Ita/1/2022 Of Principal Commissioner Of Income Tax v. M/S Noor Resorts Pvt Ltd

REPORTABLE IN THE HIGH COURT OF HIMACHAL PRADESH AT SHIMLA ON THE 22[nd] DAY OF AUGUST, 2022. BEFORE HON’BLE MR. JUSTICE TARLOK SINGH CHAUHAN & HON’BLE MR. JUSTICE VIRENDER SINGHINCOME TAX APPEAL NO.1 OF 2022.-Between: PR. COMMISSIONER OF INCOME TAX-1, CHANDIGARH. …..APPELLANT. (BY SH. VINAY KUTHIALA, SENIORADVOCATE WITH SH. DIWAN SINGHNEGI, ADVOCATE) AND M/S NOOR RESORTS PRIVATE LIMITED,RIVERSIDE,PARGANOO,BHUNTAR,DISTT. KULLU (H.P.) THROUGH ITSMANAGING DIRECTOR. …...RESPONDENT. ________________________________________________________________ This appeal coming on for admission before noticethis day, Hon’ble Mr. Justice Tarlok Singh Chauhan,delivered the following: J U D G M E N T OMP(M) No. 39 of 2022. The appeal is deemed to be filed within time in view of the order passed by the Hon’ble Supreme Court.Therefore, this application seeking condonation of delay infiling the appeal is misconceived and dismissed as such. OMP No.563 of 2022. 2.For the reasons stated in the application, thedelay in refiling the appeal after removing objections, iscondoned. The application stands disposed of. INCOME TAX APPEAL NO.1 OF 2022. 3. The facts giving rise to the instant appeal are that the assessee is a Private Limited Company engaged inthe business of renting of immovable properties. Theassessee electronically filed its return of income for theAssessment Year 2014-15 on 26.09.2014 declaring NILincome and claiming refund of Rs.1,96,140/-. The returnwas processed under Section 143(1) of the Income Tax Act(for short ‘Act’) and later the case was selected for scrutiny.The Assessing Officer (‘A.O.’) assessed the income of theassessee under Section 143(3) of the Act at Rs.1,34,832/-after making two additions: (1) Rs.34,832/- under Section 40(a)(ia) of the Act and (2) Rs.1,00,000/- out of expensesdebited to the tune of Rs.9,48,281/- in the P & L Accountunder the heads of Telephone and vehicle expenses byobserving element of personal usage. The assessee hadbeen engaged in the business of renting of immovableproperties and the A.O. allowed income received fromletting out of shops as business income. Later on, theRevenue Audit Party has raised an objection that incomederived from letting out of the shops is not businessincome but income from house property. 4.Thereafter, the Principal Commissioner of IncomeTax (in short ‘Pr. CIT’) exercised its revisionary powersunder Section 263 of the Act and observed that theassessment order dated 16.09.2016 was not onlyerroneous but also prejudicial to the interest of Revenueby making following points:- (a)It was noticed that the assessee had earnedrental income of Rs.26,63,438/- which had beenshown as “Income from Business & Profession”rather than showing the same as “Income fromHouse Property” and that the said income wasfurther set off against the various expensesclaimed viz. directors remuneration, depreciationand other expenses resulting into net profit of 4.Thereafter, the Principal Commissioner of IncomeTax (in short ‘Pr. CIT’) exercised its revisionary powersunder Section 263 of the Act and observed that theassessment order dated 16.09.2016 was not onlyerroneous but also prejudicial to the interest of Revenueby making following points:- (a)It was noticed that the assessee had earnedrental income of Rs.26,63,438/- which had beenshown as “Income from Business & Profession”rather than showing the same as “Income fromHouse Property” and that the said income wasfurther set off against the various expensesclaimed viz. directors remuneration, depreciationand other expenses resulting into net profit of Rs.28,903/- only. A show cause notice dated04.10.2018 was issued to the assessee asking toexplain as to why the rental income receivedmay not be treated as “Income from HouseProperty” rather than considering the same as“Income from Business & Profession”. In responsethe assessee furnished a chart on 28.11.2018explaining that if the rental income was to beassessed as its “Income from Business &Profession” the resultant loss of Rs.7,70,160.40would be much higher than the resultant loss ofRs.3,89,226/- declared by the assessee. It wasfurther submitted that since the loss assessedwas lesser than the loss to be assessed, if therental income was to be considered as incomefrom House Property. The assessee also furnisheda chart showing the closing stock as on 31.03.2014of Rs.51,98,161/- pertaining to two different plotsof land which were stated