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2016 (6) TMI 131 - ITAT PUNE

2016 (6) TMI 131 - ITAT PUNE - TMI - Income from lease rent - assessability of income - taxable under the head "Income from other sources" OR "Income from Business and Profession" - admission of additional evidence - Held that:- CIT(A) has taken note of the partnership deed executed between the parties. Merely because the document was not filed before the Assessing Officer in the original assessment proceedings but was filed before the CIT(A) during the course of appellate proceedings by way of .....

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was not filed before the Assessing Officer, the same cannot be rejected on surmises and in the totality of the above said facts and circumstances, we consider the issue in the light of deliberations of CIT(A) on the said so called additional evidence, since the powers of CIT(A) are co-terminus with the Assessing Officer. Accordingly, we hold that the income received by the assessee merits to be assessed in its hands as income from business and corollary to the same, brought forward losses on acc .....

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n 43B - Held that:- Since the income is assessed as income from business, relevant provisions of section 43B of the Act are attracted. The Assessing Officer is directed to verify the same and decide the issue. - ITA No.1143/PN/2013, SA No.100/PN/2015 - Dated:- 25-4-2016 - MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Appellant : Shri Kishore Phadke For The Respondent : Shri S.K. Rastogi, CIT ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of CI .....

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e from lease rent amounting to ₹ 3,06,63,400/- received from M/s Shriram Jawahar Shetakari Sahakari Sakhar Udyog as an income taxable under the head "Income from other sources" instead of the head "Income from Business and Profession". 3. The learned CIT(Appeals)-III, Pune erred in law and on facts in confirming the order of the AO treating the income from lease rent amounting to ₹ 1,19,10,041/- received from M/s Deccan Bottling & Distilling Industries Ltd. as .....

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by the learned AO under the head "Income from Other Sources". 5. Alternatively & without prejudice to Ground No. 3, the learned CIT(A) and learned AO erred in law and on facts in not treating the income from lease rent amounting to ₹ 1,19,10,041/- received from M/s Deccan Bottling & Distilling Industries Ltd. as business income for the purpose of section 72(1) of the ITA, 1961, though taxed by the learned AO under the head "Income from Other Sources". 6. The le .....

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eals)-III, Pune erred in law and on facts in characterizing the genuine partnership deed of the appellant as a sham document and a colourable device. 9. Without prejudice to Ground No.2, the learned CIT(Appeals)-III, Pune erred in law and on facts in disallowing ₹ 12,30,068/- u/s 43B of IT Act without appreciating the fact that provisions of Section 43B are not applicable in case of Income from Other Sources . 10. The appellant craves leave to add / modify / alter / delete all / any of the .....

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me for the year under consideration was filed by the assessee declaring total income at Rs.Nil. The assessee had leased out its sugar factory to M/s. Shriram Jawahar Shetkari Sahakari Sakhar Udyog and for the year under consideration had received lease rent of ₹ 3,06,63,400/-. Further, the assessee had also received sum of ₹ 1,19,10,041/- as lease rent from Distillery Division. The assessee had declared the said receipts under the head Income from business . The Assessing Officer dur .....

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tion of ₹ 33,81,649/- on the sugar factory plant and ₹ 22,93,610/- on distillery plant and the balance amount was treated as Income from other sources . The assessee had further declared income from capital gains at ₹ 4.62 crores and after setting off of the brought forward losses of ₹ 10,08,91,625/-, the total income was computed at Rs.Nil. The Assessing Officer denied the set off of brought forward losses to the extent of ₹ 4.62 crores against the income from capi .....

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sessee is to be assessed as income from business since it was engaged in the business of manufacturing of crystallized sugar in partnership with another sugar factory namely Jawahar Shetkari Sahakari Sakrkhana Ltd. The said partnership deed was entered on 09.10.2006 and was valid for period of 15 years. As per the terms of partnership deed, the profit of partnership firm was to be earned by Jawahar SSK and the assessee was to be given compensation of ₹ 100/- per MT of cane crushed for the .....

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part of current depreciation and along with current depreciation, the same was first to be adjusted against the business income of relevant year and in case amount remains unabsorbed, then the same is to be set off against income from any other head of income. If further, there is certain unabsorbed portion, the same was to be carried forward without any time limit. Further, reliance was placed on the ratio laid down in CIT Vs. Virmani Industries Pvt. Ltd. (1995) 216 ITR 607 (SC) for the proposi .....

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07,570/- and the same had to be treated as depreciation for the year under consideration, in view of the provisions of section 32(2) of the Act. As per the learned Authorized Representative for the assessee, the set off of depreciation loss amounting to ₹ 4,62,05,300/- against the income from capital gains was to be allowed. The assessee further stressed that it had not leased out any of its assets to the new partnership firm namely Shriram Jawahar Shetkari Sahakari Sahkar Udyogm wherein t .....

