2018 (3) TMI 1312 - AT - Income Tax

Treatment to the warehouse rent - income from business OR house property income - Held that - Respectfully following the decision of the Hon ble Supreme Court in the case of Chennai Properties 2015 (5) TMI 46 - SUPREME COURT , we hold that the ld CIT-A had rightly directed the ld AO to treat the warehouse rentals as income from business and consequentially allow the expenditure claimed in the return as business expenditure. Accordingly, the Ground No.1 raised by the revenue is dismissed. Disallowance of commission paid to related parties by invoking provisions of section 40A(2) - Held that - The assessee had made payment of commission at 4% on sales made to both related as well as unrelated parties. Hence the percentage of commission at 4% is determined to be at Arm s Length. Hence the same cannot be construed as excessive or unreasonable within the meaning of section 40A(2) of the Act. There is no evidence to prove that the impugned transaction of payment of commission was prompted by consideration of tax avoidance. On the contrary, the evidences suggest that the payee had suffered taxes on the said commission income at maximum marginal rate and had also derived commission income of ₹ 16.12 crores which admittedly includes commission payments made by the assessee herein. CIT-A had rightly appreciated these facts and contentions of the assessee and had rightly deleted the disallowance and we find no infirmity in the said order of the ld CITA in this regard. Accordingly, the Ground No. 2 raised by the revenue is dismissed Grant depreciation at 15% on Electrical Installations - Held that - CIT-A had given a categorical finding that the electrical installations were integral part of plant and machinery installed at the factory and that the electrical installations inter alia included items such as transformers, electrical panels, HT wirings etc which were necessary for operating plant and machineries installed at the factory. He further held that without the aid and use of supporting electrical installations, the assesee s factory could not have become operational. These findings are not controverted by the revenue before us. Hence we do not find any infirmity in the order of the ld CITA in this regard. Accordingly, the Ground No. 3 raised by the revenue is dismissed.

Summary

Issues Involved:
1. Treatment of warehouse rent as house property income instead of business income.
2. Disallowance of payment of service commission to related parties under section 40A(2) of the IT Act, 1961.
3. Depreciation rate on electrical installations.

Detailed Analysis:

1. Treatment of Warehouse Rent as House Property Income Instead of Business Income:
The primary issue was whether the warehouse rent should be treated as income from business or house property. The assessee, engaged in manufacturing and trading iron or steel and letting out a warehouse, claimed the rent as business income. The AO treated it as house property income, relying on Supreme Court decisions in S.G. Mercantile Corporation and Shambhu Investment. The assessee argued that the warehouse was constructed with significant investment and infrastructure to serve multinational companies, thus constituting a business activity. The CIT(A) agreed with the assessee, citing the Supreme Court decision in Chennai Properties & Investments Ltd, which emphasized the main object in the Memorandum of Association. The Tribunal upheld the CIT(A)'s decision, noting the organized and commercial nature of the warehouse operation and the principle of consistency, as the revenue had accepted this treatment in previous years.

2. Disallowance of Payment of Service Commission to Related Parties:
The AO disallowed a portion of the commission paid to related parties under section 40A(2), suspecting it was meant to reduce taxable income. The assessee explained that the commission was paid to R.S. Ispat Ltd for marketing and sales promotion services, which was necessary due to the company's inception stage. The CIT(A) found that the AO had accepted the commission for sales to unrelated parties, thus confirming the genuineness of the agreement and services rendered. The Tribunal upheld the CIT(A)'s decision, noting that the commission rate was consistent for related and unrelated parties and that R.S. Ispat Ltd had reported the commission income in its returns, thereby negating any tax avoidance motive.

3. Depreciation Rate on Electrical Installations:
The AO reduced the depreciation rate on electrical installations from 15% to 10%, treating them as office equipment. The assessee argued that these installations were integral to the factory's operations. The CIT(A) agreed, noting that the installations included transformers, electrical panels, and HT wirings essential for operating the factory's machinery. The Tribunal upheld this view, emphasizing that the installations were necessary for the factory's operation and had been consistently treated as part of plant and machinery in previous years.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all issues. The warehouse rent was rightly treated as business income, the commission payments to related parties were justified, and the higher depreciation rate on electrical installations was appropriate. The judgment emphasized the importance of the true nature of activities, consistency in tax treatment, and the necessity of substantiating claims with evidence.