AHMAD FAREED, A.M.: ORDER This appeal by assessee is directed against order of CIT(A), dt. 18th Nov., 2005 for asst. yr. 2001-02. 2 . assessee company was deriving income from providing warehousing facilities to various parties including Hindustan Lever Ltd. return for asst. yr. 2001-02 was filed on 31st Oct., 2001 showing total income of Rs. 21,98,050. In assessment order passed under s. 143(3) of Act AO, assessed lease rent received from M/s Hindustan Lever Ltd. under head Income from house property , and made disallowance of Rs. 13,51,000 under s. 40A(2)(b). He assessed total income at Rs. 92,06,815 as under : Particulars (Rs.) (Rs.) Total receipts from 78,54,621 warehousing services Disallowance Donation 27,216 Deemed 1,49,279 Dividend Proportional Depreciation on 15,56,527 Bldg. Depreciation 489 on vehicles 43B 1,823 disallowance Disallowance out of interest 9,28,154 payment Payment made to Shree 13,51,000 40,14,488 Indl. Services [40A (2)(b)] Less : Allowable 1,18,69,109 expenditure Admn and establishment 49,16,584 expenses Depreciation 5,77,730 Lease rent paid : Kamadhenu 6,00,000 Chem Ind Navlakha 30,000 N.N. Navlakha 30,000 Asha National 60,000 Agro Services Shree 13,51,000 Industrial Services Warehousing 3,97,541 24,68,541 79,62,855 charges paid Income from 39,06,254 warehousing Income from 39,06,254 business Total lease rent received from 34,98,552 Lipton India Ltd. Total lease rent received from 35,68,863 Hindustan Lever Ltd. 70,67,415 1/4 Repair 17,66,853 Income from 53,00,561 house property Total income 92,06,815 3. order of AO was challenged before CIT(A) by assessee. CIT(A) upheld AO s view that lease rent received from Hindustan Lever was assessable as income from house property , confirmed disallowance under s. 40A(2)(b), and held that receipts from warehousing charges were also to be assessed as income from house property . He accordingly enhanced income on two counts as under : (i) Withdrawing deductions, which are not admissible while computing income from house property in respect of receipts from warehousing charges. (para 2.4 of his order) (ii) Enhancing disallowance under s. 40A(2)(b) by Rs. 9,76,592. 4 . order of CIT(A) has been challenged by assessee in present appeal. Grounds Nos. 1, 2, 3, and 4 "1. learned CIT(A) erred in enhancing income by directing AO to compute income from warehousing activities as income from house property rather than as business income. 2. learned CIT(A) erred in holding that income from warehousing charges is taxable as income from house property and not as business income. 3. learned CIT(A) erred in holding that lease rentals received from Lipton India Exports (P) Ltd. are taxable as income from house property. 4. learned CIT(A) erred in holding that warehousing charges received from Hindustan Lever Ltd. are taxable as income from house property." 5 . In grounds Nos. 1 and 2 assessee has contended that CIT(A) erred in enhancing income by holding that income from warehousing charges was taxable as income from house property and not as income from business . In assessment order AO assessed receipts from warehousing charges as income from business . He took gross receipts from warehousing charges at Rs. 78,54,621, allowed expenses claimed under various heads and computed income from business at Rs. 39,06,254. CIT(A), while holding that warehousing charges should be assessed under t h e head Income from house property directed AO to withdraw deductions allowed in respect of various expenses which were not admissible in computation of income from house property . This direction of CIT(A) resulted in enhancement of income and has been challenged by assessee through ground Nos. 1 and 2. 6. In ground Nos. 3 and 4 it has been contended that CIT(A) erred in confirming AO s view that lease rent received from Lipton India and from Hindustan Lever was taxable as income from house property and not as income from business . 7 . details of total area being used by assessee for leasing/warehousing are as under : Nature of Area use (Sq. ft.) From From From 1.4.2000 1.11.2000 1.10.2001 to 31.10.2000 to 30.09.2001 onwards Lease 33,900 1,01,900 68,000 Warehousing 1,14,660 1,14,660 1,48,560 Open area for warehousing 3,615 3,615 3,615 scrap Total area 1,52,175 2,20,175 2,20,175 8. In assessment order AO took total gross receipts in respect of lease rent and warehousing charges at Rs. 70,67,415 and Rs. 78,54,621 respectively, as mentioned in computation reproduced in para 2 above whereas according to assessee these receipts were Rs. 18,19,567 and 52,47,828 respectively. In report submitted by AO vide letter 28th Feb., 2005 these receipts were shown after verification of TDS certificates at Rs. 42,10,004 and 75,05,897 respectively. During hearing of appeal before u s assessee filed chart in which these receipts have been shown at Rs. 27,54,254 and Rs. 87,73,250 (Rs. 47,26,938+Rs. 40,46,312). It is quite curious that assessee is himself not sure as to what are correct figures of receipts in respect of lease rent and warehousing charges. It is for this reason that CIT(A) had to direct AO, in para 4.3 of his order, to examine records and to work out correctly lease rent and warehousing charges received/receivable during year for computing taxable income. 