M/S Sheetal Khurana Foods (P) Ltd., Bathinda v. The Income Tax Appellate Tribunal And Others

Income-tax Appeal No.679 of 2008 -1- **** IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income-tax Appeal No.679of 2008 Date of decision: 3.1.2011 M/s Sheetal Khurana Foods (P) Ltd., Bathinda ...Appellant Versus The Income Tax Appellate Tribunal and others ...Respondents CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Mr. Binderjit Singh, Advocate for the appellant. Ms. Savita Saxena, Advocate for the respondents. **** ADARSH KUMAR GOEL, J (Oral). 1.This order shall dispose of ITA Nos. 679 and 680 of 2008as both the appeals have been filed by the same assessee raisingcommon questions. 2.Income-Tax Appeal No.679 of 2008 has been preferredby the assessee under Section 260A of the Income Tax Act, 1961(hereinafter referred to as “the Act”) against order dated 11.1.2008passed by the Income Tax Appellate Tribunal, Amritsar Bench,Amritsar in ITA No.468(ASR)/2006, for the assessment year 2003-04, claiming following substantial questions of law:- “a).Whether impugned order dated 11.1.2008 issustainable in eyes of law? b)Whether the department can be permitted to take adifferent and contrary view in respect of nature ofincome of the appellant-company in the given factsand circumstances of this case?different and contrary view in respect of nature ofincome of the appellant-company in the given factsand circumstances of this case? c)When any property is taken on lease for running aHotel and Restaurant, and some portion of it isfurther let out for avoiding losses and expenditure,whether it can be said that this activity was not abusiness activity and income derived from sub-letting is not a business income?Hotel and Restaurant, and some portion of it isfurther let out for avoiding losses and expenditure,whether it can be said that this activity was not abusiness activity and income derived from sub-letting is not a business income? d)Whether the Income Tax Appellate Tribunal wasjustified in reversing the well reasoned order ofCommissioner of Income Tax (Appeals)?justified in reversing the well reasoned order ofCommissioner of Income Tax (Appeals)? e)Any other substantial question of substantial lawwith the leave of the Hon'ble Court?with the leave of the Hon'ble Court? 3.The assessee received income from letting out of abuilding but sought to treat the same as business income. However,the assessing officer treated the same as rental income relying uponjudgment of Hon'ble Supreme Court in Shambhu Investments (P)Ltd. Vs. CIT263 ITR 143 (SC). The CIT(A) reversed the said viewand upheld the plea of the assessee as follows:- “I have considered these submissions. The actions of theappellant certainly partake of those of a businessmantrying to minimise the expenditure reduce the losses dueto non-completion of the Hotel/Restaurant project. This is a finding of fact and is borne out by the above discussion.It is also a material fact that in the case of jurisdictionalHigh Court in Anand Rubber and Plastics (P) Ltd. (178ITR 301), the lease period was even longer at even 19years and yet the Hon'ble Punjab and Haryana HighCourt held the letting out income as business income. The other distinguishing features, discussed earlier,also detract from applying the Supreme Court ruling in thecase of Shambhu Inv. (P) Ltd. in 184 CTR 91 (2003)(SC). The appellant has also pointed out that the casesrelied upon by the AO do not have similar facts and aredistinguishable. a finding of fact and is borne out by the above discussion.It is also a material fact that in the case of jurisdictionalHigh Court in Anand Rubber and Plastics (P) Ltd. (178ITR 301), the lease period was even longer at even 19years and yet the Hon'ble Punjab and Haryana HighCourt held the letting out income as business income. The other distinguishing features, discussed earlier,also detract from applying the Supreme Court ruling in thecase of Shambhu Inv. (P) Ltd. in 184 CTR 91 (2003)(SC). The appellant has also pointed out that the casesrelied upon by the AO do not have similar facts and aredistinguishable. I have already discussed earlier in this appellateorder that the facts have to be viewed in totality. It is themotive, intention, and actual activity of the appellant indealing with the property that is relevant. There is also nochoice but to acknowledge the fact that the AO has madea major error in not noticing the fact that as per page 3 ofthe AO's assessment order, the objectives of thecompany clearly include running a Hotel/Restaurant andserving food, drinks etc. The appellant's action in applying for a Pub licence,as evidenced from a copy of its