Soumitra Pal, J@mdashThis appeal, under section 260A of the Income Tax Act, 1961 (for short the "Act"), has been preferred by the appellant against the order dated 14th December, 2004 passed by the Income Tax Appellate Tribunal, Kolkata in ITA Nos. 1276 (Kol) of 2004 for the assessment year 1996-97.
2. The appeal was admitted on the following substantial questions of law:
"i) Whether the Tribunal was justified in law in holding that the appellant could not claim the assessment of the rental income under the head ''business'' because the same was all along offered for assessment under the head ''house property''.
ii) Whether the rental income earned by the appellant is assessable under the head ''business'' and the compensation of Rs. 53,50,000/- paid by it for obtaining possession from lessee/tenant so as to earn a higher income is an admissible revenue deduction and the purported findings of the Tribunal to the contrary are arbitrary, unreasonable and perverse?"
3. The facts are set out hereinafter. The appellant is a public limited company within the meaning of the Companies Act, 1956. The main objects specified in its Memorandum of Association (for short "Memorandum") is to acquire and develop properties and to deal with the same by way of sale, lease, letting out, etc.
4. The appellant acquired premises No. 6, Royd Street, Kolkata (hereinafter referred to as "the said premises") comprising land and buildings. The appellant raised two new constructions on the said premises at a substantial cost after demolishing some of the existing buildings. One of the new constructions was sold to different buyers and the profit and loss arising therefrom was assessed under the head "business". Portions of the second new construction were let out to different tenants.
5. The appellant states that in April 1988, an area of 3310 sft. on the ground floor of the second new construction was given on lease to Yogi Industries Private Limited (hereinafter referred to as "the said lessee") at a monthly rent of Rs. 5,000/- plus actual outgoings. The lease rent was to be revised every five years. The said lessee made an interest-free deposit of Rs. 6,62,000/- and had the right to sub-lease. The said lessee paid the monthly rent of Rs. 5,000/- till August, 1994 after which the appellant did not accept the rent and requested for revision thereof with effect from April, 1994 but the said lessee refused to increase the rent on the ground of business difficulties.
6. During 1995, the said lessee introduced NIIT Limited to the appellant who was willing to pay a sum of Rs. 1,65,000/- per month for the area under the said lessee''s occupation. The said lessee offered to vacate in favour of NIIT Limited provided the appellant paid adequate compensation. The appellant and the said lessee agreed for determination of the lease and payment of compensation. The appellant was to refund the deposit of Rs. 6,62,000/- and not claim any rent with effect from September, 1994. Upon the said lessee handing over possession to the appellant, the appellant was to pay compensation of Rs. 50,00,000/-. The appellant paid the compensation and obtained possession.
7. One Gope R. Vaswani was a tenant in one of the old buildings at the said premises paying a monthly rent of Rs. 150/- for an area of 1284 sq.ft. The said tenant was depositing the rent in the office of the Rent Controller. The said tenant agreed to vacate the portion occupied by him against payment of compensation of Rs. 3,50,000/-. The appellant duly made the said payment and obtained possession.
8. The appellant in its accounts for the financial year ended March 31, 1996 treated the said payments aggregating to Rs. 53,50,000/- as revenue expenditure and claimed the same as deduction. However, the Assessing Officer rejected the said claim and disallowed the said payment as capital expenditure.
9. Being aggrieved, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals). The CIT(A) by an order dated April 07, 2004 allowed the same holding that the income from rent constituted the appellant''s business income and that the compensation amount of Rs. 53,50,000/- was expenditure laid out wholly and exclusively for the purposes of business on grounds of commercial expediency and had resulted in having a higher income.
10. Against the said order the revenue preferred appeal before the Tribunal. The Tribunal by the impugned order dated December 14, 2004 allowed the appeal of the revenue.
