1997-VIL-107-ITAT-DEL

Equivalent Citation: ITD 063, 001, TTJ 059, 474,

Income Tax Appellate Tribunal DELHI

Date: 05.08.1997

NEELAM CABLE MANUFACTURING COMPANY.

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX.

BENCH

Member(s)  : B. M. KOTHARI., B. S. SALUJA.

JUDGMENT

Per B.M. Kothari, A.M. -- The first ground raised by the assessee in this appeal relates to confirmation of the additions of Rs. 9,100 and Rs. 10,100 added as unexplained and non-genuine loans.

1.2 Shri N. K. Bagla had deposited Rs. 5,000 in cash on 1-4-1987 and Rs. 4,100 on 2-4-1987 with the assessee firm. The assessee filed affidavit before the Assessing Officer in which Shri Bagla had admitted that the aforesaid interest-free loan of Rs. 9,100 was given by him to the assessee out of his savings from salary income. His statement was also recorded by the Assessing Officer on 7-8-1989. Shri Bagla in the said statement has once again confirmed the aforesaid facts. It was explained by him that the aforesaid loan was given out of the money brought from his father Shri Tej Bhan who owns agricultural land. The contents of the affidavit and the statement clearly indicate that the assessee has discharged the burden of proving the identity as well as capacity of the depositor. The Assessing Officer is, therefore, directed to delete the addition of Rs. 9,100.

1.3 The loan of Rs. 10,100 was received by the assessee from one Shri L.D. Sachdeva, Chartered Accountant. His statement was also recorded by the Assessing Officer on 7-8-1989. In the said statement, Shri L.D. Sachdeva has clearly confirmed the fact of having advanced the aforesaid loan. He has also stated that a house was constructed by him during the period from February 1985 to June 1987 which cost a sum of Rs. 70,000. He has also disclosed the sources of his income. He had purchased a Maruti in January 1989. All these facts stated in the affidavit and the statement clearly reveal that Shri L.D. Sachdeva was a man of means. He has confirmed the fact of having advanced the loan. Hence, there is no justification for sustaining the said addition of Rs. 10,100. The Assessing Officer is directed to delete the same.

2. In ground No. 2, the assessee has challenged the finding given by the CIT(A) holding that the rental income received by the assessee from the leasing out of factory godowns and industrial sheds is assessable as income from property and not as income from business as claimed by the assessee. It has been further stated in the said ground that the CIT(A) has erred in confirming the disallowance of the following expenses incurred in pursuance of the agreement with the tenants in respect of the said property :

Rs.

(a) Out of building repair and security service charges 55,552

(b) Out of house-tax 8,284

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63,836

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2.1 The learned counsel for the assessee submitted that the original partnership deed of the assessee-firm executed on 24th April, 1982 shows that the main business of the firm was manufacture and sale of PVC insulated cables. This partnership deed was amended by a deed executed between the partners on 9th September, 1983 which, inter alia, provided that the business of the firm apart from manufacture and dealer in PVC insulated cables shall be to give on lease factory godowns, industrial premises and properties and to deal in real estates. He submitted that in view of amended partnership deed, the activity of leasing factory godown, industrial premises and other properties was a business activity and the income derived pursuant to the lease agreement executed by the assessee should be assessed under the head 'Income from business' and all the expenditure incurred for the purposes of carrying on the said business as well as depreciation on rented portion of the building should also be allowed. He drew our attention towards the agreement executed with the tenants to show that the lease rent received by the assessee was not simply meant for the premises given on lease but it, also include service charges as per the terms of the said contract. The learned counsel invited our attention towards the observations made by the Assessing Officer on page 6 of the assessment order in which it has been clearly stated that a sum of Rs. 2,72,707 has been credited in the Profit and Loss account on account of rent and service charges received by the assessee. The Assessing Officer has himself, after going through the said agreement recorded a finding that the premises have been given on rent which is inclusive of service charges. The service charges are for providing various amenities as mentioned in the agreement executed with the lessee.

2.2 The learned counsel further invited our attention towards the judgment of the Hon'ble Karnataka High Court in the case of Balaji Enterprises v. CIT [1997] 225 ITR 471 in which it was, inter alia, held that such a question has to be considered on the basis of determination of the facts as to whether the firm had carried on such activity as a business activity and they were merely receiving the rent only as owners of the properties. He submitted that emphasis has to be laid on the nature of activity and it should be found whether such an activity was a business activity or was merely an activity of receiving the rent as owners of the properties. In the present case, the assessee has derived such income from a business activity. It is, however, observed from the said judgment that it was a case where the assessee had taken certain property on lease and constructed building thereon and leased out to various tenants. The Hon'ble High Court in the said judgment at page 747 has specifically observed that there is no finding by the Tribunal that the assessee is the owner of the property. In the present case, the assessee is the owner of the property from which rental income has been derived. The aforesaid judgment is, therefore, clearly distinguishable on facts.

