Case Law Details
ITAT MUMBAI BENCHES `B’,
Batra Gulati Hotels Vs. ITO,
APPEAL NO: ITA NO. 655/Mum/2009,
DECIDED ON June 25,2010
ORDER
PER P.M. JAGTAP, A.M.
This appeal by the assessee is directed against the order of ld. CIT(A) XVI, Mumbai dtd. 27.10.08.
2. The assessee in the present case is a partnership firm which filed its return of income for the year under consideration on 25.10.2005 declaring total income of `Nil’. During the course of assessment proceeding, it was noticed by the A.O. that practically no business activity was carried on by the assessee during the year under consideration except collecting rent from the buildings owned by it and given on lease to run hotel business at Bangalore. The rent received from the said buildings aggregating to Rs. 35,04,000/- was declared by the assessee as its business income and various expenses were claimed as deduction against the said income. According to the A.O., the said rental income was chargeable to tax in the hands of the assessee under the head “income from house property” and not under the head “profits and gains of business or profession”. He, therefore, required the assessee to offer its explanation in the matter. In reply filed vide letter dated 17.12.2007, it was submitted on behalf of the assessee that hotel buildings owned by it were its commercial assets and income from exploitation thereof was its business income irrespective of whether the exploitation was done directly by the assessee or through some other agency. It was submitted that the assessee firm itself was running the restaurant in the said buildings for many years in the past and the same have subsequently been given on lease temporarily for overcoming financial crisis. The submissions made on behalf of the assessee were not found acceptable by the A.O. for the following reasons given in para No. 4 to 5.1 of his order:
“The assessee has claimed various expenses against rental income and income from other sources. It may be noted here that rental income is formed p[art of income from house property and comes under the concept of house property only. The assessee has claimed huge expenses in order to treat the rental income i.e. house property income as business income.
In this way the assessee has tried to minimize the margin of profit and defraud the revenue by giving colour of genuineness to business income. Further the assessee has claimed depreciation of Rs. 8,92,848/- which consists of kitchen equipment depreciation of Rs. 5,08,543/-, the major part of expenses on depreciation. It is not known what kitchen equipments have been used to collect the rental income and dividend income. Further, the assessee has not claimed depreciation on land and building as forming part of his business. Any wise and prudent businessman would claim depreciation on these types of assets for the instant case; the assesse deliberately did not claim depreciation.
It is further gathered that the assessee debited Rs. 26,94,967/- to P&L A/c as interest paid. The assessee has shown liability of Rs. 2,01,36,483/- on which he has claimed interest paid Rs.26,94,967/-. There is no nexus between the loan taken for earning income during this year. It was for investment in other parts of assets shown in balance sheet. Therefore, interest is not allowed for the purpose of rental income hence this ground of interest loan is also rejected.
The other portion of expenditure is loan processing fees of Rs. 2,10,000/-. The assessee was asked to furnish the details of expenditure on loan processing and the assessee’s representative filed an explanation on 20.12.2007, regarding loan processing fees paid where he has produced the copy of Bank account showing the debit entry on 27.05.2007 on processing charges of Rs. 1,00,000/- only. While the assessee has claimed loan processing charges of Rs. 2,10,000/-, it is clear that the assessee has shown excessive expenditure only with an intention to increase more expenditure and reduced the tax liability and suppressed income. In this way the assessee has tried to establish the fact that all expenses are connected with the business. In fact the assessee has given colourable dimension to the rental income as if the assessee in actively involved in the business. Therefore, this ground relating to business expenditure as claimed by the assessee against rental income is not sustainable and therefore not accepted as business expenditure.”
