Hon’ble Supreme Court in the case of Chennai Properties supra, we hold that the ld CITA had rightly directed the ld AO to treat the warehouse rentals as income from business and consequentially allow the expenditure claimed in the return as business expenditure. Accordingly, Ground raised by the revenue is dismissed.
FULL TEXT OF THE ITAT JUDGMENT
This Revenue’s appeal for assessment year 2012-13 arises against the Commissioner of Income Tax (Appeals)-4, Kolkata’s order dated 28.08.2015 passed in case No.1940/CIT(A)/Cir-10(1)/14-15, in proceedings u/s 143(3) of the Income Tax Act, 1961; in short ‘the Act’.
Heard both the parties. Case file perused.
2. The Revenue’s former substantive ground seeks to revive the Assessing Officer’s action treating the taxpayer’s share subscription sum of ₹3,01,00,000/- to be sec. 68 unexplained cash credits as reversed in the lower appellate proceedings as follows:-
“4.2 I have carefully considered the AR’s submissions and the AO’s findings recorded in the impugned order. I have also given my utmost attention to the judicial decisions on which AR of the appellant relied in his submissions as also the decisions to which the AO made reference in the impugned order. From the assessment order I find that the AO per se did not dispute the fact that the AR of the assessee in the course of assessment had submitted the documentary evidences in support of the share subscription amounts received. It is not the AO’s case that the assessee had failed to furnish any documents in support of the subscription amount received from the five corporate entities. In AO’s opinion however mere furnishing of documents being Xerox copies of PAN Cards, Bank statements, IT Acknowledgments etc. of the share subscribing companies was not sufficient to discharge the onus cast by Section 68 of the Act. In AO’s opinion presently several companies in Kolkata existed on paper through which undisclosed income of other assessees was ploughed back in the guise of share capital. According to AO in order to verify the genuineness of the assessee’s share transactions; notices u/s 131 of the Act were issued but save & except two cases the remaining three notices were returned unserved. Even with regard to two notices served there was no compliance. The AO therefore held that he was constrained to draw adverse inference against the assessee. On these facts therefore the question is whether the addition u/s 68 made in the impugned order was validly made.
4.3 The issue with regard to addition u/s 68 in respect of share subscription amounts received has engaged attention of judicial authorities for quite some time. The jurisdictional High Court as also various other High Courts have taken a consistent view that where a company has received subscription to its share capital then the primary onus is on the assessee to prove the identity and creditworthiness of the share subscribers and also prove the genuineness of the transactions. The Courts have further held that once the assessee proves the identity of the subscriber and the assessee also proves that there was genuine issuance of shares as per the provisions of the Companies Act, 1956 then the assessee is not required to prove anything more.
4.4 In the appellant’s case I find that all five share subscribers in respect of whom addition u/s 68 was made were-corporate assessees. In the assessment order the AO himself quoted their respective PANs which proves that each of them were assessee’s in their own right. The assessee also filed copies of their the audited accounts for the FY 2011-12 of the five subscribed companies. Examination of these accounts revealed that each share subscribing company was having substantial own funds in the form of capital & reserves which were several times more than the share subscription amount paid to the appellant. For example in the case of Agrani Credit & Finvest Pvt Ltd, the company’s own funds were ₹6914.38 lacs whereas the amount invested in assessee’s shares was only ₹28 lacs which in percentage terms was 0.4%. In case of Crown Mansion Pvt Ltd. the company’s net owned funds were, ₹4626.05 lacs whereas investment in appellant’s share was ₹56 lacs, which in percentage terms of 1.21 %. In case of Liberal Infrastructure Pvt Ltd and Darshan Enclave Pvt Ltd, the investment was ₹84 lacs each as opposed to their net owned funds of ₹2442.02 lacs & ₹2170 lacs respectively. In percentage terms it was about 3.5%. In the case of Snowfall Impex Pvt Ltd, the net owned funds were 2046.01 lacs whereas investment in appellant’s share was ₹49 lacs, which in percentage terms was only 2.4%. From these facts I find that only a fraction of the net owned funds of the respective subscribing companies was invested in assessee’s equity shares. assessees at the addresses specified in the respective assessment order. Since the addresses specified in the assessment orders of the respective companies tallied with the addresses specified on Page 1 of the impugned order, supported the appellant’s case that the share subscribing companies had their respective offices at the addresses specified before the AD and therefore no adverse inference was not permissible merely because the AO was unable to serve the notices u/s 131. at the given addresses.
4.6 The assessment orders of the share subscribing companies also proved that each share subscribing company was regularly assessed to tax and for AY 2012-13 being the year under consideration they were assessed in their own rights with reference to the financial results disclosed by their respective audited financial statements. The facts and documents therefore supported the AR’s contention that the assessee had established identity of all the five share subscribing companies. No adverse inference was therefore required to be drawn on the ground that either the notices were not served or the parties did not appear in response to the notices. The AR of the appellant also furnished copies of the bank statements of the respective share subscribing companies. Referring to the copies of the bank statements, the AR established that payment of subscription amounts were recorded in the bank statements of the respective companies. The entries in the bank statement proved that the share subscription amount was transacted through banking channel. Besides the entries in the bank statements also substantiated that before payment of share subscription amounts, no cash was deposited in the bank accounts of the subscribing companies. The AR further pointed out that appellant had furnished explanations before the AO with regard to immediate sources from which share subscription amounts were paid. On these facts therefore I find that in terms of Section 106 of the Evidence Act, the creditworthiness of the share subscribers and the genuineness of the transactions could not have been doubted by the AO merely on the ground that share subscribers were not produced for AD’s verification.
