Receipt of warehousing charges taxable as business income

Chhattisgarh State Warehousing Corporation Vs ACIT (ITAT Raipur)

ITAT Raipur held that warehousing charges received by the assessee is taxable under the head ‘Income from Business’ and not under the head ‘Income from house property’.

Facts-

During the course of the assessment proceedings, it was observed by the A.O that the assessee company derived income from rendering various services to the persons who store their goods in warehouses. It was observed by the A.O that the warehousing charges were fixed by the assessee company as per the directions of the Central Ware Housing Corporation after considering various factors and services rendered. Holding a conviction that the aforesaid income derived by the assessee was liable to assessed under the head “Income from house property” as against that disclosed by the assessee under the head “Income from business”, the A.O called upon the assessee to put forth an explanation as regards the same.

Conclusion-

We are of the considered view that the warehousing charges received by the assessee had rightly been offered by it to tax as its income from business. We, thus, in terms of our aforesaid observations set-aside the order of the CIT(Appeals) and direct the A.O to assess the warehousing charges received by the assessee under the head “Income From Business”.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present appeal filed by the assessee is directed against the order passed by the CIT(Appeals)-I, Raipur dated 05.11.2018, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income-tax Act, 1961 (in short ‘the Act’), dated 20.12.2016 for the assessment year 2014-15. The assessee has assailed the impugned order on the following grounds of appeal before us:

“1. For that the order passed by the learned Commissioner of Income Tax (Appeals)-1, Raipur is bad in law as well as on facts.

2. The Ld. CIT(A) erred in confirming the addition of Rs.63,22,58,355/- treating the receipt from warehousing charges as income from house property instead of income from business.

3. For that the appellant craves leave to add, alter or amend any ground/s of appeal on or before hearing of the case.”

2. Succinctly stated, the assessee which is a state government company engaged in the business of warehousing had e-filed its return of income for the A.Y.2014-15 on 29.09.2014, declaring an income of Rs. 4,86,61,460/-. Subsequently, the case of the assessee was selected for scrutiny assessment u/s.143(2) of the Act.

3. During the course of the assessment proceedings, it was observed by the A.O that the assessee company derived income from rendering various services to the persons who store their goods in warehouses. It was observed by the A.O that the warehousing charges were fixed by the assessee company as per the directions of the Central Ware Housing Corporation after considering various factors and services rendered. Holding a conviction that the aforesaid income derived by the assessee was liable to assessed under the head “Income from house property” as against that disclosed by the assessee under the head “Income from business”, the A.O called upon the assessee to put forth an explanation as regards the same. In reply, it was claimed by the assessee that income from warehousing was rightly disclosed by it as its business income. The assessee in support of its said claim had relied upon the judgment of the Hon’ble Supreme Court in the case of Chennai Properties and Investments Ltd. Vs. CIT (2015) 373 ITR 673 (SC), wherein it was held that the entire income derived from rent by the assessee before them was liable to be brought to tax as its business income. Apart from that, it was the claim of the assessee that the ITAT, Raipur Bench in assessee’s own case for A.Y.2003-04 to 2008-09 in ITA No. 18 & 19/BLPR/2010, ITA Nos. 27/BLPR/2011 to 30/BLPR/2011 & ITA No.178/BLPR/2011, dated 12.06.2015 had accepted the assessee’s claim and had held that the income from warehousing was to be assessed as the assessee’s income from business. However, the A.O did not find favor with the aforesaid claim of the assessee. It was observed by the A.O that as the principles of res-judicata were not applicable to income-tax proceedings, therefore, the view taken in the case of the assessee for the preceding years would not be binding upon him qua the issue in hand. It was also observed by him that as the order of the ITAT, Bilaspur had not been accepted by the revenue and had been assailed before the Hon’ble High Court of Chhattisgarh, therefore, the view therein taken had not attained finality. Also, it was observed by the A.O that the CIT(Appeals) in exercise of his jurisdiction u/s.263 of the Act was taking necessary action for quashing the assessment order passed by the A.O u/s.143(3) for A.Y 2012-13, in which, it was observed by him that the income from warehousing was rightly disclosed by the assessee as its business income. Considering the aforesaid facts, the A.O vide his order passed u/s.143(3), dated 20.12.2016 after, inter alia, recharacterizing the head of income under which the warehousing receipts were to be brought to tax assessed the income of the assessee at Rs. 68,09,19,820/-.