3. For the reasons given above and relying, inter alia, on the decision of Hon’ble Supreme Court in the case of Shambhu Investment P. Ltd. 263 ITR 143, the A.O. held that the rental income received by the assessee was chargeable to tax in its hands under the head “income from house property”. Accordingly, deduction u/s 24 amounting to Rs. 10,51,200/- being 30% of the rent received only was allowed by him as deduction for repairs and maintenance and the deductions claimed by the assessee on account of various expenses aggregating to Rs. 40,93,651/- was disallowed by him. During the course of assessment proceedings, the A.O. also noticed that deposits in cash amounting to Rs. 1,50,000/- and Rs. 32,000/- were made by the assessee in its bank account with Centurion Bank on 20.8.2004 and 18.10.2004 respectively. When the assessee was called upon by the A.O. to explain the source and nature of the said cash deposits, it was submitted by the assessee that the said deposits were made in the bank account out of cash available as per the cash book. The extract of the relevant cash book was also filed by the assessee before the A.O. in support. According to the A.O., the assessee, however, did not produce the cash book and in the absence of the same, he treated the cash deposits found to be made in the bank account of the assessee amounting to Rs. 1,82,000/- as unexplained. The said amount thus was added by him to the total income of the assessee u/s 68.
4. Aggrieved by the order of the A.O., an appeal was preferred by the assessee before the ld. CIT(A) challenging the treatment given by the A.O. to its rental income as income from house property instead of business income, the disallowance of Rs. 40,93,651/- made by the A.O. on account of various expenses and addition of Rs. 1,82,000/- made u/s 68. It was submitted on behalf of the assessee before the ld. CIT(A) that first restaurant by name “Jacaranda” was started by the assessee at Bangalore in the year 1991. It was submitted that a second restaurant by name “Orchids & Roses” was started by the assessee in the year 1997-98 and it continued the restaurant business till the year 2000-01. It was submitted that in the year 2000-01, the assessee firm leased out the restaurant “Jacaranda” to M/s Rendezvous Restaurant Pvt. Ltd. along with all fixtures & fittings and equipments for a consolidated lease charge and the said lease rent was offered and taxed as business income of the assessee from A.Y. 2001-02 to 2003-04. It was submitted that in the previous year relevant to A.Y. 2004-05, the second restaurant was also leased out by the assessee to M/s Banjara-The Restaurant” along with all furniture, fittings and equipments at a consolidated charge and these lease rentals were also offered as business income. It was submitted that substantial funds were borrowed by the assessee to acquire the business assets and since the total turnover of both the restaurants was not enough to meet the routine expenses as also to repay the borrowed funds, the financial position started deteriorating. It was submitted that with a view to arrest the further deterioration in financial position, the assessee firm decided to lease out temporarily both the restaurants in order to repay all the interest and loan. It was contended that the intention of the assessee behind leasing out the restaurant thus was to overcome financial crisis and not to go out of business. It was contended that the rental income was received by the assessee by exploitation of its commercial assets and the same was chargeable to tax in its hands as business income irrespective of the fact that such exploitation was done through some other agency. In support of its contention, reliance was placed on behalf of the assessee on the decision of Hon’ble Supreme Court in the case of Commissioner of Excess Profit vs. Shri Laxmi Silk Mills Ltd. 20 ITR 451.
5. As regards the disallowance of expenses made by the A.O. amounting to Rs. 40,70,496/-, it was submitted on behalf of the assessee before the ld. CIT(A) that the said expenses have been incurred wholly and exclusively for the purpose of its business. It was submitted that the main expenditure on account of interest amounting to Rs. 26,94,967/- was incurred in respect of funds borrowed for acquisition of building and fixtures of restaurant and the same, therefore, was allowable as deduction. It was submitted that similarly depreciation claimed by the assessee on fixed asset amounting to Rs. 8,92,849/- was allowable as deduction as fixed asset were used by the assessee for the purpose of its business. It was submitted that even the other expenses incurred by the assessee were wholly and exclusively incurred for the purpose of its business and inspite of assessee having furnished the complete details thereof, the same were disallowed by the A.O.
6. As regards the addition of Rs. 1,82,000/- made by the A.O. u/s 68 on account of cash deposits found to be made in the bank account of the assessee, it was submitted on behalf of the assessee before the ld. CIT(A) that the said deposits were made out of cash available in hand and a copy of the relevant extract of cash book was also filed before the A.O. to support and substantiate the said expenditure. It was contended that the A.O., however, did not accept the same on the ground that the relevant cash book was not produced by the assessee for verification. It was contended that the A.O., however, never asked the assessee to produce the said cash book for verification and the relevant cash deposits were treated by him as unexplained without giving the assessee a sufficient and proper opportunity of being heard.