9 . Shri Chetan Karia learned Authorised Representative, made identical arguments with regard to both issues raised through grounds Nos. 1 to 4. He reiterated arguments put forward on behalf of assessee before AO and CIT(A). submissions made by him are summarized below : That assessee was carrying on business of warehousing since 1972. That assessee received license under Bombay Warehousing Act, 1959 to carry out warehousing activities. That services as warehouse keeper entail services of storage of goods on directions of assessee, insurance of goods, etc. That warehouses were commercial assets and income earned f r o m exploitation of commercial assets partakes character of business income. That assessee had leased out three units, called gala, to HLL. That in 1999-2000 assessee company constructed factory building admeasuring 68,000 sq. ft. on land belonging to its directors at total cost of Rs. 4.99 crores out of which Rs... was financed by HLL as security deposit and balance was financed out of bank loans. That HLL shifted its unit to new premises and surrendered old one to assessee, which was put to use for warehousing activity. That whole of land on which warehouses were constructed did not belong to assessee company but to its directors and relatives. That assessee rendered complex commercial services and income received was more because of services rendered rather than for letting out of premise. That letting out was incidental or subservient to main business of assessee. That commercial asset was let out and therefore exception provided in s. 22 was applicable. That circumstances are provided in s. 56(2)(iii) where building let out with plant and machinery when two are inseparable. That reliance was placed on decisions in following cases : (i) CIT vs. National Storage (P) Ltd. (1963) 48 ITR 577 (Bom); (ii) CIT vs. National Storage (P) Ltd. (1967) 66 ITR 596 (SC); (iii) CIT vs. Shambhu Investment (P) Ltd. (2001) 168 CTR (Cal) 237 : (2001) 249 ITR 47 (Cal); (iv) Shambhu Investment (P) Ltd. vs. CIT (2003) 184 CTR (SC) 91 : (2003) 263 ITR 143 (SC); (v) CEPT vs. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC); (vi) CIT vs. New India Industries Ltd. (1992) 106 CTR (Guj) 374 : (1993) 201 ITR 208 (Guj); (vii) Sultan Brothers (P) Ltd. vs. CIT (1964) 51 ITR 353 (SC); (viii) Vora Warehousing (P) Ltd. vs. Asstt. CIT (2001) 71 TTJ (Mumbai) 361 : (1999) 70 ITD 518 (Mumbai). 1 0 . Shri. Atul Pranay learned Departmental Representative placed reliance on decision of CIT(A) and vehemently argued saying that his order needed to be upheld. His arguments are summarized below : That dictionary meaning of warehouse was building where large quantities of goods are stored . That assessee had let out specific areas in its buildings to different parties. That receipts from leasing and from warehousing were from exploitation of land and building. That lease agreements with Lipton India and with Hindustan Lever make it abundantly clear that it was case of bare letting of factory building. That no complex commercial activity was involved. That main/dominant object was to lease out property and providing other services like loading/unloading, security, etc., was incidental to main activity of leasing. That reliance was placed on decisions in following cases : (i) Shambhu Investment (P) Ltd. vs. CIT (supra); (ii) Parekh Traders vs. CIT (1983) 37 CTR (Bom) 4 : (1984) 150 ITR 310 (Bom); (iii) CIT vs. Podar Cement (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC); (iv) CIT vs. Bhoopalam Commercial Complex & Industries (P) Ltd. (2003) 183 CTR (Kar) 275 : (2003) 262 ITR 517 (Kar); (v) CIT vs. Chennai Properties & Investments Ltd. (2004) 186 CTR (Mad) 409 : (2004) 266 ITR 685 (Mad); (vi) CIT vs. Indian Warehousing Industries Ltd. (2002) 258 ITR 93 (Mad). 11. short question for our consideration, in relation to ground Nos. 1 to 4, is whether lease rent and warehousing charges received by assessee are to be assessed under head Income from house property under s. 22 of Act. 12. Sec. 22 of Act reads as under : "The annual value of property consisting of any buildings or land appurtenant thereto of which assessee is owner, other than such portions of such property as he may occupy for purposes of any business or profession carried on by him profits of which are chargeable to income-tax, shall be chargeable to income-tax under head "Income from house property." 