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TMI Blog2015 (11) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... on of manufacturing activities which tantamount to implicit admission that no re-commencement of business activity has taken place. There appears to be no rationale or intelligible nexus between the plea of the Assessee and the fact situation. In the totality of situation viz. stipulations in lease deed revealing the continuance of business by the lessee by exploiting the business set-up of the lessor in exclusion to the lessor, passive conduct over fairly long period of 10 years or so, stepping in of liquidator in the shoes of the management etc., We find ourselves in agreement with the conclusion of the CIT that the situation has become irreversible in the immediate future and the Assessee has exited the business of manufacturing activity without there being any trappings of temporariness about it. The most pertinent of all observations is the complete lack of enquiry and total lack of application of mind. This in itself renders the order erroneous as well as prejudicial to the interest of revenue without anything further. The Assessee has set off current year income of 2.68 crores approx against the unabsorbed business losses of the earlier years and rest has been carried forwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpense of ₹ 2,84,95,000/- was not allowable ignoring the fact that this expense pertained to the loan taken for acquiring the assets which were leased out. 6. The ld. CIT further erred in holding that expenses on salary and wages and administrative expenses were wrongly allowed without appreciating that these expenses were small and incurred on day to day activity of the appellant. 7. The ld. CIT grossly erred in exercising power u/s 263 though the assessment order was not erroneous and prejudicial to the interest of revenue and the issues considered by him were highly debatable and hence not within the purview of section 263 of the Act. 8. The above Grounds of Appeal are without prejudice to one another. 9. The Appellant craves leave to revise, modify, alter or delete any of the above Grounds of Appeal or to add new Grounds of Appeal." 3. The relevant facts of the case are that for the assessment year 2008-09, the assessee filed its return of income on 23.07.2009 declaring therein NIL income. The income declared in the return was shown under the head "profits and gains of business or profession" and brought forward business losses pertaining to the earlier year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, etc. which were prima-facie not admissible. The expenses were routinely allowed without any application of mind. In short, the Ld. Commissioner alleged that assessment suffers from the vice of non-application of mind. As a result the returned income was assessed as it was i.e., under the wrong head and without any enquiry also by erroneously allowing the assessee the benefit of set-off of carry forward business losses which it was not entitled to. 4. In view of the aforesaid failures on the part of the Assessing Officer as alleged, the assessment order dated 19.11.2010 passed under section 143(3) of the Act was considered to be erroneous in so far as it is prejudicial to the interest of the Revenue by the Commissioner. Accordingly, the notice under section 263 of the Act was issued to the assessee on 14.03.2013 calling upon it to show-cause as to why the impugned assessment order should not be revised. 5. The relevant paras of show cause notice under section 263 of the Act issued to the Assessee are reproduced hereinbelow for convenience :- "3. It is seen from records that you had stopped manufacturing sugar since crushing season 2001-02 and there was virtually no activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest expenses of ₹ 2,84,95,000/- claimed under the sub-head "administrative expenses". Nothing had been furnished by you to show that any part thereof had been incurred for earning the interest income or any other income. Similarly, in your Return of Income you had brought forward and set off earlier year's business losses of ₹ 2,68,64,699/- even though in the absence of any business / business income, you were not eligible to such set off. 4. During the course of the scrutiny proceeding, the Assessing Officer did not raise any question, nor made any enquiry whatsoever, regarding the issues / claims mentioned in the preceding para. A questionnaire was issued by him on 21.06.2010. However, in the said questionnaire, not a single query was raised as regards the heads of income under which the income returned by you should be assessed and the eligibility or otherwise of the various expenses claimed by you as deduction under such respective heads. The Assessing Officer also did not raise any question regarding your eligibility for set off of brought forward losses. In fact, the above questions / issues did not cross his mind at all. In any assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Profit & Loss Account and Balance Sheet would show, the assessee business was going on. Therefore, it was justified in claiming interest costs of ₹ 2,84,95,000/- as business expenditure. In this connection, the assessee also stated that the above interest had been incurred for acquiring fixed assets, setting up plants and for other business purposes. The assets thus acquired continued to be used by the lessee in the business of manufacturing sugar. Therefore, the assessee was eligible for deduction of the interest so incurred. For the same reason, its claim of depreciation was also valid. Lastly, the business was temporarily leased out and therefore the assessee's claim of set-off of unabsorbed business losses against the current year's income was also justified. 7. As a sequel to the aforesaid reply of the assessee, the Ld. Commissioner required the assessee to furnish year-wise details of manufacturing and any other business related works done by it on its own (i.e. not through the lessee) since the year 2001. As the assessee claimed in its written submissions that it had not discontinued its business but had leased out the business assets only temporarily, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the contrary. 