7. After considering the submissions made on behalf of the assessee before him as well as the material available on record, the ld. CIT(A) found that there was no evidence produced by the assessee to show that any business activity was carried out by it from the premises given on lease. He also noted that no evidence was produced by the assessee to show that the leasing out of premises was only a temporary feature and it was planning to continue to carry on the hotel business in future. On perusal of the relevant lease agreement, he noted that the premises were given on lease by the assessee on long term basis for a period of 6 to 15 years. He held that there was thus no merit in the claim of the assessee that the arrangement of leasing its premises was only a temporary feature. As regards the submission of the assessee that rental income declared by it as business income was accepted by the Department in the earlier years, the ld. CIT(A) held that there was a change in the factual position of the year under consideration in as much as even the second restaurant was also given on rent by the assessee company and there was no business activity of running a restaurant carried on in that year. He noted that the income of the assessee was consisting only of licence fee for premises given on leave and licence basis, the rent for letting out the premises and hire charges for infrastructure and equipments. According to the ld. CIT(A), the nature of such income was such that the same could not be termed as business income of the assessee. He held that the main intention of the assessee thus was to let out the property owned by it and the income from such letting out was chargeable to tax in its hands under the head “income from house property” as held by the Hon’ble Supreme Court in the case of Shambhu Investment (supra). He therefore upheld the action of the A.O. on this issue.
8. Having held that the entire rental income received by the assessee was chargeable to tax under the head “income from house property”, the ld. CIT(A) also agreed with the A.O. that the assessee was entitled only to deduction u/s 24 and expenses claimed by it under the various heads were not allowable as deduction in the absence of any business activity carried on by the assessee. He, therefore, confirmed the disallowance of Rs. 40,70,496/- made by the A.O. on account of various expenses claimed by the assessee. He also disallowed the claim of the assessee for setting off of brought forward business losses and unabsorbed depreciation of the earlier years on the ground that the entire rental income was chargeable to tax under the head “income from house property” and there was no income chargeable to tax under the head “profits and gains of business or profession”.
9. As regards the addition of Rs. 1,82,000/- made u/s 68 on account of cash deposits found to be made by the assessee in its bank account, the ld. CIT(A) held that even though a copy of the relevant portion of the cash book showing the availability of cash on the relevant dates was furnished by the assessee, there was a failure on the part of the assessee to satisfy the A.O. about the source and genuineness of the said cash. He therefore confirmed the addition of Rs. 1,82,000/- made by the A.O. u/s 68. The ld. CIT(A) thus confirmed the addition made by the A.O. to the total income of the assessee substantially vide his appellate order dated 27.10.08 and aggrieved by the same, the assessee has preferred this appeal before the Tribunal.
10. The assessee has raised the following grounds in this appeal:
“2. The learned lower authorities have grossly erred in treating the lease rental receipts as income exigible to tax under the head “income from house property” as against the “business income” claimed by the appellant. The findings of the Assessing Officer is contrary to the propositions laid down by the Hon’ble Supreme Court.
3. The learned lower authorities have grossly erred in disallowing entire amount of expenses claimed at Rs. 4,093,651/-. Reasons assigned for the impugned disallowance are wholly wrong and contrary to the provisions of law and evidences on record.
4. Having regard to the facts of the case, provisions of law and judicial propositions, the whole of the expenses claimed at Rs. 4,093,365/- ought to have been allowed.
5. The learned lower authorities have grossly erred in making/upholding an addition of Rs. 1,82,000/- on account of cash deposited in the bank, holding it to be an unexplained cash credit though no credit in the books of account appears. Reasons assigned for the impugned addition are wrong and contrary to the evidence on record.
6. The learned lower authorities have grossly erred in not allowing the set off of brought forward unabsorbed business loss at Rs. 1,240,949/- and brought forward unabsorbed depreciation allowance of prior years at Rs. 4,019,385/-. Reason assigned for the impugned refusal are wrong and contrary to the provisions of law.”