4. Aggrieved the assessee carried the matter in appeal before the CIT(Appeals), who upheld the view taken by the A.O by observing as under :

“2.3 Appellant has cited provisions of section 24 of Ware Corporation Act. The perusal of the same shows that the corporation is authorized to carryout the activity of providing warehousing facility on rent. However, it does not and cannot provide for the manner in which the income from this activity has to be taxed. That the domain of the Income Tax Act, 1961. Chhattisgarh State Warehousing Corporation has been established to provide warehousing facilities to store grains and other items meant to distribution and for other purposes. The corporation has been established for this main purpose and not to undertake the business of constructing building and giving these on rent. When a particular income in this case income from letting out the warehouse is assessable under the head house property, the mere fact of appellant having business in lettering out the property by itself will not conclusively point out that the income is business income. Appellant’s contention is misplaced that since warehouse constructed by the appellant are commercial asset and are constructed to expedite these commercially, therefore, income of the corporation is business income. Corporation has been constituted not to do business per-se of giving warehouses on rent but to provide warehousing facilities in the state and any income arising out of venture will be treated according to the nature of that income as defined in the Income Tax Act. It has been reiterated in several judicial decisions that when the income had arisen by exploitation of the property by the assessee and not by way of exploitation of business assets, the income will be rental income and assessee’s contention that nature of receipt will be decided by nature of business cannot be accepted. This contention could be acceptable in the case of a business but in the case of income from exploitation of property for which a separate Chapter VI(c) “Income from house property” has been enacted in the income Tax Act, 1961 for precisely this type of receipt. Therefore, the A.O’s action of taxing the income of the assessee under income from house property is hereby sustained and appellant’s grounds are dismissed.”

5. The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.

6. We have heard the ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.

7. We have deliberated at length on the issue in hand, i.e., as to whether income derived by the assessee company from its warehousing activities were to be construed and brought to tax as its business income (as claimed by the assessee), or were liable to be assessed as its income from house property (as claimed by the department). As stated by the Ld. AR, and, rightly so, the issue under consideration is squarely covered by the order passed by the Tribunal in assessee’s own case for A.Y. 2003-04 to 2008-09 (supra), wherein, after exhaustive deliberations the Tribunal had concluded that the warehousing charges were liable to be brought to tax under the head “Income from business”, observing as under:

“6. After hearing both the parties and on a perusal of the material on record, we find that the main function of the assessee Corporation are as under:-

a) Acquire and build godowns and warehouse within state with previous approval of Central Warehousing Corporation;

b) Run warehousing in the State, for the storage of agricultural produces, seeds, manures, fertilizers, agricultural implements and notified commodities;

c) Arrange facilities for the transport of agricultural produce, seeds, manures, fertilizers, agricultural implements and notified commodities;

d) Act as agent of the Central Warehousing Corporation or of the State Government for the purpose of the purchase, sale, storage and distribution of agricultural produce, seeds, Manures, Fertilizers agricultural implements and notified commodities;

e) To carry on other functions as may be notified. However, during the years under consideration the Corporation is doing only one business of warehousing.

7. The assessee Corporation during the course of business rendered various services to persons who store their goods in the warehousing. These are as under:-

a) The proper arrangements are made for transportation inside the godown premises, loading and unloading of the goods in the premises and store it scientifically in the godowns.

b) Preservation activities are carried out so the quality of goods is preserved.

c) Security is provided by employing the staff. d) The goods stored in the warehouses are insured; e) In the case of loss / storage in the goods on the part of Corp. in the same is reimbursed.

8) The warehousing charges is decided after considering the size of bags, drums, tins, open quantity and period of storage. In the light of the above, we find considerable cogency in the statement of the learned Counsel that there is a basic difference in giving the premises on rent on one hand and on the other hand, allowing persons to store their goods in the control and supervision of the assessee Corporation. In this regard, we may also gainfully refer to the difference brought out by the learned Counsel as under:-

9. In the light of the above, it is the contention of the assessee warehousing actually is carried on by it in a systematic system to income and at no point, the possession of the godownsare handed over to the persons who are storing their goods. While in the ca “AI) es/ rent, the landlord hand over the possession of godowns and after that those the godowns are under the lock and key of the tenant. Thus agree that there is basic difference between general rent and warehousing charges being received by the assessee. We find identical issue was considered by the Bangalore Bench of the Tribunal in Karnataka State Warehousing Corp. (supra). The mattertravelled to the Hon’ble Karnataka High Court. The Hon’ble High Court, vide order dated 17th march 2014, had upheld the order of the Tribunal in holding that the warehousing rental charges received by the assessee is assessable under the head “Income From Business” and not from “Income From House Property”. Thus, in an analogical issue, there is a decision of the Hon’ble Karnataka High Court which is in favour of the assessee. We further note that the Hon’ble Supreme Court in its latest decision on this issue Chennai Properties And Investments Ltd. (supra), has considered similar issue and has also considered various other Hon’ble Supreme Court’s decision on the issue including that of the Constitutional Bench judgment in the case of Sultan Brothers Pvt. Ltd. v/s CIT, [1964] 51 ITR 353 (SC). In this case, the Hon’ble Apex Court held as under:-

“The appellant-assessee is a company incorporated under the Indian Companies Act. Its main objective, as stated in the memorandum of association, is to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The assessee had rented out such properties and to rental income received therefrom was shown as income from business in the return filed by the assessee. The Assessing Officer, however, refused to tax the same as business income. According to the Assessing Officer, since the income was received form letting out of the properties, it was in the nature of rental income. He, thus, held that it would be treated as income from house property and taxed the same accordingly under that head.”

