Rent from commercial property taxable as business income not house property

Rent from commercial property taxable as business income not house property-ITAT

INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT

ITA No: 337/Rjt/2013 & C.O. No. 3/Rjt/14 Assessment Year: 2009-10

ITA Nos: 98 & 99/Rjt/2015 Assessment Years: 2010-11 & 2011-12

Parties: Income tax Officer vs. M/s Ultravision Associates

Date of Order: 09/03/2016

Rent from commercial property taxable as business income

ORDER

PER ANIL CHATURVEDI, ACCOUNTANT MEMBER

These appeals of Revenue and cross appeals of assessee and Cross Objection of Assessee are against the order of CIT(A)-XVI, Ahmedabad, dated July 15th, 2013 for A.Y. 2009-10, 08.01.2015 for A.Y. 2010-11 & 06.01.2015 for A.Y. 2011-12.

2. Before us, at the outset, ld. A.R. submitted that though the appeals pertain to different assessment years, but most of the issues are identical except for the amounts and assessment years and therefore the submission made by him on those issues would be applicable to all the assessment years. Ld. D.R. did not object to the aforesaid submission of ld. A.R. We therefore, for the sake of convenience, proceed to dispose of all the appeals by a common order and proceed with the facts for A.Y. 2009-10.

3. The relevant facts as culled out from the material on record are as under.

4. Assessee is a partnership firm which is stated to be having income from rent. It filed its return of income for A.Y. 2009-10 on 29.07.2009 declaring total income of Rs.35,620/-. The case was selected for scrutiny and thereafter the assessment was framed u/s.143(3) vide order dated 19.12.2011 and the total income was determined at Rs.11,90,100/-. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who vide order dated 15.07.2013 (in Appeal No. CIT(A) – XVI/ITO/Wd.2/SNR/561/11-12) granted partial relief to assessee. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us and assessee has filed C.O. The grounds raised by Revenue in ITA No.337/Rjt/2013 reads as under:

“(i) The CIT(A) has erred in law and facts in not considering the condition of provision of section 22, and deleted the addition of Rs.8,92,173/- on account of rent income is to be taxed under the head “Income from House Property”, treating the income, earned on account letting to be taxed as income from business.

(ii) The CIT(A) has erred in law and facts in restricted the addition of Rs.2,97,930/- on account of unaccounted investment u/s.69 of Act to ½ without any cogent reason.”

4.1 On the other hand, the grounds raised by assessee in C.O. No.3/Rjt/14 reads as under: “1. The Learned Commissioner of Income-tax (Appeals)-XVI, Ahmedabad has erred in confirming addition of Rs.1,48,965/- being 50% of Rs.2,97,930/- made by I.T.O. Ward-2, by way of treating labour expenses as unaccounted investment u/s69 of the Income-Tax Act, 1961.

We first take up Revenue’s appeal in in ITA No.337/Rjt/2013 (A.Y.2009-10)

5. First ground is with respect to treating the income from letting as business income.

5.1 During the course of assessment proceedings, A.O. noticed that assessee had received Rs.14lacs as rent from the letting out of property that was let out by it and the income from which was considered as “business income”. A.O. was of the view that the income from rent has to be taxed as “income from house property” u/s.22 of the Act. He thereafter proceeded to tax the income as house property income and after granting statutory deduction u/s.24 of the Act and other deductions determined the income of Rs.8,92,173/- as income from house property. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A), who vide order dated 15th July, 2013, decided the issue in favour of assessee by holding as under:

“3.2 I have carefully considered the facts of the case in the light of submissions made by the appellant and the arguments taken by the assessing officer. It is the case of the appellant that as the impugned property is a commercial property, income of same deserves to be taxed as business income. In support of its contentions that the impugned property is a commercial property, the appellant has filed , a copy of telephone bill issued by BSNL showing that the customer type as ‘business’, a copy of electricity bill issued by Gujarat Electricity Board indicating the terrif rate applied for the impugned property as that of an educational institute and hot residential, a copy of property tax / Nagar Palika Tax Bill issued by Surendranagar Municipal Authorities indicating that the tax applied is that for commercial property as against residential property, a copy of construction plan approved by Surendranagar Municipal Authority indicating that the impugned property was passed as a school building. The appellant has argued that the main objective of the partnership firm incorporated on 4-1-2008 was to carry out ‘land , building, farm house, club resort, health club construction to give on rent, to take on rent, lease agreement and to do educational activities to run the classes and trading and manufacturing. It has been argued that to undertake educational activity is one of main objective of the firm and that in the instant case after creating necessary set up for running an educational institute, the property was given on rent to another educational trust. Thus, giving property on rent to carry out education activity is incidental to the main object of the firm. Asserting that facts of judicial decisions relied upon by the A O are distinguished from appellants facts, the appellant has placed reliance upon decision of Hon’ble Madras High Court in the case of CIT vs B Nagireddy 147 ITR 337 and of Hon’ble A P High Court in the case of CIT vs Ramaiya Krishnamurty 159 !TR 929.