to be available for salebeing part of its stock in trade. It was submittedthat since the assessee was dealing in thebusiness of real estate development and merelybecause due to slump in the market, the stock intrade remained same at the beginning and atthe end of the year, it could not be held that thebusiness was discontinued. (b)The Pr. CIT observed that the assessee wasowner of shops on the ground floor andbasements in SCO Nos. 126 & 127, Sector 8C,Madhya Marg, Chandigarh. First floor and second floors of these SCOs were stated to be alreadysold by the assessee within a year of its purchasein the year 2005-06. The said shops andbasements were let out during the year underconsideration against which it has earned rentalincome of Rs.26,63,438/- as disclosed in the returnof income. He further observed that in the balancesheet, the said property was shown as its“investment asset” and not part of “stock intrade”. According to the Pr. CIT the aforesaidproperty was the only property which was given atannual lease rent right from its beginning of theacquisition or purchase i.e. from the year 2005-06till date. He further pointed out that no ancillaryservices were rendered by the assessee to itstenants and it had let out the premises on monthlylease rent right from the beginning of theacquisition or purchase and the AO had notverified the lease deeds executed by theassessee. The Pr. CIT observed that it was categoricallyspecified in the lease deed that the lesser (theassessee) shall at its own cost keep the demisedpremises in substantial repair and tenablecondition, it shall carry out major, heavy and/orstructure repairs and keep the demised premisesboth exterior and interior in good orders whereas,all minor repairs of interiors is the responsibilityof the tenant or lessee and that the penalty wasprovided on lessee in case the lease rent was not The Pr. CIT observed that it was categoricallyspecified in the lease deed that the lesser (theassessee) shall at its own cost keep the demisedpremises in substantial repair and tenablecondition, it shall carry out major, heavy and/orstructure repairs and keep the demised premisesboth exterior and interior in good orders whereas,all minor repairs of interiors is the responsibilityof the tenant or lessee and that the penalty wasprovided on lessee in case the lease rent was not paid on time. The statutory dues and othercharges including municipal taxes, service tax,property tax, water and electricity charges etc. asper actual basis, were to be borne/paid by thelessee or tenant only and that the leaseagreement was renewed after the expiry of leaseperiod on fresh terms and conditions mutuallyagreed upon by both the parties. Therefore,merely because the MOA of the assesseecompany having one of its main objects to carryon the business of real estate dealers anddevelopers including purchase and sale of land,land development, colonization, purchase, saleconstruction and letting out of houses , flats andfarm houses would not make the rental income tobe assessed under the head “Income from HouseProperty” particularly in view of the judgment ofthe Hon’ble Apex Court in he case of M/s RajDarekar and Associates Vs. CIT reported in 394 ITR592 (SC) and in the case of M/s Sultan BrothersPvt. Ltd.(supra). He therefore set aside theassessment order passed by the A.O. and directedthe A.O. to reassess or recomputed the income byconducting further enquiry as well as duly takinginto account consideration of the fresh evidencebrought on record including the MOA of theassessee company and the legal position whilereplying upon certain case laws, on this issue. 5.Aggrieved by the order of the Pr. CIT, theassessee preferred an appeal before the Income TaxAppellate Tribunal, Chandigarh (‘ITAT, Chandigarh’), whovide order dated 11.11.2020 allowed the appeal of theassessee and granted the following reliefs:- “(i)The ITAT vide order under considerationheld that in the present case, the main object ofthe assessee in its MOA is to carry on the businessof Real Estate Dealers and Developers includingpurchase and sale of land, land development,colonization, purchase, sale, construction andletting out of houses, flats, farm houses. However,as per Clause 19 of the aforesaid MOA, theassessee was authorized to sell, improve, alter,manage, develop exchange, lease, mortgage,dispose of etc. of the business lands, property,assets, etc. in whole in part in such manner and onsuch terms as the Directors may think fit.Therefore, the income