4.7 From perusal of Para 2.2 of the assessment order I note that in the notices u/s 131 the AO had required the shareholders to furnish certified copies of the statement of accounts/statement of affairs! balance sheet of the directors for the period 01.04.2009 to 31.03.2012, photo identity proof, residential address proof and the addresses for the communication of all directors as on that date. In my considered opinion in deciding the question of proving identity and creditworthiness and genuineness or share subscription amounts paid by the companies, personal information of the individual directors had no relevance whatsoever. The AO in his impugned order did not specify as to how such information or personal documents of the Directors could have led the AO to determine the genuineness of the transactions. The AO has not amplified in his order as to why by examining the personal particulars of the directors such as their residential address, statement of affairs etc could have established genuineness of transactions conducted by the Companies who were separate entities. The AO also required the share subscribing companies to furnish copies of their latest returns filed with the ROC. In determining genuineness of the share transaction, conducted in FY 2011-12 latest copy of the annual return filed with the ROC by the share subscribing companies apparently did not have any relevance nor the AO clarified in what way such information was required for determining the genuineness and creditworthiness of the share subscribing companies .. The AO had further required the share subscribing companies to clarify whether they had received any dividend from Singhania & Sons Pvt Ltd or benefitted by way of any means against the investment in shares of that company or what prompted them to make investment in shares of the said company. Once again I find that the AO made reference to a company named ‘Singhania & Sons Pvt Ltd’ whose relationship with the appellant was not explained. In what way the share subscribing companies’ transactions with Singhania & Sons Pvt Ltd were relevant in determining the appellant’s transactions with the subscribing companies was not explained by the AO in the impugned order. In my opinion the information as called for through clause (ii) of the notice u/s 131 had no relevance in determining identity, creditworthiness of the share subscribers or proving the genuineness of the transactions. The AO had required the share subscribers to substantiate their creditworthiness with reference to tangible sources of income and produce documentary evidences. In this regard I found that the assessee had produced before the AO copies of the audited financial statements and the relevant bank statements in which the transactions with the appellant were reflected. The income-tax assessment orders of the respective companies showed that the incomes of the respective companies were assessed with reference to financial data disclosed by the respective companies. AS such I find that the assessee had placed before the AO the relevant information which the AO could have verified independently from the Departmental records. The AO also required the subscribers to substantiate the physical existence with tangible material. The income-tax assessment orders passed by the officers of the Department for AY 2012-13 and which were served at the respective addresses prove the physical existence of the respective companies. On these facts therefore it appeared to me that nothing much would have turned on the appearance of the representatives of the share subscribing companies since the material required for determination of identity and creditworthiness of the share subscribers was available on AO’s record even in their absence.
4.8 From the perusal of the assessment order, I find that save & except making general assertions & observations about the modus operandi adopted by few paper companies, the AO did not bring on record any substantial material to disprove the documentary evidences which the appellant had placed on AO’s record in support of the share subscription trans-actions. For AY 2012-13, the assessee filed its return of income declaring substantial income of ₹1,74,68,9801-. From the assessee’s audited financial accounts, I find that the assessee had its own financial base. Assessee owned considerable fixed assets besides other current assets. As such on the facts I find that the appellant is not a mere paper company as alleged by the AO which are engaged in the business of providing accommodation entries. The audited accounts of the appellant showed that it is engaged in the business of trading of steel products and operating warehousing facilities. Substantial investments have been made by the assessee for the purpose of carrying on businesses. In order to part finance business activities the assessee had raised capital from other bodies corporate. In the course of assessment the appellant had furnished the documentary evidences as were made available to the assessee by the share subscribing companies. The documents furnished prima facie proved the identity & creditworthiness of the shareholders. The transactions were carried through banking channels. Although the documents were submitted before the AO no enquiry was conducted by the Assessing Officer either from the Departmental records or from the bankers of the share subscribers. The AO drew adverse inferences primarily because none of the share subscribers appeared before him. In the impugned order much emphasis was placed on the fact that three of the shareholders were not served with the notices u/s 131. However from the assessment orders passed by the different officers of the Department showed that in the assessment orders passed for AY 2012-13, the addresses of the share subscribing companies were found to be same as specified by the AO himself. On these facts therefore I find that the appellant had brought on AO’s record sufficient documentary evidences which prima facie proved the three ingredients of Section 68, that is to say, the appellant had proved identity & creditworthiness of the share subscribers and genuineness of the transactions.
