Commissioner of Income Tax vs M/s. Bhilai Management Service Pvt. Ltd.

Satish K. Agnihotri, J.—Heard learned counsel for the parties. This is a reference u/s 256(2) of the Income Tax Act, 1961 (for short ''The IT Act, 1961") against the order of refusal dated 2-5-2000 passed by the income Tax Appellate Tribunal, Bench at Nagpur (for short ''The ITAT''), in the reference application u/s 256(1) of the IT Act 1961.

The Department requested the ITAT to refer the following questions of law:

1 Whether on the facts & circumstances of the case, the Tribunal was justified in law in holding that rental income was correctly assessable as income from business instead of income form house property assessed by the AO ?

"2 Whether on the facts & circumstances of the case, the Tribunal was justified in law on holding that ratio laid down by the Hon''ble High Court in the case of Commissioner of Income Tax Vs. Shree Nirmal Commercial Ltd. (and Vice Versa), is applicable in the assessee''s case without appreciating that the facts of both the case are distinguishable ?

Whether on the facts & circumstances of the case, the Tribunal was justified in law in holding that interest payment amounting to Rs. 2,86,2301- disallowed by the AO is an admissible deduction u/s 36(1)(iii) and is not covered under the provisions of Sec. 37 (i) of the I.T. Act, 1961 being in the nature of capital expenditure ?

In regard to questions No. 1 & 2. the ITAT held that since the department in full knowledge has taken the rental income from business and there was no change in the facts of the case vis-a-vis in earlier years the Assessing Officer (for the short "the AO") was not entitled to assess the rental income as income from house property''.

In respect of question No. 3, the order passed by the Commissioner of Income Tax (Appeals) { for short "CIT (A)} was disallowed. Thus, the ITAT came to the conclusion that no question of law arose out of the order of ITAT dated 21-3-1997 (Annexure - P/3) passed earlier in ITA No. 768/Nag/ 93 A.Y. 1993-94.

Case of the applicant / Department is that the assessee derives income from dividend, consultancy, interest, rent agriculture activities and interest from various training programme. One of the objects of the assessee was to give properties on rent. In the past several years, the assessee has rental income from house property in Calcutta, which was shown as business income and accepted by the authorities. In the assessment year in question, the case was taken on scrutiny and a notice u/s 143(2) of the IT Act, 1961 was issued to the assessee.

On a query as to why the rental income earned from the house property at Calcutta building should not be treated as ''income from house property''. The assessee clarified that one of the business of the assessee company was earning income from letting out the building on rent. It is admitted position that the building at Calcutta is owned by the assessee company and it was used only for the purpose of letting out to others to earn rent.

The AO treated that income, as "income from house property" by assessment order. Thereafter, in appeal preferred by the assessee, CIT (A) allowed the appeal of assessee holding that the rental income should be treated as income from business''. The ITAT, in appeal by order dated 21-3-1997 (Annexure -P/3) held that in earlier, the department in full knowledge has taken the rental income from business and there was no change in the facts of the case vis-a -vis in earlier years the AO was not entitled to assess the rental income as ''income from house property''. Thus, the AO has wrongly held that the income from the house property.

On the question of deletion, no submission has been made and, as such, it appears that the Department has not pressed the question No. 3, which was raised before the ITAT in reference application u/s 256(1) of the IT Act 1961.

Shri Rajeev Shrivastav standing counsel for the Department, would submit that in view of the provisions of Section 14 read with Section 22 of the IT Act, 1961, rental income derived from the property even if one of the business of the assessee was letting out the house on rent, the income tax shall be chargeable under the head ''income from house property''. The ITAT has declined to refer the above - stated questions of law applying the principle of res judicata. Thus, the ITAT may be directed to state the case and refer the substantial questions of law to this Court.

On the other hand, Shri Vaibhav Shukla, learned counsel appearing for the assessee, contends in support of the order passed by the ITAT refusing the reference of questions of law.

In M/s. Radhasoami Satsang Saomi Bagh, Agra Vs. Commissioner of Income Tax, the Supreme Court held that res judicata is not applicable to IT proceedings. The Supreme Court further observed as under:

9.......On these reasonings, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the CIT in the earlier proceedings, a different and contradictory stand should have been taken, We are, therefore of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under ss. 11 and 12 of the IT Act of 1961.

However, it was made clear that the order was passed in very special circumstances, thus the decision is confined to the facts of the case and may not be treated as an authority on aspects, which have been decided for general application.

In Commissioner of Income Tax Vs. Shree Nirmal Commercial Ltd. (and Vice Versa), the High Court of Bombay has clearly held as under:

8.....Having urged earlier that the income in the earlier assessment years was income from business or trade, it would not be proper to allow the Department to completely turn and now contend that the income of the assessee is taxable under the head "House property" so as to disallow the deductions claimed by the assessee in respect of interest paid on the non-refundable deposits of the shareholders either u/s 28 or section 37 of the Income tax Act, 1961. The income of the assessee must be treated as income from trade or business.

Shri Shrivastava further relies on a decision of the Supreme Court in East India Housing and Land Development Trust Ltd. Vs. Commissioner of Income Tax, West Bengal, , wherein the assessee company constructed certain shops and stalls on purchased land, the amount received from tenants from shops and stalls by assessee was treated as ''income from property.'' He also relies on a decision of the Supreme court in Keyaram Hotels (P) Ltd. Vs. Assistant Commissioner of Income Tax, wherein the income earned by the assessee out of exploitation of property by letting it out de hors any commercial or business activity is chargeable as income from house property and not as business income.

On perusal of the order dated 2-5-2000 passed by the ITAT, where under the reference application u/s 256(1) of the IT Act, 1961 preferred by the Department was dismissed, it is found that the ITAT has not considered the other aspects of the matter, basically provisions of law, and proceeded only on the basis of principle of res judicata. Thus, the issue involved in the instant application deserves consideration.

Applying the well settled principles of law to the facts of the present case and for the reasons mentioned hereinabove, the order dated 2-5-2000 passed by the ITAT in reference application u/s 256(1) of the IT Act, 1961 is quashed. The ITAT is directed to state the case and to refer the question of law accordingly. In the result, the reference is allowed to the extent indicated above.

No order as to costs.