Case Law Details
Brief of the Case
ITAT Pune held In the case of M/s Jagdamba Sahakari Sakhar Karkhana Ltd. vs. CIT that it is not justified to show the rental income from the leasing out of its entire factory premises and industrial unit as income from business & profession as the assessee has not carried out any business of its own even in the preceding 5 years. Also the lease agreement does not show any intention of the assessee to resume the business in future. Accordingly it was decided that income should be classified as income from house property and the assessee is not entitled to set off previous year lossess as the assessee is no more in the business. He is acting only as a lessor of the factory premises and industrial unit. Thus reopening of assessment is justified.
Facts of the Case
The assessee filed its return of income for the AY 2008-09 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 years was set-off to the extent of business income declared i.e. Rs.2,68,64,699/- and accordingly the total income was declared at NIL. The return of income was subjected to scrutiny under section 143(3) of the Act and the Assessing Officer completed the scrutiny assessment vide order dated 19.11.2010. In the scrutiny assessment, the returned income was accepted in toto.
On subsequent examination of records by the Commissioner , it was noticed that gross income received by the assessee was Rs.2,93,83,760/- which included lease rent of Rs.2,90,47,300/-, other income of Rs.1,99,798/-, interest income of Rs.66,642/- and seed farm income of Rs.70,020/-. Thus, the gross total income received during the year did not include any income from manufacturing business and sale of sugar. The Commissioner also noticed from examination of records that the assessee had received rental income which arose from the leasing out of its entire factory premises and industrial unit to M/s Natural Sugar & Allied Industries Ltd. In-fact; it had not carried out any business of its own even in the preceding 5 years. In the light of aforesaid facts, the Ld. Commissioner observed that the assessee was not justified in showing the rental income and other income under the head “business income”. He was of the prima-facie view that such income ought to have been appropriately shown under the head “income from other sources” or “income from house property”.
He also observed that as the assessee is no longer carrying on business, it was not entitled to bring forward and set-off earlier year’s business losses against the current year’s non business income. In the scrutiny assessment, the Assessing Officer did not take any cognizance of these aspects. He further observed that on examination of records, it was seen that despite not having any business activity, the assessee had claimed several expenses viz. salary and wages, administrative expenses, interest, depreciation, etc. which were prima-facie not admissible. The expenses were routinely allowed without any application of mind. In short, the 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.
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) 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 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.
Contention of the Assessee
The ld counsel of the assessee submitted that the factory premises and entire industrial unit was temporarily given on lease to as a measure to tide over looming financial crisis while having solemn intention to return to the manufacturing activity itself sooner. The finding of the Commissioner that enquiries were not made and the assessment order was passed without application of mind is not factually correct. The assessment order has been subjected to scrutiny assessment in the assessment years 2004- 05, 2005-06 and 2007-08 also prior to the impugned assessment order for assessment year 2008-09. The position of the assessee was endorsed in those assessment orders also which has not been questioned. There is no reason to deviate from the earlier stand taken by the Revenue in the matter.
He further assailed the order on the ground that the assessment made under section 143(3) has been setaside holding that rent, interest or other income are liable to be assessed either under the head “income from other sources” or “income from house property” without any definite finding on this aspect. Therefore, the action of the Commissioner is without jurisdiction. He relied upon the decision in the case of (i) Jewel of India vs. ACIT, (2010) 325 ITR 92 (Bom); (ii) CIT vs. Gabriel India Ltd., (2003) 203 ITR 108 (Bom); and, (iii) Globus Infocom Ltd. vs. CIT, (2014) 108 DTR 363 (Del) to buttress its contentions.
He further contended that the Commissioner is not entitled to assume revisionary jurisdiction under section 263 merely because he is not happy with the quality of the assessment or drafting of the order. For this proposition, he relied upon the decision in the case of M/s Khatiza S Oomerbhoy vs. ITO, (2006) 101 TTJ 1095 (Mum).
He extensively argued in the alternative and without prejudice to the aforesaid contentions to say that while the lease rentals are assessed under the head ‘income from other sources’, depreciation 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 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 be ‘income from other sources’ or ‘income from house property’. Therefore, the action in any case is not prejudicial to the interest of revenue which is sin qua non for invoking section 263.
He next contended that the assessee always wanted to continue its business. Suspension of business was because of lack of working capital and huge brought forward losses which incapacitated the assessee to actual carry on of the business. Therefore, the leasing out of the factory premises for temporarily should not be seen adversely and lease rent be taken as business income as claimed. For this proposition, he relied upon the decision of the Hon’ble Supreme Court in the case of CIT vs. Vikram Cotton Mills Ltd. reported in 169 ITR 597 (SC).