4.9 Before the AO drew adverse inference, it was necessary for’ him to prove specific infirmity or falsity in the documents and the evidences produced by the appellant. However the AO did not in any specific instance proved that the documents & evidences were either false or bogus. The issue relating to taxability of subscription to the share capital u/s 68 has been judicially considered in the recent times by various judicial forums. The leading decision on which the reliance was placed by the AO in her order was in the case of Nova Promoters & Finlease Pvt. Ltd. (342 ITR 169). A copy of this decision was placed before me. A bare perusal of that decision however showed that it was rendered on the particular facts brought on record by the AO. In that case the AO had conducted detailed enquiries and thereafter brought enough evidence which proved that assessee had routed its unaccounted money in the form of share subscriptions. In that particular case the share applicants had made confession that they had only provided accommodation entries and the transaction was not genuine. On these facts therefore the Delhi High Court came to conclusion that Section 68 was applicable because admittedly the assessee had failed to bring on record any material to dislodge the factual findings of the AO which were based on the confessions of the share applicants.
4.10 In the appellant’s case save & except relying on the fact that notices u/s 131 were either unserved or remained un- complied the AO did precious little to bring on record any affirmative evidence which proved that issue of Shares was not genuine. On the contrary, the materials on record showed that the assessee had furnished documents requisitioned which established that each company had subscribed to the equity shares of the assessee. I am therefore satisfied that on the facts on the applicant’s case the decision in the case of Nova Promoters & Finlease Pvt. Ltd . (supra) was not applicable.
4.11 The AIR brought to my attention two later judgments of the Delhi High Court viz in the case of CIT Vs Gangeshwari Metal (P) Ltd in ITA No. 597 of 2012 dated 21.01.2012 and CIT Vs Kamdhenu Steel & Alloys Limited [361 ITR 220]. In both these decisions the earlier judgment in the case of Nova Promoters & Finlease Pvt Ltd (supra) was cited by the Department. However after considering the factual context in which the earlier judgment was delivered, the Delhi High Court refused to follow the ratio laid down in the earlier judgment. On the contrary the Delhi High Court took note of the fact that in later two cases each share applicant was regularly assessed to tax, having independent PAN. The shareholders had accepted their transactions with the assessee company. The High Court further found that in each case the share subscription amounts were paid by account payee cheques. Copies of the bank statement were also furnished. The High Court further found that by producing these documents, the assessee had discharged its onus of proving identity and creditworthiness of the shareholders as also the genuineness of the transactions. On the contrary however the AO had not conducted any inquiry nor proved any falsity in the documents furnished. The High Court therefore held the addition u/s 68 to be unsustainable. Following observations of the Delhi High Court in the case of CIT Vs Kamdhenu Steel & Alloys Limited (supra) are worth mentioning in the context of historical facts of the present case.
“We may repeat what is often said, that a delicate balance has to be maintained while walking on the tight rope of Sections 68 and 69 of the Act. On the on hand, no doubt, such kind of dubious practices are rampant, on the other hand, merely because there is an acknowledgement of such practices would not mean that in any of such cases coming before the Court, the Court has to presume that the assessee in questions as indulged in that practice. To make the assessee responsible, there has to be proper evidence. It is equally important that an innocent person cannot be fastened with liability without cogent evidence. One has to see the matter from the point of view of such companies (like the assessees herein) who invite the share application money from different sources or even public at large. It would be asking for a moon if such companies are asked to find out from each and every share applicant/subscribers to first satisfy the assessee companies about the source of their funds before investing. It is for this reason the balance is struck by catena of judgments in laying down that the Department is not remediless and is free to proceed to reopen the individual assessment of such alleged bogus shareholders in accordance with the law. That was precisely the observation of the Supreme Court in Lovely Export (supra) which holds the fields and is binding. In conclusion, we are of the opinion that once adequate evidence/material is given, as stated by us above, which would prima facie discharge the burden of the assessee in proving the identity of shareholders, genuineness of the transaction and creditworthiness of the shareholders, thereafter in case such evidence is to be discarded or it is proved that it has “created” evidence, the Revenue is supposed to make through probe of the nature indicated above before it could nail the assessee and fasten the assessee with such a liability under Section 68 and 69 of the Act.”
4.12 Apart from these judgments of the Delhi High Court, the AIR also placed before me the following decisions of other High Courts where the unanimous view was that no addition u/s 68 in respect of share application money is permissible once the assessee shows that there was genuine issuance of the equity shares.
CIT Vs Vacmet Packaging (India) Pvt Ltd (367 ITR 217) (Allah HC)
CIT Vs Pranav Foundation Ltd (229 Taxman 58) (Mad HC)
CIT Vs Supertech Diamond Tools Pvt Ltd (229 Taxrnan 62) (Raj HC) CIT Vs Victory Spinning Mills Limited (50 taxmann.com 416) (Mad HC)
4.13 In all the above decisions the relief was allowed by the High Courts by placing reliance on the judgment of the Apex Court in the case of CIT Vs Lovely Exports Pvt Ltd (319 ITR 5). The decision of the jurisdictional Calcutta High Court in the case of CIT vs Dataware Pvt Ltd: dated 21.09.2011 in this regard is relevant because the observations in this judgment has bearing in deciding the issue of application of Section 68 in relation to cash credit. In that decision the Calcutta High Court made the following observations:
“In our opinion, in such circumstances, the Assessing officer of the assessee cannot take the burden of assessing the profit and loss account of the creditor when admittedly the creditor himself is an income tax assessee. After getting the PAN number and getting the information that the creditor is assessed under the Act, the Assessing officer should enquire from the Assessing Officer of the creditor as to the genuineness of the transaction and whether such transaction has been accepted by the Assessing officer of the creditor but instead of adopting such course, the Assessing officer himself could not enter into the return of the creditor and brand the same as unworthy of credence. So long it is not established that the return submitted by the creditor has been rejected by its Assessing Officer, the Assessing officer of the assessee is bound to accept the same as genuine when the identity of the creditor and the genuineness of transaction through account payee cheque has been established.”