application to the Exciseand Taxation Department, in the year 2001, cannot alsobe brushed aside as it throws a clear light on its motives in running a Hotel/Restaurant and serving drinks. It is also a matter of fact that the appellant's infurther leasing out only the upper floor ( i.e. not the wholeproperty) for a short limited period, and further agreeingto the restrictive lease conditions of removing its entirebuilding (superstructure) on the expiry of the lease period,are the actions of a businessman in exploiting its property(asset), cutting its losses (expenses) and the taxtreatment for the relevant year (A.Y. 2003-04) in it's booksof account, support it's stand and not of the AO. Theappellant company's application to the Excise andTaxation Department for a bar licence is a very relevantfact that has been not discussed by the AO in theassessment order but directly supports the stand of theappellant The jurisdictional Punjab and Haryana High Courtrulings also support its stand, as discussed earlier. Theappellant's reliance on the case of CIT Vs. Bosotto BrosLtd. (1940) 8 ITR 41, of the Madras High Court alsosupports its stand, as also in the case of CIT Vs. Shree S.Shakti Mills (P) Ltd. (1999) 239 ITR 120, 131 of theCalcutta High Court wherein rental income from thesuperstructure on lease-hold was held to be businessincome. Viewed in totality, all the facts support the stand ofthe appellant. No house owner would leave a plot of land and then construct a building and agree to remove it theconclusion of the relatively short lease period of 9 years.These activities partake instead of a business exploitationof an asset. It is also not necessary for the appellant tohave a number of activities or sources of income, as perthe AO, to prove that it is commercially exploiting one ofthe assets. There need be only one single asset for it tobe exploited commercially and for the income to beassessed as income from business. In view of the above detailed discussion, the AO'saction in assessing the income as Income from Houseproperty cannot be upheld. Hence, ground of appeal no.2is allowed and AO is directed to treat the income asbusiness income.” 4.The Tribunal set aside the above finding and restored theview taken by the assessing officer. The finding recorded by theTribunal is as under:- In view of the above detailed discussion, the AO'saction in assessing the income as Income from Houseproperty cannot be upheld. Hence, ground of appeal no.2is allowed and AO is directed to treat the income asbusiness income.” 4.The Tribunal set aside the above finding and restored theview taken by the assessing officer. The finding recorded by theTribunal is as under:- “10. We have heard the parties and have perused thematerial on record. The question here is as to whetherthe income earned by the assessee has been rightlydirected by the learned CIT(A) to be assessed asbusiness income of the assessee and not its income fromthe house property. The undisputed facts are that theassessee is a Private Limited Company, incorporated in1999, with Dr. Bipindeep Singh Khurana, as one of itsdirectors. The main objects of the company are as follows:- “1. 2. To manufacture, process, import export, buy,sell and otherwise deal in milk, butter cream,ghee, cheese, condensed milk, malted milk,milk powder, skimmed milk, powder milk, icecream, milk foods, baby foods, confectionaryitems, sea foods, agriculture products of allkinds including Soya milk protein foods spraydried milk, protein foods and otherpreparations of Soya, cereals and lentilsincluding flour and dal, Soya snack foods,nutrias, Soya sweets, Soya weaning foodflavored with fruits and vegetables and Soyabeverages and other products andpreparations of every kind, nature anddescriptions. To sell, import, export, improve, preparemanufacture and market and generally tocarry on the manufacturing and trading injams, jelleys, pickles, cider, spices, chutney,marmalades, vinegars, ketchups, juices,squashes, syrups, powders (edible) drinks,beverages, gelatives, essences, ice cream,milk preparation, meat, sausages, porkpies,prawn, potted meats, table delicacies andother eatables. 3.To carry on the business as manufactures,sellers, purchases, importers, exporters,stockiest, distributors, traders, dealers,wholesalers, and retailers in all kinds of foodsnacks fruit, juices, breads, biscuits, syrups,cordial, jam, jellies.sellers, purchases, importers, exporters,stockiest, distributors, traders, dealers,wholesalers, and retailers in all kinds of foodsnacks fruit, juices, breads, biscuits, syrups,cordial, jam, jellies. 