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TMI Blog2015 (4) TMI 882X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the High Court, with the approval of the assessee and the creditors evolved a scheme where under the business assets of the assessee were let out to M/s. General Fibres Dealers (P) Ltd. It is in that peculiar fact situation that the Supreme Court took the view and with regard to the nature of income. We are of the view that on the essential contentions raised before the Tribunal and as elaborated or additionally proposed before us a different view than the one taken by the Tribunal is not possible.- Decided against revenue. Expenses claimed on account of incomplete work - Held that:- It is an undisputed fact that in the case of project completion method the project is deemed to have been completed on its completion and sale of its 80%. The remaining portion of 20% is under either renovation or under sale. The common areas are generally renovated after the completion of the project. In this situation, making a provision for incomplete work, cannot be called to be incorrect system of accounting. More over, the claim made by the assessee were not doubted by the Assessing Officer. He has simply disallowed the claim of the assessee on the ground that the provision of incomplet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , J.] 1. These appeals were heard together and are being disposed of by a common order. That is because common questions and submissions are raised by parties. 2. Both sides agree that for the sake of convenience, the facts in Income Tax Appeal No.5313 of 2010 can be referred to. The respondent-assessee before us is common to all appeals and it is engaged in the real estate business and constructed a commercial complex viz. May Fair Tower. It is stated to be a partnership firm registered under the Indian Partnership Act, 1932. It filed its return of income for the assessment year 2000-01 dated 25th October, 2000, declaring total income at ₹ 5,51,81,680/- including rental income of ₹ 45,57,272/- and claimed deduction under section 24(a) of the Income Tax Act,1961 (hereinafter referred to as the IT Act ) of ₹ 11,39,318/-. This claim of the assessee was not accepted by the Assessing Officer. The Assessing Officer treated the rental income as business income on the ground that the receipts from this property were on account of exploitation of commercial assets and as such, it is the business profit of the assessee. He further observed that the assessee is engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as interest on borrowed capital. In Income Tax Appeal No.1504 of 2012 and which pertains to assessment year 2007-08, this additional question of law would also arise according to Mr. Chhotaray. Lastly, he would submit that in Income Tax Appeal No.418 of 2013 also, the additional questions would arise. This appeal pertains to assessment year 2008-09. 9. Thus, it is submitted by Mr. Chhotaray that the following questions are substantial questions of law : (a) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Income Tax Appellate Tribunal was justified in directing the Assessing Officer to tax the rental income of ₹ 45,57 lakhs as 'income from house property' and to allow deduction u/s 24 ignoring the fact that the income was received from the business asset of unsold flats shown as closing stock? (b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Income Tax Appellate Tribunal was justified in directing the Assessing Officer to allow the claim of expenses of ₹ 45 lakhs on account of provision for incomplete work ignoring the fact that there was no incomplete work in the project as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal lost sight of the fact that the unsold units were given on rent / leave and licence for earning income therefrom. The rental income from these unsold units has been shown as income from house property and huge deduction has been claimed under section 24(a) of the IT Act. However, the Assessing Officer noted that the assessee firm was formed with specific object of construction of buildings with a view to sell the units therein and not letting out the same. A business transaction of leasing of unsold units was thus nothing but a transaction to generate business income. The assessee maintains a consolidated Profit Loss Account thereby combining its trading and rental receipts. However, to claim the deduction as above, it has taken out the rental receipts and property taxes and shown it under a separate head of income from house property. The Assessing Officer noticed this and strongly commented on the method of drawing up the Profit Loss Account by the assessee. He noted that certain expenditure like legal, professional and consultancy charges to the tune of ₹ 6,52,000/- and which pertains to the rented property has been claimed as deduction again in computing the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One consolidated Profit Loss account is prepared and on the right side of which trade receipts and rent receipts appear. The expenses are common. No separate account of expenses was maintained in respect of the property let out and from which rental income is received. The expenses pertaining to the let out properties merged with other expenses. There is no bifurcation of the expenses relating to properties let out for other business. It is this consolidated account which was audited. The apparent defect noted by the Assessing Officer in the assessment for the year 2005-06 would go to the root of the case. The assessee never contended that rental income should be separated from trade receipts and that is why single consolidated account was maintained. 