4.14 Applying the judicial principles culled from these decisions to the appellant’s case I find that the AO made addition u/s 68 in haste and without properly applying his mind to the material available before him. The documents which the appellant had placed before AO, proved that each of the share subscribing company was regularly assessed to tax. The share subscribing amounts were received through banking channels. The assessment orders passed for AY 2012-13 in the case of share subscribing companies proved that each company was assessed in its own right and therefore identity of these companies could not be ignored or overlooked by the AO in the appellant’s case. On these facts therefore I have no hesitation in holding that the appellant had proved the identity & creditworthiness of the shareholders.
4.15 From the documents available it appeared that the share subscription amounts were received from bodies corporate, who were all independently assessed to tax. In the impugned order much emphasis was placed on the fact that notices u/s 131 remained un-complied and therefore it could not be said that the assessee had proved existence of the subscribing companies. The income-tax assessment orders of the share subscribing companies for the AY 2012-13 however proved otherwise because the AOs of the respective subscriber companies had passed the assessment orders for AY 2012-13 specifying the same address as furnished before the AO. The fact that the appellant was able to obtain copies of the assessment orders for AY 2012-13 from the respective share subscriber companies established that the AOs of the respective companies had served the assessment orders on the respective companies at their given addresses. If the AOs of the Department were able to serve on the respective share subscribing companies at the addresses specified in the respective assessment orders and which tallied with the addresses furnished before the AO of the present appellant, then I see no reason for the AO not to find the very same companies at the given addresses. Moreover the assessment orders passed by the AOs of the respective share subscribers also substantiated the fact that the IT Department had accepted the genuine existence of the respective companies and with reference to information disclosed by each of them in their respective balance sheet, the total income was assessed. If the existence of the respective share subscribers was accepted by the AOs of the IT Department for the purposes of framing assessment for AY 2012-13, then I see no reason why the AO of the appellant company could dispute and doubt their existence. Moreover, I find that each share subscribing company had disclosed in its audited accounts sufficiently large investible funds and only fraction of such investible funds were received by the appellant in the form of share capital. On these facts it could not be alleged that respective companies were benamidar of the assessee. In the impugned order the AO has also referred to the alleged modus operandi adopted by the paper companies where the monies are routed from one company to another in the form of subscription to share capital. On the facts of the present case I find that the appellant was carrying out substantial business activities and for that purpose had invested substantial funds in acquiring fixed assets. As such it could not be said that the appellant in question was a company who was involved in providing mere accommodation entries as alleged.
4.16 In various judicial decisions relied upon by the AR in his submissions it was held that before an addition u/s 68 is made, it is necessary for the AO to bring on record some irrefutable material for evidence which would prove that there was no valid issuance of the shares and for that reason the assessee had failed to prove identity & creditworthiness of the shareholders and also failed to substantiate genuineness. If these touchstones are applied to the appellant’s case then I find that the income-tax assessment orders passed by the Departmental Officers for AY 2012-13 showed that existence of all the five share subscribing companies at their given addresses was accepted in their respective assessment proceedings. This fact established identity of the share subscriber. In the balance sheets of the respective share subscribers, the investments in assessee’s share were recorded and each subscriber in its balance sheet had disclosed sufficiently large investible funds. The entries in balance sheet also established that apart from investment in shares of appellant, each share subscribing companies had made several other investments. The assessee had also filed copies of the bank statements of the respective share subscribing companies which established that the share subscription amounts were received, through banking channel. The sources of making payment were also furnished and the entries in bank statements indicated that there was no deposit of cash prior to clearance of the cheques in assessee’s favour. All these facts and documents considered cumulatively establish that the assessee had discharged the onus of proving creditworthiness of the share subscribers and the genuineness of the transactions. In terms of the ratio laid down by the Supreme Court in the case of CIT Vs. Lovely Exports Pvt Ltd (supra) Calcutta High Court in the case of CIT Vs Dataware Pvt. Ltd. and Delhi High Court in the case of CIT Vs Kamdhenu Steel & Alloys Limited (supra) and CIT Vs Gangeshwari Metal (P) Ltd (supra), I hold that the AO was not justified in making addition o Rs.3,01,00,000/.- u/s 68 of the Act. The addition is accordingly deleted. [Ground Nos. 1 to 4 are therefore allowed].”
