TMI Blog2007 (3) TMI 296X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. However, he found that the assessee claimed this income as business income and claimed the various expenditures against the said income. The AO asked the assessee to explain why this rental income should not be treated as "income from house property" since assessee is the owner of the house property. 2.1 In response to the said query raised by the AO, the assessee submitted that the assessee company cannot be treated as the owner of the house property at 6, Marquis St., Kolkata-16. The company has acquired the partnership firm, Ganesh Properties, which erected the structure on the leasehold land for the period of 51 years commencing from 1963. The interest in the property vested in the assessee by reason of the takeover of the partnership firm by the company as a going concern on 1st April, 2000. 2.2 It was further submitted that according to the lease agreement the lease right that subsisted in the partnership firm now vests in the company by acquisition from the firm as the culmination of the takeover. But in the hands of the assessee, its character is radically different. As the transferee, it has only temporary right, both in the building and the land which is l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 625 (SC) (d) Scindia Potteries (P) Ltd. vs. CIT (2001) 171 CTR (Del) 455 : (2002) 253 ITR 168 (Del). (e) Indian Overseas Bank Ltd. vs. CIT (2000) 246 ITR 206 (Mad) (f) CIT vs. Chennai Properties Investments Ltd. (2004) 186 CTR (Mad) 409 : (2004) 266 ITR 685 (Mad). 4. Aggrieved with such order of the learned CIT(A), the assessee is in appeal before us with the following grounds of appeal: "1. That the learned CIT(A) was wrong in confirming the action of the AO in assessing to tax the rental income received from short-term leasehold property as income from house property instead of income from business. 2. That the income from the short-term leasehold property should have been allowed in computing the business income: (i) Repairs and maintenance Rs. 7,04,369.75 (ii) General expenses Rs. 17,280.00 (iii) Salary and bonus Rs. 36,000.00 (iv) Printing and stationery Rs. 540.00 (v) Electricity charges Rs. 24,322.00 (vi) Corporation tax Rs. 43,576.00 (vii) Lease rent for land Rs. 6,000.00 (viii) Preliminary expenses written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decision of the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. and the decision of the Allahabad Bench of the Tribunal in the case of Verma Roadways and in absence of any contrary decision brought before us by the learned Departmental Representative, the additional grounds taken by the assessee are admitted for adjudication. 8. The learned counsel for the assessee filed a detailed written submission and submitted that the assessee company was incorporated on 25th Jan., 2000 with the main object of carrying on business of purchase, take on lease/rent and to sale, dispose of, give on lease, let out, etc. of property and to carry on the business of developers, builders, contractors, etc. 8.1 He submitted that the appellant assessee took over the partnership firm, M/s Ganesh Properties, as a going concern with all the assets and liabilities w.e.f. 1st April, 2000. The assets of the said partnership firm include leasehold property taken on 31st Jan., 1963 from Sri Samarendra Nath Khan. During the asst. yr. 2001-02 and asst. yr. 2002-03, the assessee gave out the property along with other amenities and earned net profit of Rs. 4,66,140 and Rs. 42,660, respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellant on the tenants, a reasonable amount i.e. 50 per cent of the total receipts may kindly be treated as on account of services rendered, considering the expenses incurred by appellant in relation to providing such services which include the payment of Rs. 55,000 per month to M/s Star Dox Commercial (P) Ltd. and other similar expenses. The said receipt on account of service charges may kindly be directed to be treated as business receipt chargeable to tax under the head income from business and profession after allowing corresponding expenses under s. 37(1). The balance amount of receipt of 50 per cent may be treated as receipt on account of rent chargeable to tax under the head income from house property after allowing payment of corporation tax and deduction under s. 24(1) for rent and repairs. For this proposition, he relied on the decision of the Hon'ble Supreme Court in case of Karnani Properties Ltd. vs. CIT (1971) 82 ITR 547 (SC) and the decision in the case of CIT vs. Sarabhai Management Corpn. Ltd. (1992) 102 CTR (SC) 164 : (1991) 192 ITR 151 (SC). 8.4 He submitted that in the instant case the appellant assessee rendered services along with letting out prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of the assessee. 8.8 Distinguishing the decisions of the apex Court in the cases of CIT vs. Coconda Radhaswamy Bank Ltd. and Nalinikant Ambala1 Modi vs. S.A.L. Narayan Row, relied on by the learned CIT(A), he submitted that in those cases it has been held that the head of income has to be decided on commercial principles and by applying practical notions and not by reference to an assessee's treatment of income. He submitted that it is a well-settled principle that any activity carried on in pursuance of achievement of object of the company is treated as business activity. Hence, even applying decisions of the apex Court, in cases of Coconda Radhaswamy Bank Ltd. and Nalinikant Ambalal Modi, it can be construed that providing facilities was towards achievement of its objectives and hence, by applying commercial principles and practical notions, the same shall be treated as business activities. 