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Principles of res judicata are not applicable to income tax proceedings and Revenue authorities are permitted to tax same income under different heads, than those from previous years: ITAT

2019-TIOL-1689-ITAT-RANCHI

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH, RANCHI

ITA No.47/RAN/2018
Assessment Year: 2014-2015

M/s JOKHIRAM DURGADUTT
SARAWGI HOUSE, JJ ROAD
UPPER BAZAR, RANCHI-834001
PAN NO:AABFJ2200Q

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-1, RANCHI

Chandra Mohan Garg, JM & L P Sahu, AM

Date of Hearing: August 27, 2019
Date of Decision: August 30, 2019

Appellant Rep by: Shri P S Paul, CA
Respondent Rep by:
 Shri P K Mondal, Addl.CIT (DR)

Income Tax – Principles of res judicata.

Assessee was engaged in the business of real estate dealer, let out of properties, revenue sharing of cinema hall & gaming zone & mall maintenance. After scrutiny, AO completed the assessment and assessed total income of the assessee at Rs.71,99,230/- and made addition of Rs.4,49,867/- on account of inadmissible electricity expenses, Rs.19,12,911/- on account of inadmissible depreciation and Rs.48,36,449/- on account of income from house property, respectively. On appeal, CIT(A) upheld the additions made by the AO except the alternate plea made by the assessee. Therefore, assessee was in further appeal.

Tribunal held that,

Whether if principles of res judicata are not applicable to income tax proceedings and each year has to be treated as such, decision of Revenue authorities to tax income of assessee as business receipt cannot be held as wrong merely because same was taxed as house property income in previous occasions  – YES: ITAT

++ the CIT(A) after considering the submissions of the assessee and findings of AO has discussed the issue elaborately relying on plethora of judgments. The CIT(A), prima facie, with regard to the issue of principles of consistency raised by the assessee has observed that it must be borne on mind that it has been held in a catena of judgments that principles of res judicata are not applicable to income tax proceedings and that each year has to be treated as such. For this reason, the CIT(A) has relied on the decision of Supreme Court in the case of Radhasoami Satsang v CIT 2002-TIOL-745-SC-IT. Now, coming to the issue of rent receipt treated by the AO as business receipts instead of House Property income and thereby disallowing 30% of standard deduction. From the observations of the CIT(A), first of all, the Tribunal is in agreement with the findings of the CIT(A) that principles of res judicata are not applicable to income tax proceedings and that each year has to be treated as such. There is no infirmity in the findings recorded by the CIT(A) holding receipts from Stargaze was business receipts.

Assessee’s appeal dismissed

ORDER

Per: Bench:

This appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals), Ranchi, dated 21.12.2017 for the assessment year 2014-2015, on the following grounds :-

Ground No: 1

Besides Rent received from 20 nos of shop, the account has been prepared taking receipt from cinema hall, gaming zone and event management Area as house property income. |t was assessed upto the assessment year 2013-14. The Ld. A. 0. has treated the above three receipts as business income without allowing depreciation in A.Y: 2014-15. The C.I.T. (A) has directed to allow depreciation on cinema hall.

The Ld. C.I.T. (A) is not justified in not directing to allow:

(a) Depreciation on event management & gaming zone area. Directed to allow depreciation on cinema hall only.

(b) The Ld. A.O. is not justified in not allowing depreciation on the other two items and C.I.T. (A) has made a mistake in directing to allow depreciation on these above two items i.e. Gaming Zone and Event Management Area.

(c) Common expenses like Audit fee, Travelling & Conveyance, Interest, and Advertisement etc. (Not directly related to business or house property) those expenses have been distributed on the basis of floor area used. The Ld. A. 0. is not justified in not apportioning the expenses on prorata basis. The C. I. T. (A) has allowed depreciation on pro rata basis but is not justified in not directing to allow the common Expenses on revised proportionate area basis.

Revised calculation sheet of area is enclosed. Annexure-1

(d) That the Ld. AO is not justified in calculating the rent receipt from (a) Cinema Hall, (b) Gaming Zone & (c) Event space of Rs. 1,61,21,497/- and disallowing 30% on the same of Rs. 48,36,449/- treating the same as business income and the Ld. CIT (A) is not justified in agreeing with the view of A. 0.