1 3 . section employs expression property consisting of any buildings or lands appurtenant thereto and it specifically excludes from its scope, property which owner may occupy for purposes of his own business or profession, profits of which are chargeable to income-tax. liability to tax under s. 22 is of owner of buildings or lands appurtenant thereto. In case of CIT vs. Podar Cement (P) Ltd. & Ors. (supra), it was held by Supreme Court that, though under common law owner means person who has got valid title legally conveyed to him after complying with requirements of law such as Transfer of Property Act, Registration Act, etc., in context of s. 22 of IT Act 1961, having regard to ground realities and further having regard to object of IT Act, namely, to tax income, owner is person who is entitled to receive income from property in his own right. 14. decisions of High Courts and of Supreme Court on question whether income from letting out asset under different situations was to be assessed as business income or as income from house property in relation to facts of present case are discussed in following paragraphs. 1 5 . Shri Karia, learned Authorised Representative, placed heavy reliance on decision of Bombay High Court in case of CIT vs. National Storage (P) Ltd. (supra), which was affirmed by Supreme Court in CIT vs. National Storage (P) Ltd. (supra). In this case assessee company was promoted/floated by members of Indian Motion Picture Distributor s Association, because Cinematograph Film Rules, 1948 promulgated by Government required distributors to store films only in godowns constructed strictly in conformity with specifications laid down in said Rules and in place to be approved by Chief Inspector of Explosives, Government of India. place at Mahim in Mumbai was approved and assessee company, after purchasing plot of land there, constructed 13 units thereon, 12 units meant for members of Indian Motion Picture Distributor s Association, who had floated company and one unit for Foreign Film Distributors in Mumbai, who were not members of Association. Each unit was divided into 4 vaults having ground floor for rewinding of films and upper floor for storage of films. walls and ceilings where of particular width and automatic fire proof door was installed in one wall which would close immediately on outbreak of fire. vaults were licensed to film distributors and could not be used for any purpose other than storing cinema films. licensee could not transfer or sub-let. licensees paid monthly charges for use of vaults. Supreme Court, affirming decision of Bombay High Court in (1963) 48 ITR 577 (Bom) (supra), held that return received by assessee company in this case was not income derived from exercise of property rights only, but was income received from carrying on adventure in nature of trade because, especially built vaults were hired out for providing special services to licensees and that these vaults could only be used for specific purpose of storing films. 15.1 It is seen that facts in case of National Storage (P) Ltd. (supra) were different and were distinguishable from those in present case before us. In case of present assessee mere factory sheds were given on lease to Lipton India and to Hindustan Lever on monthly rent for purpose of storing, blending, processing, mixing and packing of tea and other items of food and beverages. There was no complex commercial activity involved. asset in present case was mere factory shed (land and building) and income is derived from bare letting of property, by exercise of property rights, properly so-called. Therefore, in our humble opinion, judgment of Supreme Court in case of National Storage (P) Ltd. (supra) is not applicable to facts of present case. 16. Shri. Karia, relying on decision in case of CIT vs. Shambhu Investments (P) Ltd. (supra), which was confirmed by Supreme Court (2003) 263 ITR 143 (SC) (supra), submitted that leasing of property involved complex commercial activities and therefore receipts from leasing should be assessed as business income . In case of Shambhu Investments (P) Ltd., Calcutta High Court, after discussing decisions of Madras High Court, Bombay High Court and Supreme Court, observed that what was to be seen was primary object of assessee while exploiting property, that if main intention was to let out property or any portion thereof, same must be considered as income from house property , and that if it was found that main intention was to exploit immovable property by way of complex commercial activities in that event it must be held as business income. It is manifest from lease agreement in present case that lease rent received from Lipton India and from Hindustan Lever was from bare letting of property and that there was no complex commercial activity involved. Therefore, decision of Supreme Court in case of Shambhu Investments (P) Ltd. (supra) also is not applicable to facts of this case. 17. In case of Parekh Traders vs. CIT (supra), it was observed that heads of income enumerated in IT Act are mutually exclusive and each specific head covers items of income arising from specific source. 