of the assessee receivedon lease out property was its business income. (ii)The ITAT further held that it can not be saidthat the view taken by the A.O. was wrong and ifthe view taken by the A.O. was one of thepossible vide the assessment order dated10.09.2016 passed by him cannot be consideredto be erroneous. For the aforesaid view, we arefortified by ratio laid down by the Hon’bleSupreme Court in the case of CIT vs Max India Ltd. (2007) 295 ITR 282 wherein it has been held asunder:- (ii)The ITAT further held that it can not be saidthat the view taken by the A.O. was wrong and ifthe view taken by the A.O. was one of thepossible vide the assessment order dated10.09.2016 passed by him cannot be consideredto be erroneous. For the aforesaid view, we arefortified by ratio laid down by the Hon’bleSupreme Court in the case of CIT vs Max India Ltd. (2007) 295 ITR 282 wherein it has been held asunder:- “The Phrase “prejudicial to the interest of therevenue” in section 263 of the Income Tax Act,1961 has to be read in conjunction with theexpression “erroneous” order passed by theAssessing Officer. Every loss of Revenue as aconsequence of an order by the AssessingOfficer cannot be treated as prejudicial tointerests of the Revenue. For example, whenthe Assessing Officer adopts one or two causespermissible in law and it has resulted in lossof Revenue or where two views are possibleand the Assessing Officer has taken one viewwith which the Commissioner does not agree,it can not be treated as an erroneous orderprejudicial to the Revenue, unless the viewtaken by the Assessing Officer isunsustainable in law”. (iii) The ITAT further held that by considering therental income received by the assessee as“business income” which was consistently claimedby the assessee in the preceding years also andthe department had accepted the same, theassessment order passed by the A.O. was notprejudicial to the interest of the Revenue,particularly when the loss would have been morethan Rs.7,70,160.40 instead of Rs.3,89,226/-, ifthe rental income as to be considered as “incomefrom house property”, instead of “businessincome” as declared by the assessee.” 6.The decision of the ITAT has been assailed by the Revenue on the ground that the ITAT has consideredonly Clause-19 of the Memorandum of Association (MOA) by ignoring Clause-3 of the same. Additionally, it has beenurged that the ITAT erred in holding that the rental incomeearned by the assessee has rightly been claimed under the head “income from business or profession” 7.We have heard the learned counsel for theappellant. 8.It has come on record that during the course ofthe original proceedings, the A.O. had issued aquestionnaire to the assessee. In response to the same, theassessee filed reply and attached documents, which wereduly considered by the A.O. which is a substantial proof ofthe fact that the A.O. had made inquires. It is on thebasis of the inquiry that it was concluded that the rentalincome as shown by the assessee was considered to be“business income” as had been done in the precedingyears since the inception of the business of the assessee.However, this finding was not agreed to by the Pr. CIT andthe matter was again remitted back to the A.O. 9.However, the ITAT in order to resolve thiscontroversy considered the object and ancillary object asmentioned in the MOA, more particularly, Clauses-3 and 19thereof and came to the conclusion that the assessee was authorized to lease out the property which in the instantcase had been done in respect of First floor and Secondfloor, SCO Nos. 126 and 127, Sector 8C, Chandigarh. 10.It was further concluded that the said activity ofleasing out was undertaken by the assessee company fromthe very beginning when those assets were purchasedand, therefore, it could not be said that this activity wasonly for the year under consideration. It was alsoconcluded that even in the earlier years the incomereceived from the leased out properties was considered as“business income” as Clause-19 of the MOA authorized theassessee to lease out the property which was an ancillaryactivity. authorized to lease out the property which in the instantcase had been done in respect of First floor and Secondfloor, SCO Nos. 126 and 127, Sector 8C, Chandigarh. 