Ground No: 2

That the Ld. A. 0. and C. I. T. (A) is not justified in not carrying forward un-absorbed business Loss and Un-absorbed depreciation which is determined by D.C.I.T. in the assessment year 2011-12. The direction of C.I.T. (A) for assessment year 2012-13 is enclosed. (Last page of order, page no: 19) Annexure-2

Till date A. 0. has not carry the direction of C.I.T. (A).

Copy of Assessment order for the financial year 2011-12 Annexure-3

Calculation sheet for carry forward loss Annexure-4

Ground No: 3

The finding of C.I.T. (A) order in para 8.31, page No: 38 of 39 “As regards point no: 1 to 3 above, the Ld. Assessing officer shall calculated the depreciation on the area occupied by Stargaze and allow depreciation on building at the rates applicable. Similar exercise may be done for depreciation on assets (now held to be business assets) and other common expenses (now to be held as business expenses) after ascertaining their linkage with the running of the cinema hall.”

The Ld. C.I.T. (A) has committed a mistake in making such direction. All the tenants are running their business independently. It is nothing to do with cinema business. ADDITIONALLY, the common expenses are such expenses incurred by the firm that cannot be bifurcated exactly into expenditure incurred for house property or business therefore these expenses are divided between the two in the ratio of floor area used for house property is to floor area used for business. Since the Ld C.I.T.(A) has treated income from cinema, gaming zone and events as business expenditure the floor area ratio will hence change to 25:75 against 60:40. Just like in all previous years the A.O. has allowed the above-mentioned formula for bifurcation of common expenses therefore the same should be applied after recasting the ratio irrespective of its direct linkage with the cinema business.

Ground No: 4

The Ld. A. 0. and C.I.T. (A) has not assigned any reason why gaming zone and event management receipt are business income not a rent to be treated as income from house property from A.Y. 2014-15.

Ground No: 5

That the Ld. A. 0. is not justified in arriving of net income (vide page no: 21 of his order) of the net profit of Rs. 71,99,227/- against actual Loss of Rs. 7,41,215.

Summary of A. O.’s Order, CIT (A) relief as bellow:

Electricity Expenses disallowed (para 6, page 3 to 5 of A. 0. order)Rs. 4,49,867 
Depreciation on Machineries (para 7, page 5 to 9 of A. 0. order)Rs.19,12,911 
Standard deduction 30% on rent ie.1,61,21,497/- disallowed by treating the same as business income (para 8, page 10 to 20 of A. 0. order)Rs.48,36,449Rs. 71,99,227
Less: Relief given by C.I.T. (A)  
On Electricity expenses (para 6 to 6.2, page 4 of 39 of CIT (A) order)Rs. 4,49,867 
On Depreciation(para 7 to 7.2, page 5 of 39 to 15 of 39 of CIT (A) order)Rs. 19,12,911Rs. 23,62,778
  Rs. 48,36,449
Less:  
As per Direction given by CIT (A) to allow depreciation on building, depreciation on assets, and Common expenses (para 8.30, page 38 of 39 of CIT (A) order), assessee has calculated the same and enclosed as Annexure-4 above, page 16. Subject to verification of A.0.  
Depreciation on buildingRs. 28,97,436 
Depreciation on Assets (pro rata basis)Rs. 23,01,043 
Common expenses (pro rata basis)Rs. 3,79,185Rs.55,77,664
Relief by CIT(A) against income determined by Assessing Officer of Rs.71,99,927/- before any relief by I.T.A.TRs.-7,41,215 

Ground No: 6

That the other and further ground will be argued at the time of hearing.

2. Brief facts of the case are that the the assessee is engaged in the business of real estate dealer, let out of properties, revenue sharing of cinema hall & gaming zone & mall maintenance and filed its return of income for A.Y.2011-2012 on 22.09.2011 disclosing total income of Rs.Nil, which was processed u/s.143(1) of the Act and the case was selected for scrutiny. Thereafter the Assessing Officer issued statutory notices to the assessee. In compliance to the same, the assessee submitted the details of gross profit & net profit margins with corresponding turnover as under :-

Assessment YearTurnover (in lakhs)Gross Profit%Net Profit %
2011-1226750136-38,10,335-2,09,54,715
2010-11595994061.94123.61

On examination of evidences submitted by the assessee, ,the Assessing Officer completed the assessment assessing total income of the assessee at Rs.71,99,230/- and made addition of Rs.4,49,867/- on account of inadmissible electricity expenses, Rs.19,12,911/- on account of inadmissible depreciation and Rs.48,36,449/- on account of income from house property, respectively.