11. Mr. J.P. Khaitan, learned senior advocate appearing for the appellant submitted that the Tribunal was not justified in law in holding that merely because the appellant had been declaring the rental income under the head "house property", there was no justification for assessing the same under a different head of income. Submission was that the Tribunal failed to consider that res judicata did not apply to income tax proceedings and an assessment for particular year was final and conclusive between the parties only in relation to that year. It was submitted that the Tribunal failed to consider that there was no litigation or controversy between the appellant and the Department as regards the head of assessment of the rental income in the earlier years inasmuch as the appellant had itself shown the income under the head "house property". The Tribunal failed to consider that as the appellant had itself shown the rental income under the head "house property", the Assessing Officer simply accepted the head under which the appellant offered the income to be assessed. The Tribunal did not consider that since there was no prior adjudication as regards the head of assessment of the rental income, it was open to the appellant to claim in the assessment year in question that the rental income was assessable under the head "business" and there was no question of any res judicata or estoppel. Moreover, the Tribunal failed to consider that it was apparent from the appellant''s Memorandum that one of its main objects was to acquire and develop properties and deal with the same by way of sale, lease, letting out etc. and having regard to the manner in which the appellant carried on its activities, it was apparent that the income by way of rent was the appellant''s "business income" assessable as such. Further the Tribunal was not justified in law in upholding the finding of the Assessing Officer that the payment of compensation was for acquiring any benefit of enduring nature or was a capital expenditure or that the appellant was not engaged in business of letting out of property on hire. It was also submitted that the rental income earned by the appellant is assessable under the head ''business'' and the compensation of Rs. 53,50,000/- paid by it for obtaining possession from the lessee/tenant so as to earn a higher income is an admissible revenue deduction and the findings of the Tribunal are arbitrary, unreasonable and perverse. Submission was that the Tribunal should have considered that the compensation paid by the appellant to have portions of the said premises vacated so that higher income could be fetched and higher deposits procured was expenditure laid out wholly and exclusively for the purposes of the appellant''s business on grounds of commercial expediency and was revenue in nature. This apart, the Tribunal was not justified in law in upholding the finding of the Assessing Officer that the payment of compensation was for acquiring any benefit of an enduring nature or was a capital expenditure or that the appellant was not engaged in the business of letting out of property on hire. Moreover, the Tribunal failed to consider that the Assessing Officer had himself made a computation under the head "business" after excluding the rental income and the aforesaid expenditure had to be allowed while computing income under the head "business". Mr. Khaitan had relied on the following judgments:-1)
12. Mr. M.P. Agarwal, learned advocate for the respondent submitted that since there is a clear finding by the Assessing Officer that in the earlier years the assessee had itself shown the rental income under the head "income of house property" and the facts being same, there was no occasion for assessing the rental income of the assessee under the head "business income". Since all along the petitioner had returned the income from house property and the Assessing Officer accepted it, it cannot be said that returns are not complete as there was no adjudication. As 85% of the income, the main source, was from house property, it cannot be contended that income was not from house property. Though in a Income Tax proceeding res judicata is not applicable, as the appellant had consistently declared the rental income as income from "house property", in view of principle of consistency the appellant is bound by it and is estopped from pleading otherwise. Mr. Agarwal had referred to several judgments in support of his submission which are as follows:-
"1)
13. In order of appreciate the issue, it is appropriate to refer to Clause 4 of the Memorandum of Association of the Appellant Company, which is as under:-
"A. MAIN OBJECTS: TO BE PURSUED ON INCORPORATION"
..........................
"4. To carry on the business of purchasing, taking on lease or on hire, importing, acquiring in exchange or otherwise and letting on lease, sub-lease, hire sell, transfer, mortgage, pledge, hypothecate, leased assets in any part of India or abroad all kinds of plants, machineries, tolls, automobiles and vehicles of every kind and description, computers, office equipments of every kind and description, air conditioning plants, electrical and electronic equipment of all kind and description and to render leasing, consultancy and advisory service to clients in the field of equipment leasing. To acquire by purchase lease, tenancy, hire, exchange or otherwise and develop, promote, pull down, rebuild enlarge and extend repairs and renovate houses, buildings, land, factories, bungalows, godowns sheds, flats, hotels markets, firms, warehouses and other properties or any other kind of estates or property of every description and to sell, lease let out, hire transfer and deal in any manner of such estates and properties."
