1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. INCOME TAX APPEAL NO.1269 OF 2007 Nutan Warehousing Company Private Limited ..Appellant. Vs. The Deputy Commissioner of Income Tax, Circle-2, Pune ..Respondent. .... Mr. S.N. Inamdar with Mr. Atul K. Jasani for the Appellant. Mr. Vimal Gupta for the Respondent. .... CORAM : DR. D.Y.CHANDRACHUD & J.P. DEVADHAR, JJ. 18th February, 2010. P.C.: 1. The appeal in the present case arises out of an order passed by the Income Tax Appellate Tribunal on 31st August, 2006, pertaining to Assessment Year 2001-02. The Appeal was admitted on the following questions : I. Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the lease rentals received from Lipton Export Hindustan Lever were taxable under the head ‘Income from House Property’ and not under the head ‘Profits and Gains of Business or Profession’? II. Whether on the facts and in the circumstances of the case the Tribunal ignoring its own earlier orders was justified in law in holding that even the income from warehousing activity had to be taxed under the head ‘Income from House Property’ and not under the head ‘Profits and Gains of Business or Profession’? III. Whether on the facts and in the circumstances of the case the Tribunal was justified in law in upholding the disallowance of Rs. 2 23,27,592/- under Section 40 A(2)(b) of the Act in respect of payment of Rs.27,02,000/- made to M/s. Shree Industrial Suppliers? 2. The assessee is a company incorporated under the Companies Act, 1956. According to the assessee the company was established in 1972 and the object of the incorporation of the company as borne out by the Memorandum of Association is the carrying out of warehousing activities. Among the objects with which the company has been formed is to carry on the business of warehouse, cold storage and refrigeration in all its branches, activities and spheres. The assessee has a warehouse at Fursungi, Pune, in respect of which a licence has been issued for the carrying on of the business of a warehouse under the provisions of the Bombay Warehouse Act, 1959. The warehouse, appears to occupy an area of 1,48,560 sq. ft. Adjacent to the warehouse, a factory has been constructed by the assessee and a lease has been executed on 18th March, 2001 in favour of Hindustan Lever Limited. The lease agreement was for a period of ten years on a monthly rent of Rs.4.45 lacs. The lessee agreed to pay to the assessee as lessor an amount of Rs.144 lacs on taking possession as a security deposit and certain other sums on the commencement of the fourth and seventh years of the lease. The assessee agreed to allow the lessee to possess and enjoy the premises for carrying out manufacturing activities including blending, processing, mixing and packing of tea and other items of food and beverages. The lease was renewable on the option of the lessee upon such terms as may be mutually agreed 3 upon with the assessee. The lease agreement contains other usual clauses to which it may not be necessary to refer at this stage. 3. According to the assessee, upto Assessment Year 1995-96 the income that was derived from the activity of the assessee was accepted and assessed as business income. During the course of the assessment proceedings for Assessment Year 1995-96 the assessing officer came to the conclusion that the income received by the assessee was liable to be split up into rental income and income received from the rendering of service as a warehouseman. The rental income was assessed as income from house property. On this basis the assessment for 1994-95 was reopened and enhanced. The assessment was completed for subsequent years also. The assessment proceedings relating to Assessment Years 1994-95, 1995-96 and 1996-97 were eventually carried in appeal before the ITAT at its Pune Bench. By its decision dated 19th March, 2001 the Tribunal inter alia came to the conclusion that the warehousing charges received by the assessee had quite correctly been treated all along as business income and the leasing of a portion of the property was integral to the warehouse business and was only incidental to the main business of the assessee. During the course of the assessment proceedings for Assessment Year 2001-02 the assessing officer assessed the warehousing charges as income from business and the rental income that has been received as income from house property. In appeal, the CIT (A) 4 confirmed and enhanced the assessment such that even the warehousing charges came to be treated as income from house property. A disallowance made by the assessing officer under Section 40-A(ii) on the assumption that the income was income from business was confirmed. In appeal the Tribunal has upheld the order of the CIT(A) in its entirety. 4. The submission of counsel appearing on behalf of the assessee is that in the case of the assessee on the same set of facts the income which was received from the entirety of the activities was assessed as income from business for several years. In these circumstances, the ITAT while dealing with the case of the same assessee for the Assessment Year 2001-02 has not furnished any reasons whatsoever for differing with the earlier judgment of the Tribunal. Secondly, in the present case the assessee is not a mere owner who has received income from investment in property and the letting out of the property was not the dominant purpose of the transaction. The assessee has been formed with the object of carrying on warehousing business and the dominant nature of the activities of the assessee related to the carrying on of the warehousing business. A licence has been obtained by the assessee under the Bombay Warehouse Act, 1959. 