3.3 On careful consideration of the facts of the case, it is revealed that the main issue is regarding the taxation of amounts of monies received by the appellant, on account of letting out of its premises as a business income or as income from house property. The view taken by the A O is that the same is to be taxed as income from house property. The solitary argument putforth by the Ld A O is that the same is to be done as there is a separate head of income for taxation of monies received from letting out of the property viz income from house property. Contrary to the view taken by the Id A O, the appellant has disclosed the said amount of monies received on letting out of its property as business income. The appellant is of the view that the property under consideration is a commercial property; It has been argued that appellant is engaged in the business of creating properties and thereafter letting them out as well as running educational institute. It has been submitted that in the instant case, a commercial property was created and since, on acquisition of the property, the appellant was not immediately in a position to start its business, it chose to let out the same to M/s Trimurti Education Trust, who are also incidentally in same line of business i.e. of imparting education. The primary objective was to gainfully utilise the property upon its creation. The appellant has argued that it is not a case where its own business had closed down and the business assets were leased out. On the controversy at hand, it is seen that in the case of Universal Plast Ltd 237 ITR 454 (S.C.), Hon’ble Apex Court have held that no precise test can be laid down to ascertain whether income, referred by whatever nomenclature, receipt from letting out of asset would fall under the head income from business / profession and that it is always a mix question of law and facts and has to be determined from the point of view of the businessmen of that business. Thus, it has been held that if only a few of the business assets are let out temporarily while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets, otherwise then employing them for his own use for making profit from that business. In the recently decided case of Scientific Instrument Co Ltd vs CIT 14 Taxman.com 157 (2011) Hon’ble Allahabad High Court, relying upon the decision of Hon’ble Gujarat High Ciourt in the case of CIT vs New India Industries Ltd have held that the income earned from the letting out of commercial property was to be taxed as business income and not as income from house property, -the relevant portion of the said judgement are as under :-

“……….We need not discuss all the judgments relied upon by the learned counsel for the department, as the principle of income from property is an income of profit and gain of business, or profit and gain from the house property have been clearly laid down by the Supreme Court. The test laid down by the Supreme Court in Universal Plast Ltd.’s case (Supra) case have been followed, in almost all the subsequent judgments. We may however refer to judgement in Mangla Homes (P.) Ltd.’s case (supra).

10. In Mangla Homes (P.) Ltd.’s case (supra), the appellant – a private limited company was incorporated with the object of dealing in properties. The main Object of the company, as contained in the memorandum of association, was to carry on business of dealing and investment in properties, flats ,warehouses, shops, commercial and residential houses, and the ancillary object was to carry on business of leasing, hire-purchase, renting, selling, reselling or otherwise dispose of all forms of movable or immovable properties and assets including buildings, godowns, warehouses and real estate of any kind. The assessee purchased flats for trading purposes, at the cost of Rs. 4 crores. At the time of purchase, according to the assessee, it was expected that the value of the flats would go up, after completion of repairs. The flats could not be sold because of recession in the market, and, hence, they were let out on licence basis, for temporary periods, for earning monthly rental income, as licence fee. The Bombay High Court distinguished the judgment of the Supreme Court in S.G. Mercantile Corpn. (P.) Ltd v. CIT [1972] 83 ITR 700 (SC) and Shri Lakshmi Silk Mills Ltd.’s case (supra), and held that in the facts of the case, the authorities below did not commit any error in the finding that the rental income could not be treated as ‘income from business’ and should be treated as ‘income from house property’.

11. In New India Industries Ltd.’s case (supra) [(1993) 201 ITR 208 (Gujarat)], the Gujarat High Court had laid down nine tests to decide as to under which head of income, the ‘rental income’ would fall. The Gujarat High Court, held that the assessee never wanted to exploit the asset as a commercial asset for any commercial gain. It acted like a prudent owner of the property.

On closure of the business, instead of permitting the building to lie idle, it leased out the same with a view to earning rental income and, thus, the income was from ‘income from house property’. The tests laid down by the Gujarat High, to decide such matter, are quoted hereunder:-

“From the observations made by the Supreme Court and various High Courts in diverse fact-situations, dealing with question as to under which head of income, the “rental income” would fall, in our opinion, the following principles emerges :

(i)No general principle could be laid down which is applicable to all cases and each case has to be decided on its own facts and circumstances.