(Emphasis supplied)
14. Admittedly the appellant had all along offered for assessment the rental income under the head "house property". In this assessment year the position is no different. However in this assessment year the assessee had claimed Rs. 53,50,000 paid as compensation an admissible deduction under the head "business expenditure". The Assessing Officer found that the appellant had made payment of the said sum to two tenants for securing vacant possession of the space occupied by them. The Assessing Officer rejected that contention of the appellant by holding that as it had shown the rental income as "Income from house property", only deductions as laid down in section 24 of the Act would be allowed and since the payment was made for acquiring a benefit of enduring nature, the expenditure was considered as capital expenditure and thus disallowed. This view was affirmed by the Tribunal by holding inter alia, as under:-
"We find that the assessee in the preceding years throughout has declared the rental income under the head "Income from House Property" and there being no change in the facts of the case during the relevant period, we hold that there is no justification for assessing the rental income under a different head of income other than "Income from House Property".
15. It is to be noted that the CIT(A) had allowed the appeal of the appellant from the order passed by the Assessing Officer by holding, inter alia, as under:-
"I have examined the facts of the case and considered the appellant''s submission. On examining the Memorandum of Association placed on record, the appellant''s contention is found to be correct on facts. I find that 85% of the income of the appellant company was accounted for by rent and lease rentals. The decisions of various High Courts cited by the assessee were perused. It is seen that in all the case the Hon''ble High Courts after examining the Objects Clause of the memorandum of Association had held that the income derived by the assessee from the letting out of properties was assessable as income from business. The ratio of the aforesaid decisions is squarely applicable in the present case since the facts are similar. The mere fact that the appellant had shown its rental income in the income-tax return separately under the head ''Income from House Property'' could not be held against the appellant. Any assessee is within its rights to avail of such statutory deductions as are provided in law. Accordingly, the action of the assessee in claiming deductions u/s. 24 in respect of its rental income does not constitute an admission that the appellant was not engaged in the business of letting out properties. Considering all materiel facts, I am inclined to agree with the appellant''s contention that the income from rent constituted the appellant''s business income."........... "In the present case also since the letting out of the properties has already been held to be business activity, the decision in the case of Auto Distributors Ltd. is squarely applicable to the instant case. Therefore, I am unable to agree with the A.O.''s alternate view that the payment of compensation was capital in nature. Enquiry was also caused into the income-tax records of the principal recipient of the impugned compensation namely, M/s. Yogi Industries Pvt. Ltd. which was paid a sum of Rs. 50 lakhs. From the asstt. records of M/s. Yogi Industries Pvt. Ltd. I find that the sum of Rs. 50 lakhs received by way of compensation has been declared as a revenue receipt chargeable to tax. Hence, considering all materials facts, I hold the compensation of Rs. 53,50,000/- as an admissible deduction. The A.O. is directed to delete the disallowance."
16. Thus, while the Assessing Officer and the Tribunal had disallowed the claim of the appellant on the ground that it had consistently shown the rental income under the head "Income from House Property", the CIT(A) after considering the object''s clause of the Memorandum and observing that an assessee is within its rights to avail of the statutory deductions under the law, held that the income from rent constituted the appellant''s business income and had allowed deduction. The question is since the assessee had all along shown the rental income as " income from house property", applying the principle of consistency, whether the Assessing Officer and the Tribunal were justified in holding it as "income from house property" or as contended by the appellant, as there was no prior adjudication or decision as regards the head of assessment of the rental income, it was open to the Appellant to claim in the assessment year in question that the rental income was assessable under the head "business" as there was no question of estoppel or res judicata.
