THE OLD SETTLERS OF SIKKIM

Wealth Tax – Mere letting of office premises cannot put them in the category of commercial establishment or complex

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When the assessee is not in the business of leasing out of the property and the intention of letting out the premises in question was not to exploit the business assets in relation to the business of the assessee then the said property would not fall under the exception as provided u/s 2(ea)(i)(5) of the W T Act being commercial establishment or complex. Further, when the rental income for letting out the premises in question has been treated as income from house property, then the same cannot be treated differentially under the provisions of Wealth tax Act.

IN THE ITAT MUMBAI BENCH ‘WT’

Naturell (India) (P.) Ltd.

v.

Assistant Commissioner of Wealth Tax

WT A No. 75 (Mum.) of 2011

[Assessment year 2006-07]

May 11, 2012

ORDER

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Vijay Pal Rao, Judicial Member – This appeal by the assessee is directed against the order dated 27.7.2011 of the CWT(A) for the AY 2006-07.

2. The assessee has raised the following grounds in this appeal:

I. First Ground of Appeal:

1. The Commissioner of Wealth Tax (A) has erred in confirming validity of the issuance of notice u/s 17 of the Wealth Tax Act.

2. He failed to appreciate that the notice u/s 17 and assessment order passed u/s 16(3) was illegal and without jurisdiction.

3. The appellant prays that the assessment order passed u/s 16(3) read with section 17 be treated as illegal and without jurisdiction and be quashed.

II Second Ground of Appeal:

1. The Commissioner of Wealth Tax (A) has erred in confirming an addition of Rs.5,00,91,438 to the net wealth of the assessee.

2. He further erred in stating that whether the premises is in the nature of commercial establishment or complex has not been proved by the appellant.

3. He failed to appreciate that:

 (a)  The appellant had produced copy of purchase agreement which clearly shows that the said premise is in the nature of a commercial establishment / complex.

 (b)  The said premise is not liable to wealth tax.

4. The appellant prays that the addition of Rs. 5,00,91,438 to the net wealth be deleted.

3. First ground is regarding validity of issuing notice u/s 17 of the W T Tax for reopening of the assessment.

3.1 The assessee did not file its return of wealth u/s 14(1) of the W T Act. However, during the assessment proceedings of the Income Tax Act u/s 143(3), it was noticed that the assessee had received rental income of Rs. 39,48,600/- by letting out of office premises. The said income was assessed by the Assessing Officer in the Income Tax Proceedings as income from house property and consequently notice u/s 17 of the W T Act was issued on 24.3.2010 after recording reasons. In response to notice the assessee filed its return of net wealth on 27.4.2010 declaring net wealth of Rs. 15,10,300/- . The assessment was completed u/s 16(3) r.w.s 17 of the W T Act on 27.12.2010 whereby the Assessing Officer computed the net wealth of the assessee at Rs. 5,16,01,721 which includes the value of the immovable property in question as determined by the Assessing Officer on the basis of annual rent received at Rs. 5,00,91,438/-.

3.1.1 The assessee challenged the action of the Assessing Officer before the CWT(A) and also raised objection against validity of the reopening of the assessment. The CWT(A) did not agree with the contention of the assessee and accordingly, upheld the order of the Assessing Officer.

4. Before us, the ld. AR of the assessee has submitted that the property in question is a commercial property given on leave and license. All the details and particulars were available with the Assessing Officer as filed along with return of income u/s 139 of the IT Act. The ld. AR of the assessee has forcefully contended that the reassessment is invalid because it is based on the income tax assessment and therefore, based on change of opinion without any new material or information came into knowledge of the Assessing Officer. In support of his contention, the ld. AR has relied upon the decision of the Hon’ble Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 and submitted that there was no new tangible material to show that the net wealth of the assessee is assessable to tax has escaped assessment. Therefore, it was contended that the reassessment is only on suspicion and therefore, the same is not valid.

4.1 On the other hand, the ld. DR has submitted that the assessee did not file any return of net wealth and only from the income tax proceedings, the Assessing Officer came to know that the assessee has let out the premises in question on lease and received rental income, which was assessed as income from house property. Therefore, there is good and sufficient reason to believe that the net wealth assessable to tax has escaped assessment. He has relied upon the orders of the authorities below.

