TMI Blog2006 (8) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... directions of the client lighting, cleaning, and sanitation, etc., which are only incidental to the use and occupation of the premises. Therefore, we hold that the lease rent received by the assessee from Lipton India and from Hindustan Lever was rightly assessed as 'income from house property'. The ground Nos. 3 and 4 are accordingly rejected. Whether the warehousing charges received by the assessee should be assessed as 'income from house property' or as 'business income' - The income from warehousing is derived from house property by the exercise of the property rights, properly so-called, and the said character is not changed and the income does not become 'income from business' merely because the hiring is inclusive of certain services, such as security, labour for loading and unloading, lighting, cleaning etc., which are incidental to the use and the occupation of the premises. In warehousing the dominant object is exploitation of house property and the other services that go with it are only incidental. In it no complex commercial activity is involved. Thus, we agree with the conclusions reached by the CIT(A). The grounds Nos. 1 to 4 are accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustan Lever Ltd. under the head 'Income from house property', and made a disallowance of Rs. 13,51,000/- under s. 40A(2)(b). He assessed the total income at Rs. 92,06,815/- as under: Particulars (Rs.) (Rs.) Total receipts from warehousing services 78,54,621 Disallowance Donation 27,216 Deemed Dividend 1,49,279 Proportional Depreciation on Bldg. 15,56,527 Depreciation on vehicles 489 43V disallowance 1,823 Disallowance out of interest payment 9,28,154 Payment made to Shree Indl. Services [40A(2)(b)] 13,51,000 40,14,488 Less : Allowable expenditure 1,18,69,109 Admn and establishment expenses 49,16,584 Depreciation 5,77,730 Lease rent paid : Kamadhenu Chem Ind. 6,00,000 Navlakhs N.N. 30,000 Navlakha Asha 30,000 National Agro Services 60,000 Shree Industrial Services 13,51,000 Warehousing charges paid 3,97,541 24,68,541 79,62,855 Income from warehousing 39,06,254 Income from business 39,06,254 Total lease rent received from Lipton India Ltd. 34,98,552 Total lease rent received from Hindustan Lever Ltd. 35,68,863 70,67,415 1/4 Repair 17,66,853 Income from house property 53,00,561 Total income 92,06,815 3. The order of the AO was challenged before the CIT(A) by the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lease rent received from Lipton India and from Hindustan Lever was taxable as 'income from house property' and not as 'income from business'. 7. The details of the total area being used by the assessee for leasing/warehousing are as under: Nature of use Area (Sq. ft.) From From From 1.4.2000 to 31.10.2000 01.11.2000 to 30.09.2001 01.10.2001 onwards Lease 33,900 1,01,900 68,000 Warehousing 1,14,660 1,14,660 1,48,560 Open area for Warehousing Scrap 3,615 3,615 3,615 Total area 1,52,175 2,20,175 2,20,175 8. In the assessment order the AO took the total gross receipts in respect of lease rent and warehousing charges at Rs. 70,67,415/- and Rs. 78,54,621/- respectively, as mentioned in the computation reproduced in para 2 above whereas according to the assessee these receipts were Rs. 18,19,567/- and 52,47,828/- respectively. In the report submitted by the AO vide letter 28th Feb., 2005 these receipts were shown after verification of the TDS certificates at Rs. 42,10,004/- and 75,05,897/- respectively. During the hearing of the appeal before us the assessee filed a chart in which these receipts have been shown at Rs. 27,54,254/- and Rs. 87,73,250/- (Rs. 47,26,938/- + ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs. National Storage (P) Ltd. (1967) 66 ITR 596 (SC); (iii) CIT vs. Shambhu Investment (P) Ltd. (2001) 168 CTR (Cal) 237 : (2001) 249 ITR 47 (Cal); (iv) Shambhu Investment (P)Ltd. vs. CIT (2003) 184 CTR (SC) 91 : (2003) 263 ITR 143 (SC); (v) CEPT vs. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC); (vi) CIT vs. New India Industries Ltd. (1992) 106 CTR (Guj) 374 : (1993) 201 ITR 208 (Guj); (vii) Sultan Brothers (P) Ltd. vs. CIT (1964) 51 ITR 353 (SC); (viii) Vora Warehousing (P) Ltd. vs. Asstt. CIT (2001) 71 TTJ (Mumbai) 361: (1999) 70 ITD 518 (Mumbai). 10. Shri. Atul Pranay the learned Departmental Representative placed reliance on the decision of the CIT(A) and vehemently argued saying that his order needed to be upheld. His arguments are summarized below: That the dictionary meaning of warehouse was 'a building where large quantities of goods are stored'. That the assessee had let out specific areas in its buildings to different parties. That the receipts from leasing and from warehousing were from exploitation of land and building. That the lease agreements with Lipton India and with Hindustan Lever make it abundantly clear that it was a case of bare letting of fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eive income from the property in his own right. 14. The decisions of the High Courts and of the Supreme Court on the question whether the income from letting out an asset under different situations was to be assessed as 'business income' or as 'income from house property' in relation to the facts of the present case are discussed in the following paragraphs. 