TMI Blog2010 (11) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... gway Trade-links to cure coffee in its premises for a consideration - It is also seen that the expenses incurred, employees employed, books of accounts maintained were common and, thus, income derived from this business has, no doubt, to be assessed as business income only. - In a nut-shell, the income of the assessee is to be assessed under the head 'income from business' only in stead of bifurcating its income under various heads as did by the AO in his impugned orders for all the AYs under challenge - Appeals are partly allowed - ITA Nos. 116/Bang/2010 and 696 to 700/Bang/2010 - - - Dated:- 19-11-2010 - George George K, A. Mohan Alankamony, JJ. S. Venkatesan, CA for the Appellant Meera Srivastava, Jt. CIT, for the Respondent ORDER Bench: These six appeals of the assessee firm are directed against the orders of the CIT(A), Mangalore in ITA Nos: 84 to 88/MNG/CIT(A)/MNG/2009-10 dated: 29.3.2010 for the assessment years 2002-03, 03-04, 04-05, 05-06 and 07-08 and in ITA No: 55/CIT(A)/MNG/08- 09 dated: 15.12.2009 for the assessment year 2006-07. I. ITA Nos. 696, 697, 698, 699 and 700/B/10 [AYs.02-03, 03-04, 04-05, 05.06 and 07.08: 2. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the remaining grounds are reformulated as under: (i) the authorities below failed to recognize that the same business activity of coffee curing was continued during the previous year and the income from such activity was to be assessed under the head 'business' as against either as 'other sources' or 'house property; (ii) without prejudice, the carried forward business loss was required to be allowed to set off against such income; (iii) the authorities below erred in disallowing the expenses claimed such as traveling expenses, service charges, repair and maintenance etc., (iv) the CIT(A) erred in directing the AO to bifurcate the income under the head 'business' in the earlier years into 'house property' and 'other sources' to deny set off of carry forward of business loss. 3.3. In the meanwhile, the assessee vide its application dated: Nil prayed, during the course of hearing on 11.5.2010 for admission of additional grounds of appeal for the AY 2006-07. The additional grounds sought to be raised are listed as under: (i) the authorities below were not justified in assessing the assessee as 'firm' instead of 'AOP' or 'firm' assessable as 'AOP' since the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offee Board had withdrawn its operation in the assessee's business premises. It was, further, contended that the warehousing charges included the rent realized from open yard and shed and for various facilities, services and security rendered to its customers. IT was pleaded that the entire income be treated as income from business etc. 6.1. Taking into account the contentions put-forth by the assessee and also extensively citing various judicial pronouncements on the issue, the Ld. CIT (A) was of the view that- "18...........................that the appellant firm had ceased to carry on the coffee curing business and had opted to lease out its go-downs and machinery, as an alternative way of earning income, rather than a part of its business. Thus, the rental income derived from leasing out property could not be held as business income particularly when the said segment of business, viz., coffee curing had ceased to exist. The AO has already accepted that the appellant firm had derived business income from other activities like photo-copying, Weigh Bridge, coin box, generator collections etc., in respect of which he has allowed corresponding expenditure. I therefore dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had reasoned that these amounts received as rents were chargeable to income-tax under the head 'income from house property' and, accordingly recomputed the assessee's total income for the AYs under consideration. 7.2. Aggrieved, the assessee took up the issues before the CIT (A) for solace. During the course of appellate proceedings, it was pleaded on behalf of the assessee that- (i) Highland Coffee Works was 100 years' old and was acting as an agent of Coffee Board until decontrol of coffee trade in 1995 and since though the firm was not doing coffee curing business, the facility was being utilized by others for which the assessee getting remuneration from time to time as per agreements entered into; (ii) The facility extended to Coffee Board was continued to be given to Longway Tradewings and the idle capacity in other areas was given to others with a sole intention to earn income by commercial exploitation of the assessee's assets and facility; (iii) Unable to distinguish the type of income earned by the assessee, the AO had classified the income as income from house property, but, income from hire of machinery and warehousing charges offered was treated as busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the PAN allotted to it was under the status of a firm and as per the copy of partnership deed dated 1.8.1995 and as per clause 6 of the said deed, the assessee was constituted as a partnership firm terminable at will. As per clause 23 of the deed, the provisions of the Indian Partnership Act, 1932 were applicable to the partners. (2) Assessing the income as 'income from house property': Extensively quoting the findings of the AO in his