18. In case of Sultan Brothers (P) Ltd. vs. CIT (supra) it was held that whether particular letting was business had to be decided in circumstances of each case, that thing, is not by its very nature commercial asset, that commercial asset was only asset used in business and nothing else, and business may be carried on with practically all things, that it was not possible to say that particular activity was business because it was concerned with asset with which trade is commonly carried on. Therefore, respectfully following judgment of Supreme Court in case of Sultan Brothers (supra), it is not possible to accept plea of Shri Karia that warehouses were commercial assets of assessee. 19. In case of CIT vs. New India Industries Ltd. (supra), Gujarat High Court, after discussing observations of various High Courts and of Supreme Court in relation to question whether income from letting out asset was business income or income from house property, held that each case had to be decided on its own facts and circumstances, that when asset is in nature of land or building, income derived by assessee by renting out same would fall under head income from house property , that in such cases it is not factum of his business or commercial activity which brings income to him but it is his investment in property or his ownership of property which brings income to him, that in such cases leasing of property itself is activity and transaction in leasing is quite different from ordinary business activity of assessee. In our opinion, this decision squarely supports view taken by AO and CIT(A) in present case. 20. In case of East India Housing & Land Development Trust Ltd. vs. CIT (1961) 42 ITR 49 (SC), assessee company was incorporated with objects of buying and developing landed properties and promoting and developing markets. question before Court was whether income realized by assessee from tenants of shops and stalls was liable to be taxed as business income or as income from house property. Court observed that income derived from shops and stalls was income received from property and that character of that income was not altered because it was received by company formed with object of developing and setting up markets. 2 1 . In case of CIT vs. Indian Warehousing Industries Ltd. (supra), which is direct decision on issue involved present case, assessee had received income by way of rent from Food Corporation of India which had taken warehouses belonging to assessee on lease. Madras High Court, relying on judgment of Supreme Court in case of East India Housing & Land Development Trust Ltd. vs. CIT (supra) held that income received from renting out of warehouses to Food Corporation of India was assessable as income from house property . We find that facts in case of Indian Warehousing Industries Ltd. (supra) and those in present case before us, are identical and therefore grounds Nos. 1 to 4 are squarely covered against assessee by this judgment of Madras High Court. 22. In case of CIT vs. Chennai Properties & Investments Ltd. (supra), Madras High Court, after discussing decisions of different High Courts and of Supreme Court observed that, in all cases which had come before Courts involving commercial or residential buildings owned by assessees it had been held that income realized by such owners by way of rental income from building, whether commercial building or residential house, is assessable under head Income from house property . only exceptions are cases where letting of building is inseparable from letting of machinery, plant and furniture. In such cases, it has been held that rental would not have been realized but for letting out of machinery, plant or furniture along with such building and therefore rental received for building is to be assessed under head Income from other sources This decision also supports action of AO and CIT(A). 23. legal position that emerges from above discussions can be summarized as under : (i) heads of income enumerated in IT Act are mutually exclusive and each specific head covers items of income arising from specific source. (ii) House-owning, however profitable, cannot be business or trade under IT Act. (iii) income realized by way of rental income from building whether commercial building or residential house, is assessable under head Income from house property . (iv) What has to be seen is as to what was primary object of assessee while exploiting property. If main intention was to let out property or any portion thereof same must be considered as income from house property. (v) income derived from shops and stalls was income received from property and that character of that income was not altered because it was received by company formed with object of developing and setting up markets. (vi) If main intention of assessee was to exploit his immovable property by way of his own complex commercial activities in that event alone it