4.To carry on the business of hotels, restaurantand canteens and to serve food, fast food,drinks, soft drinks of all types and to operaterecreation centre of all types.”and canteens and to serve food, fast food,drinks, soft drinks of all types and to operaterecreation centre of all types.” 11.On 1.4.2000, the assessee company entered into a lease deed-cum-agreement with Dr. Bipindeep SinghKhurana, Director, for taking on lease land measuringabout 438 sq. yards, located at Pakhowal Road,Ludhiana. The property were taken on lease for initialperiod of five years. The terms and conditions of thelease agreement included that the assessee waspermitted to raise construction on the plot, with thecondition that the assessee would remove the saidstructure at its own costs and would not be entitled to anycompensation on this account. On 21.9.2001, theassessee company entered into a lease deed withCFCFIL, giving the building constructed on the aforesaidplot to CFCFIL, for an initial period of three years, as perthe following terms and conditions:- “I)The lease agreement is for initial period of three years commencing from 21.12.2001 andshall be extended for another term of threeyears on 20% enhancement in the existingrent. As per agreement, the lease shall standterminated on expiry of nine years and theassessee company will be given back thevacant premises and terrace thereon. “I)The lease agreement is for initial period of three years commencing from 21.12.2001 andshall be extended for another term of threeyears on 20% enhancement in the existingrent. As per agreement, the lease shall standterminated on expiry of nine years and theassessee company will be given back thevacant premises and terrace thereon. II)Premises will be for commercial use only and ifany charges/duties/taxes/penalties etc., imposedby any authority will be born by the tenant in thiscase i.e. Association India Financial Services Pvt.Ltd. (presently knownas City FinancialConsumer Finance India Ltd.). TheCorporation Tax @ 12% approximate will beborne by the tenant company.” 12.On query by the A.O. as why the rent received bythe assessee from the aforesaid premises should not betreated as income from house property of the assessee,in accordance with “Shambhu Investments” (supra), theassessee contended that its case was entirely differentfrom “Shambhu Investments” (supra), on facts. Theassessee also contended that the assessee had givenonly the building on lease; that no security of advancecovering the entire cost of construction had beenreceived; that no relationship of landlord and tenantexisted between the assessee and CFCFIL, since the assessee was holding the property not as owner, but onlyon lease rent basis; that no house property statutorydeduction on the rent could be claimed by the assessee,the assessee was not being owner of the property; thatthe lease to CFCFIL, was only a temporary arrangement;and the numerous case laws, as cited by the assessee,supported its case. The A.O., however, for the reasonrecorded in the assessment order, as discussedhereinabove, disagreeing with the assessee, brought totax the income as the income from the house property.The learned CIT(A) reversed the order of A.O. mainly forthe reason that the assessee had applied for the Publicence, in keeping with its main objects of running hoteland restaurant and that since the said licence was notgranted, the assessee let out the upper floor of thepremises on lease for a limited period only, in order toreduce its expenditure and losses; that the assessee hadagreed to the restrictive lease condition of removing itsentire building on the expiry of the lease period, whichwas indicative of intention of a business-man to exploit itsproperty/asset. In doing so the learned CIT(A) placedreliance on “Anand Rubber & Plastic (P) Ltd.” (supra) andGolden Engg. Works” (supra). 13.We, however, do not find ourselves persuaded toagree with the order of the learned CIT(A). Undoubtedly,as held repeatedly by valid court, including “Shambhu **** 13.We, however, do not find ourselves persuaded toagree with the order of the learned CIT(A). Undoubtedly,as held repeatedly by valid court, including “Shambhu **** Investments” (supra), it is the intention of the assesseein letting out the property, which is determinative of thenature of income. This obviously, depends on the facts ofeach case. In the present case, first of the assesseenever contended before the A.O. that it had applied forthe Bar (Pub) licence. There is no discussion in thisregard in the assessment order. The learned CIT(A) hasalso taken objection to such fact. However, in theassessment order, in the narration of the contentions ofthe assessee too, it does not come out that the assesseeever