Whether income from unsold flats of builder, given on rent, is to be treated as income from HP or Business

 

I-T- Whether income from unsold flats of builder, given on rent, is to be treated as income from house property or income from business - Income from house property, rules Calcutta HC

KOLKATA, NOV 11, 2011: THE issue before the High Court is - Whether income from unsold flats of a builder, given on rent, is to be treated as income from house property or income from business. Income. And, the HC rules in favour of the assessee.

Facts of the case

Assessee is a property developer and builder. Assessee constructed a building in which there were some unsold flats which were appearing as stock-in-trade under the current assets and were meant for sale. Costs of these unsold flats were Rs.26.09 lacs and the rental income of Rs.49.00 lacs from these flats were shown under the head `operating income'. Assessee had shown the rental income under the head "income from house property" and, thus, claimed statutory reduction of 1/5th on account of repair from annual letting out value. AO stated that in the wealth tax proceedings, the assessee had considered the unsold flats as stock in trade and not assets for the purpose of wealth tax. Since the assessee had been treating the unsold flats as stock-in-trade of its business, the income from such business assets in the nature of stock-in-trade should be treated as business income and not income from house property, as claimed by the assessee and thus the AO rejected the claim of statutory deduction on account of repair to the extent of 1/5th of the gross rental income.

CIT (A) allowed the appeal of the assessee observing that the appropriate head for the income derived by way of letting out the unsold flats should be income from house property and not business income. ITAT set aside the order passed by the CIT (A) and restored the order passed by the AO.

Assessee contended that following the decision of Apex Court in the case of East India Housing and Land Development Trust Ltd. vs. Commissioner of Income-Tax (2002-TIOL-420-SC-IT) that the distinct heads specified in the Act indicating the sources are mutually exclusive and the income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. The assessee had a business of developing house property and the unsold flats, income derived from such unsold flats by way of letting out so long a buyer was not procured amounts to income from house property by letting out and could not be a business income.

After hearing both the parties, the High Court held that,

++ what was to be seen was whether the asset was being exploited commercially by the letting out or whether it was being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend upon certain facts peculiar to each case. The commercial assets like machinery, plants, tools, industrial sheds or godowns having high business potentials stand on a different footing from assets like land and building;

++ the subject matter of exploitation of unsold flats still owned by the assessee, the CIT (Appeals) rightly concluded that the same should be treated as income from house property by way of letting it out. The unsold flats being house property, pure and simple and having fallen under the head, income from house property, as provided in section 22 of the Act, thus the rental income of such property should be assessed u/s 22 of the Act;

++ the income of an assessee is one and various sections of the Act direct the modes in which the income is to be taxed. None of those sections can be treated as general or specific for the purpose of any one particular source of income; they are all specific and deal with various heads in which an item of income, profits and means of an assessee falls. These sections are mutually exclusive and where an item of income falls specifically under one head, it has to be charged under that head and no other.

Whether services like repair and maintenance constitute an integral part o

 

Whether services like repair and maintenance constitute an integral part of manufacturing of Industrial Undertaking as per Sec 80IB - NO, rules ITAT SB

KOLKATA, AUG 18, 2011: THE issues before the Special Bench are - Whether services like repair and maintenance constitute an integral part of manufacturing of industrial undertaking - Whether any income derived from such jobwork of repair and maintenance is also eligible for Sec 80IB benefits and whether such income has any direct nexus with the main activity of the industrial activity. And the verdict has gone against the assessee.

Facts of the case

Assessee is a manufacturer of moulds for ball pen and mould parts. Revenue issued notices u/s 143(2) and 142(1). Assessee stated that it was a manufacturing unit and claimed deduction u/s. 80-IB of the Act but it failed to produce details due to fire break-out in the office premises of M/s Today's Writing Product Ltd and all the records were destroyed. Assessee HUF through Karta Shri `R' was one of the promoters/directors of `TWPL'. AO made assessment u/s 144 stating that assessee was selling as well as providing services to `TWPL' and another group concern `PWP' by way of repair and maintenance of moulds sold to them. Deduction claimed u/s 80IB in respect of repair and maintenance was disallowed stating that it provided only services for repairing and maintenance of moulds which did not constitute manufacturing activity and no new article or thing came into existence. CIT (A) allowed the appeal of the assessee following the order of the ITAT in preceding years.