(ii)Whether an income falls under one head or another has to be decided according to the common notions of a practical and reasonable man, for the Act does not provide any guidance in the matter.

(iii) In each case, what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two in a narrow one hand has to depend on certain facts peculiar to each cases. Pure and simple. Commercial, asset like machinery, plant, tools, industrial sheds on godowns having high business potential stand on a different fooling from assets like land or building.

(iv) If an assessee derived income from a commercial assets which is capable of being use as a commercial asset, then it is income from his business. Whether he uses that commercial asset himself for lets it out to somebody else to be used. The asset would not cease to be commercial asset simply because temporarily it was put out of use or it was let out to another person for his use.

(v) So long as the Commercial asset is capable of being exploited as such, its income is business income irrespective of the manner in which the asset is exploited by the owner of the business. He entitled to exploit it to his best advantage and be may do so either by using it himself personally or by letting it out to somebody else.

(vi) If the commercial asset is not capable of being used as such or as a commercial asset, then its being let out to other does not result in the accrual of business income.

(vii) When the assessee has stopped doing business altogether and when the asset ceases to have the character of business or commercial asset’s, it becomes a capital asset. Qua such asset, the assessee is not carrying on any business. As the owner of the asset, he may exploit such asset but, in such circumstances, income which he receives is no longer business income but income from property owned by him and, hence, “income from house property”.

(viii) When the asset is in the nature of land or building capable of being used for any other purpose and when the assessee ceases to use it is as a commercial asset either himself or even through others, the income derived by him by renting out the same would made appropriately fall under the head “Income from house property” as, like any other owner of property, he gets income from that property as owner. In such cases, it is not the factotum of his business or commercial activity which brings income to him but it is his investment in property or his ownership of property which brings income to him. In such cases, leasing of property itself is the activity. It is leased with a view to produce income, a transaction quite apart from the ordinary business activities of the assessee.

(ix) In the descending whether an assessee dealt with its property as owner or as a businessman or as a prudent man of commerce. One must see not the form which it gave to the transaction but to the substance of the matter. In which that property is used, ownership of property and leasing it out may be done as a part of business or it may be done as a landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. If the dominant object of leasing out is incidental to and for the purpose of the assessee’s business, the income would be business income. What has to be discovered is whether the property is subservient to the main business of the assessee.”

12. In the present case, we find that the authorities did not apply the principle laid down in Universal Plast Ltd.’s case (supra) in deciding the issue. Though the Income Tax Appellate Tribunal relied upon Tutocorin Alkali Chemicals & Fertilizers Ltd v. CIT [1997] 227 ITR 172 / 93 Taxman 502 (SC), Sultan Bros. (P.) Ltd.’s case (supra), Commercial Properties Ltd. v. CIT AIR 1928 Cat. 456, East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC), CIT v. Punjab National Bank Ltd. [1983] 141 ITR 886/ 13 Taxman 32 (Delhi)], CIT v. Indian Metal and Metallurgical Corpn. [1995] 215 ITR 424/[1996] 84 Taxman 481 (Mad.), CIT v. Arvindkumar Odhavij [1995] 213 ITR 551 (Bom.), and other cases, it did not apply the principle laid down by the Supreme Court in Universal Plast Ltd.’s case (supra) to the facts of the present case.

13. If we apply the tests laid down by the Supreme Court in Universal Plast Ltd.’s case (supra), to the facts of the present case, we find that all the assets of the business were not rented out by the assessee-company. It was doing the main business of manufactures, imports, purchases and dealing In scientific apparatus, chemicals, chemical products, articles of glass, metal, wood, paper etc., more or /ess connected with science, as given in clause 3(a) of the Memorandum of Association. Out of the three properties in Mumbai, the property in dispute was being used for its Regional Office. In the interest of the company, it decided to let out one of its properties, to the City Bank, by way of exploitation of business assets, for making profit. The assets were let out, while carrying out other business activities. There was nothing on record to show that the assessee had sold away the properties or abandoned its business activities. In the circumstances, in order to exploit business assets, as a prudent business decision, the assessee took interest free loan from the City Bank, rented out, one of its properties to it, and shifted its Regional Office. In this commercial venture, the assessee received a higher income regularly from its commercial assets….”.

