2014 (4) TMI 1085 - AT - Income Tax

Validity of claim for deduction/exemption u/s. 54F as well as Long Term Capital Gain (LTCG) - denial of claim by treating the gain, returned by the assessee(s) as LTCG, as unexplained cash credit u/s 68. - Held that - both the purchase and sale transactions in shares have been executed off market, without in fact even fulfilling the reporting requirements in respect thereof under the regulatory framework.The Revenue s findings and decision are thus completely endorsed and upheld, confirming the additions The fringe services provided merely facilitate the assessee s principal business of making available office space to others for carrying on their businesses, at least in so far and the extent as could be carried out from within the confines of a cabin. It is stated that even tea, snacks are provided for a charge. Whether, however, the assesse has employed staff, incurring expenditure on their preparation, toward which we find no contention, much less material. All it has done, as it would appear, is make available peon for serving tea or even snacks, as bought-outs, as would be the case in any office setting. In fact, tea could be prepared in-house, or even through a vending machine, with little or no impact on the essential character of the services being provided. Why, a landlord may provide services of a lift, security services, even a caretaker to take care of the needs of the tenants of different flats residing in his building. That, however, would not though make it any less an arrangement to exploit the inherent rental capacity or potential of the property. Further, what is the furniture and fixture, also let, and if it is inseparable from the letting the building and, further, not a part of the cabin itself, remains to be clarified. The assessee has referred to a hotel, implying perhaps that while the said industry falls in the hospitality sector, it operates in the business sector. The argument is flawed, and the comparison ends before it begins. We have already noted absence of any economic activity of merit, which alone would enable the assessee s business being categorized under a particular sector or even be termed as an industry. While a hotel would fall in the hospitality sector, which business segment signifies the assessee s business it fails to convey. No separate charge for the electricity consumed or the equipment used, viz. TV and other equipments, installed therein, being part of the hospitability services being provided, is made in the case of a hotel. An analogy thereto, if at all, could be of a taxi operator or a photocopier, who for a charge make available, through user their equipments, furnishing the required service, viz. the transport service or the copying service, as the case may be. In fact, even in the case of hotel, where there is a continuing arrangement, as in the instant case, the charge for the space provided would only be a measure of the AV of the property. As such, where the contract/s for stay is to subsist for any significant length of time, the same under certain cases would assume the nature of rent, and not a license, even as clarified by the CBDT per its circular in the context of section 194I of the Act. We may, however, add that on the same basis and premises as the telephone and electricity charges, the assesse, at its option, is entitled to segregate the charges, if any, toward receipt for internet, fax, etc. collected by it, and claim expenditure there-against u/s. 37(1) or any other applicable provision. We say so as, as it appears, these may also be provided on a continuous, systematic basis, so as to constitute a separate source of income. Subject to this modification, we find little merit in the assessee s case and endorse the findings of the Revenue authorities. We decide accordingly, partly allowing the assessee s ground.

Issues Involved:
1. Validity of the assessee's claim for deduction/exemption u/s. 54F of the Income Tax Act, 1961 and Long Term Capital Gain (LTCG).
2. Validity of the assessments under section 143(3) r.w.s.153A of the Act.
3. Classification of income from the business center as business income or income from house property.

Detailed Analysis:

1. Validity of the Assessee's Claim for Deduction/Exemption u/s. 54F and LTCG:
The principal issue in these appeals is the validity of the assessee's claim for deduction/exemption u/s. 54F of the Income Tax Act, 1961, and Long Term Capital Gain (LTCG). The Revenue treated the gain, returned by the assessee as LTCG, as unexplained cash credit u/s 68 of the Act. The assessee purchased shares in Eltrol Ltd. at a low price and sold them at a significantly higher price, leading to a substantial gain. However, the Revenue's investigation revealed that the transactions were off-market and the purchasers of the shares could not be confirmed, leading to the conclusion that the transactions were bogus and a device to convert unaccounted money into accounted money.

The Tribunal noted that the onus to prove the credits under section 68 rests on the assessee, which includes proving the identity of the creditor, their capacity, and the genuineness of the transaction. The Tribunal found that the assessee failed to discharge this onus satisfactorily. The transactions were found to be circular and managed, with significant discrepancies in the books of account and the absence of credible evidence of genuine transactions. The Tribunal upheld the Revenue's findings, confirming the additions under section 68.

2. Validity of the Assessments under Section 143(3) r.w.s.153A of the Act:
The assessee challenged the assessments on the grounds that the search was invalid as the search warrant was in joint names, no incriminating materials were found during the search, and the warrant of authorization was in the name of the assessee's proprietary concern. The Tribunal found these arguments to be without merit. It held that the words 'incriminating material' do not find mention in section 153A, and the jurisdiction to frame assessment is based on the search itself. The Tribunal also noted that the warrant of authorization being in joint names or in the name of the proprietary concern does not invalidate the search. The Tribunal rejected the assessee's arguments, upholding the validity of the search and the assessments.

3. Classification of Income from the Business Center:
The assessee disclosed income from the business center as business income, while the Revenue treated it as income from house property. The Tribunal examined whether the assessee was carrying out any significant economic activity apart from letting out cabin space. It found that the assessee was providing only peripheral services to facilitate the letting of office space and not carrying out any significant business activity. The Tribunal held that the income should be classified as income from house property, with the assessee entitled to standard deductions. However, the Tribunal allowed the assessee to segregate charges for services like internet and fax, and claim expenditure against those receipts under section 37(1) or other applicable provisions.

Conclusion:
The Tribunal dismissed the assessee's appeals for AY 2004-05 and partly allowed the appeals for other years for statistical purposes. The Tribunal upheld the Revenue's findings on the genuineness of the transactions, the validity of the search and assessments, and the classification of income from the business center.

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