14. If the accounts are maintained in the normal course treating the entire receipts including rental income as business receipts, then, there is no question of claiming deduction under section 24(a). The problem arose when the assessee abruptly deviated from the accounting practice by taking out only two items - rental receipts and property taxes from house property and claimed huge deduction under section 24(a). For the reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stock-intrade and yet the assessee proceeded to claim the deduction in respect of the income generated from leasing out of the flats / units as income from house property, then, this itself shows that conflicting claims were made. If the units constitute the stock-in-trade of the firm, then, dealing with such stock-in-trade would generate only business receipts. As the same reasoning has been adopted to disallow the interest claim, then, the conclusion of the Assessing Officer should not have been interfered with. There was actually no interest expenditure incurred on borrowed capital. All such claims were clearly an afterthought. The partnership capital could have been utilised for different purpose. There should be a clear link between the borrowed money and construction on the property. If no separate account is maintained in respect of the let out property, then, there is a grave doubt about the claim of the assessee on deduction under section 24(b). For all these reasons he submits that such an important issue having been missed by the Commissioner and the Tribunal, we should proceed to entertain this appeal and allow it. Mr. Chhotaray has pointed out in his written submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit Loss account for rental income cannot be a reason for denying the deduction. These questions are based on clearly untenable and erroneous premise that heads of income for the purpose of assessment under Income Tax Act depend upon the treatment given in the assessee's books of account. Mr. Tiwari submits that the computation of income chargeable to income tax is a question that has to be decided on the touchstone of the provisions of the Income Tax Act, 1961, as applicable to the particular case. The treatment given or not given in the assessee's books of account does not decide the assessee's tax liability. In that regard, reliance is placed on Kedarnath Jute Manufacturing Company Limited vs. Commissioner of Income Tax 82 ITR 363 and Sutlej Cotton Mills Ltd. vs. Commissioner of Income Tax, 116 ITR 1. Mr. Tiwari submits that as far as assessment year 2006-07 onwards are concerned, there is no income from sale of apartments. In none of the assessment orders, the Assessing Officer has found any fault with the Profit Loss account of the respondent-assessee because in the return of income, the income from house property has been separately computed. Now, a differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There leasing out the factory as distinguished from the factory building was in issue. Whether the income from that should be assessed under the head profits and gains of business or profession or income from other sources was the further aspect under consideration. In that decision the Hon'ble Supreme Court did not consider as to whether such income could be termed as income from house property. Therefore, the parameters relating to income from other sources would not apply. For all these reasons, it is submitted that the Revenue appeals are in the nature of seeking a re-appreciation and re-appraisal of the factual materials and, therefore, they deserve to be dismissed. 20. We have, with the assistance of the learned counsel appearing on both sides, perused the Memo of Appeals and which are stated to be raising the above questions. They are common to all and, therefore, the Revenue as also the assessee's counsel pointed out that we need not separately refer to each and every Memo of Appeal and its annexures. Thus, we are not required to refer to all the Memos of Appeal and the individual facts therein or the view taken by the authorities under the I.T. Act simply b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o that, the Hon'ble Supreme Court further held that income from tenants of shops and stalls is income from house property and the distinct head specified in the erstwhile Income Tax Act of 1922 could be pressed into service. These are mutually exclusive claims of deduction. The character of rental income is not altered just because it was received by a company formed with the object of developing and setting up markets or because occupants are not permanent. 