In appeal, the Revenue contended that the repair and maintenance was not an ancillary activity of the assessee and once assessee did not file details and did not produce books of account, it was not possible to know the exact nature of `job work charges' on which assessee claimed deduction u/s 80IB. It was further contended that the Tribunal heavily relied upon erroneous interpretation of "job work charges". In the preceding year also nature of "job work charges" remained vague, unclear and liable to be misinterpreted by CIT(A) as well as Tribunal. The job work was nothing but repairing and maintenance of the mould which had been sold by the assessee earlier. Due to repairs and maintenance of old moulds, their life might be renewed and they might become useful for further use. But, the activity of repairing and maintenance brings no new article or thing, therefore, assessee was not eligible for deduction U/s 80IB of the Act on such job charges. Reliance was placed on the judgement of Apex Court in the case of Liberty India v CIT (2009-TIOL-100-SC-IT), wherein it was held that the words "derived from" are narrower in connotation as compared to the words "attributable to" and that by using the expression "derived from" the Parliament intended to cover sources not beyond the first degree and also that the source of receipts must be manufacture and production of an article. Deduction U/s.801B of the Act will be available to assessee only if a new article comes into existence as a result of manufacture or production but in the present case, assessee was doing only repairs and maintenance of old moulds which were sold by him earlier in the garb of so-called job charges. As a result of repairs and maintenance, no new articles came into existence. Accordingly, it was urged that the order of CIT(A) be reversed and that of the AO be restored.

On the order hand, the assessee contended that it was a manufacturer of moulds for ball pen and mould parts and these moulds were hollow design of ball pen parts which were manufactured with the help of Injection moulding machines. Mould manufactured consisted of the parts punches, pin point, guide pins, guide/degree bush, hanging pin/link rode, ejector bush and cavities which were also manufactured by the assessee itself. Manufacture of these parts with its own material as well as steel supplied by customers and sale of moulds as well as supply of mould parts manufactured qualifies for deduction u/s 80-IB of the Act, whether manufactured on its own material or on job work basis. It was further contended that supplying of manufactured parts in the course of after sales service s very much manufacturing activity. Assessee provided after sales service to its valued customers, which was essential for selling moulds. After sales service was an exclusive service to its own customers and it was not that assessee carried on the business of doing repair. It was an indispensable part of manufacturing, almost universally, undertaken by manufacturers to maintain confidence and dependence of the users and to retain market of manufactured items.

It was further contended by the assessee that until recently nowhere in Section 80 IA or 80 IB of the Act, no definition of the word `manufacture' was available. The absence of definition of the word was not by chance but by design to leave the word to its widest amplitude possible consonant with incentive nature of benefits of deduction/exemption under various sections hinging on manufacture as the central condition precedent. Under Export Import Policy 2002 to 2007, the word `Manufacture' is defined as "Manufacture means to make, produce, fabricate, assemble, process or drawing into existence by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, polishing, blending, reconditioning, repair, refurbishing, testing calibration, reengineering. "Manufacture" for the purpose of this policy shall also include agriculture, aquaculture, animal husbandry, floriculture, pisci-culture, poultry, sericulture, viti-culture and mining." which is inserted in Explanation 1 below sub section 9 of section 10AA by insertion of clause (c) of Schedule of the SEZ Act where the said definition is lifted. The work relating to "repair" finds place in definition of "manufacture" as adopted for the purpose of Section 10AA of the Act and it is for the first time that a definition of the word "manufacture" is available in the Act. Logic for calling into aid the definition in section 10AA of the Act is straightforward and forthright and provisions of deduction in Section 80-IB of the Act are undisputedly meant to encourage entrepreneurs to set up manufacturing undertakings in identified backward areas. This section gives entrepreneurs reward for undergoing hardihood in venturing out in such areas and contributing towards nation's strife for even growth of the industry nationwide. So, it is essentially an incentive provision and a relief provision as well. This needs a purposive approach while giving the word "manufacture" its connotation. It was further contended that since definition of "manufacture" in Section 10AA of the Act includes repair as one of the parameters of the expression "manufacture", it is only fair, reasonable and irresistible that repair should also be taken as a parameter of "manufacture" for the purpose of Section 80-IB of the Act. There is nothing in the object of Section 80-IB of the Act, which can be said to be repugnant to the object of Section 10AA of the Act. Both provisions stand on equation in regard to the basic nature of the objects, i.e., growth of industry - one, for the purpose of export development and the other for the purpose of removing the pockets of industrial backwardness of the national economy. Further in case of doubts the construction most beneficial or favourable to assessee should be adopted even if it results in his obtaining a double advantage and if it is a case of considering respective hardships or inconveniences of revenue and assessee, the court should lean in favour of assessee.

