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TMI Blog2019 (2) TMI 910X X X X Extracts X X X X X X X X Extracts X X X X ..... ) & (ii) in favour of the assessee and against the revenue. Proceedings initiated u/s 147 - assess the arrears of rent received as 'income from house property' in the previous years of the relevant assessment years, in which the property was let and the rent accrued - whether it was within the period of limitation as provided under Section 149? - Held that:- We cannot countenance the argument especially noticing the fact that the assessee had taken legal proceedings for enhancement of rent and was following the mercantile system of accounting. Admittedly on the expiry of lease period, after the assessee acquired the property, the assessee sought for enhancement. There was no claim for eviction of tenants who were continuing in the premises paying rent as per the earlier agreement. The tenants having not acceded to the request of an enhancement, the assessee had taken legal proceedings which culminated in an arbitration and the arbitration concluded with the enhancement sought by the assessee being allowed which resulted in the receipts of arrears in a far later year relatable to various prior years. It cannot be said that the assessee did not have a reasonable expectation of enh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r assessments in which the assessee had returned rental income obtained from the very same building at Kolkata. We agree with the learned Senior Counsel that if at all a claim had to be made, it had to be made in the regular assessment. It is also pertinent that the Revenue would be disabled insofar as conducting an enquiry after long years within the period in which the reassessment is made. The Hon'ble Supreme Court has also held that re-opening is for the benefit of Revenue to bring to tax the escaped income and the assessee cannot agitate matters concluded in the original assessment. A reassessment has to be confined to that found in the notice which is issued by the AO or any other aspect discovered in the course of the proceedings, which appear prejudicial to the revenue. We, hence, answer the question of law raised as (v) against the assessee and in favour of the Revenue. We set aside the order of the Tribunal which remanded the consideration of vacancy allowance. Set-off of carried forward depreciation as existing in the last year of its operation, in the subsequent years in which the assets of the business were not put to use - Whether the assets can be said to have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year in which there was no use of assets by the assessee can be permitted - Held that:- We have to observe that we are looking at the re-assessment proceedings and not necessarily the factual adjudication of whether the expenses claimed are excessive or not. The principle on which the re-assessment has been made is that if there is no business income, there could be no expenditure claimed under Section 37. We are only called upon to decide the said question of law, which also arises on reassessment and we do not think that our answering the question of law against the Revenue and in favour of the assessee would commend a remand to re-examine the issue on facts. The facts have already been gone into by the Assessing officer and the allowance granted and we do not attempt re-examination by another incumbent officer which would result in a further challenge on the ground of mere change of opinion. We hence reject the said ground raised by the Revenue. Un-absorbed business loss - Held that:- It is an accepted position that carry forward can be set off only against business income. The assessee had no business income for the said year. Hence, the said question has to be answered ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I(TAXES)AND SRI. JOSE JOSEPH, SC FOR INCOME TAX For the Respondent : ADVS. SRI. E. K. NANDAKUMAR (SR. ) SRI. K. JOHN MATHAI SRI. P. BENNY THOMAS AND SRI. P. GOPINATH (SR. ) JUDGMENT Vinod Chandran, J . The appeals, arising from a common order of the Tribunal, raise common and different questions in the various assessment years (for brevity A.Ys). We, hence, would go by the issues raised in the various appeals. 2. For the years 1985-1986 and 1996-1997 to 2000-2001, a total of six A.Ys, one of the questions raised is on the rent arrears of earlier years, received by the assessee in the subsequent years. On facts, suffice it to record that the assessee was the owner of a multi-storeyed building, by name 'Lindsay Towers' in Kolkata, which was purchased in 1971. On the assessee seeking enhancement of rent from the tenants, the tenants refused and the matter was referred to an Arbitrator, which was settled much later. The rent so fixed by the Arbitrator along with interest as awarded, for many previous years, was received by the assessee from the various tenants in a far subsequent year. The Assessing Officer [for brevity AO ] for certain yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st appellate authority followed the order in first appeal for the year 1985-1986 which relied on Section 25B, which was introduced later; but found it to be clarificatory and upheld the assessment made. The Tribunal relied on two decisions of the Calcutta High Court in Hamilton Co. (P) Ltd. v . CIT [ ( 1992) 194 ITR 391 (Cal) ] and Hope (India) Ltd. v . CIT [ ( 1999) 238 ITR 740 (Cal) ] to find that there could be no assessment made in the previous year in which the arrears of rent was received, since it related to a prior year. Section 25B was held to be not clarificatory. 