could be held as business income. (vii) Where income obtained is not so much because of bare letting of tenement but because of facilities and services rendered, operations involved in such letting of property may be of nature of business or trading operations. (viii) In cases where letting is only incidental and subservient to main business of assessee, income derived from letting will not be income from property. (ix) Where income is derived from house property by exercise of property rights, properly so-called, income falls under head "income from property". (x) If income falls under head Income from property , which is chargeable under s. 22, it has to be taxed under s. 22 only and cannot be taken to s. 28 on ground that business of assessee was to exploit property and earn income or because income was obtained by trading concern in course of its business. (xi) If dominant object of leasing/letting out is only incidental to and for purposes of assessee s own business, income would be business income. What has to be discovered is whether letting of property is subservient with main business of assessee or vice versa. (xii) Where house property is given on lease or licence basis for earning income therefrom, true character of income derived is income from house property falling under s. 22. said character is not changed and income does not become income from trade or business if hiring is inclusive of certain additional services such as heating, cleaning, lighting or sanitation, which are relatively insignificant and only incidental to use and occupation of tenements. 24. We, now proceed to examine facts of this case, in light of legal position enunciated in above paragraphs. assessee had entered into lease agreement with Lipton India Exports Ltd. dt. 17th Feb., 2000 and then with Hindustan Lever Ltd. (HLL) dt. 18th March, 2001. relevant parts of these agreements are reproduced by AO in his order. 25. In terms of lease agreement with HLL factory building with area of 68,000 sq. ft. on its land admeasuring six and half acres, bearing survey No. 157 (new No. 190), 5 to 8/2, Village Fursungi, Taluka Haveli, outside Pune municipal limits. This property was let out on lease to Hindustan Lever vide lease deed dt. 18th March, 2001 for period of ten years on monthly rent of Rs. 4,45,000, to be paid in advance on/or before 21st of each month. lessee was to pay security deposit of Rs. 144.00 lacs on taking possession of premises, Rs. 31.64 lacs at beginning of fourth year, and Rs. 39.65 lacs at beginning of seventh year. salient part lease agreement is reproduced below for ready reference : "This deed of lease executed on this 18th day of March, 2001 Between M/s Nutan Warehousing Co. (P) Ltd.............of one part. And M/s Hindustan Lever Limited .................... of second part. Preamble Whereas Lessor is seized and possessed or is otherwise well and sufficiently entitled to estate comprising land admeasuring six and half acres, bearing Survey No. 157 (new 190), 5 to 8/2, Village Fursungi, Taluka Haveli, District Pune, which is outside Pune Municipal Limits, on which land Lessor has constructed several sheds for warehousing and/or industrial purposes. And whereas Lessor at request for Lessee, to house their plant and machinery and office, has offered in aforesaid land factory building with area of 68,000 sq.ft. along with supporting area (hereinafter referred to as "demised premises" and more particularly described in Annex. A) together with all rights, easements and appurtenances and delineated by red line on plan annexed hereto. And whereas Lessor is willing and desirous of letting out said premises and has agreed to give on Lease to Lessee abovementioned demised premises along with fixtures and fittings as mentioned in Annex. and lessee companies interested to take on lease said property for purpose of storing original teas and other materials and for carrying out manufacturing activities including blending, processing, mixing and packing of teas and other items of food and beverages and for purposes consequential and incidental thereto on terms given". 26. lease agreement further says as under : That lease was for period of 10 years w.e.f. 1st Nov., 2000 for premises comprising of factory building admeasuring 68,000 sq. ft. on monthly rent of Rs. 4,45,000. That lessee will pay said monthly rent at rate of 4,45,000 per month in advance on or before 21st day of each calendar month. That lessee (HLL) agreed to pay assessee company (the lessor) Rs. 144.00 lacs on taking possession, Rs. 31.64 lacs at beginning of forth year and Rs. 39.65 lacs at beginning of seventh year as security deposit. That assessee company (the lessor) agreed to allow lessee (HLL) to possess and enjoy demised premises , for carrying out manufacturing activities including blending, processing, mixing and packing of tea and other items of food and beverages. That as long as lessee continued to