made out any such case before the A.O. Before us,on our asking the learned counsel for the assessee couldnot deny that no such argument was raised before theA.O. Further, the stand of the assessee that it was notthe owner of the property, has also been proved to beincorrect. Before the A.O. the assessee denied suchownership. However, it was found in the agreement withCFCFIL, the assessee had stated that it was absoluteowner in possession of the property in question. Further,the assessee had also claimed depreciation andexpenses on account of repairs of the building. As such,the assessee was undisputedly the owner of the premisesleased out, so far as regards income tax purposes andwas to taxed in respect the annual value of such building,under section 22 of the Act. 14.The assessee having given an unfurnished accommodation on lease also does not help the case ofthe assesse. The assessee has tried to raise this as apoint of distinction with “Shambhu Investments” (supra).As discussed hereinabove, what to see is the intentionof the assessee in letting out the premises. Here, thoughrunning of a hotel/restaurant was one of its main objects,such main object was never shown to have been carriedout during the year under consideration. 15.The assessee also sought of distinguish “ShambhuInvestments” (supra), for the reason that it had notrecovered the cost of construction from the occupant andthat the letting out of the premises was only a temporaryarrangement. In this regard, the A.O. rightly observedthat this makes no difference and that even Dr. BipindeepSingh Khurana had not recovered the entire cost ofconstruction from the assessee and he had been showingthe income from the rental receipts from the assessee asincome from the house property. Regarding theargument temporary arrangement, the initial duration ofthe agreement was of three years, which was extendedfor a further period of three years, with 20%enhancement. This was the arrangement of theassessee with Dr. Bipindeep Singh Khurana. On theother hand the lease by the assessee to CFCFIL, was fornine years, which goes directly against the lease enteredinto by Dr. Bipindeep Singh Khurana with the assessee. **** The assessee obviously could not lease out the premisesfor a period longer than that for which it was itself leasedout the premises. 16.Apropos the assessee's contention it was in line ofhoteling, the A.O. made a specific observation as under:- **** The assessee obviously could not lease out the premisesfor a period longer than that for which it was itself leasedout the premises. 16.Apropos the assessee's contention it was in line ofhoteling, the A.O. made a specific observation as under:- “........Secondly, the assessee contendedduring assessment proceedings that it is in theline of hoteling but the activity of the assesseeat all during the relevant period. Profit andloss account of the assessee company for thefinancial year 2001-02 (rent receipts ofRs.6,06,000/-) and 2002-03 (rent receipts ofRs.8,64,000/-) reveal that all the receipts ofthe company are on account of rent only.Admittedly the first year of the company wasassessment year 2002-03 and this evidentfrom the agreement also, as discussed above.So, how come the question of the companyhaving main business of hoteling? Moreover,the main objects to be pursued by thecompany on its incorporation have alreadybeen reproduced above and established thatthe main objects of the company does notinclude hotel/restaurant business. So, thecontention of the assessee that it has given onrent the building as temporary arrangement is not only misleading but also untrue as theconduct of the business of the company sofar.” 17.From the above, it is evident that the assessee didnot carry on the business of running of hotel/restaurantduring the year. Though, as rightly observed by thelearned CIT(A), the A.O. went wrong in observing that themain object of the assessee company did not includehotel/restaurant business, the fact remain that eventhough this was the one of the main objects of theassessee company, it did not carry on any suchbusiness.” 5.We have heard learned counsel for the parties. 6.Learned counsel for the assessee submitted that theintention of the assessee in letting out the property was to minimiseits business loss and thus transaction of letting out could be treatedas part of business activity of the assessee as held by the CIT(A).Letting out was for a temporary period, pending obtaining of Publicence by the assessee. It was, therefore, different from atransaction of letting out of property with a view to earn income fromthe property. In these circumstances, the view taken in ShambhuInvestments' case should not have been followed by the assessingofficer and the Tribunal. 