2.3 The learned counsel also relied upon the judgment of Hon'ble Punjab and Haryana High Court in the case of CIT v. Anand Rubber & Plastics (P.) Ltd. [1989] 178 ITR 301. In this case, it was held that in order to determine whether rent is assessable as income from property or business income, what has to be seen is whether the asset is being exploited commercially by letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend on certain facts peculiar to each case. In that case, the factory premises of the assessee consisted of three portions, the main building, front shed and a rear shed. In order to curtail losses, production was reduced with the result that the rear shed became surplus. The rear shed was leased out with a view to reduce the losses. On these facts, it was held that the shed was leased out temporarily as a commercial asset. The rent was, therefore, held to be assessable as business income. This case is also distinguishable on facts with the assessee's case. It is apparent from the facts recorded in the assessment order that only 10% of the building owned by the assessee is used for self-business and 90% portion of the property in question has been given on rent. There is no material on record to prove that such letting out of 90% portion of the property was only by way of a temporary measure. Hence, the aforesaid case is also clearly distinguishable.

2.4 The learned counsel further placed reliance on judgment of Hon'ble Supreme Court in the case of Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353. In that case, there was a composite letting of building fitted with furniture and fixtures for the purposes of being run as a hotel. It was held on the facts of that case that when a building and plant, machinery or furniture are inseparably let, the Income-tax Act contemplates the rent from building as a residuary head of income and not one to be computed under the head 'Income from property' under section 9 of I.T. Act, 1922. The learned counsel submitted that once a composite rent is received for the building and services, it cannot be bifurcated and, therefore, the income received by way of such composite rent will be assessable either as income from business or as income from other sources in view of the aforesaid judgment of the Hon'ble Supreme Court.

2.5 We have carefully gone through the aforesaid judgment. In that case, the limited company was the owner of a certain building constructed on plot No. 7 on the Church Gate in Bombay, in which furnitures and fixtures were also fitted up for being run as a hotel. The company let out the said building fully equipped and furnished to one Voyantizis for a term of six years for running a hotel and for certain other ancilliary purposes. On these facts, it was held that as the assessee and the lessee intended that the building and the furniture and fixtures were to be used for one purpose, namely, for the purposes of running a hotel altogether, and not one separately from the other, notwithstanding that the sums payable for their enjoyment were fixed separately, the lease satisfy all the conditions for the applicability of section 12(4) and the rent from the building had to be computed under section 12 after providing for the allowances mentioned in section 12(4) and section 9 did not apply. The Hon'ble Supreme Court at page 358 of Sultan Bros. (P.) Ltd.'s case in the said judgment has observed that whether a particular letting is business has to be decided on the circumstances in each case. Each case has to be looked on from a businessman's point of view to find out whether the letting was for doing of a business or exploitation of his property by an owner. In the present case, the premises were given on rent or lease to the various tenants as per the agreements executed with them. A perusal of letter dated 25th July, 1989 submitted by the assessee before the Assessing Officer indicates that the payment of rent included the payment for providing services such as security, electricity, gardening, sanitary arrangement, etc. Such services are incidental to the main activity of giving the property on rent/lease to tenants. The facts of the present case cannot, therefore, be said to be comparable or similar with the facts of the aforesaid case decided by the Hon'ble Supreme Court where a fully equipped hotel building with furniture, fixtures and fittings was given on lease. The only asset which was leased out or given on rent by the assessee to various tenants was the factory building. The pre-dominant object of giving such property on rent/lease was to derive income by way of rent. Such incidental services such as providing of security, electricity, gardening, sanitary arrangement would not alter the nature of the rental income as an income assessable under the head 'Income from business' or under the head 'Income from other sources'.

2.6 The learned counsel also drew our attention towards the past history of the assessee's case with regard to the assessability of such income under the head 'Income from business'. This chart was submitted giving details from assessment years 1983-84 to 1994-95. The said chart shows that in some years the income by way of rent was assessed under the head 'Income from house property' whereas in some other years, the income was assessed as 'Income from business'. The past history, therefore, neither squarely supports the assessee's contention nor it squarely goes against the assessee. The matter will have, therefore, to be decided on the basis of facts brought on record in the year under consideration.