3. Mr. Choudhury vehemently contends during the course of hearing that the Assessing Officer had rightly made the impugned addition since the taxpayer had failed to prove identity, genuineness and creditworthiness of the share premium money. He terms the impugned share subscription premium ₹690/- per share having face value of ₹10/- each as highly exorbitant. Case laws Sumati Dayal vs. CIT (1995) 214 ITR 801 (SC) and CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC) is further quoted during the course of hearing that the relevant evidence submitted during the course of assessment has to be considered as per the human probabilities by removing all blinkers. Our attention is thereafter invited to the relevant nuances of such share subscription routing involving multiple layers to plough back unaccounted monies back to the books. We find no merit in the Revenue’s instant grievance in the light of relevant facts on record. There is no dispute about the assessee’s having declared its share subscription premium from M/s Agrani Credit & Finvest Pvt. Ltd., Crown Mansion Pvt. Ltd., Liberal Infrastructure Pvt Ltd., Darshan Enclave Pvt. Ltd., Snow Fall Impex Pvt. Ltd. involving corresponding sums of ₹27,60,000/-, ₹55,20,000/-, ₹82,80,000/- in case of third and fourth and ₹48,30,000/- in last entity’s case; respectively totalling to ₹3,01,00,000/-. Case file suggests that the assessee has placed on record their income tax acknowledgement of the impugned assessment year 2012-13, directors’ report alongwith audited financial statements, explanation regarding source of investments, bank statements, share application forms and board’s resolution(s) followed by their respective regular assessment orders pertaining to very assessment year u/s. 143(3) of the Act. Their Assessing Officer(s) made u/s 68 unexplained cash credits additions of share premium amounting to ₹67,03,00,000, ₹44,85,00,000/-, ₹24,42,00,000/- & ₹21,70,00,000/- in case of first four entities and accepted similar credits of ₹20,45,00,000/- to be genuine satisfying all parameters of identity, genuineness and creditworthiness. It can therefore be safely assumed that all these additions sums forming subject-matter of the impugned additions to be accepted as genuine in respective investors entities’ end as the source of the amount(s) in issue totalling to ₹3,01,00,000/-. Learned Departmental Representative fails to dispute that the same very amount cannot be added twice in payees and recipients’ hands u/s 68 of the Act. We therefore see no reason to accept Revenue’s instant former substantive ground. We affirm CIT(A)’s findings under challenge qua the instant former issue.
4. Next comes the Revenue’s latter grievance seeking to treat assessee’s rental income of ₹656,63,468/- derived from its warehouse as income form house property instead of business income. The CIT(A)’s detailed discussion qua the instant latter issue reads as under:-
“5.2. I have considered the submissions of the AR and perused various judicial decisions cited before me in support of the appellant’s claim. I have also examined the impugned order wherein the AO discussed his reasons for assessing the income derived from letting out of the warehouse facilities under the head “House Property” as opposed to “Profits & Gains of Business” as claimed by the assessee. It is relevant to note” that the jurisdictional facts in the present case are in narrow compass and there is no dispute with regard to these facts between the assessee and the AO. Having regard to the admitted and undisputed facts the short question to be decided is whether the income which the assessee derived from letting out of the warehousing facilities was rightly assessable under the head “House Property” or Business. On scrutiny of the material placed before me, I note that the appellant was incorporated as a private company in 2006. From the assessee’s Memorandum of Association, I note that the main object of the appellant inter alia included object No. 1 which reads as follows:
” To conceive, plan, survey, design, study and evaluate all steps, process, techniques and methods for setting up of all types of infrastructure Projects, facilities or works, and to, build, construct, install, erect, undertake, la-down, commission, establish, own , operate, manage, maintain, control, and administer, lease, transfer, all Infrastructure Projects, facilities or works including/ Agricultural; Parks, Gardens, Roads, Bridges, Fly-overs, Highways, Roadways, structures and facilities. Rail roads, Railway Stations, Platforms, Railway Yards, Rail Tracks, including gauge conversions thereof, Railway Electrification, Tram-ways, Buildings, Wells, Water Sources, Dams, Canals, Reservoirs, Urban and Rural Water supply system, Sewerage and underground drainage systems, Airstrips, Airports, Seaports, Berths, Jetties, Quays, Docks and Marine structure of all types, Rapid Transport and telecommunication System of all types, Transportation Systems, Irrigation Projects, water-ways, Water Supply Scheme including distribution system, Chemical Plants, Fertilizer Plants Distillery Plants, LPG and all types of Petroleum products, Handling and storage Plants and Terminals, Handling Equipment’s of various types. Pumping Stations, Light Rail Transport Systems for cities, Mass Housing Projects, Industrial Plants of all types, Industrial and Technology park and civil projects, Environmental based projects and Equipments, On shore/off shore projects, Airport facilities, Electronics Hardware Technology Park Schools, Colleges and other educational institutions, Public halls, Museum, Libraries, Garages, Hospitals, Health Centers, Community Centers, Hotels, Theaters, Muitiplexes, Shopping Malls, Holiday Homes and/or Beach Resorts and to render all services in connection thereto as planners, Designers, Consultants, Constructors, Builders, Developers, Architects, Engineers, Storage services, Erectors, Installers, Commissioning Agents, Management Consultants and for these purposes to purchase, take on lease, or otherwise acquire and hold any lands, houses, offices, workshops, structures, buildings and premises and prepare layout thereon or building of any tenure or description wherever situated, or right or interest therein or connected therewith,”