22. Then the Hon'ble Supreme Court decisions and rendered later than this judgment in East India (supra) have been referred by the Tribunal including some of the High Court judgments and the parameters laid down therein. The Tribunal found that the Commissioner examined this issue in detail. Para 2.23 of the Commissioner's order with specific references to the legal provisions have been reproduced in the Tribunal's order. The Commissioner held that the assessee has constructed a building of which it is owner and received income from letting out some portion of this house property. It continued to receive the same even till the date of passing of the order by the Commissioner. The Commissioner referred to some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or gains of business and that the income is not liable to be taxed as income from property under section 9 of the Act. The appellant is undoubtedly, under the provisions of the Calcutta Municipal Act, 1951, required to obtain a licence from the Corporation of Calcutta and to maintain sanitary and other services in conformity with the provisions of that Act and for that purpose has to maintain a staff and to incur expenditure. But, on that account the income derived from letting out property belonging to the appellant does not become profits or gains from business within the meaning of section 6 and 10 of the Income-tax Act. By section 6 of the Income-tax Act the following six different heads of income are made chargeable : (I) salaries, (2) interest on securities, (3) income from property (4) profits and gains of business, profession or vocation, (5) income from other sources and (6) capital gains. This classification under distinct heads of income, profits and gains is made having regard to the sources from which income is derived. Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Act. It was observed in that case that, merely because the owner of the property was a company incorporated with the object of owning property, the incidence of income derived from the property owned could not be regarded as altered; the income came more directly and specifically under the head property than income from business. The income received by the appellant from shops is indisputably income from property; so is the income from stalls from occupants. The character of the income is not altered merely because some stall remain occupied by the same occupants and the remaining stalls are occupied by a shifting class of occupants. The primary source of income from the stalls is occupation of the stalls, and it is a matter of little moment that the occupation which is the source of the income is temporary. The income-tax authorities were, in our judgment, right in holding that the income received by the appellant was assessable under section 9 of the Income-tax Act. The appeal, therefore, fails and is dismissed with costs. 25. We do not find that the emphasis by Mr. Chhotaray and on certain aspects which allegedly missed and escaped the attention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate Tribunal. However, the Tribunal drew up a statement of case and referred the questions of law which have been reproduced in the Supreme Court judgment. These two questions of law are whether the Tribunal was correct in holding that the income received by the assessee by leasing out the factory was business income. Similarly, in the Andhra Pradesh case, whether leasing out of godowns and the letting of the factory with machinery constituted business income of the assessee or not. It is in relation to these questions that the rival contentions have been noted and thereafter the judgments of the Supreme Court in the field. It is thereafter that the propositions have been summarised and which read as under : (1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, least,amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head Profits and gains of business or profession ; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the matter has to be approached by referring and taking into account the facts and circumstances of each case. These are not general tests or rules which have been laid down. They have been evolved and that is how we do not think that reliance by the Revenue on this decision would carry the matter any further. Equally, we do not think that any factual aspect and particularly on the conduct of the assessee and the treatment or non treatment in the books of account would carry the matter further. Eventually, the character and nature of the income is determinative and decisive and it is not the treatment that the assessee gives it in its books of account which would enable us to come to any conclusion. If the legal propositions which have been invoked and the deductions claimed are to be granted by applying the tests evolved and the parameters laid down, the governing conditions would be as to whether the deduction is permissible given the clear language of the section or provision and whether that is applicable to the facts and circumstances of a given case. Similarly, we do not think that the reliance on the judgment of the Hon'ble Supreme Court in the case of Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually, as the Madras High Court held, the fundamental position had to be ascertained and that was whether a particular building or premises was a commercial asset or a house property. 29. We do not think that when the Tribunal relied upon the judgment of the Hon'ble Supreme Court in the case of East India Housing, it had committed any error of law or acted perversely. Therefore, assuming that we can allow any mixed questions to be raised for the first time, raising them does not enable the Revenue to urge and contrary to what is held by the Tribunal. 