17. Before proceeding a few words on the principle of consistency need to be mentioned. In the facts of the case, it would mean happening of same set of events periodically or successively during a span of time. Accordingly law will have to be applied. If not, the principle of consistency is not applicable.
18. It is significant that the Assessing Officer and the Tribunal had rejected the contention of the appellant for treating the rental income as income from business as it in the preceding years had throughout declared it as income from house property and there was no change in the facts of the case in this assessment year. Then the issue is whether in the earlier assessment years whether assessee had declared the rental income as business income and was it considered in the light of the Memorandum. The answer is in the negative. Though as noted, in earlier assessment years the appellant had shown rental income as "income from house property", however, in this assessment year it has claimed rental income as business income, in view of the object as set out in clause 4 of the memorandum. Though before the Tribunal the Memorandum was relied on to put forward the case that the income was part of the business and payment of compensation was to earn higher income, it was not at all considered. Since in this assessment year the appellant had claimed rental income as business income, and as previously there was no adjudication or decision considering the Memorandum, and as being the owner of the premises, payment of compensation - the expenditure - was wholly and exclusively for commercial expediency. As the judgment in Chennai Properties and Investments Ltd. (supra) had held "that the objects of the company must also be kept in view to interpret the activities. (paragraph 8), the Tribunal was not justified in disallowing the claim of appellant. In the said circumstances the principle of consistency cannot be made applicable. Again, the Assessing Officer and the Tribunal had rejected the claim of the appellant as there was no change in the facts of the case during the relevant assessment year. Though the appellant had claimed that the rental income earned by the appellant assessable under the heard "business" and the compensation of Rs. 53,50,000/- paid by it for obtaining possession from lessee/tenant, so as to earn a higher income, as an admissible revenue deduction, inspite of Memorandum permitting the appellant to carry on business by letting out properties, the Assessing Officer and the Tribunal ruled otherwise.
19. Since the object in the Memorandum permitted the appellant to carry on business in letting out properties and as 85% of the income of the appellant was by way of deriving rent and lease rentals, in our view the income from rent constituted the business income of the appellant. Since compensation of Rs. 53,50,000/- was paid by the appellant, the landlord of the premises, to obtain possession from the lessee/tenant so as to earn a higher rental income, it had arisen out of business necessity and commercial expediency. Since there was no question of acquiring a property it cannot be said that the payment made was for having a benefit of enduring nature. Rather the compensation was paid to the existing tenants to have their portions vacated to have new tenants with higher rent and thus to have a higher rental income which was a business activity permitted by the Memorandum. The judgement in CIT v. Auto Distributors (supra) wherein the assessee company was engaged in the business of taking properties of lease and letting out for the purpose of earning income by way of rent, supports the case of the appellant as therein the payment made by the assessee was on the ground of commercial expediency and held to be revenue in nature as the assessee did not acquire any new asset or advantage of enduing nature. The judgement of the Supreme Court in Empire Jute Co. Ltd. (supra) supports the stand of the assessee as therein too the payments made by the assessee for purchase of loom hours was expenditure laid out as a part of the process of profit earning and was revenue in nature. That the object for the purpose for which the company was established is vital in considering the issue is evident from the judgment in S.G. Mercantile Corporation P. Ltd. (supra) wherein on facts the Supreme Court held taking property on lease and subletting portion thereof was part of the business and trading activity and the income would fall under business income. Though in the judgment in Radhasoami Satsang (supra) Supreme Court had observed that the said judgment was confined to the facts of the case which were special and may not be treated as an authority on aspects which have been decided for general application, however it was held that a question cannot be reopened if it is "decided" in earlier proceedings unlike the case in hand in the earlier assessment years no such issue was raised and decided. In CIT v. Bhaskar Mitter (supra) it was held that it is always open to an assessee to take the plea that the figure in his return is not taxable under the Act and law empowers the Assessing