Sections 28, 40A(2)(b) – If the assessee derives income from developing properties and leasing them out, income is chargeable to tax as ‘business income’ following the concept of consistency. No disallowance u/s. 40A(2)(b) can be sustained if the AO fails to specifically bring the actual fair market value on record on basis of corroborative evidences.

25.  (2018) 66 ITR (Trib.) 116 (Mumbai) ACIT vs. Grew
Industries Pvt. Ltd. ITA No.:
5427/Mum/2016 A.Y.: 2011-12 Dated: 9^th May, 2018

Sections
28, 40A(2)(b) – If the assessee derives income from developing properties and
leasing them out, income is chargeable to tax as ‘business income’ following
the concept of consistency.

No
disallowance u/s. 40A(2)(b) can be sustained if the AO fails to specifically
bring the actual fair market value on record on basis of corroborative
evidences.

FACTS

Briefly,
facts were that the assessee – a company, was engaged in the business of
development of commercial properties including I.T. Parks, offices etc., and
given them on lease. The Assessing Officer (AO) intended to treat the lease
rent as ‘Income from house property’ as against ‘Business income’ as offered by
the assessee. Upon this, the assessee explained that the I.T. Park was
developed by Salarpuria Properties Pvt Ltd (SPPL) on the land belonging to the
assessee. That the assessee developed the property to be used as I.T. Park in
Bangalore keeping the need of I.T Sector in Bangalore and office premises of
several I.T Companies were located in the I.T. Park. Also, the development and
maintenance of I.T. Park was a very complex commercial activity, which required
continuous and considerable efforts so as to provide services round the clock.
It was submitted, as per section 80 IA of the Act, development and maintenance
of I.T. Park was regarded as a business activity. It was submitted by the
assessee that in A.Y. 2006-07 to A.Y.2010-11, the income received from I.T.
Park was offered as ‘Business income’ and the department had also accepted it.
Therefore, it was submitted that the income offered by the assessee should not
be assessed as ‘Income from House Property’. Disregarding the assessee’s
submissions, the AO held the income to be ‘Income from house property’. This
was later reversed by the first appellate authority.

During
the course of assessment proceedings, the Assessing Officer noticed that the
assessee had claimed deduction on account of payment of salaries of Rs.
1,11,000/- and Directors remuneration of Rs. 2,20,00,000/. The AO found that no
such remuneration was paid in the earlier assessment years. He, therefore,
called upon the assessee to justify the reasonableness of payment made to them.
The assessee justified the payment made to the Directors, however, the
Assessing Officer was of the view that there was no justification of payment to
the Directors and also observed that the assessee failed to establish the
reasonableness of commission paid to the Directors. Accordingly, he disallowed
the payment made u/s. 40A(2)(b) of the Act. The CIT(A) after considering the
submissions of the assessee, allowed assessee’s claim. The CIT(A) appealed to
the ITAT.

HELD

The
learned DR relying on the observations of the Assessing Officer submitted that
the lease rentals were received by the assessee merely as an owner of the property.
Therefore, the income derived from lease rental had to be assessed as ‘Income
from House Property’. The learned AR submitted that the assessee had also
demonstrated with documentary evidence that it was operating and maintaining
the I.T. Park. The learned AR submitted that the assessee was in the business
of developing and leasing out commercial properties, I.T. Parks etc. Therefore,
the income derived from such activities had to be treated as ‘Business income’.

The
Tribunal pointed out that the Assessing Officer himself had accepted the fact
that the assessee owns number of properties and had leased them out. Though
principle of res judicata is not strictly applicable to income tax
proceedings, each assessment year being an independent unit, rule of
consistency cannot also be ignored. Considering all the facts on record, the
ITAT held that the object of the assessee was to derive income from developing
properties and leasing them out. Further following the principle of
consistency, as per earlier years the income of the concerned year should also
be considered to be ‘business income’.

As
regards the payment made to the Directors, the Assessing Officer had disallowed
them primarily for two reasons – firstly, the assessee had not carried out any
business activities and secondly, the payment made was unreasonable. The first
reasoning of the Assessing Officer had lost its force considering the fact that
the income derived by the assessee had been held to be business income. Even
otherwise also, besides leasing out of properties, the assessee had other
business activities also. That being the case, the disallowance of expenditure
on the ground of no business activity was totally wrong. As regards the
applicability of section 40A(2)(b) of the Act is concerned, the ITAT observed
that the Assessing Officer had not established on record what was the fair
market value of the services rendered by the assessee. The Assessing Officer
merely made a vague statement that the remuneration paid by the assessee to the
Directors was unreasonable, without bringing any corroborative evidence on
record. Neither did he establish the actual fair market value of the services
rendered. Hence, the ITAT held that the disallowance was merely on the basis of
conjectures and surmises and could not be sustained.