3.4 A perusal of the above judgement indicates that the Hon’ble Allahabad High Court has followed the ratios laid down by Apex Court as well as Hon’ble jurisdictional High Court(as in the case of CIT vs New India Industries Ltd 201 ITR 208 (Guj). Analysing the facts of present case with the test laid down by Hon’ble Gujarat High Court supra, it is seen that in the present case, evidence on record indicate that the property let out by the appellant is a commercial property/commercial asset. There is also no dispute that the property under consideration, is capable of being used only as a commercial asset as no other kind of usage like residential etc can be made of such property. In the judicial citation cited above, it has been laid down that in such situations the property under consideration would not loose its character of being a “commercial property” only because it was let out. Thus, it has been laid down that income earned from letting out of such commercial asset would squarely fall in the domain of business income.

3.5 In this regard, it is further seen that in the case of Vyline Glass Works Ltd quoted at 20Taxman.com 32, Hon’ble ITAT, Chennai took a similar view holding

“…..The fact coming out of the above situation is that the nature and character of the properties exploited by the assessee company to carry on its business remained the same even after the properties were let out to M/s. Borosil Glass Works Ltd. Before and after the lease agreement, the nature and character of the assets remained the same. The assets were retaining the character of productive/commercial/industrial assets since their inception. The assets included factory buildings, land appurtenant thereto alongwith functional plant and machineries. Therefore, there cannot be any case that the nature of the assets has been changed. The commercial assets exploited by the assessee for the purpose of its business remained the same and its character has not been converted into a house property or non commercial asset. Therefore, whether the business of manufacturing glass products is carried on by the assessee company itself or by M/s. Borosil Glass Works Ltd., the lessee, the assets including land, buildings, plant and machineries always remained as properties in the nature of commercial establishments occupied for the purpose of carrying on business. In other words, it was always economic/productive asset. Section 2(ea) excludes such assets from the definition of assets operative from first day of April, 1993. Any property in the nature of commercial establishments or complexes is excluded from the definition of assets liable for wealth tax. That is specifically mentioned as item(5) of section 2(ea)(i). Item(3) thereof provides exemption if the assessee occupies the house for the purpose of any business or profession carried on by him. The exemption provided in item(5) goes beyond that. It also provides exemption to any property in the nature of commercial establishments or complexes, where it is not necessary that the business should be carried on by the owner itself. It could be seen that the difference in the wordings of items(3) and (5) provides that the emphasis is on the nature of the asset and not on who is carrying on the business Therefore, what is to be seen is that even though the assessee is receiving lease rent from the lessee, the property remained a commercial asset exploited for the purpose of carrying on manufacturing business…..”

3.6 Similar view has been taken by Hon’ble ITAT, Cuttack in the case of Narayan Market complex vs ITO 21 Taxmann.com 325 holding as under :-

“I have heard the rival submissions of both the parties and perused the orders of the authorities below. Considering the facts and circumstances of the case, I find that the case laws cited at the Bar and considered by the Assessing Officer and the learned CIT(A) rather leans in favour of the assessee on the basis of facts and circumstances of the case as have been brought on record. It appears the endeavor of the taxing authorities to refuse the assessee’s claim of rendering income from business activities by holding the annual letting out value subject to deduction under the provisions of Section 24(b). The Assessing Officer has rather misdirected himself to hold the case laws cited by him leaning in favour of the Department when actually the Department’s appeal had been dismissed by the Hon’ble Apex Court on the finding as was that the partners pooled their resources for carrying on an adventure in the nature of trade and subjected to hiring out the complex. This particular venture or concern was considered taxable as business income was held by the Hon’ble Apex Court in the case of Sambhu Investment (P.) (supra). Here again the Hon’ble Apex Court distinguished the method of finding out the intention of the income whether being taxed as income from house property or commercial activities was misconstrued by the learned CIT(A) on extraneous circumstances that the assessee itself could not have utilised the property for its own commercial venture, when the manufacturing unit had been shifted to Mancheswar Industrial Estate area. I am of the considered view that this observation of the learned CIT(A) rather leans in favour of the assessee’s claim that the bank took cognizance of the commercial viability of this project to grant loan which partners pooled their resources to repay the loan and let out the property to the commercial organizations for earning income against which incidental expenses incurred for carrying out such activities were denied. The depreciation and interest therefore becomes an integral part for earning the income cannot be lost sight off when there is specific provision for claiming the same from the house property. It is not the case of the assesses to claim higher depreciation that what is allowable by law. It is also not the claim of the assessee to make profit in the form of income from business by earning more interest than what has been paid to the bank. The assessee’s contention therefore becomes clear insofar as it rendered its income, residual to receipts from the lessees on account of electricity, water charges etc., which are the business activities from the assesses to charge for their portion and incur the remaining for itself along with the maintenance and providing security was in the nature of carrying out commercial activities and not for the purpose of letting it out as house property. On perusal of the assessment order and the appellate order, I am of the considered view that once the adoption for taxing the same as income from house property was made the various facts and circumstances leading to the intention of exploiting the property as commercial activities has been given a go by both the authorities. The learned, DR’s emphasis on obtaining the lease agreement would be of no avail to establish the intention of earning of income and not on the basis of payment of lease rent as they themselves are business entities. It is not the case of the Assessing Officer that the annual letting value will differ for the purpose of determining the income from house property as provided under law. For the reasons discussed above, the impugned orders of the authorities below are set aside with a direction to the Assessing Officer to accept the return of the assessee holding the same as income from business and not income from house property……”