10.It was further concluded that the said activity ofleasing out was undertaken by the assessee company fromthe very beginning when those assets were purchasedand, therefore, it could not be said that this activity wasonly for the year under consideration. It was alsoconcluded that even in the earlier years the incomereceived from the leased out properties was considered as“business income” as Clause-19 of the MOA authorized theassessee to lease out the property which was an ancillaryactivity. 11.It is on this reasoning that the order passed bythe A.O. was upheld and we have not been persuadedenough to take a contrary view as the findings so recordedare based on a complete appreciation of Clause-3 as alsoClause-19 of the MOA and are in tune with the law laid downby the Hon’ble Supreme Court. 12.The Hon’ble Supreme Court inChennaiProperties and Investments Limited, Chennai vs.Commissioner of Income Tax Central III, Tamilnadu (2015) 14 SCC 793 held that where the assessee is acompany whose main object of business is to acquireproperties and to let out properties, the rental incomereceived therefrom was taxable as “income frombusiness” and not “income from house property”. 13.This view was taken after following the ratio ofthe judgment of the Constitution Bench of the Hon’bleSupreme Court inSultan Brothers (P) Ltd.vs.Commissioner of Income Tax AIR 1964 SC 1389:(1964) 5 SCR 807, wherein it was held that each case hasto be looked at from businessman’s point of view to findout whether the letting was doing of a business or theexploitation of the property by the owner. It shall beapposite to reproduce the relevant observations made inChennai Properties’s case (supra) which read as under:- “9. Before we refer to the Constitution Benchjudgment in the case of Sultan Brothers (P) Ltd. v.CIT, AIR 1964 SC 1389, we would be well advised todiscuss the law laid down authoritatively andsuccinctly by this Court in 'Karanpura DevelopmentCo. Ltd. v. Commissioner of Income Tax, West Bengal(1962)44 ITR 362 (SC). That was also a case wherethe company, which was the assessee, was formedwith the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coalfields and it had restricted its activities to acquiringcoal mining leases over large areas, developing themas coal fields and then sub-leasing them to collieriesand other companies. Thus, in the said case, theleasing out of the coal fields to the collieries andother companies was the business of the assessee.The income which was received from letting out ofthose mining leases was shown as business income.Department took the position that it is to be treatedas income from the house property. It would be thus,clear that in similar circumstances, identical issuearose before the Court. This Court first discussed thescheme of the Income Tax Act and particularly sixheads under which income can be categorised/classified. It was pointed out that before income,profits or gains can be brought to computation, theyhave to be assigned to one or the other head. Theseheads are in a sense exclusive of one another andincome which falls within one head cannot beassigned to, or taxed under, another head.Thereafter, the Court pointed out that the decidingfactor is not the ownership of land or leases but thenature of the activity of the assessee and the natureof the operations in relation to them. It washighlighted and stressed that the objects of thecompany must also be kept in view to interpret theactivities. In support of the aforesaid proposition,number of judgments of other jurisdictions, i.e. PrivyCounsel, House of Lords in England and US Courtswere taken note of. The position in law, ultimately, is summed up in the following words: (KaranpuraDevelopment Case, ITR p. 377) “As has been already pointed out in connectionwith the other two cases where there is a lettingout of premises and collection of rents theassessment on property basis may be correct butnot so, where the letting or sub-letting is part of atrading operation. The diving line is difficult to find;but in the case of a company with its professedobjects and the manner of its activities and thenature of its dealings with its property, it ispossible to say on which side the operations falland to what head the income is to be assigned.” 