2016 (9) TMI 1255 - AT - Income Tax

Lease rental - nature of business - assessee in business of warehousing, cold storage and refrigeration - income from house property OR business income - Held that - The main objects of the assessee company is to carry on the business of warehousing, cold storage and refrigeration, to provide facilities and godowns for proper and safe storing of valuable agricultural and horticultural produce and to provide godowns and warehousing facilities for goods of all description of agricultural and allied products. Similarly, the other objects of the assessee company also provide to let on lease or hire the whole or any part of the real and personal property of the assessee company. We, therefore, hold that the lease income received by the assessee on account of let out of the warehouses/godowns as profits and gains from business or profession . See M/s. Rayala Corporation Pvt. Ltd. Versus Assistant Commissioner of Income Tax 2016 (8) TMI 522 - SUPREME COURT . Reopening of assessment - Held that - Since all material facts were already there on record and no tangible material was available before the AO, therefore we hold that the reassessment proceedings initiated by the AO are bad in law. Disallowing the service charges made to Shri Industrial Services by invoking the provision of section 40A(2)(b) - Held that - Since the Director of the assessee company is also the proprietor of Shri Industrial Suppliers and he is the key person for both the concerns, therefore, diversion of income of the assessee company to the proprietary concern of the Director is clearly visible and therefore the same in our opinion comes within the purview of section 40A(2)(b) of the I.T. Act. We therefore hold that the AO was justified in disallowing 50% of such payment as excess payment to the relatives as per provisions of section 40A(2)(b). However, the CIT(A) in our opinion is not justified in enhancing the same to ₹ 23,27,592/- in the instant case only on the ground that Mr. Navlakha has incurred meager expenditure of ₹ 3,40,371 out of the total receipt of ₹ 27,02,000/-. There may be so many reasons for incurring of less expenditure by the Director. Thus disallowance of 50% of the expenses as done by the AO in the instant case was the correct approach. We accordingly hold that disallowance of ₹ 13,51,000/- u/s.40A(2)(b) is justified under the facts and circumstances of the case. Ground raised by the assessee is accordingly partly allowed.

Summary

Issues Involved:
1. Classification of lease rental income as 'Income from House Property' vs. 'Business Income'.
2. Validity of reopening assessments under Section 147 in absence of tangible material.
3. Disallowance of service charges under Section 40A(2)(b).

Issue-wise Detailed Analysis:

1. Classification of Lease Rental Income:
The primary issue was whether the lease rental income should be classified as 'Income from House Property' or 'Business Income'. The assessee, a private limited company engaged in warehousing, argued that its lease rental income should be treated as business income. Historically, the warehousing receipts with lease charges were assessed as business income from 1973-74 to 1999-2000. However, the AO assessed the lease charges as property income for the impugned assessment years. The CIT(A) upheld this view, but the Tribunal had to reconsider the matter following directions from the Hon’ble Bombay High Court.

The Tribunal examined the nature of the assessee's business, the services provided, and the terms of the lease agreements. It was noted that the assessee was actively involved in warehousing activities, providing services like loading, unloading, security, and maintenance, which indicated a business activity rather than mere property letting. The Tribunal referred to the Supreme Court's decisions in the cases of M/s. Chennai Properties and M/s. Rayala Corporation Pvt. Ltd., which held that if letting out properties is the business of the assessee, the income should be treated as business income. Consequently, the Tribunal directed the AO to treat the lease rental income as 'business income'.

2. Validity of Reopening Assessments:
The second issue involved the validity of reopening assessments under Section 147 in the absence of tangible material. The AO had issued notices under Section 148 for several assessment years, arguing that the entire receipts, both warehousing and lease charges, should be assessed as property income. The assessee contended that all relevant details were already disclosed in the returns, and there was no new tangible material to justify the reopening.

The Tribunal found merit in the assessee's argument, citing the Supreme Court's decision in Kelvinator of India Ltd., which requires tangible material for reopening assessments. The Tribunal also referred to the Delhi High Court's decision in Orient Craft, which held that in the absence of new tangible material, reopening assessments is invalid. Consequently, the Tribunal held that the reassessment proceedings were bad in law and allowed the assessee's appeals on this issue.

3. Disallowance of Service Charges:
The final issue was the disallowance of service charges paid to Shri Industrial Suppliers, a proprietary concern of the assessee's director, under Section 40A(2)(b). The AO disallowed 50% of the service charges, arguing that the payments were excessive and unreasonable. The CIT(A) enhanced the disallowance, but the assessee contended that the reasonability should be based on the fair market value of the services, not the net profit of the recipient.

The Tribunal agreed with the AO's initial disallowance, noting that the director's proprietary concern incurred minimal expenses, indicating excessive payments. However, the Tribunal found the CIT(A)'s enhancement unjustified and held that the disallowance of 50% of the expenses was appropriate. Thus, the Tribunal partly allowed the assessee's appeal on this issue.

Conclusion:
The Tribunal concluded that the lease rental income should be treated as business income, the reassessment proceedings were invalid due to the lack of tangible material, and the disallowance of service charges should be limited to 50% as initially determined by the AO. The appeals were allowed in part, providing relief to the assessee on the primary issues.