15. Shri Karia, the learned Authorised Representative, placed heavy reliance on the decision of the Bombay High Court in the case of CIT vs. National Storage (P) Ltd., which was affirmed by the Supreme Court in CIT vs. National Storage (P) Ltd. In this case the assessee company was promoted/floated by the members of the Indian Motion Picture Distributor's Association, because the Cinematograph Film Rules, 1948 promulgated by the Government required the distributors to store films only in godowns constructed strictly in conformity with the specifications laid down in the said Rules and in a place to be approved by the Chief Inspector of Explosives, Government of India. A place at Mahim in Mumbai was approved and the assessee company, after purchasing a plot of land there, constructed 13 units thereon, 12 unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court, after discussing the decisions of the Madras High Court, the Bombay High Court and Supreme Court, observed that what was to be seen was the primary object of the assessee while exploiting the property, that if the main intention was to let out the property or any portion thereof, the same must be considered as 'income from house property', and that if it was found that the main intention was' to exploit the immovable property by way of complex commercial activities in that event it must be held as business income. It is manifest from the lease agreement in the present case that the lease rent received from Lipton India and from Hindustan Lever was from bare letting of the property and that there was no complex commercial activity involved. Therefore, the decision of the Supreme Court in the case of Shambhu Investments (P) Ltd. also is not applicable to the facts of this case. 17. In the case of Parekh Traders vs. CIT, it was observed that the heads of income enumerated in the IT Act are mutually exclusive and each specific head covers items of income arising from the specific source. 18. In the case of Sultan Brothers (P) Ltd. vs. CIT it was held that whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustries Ltd., which is a direct decision on the issue involved the present case, the assessee had received income by way of rent from the Food Corporation of India which had taken the warehouses belonging to the assessee on lease. The Madras High Court, relying on the judgment of the Supreme Court in the case of East India Housing Land Development Trust Ltd. vs. CIT held that the income received from the renting out of the warehouses to the Food Corporation of India was assessable as 'income from house property'. We find that the facts in the case of Indian Warehousing Industries Ltd. and those in the present case before us, are identical and therefore the grounds Nos. 1 to 4 are squarely covered against the assessee by this judgment of Madras High Court. 22. In the case of CIT vs. Chennai Properties Investments Ltd., the Madras High Court, after discussing the decisions of different High Courts and of the Supreme Court observed that, in all the cases which had come before the Courts involving commercial or residential buildings owned by assessees it had been held that the income realized by such owners by way of rental income from a building, whether a commercial building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty', which is chargeable under s. 22, it has to be taxed under s. 22 only and cannot be taken to s. 28 on the ground that the business of the assessee was to exploit property and earn income or because the income was obtained by a trading concern in the course of its business. (xi) If the dominant object of leasing/letting out is only incidental to and for the purposes of the assessee's own business, the income would be business income. What has to be discovered is whether the letting of the property is subservient with the main business of the assessee or vice versa. (xii) Where house property is given on lease or licence basis for earning income therefrom, the true character of the income derived is 'income from house property' falling under s. 22. The said character is not changed and the income does not become income from trade or business if the hiring is inclusive of certain additional services such as heating, cleaning, lighting or sanitation, which are relatively insignificant and only incidental to the use and occupation of the tenements. 24. We, now proceed to examine the facts of this case, in the light of the legal position enunciated in the above p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities including blending, processing, mixing and packing of teas and other items of food and beverages and for purposes consequential and incidental thereto on the terms given . 