Officer to assess the income of an assessee in accordance with law and to determine tax accordingly. Therefore, an Assessing Officer has to assess the income of an assessee after considering whether the figure in the return is taxable or not and then to determine the tax in accordance with law. In determining the same, a decision has to be reached on the issue raised. Unless a decision is reached, it cannot be said that the issue was adjudicated or decided. Keeping these principles of law as formulated by the Courts in mind, the finding by the Assessing Officer and Tribunal that declaring the rental income under the head "income from house property" precludes the appellant from calming deduction cannot be accepted as Memorandum permitted it to carry on business of letting out properties and indisputably it was carrying on business in letting out properties and in carrying on such trading activity had paid compensation. The observation of the Tribunal that the appellant had all along, including in this assessment year, had shown the income under "Income from house property" cannot be a ground for denial of the deduction as in the earlier assessment years never an occasion arose for adjudication or decision on the said issue. Thus the conduct of the appellant cannot be called approbate and reprobate since in CIT v. V.M.R.P. Firm, Muar (supra) it was held that "As in the case of estoppel, it cannot operate against the provisions of a statute. If a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the Income-tax Officer has no power to impose tax on the said income." Had there been an adjudication on the said issue, the submission of the Revenue would have been acceptable. Thus, the application of the principles of consistency or res judicata does not arise. Moreover though the principles of res judicata are not applicable in tax proceedings, issue would have been different had there been an adjudication in the earlier assessment years including on the issue of payment of compensation. Absence of adjudication on the question of payment of compensation takes the matter out of the ambit of the principle of consistency.
20. There is another aspect of the matter. Though the appellant had relied on the Memorandum in support of its contention that it was carrying out business by letting out the property, however, neither the Assessing Officer nor the Tribunal, which had recorded the submission of the appellant in paragraph 2 of its order, had considered the issue at all from that angle. Since the CIT(A) while allowing the appeal of the appellant had referred to the Memorandum, it was incumbent on the part of the Tribunal to deal with the said Memorandum instead of denying deduction on the ground that the assessee in the preceding years throughout had declared the rental income under the head "Income from house property". Though in Bharat Sanchar Nigam Ltd. (supra) it was held that "The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position" (paragraph 20) and though, as evident from the "order" reported in
21. Since Memorandum of the appellant company was not considered, the judgment in CIT v. Estate of Omprakash Jhunjhunwala (supra) or the judgment in Sultan Brothers Private Ltd. (supra) does not further the case of the revenue as Supreme Court therein held that "Whether a particular letting is business has to be decided in the circumstances of each case" and "each case has to be looked at from a businessman''s point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner" which the Assessing Officer and the Tribunal failed to do. The judgment in Chloride India Limited (supra) is not applicable as it is evident from the facts that the assessee had taken vacant possession of the property on lease, whereas in the case in hand the assessee is the owner of the property. The judgment in E.I.D. Parry (India) Ltd. (supra) is inapplicable as therein the expenditure incurred for setting up of a project was capital in nature. In Rajasthan Rajya Sahakari (supra) though it has been held that in tax matters one has to interpret taxation statute strictly, in the instance case, as discussed, the Tribunal did not at all decide the claim. The judgment in C.I.T. v. Arawali Constructions (supra) is also inapplicable as it was a case of expenditure regarding acquisition of software. Whether the activities of the assessee constituted business has to be gathered from the facts of each case and as we have held that income from rent constituted the business income of the assessee, the judgment in ICAI v. Director General of IT (Delhi) (supra) is not of much assistance.
22. Hence, as the appellant, being the owner of the property, was carrying on business and had paid compensation for deriving higher rent which was in tune with the Memorandum - a fact which was not at all considered by the Assessing Officer and the Tribunal, the question No. 1 is answered in the negative, against the Revenue and in favour of the Appellant. The question No. 2 is answered in the affirmative, against the Revenue and in favour of the Appellant.
23. Therefore, the appeal is allowed.
Mir Dara Sheko, J.
I agree.