5. Sri.P.K.R.Menon, learned Senior Counsel, Government of India (Taxes) would seek to sustain the order of the AO. assessing it as 'income from other sources'. Alternatively, it is argued that merely because the rent arrears was received in a subsequent year, it would not change the character of the income and it could be assessed as income from house property itself. There is no restriction insofar as assessing the income from house property in the year in which it accrues or arises and the receipt in a subsequent year would also enable such assessment in that year when the amounts are rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l was correct in holding Section 25B to be clarificatory? 8. We extract Section 23(1)(a) and (b) and Explanation I: 23(1) For the purposes of section 22, the annual value of any property shall be deemed to be - ( a) the sum for which the property might reasonably be expected to let from year to year; or ( b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; xxx xxx xxx Explanation 1.- For the purposes of this sub-section, annual rent means - ( a) in a case where the property is let throughout the previous year, the actual rent received or receivable by the owner in respect of such year; and ( b) in any other case, the amount which bears the same proportion to the amount of the actual rent received or receivable by the owner for the period for which the property is let, as the period of twelve months bears to such period . 9. Section 22 provides that the annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l year 1999-2000 on account of the arrears of rent for the period 01.01.1994 to 31.03.1999. The appellant contended that this amount was in fact damages and mesne profits. The terms of the compromise in the suit was specifically noticed to negative the said plea. The Division Bench held that, by virtue of the compromise between the parties, the assessee not only acquired the right to additional income but also received the arrears of rent during the financial year 1999-2000, attracting the provisions of Section 5(1)(a) of the Act. 11 . R.J.Wood P.Ltd. is in identical circumstances of a letting out made by the assessee to five tenants. A dispute arose as to who is to bear maintenance charges, upon which the tenants filed a suit before the Small Causes Court for fixation of standard rent. The Court by an interim order fixed a rent on a lump sum basis; lesser than that agreed upon between the parties. The assessee paid the maintenance charges during the period of the pendency of the suit and claimed it as expenditure. The AO disallowed the claim finding that the agreement created the liability for maintenance on the tenants. The suit came to be finally decided, in which the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the arrears were received. It was held: If the arrears of rent of past years are not part of the annual rent of the year of account in which such arrears are received, then the only rational inference should be that the annual rent or annual rents of the past year or years to which they pertain can be brought to charge only in the assessment years relevant to such past years of account. The receipt of arrears of rent cannot, by any stretch of imagination, be said to have shed their character as rent from property and to have ceased to be liable to tax as income from house property. The simple case is that the rent of a past year increased retrospectively shall be the annual rent of such past year or years but not the annual rent of the year in which it is received consequent upon subsequent increase . 14. In this context, we also notice the following from Departmental Circular No.494 dated 9th August 2000: Introduction.- Section 25B [enacting special provision for arrears of rent received] has newly been inserted (w.e.f. 1.4.2001) by the finance Act, 2000. The scope and effect of such insertion of section 25B by the Finance Act, 2000, have been elabora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arrears of rent arise last in the assessment year 2000-2001, the previous year relevant to which, ends on 31.03.2000. Section 23 as amended by the Finance Act,2001, again spoke of determination of annual value and deemed it to be the actual rent received or receivable by the owner in respect thereof, in excess of the sum, which is reasonably expected to be received when it is let from year to year. Before the said amendment to Section 23, Section 25B was brought in as a special provision for arrears of rent received subsequently, by Finance Act, 2000 with effect from 01.04.2001. Hence, when Section 25B was first brought into the Statute, Section 23 existed as it did from 1993 onwards, with the annual value deemed to be the annual rent and the definition of annual rent found in Explanation I to be the rent accruing for that previous year when the property was let. Section 25B sought to remove the prohibition, insofar as the arrears of rent received in a subsequent year not being charged under Section 22 for reason of the measure of 'annual value' as defined by 'annual rent' not enabling the assessment of any rent, which is not received or receivable for the prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'income from other sources'. The rent received being 'income from house property', does not change its character, merely for the reason that it has been received in a far later subsequent year to the financial year in which it actually accrued and was payable. But 'income from house property' cannot be assessed in any year other than the assessment year; in which previous year the property was let and the rent received or receivable for that previous year's letting. We also do not agree with the order of the CIT (Appeals) and the Tribunal that Section 25B is clarificatory; which ground has been taken to sustain the assessment in the assessment year 2000-01. 