After hearing both the parties, the Special Bench, ITAT held that,

++ the expression used in section 80-IB of the Act is "where the gross total income of an assessee includes any profits and gains derived from any eligible business in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains….", it means that the purpose for providing deduction from business profits u/s. 80-IB of the Act was to encourage industrial activity in India and it is inconceivable that deductions should be made available in respect to profits and gains which are not derived from an activity having a direct nexus to the industrial activity as contemplated in this section. The entire section has to be read as a whole and interpretation placed thereon has to fit the overall scheme of the provision, which is to encourage industrial activity in India and if the interpretation sought to be placed by the assessee is accepted, then it might possibly lead to a situation where profits from repairs and maintenance apart from job work for which industrial undertaking has been set up for manufacturing may undertake very little manufacturing in an assessment year but assessee yet claimed deduction from the profits and gains of business including repairs and maintenance;

++ service and maintenance is not an integral part of manufacturing activity of industrial undertaking and as is clear from the opening word of section 80-IB of the Act that deduction in respect of profits and gains from certain industrial undertaking is to be allowed under the provisions of section 80-IB of the Act while computing taxable income in respect of profits derived from an industrial undertaking and not from any other activity which has no immediate or direct nexus to the essential activity of the industrial undertaking. Section 80-IB of the Act uses the opening word that where the gross total income of assessee includes any profits and gains derived from any business and the deduction under this provision be allowed in computing the total income of the assessee from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. The Apex Court has also drawn a distinction between the expression `derived from' and `attributable to' in the case of Cambay Electric Supply Co. Ltd Vs. CIT (2002-TIOL-76-SC-IT), wherein it is held that the expression `attributable to' was wider in import than the expression `derived from'. But in the present case, the assessee's source of income is from repairs and maintenance i.e. after sale services and it may have commercial connection between the profits earned and the industrial undertaking but industrial undertaking itself is not the source of this profit. This profit from repair and maintenance earned by assessee is not a direct yield from industrial undertaking as the word used in section 80-IB of the Act of profits and gains derived from;

++ the provisions of section 10AA(9) and explanation (1) below section 10AA(9) of the Act is for the purpose of this section only and it cannot be enlarged to other chapters of this Act as section 10AA is a code in itself and it gives complete exemption to the income earned by units in SEZs. The income earned from units in SEZs do not form part of total income u/s. 10AA of the Act, whereas u/s. 80-IB of the Act the deduction is to be allowed where gross total income of assessee includes any profits and gains derived from business profits of industrial undertaking while computing the total income of the assessee. Inclusion of the definition of `manufacture' as assigned in clause (r) of section 2 of the SEZ Act, 2005 in section 10AA of the Act, will not apply to other provisions of the Act, particularly section 80-IB of the Act in view of specific mention in Explanation (1) that these definitions are for the purposes of this section i.e. sec. 10AA of the Act. There is marked difference between the provisions of section 10AA of the Act that is meant for exemption of income from the total income of the Assessee, whereas section 80-IB of the Act grants deduction to the assessee from the profits and gains derived from its industrial undertaking and that also from the business of the industrial undertaking that had directly yielded that profit;

++ there is no quarrel over the proposition and in case the assessee is selling moulds manufactured by it and spare parts of moulds also sold for doing repairs and maintenance, qua sale of moulds and spare parts of moulds assessee is entitled for deduction u/s. 80-IB of the Act. But in respect to repair of moulds, it charges two types of receipts i.e. receipt on account of sale of spare parts as well as repairs and maintenance charges, in case of sale of spare parts assessee is entitled for deduction u/s. 80-IB of the Act but in respect to repairs and maintenance charges it is not entitled for deduction in view of clear provisions of section 80-IB of the Act, because that receipt has no immediate or direct nexus with the industrial undertaking and that is not the source of profit of industrial undertaking. Since there was a major fire broke out and as such entire record of the assessee was destroyed and it would not be possible to furnish books of account and other documents to AO instead of restoring the matter to AO and with a view to finally decide the issue it will be reasonable to consider 50% of the receipt as job work charges on which assessee will be entitled to get deduction u/s. 80-IB of the Act and the balance 50% is the receipt on account of repair and maintenance charges on which the assessee will not be entitled to get deduction u/s. 80-IB of the act.

Sec 158BC - Whether when no incriminating document is found during search,

Sec 158BC - Whether when no incriminating document is found during search, even then addition can be made on ground that some transactions shown in books are found to be fictitious - NO, rules HC

KOLKATA, JULY 08, 2011: THE issues before the Bench were - Whether when no incriminating document is found during the search, no addition can be made in respect of the transactions reflected in the regular books in the block assessment even if they are found to be fictitious and can only be considered under regular assessment and whether surcharge is applicable to the Income tax payable even though the search and seizure took place before insertion of the proviso to Section 113. And the verdict partially goes in favour the assessee.