7.Learned counsel for the revenue supported the viewtaken by the assessing officer and the Tribunal. 8.We are unable to find any merit in the appeal. Under thescheme of the Act, heads of income are mutually exclusive . When aparticular item of income falls specifically under one head it could notbe charged under any other head. If income from a source fallsunder a specific head, the fact that it may indirectly be covered byanother head is not enough to attract the other head. (UnitedCommercial Bank Ltd. Vs. CIT [1957] 32 ITR 688 (SC), East IndiaHousing and Land Development Trust Ltd. Vs. CIT[1961] 42 ITR49 (SC) and Commissioner of Income-Tax Vs. D.P.Sandu Bros.Chembur P. Ltd.[2005] 273 ITR 1(SC). 7.Learned counsel for the revenue supported the viewtaken by the assessing officer and the Tribunal. 8.We are unable to find any merit in the appeal. Under thescheme of the Act, heads of income are mutually exclusive . When aparticular item of income falls specifically under one head it could notbe charged under any other head. If income from a source fallsunder a specific head, the fact that it may indirectly be covered byanother head is not enough to attract the other head. (UnitedCommercial Bank Ltd. Vs. CIT [1957] 32 ITR 688 (SC), East IndiaHousing and Land Development Trust Ltd. Vs. CIT[1961] 42 ITR49 (SC) and Commissioner of Income-Tax Vs. D.P.Sandu Bros.Chembur P. Ltd.[2005] 273 ITR 1(SC). 9.In East India's case the assessee was in the business ofbuying and developing landed property including development ofmarkets. It derived income by letting out shops and stalls in theinterregnum pending sale of the said property. Claim of theassessee that the said income was business income was rejectedand the same was held to be income from property. Relying uponjudgment of House of Lords in Fry Vs. Salisbury House EstatesCo. Ltd.[1930] A.C. 432 and judgment of Calcutta High Court inCommercial Properties Ltd. Vs. Commissioner of Income-Tax[1928] I.L.R. 55 (Cal.), it was held that income from letting out wasincome from property unless business of the assessee itself was tolet out the property. Mere fact that letting out was incidental to itsbusiness will not deviate from the character of income being incomefrom property. It will be appropriate to make a reference to thefollowing observations in the said judgment:- **** “The appellant contends that because it is a companyformed with the object of promoting and developingmarkets, its income derived from the shops and stalls isliable to be taxed under section 10 of the Income-tax Actas “profits or gains of business” and that the income is notliable to be taxed as “income from property” under section9 of the Act. The appellant is undoubtedly, under theprovisions of the Calcutta Municipal Act, 1951, requiredto obtain a licence from the Corporation of Calcutta and tomaintain sanitary and other services in conformity withthe provisions of that Act and for that purpose has tomaintain a staff and to incur expenditure. But, on thataccount, the income derived from letting out propertybelonging to the appellant does not become “profits orgains” from business within the meaning of section 6 and10 of the Income Tax Act. By section 6 of the Income-taxAct the following six different heads of income are madechargeable :(I) salaries, (2) interest on securities, (3)income from property, (4) profits and gains of business,profession or vocation, (5) income from other sources and(6) capital gains. This classification under distinct headsof income, profits and gains is made having regard to thesources from which income is derived. Income-tax isundoubtedly levied on the total taxable income of thetaxpayer and the tax levied is a single tax on theaggregate taxable receipts from all the sources; it is not a **** collection of taxes separately levied on distinct heads ofincome. But the distinct heads specified in section 6indicating the sources are mutually exclusive and incomederived from different sources falling under specific headshas to be computed for the purposes of taxation in themanner provided by the appropriate section. If theincome from a source falls within a specific head set outin section 6, the fact that it may indirectly be covered byanother head will not make the income taxable under thelatter head. **** collection of taxes separately levied on distinct heads ofincome. But the distinct heads specified in section 6indicating the sources are mutually exclusive and incomederived from different sources falling under specific headshas to be computed for the purposes of taxation in