business or profession or the benefit derived by, or accruing to, the assessee from the expenditure. Such portion of the expenditure which, in the opinion of the AO, is excessive or unreasonable according to these criteria is to be disallowed in computing the profits of the business or profession. 44. In the case of CIT vs. Shatrunjay Diamonds (2003) 183 CTR (Bom) 86 : (2003) 261 ITR 258 (Bom) it was held by the Bombay High Court that in cases falling under s. 40A(2)(b) the burden of proof shifts to the assessee and that in such cases it is the duty of the assessee to prove and discharge its burden by leading proper evidence. 45. In the case of Keltron C....