10.After applying the aforesaid principle to thefacts, which were there before the Court, it came tothe conclusion that income had to be treated asincome from business and not as income from houseproperty. We are of the opinion that the aforesaidjudgment in Karanpura Development Co. Ltd.'s casesquarely applies to the facts of the present case. 11. No doubt in Sultan Brothers (P) Ltd.'s case,Constitution Bench judgment of this Court hasclarified that merely an entry in the object clauseshowing a particular object would not be thedeterminative factor to arrive at an conclusionwhether the income is to be treated as income frombusiness and such a question would depend uponthe circumstances of each case, viz., whether aparticular business is letting or not. This is so statedin the following words: (AIR p. 1391, para 7) “7….We think each case has to be looked at from abusinessman's point of view to find out whetherthe letting was the doing of a business or theexploitation of his property by an owner. We do notfurther think that a thing can by its very nature bea commercial asset. A commercial asset is only an asset used in a business and nothing else, andbusiness may be carried on with practically allthings. Therefore, it is not possible to say that aparticular activity is business because it isconcerned with an asset with which trade iscommonly carried on. We find nothing in the casesreferred, to support the proposition that certainassets are commercial assets in their very nature.” 12.We are conscious of the aforesaid dicta laiddown in the Constitution Bench judgment. It is forthis reason, we have, at the beginning of thisjudgment, stated the circumstances of the presentcase from which we arrive at irresistible conclusionthat in this case, letting of the properties is in fact isthe business of the assessee. The assessee therefore,rightly disclosed the income under the Head Incomefrom Business. It cannot be treated as 'income fromthe house property'. We, accordingly, allow thisappeal and set aside the judgment of the High Courtand restore that of the Income Tax Appellate Tribunal.No orders as to costs.” 14. The aforesaid decision was thereafter followed by another Bench of the Hon’ble Supreme Court in RayalaCorporationPrivateLimitedvs.AssistantCommissioner of Income Tax (2016) 15 SCC 201 inwhich the position of law was succinctly reiterated andfollowed and it was held as under:- “9. Upon hearing the learned counsel and goingthrough the judgments cited by the learned counsel, we are of the view that the law laid down by thisCourt in the case of Chennai Properties andInvestments Ltd. v. CIT (2015) 14 SCC 793 shows thecorrect position of law and looking at the facts of thecase in question, the case on hand is squarelycovered by the said judgment. 14. The aforesaid decision was thereafter followed by another Bench of the Hon’ble Supreme Court in RayalaCorporationPrivateLimitedvs.AssistantCommissioner of Income Tax (2016) 15 SCC 201 inwhich the position of law was succinctly reiterated andfollowed and it was held as under:- “9. Upon hearing the learned counsel and goingthrough the judgments cited by the learned counsel, we are of the view that the law laid down by thisCourt in the case of Chennai Properties andInvestments Ltd. v. CIT (2015) 14 SCC 793 shows thecorrect position of law and looking at the facts of thecase in question, the case on hand is squarelycovered by the said judgment. 10. The submissions made by the learned counselappearing for the Revenue are to the effect that therent should be the main source of income or thepurpose for which the company is incorporatedshould be to earn income from rent, so as to makethe rental income to be the income taxable under thehead “Profits and Gains of Business or Profession”. Itis an admitted fact in the instant case that theassessee company has only one business and that isof leasing its property and earning rent therefrom.Thus, even on the factual aspect, we do not find anysubstance in what has been submitted by the learnedcounsel appearing for the Revenue. 11. The judgment relied upon by the learned counselappearing for the assessee squarely covers the factsof the case involved in the appeals. The business ofthe company is to lease its property and to earn rentand therefore, the income so earned should betreated as its business income. 12. In view of the law laid down by this Court in thecase of Chennai Properties (supra) and looking at thefacts of these appeals, in our opinion, the High courtwas not correct while deciding that the income of the assessee should be treated as Income from HouseProperty.” 