2.7 After giving our deep and thoughtful consideration to the submissions made by the learned representatives of the parties and after going through all the relevant judgments on the point which were brought to our attention by the learned representatives, we are of the view that the rental income derived by the assessee has rightly been charged to tax under the head 'Income from property'. Such a view is fully fortified by the judgment of the Hon'ble Supreme Court in the case of East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49. The Head note of the said judgment is reproduced hereunder :

"The appellant-company, which was incorporated with the objects of buying and developing landed properties and promoting and developing markets, purchased 10 bighas of land in the town of Calcutta and set up a market therein. The question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as 'business income' under section 10 of the Income-tax Act or as income from property under section 9 :

Held, that the income derived by the company from shops and stalls was income received from property and fell under the specific head described in section 9. The character of that income was not altered because it was received by a company formed with the object of developing and setting up markets. Nor because of the fact that the company was required to obtain a licence from the Calcutta Municipality to maintain sanitary and other services and for that purpose has to maintain a staff and to incur expenditure did the income become 'profits or gains' from business within the meaning of section 10. Nor was the character of the income altered merely because some stalls were occupied by the same occupants and the remaining stalls were occupied by a shifting class of occupants. The primary source of income from the stalls was the occupation of the stalls, and it was a matter of little moment that the occupation which was the source of the income was temporary. Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in section 6 of the Income-tax Act indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in section 6, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head."

2.8 The Hon'ble Supreme Court in subsequent judgment in case of S. G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 considered the question relating to assessability of rental income derived by sub-leasing a property taken on lease as well as the rental income derived from a property owned by the assessee. It was held in that case that since the appellant-company was not the owner of the property or any part thereof and had taken the property on lease and after developing the property let out the portions thereof as shops, stalls and ground spaces to shopkeepers, etc., the rental income was assessable under the head 'Income from business' because it was a trading activity of the company. In the present case, the assessee derived rental income from a property owned by them. The aforesaid judgment also clearly supports the view that in case where the assessee is the owner of the building and the land appurtenant thereto, he would be liable to pay tax under section 9 of the Income-tax Act, 1922 even if the object of the assessee in purchasing the landed property was to permit and develop the market thereof.

2.9 We, therefore, confirm the order of the CIT(A) holding that such income is assessable under the head 'Income from house property'.

2.10 We will now consider the assessee's claim with regard to grant of deduction in respect of the various expenses claimed by the assessee. The assessee claimed deduction of Rs. 55,552 on account of building repairs and security service charges. No separate deduction can be allowed in respect of repairs, as the Assessing Officer had already allowed deduction of 1/6th for repairs as provided in section 24 of the Income-tax Act, 1961. The assessee's claim of Rs. 55,552 on account of building repairs and security service charges includes a sum of Rs. 30,012 incurred by way of security service charges. This amount of security service charges of Rs. 30,012 spent by the assessee should be deducted out of the gross rent of Rs. 2,72,707 received by the assessee. It is true that no such deduction is specifically provided in section 24 of the Income-tax Act, 1961. However, deduction in respect of security service charges paid by the assessee will be deductible while computing the annual value under section 23 of Income-tax Act, 1961. Section 23 provides that the annual value of any property shall be the same which the property might reasonably be expected to let from year to year. Where the property has been let and the annual rent received or receivable by the owner in respect of such property is in excess of the fair annual letting value, such amount of actual rent shall be taken as the annual value. The gross rent received by the assessee at Rs. 2,72,707 also includes service charges. Therefore, while computing the annual value only that amount of rent which is paid in respect of the letting out of the property will have to be taken into consideration. It will, therefore, be necessary to deduct the amount of security service charges of Rs. 30,012 incurred by the assessee while taking the actual amount of rent receivable in respect of the property for determination of the annual value as per section 23. The Assessing Officer is, therefore, directed to grant deduction in respect of Rs. 30,012.

2.11 The assessee has also claimed deduction in respect of house-tax aggregating to Rs. 16,044 paid by the assessee. The Assessing Officer allowed deduction only of a sum of Rs. 7,760. It was stated by the learned counsel for the assessee that the entire amount of house tax which relate to more than one year was paid in the year under consideration. The Assessing Officer has disallowed the same on the ground that the amount to the extent of Rs. 8,284 does not relate to the year under consideration. The proviso to section 23 clearly provides that the taxes levied by any local authority in respect of the property, shall, to the extent such tax are borne by the owner, be deducted in determining the annual value of that previous year in which such taxes are actually paid by him irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him. Since the entire amount of house-tax was actually paid by the assessee in the year under consideration, there is no justification in disallowing a sum of Rs. 8,284. The Assessing Officer is, therefore, directed to grant deduction in respect of this amount also.

3. In ground No. 3, the assessee has challenged the finding given by the CIT(A) of confirming the disallowance in respect of depreciation on the portion of the building let out by the assessee. Since, we have held that the income from rent is assessable under the head 'Income from house property', the assessee is not entitled to grant of depreciation on the cost of portion let out to tenants. The view taken by the CIT(A) is, therefore, confirmed.

4. In the result, the appeal is partly allowed.

 

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