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TMI Blog2016 (6) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... rom Business and Profession". 3. The learned CIT(Appeals)-III, Pune erred in law and on facts in confirming the order of the AO treating the income from lease rent amounting to Rs. 1,19,10,041/- received from M/s Deccan Bottling & Distilling Industries Ltd. as an income taxable under the head "Income from other sources" instead of the head "Income from Business and Profession". 4. Alternatively & without prejudice to Ground No. 2, the learned CIT(A) and learned AO erred in law and on facts in not treating the income from lease rent (compensation) amounting to Rs. 3,06,63,400/- received from M/s Shriram Jawahar Shetakari Sahakari Sakhar Udyog as business income for the purpose of section 72(1) of the ITA, 1961, though taxed by the learned AO under the head "Income from Other Sources". 5. Alternatively & without prejudice to Ground No. 3, the learned CIT(A) and learned AO erred in law and on facts in not treating the income from lease rent amounting to Rs. 1,19,10,041/- received from M/s Deccan Bottling & Distilling Industries Ltd. as business income for the purpose of section 72(1) of the ITA, 1961, though taxed by the learned AO under the head "Income from Other Sources". 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income as provided under section 57(ii) of the Act. The Assessing Officer thus, allowed depreciation of Rs. 33,81,649/- on the sugar factory plant and Rs. 22,93,610/- on distillery plant and the balance amount was treated as 'Income from other sources'. The assessee had further declared income from capital gains at Rs. 4.62 crores and after setting off of the brought forward losses of Rs. 10,08,91,625/-, the total income was computed at Rs.Nil. The Assessing Officer denied the set off of brought forward losses to the extent of Rs. 4.62 crores against the income from capital gains as the same was not allowable as per provisions of section 72 of the Act. Further, since the income was assessed under the head 'Income from other sources', no set off of brought forward losses were allowed. Against the same, only to the extent of business income declared by the assessee on sale of old stock of sugar to the extent, sum of Rs. 54,80,993/- was allowed to be set off. 5. Before the CIT(A), the claim of assessee was two-fold that first the lease income received by the assessee is to be assessed as income from business since it was engaged in the business of manufacturing of crystallized suga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being given compensation for introducing the usage of sugar plant as capital in kind in the partnership firm. The nature of compensation was on account of capital employed by the assessee in the partnership firm and where the assets had been put to use by the assessee for business, the amount received from such arrangement by way of compensation was to be assessed under section 28 of the Act and not under section 56 of the Act. In respect of Distillery unit, it was pointed out by the learned Authorized Representative for the assessee that it constituted business income as the assessee was carrying the business of leasing distillery division as a whole. 7. The CIT(A) vide para 6.1 noted that the assessee's claim of having entered into partnership with Jawahar Shetkari Sahakari Sakrkhana Ltd. on 09.10.2006 was not brought to the notice of Assessing Officer and the assessee had filed the copy of partnership deed dated 09.10.2006 with a request to admit the same as additional evidence under Rule 46A of the Income Tax Rules, 1962. The CIT(A) was of the view that where the assessment proceedings were in progress for more than a year and where the assessment order was passed after givin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k into surrounding circumstances to find out the reality of recitals made in the documents. Therefore, merely because the document in question was one of partnership, the CIT(A) held that it was open to the Assessing Officer to look into surrounding circumstances to find out the reality of recitals made in the agreement. Another aspect noted by the CIT(A) was that the fixed compensation of Rs. 100/- per MT received by the assessee from Jawahar was shown as lease rent in the TDS certificate issued by Jawahar. The rent was paid to the assessee as contemplated in section 194I of the Act and the CIT(A) has scanned and reproduced the copy of Form 26AS in this regard at page 12 of the appellate order. The CIT(A) also noted that in the immediate preceding year also, the said lease rent was declared in Form 26AS and tax was deducted under section 194I of the Act. The CIT(A) thus, held that the assessee had received fixed compensation and nothing more out of profits of partnership firm and other clauses in the said deed provided immunity to the assessee from losses of the partnership, clearly indicates that the relationship between the assessee and Jawahar was that of Lessor and Lessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned. We proceed to decide the present appeal after hearing both the learned Authorized Representatives. 10. In respect of merits of the case, the learned Authorized Representative for the assessee pointed out that the issue in the case is in relation to assessability of income in the hands of assessee. It was pointed out by him that as per section 20 of Maharashtra Co-operative Societies Act, the partnership was entered into between the assessee and Jawahar. The learned Authorized Representative for the assessee fairly admitted that the said partnership deed was not filed before the Assessing Officer. However, the same was filed before the CIT(A), who first vide para 6.2 stated that the same is not to be admitted but in the later paras, admitted the said partnership deed and considered the merits of the case and decided the present issue. Our attention was drawn to various clauses of partnership deed, under which there was status of societies i.e. the assessee which was a cooperative society which was established with the aim of crushing sugarcane of members entered into the said partnership. The assessee was contributing material through its members. The workforce was also provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by him that the Assessing Officer in assessment year 2011-12 was of the view that this was the business income and the plea of the assessee was accepted by order passed under section 143(3) of the Act. Without prejudice, it was pointed out by the learned Authorized Representative for the assessee that even it is held to be not business income, then the same is an adventure in the nature of trade and is to be assessed as business income. In respect of income from Distillery unit, it was pointed out by the learned Authorized Representative for the assessee that only when sugar factory was run, molasses would be produced and Distillery would function. He also stated that in case of Distillery, there was no permission under section 20 of the Maharashtra Co-operative Societies Act. He stressed that applying function asset and risk test, income earned by the assessee is to be assessed as business income. 