impugned orders and also taking sanctuary on the rulings of the Hon'ble Apex Court in the cases of (i) A.V. Thomas and Co. Ltd. v. CIT (1963) 48 ITR 67 (SC); (ii) Universal Plast Ltd. v. CIT (1999) 237 ITR 454 (SC) and the Hon'ble A.P.High Court in the case of Guntur Merchants Cotton Press Co., Ltd. v. CIT (1985) 21 Taxman 324 (AP), the CIT (A) was of the view that- "27........................I am inclined to accept the assessing officer's point of view that the appellant firm had ceased to carry on the coffee curing business and had opted to lease out its go-downs and machinery, as an alternative way of earning income rather than as a part of its business. Thus, the rental income derived from leasing out property could not be held as bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the status of 'Firm' and the said PAN alone was reported in respect of the return filed in the status of AOP which it was obliged to report lawfully in view of s.185 of the Act; - though the assessee was not serious and of no material consequence about the AO assessing in the status of 'firm' which would be contrary to the provisions of s.185 of the Act and, thus, it was not in accordance with law especially, the assessment for the AY 2006-07 was not in response to any notice to file a return in the status of firm, but, a return filed voluntarily as AOP and as far as the other AYs were concerned, they were in response to notices u/s 148 of the Act and the assessee had requested to treat the returns furnished earlier in the status of AOP as the returns filed in response to notice u/s 148 of the Act; - however, the AO took a stand for the AY 2006-07 that the object of claiming and insisting the status of AOP was to avail the benefits of s.26 of the Act in the event of property of the firm were to be sold in future and that the assessee was a firm and its claim was to be assessed as AOP was an afterthought and untenable; - the assessee was a 'firm', but in terms of s. 185 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablishing of telephone [booth] facility, Xerox etc. All these income earning activities were so dovetailed with one another that it was a single integrated business; that common books of accounts were maintained and there has been interlacing and intervening of the funds which were controlled and managed by the firm. Thus, all these earning activities constituted a single business and these were not a different businesses and income from all these activities was being assessed under the head 'business' and not part of it was assessed under the head 'house property' except certain portions of premises let out to Bank prior to 1996; - even for the years under dispute, the AO assessed the income from weigh-bridge collections, money lending etc. as business income, but, the ware-housing charges under the head 'other sources' and, thus, there has been no discontinuance of business to deny set off of carried forward losses; - money lending and estate supplies were to the planters who consigned the coffee to the assessee and the amounts payable to them for the coffee seeds delivered for curing was to be made through the assessee as the curer which gave sufficient security to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kar) - the assessee had made no attempt to sell away the property would go to show that it was struggling to survive but not to discontinue the business; - the AO's stand was erroneous that the amounts received by way of income from license for curing coffee in the curing section and also the others for using the ware-housing for storing their products was not on commercial basis; - the assessee had not given them exclusive possession and it was a mere case of license; - the mere change was that earlier, the income from the coffee curing works and assets was being received from Coffee Board and now it was being received from several persons which does not change the character of the income so received - when the Coffee Board was in helm of coffee curing business, it had required the go-downs for ware-housing the coffee seeds for curing and storing. Thus, extending the ware-housing or storing facilities was part of the assessee's activities during the agency business and the income received by way of warehousing charges from others was business income only and not income from letting out of the property liable for assessment under 'house property'; - warehousin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had furnished its returns, computing its income under the head 'business' and claiming carry forward losses etc., which were accepted by the Revenue, though not under scrutiny assessments. For the AY 1995-96, the assessment was concluded after scrutiny proceedings and, thus, the Revenue was well aware of the termination of the agency with Coffee Board; - however, there was a change in the stand of the basic facts during the assessment proceedings for the AY 2006-07 and, consequently, assessments for earlier AYs under dispute were reopened not because of any tangible materials that income had escaped assessments; - The reasoning of the AO was that the appellant had not reported the income under the head 'house property' whereas such income was reported under the head 'business. As such, there was no question of escapement of any income liable for assessment for a particular year which was absolutely necessary for a valid reopening. It was not the case of the AO that such receipts were not reported to constitute 'escapement' and, therefore, on the basis of the reasons recorded, the reassessments were not sustainable Relies on the case laws: (a) CIT v. K. Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the partnership deed of 1991 which the assessee need not have filed as per the provisions of s.184(3) of the act; - the question is- (i) what is the legal status of the assessee given the fact that a valid registered partnership deed was available and PAN quoted was that of the firm? (ii) Whether mere writing in the return that 'as the firm has not complied with the requirements of s.184 of the Act for the purposes of taxation, the status will be AOP' would relieve the firm of the liability of being treated as such? - the assessee in its letter dt.26.11.2008 had stated that it was a partnership firm and also provided a copy of the deed of partnership entered into on 1.8.1995 and that in the return of income, it had declared its status as AOP; - when the alphanumeric system of allotment of PAN was introduced, the assessee had applied for PAN as a firm which was generated on 10.12.1999 in the status of 'firm'; - as per the clause 6 of the deed of partnership cited supra, the partnership was terminable AT WILL and, further, as per clause 23 of the said deed, the provisions of the Indian Partnership Act, 1932 were applicable on the partners; - Observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above facts, according to the AO, the assessee had not declared any income from 'house property', but, admitted only business income after claiming all deductions and in the light of the findings for the AY 2006-07, he had reason to believe that income chargeable to tax for the AYs under dispute escaped assessment. Let us have a glance at what s.147 of the Act says. "147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned.............." (iii) According to the AO, he had reason to believe that income chargeable to tax had escaped assessment and as per s.147 of the Act, if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch. As a matter of fact, the assessee, according to the AO, vide its letter dated: 26.11.2008 had admitted that it was a partnership firm and also provided a copy of Deed of Partnership entered into on 1.8.1995. The partnership deed sets out the share of income of various partners. However, the assessee in its return had declared its status as 'AOP'. Furthermore, while arguing his case during the course of hearing before this Bench, the Ld. A R admitted that the assessee was not serious and of no serious material consequence about the AO assessing the assessee in the status of 'firm', however, his insistence was that the stand of the AO in treating the assessee as a 'firm' was contrary to the provisions of s.185 of the Act. We have duly perused the case laws on which the assessee had placed its strong reliance to drive home its point, the details of which are as under: (i) CIT, Andhra Pradesh v. K. Adinarayana Murthy - 65 ITR 607 (SC): The issue before the Hon'ble Court, in brief, was that the assessee was a HUF and subsequent to the original assessment, the ITO had information that the assessee had done some procurement business and earned large profits which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... status as determined by the ITO, it amounted to non-compliance with the provisions of s.139 and, therefore, set aside the order of the AAO. On a reference, the Hon'ble Court held that 'since no return was filed by the assessee in the status of an individual in response to the notice issue by the ITO u/s 148, the ITO was justified in proceeding on the basis that no return was filed by the assessee. With due respects, we have perused the ruling of the Hon'ble Court. In the present case, the assessee was required to furnish his its return in the status of 'firm' as it was being assessed as such, in stead, the assessee chose to furnish its return in the status of 'AOP' in compliance to the notice u/s 148 of the Act whereas the issue before the Hon'ble Court was that the assessee who had been assessed as an 'individual' filed a return in the status of HUF, but, the AO issued a notice u/s 148 of the Act calling upon the assessee to furnish his return in the status of an 'individual'. Since the issue before the Hon'ble Court was on a different footing, the case law relied on by the assessee has no relevance. (iii) Abdul Sattar M.Mokashi v. CIT - 174 ITR 368 (Kar): The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that non-filing of the revised partnership deed would not mandatorily result in assessing the assessee in the status of AOP and held that the revised partnership deed was deliberately not filed by the assessee so as to take the benefit of less tax applicable to an AOP which was confirmed by the CIT (A) on the ground that the assessee had filed its return in the status of a 'firm'. On an appeal, it was held by the Hon'ble Tribunal that- The statutory provisions regarding the assessment of a firm make it clear that the first condition is that an assessee seeking the status of a firm is to establish that the partnership is evidenced by an instrument and individual shares of partners are specified in that instrument. Once that condition is satisfied, the second condition is that the assessee shall file a certified copy of instrument of partnership deed before the assessing authority. Both the above conditions are mandatorily to be satisfied by an assessee seeking status of a firm for the purpose of an assessment. The above provisions are equally applicable to a case where a change in the constitution of the firm has taken place. Sub-section (4) of s.184 provides that when there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stified in treating the assessee's status that of the 'firm. It is ordered accordingly. 