15.Similarly, in Raj Dadarkar and Associates vs. ACIT, CC-46 (2017) 14 SCC 476, the legal position wasreiterated in the following manners:- “17. There may be instances where a particularincome may appear to fall in more than one head.These kind of cases of overlapping have frequentlyarisen under the two heads with which we areconcerned in the instant case as well, namely,income from the house property on the one hand andprofits and gains from business on the other hand.On the facts of a particular case, income has to beeither treated as income from the house property oras the business income. Tests which are to be appliedfor determining the real nature of income are laiddown in judicial decisions, on the interpretation of theprovisions of these two heads. Wherever there is anincome from leasing out of premises and collectingrent, normally such an income is to be treated asincome from house property, in case provisions ofSection 22of the Act are satisfied with primaryingredient that the assessee is the owner of the saidbuilding or lands appurtenant thereto. Section 22ofthe Act makes ‘annual value’ of such a property asincome chargeable to tax under this head. Howannual value is to be determined is provided inSection 23of the Act. ‘Owner of the house property’is defined in Section 27of the Act which includes certain situations where a person not actually theowner shall be treated as deemed owner of abuilding or part thereof. In the present case, theappellant is held to be “deemed owner” of theproperty in question by virtue of Section 27(iiib)ofthe Act. On the other hand, under certaincircumstances, where the income may have beenderived from letting out of the premises, it can stillbe treated as business income if letting out of thepremises itself is the business of the assessee. certain situations where a person not actually theowner shall be treated as deemed owner of abuilding or part thereof. In the present case, theappellant is held to be “deemed owner” of theproperty in question by virtue of Section 27(iiib)ofthe Act. On the other hand, under certaincircumstances, where the income may have beenderived from letting out of the premises, it can stillbe treated as business income if letting out of thepremises itself is the business of the assessee. 18. What is the test which has to be applied todetermine whether the income would be chargeableunder the head “income from the house property” orit would be chargeable under the head “Profits andgains from business or profession”, is the question. Itmay be mentioned, in the first instance, that merelybecause there is an entry in the object clause of thebusiness showing a particular object, would not bethe determinative factor to arrive at a conclusion thatthe income is to be treated as income from business.Such a question would depend upon thecircumstances of each case. It is so held by theConstitution Bench of this Court in Sultan Bros. (P)Ltd. v. CIT, (1964) 5 SCR 807 and we reproduce therelevant portion thereof: (AIR p.1391, para 7) “7.… We think each case has to be looked at froma businessman's point of view to find out whetherthe letting was the doing of a business or theexploitation of his property by an owner. We donot further think that a thing can by its verynature be a commercial asset. A commercialasset is only an asset used in a business andnothing else, and business may be carried onwith practically all things. Therefore, it is not possible to say that a particular activity isbusiness because it is concerned with an assetwith which trade is commonly carried on. We findnothing in the cases referred, to support theproposition that certain assets are commercialassets in their very nature.” 16.In view of the above settled legal position with which we are duty bound to respectfully agree, moreparticularly, when we do not find any later and recentcontrary view to the aforesaid legal position, no fault canbe found with the order of the ITAT. Thus, we are clearly ofthe opinion that once the property in question is used asbusiness asset and the exclusive business of the assesses-company or firm is to earn income by way of rental or leasemoney, then such rental income can be treated only as“business income of the assessee” and not as income from“house property”. 17. Apart from the above, we notice that no doubt this is a case which falls under the exception laid down inPara 10 (c) of the CBDT Circular dated 20.08.2018. The taxeffect otherwise involved in the instant case is barelyRs.8,04,740/- which again dissociates us from interferingwith the order passed by the ITAT, more especially, for thereasons as already stated above. 18.In view of the aforesaid discussion, we find nomerit in this appeal and the same is accordingly dismissed. (Tarlok Singh Chauhan) Judge (Virender Singh) Judge 22[nd] August, 2022. (krt)