5.3 A bare perusal of the main object clause of the MOA shows that the assessee company was incorporated with a view to promote, setup, develop, operate & lease civil infrastructure facilities in different forms and formats. From the material placed before me I find that in pursuance of the said object clause, the assessee company took active steps to setup warehousing facilities at Matigara, Siliguri in North Bengal. In order to setup a state of the art & modern warehousing facility, the assessee had arranged both own and borrowed funds. Substantial investment was made not only in construction of warehouse building but also in acquisition and installation of plant & machineries so as to develop, operate & maintain a modern warehousing facility which could simultaneously be used by number of FMCG companies for storing numerous types of consumer products. From the details furnished it appeared that apart from constructing a modern building with pre-fabricated blocks, the assessee installed several plant & machineries such as central air-conditioning, fire-fighting equipments, overhead cranes, material handling systems, electronic security surveillance systems etc. Besides the assessee also developed civic infrastructures such as roads within the building and adjoining compound, spaces for loading & unloading of goods, facilities for parking of vehicles, security for the goods & vehicles etc. The rent charged by the assessee was not only for letting out of the building simplicitor but also for providing incidental facilities and amenities for safe storage and handling of goods in an efficient manner. The air conditioning provided within the warehousing facilities enabled the occupiers to preserve the goods without being subjected to vagaries of nature. Apart from providing various facilities and amenities for storage & handling of goods, the assessee also provided support services in the form of providing security, cleaning & maintenance staff, administrative support, electrical maintenance, plumbing etc. For providing these services the assessee employed a large workforce to whom salaries were paid regularly. I therefore find that the assessee carried on an organized activity with a view to commercially exploit the civic infrastructure developed by the assessee at a substantial cost. For setting up such civic infrastructure the assessee had borrowed substantial sums on which the assessee paid interest at commercial rates of interest. For carrying on such an organized activity the assessee had employed skilled and semi skilled staff. The entire activity which the assessee carried on regularly and in an organized manner was therefore nothing but a business activity. Such activity was conducted by the assessee since its inception and the same was sanctioned by the main object incorporated in the MOA.
5.4 In the impugned order the AO justified the assessment of the rental income under the “House Property” by relying on the decisions of the Supreme Court in the case of S.G. Mercantile Coprn (P) Ltd (supra) and Shambhu Investment (P) Ltd Vs CIT (supra). On the contrary in the written submissions the AR relied on the decisions of the same Court rendered in the cases of Chennai Properties & Investments Ltd Vs CIT (~6 taxmann.com 465) & Karanpura Development Co. Ltd. v. CIT (44 ITR 362). I find that in the recent decision rendered on 9th April 2015 in the case of Chennai Properties & Investments Ltd Vs CIT (supra), the Apex Court considered the entire law on the subject. The Apex Court had the benefit of considering number of decisions rendered by the same Court on the issue of taxability of income derived from immovable properties under the head “Business” or “House Property”. After considering the judgments of the Apex Court rendered earlier and after considering the facts of the relevant case, the Supreme Court in the case of Chennai Properties & Investments Ltd Vs CIT (56 taxmann.com 465) held as follows:
“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 Ill. (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.
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.”
5.5 Applying the ratio laid down in the latest decision of the Apex Court, I find that the appellant’s case squarely falls within the said ratio. In the assessee’s case also its activity of setting up and thereafter operating, managing and maintaining the warehousing facility was carried on in an organized from year on year basis. The activities conducted by the assessee were in pursuance of the main object clause of the MOA. For the purposes of setting-up and operating the warehousing facility the assessee had not only invested in construction of the building but substantial investment was also made in acquiring, installing & erecting specialized plant & machineries so that goods of different varieties could be stored and handled in an efficient manner and the warehousing facility could simultaneously be used by number of FMCG companies. The civil infrastructure facility developed was designed in a manner which would enable the user to exploit the infrastructure for storage & handling of goods in cost effective and efficient manner. The activity carried on by the assessee can therefore fall within the definition of “business” in Section 2 (13) of the I T Act.
