9911796707
TMI Blog1995 (2) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... om which it earned rental income. The Assessing Officer further noted that two of the premises owned by the assessee were M-7 and M-15, Connaught Circus, New Delhi and that the said premises had been given by the assessee on hire/rent to M/s C.J. Hotels (Pvt.) Ltd. (CJHPL) which was an associate concern. The said concern was running hotels/restaurants, namely Dynasty, Bistro, Pantry and Mughlai Restaurant in the said premises. The assessee had shown a sum of Rs. 48,000 as the annual let-out value of the said property and declared it under the head 'Income from house property'. The assessee had also claimed depreciation allowance of Rs. 2,57,831 in respect of the said premises which were let-out to M/s. CJHPL.The assessee has further claimed deduction of Rs. 81,946 on the furniture and fixture provided in the said premises used by M/s. CJHPL. It further claimed depreciation on the equipments let out to M/s. CJHPL in respect of the said restaurant premises. 2.1 On enquiry from the Assessing Officer, the assessee-company submitted that it had let out part of its premises at M-7, Connaught Circus to M/s. CJHPL for running the Mughlai Restaurant and M- 15, Connaught Circus to run Dyna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had let out as a stop gap arrangement. He also observed that it was not a case where the premises with amenities and fixtures, etc., were let out by the assessee to carry on his business more efficiently and further it was not a case where letting of furniture or other equipments was subservient to letting accommodation and the letting of accommodation was only for facilitating the business of the assessee. He further observed that the assessee had not shown any income for the consideration received by it as 2 per cent of its turnover for the use of the premises as stipulated in the aforesaid agreement. He also observed that the assessee had incurred substantial expenditure on renovation of the premises as provided to the tenant. The assessee had incurred a sum of Rs. 12,45,944 in respect of Dynasty and other restaurants. The cost of furniture provided for the said restaurants was more than Rs. 6.43 lakhs. The equipments provided to Dynasty and other restaurants were of more than Rs. 7.79 lakhs. As against this, the assessee claimed to be receiving only a sum of Rs. 4,000 per month as hire charges of the furniture and equipments whose value exceeded Rs. 16 lakhs. He further observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercial assets and in fact they were never commercial assets in the business of the assessee. Rather, the assessee has purchased them to give them on rent to the hotel and the assessee never ran the hotel or restaurant nor he did so even now. The Assessing Officer ; therefore, concluded that the letting out to exploit the said assets was with a motive to earn rental income, and, therefore, the income was assessable as income from other sources. He further held that the aforesaid agreement with M/s. CJHPL clearly showed that the rent for the use of the premises and for the use of furniture, fixture and equipments was separately and distinctly provided. As such, the consideration received for the use of the premises was taxable as income from house property and that from leasing of equipments and furniture, etc., as income under the head " Other sources ". He further held that as the assessee had not shown as to what was the turnover of the said restaurants during the year under consideration 2 per cent of which was receivable as the rent for the premises, he would estimate 2 per cent of the turnover of the said restaurant at Rs. 2 lakhs which will be taxed as income from house prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... house property because as per agreement the assets were not commercial assets. 3.1 The CIT(A), after considering the submissions of the learned counsel for the assessee with reference to non-allowance of depreciation on the part of the premises No. M- 15, Connaught Circus, directed the Assessing Officer to verify the fact as to whether the premises are numbered as M-7 or M-15, Connaught Circus or they are the same premises having two numbers. He also directed the Assessing Officer to consider the past history of the case and decide the issue on merits after providing an opportunity of being heard to the assessee. 3.2 With reference to the addition of Rs. 5,00,000 and treating the same as income from other sources, the CIT(A) observed that it was an admitted fact both by the department and the assessee that the demand of interest claim at Rs. 6,19,974 was much more than the receipt of income as hire charges. He further observed that the transaction does not appear to be reasonable and genuine because no prudent businessman can afford to do so. He, therefore, confirmed the findings of the Assessing Officer together with the addition of Rs. 5,00,000 to be treated as income from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ham arrangement " and mentioned that in the light of the said observation, the direction of the CIT(A) to consider the allowability of Interest under section 57(iii) did not appear to be correct. He further mentioned that the provisions of the said section 57(iii) allowed deduction of " any other expenditure not being in the nature of capital expenditure laid out and expended wholly and exclusively for purpose of making and earning such income ". He, therefore, held that there has to be a direct nexus between expenditure and income earning activity and that in the instant case there was a complete absence of the same. The rental income was far less than compared with the interest paid. He, therefore, held that the assessee cannot be allowed any relief so far as CIT(A)'s directions are concerned in this behalf. 