8.9 Referring to the decision in the case of CIT vs. Podar Cement (P) Ltd. Ors. and relied on by the learned CIT(A), he submitted that the apex Court in the said case had held that "owner" is a person who is entitled to receive income from the property in his own right. The CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the sides, perused the orders of the AO and the learned CIT(A) and the various decisions relied on by the learned counsel for the assessee as well as the decisions relied on by the AO and the learned CIT(A). 10.1 There is no dispute to the fact that the company was incorporated on 25th Jan., 2000. It is also a fact that one of the objects as set out in the memorandum of association of the company is to takeover as a "going concern the partnership firm, M/s Ganesh Properties, with all its assets and liabilities". There is also no dispute to the fact that this is the first assessment year of the company and the company has received an amount of Rs. 16,62,817.64 as rental income. There is also no dispute that the assessee company treated the rent as business income and after incurring various expenditure has declared a net income of Rs. 4,66,140. There is also no dispute to the fact that the AO treated the same as income from house property which was upheld by the learned CIT(A). Therefore, the main issue to be decided is the character of the rental income so received by the assessee. 10.2 We find that the cl. A.2 of the memorandum of association reads as under: "To carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and the income arising therefrom was assessable as business income. 10.7 We find that the Hon'ble Supreme Court in the case of Karnani Properties Ltd. vs. CIT and as relied on by the learned counsel for the assessee has held as under: The assessee company owned the Karnani Mansion consisting of numerous residential flats and over a dozen shops. All these were let out to the tenants who made monthly payments which included charges for electric current, for the use of lifts, for the supply of hot and cold water, for the arrangement for scavenging, for providing watch and ward facilities as well as other amenities. It purchased high voltage current in bulk, converted the same into low voltage current in its own power house within the premises and supplied the power to the tenants. It also maintained a separate water pump-house and a boiler for the supply of hot and cold water to the tenants. The company provided electric lifts for the benefit of the tenants. For all these purposes, the assessee maintained a large number of permanent staff. The company claimed that the entire receipts from the tenants should be treated as income from business as it had been formed for carrying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness and storage accommodation and to render the premises more serviceable to its licensees or lessees. The respondent claimed that it was in a position to offer services to licensees on and from 1st Oct., 1964, and claimed deduction, in computing its profits, of expenditure incurred by it between 1st Oct., 1964, and 31st March, 1965, comprising mainly salaries to gardeners, servants and others, repairs and rewiring, legal and stationery charges, registration, printing stationery and conveyance charges. The IT authorities and the Tribunal rejected the claim holding that the respondent could not be said to have been ready to commence business prior to 1st May. 1965, the date on which it gave on leave and licence basis a part of the building. On a reference, the High Court reversed the decision of the Tribunal and allowed the respondent's claim for deduction holding that, from 1st Oct., 1964, the respondent could be said to have commenced its business activity, viz. to put the building accommodation and lands and gardens into proper shape and set up the appurtenant services so that the property could be given on leave or licence basis and that, therefore, the respondent had commenced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the expiry of the lease period. Therefore, the decision is not applicable to the facts of the present case. 10.13 Similarly, the decision in the case of Chennai Properties Investments, relied on by the learned CIT(A), is also not applicable to the facts of the present case since neither the property is owned by the assessee nor is it leased out. Further, the receipts are not restricted to rent only but also include service charges provided by the assessee. 10.14 We further find that the decisions in the cases of Scindia Potteries (P) Ltd. and Indian Overseas Bank Ltd. relied on by the learned CIT(A) are also not applicable to the facts of the present case since the assessee has not let out any property owned by it and nor the assessee is the deemed owner of the property. 10.15 Therefore, in our considered opinion, the decisions of the Hon'ble apex Court in the cases of Karnani Properties Ltd. and Sarabhai Management Corpn. Ltd. relied on by the learned counsel are squarely applicable to the facts of the case since the assessee in the instant case has rendered services along with letting out property to its tenant on a regular basis in a systematic manner. 10.16 However ..... X X X X Extracts X X X X X X X X Extracts X X X X
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