He further supported its case on the ground that the assessee never surrendered licenses to run sugar factory, registrations under Central Excise, Sales Tax, etc. and lessee carried on the business in the name of the assessee. He relied upon the decision of the Hon’ble Bombay High Court in the case of CIT vs. Mohiddin Hotels Pvt. Ltd. reported in 284 ITR 229 (Bom) and the decision of Mumbai Bench of the Tribunal in the case of Plaza Hotels (P) Ltd. vs. DCIT reported in (2014) 109 DTR 171 (Mumbai-Trib). It is further case of the Assessee that in none of assessment orders in the past, the Assessing Officer have uttered that assessee had stopped its business and accordingly business loss was determined by the Assessing Officer and allowed to be carried forward in these respective assessment years. He therefore pleaded that on the principles of consistency, the action of the Assessing Officer in passing the similar order was fully justified and no interference of the Commissioner under section 263 is called for. For this proposition on principles of consistency, the relied upon the following decisions :- (i) CIT vs. Pathy Cine Enterprises, (2007) 163 Taxmann 624 (Mad); (ii) CIT vs. Gujarat Alkalis & Chemicals Ltd., (2015) 372 ITR 237 (Guj); and, (iii) Radhasoami Satsang vs. CIT, (1992) 193 ITR 321 (SC).
Contention of the Revenue
The ld counsel of the revenue strongly relied upon the order of the 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 Assessing Officer has not made any enquiry whatsoever to ascertain the correctness of the claim of the assessee that the income declared as income from business is in tune with law in the given facts. There is no application of mind whatsoever in the light of the detailed observations and reason advanced of the Commissioner. The order of the Commissioner is based on strong legal foundation and should not be interfere with.
Held by ITAT
In our view, once the assessee has ceased to carry on business activities since long and has also entered into lease for a fairly long period of 5 years, intention to exploit the factory premises and industrial unit as a owner thereof and not the commercial exploitation of the property by taking attendant business risks is manifest. We find the contention of the Assessee that 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 is also vested with third person. Such a situation renders the possibility of resumption of business illusory.
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 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 to be belligerent. If it is taken at face value, the situation has only aggravated over the years. The onus lies on the assessee to prove its intention that it wants to come back in the business affairs actively in the near future, which has not been discharged except for making flippant averments.
The facts of the case, on the other hand, are repugnant to the version of the assessee. We concur with the view of the Commissioner that the terms of the Lease Agreement would show that assessee is no way involved in the manufacturing activity. The assessee is holding the factory premises and industrial unit in the capacity of lessor alone. The terms of the lease agreement does not throw any light on the intention of the assessee to enable it to resume on the manufacturing activity itself at the opportune time. The obligations cast on the Assessee viz. to procure sugarcane from assessee’s area of operation, mak e minimum payment of sugarcane price at SMP etc. etc. are trivial. Nothing turns out on such marginal obligations.
We notice that the Assessee has drawn blank over the query about the current situation on resumption 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. This well settled proposition is supported by long line of cases namely CIT vs. Shri Bhagwandas 272 ITR 367(All.) ; Vijendra Pal Singh vs. CIT 163 ITR 129 (Mad.); Dhariwal Industries 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 203 ITR 108 (Bom.) 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 the lease rental etc. when assessed either under head ‘income from house property’ or ‘income from other sources’. The text and tenor of the assessment order clearly reveals that order has been passed mechanically rendering it erroneous and prejudicial to the interest of revenue.
Once, it is found that the income is not chargeable to tax under the head business income, the entitlement of the Assessee to set off the income of the year with the carried forward losses of the earlier years is lost. The Assessee has set off current year income of Rs.2.68 crores approx against the unabsorbed business losses of the earlier years and rest has been carried forward on the premise that the lease rent continues to be in the nature of the business income since the act of let out is only temporary and therefore continue to retain the colour of ‘business’. Once it is found that the premise of treating the lease rent as ‘business’ is factually tenous and not on a sound footing, the set off of the carried forward loss is rendered incorrect and thus causes loss to the revenue. The impugned set off is thus also pre judicial to the interest of revenue. Likewise, the allowability of expenses claimed without examination and its sustainability in terms of legal provision is also prejudicial to the interest of revenue.
Accordingly appeal of the assessee dismissed.