3. Feeling aggrieved from the assessment order, the assessee appealed before the CIT(A), wherein the CIT(A) after considering the submissions of the assessee and findings of the Assessing Officer, upheld the additions made by the Assessing Officer except the alternate plea made by the assessee. Finally, the CIT(A) partly allowed the appeal of the assessee.

4. Further aggrieved from the order of CIT(A), the assessee is in appeal before the Income Tax Appellate Tribunal.

5. Ld. AR before us submitted that There are 20 numbers of shops whose rent is treated as income from house property. There is one cinema hall space, one gaming zone and one free hold space on which various parties hold events. However, the Assessing Officer was not justified in treating the receipts from or rent from Cinema hall, receipts from gaming Zone and receipts from Event management area from this Assessment Year as Business Income. Ld. AR further submitted that the Computation of Total Income, the Copy of the Accounts, the Assessment order of u/s 143(3) and the order of Ld. Commissioner of Income Tax ( Appeals ) of the Assessment year 2013 – 14 are enclosed as Annexure no: 1, 2, 3 and 4. Up to these Assessment Years these incomes were shown / treated and accepted as Income from House Property by the Ld. Assessing Officer and the Ld. Commissioner of Income Tax ( Appeals ). Thus the rule of consistency is breached when there is no change in facts. The accounts should be treated as it is. Therefore, ld. AR submitted that appeal of the assessee deserves to be allowed. In support of his contentions, ld. AR relied on the following decisions :-

(a) CIT Vs. Bilahari Investment (P) Ltd. (2008) 299 ITR 0001 (SC) = 2008-TIOL-32-SC-IT

(b) Radhasoami Satsang Saomi Bagh vs. CIT (1992) 193 ITR 0321 (SC) = 2002-TIOL-745-SC-IT

(c) CIT Vs. Realest Builders & Services Ltd (2008) 307 ITR 0202 (SC) = 2008-TIOL-102-SC-IT

(d) Asstt. CIT Vs. Surat City Gymkhana (2008) 300 ITR 0214 (SC) = 2008-TIOL-64-SC-IT

6. On the other hand, ld. DR strongly supported the orders of lower authorities.

7. After hearing both the sides and perusing the material available on record, we find that the CIT(A) after considering the submissions of the assessee and findings of Assessing Officer has discussed the issue elaborately relying on plethora of judgments. The CIT(A), prima facie, with regard to the issue of principles of consistency raised by the assessee has observed that it must be borne on mind that it has been held in a catena of judgements that principles of res judicata are not applicable to income tax proceedings and that each year has to be treated as such. For this reason, the CIT(A) has relied on the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang v CIT [1992] 193 ITR 321 = 2002-TIOL-745-SC-IT. Now, coming to the issue of rent receipt treated by the Assessing Officer as business receipts instead of House Property income and thereby disallowing 30% of standard deduction, the CIT(A) relying on the various judicial decisions has observed as under :-

“[8.22 Keeping the above principles in mind, the facts as stated by the appellant need to be analysed which are stated at para-7.13(3) (a to g). The agreement that the appellant had entered into with Stargaze Cinema was not a fixed income which the appellant expected. As pointed out by the Ld. Assessing Officer, the appellant was entitled to 12% of Net Monthly Revenue if the occupancy level achieved was less than 35% calculated on an average of 5 shows per day or 17% of Net Monthly Revenue if the occupancy level achieved was 35% or more calculated on an average of 5 shows per day. There is use of expressions occupancy level* and “shows per day” to determine the revenue sharing. Besides the appellant was also entitled to receive 18% revenue generated from business activities as ‘food & beverages, merchandise, memorabilia, advertisement. ATM/NCR counters” or from any other activities which generate revenue. The aforesaid calculation was based on business proposition and totally based on profits of the business and was proportionate to the business income. The minimum fixed sum mentioned in this agreement was made to ensure that even if there was no/less receipt in any quarter, minimum sum was paid to ensure that major repair/maintenance, etc. should not suffer. Therefore, though there was a minimum guarantee, there was no upper limit on the ‘revenue sharing’ method, unlikerental incomes. Moreover, Stargaze was required to provide detailed account of day to day revenue from sale of tickets, concessional sale and any other revenue to the appellant on a monthly basis. The appellant also had the right to verify the accounts, with prior notice to Stargaze.

