2018 (8) TMI 911 - AT - Income Tax

Income received from undivided share in I.T.Park - income from business or house property - Held that - the assessee may not have constructed the I.T.Park he is a developer of the I.T.Park. From the Memorandum of Association of the assessee company he has found that the main object of the assessee company is to carry on all or any of the business as estate builders of residential, office or any other type of accommodation and for that purpose to buy, hold and sell or otherwise deal in lands, sites and other immovable and movable properties . In fact, the Assessing Officer himself has accepted the fact that the assessee owns number of properties and has leased them out. In the preceding assessment years the Assessing Officer has accepted the income derived from the leasing out of properties as Business Income of the assessee. Though principle of res judicata is not strictly applicable to income tax proceedings, each assessment year being an independent unit, however, rule of consistency cannot also be ignored. Once both the parties have accepted certain position relating to a particular issue over a period of time, the same cannot be disturbed in a subsequent year unless there are material differences in fact. - Taxable as business income - Decided in favor of assessee. Additions u/s 40A(2)(b) - excessive payment of salary to the directors - AO found that no such remuneration was paid in the earlier assessment years. He, therefore, called upon the assessee to justify the reasonableness of payment made to them. - Held that - The CIT(A) after considering the submissions of the assessee allowed assessee s claim on the reasoning that the leasing out of I.T Park and other properties were a business activity of the assessee and the Directors had undertaken all the activities themselves and the remuneration paid to them was commensurate with their inputs. He further observed that the disallowance at the hands of the company would amount to double taxation as Directors have offered the amount received by them as income in the return of income filed by them. - No disallowance - Decided against the revenue. Genuineness of payment made as commission towards providing services to the company - reasonable amount - Held that - It is also found that the assessee has duly deducted tax at source u/s. 194J of the Act on the payment made to the said party. Thus, from the material on record, it is established that the payment made by the assessee to the concerned party was against services actually rendered. That being the case, the disallowance made by the Assessing Officer cannot be sustained. - Decided against the revenue.

Summary

Issues Involved:
1. Classification of income from undivided share in I.T. Park as 'Income from Business' or 'Income from House Property'.
2. Deletion of addition made under Section 40A(2)(b) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Income from Undivided Share in I.T. Park:
The primary issue concerns whether the income received by the assessee from its undivided share in an I.T. Park should be classified as 'Income from Business' or 'Income from House Property'. The assessee, a company engaged in developing commercial properties, argued that the income should be treated as 'Business Income' since the I.T. Park was developed with the intention of leasing it out along with providing various supporting infrastructure facilities. The assessee highlighted that the development and maintenance of the I.T. Park is a complex commercial activity requiring continuous effort, and this activity is recognized as a business under Section 80 IA of the Income Tax Act.

The Assessing Officer (AO) disagreed, stating that the income should be assessed under 'Income from House Property' since the assessee did not construct the I.T. Park and was merely receiving lease rentals as the property owner. However, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's claim, noting that the assessee was involved in the development and maintenance of the I.T. Park and had been consistently treated as 'Business Income' in previous assessment years.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing the rule of consistency and the recognition of the I.T. Park as a business activity by the Central Board of Direct Taxes (CBDT). The ITAT noted that the department had accepted the income as 'Business Income' in previous years, and no material differences in facts were presented to justify a change in classification. The Tribunal also referenced CBDT Circular No. 16/2017, which clarifies that income from letting out premises in an industrial park should be treated as 'Profits and Gains of Business'.

2. Deletion of Addition Made Under Section 40A(2)(b) of the Income Tax Act:
The second issue pertains to the deletion of an addition made by the AO under Section 40A(2)(b) of the Income Tax Act, which disallows excessive or unreasonable payments to related parties. The AO had disallowed certain payments made by the assessee, including directors' remuneration and payments to M/s. Shirolkar & Associates, on the grounds that they were unreasonable and not justified.

The CIT(A) deleted the additions, reasoning that the leasing out of the I.T. Park and other properties constituted a business activity, and the directors' remuneration was commensurate with their inputs. The CIT(A) also noted that disallowing the remuneration would result in double taxation since the directors had already offered the amounts as income in their returns. Regarding the payment to M/s. Shirolkar & Associates, the CIT(A) found that the payment was for actual services rendered, supported by documentary evidence.

The ITAT upheld the CIT(A)'s decision, agreeing that the payments were reasonable and for actual services rendered. The Tribunal noted that the AO had not established the fair market value of the services before concluding that the payments were unreasonable. The ITAT also pointed out that the directors' remuneration had been taxed at the maximum rate, resulting in no significant revenue loss to the department.

Conclusion:
The ITAT dismissed the department's appeal, affirming the CIT(A)'s decision to classify the income from the I.T. Park as 'Business Income' and to delete the additions made under Section 40A(2)(b). The Tribunal emphasized the importance of consistency in tax treatment and the necessity of substantiating claims of unreasonableness with concrete evidence. The order was pronounced on May 9, 2018.