4.4 In view of the foregoing, the Assessing Officer computed the income of the assessee at Rs. 8,80,002 after allowing a relief of Rs. 2,00,715. On further appeal to the CIT(A) against the assessment order dated 30-12-1992, the CIT(A), after considering the detailed submissions made by the learned counsel for the assessee, which were almost the same as during the appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal, the CIT(A), after considering the detailed submissions made by the learned counsel for the assessee to the effect that the assessee-company had provided the premises to exploit commercial assets and the income accruing therefrom should be regarded as income from business, upheld the following additions/disallowances made by the' Assessing Officer : (a) Rs. 5,00,000 estimated as hire charges in respect of fixtures, furniture and equipment. He also observed that the assessee was never engaged in the business of running a restaurant and thus the furniture, fixture, etc., were never the commercial assets of the assessee-company. He further observed that the same were leased out for a period of 10 years and the assessee could not be said to have exploited commercial assets through others and held that the AO was justified in holding that the hire charges were not taxable as business income ; (b) Disallowance of the claim of depreciation by the assessee to the extent of Rs. 2,08,265 as against the claim of Rs. 5,78,371 made by the assessee. He observed that the assessee had received commission of Rs. 38,202 which was assessed by the Assessing Officer under the head 'Income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilities, CJHPL shall pay to OBF as under : (a) a sum of Rs. 4,000 (Rupees Four thousand) per month towards hire charges for equipment, furnitures, fixtures and fittings ; and (b) an amount of 2% (two per cent) of its turnover excluding the sales-tax and all other Government levies for the use of the premises." 6.2 The learned counsel submitted that a close reading of the Agreement will clearly show that it is a composite Agreement for leasing of premises on monthly charges of Rs. 4,000 plus an amount of 2 per cent of the turnover of the business of M/s. CJHPL, excluding sales-tax etc. He further submitted that up to the assessment year 1988-89, the said income has been treated as business income. 6.3 The learned counsel for the assessee relied on the following case law in support of his arguments :-- 1. New India Construction Co. (P.) Ltd. v. Asstt. CIT [1991] 38 ITD 28 (Delhi) 2. CIT v. Bosotto Bros. Ltd. [1940] 8 ITR 41 (Mad.) 3. M.M. Ipoh v. CIT [1968] 67 ITR 106 (SC) 4. Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486 (SC) 5. Snam Progetti. S.P.A. v. Addl. CIT [1981] 132 ITR 70 (Delhi) 6. Smt. Godavari Devi Sehgal v. ITO [1992] 198 ITR (AT) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to claim that he should be taxed under that one which leaves him with a lighter burden. The learned counsel laid stress on the said observations of the Hon'ble High Court and submitted that in case the authorities below felt that the Agreement was not genuine then market rate of rent could be adopted. In this connection, he referred to the provisions of section 23(1)(b) of the Income-tax Act, 1961. 6.3-3 In the case of M.M. Ipoh where section 3 of the Income-tax Act. 1922 was challenged as offending Article 14 of the Constitution, the Hon'ble Supreme Court observed that the function of the Income-tax Officer is fundamentally quasi-judicial. The Income-tax Officer's discretion to bring to tax either the income of the association collectively or the shares of the members of the association separately is not final, it is subject to appeal to the Appellate Assistant Commissioner and to the Tribunal. Exercise of this power is from its very nature contemplated to be governed not by considerations arbitrary but judicial. The nature of the authority exercised by the Income-tax Officer in a proceeding to assess to tax income, and his duty to prevent evasion or escapement of liability to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of shares was therefore a revenue receipt and as such liable to income-tax. It was also held that the decision of the department in the earlier years that the transactions were in the nature of change of investments was not binding in the proceedings for the assessment during the subsequent years. The learned counsel submitted that in the case of the present assessee the whole arrangement. as per Agreement dated 26-12-1983, is for the exploitation of the commercial assets of the assessee and the income of Rs. 48,000 per annum on account of hiring charges for furnitures, fixtures and equipments and 2% of the total turnover of M/s. CJHPL, as received by the assessee, should be treated as business income and depreciation and interest should be allowed in relation to such income. 