[8.23] Under the heading ” Revenue and Costs” the following text is stated :-

“Subject to the conditions mentioned in 3.1, 3.2, 3.3 and 3.4 below, ‘Stargaze’ shall conduct the multiples space exhibition business for or on behalf of the Developer (in this case being the appellant). STARGAZE shall be entitled to sell cinema tickets and to colect the revenue from the Multiplex space exhibition business for on or behalf of the Developer…………………..’.

This clause of the agreement clearly shows that the owner of the receipts (minus the share of Stargaze) was the appellant. Clauses 3.1. 3.2 and 3.3 limits the minimum that would be required to be paid by Stargaze to the appellant.

[8.24] The agreement that the appellant had entered into with Stargaze clearly was a business venture alongwith Stargaze in which the appellant had provided space which was built to the specification of a cinema theatre. It must be borne in mind that an)’ cinema theatre has to obtain separate licence from the fire safety department and other government agencies and under the Jharkhand Cinemas (Regulation) Act. 2000. Any building not adhering to specific regulatory requirements cannot be granted licence to run a cinema. Apart, the appellant also provided areas for vending food and other items.

[8.25 At this juncture it would be relevant to discuss the judgement of the Hon’ble SC rendered in the case of CIT v National Storage (P) Ltd. [ 1967J 66 ITR 596 (SC) = 2002-TIOL-2008-SC-IT-LB. The facts in this case were that the assessee was promoted due to promulgation of the Cinematograph film Rules. 1948, by the Government. The rules required the distributor to store films only in godowns constructed strict!) in conformity with the specifications laid down in the Film Rules and in a place to be approved by the Chief Inspector of Explosives. The assessee purchased a plot of land and had constructed 13 units. Each unit was divided into four vaults. The ground floor of vaults was utilised to rewind the films and upper floor for the storage of films. The units were constructed in conformity with the requirements of and the specifications laid down in the film Rules. The key to each vault was retained by the vault holder but the Key to the entrance was kept in the exclusive possession of the assessee. A fire alarm was installed and an annual amount was paid to the municipality towards fire sendees. The assessee opened in the premises two railway booking offices free of charge for the convenience of members for despatch and receipt of film parcels. A canteen was also run for the benefit of the vault holders. The assessee entered into agreement with the film distributors. In terms of said agreement, the film distributors were given licence to use the vaults only for the purpose of storing cinema films on payment of monthly amounts. The ITO assessed the rental income accrued to the assessee under section 9 of the 1922 Act. On examination of the facts the apex court held that: –

“The High Court was right in holding that the assessee was carrying on an adventure or concern in the nature of trade. The assessee not only constructed vaults of special design and special doors and electric fittings, but it also rendered other services to the vault-holders. It installed fire alarm and was incurring expenditure for the maintenance of fire alarm by paving charges to the municipality. Two railway booking offices were opened in the premises for the despatch and receipt of film parcels. This was a valuable service. It also maintained a regular staff consisting of a secretary, a peon, a watchman and a sweeper, and apart from that it paid for the entire staff of the Indian Motion Picture Distributors’ Association an amount of Rs. 800 per month for services rendered to the licensees. These vaults could only be used for the specific purpose of storing of films and other activities connected with the examination, repairs, cleaning, waxing and rewinding of the films.

The agreements were licenses and not leases. The assessee kept the key of the entrance which permitted access to the vaults in its own exclusive possession. The assessee was thus in occupation of all the premises for the purpose of its own concern, the concern being the hiring out of specially built vaults and providing special services to the licensees. Thus, it could be concluded that return received by the assessee was not the income derived from the exercise of property rights only but was derived from carrying on an adventure or concern in the nature of trade.”

