IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C' NEW DELHI)
BEFORE Shri U. B. S. BEDI, JUDICIAL MEMBER
& Shri T. S. KAPOOR , ACCOUNTANT MEMBER
I.T.A. No. 1685/Del/2013
(Assessment year 2006-07)
M/s. Green Valley Agro Mills Ltd., Vs. ITO, Ward 12(2),
C/o M/s RRA TAXINDIA, New Delhi
D-28, South Extension, Part-I,
New Delhi 110 049
PAN/GIR No.: AAACG3620P
(Appellant) (Respondent)
Assessee by : S/Shri Ashwani Taneja, Rohan Garg, Adv.
Department by: Shri Satpal Singh, Sr. DR
ORDER
PER U.B. S. BEDI, JM :
This appeal of the assessee is directed against ht order passed by Ld.
CIT(A) X, New Delhi dated 04.02.2013 relevant to assessment year 2006-07
wherein following eight effective grounds have been raised.
"1) That having regards to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in confirming the action of
Ld. A.O. in treating the service charges received as rental income
under the head income from house property and has erred in
disallowing the expenses incurred in relation to service charges
received.
2) That having regards to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in confirming the action of
Ld. A.O. In disallowing a sum of Rs.l,41,217/- on account of service
charges.
2 I.T.A. No. 1685/Del/2013
3) That having regards to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in confirming the action of
Ld. A.O. in disallowing a sum of Rs.30,000/- on account of legal and
professional . charges and that too by treating that it is related to
property.
4) That having regards to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in confirming the action of
Ld. A.O. in disallowing a sum of Rs.4,04,400/- on account of staff
salary paid and that too by treating that it is related to property .
5) That having regards to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in confirming the action of
Ld. A.O. in disallowing a sum of Rs.9,950/- on account of
depreciation on improvement of leased property.
6) That having regards to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in confirming the action of
Ld. A.O. in disallowing a sum of Rs.1,37,905/- on account of foreign
travel expenses and has further erred in holding that the same is not
related to business activity.
7) That having regards to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in confirming the action of
Ld. A.O. in disallowing a sum of Rs.43 ,816/- on account of medical
expenses related to director.
8)That having regards to the facts and circumstances of the case, Ld.
CIT(A) has erred in law and on facts in not reversing the action of Ld.
AO in charging interest u1s 234D of the Income Tax Act, 1961."
2. Assessment in this case was completed u/s 143(3) on 22.09.2008
against which assessee filed appeal before the first appellate authority by
raising 11 grounds, out of which grounds No.1 And 11 were general in
nature and did not call for specific adjudication. Grounds No.2 & 3 were
taken by Ld. CIT(A), which were interrelated and considered together.
These grounds relate to disallowance of Rs.1,41,217/- on account of service
charges.
3 I.T.A. No. 1685/Del/2013
3. On going through the assessment order, it was observed that the A.O.
has stated that service charges received as rental income instead of business
income as claimed by the assessee. Accordingly, the A.O. has disallowed
the expenses totaling Rs.10,95,073/- incurred by the assessee and has
allowed standard deduction of Rs.5,79,600/- u/s 24 of the I. T. Act, 1961.
The A.O. has given finding that since the lessee HDFC Finance Ltd. has
deducted income tax on service charges u/s 194-I instead of Section 194-C,
the income has been treated as being received as service charges instead of
house property.
4. The A.O. has highlighted the main clauses of service agreement on
the basis of which he has concluded that these service charges were ancillary
rental income. After considering reply of the assessee, the A.O. concluded
that this amount should be treated as income from service charges and not
income from house property.
5. The Order of the AO was challenged before the CIT(A) who
summarized the arguments of the A.R. of the assessee as per sub-para (a) &
(b), after para 2.2 of the order, which is reproduced as under:
"(a) The A.R. of the appellant has argued that the assessee had
entered into an agreement with HDFC Bank for letting out a property
and also for providing services in terms of an agreement dated 29-01-
2001. It was argued by the A.R. that there were separate agreements
entered by the appellant company wherein part of the amount was on
account of rental receipts and as per a separate agreement, certain
services were to be provided for which separate payment was being
paid on a monthly basis.
(b) The A.R. of the appellant has further highlighted that in view of
the various judicial pronouncements letting out a building and
providing for different amenities are separate activities. All income
derived by the owner of this property cannot be treated as income
from house property. In this context, the A.R. of the appellant has
relied upon large number of judicial pronouncements which are as
follows:
4 I.T.A. No. 1685/Del/2013
(i) CIT v. Model Manufacturing Co. P. Ltd (1989) 175 ITR 374
(Cal)
(ii) CIT v. Model Manufacturing Co. P. Ltd. (1985) 49 CTR (Cal.)