11. The learned counsel for the assessee at the time of hearing took us through the relevant clauses of the lease agreement placed in his paper book to show that the assessee has let out not only the premises but also the furniture, fixtures & equipments etc. which are required for running a restaurant. He also pointed out that there was restriction on the tenant to use the premises only for the purpose of running a restaurant and even the possession of the said premises was given subject to various conditions. He pointed out that even the employees of the assessee working in the restaurant were to be continued to work with the tenant and there was no right created in respect of the premises in favour of the tenant. He submitted that consolidated amount of rent was charged by the assessee for the premises to the tenant and there was no bifurcation of such rent made for premises separately and for other assets such as furniture, fixtures & equipments etc. He contended that having regard to all these terms and conditions on which the property was let out by the assessee, it cannot be said that it was a case of letting out the property simplicitor. According to him, the activity of the assessee, on the other hand, was a complex commercial activity and the income arising from such activity in the form of gross rental amount is chargeable to tax under the head “profits and gains of business or profession” as rightly claimed by the assessee.
12. As regards ground No. 3 & 4 relating to the assessee’s claim for deduction on account of various expenses, the ld. Counsel for the assessee submitted that the major expenditure incurred by the assessee on account of interest was in respect of funds borrowed for the purpose of acquisition of assets. He submitted that the claim of the assessee for deduction on account of interest thus is liable to be considered in accordance with law depending on the head of income under which the rental income is to be brought to tax. He submitted that bifurcation can be made of the rental income received by the assessee in rent attributable to the building and rent attributable to furniture, fixtures and other equipments and since the rent attributable to furniture and fixtures and other equipments is chargeable to tax under the head “income from other sources”, the claim of the assessee for depreciation as well as other expenses has to be considered under the said head in accordance with law. He invited our attention to the details of such expenses placed at page No. 68 of his paper book and submitted that a suitable direction may be given to the A.O. to consider the allowability of the same.
13. As regards ground No. 5 relating to the addition of Rs. 1,82,000/- made by the A.O. and confirmed by the ld. CIT(A) u/s 68 on account of cash deposits found to be made in the bank account of the assessee, the learned counsel for the assessee submitted that the said cash deposits were made out of cash available with the assessee as per the cash book. He submitted that computerised books of account are maintained by the assessee using Tally Software and therefore the printout of the relevant pages of the cash book was taken and filed before the A.O. to show the availability of cash. He submitted that the assessee, however, was not given an opportunity to produce the complete cash book and if such opportunity is now given by restoring this matter to the file of A.O., the assessee is in a position to produce that cash book for verification.
14. As regards ground No. 6, the ld. Counsel for the assessee submitted that the claim of the assessee for set off of brought forward business loss and unabsorbed depreciation is consequential to the main issue involved in this appeal relating to the head of income under which the rental income is to be held as chargeable to tax in the hands of the assessee.
15. The learned D.R. strongly relied on the impugned order of the ld. CIT(A) in support of the Revenue’s case on the issues raised by the assessee in this appeal. He submitted that both the premises owned by the assessee were let out by him on long term basis to earn rental income and there being no services whatsoever rendered by the assessee except giving the premises on rent, it was a case of earning rental income simplicitor and the income so earned is chargeable to tax in the hands of the assessee under the head income from house property as rightly held by the A.O. as well as ld. CIT(A). He submitted that there was no involvement of the assessee in the restaurant business carried out in the said premises nor there was any other business activity independently carried out by the assessee. He submitted that there was nothing to show even any intention of the assessee to restart the restaurant business and in these facts and circumstances, it cannot be said that there was any complex commercial activity carried on by the assessee. As regards the alternative contention of the ld. Counsel for the assessee that rent attributable to furniture, fixtures and other equipments may be taxed under the head `income from other sources’ and the allowability of various expenses to be considered under the said head, the ld. D..R. submitted that no such bifurcation of rent is made even in the relevant leave & licence agreements. He contended that in the absence of such bifurcation and keeping in view the fact that rent is mainly attributable to the premises, even the alternative contention of the assessee cannot be accepted.