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ery unit, it was pointed out by the learned Authorized Representative for the assessee that it constituted business income as the assessee was carrying the business of leasing distillery division as a whole. 7. The CIT(A) vide para 6.1 noted that the assessee s claim of having entered into partnership with Jawahar Shetkari Sahakari Sakrkhana Ltd. on 09.10.2006 was not brought to the notice of Assessing Officer and the assessee had filed the copy of partnership deed dated 09.10.2006 with a reques .....

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he Assessing Officer was prevented by circumstances beyond its control, then in such circumstances, the additional evidence filed by the assessee could not be admitted. However, vide para 6.3 onwards, the CIT(A) in the interest of justice and fair play, noted that the clauses of partnership deed filed by the assessee as additional evidence. The CIT(A) vide para 6.4 observed that the assessee had offered its sugar plant for usage as capital contribution in kind to the partnership for period of 15 .....

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r was entitled to all the profits/loss of the partnership firm and the assessee was only entitled to compensation at a fixed rate, which as per the CIT(A), was against the basic principles of partnership. Further, the share of each partner in profits / losses of the partnership were not specified in the partnership deed and further, the assessee was immune from losses incurred by the partnership firm. In this view, the CIT(A) observed that it could not be inferred that the assessee was in fact i .....

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king at the documents before them and where there were reasons to believe that apparent was not real, it was open to the Assessing Officer to look into surrounding circumstances to find out the reality of recitals made in the documents. Therefore, merely because the document in question was one of partnership, the CIT(A) held that it was open to the Assessing Officer to look into surrounding circumstances to find out the reality of recitals made in the agreement. Another aspect noted by the CIT( .....

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194I of the Act. The CIT(A) thus, held that the assessee had received fixed compensation and nothing more out of profits of partnership firm and other clauses in the said deed provided immunity to the assessee from losses of the partnership, clearly indicates that the relationship between the assessee and Jawahar was that of Lessor and Lessee and not of partnership. Further, if it is the case of income from partnership as claimed by the assessee, there was no necessity for Jawahar to deduct tax .....

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tative for the assessee made a prayer for condonation of delay in filing the present appeal late by 90 days. Our attention was drawn to the application filed in this regard, wherein it was pointed out that earlier the case of the assessee was being looked after by M/s. Mohan Deshmukh & Co. However, the assessments and appeal of the assessee were looked after by M/s. ANRK & Associates LLP. On 16.01.2013, the assessee received a letter giving effect to the appellate order passed by the CIT .....

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is of receipt of said copy. However, later it realized that the application had to be made from the date of receipt by the earlier Counsel resulting in delay of 226 days. The assessee made a request for condonation of delay in filing the present appeal late as the delay was attributable to confusion in handing over of papers / files between earlier CA firm and the present CA firm. The assessee has filed an application for condonation along with an Affidavit which is available on record. In the e .....

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n relation to assessability of income in the hands of assessee. It was pointed out by him that as per section 20 of Maharashtra Co-operative Societies Act, the partnership was entered into between the assessee and Jawahar. The learned Authorized Representative for the assessee fairly admitted that the said partnership deed was not filed before the Assessing Officer. However, the same was filed before the CIT(A), who first vide para 6.2 stated that the same is not to be admitted but in the later .....

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nd was responsible for the methods to be utilized in crushing the sugarcane. The other partner was working partner, who had infused money and expertise in running the sugar factory. The learned Authorized Representative for the assessee pointed out that the assessee s interest in the said partnership was that its member cane growers, cane is used for crushing and also appropriate and timely wages are paid to its workforce, so that there is no unrest and possibility of money getting jeopardized i .....

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in this regard, where he had objected to the claim of assessee that it was not carrying on any business activity and also stated that there was no complexity in renting out the sugar factory. In reply, it was stated that in the case of assessee, where the sugar factory was complex structure, then the activity engaged in by the assessee could not be called simple renting. The assessee was engaged in carrying on the business activity by way of providing sugarcane of its 12982 for crushing and also .....

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seen as to whether the asset was exploited as an owner or as commercial asset. Where the assessee had adopted risk for earning the remuneration, then the said income is to be assessed as business income. He further relied on the ratio laid down by the Hon ble High Court of Delhi in CIT Vs. Francis Wacziarg (2013) 353 ITR 187 (Del). It was further pointed out by him that the Assessing Officer in assessment year 2011-12 was of the view that this was the business income and the plea of the assesse .....