6.3-5 In the case of Snam Progetti S.P.A. the assessee, an Italian company, placed its excess business funds in short term deposits with the banks and interest income was earned thereon. For the assessment year 70-71, the assessee-company had incurred a net business loss of Rs. 122 lakhs. In the next assessment years 71-72, the assessee-company earned a profit of about Rs. 30 lakhs and interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a depends upon the emergence or surfacing of new facts. In the absence of surfacing of new facts, it may not be expedient or possible to change the earlier decisions." The learned counsel submitted that in the case of the present assessee also, the department had treated the income from the said premises and fixtures, furniture and equipments as business income up to the assessment year 1988-89 and that the same treatment should be given in the years under consideration. 7. The learned Departmental Representative, Smt. Surabhi Sinha, submitted that in the earlier years there was no specific finding or mention about the agreement entered into by the assessee with M/s. CJHPL and that the Department had been accepting the income as returned by the assessee. She further submitted that now the Tribunal has to determine as to whether the income of 2% commission on the turnover of M/s. CJHPL is to be taken as income from " house property " or " business income ", irrespective of the fact how the department had been treating the said income in earlier years. In this connection she invited our attention to page 4 of the assessment order dated 18-3-1992 and submitted that it is necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery as a commercial asset during the subsistence of lease the income from lease could be assessed under the head other sources only. Similar view has been held by the Delhi High Court in the case of CIT v. Superfine Cables (P.) Ltd. In view of the judgment of the Supreme Court and Delhi High Court, as cited above, the terms of Agreement between the appellant and the associated concern and the facts of the case I hold that the Assessing Officer was correct in treating the hire charges of furniture, fixture, etc., as income from other sources." The learned DR further submitted that the assessee is the owner of the premises which have been provided to M/s. CJHPL and any income from the said house property can only be treated as rent and is taxable as 'income from house propety'. In this connection she relied on the decision of the Hon'ble Supreme Court in the case of S. G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700. With reference to the Agreement, she submitted that even if the Agreement is held as a composite agreement, the basic question as to whether the income is to be treated as income from house property or as business income will still have to be determined. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (as is clear from page 28 of the paper book wherein the break-up of expenditure on renovation has been given), it cannot be said that the whole of the expenditure out of the borrowed funds has been laid out or expended wholly and exclusively for the purpose of earning the income of Rs. 4,000 per month towards hire charges for equipments, furniture, fixtures and fittings. Thus the deduction of interest claimed by the assessee with reference to the aforesaid borrowed funds cannot be allowed even under section 57(iii). 7.2 The learned Departmental Representative relied upon the following case laws in support of her arguments referred to in paragraphs 7 and 7.1 : (1) CIT v. Sir Homi M. Mehta [1943] 11 ITR 142 (Bom.) (2) Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 (SC) (3) CIT v. Jagmohandas J. Kapadia [1966] 61 ITR 663 (Bom.) (4) CIT v. Kasturbhai Lalbhai [1968] 70 ITR 267 (Guj.) (5) New Savan Sugar Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC) (6) S.G. Mercantile Corpn. (P.) Ltd.'s case (7) Super Fine Cables (P.) Ltd.'s case (8) Smt. Padmavati Jaikrishna's case 7.2-1 In the case of Sir Homi M. Mehta the assessee who was the promoter, managing direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Supreme Court also observed that " whether a particular letting is business has to be decided in the circumstances of each case. Each case has to be looked at from businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. A thing is not by its very nature a commercial asset. A commercial asset is only an asset used in a business and nothing else and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trace is commonly carried on ". The Apex Court also observed that " when a building and plant, machinery or furniture are inseparably let the Income-tax Act contemplates the rent from the building as a residuary head of income and not one to be computed under section 9 ". The Apex Court further observed that " the letting of a building can never be incidental to the letting of furniture contained in it, and therefore, no consideration of primary, and secondary lettings arises in construing the section : what must apply when furniture is let and also buildings must equally appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he director's fees and hence was allowable under section 12(2). However, the expenditure incurred in collecting