Itta/110/2002 Of M/S.jayalakshmi Enterprises Kodavalur v. The Incometax Officer Nellore

* HONOURABLE SRI JUSTICE L. NARASIMHA REDDY AND * HONOURABLE SRI JUSTICE T.SUNIL CHOWDARY + I.T.T.A. Nos.108 and 110 of 2002 %Date:07.10.2013 M/s.Jayalaxmi Enterprises, Kodavalur, Nellore DistrictRepresented by its Managing Partner D.Narayana Rao ... Appellant and -$Income Tax Officer, Ward3, Nellore ...Respondent !Counsel for the appellant:Sri N.V.Sravan Kumar ^Counsel for respondent: Sri J.V. Prasad, learned Stanting Counsel for Income Tax <GIST: >HEADNOTE: ?CASES REFERRED: 1. (1999) 240 ITR 5 (AP) THE HON’BLE MR JUSTICE L. NARASIMHA REDDYANDTHE HON’BLE SRI JUSTICE T. SUNIL CHOWDARY I.T.T.A. Nos.108 and 110 of 2002 COMMON JUDGMENT:(Per Hon’ble Sri Justice L. Narasimha Reddy) These two appeals arise out of a common order dated29.4.2002 passed by the Hyderabad Bench of Income Tax AppellateTribunal (for short, ‘the Tribunal’) in I.T.A. Nos.2082 of 1998 and709 of 1999. The assessee is the appellant. The appellant is a firm, which, in turn, is the assessee underthe Income Tax Act. Its activity, as evident from the deed ofpartnership, is to construct or otherwise acquire godowns and otherbuildings, to lease them to third parties and to undertake otheractivities. The appellant constructed godowns and leased them tovarious agencies including Food Corporation of India. It submittedthe returns for the first time in the assessment year 1977-78. Theincome earned in the form of rents from the godowns was shown asincome from the business. The same was accepted by theassessing officer and deductions permissible in law were allowed. This pattern continued upto 1993. In respect of the returns submitted for the assessment year1993-94 and 1994-95, the assessing officer took the view that theincome derived by the appellant from the godowns deserves to betreated as the one from the property. The deductions in relationthereto, as provided under law, were permitted. The appellant carried the matter in appeal to theCommissioner of Appeals. The appeal was allowed through order dated 12.9.1996. The Commissioner observed that in a similarmatter, he has taken the view that income in the form of rents fromgodowns must be treated as the one from business. The Revenuefiled two appeals before the Tribunal in respect of the twoassessment years. It was pleaded that the appellant is the ownerof the godowns and leasing of the godowns is almost incidental toownership and thereby, the income deserves to be treated as theone, from property. After hearing both the parties, the Tribunalallowed the appeals and has set aside the order of theCommissioner. Hence, these appeals are filed under Section260(A) of the Income Tax Act, by the assessee/appellant. Mr.N.V.Sravan Kumar, learned counsel for the appellant,submits that almost for a period of 1½ decades the income from thegodowns was treated as the one from the business and there wasabsolutely no basis for the assessing officer to change the stand atonce. He contends that the question as to whether the lessor of agodwn is the owner of the premises or he himself is a lessee, doesnot make much of difference, in this regard. Learned counselfurther submits that in the partnership deed itself, it was clearlymentioned that the principal object of the appellant is to carry on thebusiness of constructing and leasing the godowns and there was nobasis for the Tribunal in reversing the order passed by theCommissioner. Sri J.V. Prasad, learned Standing Counsel for therespondent, on the other hand, submits that whatever be the scopefor treating the income derived in the form of lease of a godown,when the assessee himself is a lessee, once the assessee is theowner of the premises, the inescapable conclusion is that theincome in the form of rents must be treated as the one fromproperty. He placed reliance upon the judgment of this Court in C.I.T. v Veerabhadra Industries[[1]]. He further submits that amistake committed for a considerable period does not make itlawful. Sri J.V. Prasad, learned Standing Counsel for therespondent, on the other hand, submits that whatever be the scopefor treating the income derived in the form of lease of a godown,when the assessee himself is a lessee, once the assessee is theowner of the premises, the inescapable conclusion is that theincome in the form of rents must be treated as the one fromproperty. He placed reliance upon the judgment of this Court in C.I.T. v Veerabhadra Industries[[1]]. He further submits that amistake committed for a considerable period does not make itlawful. The first contention on behalf of the appellant is about theconsistency. That in fact was an important plank of argumentbefore the Commissioner as well as the Tribunal. It may be truethat from the inception i.e., from the assessment year 1977-78 till1994-95, the plea of the appellant that the income in the form ofrents for the godowns must be treated as the one from thebusiness, was accepted. However, the same was contrary to law. Consistency or repetition does not add strength to an act, if it isotherwise contrary to law. It is fairly well established that theprinciples of res judicata or waiver do not have any application vis-à-vis orders of assessment. Each year happens to be anindependent unit and the view taken in respect of the returns of anassessee for one assessment year need not be followed in thesubsequent assessment years. On merits the question is whether the rent derived by theappellant from the godowns must be treated as the income frombusiness or income from property. In whatever form it is treated,the income is liable to tax. The only difference is about the natureof deductions. In case it is treated as income from business, thedeductions are fairly wide in scope compared to the one which isfrom property. The Income Tax Act or the Rules made thereunder do notcontain any specific provisions that differentiate a particular item ofincome on the lines of business or property. The question has tobe dealt with on the facts of the case. The safest way to proceedis, to ascertain the jural relation between the assessee, on the one hand, and the property, on the other hand. If he happens to be theowner of the property, any income derived from it must be treatedas the one from the property itself. If, on the other hand, theassessee himself is a lessee and he, in turn, sub-leases it to thirdparties, the income he so derives, has to be treated as the one frombusiness. The reason is that he has no proprietary right over theproperty. Viewed in this context, the income derived by theappellant from the property in the form of rent needs to be treatedas the one from the property itself. I n Veerabhadra Industriescase (supra), this Court has taken similar view. In view of the above discussion, we find that the commonorder passed by the Tribunal accords with law and we do not findany substance in these appeals. Accordingly, the appeals are dismissed. There shall be noorder as to costs. Miscellaneous applications, if any pending inthese appeals, shall stand closed. ____________________________ L. NARASIMHA REDDY, J. Date:12.08.2014.NOTE:L.R. Copy be marked.(By order)YS/Kvsn __________________________T.SUNIL CHOWDARY, J. [1](1999) 240 ITR 5 (AP)