[8.26] The facts of the above stated case are almost pari materia with that the of the appellant’s case. It is well understood that not any structure can be used for displaying movies. These have to be built as per specifications stated in the Jharkhand Cinemas (Regulation) Act, 2000. It includes both safety norms for evacuation in case of emergency. The Uphaar cinema tragedy is a case in point. Apart, from the building specification, there has to be fire safety-‘ audit done of the cinema and only if the arrangements are found to be satisfactory, the fire safety department allows the theatre to run. As was the fact in the case of National Storage (supra), the appellant also provided other amenities like space for food court etc.

[8,27] In the agreement with Stargaze the appellant was entitled to a minimum amount but. on the other hand, the outer limit was based on the occupancy levels achieved by Stargaze. Further, Stargaze was required to provide detailed account of day to day revenue from sale of tickets, concessional sale and any other revenue to the appellant on a monthly basis. The appellant also had the right to verify the accounts, with prior notice to Stargaze. These facts show that the receipts had the character of business income.

For this proposition reliance is place on Chennai Properties & Investments Ltd. v. C1T (2015) 373 ITR 0673 (SC) = 2015-TIOL-93-SC-IT and Rayala Corporation (P) Ltd. v. Asstt. CIT(2016) 386 ITR 0500 (SC) = 2016-TIOL-119-SC-IT.

[8.28] As against this the agreement of letting out space to other tenant was on a square foot basis which was to be enhanced after three years. The activities and entitlements of the appellant vis a vis Stargaze were completely absent. It was a mere act of letting put property at a fixed rent based on square foot area let out.

[8.29] The appellant has died upon the judgement of the Hon’ble Delhi HC in the case of C.I.T. Vs Ansal Housing & Construction [2016] 389 ITR 0373 (Del-HC) = 2016-TIOL-1625-HC-DEL-IT. However, a close reading of the said judgement would show that their Lordships had noted the “object’ of the transaction. The whole judgement turned on the issue of the ‘object*. In the present case, it has been clearly brought out through the various clauses of the agreement with Stargaze that the main ‘object’ was to earn business profit. Therefore, the appellant, though the fixed the lower floor rate, the upper floor rate was left open. The appellant was also entitled to a share of business generated by the food court/ATM etc. The agreement not only specifies the areas that was to be given for running of the cinema but also the parking space which would be part of the ” Multiplex space’ [see clause D at Page No.2 of the agreement]. Based on the above discussion it is held that the receipts from Stargaze was business receipt. The stand of the Ld. Assessing Officer is upheld. Grounds of appeal are dismissed.”

8. From the above observations of the CIT(A), first of all, we are in agreement with the findings of the CIT(A) that principles of res judicata are not applicable to income tax proceedings and that each year has to be treated as such. Further we do not see any infirmity in the findings recorded by the CIT(A) holding receipts from Stargaze was business receipts and we uphold the same.

9. With regard to the issue of depreciation of building, depreciation on assets (pro rata basis) and common expenses (pro rata basis), the CIT(A) has observed as under :-

“[8.30] Now coming to the alternate grounds raised by the appellant (6 to 9). The submission of the appellant is that if the receipts are to be taken as business receipts it should be granted :-

1. depreciation on building (pro rata basis)

2. depreciation on assets (on pro rata basis)

3. common expenses (on pro rata basis)

4. carry forward of business and depreciation losses

[8.31] As regards Points No.1 to 3 above, the Ld. Assessing Officer shall calculate the depreciation on the area occupied by Stargaze and allow depreciation on building at the rates applicable. Similar exercise may be done for depreciation on assets (now held to be business assets) and other common expenses (now to be held as business expenses) after ascertaining their linkage with the running of the cinema hall. As regards the issue of carry forward of depreciation and business loss, it is held that no such claim has been made by the appellant and therefore, no such determination has been made in the past in terms of the provisions of section 32 (2) and 72. No claim at this stage can be adjudicated in terms of the ratio of the judgement of the Apex Court in the case of Goetze (India) Ltd. v CIT 284 ITR 323 (SC) = 2006-TIOL-198-SC-IT which held that appellant-assessee cannot make a claim for deduction other than by filing a revised return.”

On careful perusal of the above observations of the CIT(A), we do not see any good reason to interfere with the findings recorded by the CIT(A) in this regard and accordingly we uphold the same and dismiss the grounds of appeal of the assessee.

10. In the result, appeal of the assessee is dismissed.

(Order pronounced in the open court on 30.08.2019)

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