38
(iii) Indian City Properties Ltd. v. CIT (1978) 111 ITR 19 (Cal)
(iv) CIT v. Shankaranarayana Hotels P. Ltd (1993) 109 CTR (Kar)
196
(v) Karnani Properties Ltd. v. (1971) 82 ITR 547 (SC)
(vi) CIT v. Sarabhai P. Ltd (2003) 129 Taxman 43/263 ITR 197
(Guj)
(vii) CIT Vs Khosla Indair Ltd. (2005) 147 Taxman 602 (Del.)
In view of the various judicial pronouncements and the facts of the
present case, the A.R. of the appellant argued that the treatment of
this income as considered by the assessing officer was not justified
and accordingly, the contention of the appellant regarding business
income and house property separately should be accepted."
6. Ld. CIT(A) while considering but not accepting the plea of the
assessee, has adjudicated the issue as per para 2.3 of his order and dismissed
the grounds raised in appeal. Relevant para of his adjudication/conclusion
is reproduced as under:
"After going through the observations of the A.O., submissions
of the A.R. of the appellant including various judicial
pronouncements, these grounds are being finalized after making the
following observations:
(a) From the assessment order and the observations of the A.D. on
page 2 of the order it has been highlighted that the nature of services
provided by the assessee company were very closely related to the
house property and were related to the basic amenities to keep the
surroundings clean, to provide adequate drainage facilities, to
provide parking facility, to arrange for adequate lighting in the
compound, to ensure continuous supply of power and water at all
times etc. The A.D. has, therefore, argued that these services were
very closely related to the basic amenities attached with the house
property. Accordingly, the TDS had been deducted u/s 1941. The A.D.
5 I.T.A. No. 1685/Del/2013
has, therefore, strongly argued that the total income by whatever
name call was actually in the nature of rent from house property. The
A.O. has, therefore, rejected the contention of the assessee and has
held that these services were actually an integral part of the rent
agreement and were closely related to the basic amenities of the
house property. Accordingly, the contention of the A.O. that the total
amount was taxable under the head of house property has been
strongly made out in the assessment order.
(b) On the other hand, the A.R. of the appellant has consistently
argued that in view of the various judicial pronouncements the issue
of services and house rent should be considered separately under the
head of house property and business income. Even though the A.R.
has relied upon various judicial pronouncements, the facts of the
different cases are not identical and in this particular case also
keeping in view that TDS has been deducted under the head of 1941
which relates to rental income, the various submissions of the A.R. of
the appellant are in contradiction to this TDS deduction wherein all
these payments have been considered as income from house property.
In this regard, it is pertinent to note that ~ there is a thin line of
difference between the amount being treated as rent and a separate
agreement only for the purposes of changing the head of income and
also for gaining benefit in municipal valuation etc. On going through
the specific nature of services mentioned in this case, it is amply clear
that the various services mentioned are very general and vague in
nature and would normally be part of routine services which should
be provided by any owner of property.
Issues like keeping clean surroundings or providing proper drainage
facility or disposal of garbage etc. are always an integral part of any
rental agreement in the normal parlance. Therefore, it appears that 2
separate agreements may have been made for any specific reason best
known to the appellant but in fact the agreement regarding the
services does not have any specific purpose other than to break down
the effective rent into two parts. Accordingly, in my opinion, also
keeping in view that the TDS has been deducted u/s 1941 and the fact
that the nature of services are very basic and integral to the house
property, the stand taken by the assessing officer is fully justified.
Accordingly, this treatment of the income under the head of house
property is justified and the disallowance made by the A.O. is upheld.
These grounds of the appellant are treated as dismissed."
6 I.T.A. No. 1685/Del/2013
7. Still aggrieved, the assessee has filed further appeal and while
reiterating the submissions as made before the authorities below, has further
submitted to meet the adverse observations of the A.O. in brief synopsis as
under:
"i) The A.O. has mentioned that since the TDS has been
deducted u/s 194-I therefore, such income would be income form
house property.
In reply, it is submitted that the section under which TDS is
deducted dos not determine the head of income in the hands of the
recipient. It may please be seen that u/s 194-I, TDS is required to be
deducted in respect of Plant and Machinery, Furniture and Fixture
and so many other things, the rental income of which is certainly not
taxable under the head house property.
ii) A.O. has maintained that the services rendered by the assessee
are integral part of rent agreement and nomenclature given by
assessee is inconsequential.
In reply, it is submitted that it is not the nomenclature but the
nature of agreement and the nature of jobs undertaken which are
important. These services were dehorse the renting agreement and
there were two separate and independent agreements and bank i.e. the
tenant was free not to give the job of services to the assessee. It is
incorrect to say that service agreement is integral part of rent
agreement. Landlord may simply let out a property and to keep that
property clean on day to day basis is never the function of landlord
unless specifically agreed."