the proxies from the share holders was disallowed as the same could not be regarded as expenditure connected with the earnings of the director's fees. 7.2-5 In the case of New Savan Sugar Gur Refining Co. Ltd. the assessee-company was carrying on the business of crushing sugarcane and gur refining. Its managing agents wrote a letter to its share holders advising the acceptance of an offer of the lease of the company as a running concern. At an extra-ordinary general meeting on March 5, 1946 the directors were authorised to enter into a lease and the lease was given with effect from June 1, 1945. The consideration of the lease was royalty payable on the manufacture of sugar and gur at rates specified therein subject to a minimum royalty of Rs. 65,000 per annum. The lessee was made responsible for all the running expenses of the factory and excise duty on sugar etc. The cumulative effect of clauses 11 to 14 of the lease deed was that the assessee would have no concern with the production of the factory. The question was whether the income which arose to the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y part thereof, no question of making the assessment under section 9 arose ; (ii) The definition of " business " in section 2(4) was of wide amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market ; (iii) That on the facts, the taking of the property on lease and subletting portions thereof was part of the business and trading activity of the assessee and the income of the assessee fell under section 10 of the Act : and (iv) That where, as in this case, the income could appropriately fall under section 10 as being business income, no resort could be made to section 12. It was further observed that the liability to tax under section 9 of the Income-tax Act, 1922, is of the owner of the buildings or land appurtenant thereto. In case, the assessee is the owner of the buildings and lands appurtenant thereto, he would be liable to pay tax under section 9 even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon. It was further observed that the residuary head of income can be resorted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowed a sum of Rs. 10,279 on proportional basis on the ground that to the extent, the loan was taken by the assessee to discharge her liabilities for income-tax and wealth-tax and to pay annuity deposit, the interest thereon was not allowable under section 57(iii) of the Income-tax Act, 1961. The Tribunal recorded a factual finding that the expenditure had been incurred to meet the assessee's personal liability of payment of income-tax and wealth-tax and annuity deposit and confirmed the disallowance. On a reference, the Hon'ble High Court confirmed the decisions of the Tribunal. On appeal, the Hon'ble Supreme Court held, affirming the decision of the High Court, that the sum of Rs. 10,279 was not an admissible deduction under section 57(iii) and that the High Court was right in holding that meeting the liability for income-tax and wealth-tax was a personal one and the dominant purpose for paying annuity deposit was not to earn income but to meet the statutory liability of making the deposit. The expenditure was not wholly and exclusively for the purpose of earning income. 8. In reply, the learned counsel for the assessee submitted that the basic question is as to whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and stressed that the whole expenditure was for business purposes and that no owner will spend more than Rs. 34 lakhs except for the sake of business. He submitted that it was a commercial transaction on the whole and the parties had that intention while entering into the agreement and that clause 3 of the Agreement provided for a composite consideration for giving the property for business purposes. 8.2 With reference to the claim for deduction of interest, the learned counsel invited our attention to page 54 of the paper book, wherein the details of interest accrued but not paid have been given. For the period from 1-4-1988 to 31-3-1989, relevant for the assessment year 1989-90, the amount of interest accrued has been shown as Rs. 6,19,013. It is also mentioned that such interest has been allowed as deduction up to the assessment year 1988-89. The learned counsel further submitted that the Agreement could be examined by the department only in the initial year and that the department has not questioned the agreement in the first year. In this connection, he relied on the decision of the then Hon'ble Punjab High Court at Delhi in the case of CIT v. Ganeshi Lal Sham Lal [1966] 61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) an amount of 2 per cent of its turnover excluding sales-tax and other Government levies for use of the premises. Both the parties further agreed that M/s. CJHPL will maintain by all means the premises in good and usable condition. We have carefully examined the aforesaid provisions of the Agreement between the parties and we have no doubt that the assessee undertook to provide both the premises and necessary equipments, etc., in order to enable M/s. CJHPL to run a first class restaurant at the said premises. We have also no doubt that the payments stipulated by M/s. CJHPL at the rate of Rs. 4,000 per month towards hire charges for equipment, etc., and an amount of 2 per cent of its turnover excluding