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ry would function. He also stated that in case of Distillery, there was no permission under section 20 of the Maharashtra Co-operative Societies Act. He stressed that applying function asset and risk test, income earned by the assessee is to be assessed as business income. 11. The learned Departmental Representative for the Revenue pointed out that the assessee during the year under consideration had received sum of ₹ 3.02 crores from AOP and rental income from Distillery unit. The learned .....

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ts own work source. It was further pointed out that the partnership deed was made for a period of 15 years with clause of extension which established that there was no intention to revert back to the business being carried on. In this regard, reference was made to clauses 15 and 16 of partnership deed. Since the entire control was with Jawahar, income was rightly assessed as income from other sources. Another aspect referred to by the learned Departmental Representative for the Revenue was that .....

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in the case before the Tribunal and in all other cases was that in the present case, it was a partnership deed, whereas in the other cases, it was lease agreement. Further, reliance was placed on the ratio laid down by the Pune Bench of Tribunal in M/s. Jagdamba Sahakari Sakhar Karkhana Ltd. Vs. CIT in ITA 991/PN/2013, relating to assessment year 2008-09, order dated 06.11.2015, wherein he admitted that there was fixed periodic rent to be paid on account of lease. 12. The learned Authorized Repr .....

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to reliance placed upon the decision of Hon ble Supreme Court in New Savan Sugar & Gur Refining Co. Ltd. Vs. CIT (supra) by the learned Departmental Representative for the Revenue, it was pointed out that in the facts of said case, there was fixed rental payment, whereas in the facts of assessee, same was performance basis. In respect of reliance on the ratio laid down by Hon ble High Court of Bombay in Saswad Mali Sugar Factory Ltd. Vs. CIT (supra), it was pointed out that in the facts of s .....

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e variable receipts. Another point raised by the learned Authorized Representative for the assessee was that the partnership was formed under the Maharashtra Cooperative Societies Act, which provided that the provisions of Partnership Act would not apply. 13. We have heard the rival contentions and perused the record. The issue arising before us is in respect of assessability of income received by the assessee during the year under consideration. The assessee was a cooperative society under sect .....

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f Maharashtra Cooperative Societies Act, 1960, to undertake the business of processing of agricultural produce mainly sugarcane, by utilizing the existing sugarcane crushing plant of the party of the first part located in Phaltan Taluka, District Satara . The assessee owned a full-fledged sugarcane processing factory of 2500 M.Tons, licensed capacity per day and had installed capacity of 2000 TCD in running condition and because of financial crunch, the assessee entered into this partnership dee .....

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, claims and privileges of partners, which were being vested in working partner were provided. The sugar plant owned by the assessee was backed up by sugarcane produce of 12982 members and also the sugarcane produce of nonmembers from adjoining areas and in order to more efficiently run the operations in the interest of members, it was decided that since additional funds and managerial back up and expertise could not be mobilized by the assessee due to its negative networth, the decision was tak .....

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inced about the potential of business, especially sugarcane availability and dependability of sugar factory as processing unit and therefore, decided to accede to the request of assessee for sharing its strength and expertise and also the principle of cooperation vis-à-vis concern for the society and thereby accepted the offer of assessee to share mutual strength by way of cooperative partnership. The Deed executed between the two parties recognized that the party of the first part i.e. a .....

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id sugar plant through an independent body i.e. partnership (referred to as management). It was mutually agreed between the parties that the name of partnership would be Shriram Jawahar Shetkari Sahakari Sahkar Udyogm . The main object of the partnership as per clause 2 was to process sugarcane through existing unit of the party of the First Part and further, it was entitled to carry on any other business of any kind, with mutual consent of both the parties. As per clause 3 of partnership deed, .....

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lly. The clause 6 of the Deed in respect of capital contribution provided as under:- 6. Capital contribution : A) The PARTNER hereby offer the said sugar plant for usage as the capital contribution in kind to the partnership for the period of fifteen years that may be extended from time to time. The partner hereby in addition to the capital in kind offers the usage and to transfer all licenses, including industrial License & other Licenses, permits, rights, claims easements which were being .....

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ade by the Working Partner and that shall be refunded as mutually agreed by both the partners. 15. The assessee had offered its sugar plant along with licenses, permits, rights, claims, etc. and the other party i.e. Jawahar was the working partner, which was to infuse the capital from time to time as may be required for running the sugar plant and also to manage the operations of the said sugar plant. It was specifically agreed between the parties that the contribution shall be made by the worki .....