8. Similarly, Ld. A.R. of the assessee dealt with the adverse observations
of Ld. CIT(A) as under:
"i) Ld. CIT(A) has mentioned that various services
mentioned in the service agreement are vague and general and would
normally be provided by any owner of the property.
In reply, it is submitted that this contention is not correct
because to provide cleanliness to the surroundings and courtyard and
backyard, supply of power and water, parking, disposal of garbage
etc. are not the services which would be provided by any owner of the
property. This assumption of Ld. CIT(A) is based on incorrect
premise.
7 I.T.A. No. 1685/Del/2013
This agreement with this tenant is from earlier several years
and is going on even today and in all the years, income from
providing services has been assessed under the head business.
Therefore, for consistency reasons also, the action of the authorities
may please be set aside."
8.1 Service Tax is also being paid on this amount, so it is a service, not
rent.
9. Further reliance was placed to support the plea raised as under:
"i) CIT Vs Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del.)
ii) Al-Haz Amir Hasan Properties (P) Ltd. Vs ACIT 104 TTJ 108
(Kol. `D')
iii) Diesel Engg. Co. (P) Ltd. Vs ITO 161 Taxman 129 (Del-Trib.)
iv) CIT Vs D.S. Promoters & Developers (P) Ltd., 25 DTR 8 (Del.)
v) CIT Vs Goel Builders 24 DTR 318 (All.)
vi) DCIT Vs Goel Erectors & Pipe Manufacturers (P) Ltd. 45 DTR
473 (Lko `B')"
vii) Vikram Golecha vs. DCIT 123 ITD 438 (Jp.)
viii) CIT vs. Excel Industries 358 ITR 295 (SC)"
10. It was thus pleaded for treating the services receipts as business
income and to allow expenses incurred in this regard with the prayer for
deletion of the impugned addition as made by the A.O. and confirmed by
Ld. CIT(A).
11. Ld. D.R. while relying upon the orders of authorities below, has
pleaded for confirmation of the impugned order. It was further submitted
that whatever case law have been filed by the assessee, most of these
decisions were not there when the A.O. and Ld. CIT(A) have passed their
respective orders. So, he pleaded that the impugned order be confirmed and
in case it is deemed fit then at the most, the matter can be restored back to
the file of the A.O. for redeciding the case afresh after considering all such
decisions as cited by the Ld. A.R.
8 I.T.A. No. 1685/Del/2013
12. We have heard both the sides, considered the material on record as
well as the precedents relied upon by the Ld. Counsel for the assessee and
find that in this case assessee has given on rent his premises and for which
rent agreement has been executed. There is another agreement which is
called service agreement and the same would show that this agreement was
entered into by the assessee in the capacity of contractor on which assessee
has established to show that service tax was paid in respect of various
services provided to the contractee. While relying upon the various
decisions assessee has strongly intended to establish that these are two
separate agreements, on the basis of one agreement rent is being received
and on the basis of second agreement which is service agreement, services
are being provided by the assessee to the tenant. Though, AO has
maintained that the services rendered by the assessee are integral part of the
rent agreement and the nomenclature given by assessee inconsequential, yet
it gets established that it is not the nomenclature but the nature of
agreement and the nature of jobs undertaken which are important. These
services are dehorse the renting agreement and there were two separate and
independent agreements and bank i.e. the tenant was free not to give the job
of services to the assessee and more so such arrangement is being carried
for several years, earlier as well as subsequent years and such income is
being assessed as business income consistently except the year under
consideration. So, in our view the service agreement is not integral part of
the rent agreement as landlord may simply let out a property, to keep that
property clean on day to day basis is neither the function of landlord unless
specifically agreed to. Therefore, in view of the facts and circumstances,
material on record and various case laws cited by the Ld. AR of the assessee,
we hold that neither AO was correct nor CIT(A) to treat the services
9 I.T.A. No. 1685/Del/2013
agreement as integral part of the renting of the building to the bank i.e.
tenant, therefore, orders of the lower authorities are reversed in this regard.
Besides that services obtained by tenant and rendered by the assessee can't
be said to be part of renting of property from its very nature also. Therefore,
keeping in view the contents of the services agreement, nature of services
being rendered by the assessee to the other party, we hold that it is business
income as being offered and accepted in the earlier as well as subsequent
years. So far as nature and extent of expenses claimed against such income
is concerned, same appears to have not been doubted by the AO, therefore,
we direct the AO to allow the same against business income on account of
services receipts as claimed.
13. As a result, appeal of the assessee gets allowed.
Order pronounced in the Open Court on 02-7-2014.
Sd/- Sd/-
(T. S. KAPOOR) (U.B.S. BEDI)
Accountant Member Judicial Member
Date: 02-7-2014
Sp/SRB
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A), New Delhi AR, ITAT,
5. CIT(ITAT), New Delhi NEW DELHI
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