pay rent and observed and performed terms and conditions of lease agreement lessee would have right of peaceful possession and enjoy demised premises without any interruption or disturbance from lessor. That machinery, furniture and fixtures, electrical equipments and other utilities installed or kept in said premises which are owned by lessee shall always belong to and be property of lessee. That lessee shall insure machinery, installations, stocks and other contents in demised premises which are owned by lessee. That lessee will pay for electricity, power and water charges during tenancy on basis of actual reading of meter/sub-meter installed in premises. That lessee will be entitled to construct at its cost in said premises, partitions and such other fixtures as may be necessary for lessee to carry on their industrial activities. That lease shall be renewable at option of lessee for such further period and such terms as may be mutually agreed between lessee and lessor. 2 7 . Shri. Karia, learned Authorised Representative, while making identical submissions and arguments with regard to ground Nos. 1 to 4, repeatedly pointed out that activity of warehousing was described as business in Bombay Warehousing Act, 1959. It is true that expression used in Bombay Warehousing Act, 1959 is business of warehousing , but in our opinion it is not quite relevant as to what expression is used in another statute, about nature of activity of assessee. In present case, issue about nature of lease rent and warehousing charges received by assessee from letting out of property and head of income under which it has to be taxed, will have to be decided on basis of provisions of IT Act 1961. In taking this view we are fortified by decision of Patna High Court in case of Ram Ballabh Pd. Singh vs. State of Bihar (1986) AIR Patna 218. In this case Court cautioned that in matters of construction similarity was not identity and no presumption could be safely inferred with regard to purported policy of different statutes. 28. learned Authorised Representative submitted that assessee was carrying on business of warehousing since 1972 and that leasing of property to Lipton India and to Hindustan Lever was part of assessee s business of warehousing. He stated that assessee leased three units, called gala , from its vast warehousing complex to HLL and simultaneously obtained warehousing business from HLL. 2 9 . He argued that warehousing was not only mere exploitation of house property but it involved complex commercial activities including storage of goods, security, issue of goods on instructions of clients, insurance of goods, etc. He placed heavy reliance on decisions in cases of National Storage (P) Ltd. (supra) and in case of Shambhu Investments (P) Ltd. (supra). 30. It is seen from lease agreement between assessee company and Lipton India and with Hindustan Lever, as reproduced above, that only object and intention of assessee, while exploiting impugned property, was to let out property, on lease to Lipton India and to Hindustan Lever, on monthly rent. There was no complex commercial activity involved in letting out of property. This is not case where leasing of property was incidental or subservient to main business of assessee. assessee was engaged in activity of leasing/ hiring/letting of its land and building and in our opinion, this activity was not business activity . lease rent received by assessee was because of bare letting of property. said character cannot change and income does not become income from trade or business merely because letting out included certain additional services such as security, issuing goods on directions of client. lighting, cleaning, and sanitation, etc., which are only incidental to use and occupation of premises. Therefore, we hold that lease rent received by assessee from Lipton India and from Hindustan Lever was rightly assessed as income from house property . ground Nos. 3 and 4 are accordingly rejected. 3 1 . Shri Karia, learned Authorised Representative made identical submissions with regard to ground Nos. 1 and 2 relating to enhancement made by CIT(A). In our considered opinion issue, whether warehousing charges received by assessee should be assessed as income from house property or as business income , has also to be decided against assessee. income from warehousing is derived from house property by exercise of property rights, properly so-called, and said character is not changed and income does not become income from business merely because hiring is inclusive of certain services, such as security, labour for loading and unloading, lighting, cleaning etc., which are incidental to use and occupation of premises. In warehousing dominant object is exploitation of house property and other services that go with it are only incidental. In it no complex commercial activity is involved. 