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ference in opinion, it was provided that majority shall prevail. Further for day-to-day management, the working partner had right to create, appoint appropriate executives, experts and others. 16. Further, clause 9 provided as under:- 9. Sharing of risks and/or profits: Since the party of the second part is bringing its entire strength of finance and expertise and is shouldering the responsibility of entire day to day management and execution, it will be entitled for all the profits after paymen .....

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e Societies under his order No. 77/2006 dtd. 30/9/2006. The partner shall not be responsible for any losses or shortages in the operations of the said sugar plant by the working partner. The partner shall be entitled for the compensation as enumerated hereunder and the benefits of future developments which would accrue them through the modernization and expansion, diversification of the said sugar plant and activities by the working partner. The partner shall also be entitled to ensure that the .....

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the parties that the working partner shall not take over the finance liabilities appearing in the Balance Sheet of the assessee as on date of partnership, except the one relating to repayment of Maharashtra State Cooperative Bank s restructured loan vide order dated 24.02.2006. Further, the partner also indemnified the working partner in case of adverse orders / actions of creditors except the apex bank. This was provided as per clause 10 of the Deed. Further, as per clause 15, it was agreed up .....

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the wages / salary of workforce deployed by the partner shall be paid by the management to the partner, who in turn, shall disburse it amongst the workers in the presence of representative of the management. The prevailing tax laws shall be applicable and the management would deposit the PF of the said workers / employees with the PF authorities directly. The other fringe benefits i.e. bonus, gratuity, leave salary shall be paid by the management. However, the liability of tenure of services wi .....

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f working partner, then the same shall be made good by the partner and the management shall not be responsible for any such liability. As per sub-clause (d) to clause 15, the management was at liberty to employ additional workforce necessary for it and payment of salary / wages / fringe benefits was the responsible of the management. It was further provided that the partner i.e. assessee shall take the disciplinary proceedings and action against workers / employees of the partner and further, no .....

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s resolved in the special general body meeting dated 10.09.2006 and the management shall be bound to accept the cane of such producer members treating them as their deemed members and they shall be entitled for all the benefits of the membership of partner to the extent relevant for the said management, was the understanding between the partners as per clause 18(h). Further, clauses were agreed to between the parties are not relevant for deciding the issue before us. The said partnership filed t .....

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as had clear ten days, written notice of the resolution and the date of the meeting. Provided that, in case of a society which has not taken any financial assistance from the Government, in the form of share capital, loan or guarantee, the prior approval of the Registrar for entering into such partnership shall not be required. (2) Nothing in the Indian Partnership Act, 1932, shall apply to such partnership. 18. As per the said section 20, it is provided that any two or more societies with prior .....

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istrar for entering into such partnership shall not be required. Vide clause (2) to section 20, it is provided that nothing in the Indian Partnership Act, 1932 shall apply to such partnership. Under the provisions of section 20 of the Maharashtra Cooperative Societies Act, any two or more cooperative societies have the liberty to enter into partnership for the purpose of carrying out specific business. The section itself provides that permission is to be obtained for entering into such a partner .....

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l apply to such a partnership. In other words, the provisions provided under the Indian Partnership Act, would not govern a partnership of two or more societies, which was formed under section 20 of Maharashtra Cooperative Societies Act. 19. The assessee before us was a cooperative society which was running sugar plant at Phaltan. The assessee was not able to efficiently run the said sugar plant and consequently, in order to look after the interests of members of its cooperative society, totalin .....

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gar plant. The other partner i.e. Jawahar had to provide the finance support for day-to-day running of the sugar plant and had also to manage the affairs of sugar plant in order to efficiently run the same. The assessee admitted that while carrying out its operations, it was not in a position to efficiently manage its affairs and the management of sugar plant was handed over to the other concern to efficiently manage it. It was the understanding between the parties that the workforce already emp .....

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embers by way of resolution unanimously passed by the members present in the special general meeting held on 10.09.2006 for such a partnership. On the other hand, the other concern i.e. Jawahar had also got approval of their Board of Directors as empowered by their general body resolution dated 13.06.2006 and also as per their byelaws to enter into the said partnership. The Deed of Partnership was executed at Phaltan on 09.10.2006 after both the parties had the approval from members of their res .....

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s are crushed and suitable remuneration is paid to its members and also non-members. The contribution of other partner was not only the financial contribution but also to effectively manage the operations of sugar plant. Undoubtedly, the sugar plant along with its plant & machinery and the land permits, rights, etc. were infused by the assessee in the said partnership. Further, even the workforce employed by the assessee was taken over by the other partner. The responsibility to pay the said .....

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rship was carried out by the three partner directors, two of which were to be nominated by the incoming society and one to be proposed by the assessee society. The decision making was to be made compulsorily by all the three partner directors except in the case of difference of opinion, wherein the decision of majority would prevail. It was also agreed upon between the parties that the three partner directors shall meet at least once in a month and more than once if the needs of business so requ .....