18. Admittedly the rent arrears received in 2000-01 also related to the various prior years. However, there was no attempt to reopen the assessments of the earlier years by the AO; at least, those in which the limitation period had not expired. Hence for the assessment year 2000-01 reopening of assessment under Section 147 does not arise. All the same, we make it clear that there could be no protective assessment for the earlier years as made by the AO. Hence, for the year 2000-2001, we uphold the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment was in excess of ₹ 1 lakh, it was 10 years for the year 1985-86, 1996-97 1997-98 and six years insofar as 1998-99 and 1999-2000. The assessee also had a contention before the Tribunal that the arrears of rent received were in the nature of damages and mesne profits as contented by the assessee in B.M Gupta and Sons , which was rightly negatived by the Delhi High Court. There the assessee received the rent by virtue of an agreement entered into in compromise of a suit. The Division Bench of the Delhi High Court specifically looked into the order of the Civil Court and found that the plea of damages and mesne profits is unfounded. In the present case also, admittedly, the assessee purchased a property in which there were tenants. On expiry of the lease period, the assessee claimed enhancement to which the tenants did not accede. The assessee approached the Arbitrator and the arrears of rent obtained by the assessee is by virtue of the award on arbitration. Hence the claim of damages and mesne profits cannot be sustained. The amounts received from the tenants were with respect to the rent of the relevant previous years, as enhanced by the award on arbitration. 21. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier agreement. The tenants having not acceded to the request of an enhancement, the assessee had taken legal proceedings which culminated in an arbitration and the arbitration concluded with the enhancement sought by the assessee being allowed which resulted in the receipts of arrears in a far later year relatable to various prior years. It cannot be said that the assessee did not have a reasonable expectation of enhancement. The assessee following the mercantile system also should have returned the rent claimed by them before the arbitrator as accruing in the respective previous years of the assessment year when the matter was pending arbitration. The argument holds no merit and is rejected. The question raised as (iii) is answered in favour of the revenue and against the assessee. 23. For the assessment years 1996-1997, 1999-2000 and 2000-2001 the question arises as to: ( iv) whether there could be a claim of deduction of Municipal tax, for which cheque was issued to the local authority prior to the end of the previous year relevant to the assessment year; but, however, the Bank statements show realization only on the commencement of the next assessment year. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts. The assessee only claims credit insofar as the amounts credited to be set off on the tax payable in that particular year and the balance refunded. 27. Another question arising in the years 1998-1999, 2000-2001 and 2001-2002 is as to: ( v) Whether the Tribunal was correct in having permitted the assessee to claim vacancy allowance as provided in Section 24(1)(i)(ix)? The learned Senior Counsel, Government of India (Taxes) would contend that in all the said years the assessee had filed a return and there was an assessment completed under Section 143(3). Here, the proceedings coming up for consideration is the proceeding under Section 147, for reassessment. The assessee, if at all, had the claim of vacancy allowance, ought to have claimed it in the regular assessment. Reliance is also placed on the decision in Chettinad Corporation P. Ltd. v . CIT [ ( 1993) 200 ITR 320 (SC) ]. 28. We see from the assessment orders for the respective years that they are all assessments completed under Section 147 read with Section 143(3). We also see a recital as to the regular assessments in which the assessee had returned rental income obtained from the very same build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee having had the intention to revive the industry and kept the machinery ready for use for the purpose of commencement of manufacturing activities. 