30. The position also appears to be identical in the case dealt with by the Hon'ble Supreme Court in Commissioner of Income-tax v. Vikram Cotton Mills Limited. There as well, the property came to be mortgaged and what was before the Supreme Court was the fact that the High Court, with the approval of the assessee and the creditors evolved a scheme where under the business assets of the assessee were let out to M/s. General Fibres Dealers (P) Ltd. It is in that peculiar fact situation that the Supreme Court took the view and with regard to the nature of income. We are of the view that on the essential contentions raised b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision of incomplete work of ₹ 45 lakhs. It is an undisputed fact that in the case of project completion method the project is deemed to have been completed on its completion and sale of its 80%. The remaining portion of 20% is under either renovation or under sale. The common areas are generally renovated after the completion of the project. In this situation, making a provision for incomplete work, cannot be called to be incorrect system of accounting. More over, the claim made by the assessee were not doubted by the Assessing Officer. He has simply disallowed the claim of the assessee on the ground that the provision of incomplete work should not have been made in the impugned assessment year, without looking to the facts that same cost of incomplete work was taken in the closing stock. Keeping in view of the facts of the case, we are of the opinion that CIT (A) has properly adjudicated the issue in the light of given facts and circumstances of the case. We, therefore, find ourselves in agreement with the Order of the CIT (A). Accordingly, we confirm the same. 33. We do not think that the Assessing Officer's view having been interfered with in such a scenario that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mely, a sum equal to 30% to the annual value and (b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital. The proviso, and particularly the second proviso stipulates that where the property referred to in subsection (2) of section 23 is acquired or constructed with capital borrowed on or after 1st April, 1999 and such acquisition or construction is completed within three years from the end of the financial year in which the capital was borrowed, the amount under this claim shall not exceed ₹ 1,40,000/-. This proviso and the explanation thereafter has not been pressed into service. 37. The Tribunal in Income Tax Appeal No.3216/Mum/2009 for assessment year 2006-07 dealt with this ground of the Revenue in paragraph 8.1 and 9. However, what is material to note is that the Commissioner had rendered detailed findings and which came to be confirmed by the Tribunal. The Tribunal found that in ground No.4 of the appeal, the non-allowing of deduction of interest amounting to ₹ 59,77,030/- on borrowed capital against the income from house property was the issue. The argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness and interest deduction to partner from business income has been allowed over the years. The partner's capital contribution has not been made for the purpose of acquiring property or construction of property for ownership and then for the purpose of letting it out and earning house property income on it. It is only because some flats remained unsold that these were let out and income from house property was earned. The Commissioner placed reliance on a judgment of the High Court of Allahabad in the case of Manse Ram Sons vs. Commissioner of Income Tax (1991) 54 Taxman 308. He held that the assessee had borrowed amounts for business (banking business) and was utilised for construction of properties, interest was not allowable deduction under section 24(i)(vi). Where the assessee was a partner of a firm and on dissolution of the firm, it took over all assets and liabilities including a building, another judgment was relied upon and rendered by the High Court of Punjab Harayana in the case of Commissioner of Income Tax vs. Four Fields (P) Ltd. (1998) 96 Taxman 143 which held that no relationship of borrower and lender had come into existence and deduction of interest on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der, the entire interest paid on the partners' capital was related to the premises which were let out by the assessee and the same, therefore, was allowable as deduction u/s 24(b) while computing income of the assessee under the head Income from house property . Respectfully following the said decision of the Tribunal in assessee's own case for assessment year 2006-07, we direct the AO to allow the claim of the assessee for deduction on account of interest paid on partners' capital u/s 24(b). 41. The Tribunal held that if a similar issue was involved in the immediately preceding assessment year 2006-07 and there a finding was rendered in favour of the assessee by the Commissioner (Appeals), then, it was not possible to take a different view particularly because that finding of the Commissioner was upheld by the Tribunal by its order dated 20th April, 2010. If the facts and circumstances in which the claim arose were identical, then, the Tribunal concluded that a different view on facts was impossible. 42. We do not think that any larger question or wider controversy needs to be determined. If the matter was approached in this angle by the Commissioner and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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