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tween the parties that the liabilities of the assessee prior to formation of the partnership shall not be taken over by the partnership except the one relating to apex bank. 20. Now, coming to the sharing of profits which were agreed upon between the parties. Since the working partner was bringing in its entire strength of finance and expertise and shouldering the responsibility of entire day-to-day management and execution, it was agreed upon between the parties that the working partner would b .....

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d also by its nonmembers in the said area. The role of working partner was to efficiently run the sugar plant by using not only its expertise but by financial infusions, in view of which pumping in its financial and also taking the responsibility of running the business, it was agreed and in view of the fact that the said sugar plant was running into losses, the special formula to share the profits was agreed upon between the parties. Undoubtedly, the said agreement is with the prior approval of .....

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cieties which stands on a different footing than the partnership as formed under the Indian Partnership Act, 1932. Sub-clause (2) of section 20 of the said Act, very categorically lays down that nothing contained in the Indian Partnership Act, 1932 shall apply to such partnerships. Since the partnership entered into by the assessee is under different statute, then it could not be held that the partnership so formed is not to be recognized as partnership firm as some of the conditions of Indian P .....

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working partner who had taken over the responsibility of day-to-day management and had also brought in finance and expertise to run the plant had claimed higher share of remuneration. The terms and conditions which have been agreed to between the parties were admittedly before general meeting of each of the society, who in turn, agreed to the same and the partnership so constituted. In the above said scenario, it cannot be said that the assessee was not taking any risks and hence, was not a part .....

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ar plant more efficiently and profitably by infusing working partner who was not only bring in its finance but also expertise for running dayto- day operations of sugar plant. The contribution of the assessee besides the sugarcane i.e. raw material for running the sugar plant, total infrastructure of the sugar factory i.e. the land on which it was situated along with plant & machinery and other assets and also the licenses, permits granted for running sugar factory. Further, the assessee had .....

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orkforce who had to run the sugar plant in order to crush the sugarcane, which in turn, would entitle the assessee to its part of remuneration. The assessee by way of entering into such an agreement has not only looked after the interest of its members i.e. the cane growers but has also undertaken to provide cane for running of the sugar plan and also participated in the functioning of plant through its workforce and also efficient running of the business by being part of the management of the s .....

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same as Income from other sources . Where the assessee has taken a business decision to run its sugar plant more efficiently by way of entering into such an agreement of partnership, we find that the income earned by the assessee is its income from business. 22. Now, coming to the objections raised by the authorities below and also by the learned Departmental Representative for the Revenue before us that the assessee has entered into a lease of its sugar plant and hence, the income is to be asse .....

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e of a person who had leased out its assets. In the totality of the above said facts and circumstances and as per our decision in the paras hereinabove, we find no merit in the orders of authorities below in this regard. Further, the objection of Assessing Officer and CIT(A) was that the working partner had treated the said remuneration as rent to the assessee and deducted tax at source and hence claim of assessee was not correct. As held by various Courts, it is the duty of Assessing Officer to .....

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le for assessment of income derived from letting whether under the head Income from property or as business income . Where the intention was only to let out the operation of premises to respective occupant, it was held by the Hon ble High Court of Calcutta in CIT Vs. Shambhu Investment (P.) Ltd. (supra) that the income derived therefrom was assessable as income from property and not as business income, but where the intention was to exploit immovable property by way of complex commercial activit .....

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e for the Revenue. It may be pointed out that during the course of hearing itself, it was pointed to him that the point of difference in all the reliances placed upon by him was that these were the cases of lease agreement, whereas in the present case, it is the case of partnership deed. The learned Authorized Representative for the assessee has also pointed out that the facts in the said cases relied upon by the learned Departmental Representative for the Revenue are distinguishable and are dif .....

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has discussed various terms and conditions of partnership deed to come to a conclusion that the income is to be assessed as income from other sources. In other words, the CIT(A) has taken note of the partnership deed executed between the parties. Merely because the document was not filed before the Assessing Officer in the original assessment proceedings but was filed before the CIT(A) during the course of appellate proceedings by way of additional evidence, the provisions of the Act provided th .....

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t be rejected on surmises and in the totality of the above said facts and circumstances, we consider the issue in the light of deliberations of CIT(A) on the said so called additional evidence, since the powers of CIT(A) are co-terminus with the Assessing Officer. Accordingly, we hold that the income received by the assessee merits to be assessed in its hands as income from business and corollary to the same, brought forward losses on account of depreciation would form part of current depreciati .....

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