10. In this factual matrix, the matter has travelled up to the Hon’ble Supreme Court after the Hon’ble Madras High Court had decided the issue in favour of the Revenue. The Hon’ble Supreme Court elaborately dealt with the issue as under:

“The Memorandum of Association of the appellant-company which is placed on record mentions main objects as well as incidental or ancillary objects in clause III. (A) and (B) respectively. The main object of the appellant company is to acquire and hold the properties known as “Chennai House” and “Firhavin Estate” both in Chennai and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. What we emphasise is that holding the aforesaid properties and earning income by letting out those properties is the main objective of the company. It may further be recorded that in the return that was filed, entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order.

It transpires that the return of a total income of Rs.244030 was filed for the assessment year in question that is assessment year 1983-1984 and the entire income was through letting out of the aforesaid two properties namely, “Chennai House” and “Firhavin Estate”. Thus, there is no other income of the assessee except the income from letting out of these two properties. We have to decide the issue keeping in mind the aforesaid aspects.

With this background, we first refer to the judgment of this Court in East India Housing and Land Development Trust Ltd.’s case which has been relied upon by the High Court. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It so happened that some shops and stalls, which were developed by it, had beenrented out and income was derived from the renting of the said shops and stalls. In those facts, the question arose for consideration was: whether the rental income that is received was to be treated as income from the house property or the income from the business. This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties.

Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P) Ltd., we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in ‘Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal’ [44 ITR 362 (SC)]. That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mining leases was shown as business income. Department took the position that it is to be treated as income from the house property. It would be thus, clear that in similar circumstances, identical issue arose before the Court. This Court first discussed the scheme of the Income Tax Act and particularly six heads under which income can be categorised / classified. It was pointed out that before income, profits or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under, another head. Thereafter, the Court pointed out that the deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel, House of Lords in England and US Courts were taken note of. The position in law, ultimately, i summed up in the following words: –

“As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.”

After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd.’s case squarely applies to the facts of the present case.

No doubt in Sultan Brothers (P) Ltd.’s case, Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case,viz., whether a particular business is letting or not. This is so stated in the following words:

“We think each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature:”

We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is for this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties Is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as ‘income from the house property’. We, accordingly, allow this appeal and set aside the judgment of the High Court and restore that of the Income Tax Appellate Tribunal. No orders as to costs.”

11. We now examine the present case on the touchstone of the abovesaid decision. The main object of the assessee corporation in our case is acquiring godowns and provides storage facilities to outside parties. The storage rental received by the assessee corporation has been treated under the head “Income From Business”. Thus, the main object of the assessee corporation was to acquire godowns and let them out by way of storage facilities. Thus, holding of the godowns and earning income by way of letting out those godowns by way of storage facility is the main object of the Corporation. In these facts of the case, in our considered opinion, the ratio emanating from the decision of the Hon’ble Supreme Court in Chennai Properties And Investments Ltd. (supra), is squarely applicable on the facts of the case. As a matter of fact, the assessee’s case, in the present matter, is not only letting out the godowns but it is also providing storage facility by also taking up various activities in connection with the storage agreement as mentioned in the earlier part of this order. As mentioned by the Hon’ble Supreme Court in Sultan Brothers Pvt. Ltd. (supra), the determining factors to arrive at a conclusion whether the income is to be treated under the head “Income From Business” is depending upon the circumstances of each case. Accordingly, in the present case, we are of the considered opinion that the income by way of storage charges received by the assessee is to be treated under the head “Income From Business”. This view is also supported by Hon’ble Karnataka High Court decision in the case of Karnataka Warehousing Corporation in ITA no.419 of 2013, vide order dated 17th March 2014 Hence, the issue raised by the assessee stands allowed. There 2 other issues also in these appeals which were not pressed.”

8. Apart from that, we find that the aforesaid view of the Tribunal had been upheld by the Hon’ble High Court of Chhattisgarh in its order passed in Tax Case (Income Tax Appeal) No. 02 to 07 of 2016, dated 04.04.2017, wherein, after considering the order of the Tribunal the Hon’ble High Court had declined their indulgence dismissed the appeal of the department. Considering the aforesaid facts, we concur with the contentions of the Ld. AR that the issue involved in the present appeal is squarely covered by the order passed by the Tribunal in the assessee’s own case for the preceding years, i.e, A.Y.2003-04 to A.Y.2008-09 in ITA Nos. 18 & 19/BLPR/2010, ITA Nos. 27/BLPR/2011 to 30/BLPR/2011 & ITA No.178/BLPR/2011, dated 12.06.2015, which, thereafter, had been approved by the Hon’ble High Court of Chhattisgarh. Accordingly, on the same terms, we are of the considered view that the warehousing charges received by the assessee had rightly been offered by it to tax as its income from business. We, thus, in terms of our aforesaid observations set-aside the order of the CIT(Appeals) and direct the A.O to assess the warehousing charges received by the assessee under the head “Income From Business”.

9. In the result, appeal of the assessee is allowed in terms of our aforesaid observations.

Order pronounced under rule 34(4) of the Appellate Tribunal Rules, 1963, by placing the details on the notice board.