3.7 Respectfully following the judicial citations discussed above, it is concluded that as the property under consideration let out by the appellant is a commercial property, and which can only be exploited commercially, the income earned therefrom, on account of letting, deserves to be taxed as income from business and not as income from house property. Accordingly, the action of the ld A O in taxing the income received by the appellant as income from house property cannot be sustained. Consequently, the addition made by the Id A O of Rs. 8,92,173/- is deleted and the ground of appeal No. 1. 1.1, 2 & 2.1 are accordingly allowed.”

6. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us.

6.1 Before us, ld. D.R. took us through the observations of A.O. as noted in the assessment order and supported the order of A.O. Ld. A.R. on the other hand, reiterated the submissions made before A.O. and ld. CIT(A) and supported the order of ld. CIT(A).

7. We have heard the rival submissions and perused the material on record. The issue in the present ground is about the head of taxability of the rental income received by the assessee. As per the assessee, the income is to be taxed as business income and on the other hand, it is Revenue’s contention that the income has to be taxed as “income from house property”.

7.1 We find that ld. CIT(A), while deciding the issue in favour of assessee and after considering the decision of Hon’ble Allahabad High Court cited therein and after following the ratio laid down by Hon’ble Gujarat High Court in the case of CIT vs. New India Industries Ltd. [1993] 201 ITR 208 (Guj) has given a finding that the property let out by assessee was a commercial asset which could only be exploited commercially and therefore the income earned was treated as business income. We also find that ld. CIT(A) while deciding the issue in assessee’s favour had also relied on various decisions cited in his order. In the present case, we find that one of the main object of the assessee was to run classes and to do educational activities and the property which has been let out by the assessee was a commercial property and was also used by the person to whom it was leased, for the purpose of educational activities. We further find that Hon’ble Gujarat High Court in the case of New India Industries (supra) and after relying on various decisions has laid down various tests to determine the head of income under which the rental income is to be assessed. The tests inter alia lays down the principle that when an assessee derives income from a commercial asset which is capable of being used as a commercial asset and the asset would not cease to be commercial asset simply because temporarily it was not put to use or was let out to other person for his use, the income derived would be business income irrespective of the manner in which it is exploited by the owner of business. In the present case the finding of ld. CIT(A) that asset is a commercial asset has not been controverted by Revenue. In such a situation, we do not find any infirmity in the order of ld. CIT(A) and for which we also find support by the recent decision of Hon’ble Calcutta High Court in the case of Shyam Burlap Co. Ltd. vs. CIT reported in (2016) 380 ITR 151 (Cal), wherein the Hon’ble High Court after taking into consideration that when the object in the memorandum permitted the assessee to carry on business in letting out properties and when 85% of the income was by way of deriving rent and lease, the income from letting was considered as business income of the assessee. In view of the aforesaid facts and relying on the aforesaid decisions of High Courts, we find no reason to interfere with the order of ld. CIT(A) and thus the ground of Revenue is dismissed.

8. Ground no.2 is with respect to restricting the addition on account of unaccounted investment u/s.69 of the Act.

8.1 On verification of the construction account, A.O. noticed that assessee had incurred various expenses aggregating to Rs.9,02,823/- on account of cement, aluminum section, bricks etc. (the table of expenses is reproduced at page 12 of the assessment order). He also noticed that assessee had not incurred any labour expenses though the materials purchased were stated to have consumed and debited to construction account and depreciation was also claimed by the assessee. The assessee’s explanation that since the labour charges were not finalized, the amount of labour expenses were not debited, was not found acceptable to A.O. He was of the view that around 33% of expenses should constitute labour expenses and in the absence of proof of incurring of any expenses towards labour by assessee, he estimated Rs.2,97,930/- (being 33% of Rs.9,02,823/-) as unrecorded investment and made addition u/s.69 of the Act. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who granted partial relief to assessee by holding as under:

“4.2 I have carefully considered the facts of the case in the light of submissions made by the appellant and the arguments taken by the assessing officer. The appellant has primarily reiterated the same arguments taken before the A O. It has also been argued that the addition is made upon conjectures and that section 69 do not permit any addition on conjectures. The argument of the appellant that labour expenses are debited upon finalisation of labour charges to be paid to its labours. To the extent, the argument of appellant appears convincing. The fact of the matter however remains that the appellant either during the assessment proceedings or even during current appellate proceedings has failed to give even an iota of evidence so as to indicate that the labour expenses were paid in any subsequent financial year. This aspect is important because nearly four years have lapsed since the labour services were availed by the appellant. The argument if any that the said expenses are pending finalisation till date is highly improbable and cannot be accepted. Thus, there are strong indications to establish that labour expenses were incurred by the appellant apparently by way of cash which have not been recorded in its books of accounts. It is however seen that the addition made by the ld A 0 estimating 33% of labour expenses vij a vi material consumed appears to be on a higher side. The ld A O has not given any verifiable basis for the veracity of his estimations. Consequently, it is held that ends of justice would be met if the addition made by the ld A O is reduced to half. Accordingly the addition made by the ld A O is confirmed to the extent of Rs.1,48,965/- and the balance is deleted. The grounds of appeal No. 3,3.1,3.2,3.3 & 3.4 are accordingly partly allowed.”

9. Aggrieved by the order of ld. CIT(A), Revenue and assessee are now in appeal before us.

9.1 Before us, ld. D.R. supported the order of A.O. On the other hand, ld. A.R. reiterated the submissions made before A.O. and ld. CIT(A) and further submitted that the addition has been made on presumption basis and that further, the labour expenses have been incurred in subsequent year and have also been paid by assessee. He also pointed to the copy of ledger accounts placed at page 12 and 13 of the paper book. He therefore submitted that no addition is called for when the amounts have been paid in subsequent years and the addition is purely on the basis of assumption.

10. We have heard the rival submissions and perused the material on record. In the present case, we find that A.O. had proceeded to disallow the expenses of labour on the basis of estimation and has not brought any material on record to demonstrate that the investment were not recorded in the books of account. On the other hand, before us, ld. A.R. has submitted that the expenses having been incurred in subsequent years and has also placed on record the copy of ledger account. The aforesaid statements of the assessee has not been controverted by the Revenue. In view of the aforesaid facts and more so, when the addition has been made on estimated basis and without bringing any material on record by Revenue to prove the incurring of expenses to towards labour by assessee, we are of the view that in the present case, no addition is called for. We thus direct the deletion of addition including that which is confirmed by the ld. CIT(A). In the result, this ground of Revenue is dismissed and ground of assessee in C.O. is allowed.

11. Thus, the appeal of Revenue is dismissed and C.O. of assessee is allowed.

Now, we take Assessee’s appeal for A.Y. 2010-11 in ITA No.98/Rjt/2015

12. Assessee filed its return of income for A.Y. 2010-11 on 15.07.2010 declaring total income at Nil. The case was selected for scrutiny and thereafter assessment was framed u/s. 143(3) of the Act on 22.03.2012 and the total income was determined at Rs.20,24,290/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 08.01.2015 (in Appeal No. CIT(A) -7/77/2013-14) granted partial relief to the assessee. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us and has raised the following grounds:-

“1. The learned Commissioner of Income Tax (Appeals)-7, Ahmedabad erred in holding that income of Rs.10,08,000/- should be assessed as income from house property instead of business income as claimed by the appellant.

2. The learned Commissioner of Income Tax (Appeals)-7, Ahmedabad erred in confirming addition of Rs.10,08,000/- made by the A.O. u/s 22 of the Act and thereby not allowing expenses incurred and debited in its profit and loss account by the appellant to earn business income.

3. The learned Commissioner of Income Tax (Appeals)-7, Ahmedabad erred in upholding addition of Rs.1,68,493/- made by the A.O. by way of labour expenses by failing to appreciate that no such expenditure was incurred by the appellant.”

13. The first two grounds being interconnected, considered together.

13.1 During course of assessment proceedings and on perusing the Profit & Loss Account, A.O. noticed that assessee had credited Rs.14,40,000/- as rental income from letting out of property which was considered as income to be as income from business. A.O. was of the view that the income from rent on letting out of property cannot be considered as business income but has to be taxed as income from house property and further no expenses can be claimed against the income. The assessee was therefore asked to show cause as to why the rent income not be considered as income from house property. The submissions of the assessee inter alia that the building from which it had received rent was not considered as investment but was considered as commercial assets and other submissions, were not found acceptable to the A.O. He, thereafter, treated the rental income of Rs.14,40,000/- as income from house property and after allowing statutory deduction u/s.24 of the Act, determined the net taxable income under the head of “house property” at Rs.10,08,000/-.

14. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who confirmed the addition made by A.O. by holding as under:

5.2 I have considered the assessment order and the submissions made by the appellant. The appellant is an owner of building. This building has been let out to trust. Therefore, the income is to be computed under the head “income from house property”. The appellant has relied upon various case-laws including CIT(A)’s order in its own case in the preceding year. The issue whether the income is to be taxed under the head ‘house property’ or ‘business income’ has been decided by the Hon’ble Calcutta High Court in the case of Shambhu Investment Pvt. Ltd. (2003) 129 Taxman 70. The Hon’ble Supreme Court has affirmed the order of Hon’ble Calcutta High Court and held as under:

“Hence, we hold that the prime object of the assessee under the said agreement was to let out the portion of the said property to various occupants by giving them additional right of using the furniture and fixtures and other common facilities for which rent was being paid month by month in addition to the security free advance covering the entire cost of the said immovable property.

In view of the facts and law discussed above we hold that the income derived from the said property is an income from property and should be assessed as such.”

5.2.1 It has been held in the cases of Tinsukia Development Corporation Ltd. Vs. CIT (Cal.) 120 ITR 466 and CIT Vs. Mithila Properties Publications & Contractor Enterprises P. Ltd. (Pat) 228 ITR 713 that “assessee is owner of building on leasehold land – rental income is income from house property even though letting out is an objective of company.” It has also been also held in the case of ACIT Vs. Raj Dadarkar & Associates (ITAT, Mum) 34 SOT 281 that “assessee was in possession and control of market area as a lessee and not as a licensee -lease was for a period exceeding 12 years – rental income received from sub-letting is “income from house property” and not business income.” 5.2.2 The ld. CIT(A) in his order has not considered the above decision. Therefore, differing from him, I hold that the income should be assessed as income from house property. The addition by the Assessing Officer is accordingly confirmed.

15. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us.

15.1 Before us, ld. A.R. reiterated the submissions made before the A.O and ld. CIT(A) and further submitted that one of the main object of the assessee firm was to run class and to do educational activity, for which, the firm has created necessary set up in its premises. It was further submitted that instead of carrying out the educational activity on its own, it had given property at rent to other education trust for running class and thus, the giving of property on rent for carrying out educational activity was incidental to the main object of the firm. He pointed to the copy of English translation of the partnership deed dated 04.01.2008 that was placed on record to demonstrate that the principal business of the firm was to construct, let out, take on rent, lease to carry on educational activities and conduct classes. He further submitted that on similar facts in A.Y. 2009-10, A.O. had considered the income from letting out of property as “income from house property”, however, ld. CIT(A) in the impugned year held the income to be from business. He pointed to the relevant findings of ld. CIT(A) in order passed by him for A.Y. 2009-10. He, therefore, submitted that since the facts of the case in the year are identical to that of A.Y. 2009-10 and in the absence of any change in facts, the income should be considered to be as “business income”. Ld. D.R., on the other hand, supported the order of A.O. and ld. CIT(A) .

16. We have heard the rival submissions and perused the material on record. The issue in the present case is the head under which the rental income is to be taxed i.e. whether it is to be considered as “business income” or as “income from house property”. It is an undisputed fact that the principal business of the firm is to construct, let out, take on rent, lease to carry on educational activities and conduct classes as stated in the partnership deed of the firm. It is also an undisputed fact that identical addition was made by the A.O. while finalizing the assessment for A.Y. 2009-10. Ld. CIT(A) while deciding the issue in A.Y. 2009-10 has noted that the property let out by the assessee was a commercial property/commercial asset. He further after placing reliance on the various decisions cited in the order including decision of Hon’ble Gujarat High Court in the case of CIT vs. New India Industries Ltd. [1993] 201 ITR 208 (Guj) and various decisions held the income to be from business and not from house property. We, while deciding the identical ground in Revenue’s appeal for A.Y. 2009-10, have hereinabove held that the income from rent is to be assessed as business income and not from house property and decided the issue in favour of assessee. Since, the facts of the case are similar and identical to that of A.Y. 2009-10, we therefore for similar reasons while deciding the ground in A.Y. 2009-10 decide the ground in favour of assessee. Thus, this ground of assessee is allowed.