16. We have considered the rival submissions and also perused the relevant material on record including the agreement under which the hotel premises owned by the assessee were given on rent. The main issue which is involved in this appeal is whether the rental income received by the assessee under the said agreement is chargeable to tax in its hands under the head “income from house property” as held by the authorities below or under the head “profits and gains of business” as claimed by the assessee. It is also observed in this context that the basic principles in the matter of chargeability of rental income to tax under the head “income from house property” or “profits and gains of business” have been laid down by the Hon’ble Supreme Court in the various decisions which are summarized below:
“House owning, however profitable, cannot be a business or trade in the IT Act and where income is derived from house property by the exercise of property rights properly so called, the income falls under the head “income from house property” chargeable u/s 22.
If the income falls under the head “income from house property” which is chargeable u/s 22, it has to be taxed under that section only and cannot be taken to section 28 on the ground that the business of the assessee was to exploit property and earn income or because the income was obtained by a trading concern in the course of its business.
Where house property is given on lease or license basically for earning income there from, the true character of the income derived is income from house property falling u/s 22 and the said character is not changed and the income does not become business income even if the hiring is inclusive of certain additional services such as cleaning, lighting or sanitation which are relatively insignificant and only incidental to the use and occupation of the terms.
In cases where the income received is not from the bare letting of tenements or from letting accompanied by incidental services or facilities, but the subject hired out is a complex one and the income obtained is not so much because of the bare letting of tenements but because the facilities and services rendered, the operation involved in such letting of the properties may be of the nature of business or trading operations and income derived may be income not from exercise of property rights but income from operations of trading nature falling u/s 28.
In cases where the letting is only incidental and subservient to the main business of the assessee, income derived from letting will not be the income from property falling u/s 22.
If only few of the business assets are let out temporarily while the assessee is carrying out his other business activities, then it is a case of exploiting business assets otherwise than employing them for his own use for making profit of that business. However, if the business never started or has started but ceased with no intention to be resumed, the assets also ceased to be business assets and the transaction will only be exploitation of property by an owner thereof but not the exploitation of the business.
17. If the aforesaid principles are applied to the facts of the case, we find that although its premises were given on rent by the assessee with the specific condition to use the same for running restaurant and the same were given along with furniture and fixtures as well as other equipments required for running the restaurant, the main intention of the assessee as is evident from the terms and conditions of the relevant agreements was to derive income by the exercise of property rights in the form of fixed monthly rent. As rightly submitted by the learned D.R. in this regard, there were no other services which the assessee was required to render except giving the possession of the premises owned by it to the tenant to run the restaurant. The assessee in no way either directly or indirectly involved in the business of running of restaurant in the said premises and its intention was clear to exploit the property to earn income in the form of rent. The property thus was given by the assessee on leave or licence basically for earning income there from in the form of rent and the character of income so derived was income from house property falling u/s 22 as held by the authorities below. Merely because the property was given on leave or licence for a specific purpose of running restaurant or it was given along with furniture, fixtures as well as other equipments required for running of restaurant, the same in our opinion, could not change the character of rental income which is “income from house property” and the same would not become business income even if the hire was inclusive of other assets which were incidental to running a restaurant. Having regard to all the facts of the case as well as keeping in view the terms and conditions of the relevant agreement, it cannot be said that the subject hired out was a complex one and the income obtained was not so much because of the bare letting of tenement but because of other facilities provided by the assessee. Moreover, all these business assets including two properties as well as other assets provided therein were let out by the assessee for a period of 6 to 15 years and it cannot be said that only some of its business assets were let out temporarily by the assessee while carrying out its other business activity. On the other hand, as established by the authorities below, the assessee had come out of the business of running of restaurant completely and there was no such business activity carried on by him either in the year under consideration or even in the immediately succeeding years. It was thus not a case of exploiting some of its business assets by the assessee by letting them out temporarily while carrying out its business. On the other hand it was a case of exploitation of its property by the assessee as owner thereof to earn fixed income in the form of rent. In our opinion, when all these facts of the assessee’s case are considered in the light of principles laid down by the Hon’ble Supreme Court, it becomes abundantly clear that the rental income received by the assessee is chargeable to tax under the head “income from house property” as rightly held by the authorities below and not under the head “profits and gains of business” as claimed by the assessee. We, therefore, find no merit in the contention raised on behalf of the assessee on this issue and rejecting the same, we dismiss ground No. 2 of assessee’s appeal