11. The learned Departmental Representative for the Revenue pointed out that the assessee during the year under consideration had received sum of Rs. 3.02 crores from AOP and rental income from Distillery unit. The learned Departmental Representative for the Revenue stressed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of receipt. Further, with regard to reliance placed upon the decision of Hon'ble Supreme Court in New Savan Sugar & Gur Refining Co. Ltd. Vs. CIT (supra) by the learned Departmental Representative for the Revenue, it was pointed out that in the facts of said case, there was fixed rental payment, whereas in the facts of assessee, same was performance basis. In respect of reliance on the ratio laid down by Hon'ble High Court of Bombay in Saswad Mali Sugar Factory Ltd. Vs. CIT (supra), it was pointed out that in the facts of said case, the agreement was for a period of two years, which in turn, was followed by sale. Further, in respect of reliance placed upon the ratio laid down by Pune Bench of Tribunal in M/s. Jagdamba Sahakari Sakhar Karkhana Ltd. Vs. CIT (supra), it was pointed out by him that the factory was in liquidation, the same was leased out and where a company is in liquidation, there is no question of doing any business and secondly, it had received fixed rent as against agreement, the assessee to receive variable receipts. Another point raised by the learned Authorized Representative for the assessee was that the partnership was formed under the Maharashtra Cooperativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty through resolution of special general meeting dated 10.09.2006 resolved that the producer members of assessee society shall be entitled for availment of their rights as members for marketing of their sugarcane to the partnership proposed under the Deed. 14. The second party to the partnership i.e. Jawahar had a licensed crushing capacity of 7500 TCD under IEM dated 29.01.2001 and installed capacity of 6500 TCD was convinced about the potential of business, especially sugarcane availability and dependability of sugar factory as processing unit and therefore, decided to accede to the request of assessee for sharing its strength and expertise and also the principle of cooperation vis-à-vis concern for the society and thereby accepted the offer of assessee to share mutual strength by way of cooperative partnership. The Deed executed between the two parties recognized that the party of the first part i.e. assessee had the approval of its members by way of resolution passed unanimously by the members present in the special general meeting held on 10.09.2006 for such a partnership. Further, the party of the Second Part i.e. Jawahar had also got the approval of their Board of Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, rights, claims, etc. and the other party i.e. Jawahar was the working partner, which was to infuse the capital from time to time as may be required for running the sugar plant and also to manage the operations of the said sugar plant. It was specifically agreed between the parties that the contribution shall be made by the working partner and that shall be refunded as mutually agreed by both the parties. With regard to management of partnership, clause 7 provides that it shall vest in any three members who would be designated as partner directors. Two such partner directors were to be nominated and appointed by the working partner while the other partner i.e. the assessee would appoint one partner director. The day-to-day business operations were to be carried out by the three partner directors. However, in case of difference in opinion, it was provided that majority shall prevail. Further for day-to-day management, the working partner had right to create, appoint appropriate executives, experts and others. 16. Further, clause 9 provided as under:- "9. Sharing of risks and/or profits: Since the party of the second part is bringing its entire strength of finance and expertise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and recognized / approved worker union was appended to the partnership deed as Annexure-I and the same would continue to govern the modalities regarding the services of such employees. It was agreed between both the parties that the wages / salary of workforce deployed by the partner shall be paid by the management to the partner, who in turn, shall disburse it amongst the workers in the presence of representative of the management. The prevailing tax laws shall be applicable and the management would deposit the PF of the said workers / employees with the PF authorities directly. The other fringe benefits i.e. bonus, gratuity, leave salary shall be paid by the management. However, the liability of tenure of services with the partner, other than with the management, shall be sole responsibility of the partner and in case the same was not paid by the partner, it was agreed that the management shall not be responsible for the same. It was also agreed that the services of employees / workers of the said sugar plant would be utilized by the management. In case of any past liabilities of the partner regarding dues to workers / employees or to the statutory authorities and if the same was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip Act, 1932, shall apply to such partnership." 