themanner provided by the appropriate section. If theincome from a source falls within a specific head set outin section 6, the fact that it may indirectly be covered byanother head will not make the income taxable under thelatter head. The income derived by the company from shopsand stalls is income received from property and fallsunder the specific head described in section 9. Thecharacter of that income is not altered because it isreceived by a company formed with the object ofdeveloping and setting up markets. In UnitedCommercial Bank Ltd. Vs. Commissioner of Income tax[1957] 32 ITR 688 (SC) this Court explained after anexhaustive review of the authorities that under thescheme of the Income-tax Act, 1922 the heads of income,profits and gains enumerated in the different clauses ofsection 6 are mutually exclusive, each specific headcovering items of income arising from a particularsource.” **** “Taking a sum total of the aforesaid decisions it clearlyappears that merely because income is attached to anyimmovable property cannot be the sole factor forassessment of such income as income from property,what has to be seen is what was the primary object of theassessee while exploiting the property. If it is foundapplying such test that the main intention is for letting outthe property or any portion thereof the same must beconsidered as rental income or income from property. Incase, it is found that the main intention is to exploit theimmovable property by way of complex commercialactivities in that event it must be held as businessincome.” Against the above judgment, the appeal was dismissedby Hon'ble Supreme Court without a speaking order being (2003)184 CTR 91 (SC). 11.In Commissioner of Income-Tax Vs. Anand Rubber and Plastics )P.) Ltd.[1989] 178 ITR 301 relied upon by theassesseethe rental income of the assessee was held by the Tribunalto be business income on the ground that earlier the premises werebeing used for running factory but due to heavy losses part thereofwas let out temporarily as a commercial asset. This Court, “on thepeculiar facts”, held that no question of law arose. 12.In the present case, the view taken by the assessingofficer which has been upheld by the Tribunal is based on the following reasons:- i)The main object of the company is to manufactureand market the food articles and not renting ofproperty. It took property on lease and in turn letout the same for nine years which was not itsbusiness activity;and market the food articles and not renting ofproperty. It took property on lease and in turn letout the same for nine years which was not itsbusiness activity; ii)Letting out was not temporary arrangement but for 9years. Initial duration was three years which wasextended for further three years with 20%enhancement. Intention clearly was to earn rentand not to derive business income.years. Initial duration was three years which wasextended for further three years with 20%enhancement. Intention clearly was to earn rentand not to derive business income. ii)Letting out was not temporary arrangement but for 9years. Initial duration was three years which wasextended for further three years with 20%enhancement. Intention clearly was to earn rentand not to derive business income.years. Initial duration was three years which wasextended for further three years with 20%enhancement. Intention clearly was to earn rentand not to derive business income. 13.Whether the income falls under the head of businessincome or income from property has to be decided from case to casedepending on the question whether transaction involved businessactivity or merely deriving rental income. One of the determiningfactors may be whether the transaction is normal part of business ofthe assessee. If business of the assessee has nothing to do with therenting of property and renting is an isolated transaction to earnproperty income, mere fact that such income will result in reduction ofbusiness loss is not enough to hold that it will fall under the head ofbusiness income. If this was to be the sole test, every rental incomeof a business man has to be held to be business income which isnot the statutory scheme as held by the Hon'ble Supreme Courtparticularly in East India Housing and Land Development TrustLtd. Vs. CIT [1961] 42 ITR 49 (SC). **** 14.In the facts and circumstances, the Tribunal was right inholding that the income derived by the assessee was from propertyand not business income. Question ( c) has to be answered againstthe assessee. Questions (a), (b) and (d) are consequential. 15.Accordingly, the appeals are dismissed. (Adarsh Kumar Goel) Judge January 03,2011Pka (Ajay Kumar Mittal) Judge