Hire charges received on account of hiring of the motor-cars, office equipment, computer, furniture and fixture is business income- ITAT Mumbai

ACIT Vs M/s JPS Associates (ITAT Mumbai)- Revenue has raised a grievance against the finding of the Ld. CIT (A) that hire charges received on account of hiring of the motor-cars, office equipment, computer, furniture and fixture is to be treated as a business income. The Ld. D.R. vehemently argued that the assessee has not carried out any activity and hence, the same is to be treated as income from other sources. Per contra, Ld. Counsel submitted that the said income has been accepted by the A.O. as business income in the preceding assessment years.

The Ld. CIT (A) has also observed that in the preceding assessment year, assessments are completed u/s. 143(3) and the A.O. has accepted the hire charges as a business income. In our opinion, as the facts are identical, there should be consistency in the approach of the A.O. In the preceding year, the AO. himself has treated income of hire charges as the business income in the assessment completed u/s. 143(3). Hence, no different view can be taken. We, therefore, confirm the order of the Ld. CIT (A) treating the hire charges received from hiring of the business assets as income from business and accordingly, ground no.1 is dismissed.

IN THE INCOME TAX APPELLATE TRIBUNAL

“J” BENCH: MUMBAI

ITA No. 1542/Mum/2007  

(Assessment Year: 2003- 04)

ACIT Vs JPS Associates

ORDER

PER R.S. PADVEKAR, JM

This appeal is filed by the revenue challenging the impugned order of the Ld. CIT (A) -XII, Mumbai dated 14.11.2006 for the A.Y. 2003-04. The revenue has taken the following effective grounds:-

“1. On the facts and circumstances of the case and in law the Ld. CIT (A) erred in directing the Assessing Officer to accept the receipts of hire charges of 43 lakhs including arrears on a/c of hiring of motor cars, office equipment, computers, furniture / fixture as business income without appreciating the fact that nature of arrangement between the sister concern and assessee as per Hire agreement dated 1.4.2000 does not indicate any complex commercial activity in the nature of business.

2. On the facts and circumstances of the case and in law the Ld. CIT (A) erred in directing the Assessing Officer to consider receipt of Rs. 1 lakh as income from profession without appreciating the fact that no activity of management consultancy was carried on during the year under consideration.

3. On the facts and circumstances of the case and in law the Ld. CIT (A) erred in directing the Assessing Officer to allow interest expenditure of Rs. 25 lakhs to partners holding that it is an allowable expenditure u/s. 40(b)(iv) of the I.T. Act ignoring the fact that no business activity was carried on during the year under consideration.

4. On the facts and circumstances of the case and in law the Ld. CIT (A) erred in directing the AO to allow the expenditure of Rs. 3,16,233/- as business expenditure and a remuneration of Rs. 1,59,328/- to the partner against the total income ignoring the fact that no business or professional activity was carried on during the year under consideration.”

2. The facts pertaining to the case are as under. The assessee firm is in the business of management consultancy. The assessee filed the return of income for the A.Y. 2003- 04 declaring the total income of Rs. 29,83,620/-. The return filed by the assessee was selected for scrutiny and assessment was completed u/s. 143(3) of the Act. The assessee has declared the receipt from the professional consultancy at Rs 1 lakh which was in respect of the consultancy services given to MPSRTC in the year 1997. The assessee is following the cash system of accounting and hence the said receipt was declared in the A.Y. 2003- 04. The assessee has leased out his office premises as well as other assets to JPC Associates Pvt. Ltd., in which one of the partner of the assessee-firm namely Shri J.P. Srivastava is also a director. The assessee-firm has entered into two separate agreements dated 1.4.2000, one agreement for leasing of office premises as well as residential premises and other agreement for hiring out all other assets like Furniture, computers, office equipment, motor-cars etc. The lease rent for the office premises is fixed at 10,75,000/- per quarter and in respect of the hire of the assets, the hire charges are sold at Rs 12 lakhs per annum. The assessee has declared the total receipt of the lease and hire charges of 86,00,000/- which includes Rs 31 lakhs, receipts of the earlier years. The assessee shown the lease rent as well as hire charges as its business income and claimed various expenditure. The A.O. did not accept the head under which the assessee has shown lease rent and hire charges income. The A.O. was of the opinion that the lease rental as well as the hire charges cannot be treated as income derived from the business activity and same is to be taxed under the head “income from house property”. The assessee contended that as the assessee was not doing well in the management consultancy hence it is decided to lease out the premises for five years. The A.O. relied on the decision of the Hon’ble Supreme Court in the case of Shambu Investments P. Ltd. 263 ITR 143 and he brought to tax lease rent and hire charges received by the assessee at Rs 86 lakhs u/s.22 of the Act as income from house property and also allowed deduction u/s.24 of the Act at 30% of the annual value and disallowed all other expenditure claimed by the assessee. So far as the professional receipt of Rs 1 lakh is concerned, the same has treated as a miscellaneous income of the assets under the head “income from other sources” on the reason that the assessee has not carried out any business activity during the previous year relevant to the assessment year 2003-04. The A.O. also disallowed the interest paid on the partner’s capital of 25 lakhs on the reason that the funds cannot be said to have been used for the business purposes. The A.O. finally determined the total income of the assessee at 64,69,010/-.