31. In the year 1996-97, which arises first for our consideration under I.T.A.No.1418/2009, the AO again declined the grant of allowance as also the carried forward of depreciation for the previous year to be set off against the income arising from house property, which alone was the income for the years in which the business of the assessee remained closed. The AO found that deduction on depreciation under the Act is not a mere allowance for natural wear and tear on account of the ageing process. A deduction is enabled under the Income Tax Act, only when the assets, on which depreciation is claimed are put to use. The two conditions for claiming depreciation as per Section 32(1) of the Act were found to be (i) ownership in the property and (ii) use it is put to for the purpose of business or profession. It was found that unless these two conditions are satisfied, no allowance in respect of depreciation can be allowed. Mere preparation for the user or keeping the machinery for use cannot amount to actual use. A number of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely nothing on record to take a deviation in the year 1996-97 and decline the claim when the assessee had absolutely no intention to close down the factory and had kept the machinery ready for use. The commencement of the industry got delayed not for reasons attributable to the assessee and eventually the unit was commenced in the year 2010. The Tribunal's order finding the passive use insofar as the plant and machinery of the assessee has to be upheld, is the contention raised. The learned Counsel would rely on a Division Bench decision in C.I.T. v. Geo Tech Construction Corporation, [2000] 244 ITR 452 to contend that the user as found in Section 32(1) has to be given a wider meaning and includes a passive use. The decision in C.I.T. v. Vikram Cotton Mills Ltd., [1988] 169 ITR 597 (SC) was relied on to contend that the facts were almost similar and the amounts obtained as lease rent for the machineries; though the assessee having not put it to use for the purpose of the business, was allowed when the lease was effected under a scheme formulated by the High Court. 35. Sri.Joseph Markos, learned Senior Counsel, assisting us, would, at the outset, submit that the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capital assets for its business, enables commerce and trade, generates employment and promotes overall economic growth. Necessarily there occurs wear and tear in respect of the plant and machinery, not particularly due to passage of time, but the use to which it is put to. In course of time the plant and machinery would be rendered useless, and it is expedient for continued business activity and economic growth that there should be a further investment on plant and machinery. Hence, the deduction allowable is also as a recompense insofar as the further investment required after a period of time. As we see from the Income Tax Act, depreciation is calculated based on the accounting standards by determining the written down value of an asset in a particular previous year. Allowance is insofar as granting the deduction to the extent of what is reduced from the written down value, determined in the previous assessment year, which along with carry forward depreciation, can be set off as against the income arising; not only from the profits and gains of business or profession, but also from other heads under Section 14. The carry forward is also permitted till the written down value i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year relevant for that assessment year . In the absence of any words to that effect, it must be held that for availing the benefit of Section 32(2), it is not necessary that the business carried on in the following year is the same business as was carried on in the previous year. 21. The other question is whether the assets which earned the depreciation in the preceding year should exist and should continue to be used for the purpose of business in the following year. In the absence of any words in the said sub-section to that effect, we cannot read this requirement also into the said sub-section. This is evident from the words or if there is no such allowance for that previous year, be deemed to be the allowance for the previous year occurring in the sub-section. 22. Yet another question which has to be answered before we can answer the question concerned in this appeal is whether it is necessary that in the following year the assessee must carry on business, i.e., some or other business, to avail of the benefit of the said sub-section? Two views are possible in this behalf, viz., (I) since the sub-section speaks of unabsorbed depreciation being carried forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue. 41. Now, the question arises as to whether in the relevant previous years in which the assessee did not carry on any business operation and did not, obviously earn any income from the profits and gains of business or profession, could there be an allowance by way of deduction of depreciation as against the other heads of income. If the answer is negative, then we have to consider whether such depreciation arising in an assessment year, not permissible of set off, for reason of the use having not existed; could be carried forward. We extract Section 32, as it is relevant for our consideration: 32. Depreciation : ( 1) In respect of depreciation of- ( i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed- ( i) in the case of assets of an undertaking engaged in generation or generation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Here, admittedly the business had been closed down for long, that too for a period of 24 years. We also notice the following from the decision of the Hon'ble Supreme Court, to find the declaration made therein to be not applicable to the facts of the assessee: In each case, the intention has to be gathered as to whether the commercial asset was intended to be exploited by the assessee or whether it was intended to be used by letting it out for a temporary period. It depends upon the facts and circumstances of each case. The circumstances of the instant case were as follows as appears from the statement of the case: ... . 