18. As per the said section 20, it is provided that any two or more societies with prior approval of the Registrar, obtain resolution passed by the majority of the members present at the general meeting of such society, enter into a partnership for carrying out specific business. It is provided that each member should have clear 10 days written notice of the resolution and the date of meeting. It is further provided that in case of society which had not taken any financial assistance from the Government, in the form of share capital, loan or guarantee, the prior approval of the Registrar for entering into such partnership shall not be required. Vide clause (2) to section 20, it is provided that nothing in the Indian Partnership Act, 1932 shall apply to such partnership. Under the provisions of section 20 of the Maharashtra Cooperative Societies Act, any two or more cooperative societies have the liberty to enter into partnership for the purpose of carrying out specific business. The section itself provides that permission is to be obtained for entering into such a partnership. The prior approval is to be obtained from the Registrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing areas, at the approval of its members by way of resolution unanimously passed by the members present in the special general meeting held on 10.09.2006 for such a partnership. On the other hand, the other concern i.e. Jawahar had also got approval of their Board of Directors as empowered by their general body resolution dated 13.06.2006 and also as per their byelaws to enter into the said partnership. The Deed of Partnership was executed at Phaltan on 09.10.2006 after both the parties had the approval from members of their respective societies. In other words, the terms of section 20 of Maharashtra Cooperative Societies Act, were fulfilled once the approval was received from the members of respective societies, to enter into a partnership as stipulated in section 20 of Maharashtra Cooperative Societies Act. The two parties executed the Partnership Deed by mutually agreeing to various terms and conditions, which we have referred to in paras hereinabove. The aim of assessee was that the sugarcane produced by its members are crushed and suitable remuneration is paid to its members and also non-members. The contribution of other partner was not only the financial contribution but al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as agreed for on the basis of sugarcane crushed for the respective years. It was specifically agreed between the parties that the assessee shall not be responsible for any losses or shortages in the operations of said sugar plant by the working partner. The understanding between the parties was to efficiently run the sugar plant and in turn, utilize the sugarcane produced by the members of assessee cooperative society and also by its nonmembers in the said area. The role of working partner was to efficiently run the sugar plant by using not only its expertise but by financial infusions, in view of which pumping in its financial and also taking the responsibility of running the business, it was agreed and in view of the fact that the said sugar plant was running into losses, the special formula to share the profits was agreed upon between the parties. Undoubtedly, the said agreement is with the prior approval of the Registrar of Cooperative Societies and it appears to be one of the accepted modes of sharing profits of a business run by two cooperative societies. The partnership so constituted in the present case by the assessee with Jawahar is a special vehicle constituted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r plant. The contribution of the assessee besides the sugarcane i.e. raw material for running the sugar plant, total infrastructure of the sugar factory i.e. the land on which it was situated along with plant & machinery and other assets and also the licenses, permits granted for running sugar factory. Further, the assessee had also provided its workforce which remained under its control and the payment of workforce was to be paid by the assessee though utilized and reimbursed by the working partner. Where, it was the duty of assessee to provide sugarcane, then it takes over the risks of running of sugar plant by way of providing sugarcane timely and also the risk to look after its members whose sugarcane is provided to the sugar plant. Further, the risk was taken over by the assessee vis-à-vis working of its workforce who had to run the sugar plant in order to crush the sugarcane, which in turn, would entitle the assessee to its part of remuneration. The assessee by way of entering into such an agreement has not only looked after the interest of its members i.e. the cane growers but has also undertaken to provide cane for running of the sugar plan and also participated in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head 'Income from rent does not determine the nature of receipts in the hands of assessee. The celebrity decision of Hon'ble Supreme Court in Shambhu Investment (P) Ltd. Vs. CIT (supra) clearly lays down the principle for assessment of income derived from letting whether under the head 'Income from property or as business income'. Where the intention was only to let out the operation of premises to respective occupant, it was held by the Hon'ble High Court of Calcutta in CIT Vs. Shambhu Investment (P.) Ltd. (supra) that the income derived therefrom was assessable as income from property and not as business income, but where the intention was to exploit immovable property by way of complex commercial activities, then it must be held as business income. The Hon'ble Supreme Court upheld the principle applied by the Hon'ble High Court. Applying the aforesaid decision to the facts of the present case, we hold that since the assessee has exploited its sugar plant by way of a commercial activity of running the same along with the incoming partner, then the income so earned is to be assessed as income from business. 23. Now, coming to various case laws relied upon by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from business and corollary to the same, brought forward losses on account of depreciation would form part of current depreciation in the hands of assessee and the same merits to be adjusted against income of the current year and in case of any balance, merits to be carried forward to the succeeding year. Accordingly, we decide the grounds of appeal No.1 to 3 in favour of the assessee and alternate plea raised by the assessee is dismissed. 25. Now, coming to the lease rent received by the assessee from M/s. Deccan Bottling & Distilling Industries Ltd. In line with our orders in the paras hereinabove, we hold that the said income is to be taxed as income from business and not income from other sources. 26. Vide ground of appeal No.6, the assessee is aggrieved by the denial of set off of unabsorbed depreciation for the earlier years and we allow this ground of appeal raised by the assessee. 27. The ground of appeal No.7 is against denial of CIT(A) in admitting additional evidence relating to partnership deed and the same is also allowed. 28. Similarly, ground of appeal No.8 stands allowed because of our order of admitting the partnership deed as genuine. 29. The issue in ground o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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