5. We have considered the rival contention as well as the relevant material on record. Undisputedly there is no original assessment prior to issuing the notice u/s 17 of the W T Act because the assessee did not file any return of net wealth. The income tax assessment was completed vide order dated 31.10.2008 u/s 143(3) whereby the rental income received by the assessee has been assessed as income from house property. After completion of the income tax assessment, the Assessing Officer issued notice u/s 17 of the W T Act on 24.3.2010. When there was no assessment and also the notice u/s 17 was issued within four years from the end of the relevant assessment year, then the case of the assessee does not fall under the first proviso to sec. 17(1) of W T Act. Where the case does not fall under the first proviso, the pre-requisite condition for exercising the power u/s 17 of the W T Act is the existence of reason to believe that there is an escapement of wealth from assessment. It is pertinent to note that the reopening of the assessment falls under Explanation to sec. 17(1A) of W T Act which creates deeming fiction.

5.1 It is only during the assessment proceedings u/s 143(3) of the Act the Assessing Officer made an enquiry and found that the assessee has let out the property in question and received rent which is assessable as income from house property. Even, the assessee itself has admitted the rental income as income from house property and has not challenged the order on this point.

5.2 The information and material gathered during the assessment proceedings u/s 143(3) constitute a tangible material for forming a belief that the net worth assessable to tax has escaped assessment. This view has been supported by the decision of the Hon’ble jurisdictional High Court in the case of Multi-screen Media (P.) Ltd v. Union of India [2010] 324 ITR 54/7 taxmann.com 38 (Bom.). The Hon’ble High Court after considering the decision of the Hon’ble Delhi High Court as well as the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 has held in Multiscreen Media (P.) Ltd. (supra) as under:

“What is material is that on the basis of a detailed inquiry which took place during the course of the assessment year 2005-06, the claim of the assessee of deduction of the entire expenses was not accepted and disallowance was made to the extent of expenditure incurred over and above 18.75 per cent. The Assessing Officer did so on the basis of fresh material which came before him in view of the notice dated November 26, 2008 in pursuance of which the assessee filed a detailed representation elucidating the relevant particulars of the business of the assessee and the reasons for the expenditure. Whether the Assessing Officer was justified in the decision which he took for the assessment year 2005-06 is again not a matter to be considered at this stage of the proceedings. The point is that on the basis of the additional material which was a visible on record, the Assessing Officer issued a notice for reopening the assessment for the assessment year 2004-05. In our considered view, the Assessing officer did have tangible material to reopen the assessment under section 147 of the Act and to form a reason to believe that income had escaped assessment Clause (c)(iv) of Explanation 2 to section 147 creates a deeming fiction where though the assessment has been made, income chargeable to tax is under assessed. In such a case, law deems that income chargeable to tax has escaped assessment. For these reasons, we are of the view that recourse to the provisions of section 147 cannot be faulted.”

5.3 The Hon’ble High Court has given the finding after discussing various decisions of the Hon’ble Supreme Court and earlier decisions of the Hon’ble High Court, it has been observed that the Assessing Officer while seeking the reopening the assessment u/s 147 is not precluded from relying on an order of assessment in the subsequent year where additional material has emerged before the Assessing Officer leading to the formation of a belief that the income chargeable to tax had escaped assessment.

5.4 It is settled proportion that it would open to the Assessing Officer to reopen the assessment based on the finding of fact made on the basis of fresh material gathered during the course of assessment proceedings for subsequent year or under different provisions of law as in the case in hand. It is well established position of law that the assessment can be reopened on the basis of information contain in different assessments of assessee.

6. In view of the above discussion and in the facts and circumstances of the case, we are of the considered opinion that the information and material found during the course of assessment proceedings u/s 143(3) of Income Tax Act whereby the rental income was assessed under the head ‘income from house property’ in respect to the property in question, constitute a tangible material for forming a belief by the Assessing Officer that the net wealth assessable to tax has escaped assessment. Accordingly, the reopening of the assessment by issuing notice us/ 17 of W T Act is valid and as per law. Accordingly, the order of the CWT (A) is upheld on this point.