Facts of the case

During the previous year ended March 31, 1993 relevant to the AY 1993-94, the assessee purchased for the purpose of resale HTS wire from `DKH' Stores - payment for purchases was made by account payee cheques partly during the impugned previous year and partly during the subsequent year - the entire quantity of wire was sold during the previous year ended March 31, 1993 to `SCL' giving rise to a profit of Rs.2.89 lacs – the entire sale proceeds were received by the assessee during the impugned previous year by account payee cheque deposited into the bank on 31st March, 1993. The transactions were duly accounted in the regular books of account – income tax return was filed declaring an income of Rs.3.42 lacs which was processed u/s 143(1). Search took place in Dec, 95 and the copy of audited accounts for impugned previous year was seized and the AO asked the assessee to produce the statement of `DKH' which was reflecting as creditor to whom the amount was due to payment. Assessee furnished the copies of bills, challans and details of payment made. AO made direct enquiry through the inspector who could not find the said person at the address mentioned in the documents – assessee explained the sales by submitting the copies of sales bills, sale price received by cheque and transactions were duly recorded in the books. AO held that the assessee did not require HTS wire for the fabrication work and it had inflated its expenses by claiming bogus purchases and treated it as undisclosed income.

Another issue arose was as regards to two payments of Rs.10 lakh each shown in the regular books of account allegedly made to `FC' and `SCC' in August 95 - the search took place as indicated earlier on December 21, 1995 before the close of the Financial Year 1995-96 and the assessee's return for the Assessment Year 1996-97 relevant to the Financial Year 1995-96 was due to be filed much later.

AO asked the assessee as to why the payments should not be treated as fictitious as the payments were shown as against old dues but the two parties were not shown as Sundry Creditors as on March 31, 1995. Assessee explained that the cheques issued in the names of the said parties were "Account Payee" but the endorsement in this behalf was cancelled and cash was drawn against the cheques by the assessee's cashier which was thereafter sent to Budge Budge site for payment of wages to the contractors and labourers where its receipts and subsequently disbursements were duly recorded which was duly verified by the Assessing Officer. AO, however, held that the payments were fictitious and bogus and included the same as undisclosed income for the Financial Year 1995-96. ITAT confirmed the additions made by the AO.

Assessee contended that the transactions being reflected in the return of the assessee and being also supported by the entries made in the books of account produced by the assessee cannot be added even if considered as fictitious, in block assessment. If those were disbelieved and treated to be fictitious, the AO could pass necessary order in the regular assessment, but there was no scope of passing such order in block assessment as the findings recorded by the AO were not based on any material recovered at the time of search and seizure – no incriminating papers were recovered from the office of the assessee in respect of these transactions.

Revenue contended that pursuant to a notice issued for block assessment, the AO had every right to pass the order impugned in block assessment.

After hearing both the parties, the High Court held that,

++ so far the finding of the AO that the assessee did not require HTS wire for the fabrication work and consequently, the assessee had inflated its expenses by claiming bogus purchases, it is found that such finding of the AO is not based on any material obtained during search and seizure but is founded on the documents reflected in the return of the assessee;

++ as regards the finding of the AO in respect of the two payments of Rs. 10 lakh, each shown in the regular books of account, in course of search and seizure, a certificate of license showing that Shri Umesh Narayan Jha as proprietor of `SCC' who was found to be an employee of the propriety concern of D. K. Goyal was recovered. The Photostat certified copy of the cheque which was encashed after deleting the account payee mark in favour of `SCC' and making it a self drawn one has been placed showing that the same was not seized at the time of search and seizure. The payment by the said cheque was not made to `SCC' and it was a self paid bearer cheque encashed by the drawer himself. Thus, merely because a license in the name of `SCC' was recovered from the office of the Assessee, such fact has nothing to do with the said encashment in favour of the drawer. Thus, the addition of Rs. 20 lakh which is shown in the regular books of account as payment made to `FC' and `SCC' as cash payment of Rs. 10 lakh each as fictitious entry in block assessment was patently illegal as it had no connection with the search and seizure;

++ the finding as regards addition is not based on any materials unearthed on search and seizure and thus, not liable to be assessed on block assessment under Chapter XIV B of the Act but should be subject to regular assessment;

++ the proviso to Section 113 of the Act is curative in nature as is held by the Supreme Court, in the case of CIT vs. Suresh N. Gupta (2008-TIOL-02-SC-IT). Therefore, it is held that surcharge is applicable to the Income tax fixed under Section 113 of the Act even though the search and seizure took place before insertion of the proviso to Section 113 of the Act.