9. The Ld. Commissioner next distinguished the decision in the case of Vikram Cotton Mills Ltd. (supra) and Mohiddin Hotels (P) Ltd. & Anr. (supra) on facts. The Ld. Commissioner made averments to the effect that the intention of the parties to carry on business vis-à-vis exploitation of assets has to be gathered from the overall facts. He thereafter relied upon the decision in the case of New Sevan Sugar and Gur Refinery Co. Ltd. vs. CIT, (1969) 74 ITR 7 (SC); Madras Silk and Rayon Mills (P) Ltd. vs. ITO & Anr., 262 ITR 122 (Mad); and, Universal Plats Limited vs. CIT, 237 ITR 454 (SC) to support his action under section 263 of the Act. 10. The Ld. Commissioner inter alia observed that from the various decisions cited, it can be seen that question whether income derived by an assessee from leasing its premises is in the nature of income from business or income from other sources/ house property will have to be decided on the basis of the facts and circumstances of the given case, the terms and conditions of the lease, and above all, from the intention of the lessor in resorting to leasing. Accordingly, it will have to be decided whether lease was made d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtually came out of business as per the lease agreement and for the lease period would be evident from clause 38 which stipulated that - "The lesser shall give vacant possession of the sugar godowns, molasses tank or any other storage places situated within the factory premises of the lessor that are vacant on the date of the agreement. In as much as those of such premises that are not vacant the lessor shall hand over the vacant possession thereof immediately on the same becoming vacant." 12. Based on the analysis of the terms and conditions of the lease agreement above, the Ld. Commissioner observed that even though the assets leased out continued to be commercial assets, the lessee was entitled for full-scale exploitation thereof, with the assessee no way involved in it. In so far as the assessee was concerned, it was a lease simplicitor. Of course, the lease agreement stipulated a few obligations on the lease such as to procure sugarcane from the assessee's area of operation, among others; to make minimum payment of sugarcane price at SMP and clause 5A etc.; to pay annual contributions to C.M. Relief Fund, Maharashtra Rajya SSK Sangh Ltd., Mumbai; VSI, Pune; N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the reasons advanced is also not plausible reason since the lessee who stepped into the shoes of the assessee for carrying on manufacturing operations also was operating with the same limited crushing capacity. Therefore, from the lease agreement, it would appear that the intention of the assessee in stopping the business and in parting with its factory premises and industrial unit through an arrangement of lease does not seem to be for commercial exploitation of business assets. On the contrary, the intention seems to be to exploit its properties as the owner thereof. The Ld. Commissioner further observed that from the lease agreement, it is evident that assessee did not have any role in the business operation apart from getting periodic rent. The assessee would get the rent irrespective of whether any crushing was done or not. These are further indicators that the intention was to put the assets to profitable account much as an owner of the property would do. The Ld. Commissioner reiterated that information pertaining to year to year basis business related work since 2001 and other details were not provided which only strengthen the inference that since the year 2001 the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Having stated as above, I would still desist from deciding on the issues raised in the notice u/s.263 conclusively at this point of time. Even though the various indicators emerging from the lease agreement would lead to the inference that the assessee's income is not liable to be assessed under the head "Profit and Gains of Business and Profession", I would deem it proper to remit this matter to the file of the Assessing Officer so as to enable him to examine the issues raised in the notice u/s.263 and discussed here-in-above afresh after calling for all the relevant details and evidences and also after making such further enquiries as are warranted. This course is being preferred because the assessee has not met the queries raised during the present proceedings, and the present status of operations has also not been made known. Accordingly, the assessment is hereby set aside to the file of the Assessing Officer with a direction to do the same afresh and decide the issues raised in the notice under section 263 as per law. Needless to say, the Assessing Officer shall make the fresh assessment after giving the assessee reasonable opportunity of being heard. 8. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and interest expenses are nevertheless allowable as deduction under section 57. Even unpaid interest on loan taken for purchase of business assets allowable under section 57(iii) as section 43B would not apply. Likewise, When the lease rent is assessed under the head 'income from house property', the impugned interest expense is allowable under section 24 even if remaining unpaid because section 43B would not apply here also. Moreover, the assessee would be entitled to 30% statutory deduction from gross rent. In the light of aforesaid the revision proposed by the Ld. Commissioner will not lead to any loss on the revenue as demonstrated below :- "Income from other sources- Gross rent- 2,90,47,300/- Less interest- 2,84,95,300/- Depreciation- 30,23,116/- Admin Exp.- 7,64,771/- Total- 3,22,83,187/- Balance- Loss- 32,35,807/- House Property Income- Gross Rent- 2,90,47,300/- Less Prop. Tax-……….. 