3. The assessee challenged the assessment made by the A.O. before the Ld. CIT (A). In respect of the lease rent and hire charges, the Ld. CIT (A) held that to the extent of the lease rent, the same is to be assessed as “income from house property” as per the principles laid down by the Honourable S.C. in the case of Shambu Investments P. Ltd. (supra) hence the Ld. CIT (A) held to the extent of 43,00,000/- which is a lease rent of the business premises as well as residential premises treated as income from the house property. The assessee has not challenged the said finding and it has reached the finality. So far as the income from the hire charges is concerned, the Ld. CIT (A) held that in the preceding two assessment years, the A.O. himself has accepted that the said income constitute the business income and the assessments for the A.Ys. 2001- 02 and 2002-03 are completed u/s. 143(3). The Ld. CIT (A) has also noted that the total hire charges declared by the assessee at Rs 45 lakhs include the arrears also of the previous year. The Ld. CIT (A) accepted the plea of the assessee that to the extent of the hire charges of the business assets, the same are to be treated as business income. Against the said finding of the Ld. CIT (A), the revenue is in appeal before us. So far as professional income from the management consultancy declared by the assessee at 1 lakh is concerned, the Ld. CIT (A) directed the A.O. to teat the same as a business income. Same way, the Ld. CIT (A) also directed the A.O. to allow the interest expenditure on the partner’s capital, which was utilised for the purpose of the assessee’s business as an allowable expenditure. The Ld. CIT (A) also directed the A.O. to allow the remuneration to the partners and other related expenditure. Now, the revenue is in appeal before us.

4. We have heard the rival submissions of the parties and also perused the records. Ground no.1 is raising a grievance against the finding of the Ld. CIT (A) that hire charges received on account of hiring of the motor-cars, office equipment, computer, furniture and fixture is to be treated as a business income. The Ld. D.R. vehemently argued that the assessee has not carried out any activity and hence, the same is to be treated as income from other sources. Per contra, Ld. Counsel submitted that the said income has been accepted by the A.O. as business income in the preceding assessment years. The Ld. CIT (A) has also observed that in the preceding assessment year, assessments are completed u/s. 143(3) and the A.O. has accepted the hire charges as a business income. In our opinion, as the facts are identical, there should be consistency in the approach of the A.O. In the preceding year, the AO. himself has treated income of hire charges as the business income in the assessment completed u/s. 143(3). Hence, no different view can be taken. We, therefore, confirm the order of the Ld. CIT (A) treating the hire charges received from hiring of the business assets as income from business and accordingly, ground no.1 is dismissed.

5. So far as ground no. 2 is concerned, it is in respect of treating 1 lakh, which are arrears of the consultancy fees received by the assessee from MPSRTC. The Ld. Counsel submitted that it is a professional income and in the A.Y. 1998-99, the part of the same was treated as business income. He, further submits that as the assessee is following cash system of accounting and hence, on the receipt basis, the fees are shown in this year. In our opinion, as it is not disputed by the A.O. that 1 lakh part of the management consultancy fees received by the assessee is part of consultancy business, hence same cannot be treated as income from other sources but has to be assessed under the head “income from business or profession” as very nature of the receipt will not be changed, even if the actual payment is deferred. We, accordingly, confirm the order of the Ld. CIT (A) on this issue and dismiss ground no. 2.

6. So far as ground no. 3 & 4 are concerned, these grounds depend on whether the hire charges and management consultancy fees are to be treated as business income or not. The assessee has claimed the expenditure in respect of the interest paid on the partners capital account u/s. 40(b)(iv) of the I.T. Act as well as other business expenditure of 3,16,233/- and remuneration to the partners of 1,59,328/-. As we have held that the income from the hire charges of the assets and the management consultancy fees received by the assessee are to be assessed as the business income, hence, the interest on the partners capital account and other business expenditure is to be allowed. At the same time, it is seen that the A.O. has not examined whether the assessee has claimed interest expenditure as per the terms of the Partnership Deed on the capital accounts of the partner’s, hence, for the limited purpose of verification and quantification whether the assessee has provided the interest on the partner’s capital account as per terms of Deed of Partnership, therefore ground no. 3 is restored to the file of the A.O. Needless to say that the A.O. should give opportunity of being heard to the assessee as per the principles natural justice. Ground no. 4 being consequential to ground no. 3 hence same becomes infructuous and dismissed as such.

7. In the result, revenue’s appeal is partly allowed for statistical purposes.

Order pronounced in the open court on this day of 25th February 2011.