5.6 In the impugned order in support of his conclusions the AO heavily relied on the judgment of the Supreme Court in the case of S.G. Mercantile Corpn Vs CIT (83 ITR 700). On examination of relevant decision, I however find that the ratio laid down in that decision in fact advances the case of the assessee rather than furthering the case of the Revenue. In that case the Supreme Court ultimately held that the assessee who was engaged in the business of sub-leasing of the shops, the income was assessable under Section 10 of erstwhile Income-tax Act, 1922; meaning thereby income was assessable under the head “Business” and not “Other Sources”. On the contrary the Apex Court in the case of Karanpura Development Co. Ltd. v. CIT::,(supra), had held that where the object for which the assessee was incorporated was to take on lease coalfields and which were subsequently let-out, the rental income derived was assessable under the head “Business” since it amounted to commercial exploitation of the properties. I further find that identical issue of taxability of Income derived from letting out of the warehouses was considered by the Punjab & Haryana High Court in the case of Haryana Warehousing Corporation Vs ACIT (328 ITR 23) and Karnataka High Court in the case of CIT Vs Karnataka State Warehousing Corporation (44 taxmann.com 205). In both these cases the income was derived by State Govt undertakings from letting out of the warehousing facilities and the income was offered under the head “Business”. The Assessing authorities however assessed the income under the head “House Property”. On due consideration of the facts and after considering the judgments of the Apex Court in the case of S.G. Mercantile Corpn Vs CIT (supra) and Karanpura Development Co. Ltd. v. CIT (supra), the High Courts held that income from warehousing activities was liable to be assessed under the head “Business” and not “House Property”. The same view was taken by the ITAT, Chennai Bench in the case of ACIT Vs N.D.R. Warehousing Pvt Ltd (ITA No. 182/Mds/20i3) which was upheld by the Madras High Court in its judgment dated 01.12.2014. The AR also placed before me copy of the recent decision of the jurisdictional IT AT, Kolkata in the case of Dutta Properties Vs ITO (ITA No. 973 to 979/Ko1/2012) where identical facts were involved. In the case decided by the IT AT, Kolkata the assessee had constructed a warehouse on a leased land which was let out to numerous tenants. The assessee had employed security, provided electrical installations, roads & parking facilities etc. For providing the warehousing facilities and attending amenities, consolidated rent was charged which was offered under the head “Business”. The AO however assessed the income under the head “House Property” and this was upheld by the CIT(Appeals). In its order dated 01.07.2015, the ITAT, Kolkata following the ratio laid down by the Supreme Court in the case of Chennai Properties & Investments Ltd Vs CIT (supra) however held that the income was liable to be assessed under the head “Business and not “House Property”. Following the decision of the Apex Court in the case of Chennai Properties & Investments Ltd Vs CIT (supra) as also the decision of the jurisdictional ITAT, Kolkata in the case of Dutta Properties Vs ITO (supra), I direct the AO to assess the income by way of rent derived from letting of warehouse under the head “Business”. The AO is further directed to allow the deduction for expenses as claimed by the assessee in the return since the AO had allowed deduction only 30% of the annual value as provided in Section 24 of the Act. [Ground Nos. 5 & 6 are therefore allowed].
5.7 In the course of hearing, the assessee had filed an additional ground claiming deduction for interest paid on borrowed funds under Section 24(b) of the Act for which no deduction was allowed in the impugned order is directed to assess the income under the head “Business”, the assessee would be entitled to claim the deduction for interest paid on borrowed funds under Section 36(1)(iii) of the Act. The AO is directed to allow the deduction for such interest since the borrowed funds were used for business purposes. [The additional ground of appeal thus having become infructuous is dismissed].”
5. We have given our thoughtful consideration to rival contentions. Suffice to say, it has been elaborately discussed the CIT(A)’s above extracted findings that the assessee’s object clauses duly contain the relevant stipulation regarding setting up of warehouse in issue in the nature of its business activity. We further find that the very issue had arisen in the assessee’s sister concern M/s Maa Amba Infrastructure (P) Ltd’s case ITA No.1309/Kol/2015 vide at the Revenue’s behest. Learned co-ordinate bench therein affirms the CIT(A)’s identical findings as follows:-
“2.3. We have heard the rival submissions. Briefly stated facts are that the assessee company was formed with the main object as stated in the Memorandum of Association , to conceive, plan, survey, design, study and evaluate all steps, process, techniques and methods for setting up of all types of infrastructure projects, facilities or works, and to, build, construct, install, erect, undertake, commission, establish, own, operate, manage, maintain , control and administer , lease, transfer, all infrastructure projects, facilities or works including agricultural, parks, gardens, roads, bridges, flyovers, highways, roadways, structures and facilities . In pursuance of its objective, the assessee had acquired land at Matigara and constructed a specialized warehouse of international standards providing and / or for rendering storage facilities to multinational companies. The warehouse is fitted with complete machineries, pre-fabricated structures, electrical installations and security systems. The assessee has also employed a huge labour force to run, operate and maintain the warehouse. Part of the warehouse was let out in the ordinary course of its business and rental income derived thereon was offered under the head ‘income from business’. Accordingly, we hold that the assessee had constructed a specialized infrastructure facility by way of warehouse in organized manner so as to be exploited for commercial gains. We hold that the decisive test is the true nature of activity carried out by the assessee which produces the income from warehouse and not the way in which it is measured i.e whether it is variable or a fixed monthly sum. The ld CITA had categorically observed that the assessee had made substantial investment in construction of a building and in acquisition and installation of plant and machineries so as to develop, operate & maintain a modern warehousing facility which could simultaneously be used by number of FMCG companies for storing numerous types of consumer products. The rent charged by the assessee was therefore not only for letting out of the building simplicitor but for providing incidental facilities and amenities for safe storage and handling of goods in an efficient manner. The air conditioning provided within the warehousing facilities enabled the occupiers to preserve the goods without being subjected to vagaries of nature. The assessee had carried on an organized activity with a view to commercially exploit the civic infrastructure set up by it at substantial cost. For setting up such civic infrastructure, the assessee had borrowed substantial sums on which the assessee was paying interest at commercial rates of interest. For carrying on such organized activity, the assessee had employed skilled and semi skilled staff.
