2006 (8) TMI 286 - AT - Income Tax

Let out the property i.e. warehouse - activity of leasing/hiring/letting of its land and building - business activity - whether the warehousing charges received by the assessee should be assessed as income from house property or as business income - lease agreement between the assessee company and Lipton India and with Hindustan Leve r - HELD THAT - This is not a case where the leasing of the property was incidental or subservient to the main business of the assessee. The assessee was engaged in the activity of leasing/hiring/letting of its land and building and in our opinion this activity was not a business activity . The lease rent received by the assessee was because of the bare letting of the property. The said character cannot change and the income does not become income from trade or business merely because letting out included certain additional services such as security issuing the goods on the directions of the client lighting cleaning and sanitation etc. which are only incidental to the use and occupation of the premises. Therefore we hold that the lease rent received by the assessee from Lipton India and from Hindustan Lever was rightly assessed as income from house property . The ground Nos. 3 and 4 are accordingly rejected. Whether the warehousing charges received by the assessee should be assessed as income from house property or as business income - The income from warehousing is derived from house property by the exercise of the property rights properly so-called and the said character is not changed and the income does not become income from business merely because the hiring is inclusive of certain services such as security labour for loading and unloading lighting cleaning etc. which are incidental to the use and the occupation of the premises. In warehousing the dominant object is exploitation of house property and the other services that go with it are only incidental. In it no complex commercial activity is involved. Thus we agree with the conclusions reached by the CIT(A). The grounds Nos. 1 to 4 are accordingly rejected. Disallowance of interest on account of interest free advances - HELD THAT - In our considered opinion the assessee needs to be given one more opportunity to substantiate its claim and it will be in the interest of natural justice to do so. We therefore remit this issue back to the file of the CIT(A) with a direction that he should re-examine the claim and pass a fresh order on this point after giving adequate opportunity of being heard to the assessee. The ground No. 6 is decided accordingly. Disallowance out of service charges u/s 40A(2)(b) - HELD THAT - We have no doubt in our mind that the fair market value of the services rendered by M/s Shree Industrial Suppliers was not the basis for paying Rs. 27, 02, 000. The assessee company failed to discharge the burden of proving that the impugned payment of Rs. 27, 02, 000 represented the fair market value of the services rendered by M/s Shree Industrial Suppliers and that the expenditure of Rs. 27, 02, 000 was incurred for legitimate needs of its business. The new plea of a give and take arrangement was a self-serving argument and had no merit. The CIT(A) after taking into consideration the facts of the case restricted the claim to Rs. 3, 74, 408. Shri. Pranay the ld DR explained that the method adopted by the CIT(A) for estimating the fair market value of the services rendered by M/s Shree Industrial Suppliers was akin to the Cost Plus Method which was a recognized method. In view of above discussions we are of the considered opinion that the order of the CIT(A) does not call for any interference and is accordingly upheld. The grounds Nos. 7 and 8 are accordingly rejected. In the result the appeal filed by the assessee is partly allowed.

Issues Involved:

1. Classification of income from warehousing and lease rent as 'Income from house property' or 'Income from business'.
2. Disallowance under section 40A(2)(b).
3. Disallowance under section 43B.
4. Disallowance of interest on account of interest-free advances.

Issue-wise Detailed Analysis:

1. Classification of Income from Warehousing and Lease Rent:

The primary issue was whether the income from warehousing charges and lease rent received by the assessee should be assessed as 'Income from house property' or 'Income from business'. The CIT(A) had directed the AO to compute income from warehousing activities as 'Income from house property', enhancing the income by withdrawing deductions not admissible under this head. The assessee contended that the income should be classified as 'Income from business' due to the commercial nature of the warehousing activities, which included services like storage, security, and insurance of goods.

The Tribunal analyzed various judicial precedents, including CIT vs. National Storage (P) Ltd., CIT vs. Shambhu Investment (P) Ltd., and Sultan Brothers (P) Ltd. It was observed that the nature of the property and the primary intention behind its exploitation were crucial in determining the head of income. The Tribunal concluded that the lease agreements with Lipton India and Hindustan Lever involved bare letting of property without complex commercial activities, thus classifying the income as 'Income from house property'. The Tribunal upheld the CIT(A)'s decision, rejecting the assessee's grounds.

2. Disallowance under Section 40A(2)(b):

The AO had disallowed Rs. 13,51,000 under section 40A(2)(b), which was further enhanced by the CIT(A) by Rs. 9,76,592. The disallowance pertained to payments made to M/s Shree Industrial Suppliers, a related party. The assessee argued that the payments were legitimate business expenses for services rendered. However, the Tribunal noted that the burden of proof was on the assessee to demonstrate the reasonableness of the expenditure and the fair market value of the services. The Tribunal found that the assessee failed to substantiate its claim and upheld the CIT(A)'s enhancement, applying the cost-plus method to determine the fair market value of the services.

3. Disallowance under Section 43B:

The CIT(A) had confirmed the disallowance of Rs. 843 under section 43B, which the assessee did not press during the appeal. Consequently, this ground was rejected by the Tribunal.

4. Disallowance of Interest on Account of Interest-Free Advances:

The AO had disallowed interest expenses due to interest-free advances given by the assessee. The CIT(A) provided partial relief, restricting the disallowance to non-business advances. The Tribunal noted that the assessee failed to substantiate its claim with a cash flow statement. However, in the interest of natural justice, the Tribunal remitted the issue back to the CIT(A) for re-examination, directing the CIT(A) to provide the assessee an opportunity to substantiate its claim.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on the classification of income and disallowance under section 40A(2)(b), confirming that the income from warehousing and lease rent should be assessed as 'Income from house property'. The Tribunal also remitted the issue of disallowance of interest on account of interest-free advances back to the CIT(A) for re-examination. The appeal was partly allowed.

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