26. The lease agreement further says as under: That the lease was for a period of 10 years w.e.f. 1st Nov., 2000 for the premises comprising of a factory building admeasuring 68,000 sq. ft. on a monthly rent of Rs. 4,45,000/-. That the lessee will pay the said monthly rent at the rate of 4,45,000/- per month in advance on or before 21st day of each calendar month. That the lessee (HLL) agreed to pay the assessee company (the lessor) Rs. 144.00 lacs on taking possession, Rs. 31.64 lacs at the beginning of the forth year and Rs. 39.65 lacs at the beginning of the seventh year as a security deposit. That the assessee company (the lessor) agreed to allow the lessee (HLL) to possess and enjoy the 'demised premises', for carrying out the manufacturing activities including blending, processing, mixing and packing of tea and other items of food and beverages. That as long as the lessee continued to pay the rent and observed and performed the terms and conditions of the lease agreement the lessee would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's business of warehousing. He stated that the assessee leased three units, called 'gala', from its vast warehousing complex to HLL and simultaneously obtained warehousing business from HLL. 29. He argued that 'warehousing' was not only mere exploitation of a house property but it involved complex commercial activities including storage of goods, security, issue of goods on the instructions of the clients, insurance of goods, etc. He placed heavy reliance on the decisions in the cases of National Storage (P) Ltd. and in the case of Shambhu Investments (P) Ltd. 30. It is seen from the lease agreement between the assessee company and Lipton India and with Hindustan Lever, as reproduced above, that the only object and intention of the assessee, while exploiting the impugned property, was to let out the property, on lease to Lipton India and to Hindustan Lever, on a monthly rent. There was no complex commercial activity involved in the letting out of the property. This is not a case where the leasing of the property was incidental or subservient to the main business of the assessee. The assessee, was engaged in the activity of leasing/hiring/letting of its lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madras High Court, in the case of CIT vs. Indian Warehousing Industries Ltd., on identical facts, held that the income from leasing of the warehouses was assessable as 'income from house property'. The Madras High Court, following the judgment of the Supreme Court in the case East India Housing Land Development Trust Ltd. vs. CIT, held as under: ....... The source of the income being the warehouses, it matters little as to who the lessee for the time being is, whether it is the same. lessee continuing over a period of time or a shifting class of lessees who occupied the space for shorter periods and paid rental for such use, 33. In view of the facts and circumstances of the case and the legal position discussed in the paras 8 to 32 above, we agree with the conclusions reached by the CIT(A). The grounds Nos. 1 to 4 are accordingly rejected. Ground No. 5 The learned CIT(A) erred in confirming disallowance of Rs. 843 under s. 43B. 34. The learned Authorised Representative did not press this ground and therefore it is rejected. Ground No. 6 The learned CIT(A) erred in confirming disallowance of interest on account of interest free advances. 35. It was noticed by the AO that du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y confirmed the addition of Rs. 13,51,000/- but also enhanced the disallowance by ,a further sum of Rs. 9,76,592/-. The order of the CIT(A) has been challenged by the assessee in the present appeal. 38. Shri Chetan Karia, the learned Authorised Representative, reiterated the arguments which were put forward on behalf of the assessee before the AO and the CIT(A). The submissions made by him are summarized below: That the AO and the CIT(A) did not have any evidence to justify the action of disallowing a legitimate business expenditure. That the AO and the CIT(A) did not have any comparable instance to justify the disallowance/enhancement. That while providing warehousing facility to its clients, the assessee had to provide incidental services such as loading/unloading, handling, security, transportation and in rendering these services, the assessee was assisted by M/s Shree Industrial Suppliers. That the manner of carrying on the business should be left to the assessee. That the provision of s. 40A(2)(b) is incorporated only with a view to disallow comparatively excessive and unreasonable expenses incurred on a person having direct relation to the assessee. That a new plea was taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or the benefit derived by, or accruing to, the assessee from the expenditure. Such portion of the expenditure which, in the opinion of the AO, is excessive or unreasonable according to these criteria is to be disallowed in computing the profits of the business or profession. 44. In the case of CIT vs. Shatrunjay Diamonds (2003) 183 CTR (Bom) 86 : (2003) 261 ITR 258 (Bom) it was held by the Bombay High Court that in cases falling under s. 40A(2)(b) the burden of proof shifts to the assessee and that in such cases it is the duty of the assessee to prove and discharge its burden by leading proper evidence. 45. In the case of Keltron Component Complex Ltd. vs. Dy. CIT Anr. (2003) 182 CTR (Ker) 58 : (2003) 264 ITR 352 (Ker), the Kerala High Court observed as under: ....... Sec. 40A(2)(b) of the Act clearly provides for disallowance of amounts which the assessing authority considered to be in excess of the requirements of the business. The AO in fact had limited the commission to 50 per cent of the profit accruing to the company before the commission. The first appellate authority had considered the circumstances and limited the disallowance beyond 7 per cent. The Tribunal had also a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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