Order
Chander Singh, A.M. :
This appeal by the assessee for the block period 1986-87 to 1996-97 has been filed against the order of the assessing officer. The assessee had filed the return in Form No. 2B on 11-9-1996, declaring the undisclosed income at nil. The business premises as well as the residential premises of the assessee were searched under section 132 of the Income Tax Act on 12-12-1995. Since the search and seizure operations in the case of the assessee were carried out in October, 1995, the assessment for the block period was completed by the assessing officer in accordance with the procedure laid down in Chapter XIV-B of the Income Tax Act.
2. During the block period, the assessee-company had constructed a building on the land belonging to the Kasat family. The construction was stated to have been completed departmentally and the total cost of construction, as reflected in the books of account, was shown by the assessee at Rs. 28,10,344. In addition, the building constructed was also furnished with a view to carry on the business of sarees and readymade garments, etc. The cost of furniture and fixtures, electrical installations and air-conditioning plant worked out to Rs. 17,34,230. Thus, the total costs of construction including the furniture, fixtures, etc. worked out to Rs. 45,44,594.
3. The assessee-company is a partner in Kasat Creations having 40 per cent shares of profit. The assessee-company rented out the shop premises to Kasat Creations on a monthly rent of Rs. 40,000 including furniture and fixtures. Since the assessee-company had rented out the shopping premises to the firm, no capital was contributed by the company as partner of the registered firm.
4. The issue regarding the cost of construction was closely scrutinised by the assessing officer. He was not satisfied with the cost of construction as shown by the assessee-company. He was also not satisfied with the registered valuers report according to which the cost of construction came to Rs. 27,97,000. Since the assessing officer was harbouring some doubts about the cost of construction, he made a reference to the Valuation Officer who valued the property at Rs. 33,14,000. The assessee objected to the said valuation on the grounds:
(1) The Departmental valuer valued the property as on 12-10-1995, whereas the construction commenced in 1990 and was completed in 1992. The Departmental valuer failed to give suitable cost reduction to the assessee.
(2) The construction work was done Departmentally by deploying labourers and sub-contractors. All required materials were purchased by the assessee and, therefore, there was a substantial saving in the cost and supervision charges. No such reduction or benefit was allowed by the Departmental valuer.
(3) As per the sanction got from P.M.C. the total allowable construction was 975 square meter whereas the Departmental valuer considered the valuation of 1158 square meter.
5. These objections filed by the assessee, however, were not accepted by the assessing officer and he included the undisclosed income of Rs. 5,17,000 being the difference in the valuation of building. This is the first issue in this appeal.
6. The second issue in this appeal before us is regarding the assessment of monthly rent of Rs. 40,000 received by the assessee-company from Kasat Creations. The assessee was of the view that the rental income from the shopping premises should be treated as business income. The assessing officer, however, was of the view that the said income was exigible to tax under section 22 of the Income Tax Act under the head as property income. The assessing officer, therefore, took the rent received as income from house property and after deducting 1/6th for repairs and the lease rent arrived at the total income of Rs. 3,40,000 in each of the assessment years 1983-84, 1994-95 and 1995-96. Thus, on these two issues, the undisclosed income of the assessee was computed at Rs. 15,37,000.
7. Aggrieved, the assessee has come up in appeal before us. The learned counsel of the assessee Dr. Sunil Pathak first assailed the cost of construction of the shopping premises as adopted by the assessing officer. He pointed out that the construction of the premises had commenced in 1990 and was completed in 1992. The cost of construction, therefore, has to be adopted as on the said date. Dr. Pathak took us through the valuation report of the Valuation Officer and by drawing our attention to page 13 of the paper-book pointed out that the said Valuation Officer has taken the value of the construction as on 12-10-1995. The Valuation Officer therefore apparently erred in adopting the construction cost as on 12-10-1995 whereas factually the building was completed in 1992. Even the interior decoration work and other utilities were completed in the year 1992 and in fact the shop commenced its business activity in August 1992. There was, therefore, no reason for the Valuation Officer to adopt the cost of construction as on 12-10-1995 for income-tax purposes.
8. The learned counsel has also drawn our attention to the cost inflation index. He pointed out that as on 31-3-1992 the cost inflation index was 199. As on 31-3-1995 the said cost inflation index was 259. Thus, there was an inflation of about 60 points over and above the basic point of 199 which was prevailing as on 31-3-1992. In other words, there is an increase of 30 per cent. In case the valuation at Rs. 27,97,000 shown by the assessee is increased by 30 per cent, then the incremental value would be Rs. 8,39,000 and the total cost on the said basis as on 31-3-1995, would work out to Rs. 36,36,000 as against the cost of construction valued by the Valuation Officer at Rs. 33,14,000. Even on this basis, the learned counsel urged that there was no basis for rejecting the cost of construction. In fact, as per the cost inflation index the cost of construction as on 31-3-1995 would be more than even estimated by the Valuation Officer.