30% u/s 24(a)- 87,14,190/- Interest- 2,84,95,300/- 3,72,09,490/- Balance- (-)81,62,190/-" In essence, it is the case on behalf of the assessee that there is no loss to the revenue even if the nature of lease rent is considered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis of facts recorded in the order of the Ld. Commissioner and submitted that the Assessee as a matter of fact is not doing any business activity since 2001 onwards and entering into lease agreement for long period of six years from assessment year 2006-07 to 2011- 12 would clearly demonstrate that there is no intention to carry on the manufacturing activity by the assessee itself. The action of the assessee in entering into lease agreement clearly is towards exploitation of the property as an owner thereof and therefore the Ld. Commissioner has come to a correct finding that the income declared under the head "business income" should be assessed either under income from other sources of under income from house property based on the facts and circumstances, the terms and conditions of the lease etc. for which the matter has been rightly set aside to the file of the AO in terms of the directions given. The assessee has not demonstrated the crisis situation as well as circumstances beyond its control. The assessee has not clarified whether the business started even today inspite of fair opportunity in this regard. It is evident from the assessment order itself that the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at business has only been suspended temporarily as highly unconvincing and inexplicable. When as per the facts recorded, the Assessee is out of business for nearly a decade and the affairs of the Assessee are also now saddled with Liquidator, it is highly unpalatable for a person instructed under law to accept such plea of the Assessee. The presence of Liquidator spells out that command over regular affairs are also vested with third person. Such a situation renders the possibility of resumption of business illusory. 23. The terms of the lease deed makes it abundantly clear that the Assessee is in no way involved in the business activity any more as quipped by the Ld. CIT and the entire factory premises and Industrial unit have been let out. The Assessee is merely entitled to pre-determined fixed periodic rent for exploitation of property simplicitor dehors the capacity utilization etc. and is in no way sharing the business risks. The fixed rent speaks of the fact that Assessee is not prepared to live in any kind of business uncertainty. The stand taken by the Assessee that it has stopped manufacturing activity due to financial crisis and circumstances beyond control also appear t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. vs. ACIT 111 ITD 379 (SB) ; Ambika Agro Supplies vs. ITO 95 ITD 326 (Pune) ; Pancard Clubs Ltd. vs. Dy. CIT ITA No. 2389 & 2418 /Mum/2009 order dated 16/3/2011; etc. It would be expedient to note here that the decision of the Hon'ble Bombay High Court in the case of Gabriel India (supra) relied upon on behalf of the Assessee is distinguishable on facts since an informed and plausible view was taken by the AO after proper enquiry which was sought to be displaced by the CIT. On facts, it is evident that no enquiry has been shown to be made by the AO on the relevant aspects of the matter which have direct bearing on the taxability of income. The submission of the Assessee were taken at face value. The action of the AO in summarily accepting the lease rent as 'business income' as offered by the Assessee is thus vitiated by non application of mind. As a corollary, the assessment order is 'erroneous' in so far as it is prejudicial to the interest of revenue. We also observe that it was also not demonstrated that enquiry about the bonafides of various expenditure claimed during the year has been made. The AO further clearly failed to examine the deductibility of such expenditure qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as it may, the correctness of claim of expenditure as well as its allowability qua the proper head of income need to be examined after conducting suitable enquiry. The entire act is thus prejudicial to the interest of revenue. 27. The judicial decisions cited by the learned AR for the Assessee are clearly distinguishable in the factual matrix of the case. The reliance placed on the decision of (i) Jewel of India vs. ACIT (2010) 325 ITR 92(Bom.) (ii) CIT vs. Gabriel India Ltd. 203 ITR 108 (Bom.) (iii) Globus Infocom Ltd. 108 DTR 363 (Del.) for the proposition that in the absence of clear finding of the CIT that order sought to be revised is erroneous and prejudicial to the interest of revenue is misplaced in the facts. There can be no quarrel with the legal proposition. However, we find that the findings of the CIT are clear and unambiguous backed by elaborate analysis of facts objectively. There is a definite finding by the CIT under S. 263 in unequivocal terms to the effect that rental income cannot be assessed as 'business income' in the given facts in contradiction to the stand of the Assessee. The issue on rental income whether to be taxed under the head 'income from hous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005-06; 2004-05 annexed to the paper book would show that no discussion on the taxability of the rental income as 'business income' is discernible. There is nothing on record to show that the assessment was framed in the past after consideration of issue involved in this year. These orders therefore do not operate as any kind of precedent. This year is independent and also with every passage of day, the circumstance is changing materially for visualizing the true intention of the Assessee on running business with its associated risks. The elapse of time has a direct consequence on the purported intention harped by the Assessee. Thus the circumstance namely, possibility of revival of business existing in the earlier year has eroded further in this year. The doctrine of principles of consistency has no bearing when it is found as a matter of fact that the present assessment proceedings have been concluded in a nonchalant manner. 31. Thus, on objective analysis of facts and attendant circumstances of the case and judicial precedents cited, the conclusion is inescapable that the assessment order passed is erroneous as well prejudicial to the interest of revenue and therefore rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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