sales-tax, etc., for use of the premises, though have been reflected separately in clause 3 of the Agreement, in fact forms a package payment for the use of the premises and the equipments etc. This will be clear if clauses 1 to 3 of the Agreement are read together under which the assessee is under obligation to, provide both the premises and the equipment, etc., for which M/s. CJHPL agreed to make the said payments. We see force in the arguments of the learned counsel that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various clauses of the lease deed, held that the intention of the assessee-company was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. The Apex Court further observed that the intention of the assessee-company was to go out of the business altogether so far as the factory and machinery was concerned w.e.f. June 1, 1945 and that the income from the lease could not be assessed under section 10 of the Income-tax Act, 1922 but was liable to be assessed under section 12 of that Act. A further reference may be made to the decision of the Hon'ble Delhi High Court, which is the jurisdictional High Court, in the case of Super Fine Cables (P.) Ltd. In the said case, the assessee-company, which had been set up for manufacture of cables, but could not start the said manufacture of cables, leased out the factory building on a rent of Rs. 750 per month, the Hon'ble Delhi High Court, after examining the various case laws, observed at page 535 as under : " As indicated above, the test in all these cases is whether the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as observed by the Hon'ble Supreme Court in the case of Sultan Bros. (P.) Ltd. On the facts and in the circumstances of the case, we, therefore, hold that the leasing out of the premises in question together with equipments, etc., did not amount to exploiting the commercial assets and that they were never commercial assets in the business of the assessee. The assessee had in fact never done the business of running a hotel or restaurant. 9.3 In view of our decisions in the preceding sub-paragraphs on the first two issues, now we have to examine as to under which head of income the payments received from M/s. CJHPL by the assessee should be taxed. In view of our decision in sub-paragraph 9.2- 1, the only relevant heads of income to be considered are " income from house property " and " income from other sources ". The learned Departmental Representative had laid stress on the fact of ownership of the premises by the assessee and submitted that 2 per cent of the total turnover received by the assessee from M/s. CJHPL should only be taxed under the head " income from house property ". However, in view of our decision in sub-paragraph 9.1 holding that the Agreement is of a composite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceed to decide the grounds of appeal of the assessee in the appeals for the assessment years 1989-90 and 1990-91 in the light of our decisions in paragraph 9. 10.1 ITA No. 8008/Del/92 and ITA No. 5530/Del/93 Ground Nos. 1 and 2 in appeal No. ITA 8008 relate to the taxing of the amount of 2% of the turnover of the restaurants. In the original assessment order, the AO had made an addition of Rs. 2 lakhs as income from house property on estimate basis. The CIT (A) vide his order dated 9-9-1992, restored this issue to the Assessing Officer as the Assessing Officer had not given the amount of turnover of the restaurant. The Assessing Officer further examined the issue so restored and calculated the turnover from 1-4-1988 to 31-3-1989 at Rs. 15.12,542 two per cent whereof was computed at Rs. 30,278. As the said amount of Rs. 30,278 had already been credited to the profit and loss account under the head " Commission receipts ", the Assessing Officer deleted the addition of Rs. 2 lakhs. Thus Ground Nos. 1 and 2 taken by the assessee in appeal No. 8008/Del/92 do not subsist. 10.2 Ground No. 3 in appeal No. ITA 8008/Del/92 relates to addition of Rs. 5 lakhs on estimate basis and taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was confirmed by CIT(A). We have carefully considered the submissions made by both the parties. In view of our decisions in paragraphs 9.2-1 and 9.3, we hold that the assessee is entitled for relief under section 57(iii) of the Income-tax Act as the expenditure by way of interest payable on the amount of loan, which has been utilised by the assessee in providing the equipments, furniture, fixtures and fittings and on the renovation of the premises, has been laid out and expended wholly and exclusively for the purposes of earning the income, which we have held is taxable under the head " income from other sources ". The Assessing Officer, is therefore, directed to allow the claim of the assessee for interest in accordance with the provisions of section 57(iii). 10.4 In the result, the said appeals are allowed in part. 11. ITA No. 5531/Del/93 Ground Nos. 1 and 2 in this appeal relate to taxability of the income from hire charges of equipments, furniture and fixtures as 'business income' instead of under the head 'income from other sources'. We have carefully considered the submissions made by both the parties. In view of our decision in paragraph that the entire income rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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