9. The learned counsel further urged that the assessee has maintained books of account in which the cost of construction of the building has properly been recorded. The books of account were examined by the assessing officer who failed to point out any defect in the said books of account. In the absence of any defects in the books of account, the learned counsel urged that the cost of construction as shown by the assessee should have been accepted. The learned counsel thus concluded that there is no justification for the addition of Rs. 5,17,000 as undisclosed income for the block period.
10. The learned Senior Departmental Representative, Hari Krishan, on the other hand, supported the order of the assessing officer. He pointed out that there is some confusion in the report of the Valuation Officer regarding the date of the valuation of cost of construction. He pointed out that the Departmental Valuation Officer did not apply the rate of 1995. He, therefore, contended that the assessee had suppressed the cost of construction and, therefore, the assessing officer was justified in adding a sum of Rs. 5,17,000. The learned Senior Departmental Representative prayed that the addition of undisclosed income made in this behalf should be sustained.
11. We have heard the rival submissions and have carefully gone through the facts of the case. We find from the assessment order of the assessing officer that he has not dealt with the objections of the assessee to the report of the Valuation Officer. Those three objections we have extracted above and need not be repeated. Admittedly, the construction had commenced in 1990 and was completed in 1992. Thus, the cost of construction was to be valued as on 1992 and not on 12-10-1995, as has been apparently done by the Valuation Officer. Page 13 of the material papers clearly indicates that the Valuation Officer had estimated the cost of construction as on 12-10-1995. The assessing officer had failed to deal with this aspect of the case. Similarly, the assessee had pleaded before him that the construction was done departmentally and the assessee himself had purchased the materials, etc. No deduction has also been allowed by the assessing officer on this count. The assessee had also pleaded before him that the total construction was 975 square meter whereas the Departmental valuer had arrived at cost of construction of 1158 square meter. Instead of dealing with the objections raised by the assessee, the assessing officer merely dismissed the same by observing :
“The reasons given by the assessee thereby disputing the valuation made by the Departmental valuer is not acceptable. He has not given the details regarding the purchase of material made along with the bills and moreover, the valuation officer has considered all the aspects and he has also discussed it in his report before valuing the said property. In the circumstances, I adopt the value as determined by the Departmental valuer.”
Thus, it is clear that the assessing officer has mechanically accepted the report of the Valuation Officer without rebutting the serious and genuine issues raised by the assessee against the said valuation report.
12. Since the Departmental valuer has valued the property as on 12-10-1995 the cost inflation index has to be taken into account while arriving at the cost of construction as on 31-3-1992. If the said cost inflation index is taken into account, the value of the said property as on 31-3-1995 would be Rs. 36.36 lakhs which is more than the valuation fixed by the Departmental valuer at Rs. 33,14,000. In this view of the matter, the cost of construction as reflected in the books of the assessee appears to be correct and should have been accepted.
13. There is no dispute that the assessee has maintained the books of account for the cost of construction. In our view, where the books of account are properly maintained and the expenditure is recorded therein with full details, the total expenditure so reflected in the books has to be accepted in preference to any estimate even if it is by an expert. In respect to an investment in property, there can be two methods to find out the correct position, viz.:
(1) proper books of account are maintained, and
(2) valuation report. If the assessee has maintained proper books of account, the figures shown therein have to be followed. The valuation report can be taken into consideration only when the books of account are not reliable or are not supported by proper vouchers or the assessing officer is of the opinion that no reliance can be place on such books of account. However, there has to be a positive finding by the assessing officer that the books of account maintained by the assessee are defective and not reliable. In the case before us, there is no such finding recorded by the assessing officer. He has also not given a finding that the books of account are defective and there are no vouchers for the materials purchased. In our view, therefore, the assessing officer was duty bound to accept the cost of construction as reflected in the books of account maintained by the assessee. This our view is fully supported by the decision of the Rajasthan High Court in the case of CIT v. Pratap Singh Amrosingh Rajendra Singh & Deepak Kumar 64 Taxman 585. We are of the view that the addition of Rs. 5,17,000 on account of the alleged suppression of the cost of construction is not warranted and hence deleted.