7. Second ground is regarding addition of net wealth in respect of office premises.

7.1 The assessee has let out the office premises in question for Rs 39,48,600/- p.a. The Assessing Officer proposed to assess the premises in question to wealth tax. The assessee has objected and contended that the premises in question is a commercial property and hence is not liable to wealth tax u/s 2(ea) (i)(5) of the W T Act being commercial complex or establishment. The Assessing Officer held that the property in question cannot be considered as commercial complex or establishment because it was earlier used by the assessee as office and now let out. Accordingly, the Assessing Officer valued the property for net wealth on the basis of rent capitalization method u/s 7 and Schedule III of W T Act.

7.2 On appeal, the CWT(A) has concurred the view of the Assessing Officer.

8. Before us, the ld. AR of the assessee has submitted that the assessee purchased the commercial premises being office. He has referred the purchase agreement and submitted that as per the agreement, the property in question is a commercial property. He has further submitted that the assessee has given this premises on leave and license to be used for the purpose of business of the licensee; therefore, it falls under the category of commercial establishment or complex as provided u/s 2(ea) (i)(5). In support of his contention, the ld. AR has relied upon the decision of the Pune Bench of the Tribunal in the case of Satvinder Singh v. Dy. CWT, [2007] 109 ITD 241/[2009] 27 SOT 13 (URO) and submitted that when the premises was leased out and allowed to be used for business purpose of the licensee, then the same is in the nature of commercial building and falls under the category of commercial establishment as provided u/s 2(3) (1) (5) of the W T Act. He has referred para 32 of the order of the Pune Bench.

8.1 On the other hand, the ld. DR has submitted that the premises in question falls under the main provisions of sec. 2(ea)(i) and not under any exception provided there under. Since the premise was not used for the purpose of the business of the assessee and was let out being an office; therefore, the same cannot be treated as the business establishment or complex as provided under exception (5). He has relied upon the order of the authorities below.

9. We have considered the rival contention as well as the relevant material on record. The mute question before us is whether the premises in question falls under the category of commercial establishments or complexes as stipulated under sec. 2(ea)(i)(5)of the WT Act.

9.1 We quote the exception (5) of sec. 2(ea)(i) as under:

(5) Any property in the nature of commercial establishments or complexes;

9.2 A plain language of the above exception clearly expressed the intention of the legislature that any property in the nature of commercial establishments or complexes will not be included in the definition of assets for the purpose of W T Act. The term ‘establishments’ or ‘complexes’ are used in the provision are plural and therefore, suggest that the property which comprising more than one commercial establishment is excluded from the definition of assets. Even otherwise the term ‘commercial establishments’ or ‘complexes’ does not mean a mere building structure to be used for commercial purpose.

9.3 The term of commercial establishments or complexes as may be understood by a person of a ordinary prudent, refers to commercial establishment which includes not only physical building structure comprising more than one establishment, but also incorporation, if the infrastructure and services which are necessary for carry out the business or commercial activity from the said place.

9.4 Thus, in the general parlance, commercial establishments means a building comprising more than one establishment meant for commercial purpose and having the infrastructure and ancillary facilities and establishment such as banking, financial institution, supermarket, bar, post office, retail shops, communication facilities, telephone, stationery, security etc. which are basic requirements for doing business/commercial activities from the said space. It also comprises commission business area and other common facilities for all the occupants of the various and different part of establishments/complexes. Therefore, the building structure having number of establishments’ offices and other commercial establishments coupled with the necessary infrastructure, services and facilities, which are basic requirement of doing the business or trade or commerce from the place constitutes the same as commercial establishments or complex as stipulated under section 2(ea)(i)(5) of the WT Act

10. In the case of Satvinder Singh (supra), as relied upon by the ld. AR of the assessee, the Pune Bench of the Tribunal has observed in para 32 as under:

“32. With regard to the office premises of 24, East Street Yogesh House, we have gone through the purchase deed, lease agreement cantonment tax receipt. This property was purchased by these assessees in the month of September, 1994 from M/s. Elegant Marbles (P.) Ltd. In this agreement it is stipulated that the parties have agreed to sell and purchase these office premises specified therein. The assessee-purchaser was in need of acquiring an office which has been accordingly purchased by this purchase agreement. The floor plan is also attached to the agreement which indicates that the premises are in the nature of office premises. The assessee has let out these premises on rent on leave and licence basis to M/s. D.S.S. Mobile Communications Ltd., who is allowed to use the said premises for their business of radio paging services and related activities. The licensee is thus using the said premises for carrying on their business of radio paging services and related activities. This property is subjected to property tax by the Pune Cantonment Board. Tax has been levied treating the property as shop premises situated at Yogesh House, East Street. East Street at Pune is a commercial area. The property where the shop is situated is consisting of a basement ground floor and two upper floors, i.e., a multi-storeyed building. The property has shops and offices therein. The property purchased and owned by the assessee is in the nature of office premises, which has been let out for the purpose of business carried on by the lessee. In the light of these facts, it is, therefore, clear that the property in question is in the nature of a commercial establishment. This property is not merely used for commercial purposes, but also it is in the nature of a commercial building. Therefore, having regard to the nature of the property as well as its use the property can be classified as commercial establishment within the meaning of section 2(ea)(i)(5) of the Wealth-tax Act and as such, value thereof is not includible in the net wealth chargeable to tax under the Wealth-tax Act.”

10.1 It is clear from the facts of the said case that the property in question was not a single office premises but the assessee has let out the premises on lease consisting basement, ground floor and two upper floors, i.e., a multi-storeyed building and considering these facts, the Tribunal has held that it was the property in the nature of commercial establishment within the meaning of sec. 2(ea)(i)(5) of the W T Act. It is to be noted that only a part of the other building let out by the assessee in the said case not held as commercial establishment or complex as it is clear from the findings of the Tribunal in para 31 as under:

31. With regard to the property at 1002, 2nd Floor, Budhwar Peth, Pune, we have perused the respective purchase deed, lease agreement electricity bill. Details of the amount of rent received by the assessee in respect of this property has also been furnished by the assessee. This property was purchased by the assessee vide Agreement dated 3-9-1994 from the promoter of the building M/s. Venkateshwar Associates. The assessee has purchased part of the premises situated at 2nd Floor in the multi-storeyed building situated at 1002, New Budhwar Peth, Pune. In this agreement it is mentioned that certain flat/shop/office or godown has been constructed by the promoter. The area purchased by the assessee is 625 sq.ft. along with the terrace. At the upper portion of page 6 of the agreement it is mentioned that the assessee-purchaser has agreed to purchase and acquire from the promoters an office No. 2 on 2nd Floor measuring 625 sq.ft. along with the terrace built up in the said building for the price of Rs. 2,25,000. However, in para No. 3 at page 6, it is mentioned that the assessee agrees to discharge the consideration of Rs. 2,04,070 for the acquisition of the said flat It is thus not clear as to whether this is a part of commercial complex or establishment On perusal of the plan annexed thereto, it appears that living room, kitchen, WC etc. are mentioned therein. This property has been given on rent on leave and licence basis to National Eggs Research Institute of Indian Council of Medical Research, New Delhi for office purpose. The National Eggs Research Institute of Indian Council of Medical Research, New Delhi has taken the premises for the purpose of their dispensary-cum-laboratory and not for the purpose of carrying on any business or trade. The property is not being used for the purpose of any business or trade. No evidence as to the nature of the property supported by any municipal tax paid has been furnished. The property has been let out to the said Institute. Thus, it is clear that the property was also not in use and occupation of the assessee for the purpose of any business carried on by the assessee. Therefore, the property in question is also not covered by sub-clause (3) of clause (i) of sub-section (ea) of section 2 of the Act. From the point of user of this property being used by the National Eggs Research Institute of Indian Council of Medical Research, New Delhi for the purpose of dispensary-cum-laboratory, it cannot be said that it is in the nature of a commercial establishment or complex. Therefore, the assessee’s claim in respect of this property at 1002, 2nd Floor, New Budhwar Peth, Pune that it does not fall within the definition of “asset” defined under section 2(ea)(i) as it is excluded by sub-clause (5) thereto, is not justified.”