2.3.1. We find that the issue under dispute is settled by the decision of the Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd reported in 56 taxmann.com 465 (SC). In that case, the assessee was a company incorporated with the main object, as stated in the Memorandum of Association, to acquire the properties and to let out those properties. The assessee had therefore acquired certain properties and rented it out and the rental income received therefrom was shown as income from business. The AO however assessed the rental income under the head ‘income from house property’ instead of ‘business’. When this question came up for consideration before the Hon’ble Supreme Court, the Court gave paramount importance to the main objects laid down in the Memorandum of Association to determine the nature of rental income. The Court found that the main object of the assessee was to acquire and rent out properties and accordingly it held that the rental income was earned in the regular course of assessee’s business as set out in the object clause of its Memorandum. The Hon’ble Supreme Court distinguished the decisions of its earlier co-ordinate Bench in the case of East India Housing & Land Development Trust Ltd vs CIT reported in 42 ITR 49 (SC) and Sultan Brothers (P) Ltd vs CIT reported in 51 ITR 353 (SC) . Instead the Supreme Court followed the law laid down in the decision by the same court in Karampura Development Co. Ltd vs CIT reported in 44 ITR 362 (SC). In the aforesaid case, the assessee was formed with the purpose of acquiring and disposing coal mining rights. In pursuance of its objective, the assessee had acquired long term leases of coalfields which was subsequently let out to various customers. The rental income derived from letting out coalfields was held assessable as business income by the Hon’ble Supreme Court. Applying the ratio laid down in the aforesaid judgement, the Hon’ble Supreme Court held where letting out of properties is the business of an assessee, the rental income derived therefrom is business income. We also find that the decision of Hon’ble Supreme Court relied upon by the ld AO in the case of S.G. Mercantile Corporation (P) Ltd vs CIT reported in 83 ITR 700 (SC) is actually in favour of the assessee , inasmuch as , in that case, the income was assessed only as business income.
2.3.2. We also find that the assessee was formed in the year 2006 and had been deriving rental income from warehouse from that year and the same has been accepted by the revenue upto Asst Year 2011-12 as ‘income from business’. The ld AR also stated that the assessment for the Asst Year 2011-12 was completed u/s 143(3) of the Act, wherein the rental income was assessed only under the head ‘income from business’. No new material was brought to on record to establish with sufficient evidence that the position accepted by the revenue in earlier years was untenable either on facts or as per law. Hence when there is no change in facts during the year under consideration, there is no reason for the revenue to take a differential stand by treating the rental income as income from house property. The principle of consistency cannot be given a go by eventhough the principle of resjudicate does not strictly apply to income tax proceedings. Reliance in this regard is made on the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC).
2.3.3. The ld DR placed reliance on yet another recent decision of the Hon’ble Supreme Court in the case of Raj Dadarkar & Associates reported in (2017) 81 taxmann.com 193 (SC) which was held in favour of the revenue. The ld AR stated that the said decision is distinguishable on facts. In the case of Raj Dadarkar supra, the assessee therein, had let out shops / stalls to various occupants on monthly rent. The assessee collected charges for minor repairs, maintenance, water and electricity. As per the terms of allotment by the BMC, the assessee was bound to incur all these expenses and assessee in turn collected extra money from the allottess. The assessee collected 20% of monthly rent as service charges. Such service charges were also used for providing services like watch and ward, electricity, water, etc. The tribunal held that the amounts collected towards services were inseparable from basic charges of rent. The Tribunal further held that the assessee had not established that it was engaged in any systematic or organized activity of providing service to the occupiers of the shops / stalls so as to constitute the receipts from them as business income. In our opinion, the assessee received income by letting out shops / stalls, and therefore, the same has to be held as income from house property.
The Hon’ble Supreme Court in the case of Raj Dadarkar supra had placed heavy reliance on the finding of aforesaid facts recorded by the tribunal. Whereas in the instant case before us, the ld CITA had categorically stated that the assessee had carried on an organized activity with a view to commercially exploit the civic infrastructure set up by it at substantial cost incurred out of own funds as well as borrowed funds. This finding is not controverted by the revenue before us. Accordingly we hold that the reliance placed on the decision of Raj Dadarkar supra does not advance the case of the revenue and is factually distinguishable. It is not in dispute that the warehouse has been constructed by the assessee with several infrastructure facilities in accordance with the requirements of the specific multinationals so as to store their products in the warehouse.
2.3.4. In view of the aforesaid findings in the facts and circumstances of the case and respectfully following the decision of the Hon’ble Supreme Court in the case of Chennai Properties supra, we hold that the ld CITA had rightly directed the ld AO to treat the warehouse rentals as income from business and consequentially allow the expenditure claimed in the return as business expenditure. Accordingly, the Ground No.1 raised by the revenue is dismissed.”
We adopt the above detailed discussion mutatis mutandis to conclude herein as well that CIT(A) has rightly treated assessee’s rental income from its warehouse facilities to be in the nature of business income than income from house property in the given facts and circumstances of the case.
6. This Revenue’s appeal is dismissed.
Order pronounced in the open court 12/10/2018