9.3. Whether the income is to be treated as 'business income' or under various heads? Briefly, until 1995, the assessee was engaged in the business of coffee curing - an agent of Coffee Board - and following decontrol of coffee trade, the Coffee Board dispensed with the business with the assessee in that year and consequent of which, the assessee had let out its go-downs and machineries to others for storage of commercial goods and coffee curing by others on job work basis and collected ware-housing charges from them. However, the AO took a stand that these amounts received as rent were chargeable to income-tax under the head 'income from house property' and, accordingly, re-computed its income for the reasons set-out in his impugned orders which are under challenge. After examining the agreements entered into by the assessee with whom it had let-out its go-downs etc., the AO arrived at a conclusion that the assessee was not in any way involved in the tenants' day-to-day business activities, the assets leased out had lost their commercial characters. However, the contentions of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to resume its earlier coffee curing business on its own in future and, thus, no tenancy was given and, thus, the possession of the go-downs were with the assessee and only licenses granted for storing their materials. On a critical analyze of the assessee's argument, we find there is force in its contention that the business activity of exploiting the premises continued in the nature of extending warehousing facilities which the assessee was extending to Coffee Board earlier and, therefore, the income derived by the assessee from warehousing activity to others also has to be assessed under the head 'business' along with the money lending activity, weigh-bridge collections etc., as the assets continued to remain as business assets of the assessee. It was an un-deniable fact that when the Coffee Board was at helm of coffee curing business, it had required go-downs of the assessee for ware-housing the coffee seeds for curing and storing. Thus, extending the ware-housing or storing facilities was part of its activities during the agency business and the income received by way of warehousing charges from others too was business income only and letting out of the property cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest paid etc., It was claimed during the course of hearing that these expenses were supported by vouchers which had incurred wholly and exclusively for the purposes of business only. In view of the above, the AO is directed to look into this aspect and allow the claim of the assessee which were supported by vouchers. As the assessee's income requires to be assessed as income from 'business', the assessee is entitled to the facility of carry forward of earlier years' losses. In this connection, we are drawing strength from the ruling of the Hon'ble jurisdictional High Court in the case of Karnataka Light Metal Industries (Pvt) Ltd. v. CIT reported in (1997) 225 ITR 947 (Kar) wherein the Hon'ble Court held that "In order to get the benefit of set off or carry forward of business loss of earlier years against the income of the relevant year, the business must be carried on and such business must be of such nature which has been carried on by the assessee." In the case of CIT v. Ramnath Goenka reported in 259 ITR 27 (Mad), the Hon'ble Madras High Court, in its wisdom, had held that "The adjustment of the carried forward loss under the 1922 Act as also under the 1961 Act is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be rejected on the ground that the debt has not been established to have become irrecoverable. The aforesaid position is also supported by the amendment made to s.36(2) w.e.f. 1st April, 1989 and any doubt, if remaining, has been clarified by Circular No.551 dated: 23rd January, 1990. (iii) The Hon'ble Bombay High court, in the case of CIT v. Star Chemicals (Bombay) P. Ltd. (2009) 313 ITR 126 (Bom), in its wisdom had held that 'under section 36(1)(vii) of the Income-tax Act, 1961 and Circular No.551 dated January, 23, 1990 if the assessee had written off the debt as a bad debt that would satisfy the purpose of the section." (iv) The Hon'ble Supreme Court in the case of T.R.F. Ltd. v. CIT 323 ITR 397 (SC) held that fter the amendment of section 36(10(vii) of the Incometax Act, 1961, with effect from April 1, 1989, in order to establish that the debt, in fact, has become irrecoverable: it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Accordingly, we hold that the bad debts written off by the assessee in its books of account shall be allowed as a deduction. It is ordered accordingly. A.Y. 2006-07: 9.4. In its addition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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