14. Regarding the next issue, the learned counsel for the assessee contended that the rental income from the shopping premises should have been assessed as business income in the hands of the assessee. In this connection, he has drawn our attention to page 111 of the paper-book in which the main objects of the company are mentioned. Clause (1) of the main objects mentions that the company was authorised to carry on the business of textile traders and to deal in all varieties of textiles, readymade garments, suiting, shirting, sarees and all variety of clothing whether in the form of clothing or in the form of readymade garments and to sell, purchase, trade, import, export and to deal with all varieties of textiles and to establish wholesale, retail outlets of such trading in textiles and to deal in all such varieties of textiles, garments and to act as an intending agent, commission agent, del credre agent, stockist, wholesaler, retailer, in all varieties of textile business. The object clause, according to the learned counsel, will fully demonstrate that the rental income from the shopping is a business income. The assessee-company is a 40 per cent partner in the firm to which the premises have been rented out. The assessee, as one of the partners, is, therefore, utilising his commercial assets with the object of making profit and as such the income arising from such utilisation of the capital asset was business income. The learned counsel also drew our attention to the deed of partnership and pointed out that the assessee-company had not contributed any capital in view of the fact that the shopping premises were given for use on rental basis. This fact would also show that rental income was income from business.
15. The learned counsel also drew our attention to the investment of Rs. 17,34,320 in furniture, fixtures, electrical installation and A.C. plant, etc. and pointed out that the said furniture, fixtures, etc. was inseparable from the building. It was thus a composite rent for the building as well as furniture, fixtures, etc. and therefore, has to be assessed as business income in the hands of the assessee-company. The assessing officer was, therefore, in error to assess the rental income as income from house property. He pointed out that the annual letting value of a house owned by an assessee a company, and used for the business carried on by him in partnership is not liable to be included in his total income under the provisions of section 22 of the Income Tax Act. In this regard, the learned counsel has drawn our attention to the decisions of Patna High Court in the case of CIT v. Syed Anwar Hussian (1990) 186 ITR 749 (Pat), Gujarat High Court in the case of CIT v. Rasiklal Balabhai (1979) 119 ITR 303 (Guj), Madras High Court in CIT v. K.M. Jagannathan (1989) 180 ITR 191 (Mad). He further contended that even the decision of the Mumbai High Court in the case of CIT v. Shree Nirmal Commercial Ltd. (1994) 213 ITR 361 (Bom), indirectly supports the case of the assessee. He, therefore, prayed that the rental income wrongly assessed by the assessing officer as income from house property should be computed as business income of the assessee and consequentially depreciation, etc. should be allowed.
16. The learned counsel has also drawn our attention to the commentary of the learned author Shri Sampath Iyengar at page 1465 of LAw on Income-tax, Volume I, 9th Edn. para (v). He pointed out that it is well-settled that if an assessee derived any income by exploitation of his commercial asset, whether by itself or through other agencies, such income should normally be considered to be the business income of the assessee. In the case of the assessee, the income was derived from the exploitation of its commercial asset and, therefore, income derived from letting out the shopping premises was the business income of the assessee.
17. The learned counsel has also made the alternate submission. He has urged that the furniture and fixtures, etc. are inseparable from the building and, therefore, the entire rent should be assessed as income from other sources and depreciation as per law should be allowed. In this regard the learned counsel has dealt with at length on the decision of the Mumbai High Court in the case of CIT v. D.L. Kanhere & Anr. (1973) 92 ITR 535 (Bom). He pointed out that when a building along with plant, machinery and furniture are inseparably let, income from such letting out should be assessed as income from other sources. According to the learned counsel, the issue is squarely covered by the aforesaid decision of the Mumbai High Court.
18. The learned counsel has also dealt at length regarding the scope of section 158B. He pointed out that such an addition is not contemplated as per the provisions of section 158BA(3). Thus, according to the learned counsel, both the additions are beyond the scope of section 158B. On this ground alone, the learned counsel urged, the assessee is entitled to the full relief.
19. The learned Senior Departmental Representative on the other hand, opposed the contention and argued that to start with there may be the intention of the assessee to carry out the business, but in fact no business was conducted by the assessee. The premises were merely rented out to the firm in which the assessee was a partner and therefore, such income has to be assessed under section 22 of the Income Tax Act.
20. The learned Senior Departmental Representative also drew our attention to the fact that the entire building has not been rented out to the firm. As a matter of fact, second and third floor were lying vacant in the relevant period. Only first floor was used by the firm for carrying out its business operations. Even if it is held that the rental income constitutes business income or income from other sources, full depreciation cannot be allowed.