18. We, however, find merit in the alternative contention raised by the learned counsel for the assessee that the rent attributable to the building has to be brought to tax under the head “income from house property” whereas the rent attributable to other assets such as furniture, fixtures and other equipments is chargeable to tax under the head “income from other sources”. In this regard, the ld. D.R. has raised an objection stating that there is no such bifurcation of rent made in the relevant agreement. However, the undisputed fact is that the rent received by the assessee was composite one for building as well as for furniture, fixtures and other equipments available therein and the bifurcation of rent for building and for other assets, in our opinion, can be reasonably be made on the basis of written down value of the said assets which are indicative of the quantum of investment made by the assessee in the said asset. The schedule of fixed assets as on 31.3.05 is given on page No. 71 of the paper book which shows that WDV of land and building is Rs.1.51 crores as against the WDV of other assets which is to the extent of Rs.0.34 crores. On this basis, the rental income, in our opinion, can reasonably be bifurcat4d as 80% for land and building and 20% for other assets and the same can be taxed under the head “income from house property” and “income from other sources” respectively.
19. As regards ground No. 3 & 4 relating to the assessee’s claim for deduction on account of various expenses, we are of the view that the allowability of the said claim needs to be considered afresh in accordance with the relevant provisions relating to the computation of income under the head “income from house property” and income from other sources” . For instance, the assessee is claimed to have incurred the major expenditure on account of interest in respect of funds borrowed for acquisition of assets. On verification, if it is found that the corresponding funds were borrowed for acquisition of land and building, the interest paid thereon has to be allowed as deduction while computing income from house property. If the borrowed funds are partly utilized for acquisition of other assets such as furniture, fixtures and other equipments etc., the allowability of interest attributable thereto has to be considered for computing the income of the assessee under the head “income from other sources”. Similarly, the claim of the assessee for depreciation on such assets has to be considered under the said head in accordance with law. We, therefore, set aside the impugned order of the ld. CIT(A) confirming the disallowance made by the A.O. out of various expenses and restore this issue to the file of the A.O. for considering the same afresh in accordance with law. Ground No. 3 & 4 of assessee’s appeal are accordingly treated as allowed for statistical purposes.
20. As regards ground No. 5 relating to the addition of Rs. 1,82,000/- made by the A.O. and confirmed by the ld. CIT(A)on account of cash deposits found to be made in the bank account of the assessee, the learned counsel for the assessee has submitted that no opportunity was specifically given to the assessee either by the A.O. or by the ld. CIT(A) to produce the cash book in order to establish the availability of cash on the relevant dates to make deposit in the bank account. As submitted by him, the books of account are maintained by the assessee by using Tally Software and, therefore, the printout of the page showing the availability of cash on the relevant dates was filed before the A.O. instead of the printout of the entire cash book. Keeping in view these submissions made by the ld. Counsel for the assessee, we restore this issue to the file of A.O. with a direction to give an opportunity to the assessee to produce the cash book for verification and decide the same in accordance with law after verification of the said cash book. Ground No. 5 of the assessee’s appeal is accordingly treated as allowed for statistical purposes.
21. The issue raised by the assessee in ground No. 6 relating to its claim for set off of brought forward business loss and unabsorbed depreciation is consequential to the main issue relating to the head of income under which rental income is chargeable to tax. As we have already decided the said issue against the assessee holding that the rental income is chargeable to tax under the head “income from house property” and “income from other sources” and not under the head “profits and gains of business”, the assessee will not be entitled to claim any set off of brought forward business loss and unabsorbed depreciation since there is no income chargeable to tax in its hands under the head “profits and gains of business”. Ground No. 6 of the assessee’s appeal is accordingly dismissed.
22. In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on 25th June, 2010