11. It is clear from para 31 of the said decision that the premises being a promoters office No. 2 at 2^nd Floor along with terrace was not found as commercial establishment or complex and therefore, it cannot be said that it is in the nature of commercial establishment or complex. Thus, the question of establishments or complexes has to be considered and decided on the peculiar facts of each case. Therefore, in our considered opinion the said decision of the Pune Bench of the Tribunal so far as in favour of the assessee is not applicable to the facts of the case in hand where the assessee has let out only an office premises and the rent of which has been offered and assessed as income from house property.

12. In view of the above discussion and particularly in the facts of the case, we are of considered opinion that when the assessee is not in the business of leasing out of the property and the intention of letting out the premises in question was not to exploit the business assets in relation to the business of the assessee then the said property would not fall under the exception as provided u/s 2(ea)(i)(5) of the W T Act being commercial establishment or complex. Further, when the rental income for letting out the premises in question has been treated as income from house property, then the same cannot be treated differentially under the provisions of Wealth tax Act.

12.1 The Hon’ble Gujarat High Court in the case of CIT v. Bombay Conductors & Electrical Ltd. [2002] 258 ITR 667/123 Taxman 1002 has held that when the revenue has accepted the property in question as for the purpose of the business of the assessee, then the same falls under the exception as stipulated u/s 2(ea)(i)(3) of the W T Act.

12.2 The relevant portion of the decision of the Hon’ble High Court in the case of Bombay Conductors & Electrical Ltd. (supra) reads as under:

“Since the property in question was held to be used for business in the income-tax proceedings by the Income-tax Officer himself, the same property could not have been treated differently in the wealth-tax proceedings. If the property is being used for business purposes and it is accepted to be so in the income-tax proceedings, similar treatment is to be given in the wealth-tax proceedings and as such in the wealth-tax proceedings, the value thereof cannot be included in the net wealth of the assessee as it is specifically exempt under section 40(3) (vi) of the Finance Act, 1983. In view of the above, we are of the opinion that the Tribunal has rightly excluded the value of the property from the net wealth of the assessee. We, therefore, answer the above question in the affirmative, i.e., in favour of the assessee and against the Revenue.”

12.3 Applying the same analogy once the premises in question has been treated as non-business asset and not used for the purpose of business of the assessee in the income-tax proceedings, then the same cannot be treated differently in the proceedings under Wealth tax Act.

13. Our view has been supported by the order of the Tribunal in the case of Bernhard Schulte Shipping India (P.) Ltd v. ACWT [WT Appeal Nos. 63 & 64(Mum) of 2011 vide order dt. 30.12.2011] wherein the Tribunal has decided the similar issue in para 6 as under:

“6. We have considered the rival submissions made by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee is engaged in the business of “Ship Management Services” as per the statement of facts filed before the Ld. CIT(A). Therefore, the assessee is not in the business of letting out properties. We find the Honbie Karnataka High Court in the case of Shankaranarayana Industries & Plantations (P) Ltd. (supra) after considering the various amendments to the Wealth Tax Act and CBDT Circulars issued had held that the intention was not to tax business assets used by the assessee for the purpose of his business or profession and also the business assets which are let out if the assessee is in the business of letting out properties. All other types of commercial properties are taxable under the Wealth Tax Act. Since the assessee in the instant case has let out a part of its business premises and since the assessee is not in the business of letting out properties, therefore, the said property, in our opinion, is not exempt either u/s. 2(ea)(i)(3) or 2(ea)(i)(5) of the Wealth Tax Act. The various decisions relied on by the Ld. Counsel for the assessee are distinguishable and are not applicable to the facts of the present case. In this view of the matter and in view of the detailed order passed by the Ld. CIT(A) we do not find any infirmity in his order holding that the let out property of the assessee is taxable as per the definition of “asset” under the Wealth Tax Act. The grounds raised by the assessee are accordingly dismissed.”

14. In view of the above discussion and in the facts and circumstances of the case, we hold that the premises in question being an office let out by the assessee would not fall in the category of commercial establishment or complex as per the provisions of sec. 2(ea)(i)(5) of the W T Act and consequently the same is assessable to wealth tax. Accordingly, we upheld the order of the CWT(A) on this issue.

15. In the result, the appeal filed by the assessee is dismissed.