17. Ground no.3 is with respect to upholding the addition of Rs.1,68,493/- on account of labour expenses.

17.1 During the course of assessment proceedings and perusing the “bandkam” (construction) account, A.O. noticed that assessee has incurred expenses aggregating to Rs.5,22,532/- for the material used for construction. He also noticed that though as per the construction account, all materials debited to construct house have been stated to have been consumed but assessee had debited labour expenses of only Rs.3,942/- for electric materials despite all the materials having been consumed. He was of the view that ratio of labour charges to material consumed is 1/3rd of the cost material consumed. The assessee was therefore, asked to show cause as to why the 1/3rd of the expenses not be treated as unaccounted expenses, for which, assessee, inter alia, submitted that all the items purchased were including installation etc. and there was no prescribed ratio of 1/3rd portion of the expenses to be towards labour charges.

The statement of assessee was not found acceptable to the A.O. A.O., thereafter, worked out labour expenses at Rs.1,68,493/- (being 33% of material consumed) and treated it as unexplained investment u/s.69 of the Act.

18. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who upheld the addition by holding as under:

“5.2 I have considered the assessment order and the submissions made by the appellant. The appellant has shown only Rs.3,942/- as labour expenses against the material expenses of Rs.5,22,532/-. The AO therefore estimated 1/3rd of material expenses as labour expenses and remaining unrecorded. The appellant has argued that, due to difference with the labour contractor, his bill was not passed and therefore not accounted. I do not agree with the appellant’s submission. As appellant was required to debit the labour expenses and payment of labour expenses must have been made on weekly or monthly basis. The addition made by the Assessing Officer is accordingly confirmed.”

19. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us.

19.1 Before us, ld. A.R. reiterated the submissions made before the A.O and ld. CIT(A) and further submitted that A.O. has proceeded to make the addition on estimated basis without bringing any material on record and further the percentage of labour charges as also an ad hoc estimation. He also submitted that similar addition was made by A.O. in A.Y. 2009-10. He further submitted that the expenses were paid in subsequent years and for which he pointed out the copy of the ledger account placed at page nos. 12 & 13 of the paper book. He, therefore, submitted that no addition was called for. Ld. D.R., on the other hand, supported the order of A.O. and ld. CIT(A) .

20. We have heard the rival submissions and perused the material on record. In the present case, we find that A.O. has proceeded to disallow the expenses of labour on estimation basis. He has not brought any material on record to demonstrate that the expenses were incurred by the assessee. Before us, ld. A.R. has submitted that the expenses having been incurred in subsequent years. The aforesaid statement of the assessee has not been controverted by the Revenue. In view of the aforesaid facts and more so, when the addition has been made on estimated basis and without bringing any material on record by Revenue to prove the incurring of expenses towards labour by assessee, we are of the view that in the present case, no addition is called for. We thus direct the deletion of addition. Thus, this ground of assessee is allowed.

21. In the result, the assessee’s appeal for A.Y.2010-11 is allowed.

At last, we take Assessee’s appeal for A.Y. 2011-12 in ITA No.99/Rjt/2015

22. Assessee has raised the following grounds:-

“1. The learned Commissioner of Income Tax (Appeals)-7, Ahmedabad erred in holding that income of Rs.12,60,000/- should be assessed as income from house property instead of business income as claimed by the appellant.

2. The learned Commissioner of Income Tax (Appeals)-7, Ahmedabad erred in confirming addition of Rs.12,60,000/- made by the A.O. u/s 22 of the Act and thereby not allowing expenses incurred and debited in its profit and loss account by the appellant to earn business income.

3. The learned Commissioner of Income Tax (Appeals)-7, Ahmedabad erred in upholding addition of Rs.8,854/- made by the A.O. by way of labour expenses by failing to appreciate that no such expenditure was incurred by the appellant.”

23. Before us, at the outset, both the parties submitted that grounds raised in the present appeal of assessee are identical to that of grounds raised in assessee’s appeal in A.Y. 2010-11 and the submission made by them while arguing the appeal for A.Y. 2010-11 are also applicable to the grounds raised in A.Y. 2011-12. In view of the aforesaid submissions made before us by both the parties, we for reasons as stated hereinabove while deciding the grounds of assessee’s appeal for A.Y.2011-12 and for similar reasons allow the grounds of assessee.

24. In the result, the appeal of the assessee is allowed.

25. In the result, Revenue’s appeal in ITA No.337/Rjt/13 is dismissed and Assessee’s C.O. No.3/Rjt/14 for A.Y. 2009-10 and ITA Nos. 98 & 99/Rjt/2015 for A.Y. 2010-11 & 2011-12 are allowed.

Order pronounced in Open Court on 09-03-2016

(Rajpal Yadav) Judicial Member (Anil Chaturvedi)  Accountant Member

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