21. The learned Senior Departmental Representative thereafter dealt with the judicial decisions relied upon by the learned counsel. He pointed out that these decisions deal with exemption under section 22 of the Income Tax Act and are also distinguishable on facts. Regarding the Mumbai High Court decision in the case of D.K. Kanhere (supra), the learned Senior Departmental Representative pointed out that the said decision is distinguishable, inasmuch as the case relates to renting out of a cinema house. As far as the assessees premises are concerned, any other business could have been carried on from the said shop.
22. The learned Senior Departmental Representative also disputed the contention of the learned counsel regarding the scope of section 158B. He pointed out that the assessee-company did not file any return of income and, therefore, there was no disclosure by the assessee. He, therefore, argued that the income has rightly been assessed by the assessing officer as income from house property and, therefore, the assessment order should not be interfered with.
23. We have carefully considered the rival submissions and have also perused the judicial decisions brought to our notice. We find from the facts of the case that there is no agreement in writing of letting out the building, furniture, fixtures, electrical installations and A.C. plant. The facts of the case, therefore, suggest that the assessee-company received compensation from Kasat Creations towards utilisation of shop premises, shop furniture and fixtures and other utilities which are attached to the shopping premises. The sizeable expenditure of Rs. 17,34,230 was incurred by the assessee-company for such furniture, etc. We find from the facts that the furniture inside the shop consists of wall-built racks for storing of sarees, counters and showcases, cabins, etc. All these items of furniture is inseparably attached to the shop premises and therefore, in our view, the building and furniture, etc. are inseparably let out. In such a situation income from such a rental can neither be assessed as business income nor under the head income from property. Whether a particular letting is business has to be decided in the circumstances of each case. In our view, each case has to be looked at from a businessmans point of view to find out whether the letting was doing of a business or exploitation of his property by an owner. A thing is not by its very nature a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. However, it is settled that when a building and plant, machinery or furniture are inseparably let, the Income Tax Act contemplates the rent from the building as a residuary head of income and not to be computed either as business income or income from property. In this regard, our view is amply supported by the decision of the Supreme Court in the case of Sultan Bros. (P) Ltd. v. CIT (1964) 51 ITR 353 (SC). In the said decision, it has been held that there is no warrant for saying that section 12(4) of 1922 Act contemplates that the primary letting should be of machinery, plant or furniture, and that the letting of the building has to be incidental to the letting of the plant, machinery or furniture. The letting of a building can never be incidental to the letting of furniture contained in it and, therefore, consideration of primary and secondary lettings arises in construing the section. What must apply when furniture is let and also building must equally apply when plant and machinery are let out and also buildings. All that section 12(4) of 1922 Act contemplates is that the letting of machinery, plant or furniture should be inseparable from the letting of the building. The term inseparable in that section does not contemplate either that the machinery, plant or furniture should by its very nature be inseparable from the building, so that the building has also necessarily to be let along with it, or that the plant, machinery or furniture is fixed to the building. The inseparability, according to the Supreme Court, arises from the intention of the parties. To ascertain the intention, question to be asked are:
(a) Was it the intention to enjoy two together?
(b) Was the intention to make one letting?
(c) Would one have been let alone without the other?
If the answer to (a) & (b) are in the affirmative and the answer (c) is in the negative, then inseparability is established and in such a situation the income would fall within the ambit of section 56(2)(iii) of the Income Tax Act. Applying these tests laid down by the Supreme Court, we are of the view that the composite let out of the building, furniture, fixtures, etc. by the assessee is inseparable and, therefore, the rental income from such let out has to be computed under the head as Income from other sources. Our this view is also supported by the decision of the Calcutta High Court in the case of Chitpore Golabari Co. Ltd. v. CIT (1971) 82 ITR 753 (Cal). In fact the decision of the jurisdictional High Court in the case of D.L. Kanhere (supra) has also upheld this view by applying the aforesaid decision of the Supreme Court in the case, therefore, the income in this case has to be computed as income from other sources and the assessee will be entitled to depreciation as per law.
24. It is, however, clarified that the building let out consists of basement, first floor with stilt, second floor and third floor. The assessee has let out only first floor with stilt which is used for shop premises of Kasat Creations. So depreciation would be limited only to the extent of premises let out and used for the purposes of the business. We, therefore, direct the Revenue to assessd the rental income as income from other sources and allow depreciation restricting the same under section 38 of the Income Tax Act to the extent of actual user. This ground of the assessee, therefore, is partly allowed.
25. In the result, the assessees appeal is partly allowed.