5. On the other hand, counsel appearing on behalf of the revenue has supported the reasons which are advanced in the order of the Tribunal. 5 6. The question as to whether the income which is received by the assessee from the transaction which has been entered into in respect of the immovable property in question should be treated as income from house property or as income from business would have to be resolved on the basis of the well settled tests laid down in the law in decided cases. What is material in such cases is the primary object of the assessee while exploiting the property. If the primary or the dominant object is to lease or let out property, the income which is derived from the property would have to be regarded as income from house property. Conversely if the dominant intention of the assessee is to exploit a commercial asset by carrying on a commercial activity, the income that is received would have to be treated as income from business. What has to be deduced is to whether the letting out of the property constitutes a dominant aspect of the transaction or whether it was subservient to the main business of the assessee of carrying out warehousing activities. 7. The first submission which has been urged on behalf of the assessee, to the effect that the decision of the Tribunal rendered on 19th March, 2001 for Assessment Years 1994-95, 1995-96 and 1996-97 ought to have been considered, but has not been considered by the Tribunal, cannot be brushed aside as without substance. Be that as it may, during the course of the hearing of these 6 proceedings we have considered the earlier judgment of the Tribunal. Ex facie, a perusal of the earlier judgment would show that that the Tribunal has not made a reference to the detailed terms and conditions of the warehousing agreements entered into by the assessee or to the lease agreement by which the factory came to be leased out. Consequently, upon considering the position in this regard counsel appearing on behalf of the assessee has fairly stated that the assessee would not consider that the earlier decision of the Tribunal be regarded as binding. Insofar as the decision which is impugned in these proceedings is concerned, the Tribunal has basically relied upon the lease agreement dated 18th March, 2001 between the assessee and Hindustan Lever. It is on the basis of the terms of the lease agreement that the Tribunal arrived at a conclusion that the primary purpose of the assessee was to let out the factory and that the income that was derived there from could not consequently be regarded as income from business. 8. The submission of the assessee is that the terms on which the assessee entered into warehousing agreements have not been considered at all in the decision of the Tribunal. Now a perusal of the decision of the Tribunal would show that the Tribunal noted two decisions of the Tribunal, the first in Vora Warehousing Private Limited Vs. ACIT1 where the rent which was realized from warehousing activity was held to be assessable as business income and the second 1 [1999] 70 ITD 518 (Mum)(SMC) 7 in the case of M/s. V.N. Rukari v. ITO in ITA NO.84/PN/2001 in which the Tribunal held that the income which was realized from warehousing activity would be assessable as income from house property. The Tribunal followed a decision of the Madras High Court in CIT v. Indian Warehousing Industries Limited1 and was of the view that the facts of that case were identical, in holding that the income received from the leasing of the warehouse was assessable as income from house property. Ex facie, therefore the terms of the warehousing agreement were not considered by the Tribunal. Merely styling an agreement as a warehousing agreement would not be conclusive of the nature of the transaction since it is for the Tribunal to determine as to whether the transaction was a bare letting out of the asset or whether the assessee was carrying on a commercial activity involving warehousing operations. 9. Since the Tribunal has not considered this aspect of the case, we are of the view that it would be appropriate and proper to set aside the decision of the Tribunal and to remand the proceedings back to the assessing officer for a fresh determination and assessment in accordance with law. We order accordingly. Upon remand, it is clarified that the assessing officer shall not consider himself to be bound by the decision of the Tribunal dated 19th March, 2001 for assessment years 1994-95, 1995-96 and 1996-97, in view of the concession in those terms which has been made during these proceedings by the 1 [2002] 258 ITR 93. 8 assessee. In order to facilitate a fresh exercise being carried out in terms of the order passed by this Court, the impugned order of the Tribunal dated 31st August, 2006 is set aside. However, it is clarified that all the rights and contentions of the assessee and the revenue on all aspects of the case on merits are kept open. The order of remand, it is clarified shall also be with respect to the disallowance that has been effected under Section 40A(ii) of the Income Tax Act, 1961. In view of the order of remand, it is not necessary for this Court to express any view one way or the other on the questions of law involved. The appeal is accordingly disposed of. No costs. (Dr. D.Y.Chandrachud, J.) x (J.P. Devadhar, J.)