45. Geo Tech Construction Corporation was a case in which on March 29th of the previous year the assessee had purchased two tipper lorries. The AO had refused depreciation allowance claimed on the ground that it was never put to use by the company in the relevant previous year. On facts, it was found by the Division Bench that there was a possibility of the assessee having put to use the tipper lorries in the very same previous year in which it was purchased, since it could have been transported from the place of purchase within a day. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the said decision as follows: 21. We feel that counsel for the Revenue is right in their submission. In the instant case, the entire Bhopal Unit came to a standstill and there was a complete halt in its functioning from the Assessment Year 1997-98. In that year, the AO still allowed the depreciation treating it to be a passive user . However, when it was found that even in subsequent year, the Bhopal Unit remained nonfunctional, Assessing Officer(s) disallowed the depreciation. Present appeals relate to the Assessment Years from 1998-99. In the process six years passed till the last assessment year before us, but there was no sign of this unit becoming functional. The passive user , in these circumstances, cannot be extended to absurd limits. Otherwise, the words used for the purpose of business will lose their total sanctity. It cannot be the intention of the Legislature that the words used when it is to be interpreted in a wider sense to mean, ready to use , the same is stretched to the limits of non-user for number of years. 22. We may point out at this stage that some of the High Courts have taken the view that the expression used should mean actual user (see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness and as a consequence no income from profit and gain of business or profession, our answer favours the Revenue and is against the assessee. If the allowance as per Section 32(1) does not arise then there is no question of carry forward under sub-section (2) of Section 32. The question numbered as (vii) in both its hues; of a depreciation allowance not being permissible in the long years when the assets were not put to use for the business of the assessee and the carry forward in those years when the allowance itself was not permitted are answered against the assessee and in favour of the revenue. 50. The next issue arising in the year 1996-97 to 2002-03 and 2004-05 is the business expenses claimed by the assessee for that year. The question arising is so reframed: ( viii) Whether the business expenses claimed by the assessee for that year in which there was no use of assets by the assessee can be permitted? As we noticed in the earlier paragraphs the assessee had not carried on any business in 24 years, manufacturing activities having been closed down from 1987. The assessee had claimed business expenditure in the respective years under Section 37 to be set off aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising from business or profession. In this context, as rightly pointed out by the assessee, Rajendra Moody is squarely applicable. That was a case in which the assessee had made investment in shares by borrowing funds. However, the shares did not yield any return during the relevant previous year. The expenditure claimed on interest, on borrowed funds was declined by the Assessing Officer finding that there was no income made or earned, from the said investments and hence there could be no deduction permitted. The Hon'ble Supreme Court found that Section 57(iii) requires that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. S.57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction .(sic). Hence even when the expenditure was substantial and the return was nil, the deduction permissible under Section 57 was allowable. The Hon'ble Supreme Court held that the applicability of Section 57, is to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady been gone into by the Assessing officer and the allowance granted and we do not attempt re-examination by another incumbent officer which would result in a further challenge on the ground of mere change of opinion. We hence reject the said ground raised by the Revenue. 56. Three other questions arise in the assessment year 2002-03. Whether the - ( ix) un-absorbed business loss and ( x) unabsorbed depreciation; can be permitted to be set off against the income other than the 'income from profits and gains of business or profession'. The other question is on - ( xi) the sustainability of annual value determination made by the AO merely on the basis of the rent paid by the earlier tenant in the premises. 57. As far as business loss, it is an accepted position that carry forward can be set off only against business income. The assessee had no business income for the said year. Hence, the said question has to be answered against the assessee and in favour of the Revenue. 58. On depreciation, though the carried forward depreciation is enabled to be set off against any income other than income from profits and gains of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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