32. There are two decisions of Tribunal (SMC) in which divergent views were taken with regard to question whether income from warehousing activity should be assessed as income from house property or as business income , In case of Vora Warehousing (P) Ltd. vs. Asstt. CIT (supra) it was held that rent realized from warehousing activity was assessable as business income . And, in case of V.N. Rukari & Sons vs. ITO in ITA No. 84/Pn/2001 for asst. yr. 1996-97 dt. 28th June, 2002, contrary view was taken, saying that income from warehousing activity were assessable as income from house property . We find that Madras High Court, in case of CIT vs. Indian Warehousing Industries Ltd. (supra), on identical facts, held that income from leasing of warehouses was assessable as income from house property . Madras High Court, following judgment of Supreme Court in case East India Housing & Land Development Trust Ltd. vs. CIT (supra), held as under : "....... source of income being warehouses, it matters little as to who lessee for time being is, whether it is same lessee continuing over period of time or shifting class of lessees who occupied space for shorter periods and paid rental for such use," 3 3 . In view of facts and circumstances of case and legal position discussed in paras 8 to 32 above, we agree with conclusions reached by CIT(A). grounds Nos. 1 to 4 are accordingly rejected. Ground No. 5 "The learned CIT(A) erred in confirming disallowance of Rs. 843 under s. 43B. 34. learned Authorised Representative did not press this ground and therefore it is rejected. Ground No. 6 "The learned CIT(A) erred in confirming disallowance of interest on account of interest free advances." 3 5 . It was noticed by AO that during year assessee had advanced interest-free loans aggregating to Rs. 1,38,33,318 to different parties, therefore, AO disallowed Rs. 7,45,567 representing interest paid to bank and Rs. 1,82,587 representing interest paid to others. CIT(A) while allowing part relief held that amount of Rs. 1,17,78,165 represented business advances and that balance of Rs. 20,55,153 only represented non-business advances. He therefore directed AO to restrict disallowance of interest in respect of non-business advance of Rs. 20,55,153 on pro rata basis. 36. We have considered rival submissions in light of material on record. It was submitted by Shri Chetan Karia, learned Authorised Representative, that there was no nexus between interest bearing loan taken by assessee and interest-free advances and that interest-free advances received from other parties where available for making interest-free non-business advances aggregating to Rs. 20,55,153. CIT(A) has rejected this plea on ground that assessee had failed to substantiate it with cash flow statement. In our considered opinion assessee needs to be given one more opportunity to substantiate its claim and it will be in interest of natural justice to do so. We, therefore, remit this issue back to file of CIT(A) with direction that he should re-examine claim and pass fresh order on this point, after giving adequate opportunity of being heard to assessee. ground No. 6 is decided accordingly. Grounds Nos. 7 and 8 "The learned CIT(A) erred in confirming disallowance of Rs. 13,51,000 out of service charges under s. 40A(2)(b)." "The learned CIT(A) erred in enhancing disallowance out of service charges under s. 40A(2)(b) by sum of Rs. 9,76,592." 37. During previous year relevant to asst. yr. 2001-02 assessee had collected Rs. 42,93,005 for various services provided to its clients such as loading/unloading, handling, security, transport, etc. out of which Rs. 27,02,000 was paid to M/s Shree Industrial Suppliers. Since M/s Shree Industrial Suppliers was proprietary concern of Shri G.L. Navlakha, one of director s of assessee company, AO invoked provisions of s. 40A(2)(b) of Act and disallowed 50 per cent of said claim and made addition of Rs. 13,51,000. CIT(A) not only confirmed addition of Rs. 13,51,000 but also enhanced disallowance by further sum of Rs. 9,76,592. order of CIT(A) has been challenged by assessee in present appeal. 38. Shri Chetan Karia, learned Authorised Representative, reiterated arguments which were put forward on behalf of assessee before AO and CIT(A). submissions made by him are summarized below : That AO and CIT(A) did not have any evidence to justify action of disallowing legitimate business expenditure. That AO and CIT(A) did not have any comparable instance to justify disallowance/enhancement. That while providing warehousing facility to its clients, assessee had to provide incidental services such as loading/unloading, handling, security, transportation and in rendering these services, assessee was assisted by M/s Shree Industrial Suppliers. That manner of carrying on business should be left to assessee. That provision of s. 40A(2)(b) is incorporated only with view to disallow comparatively excessive and unreasonable expenses incurred on person having direct relation to assessee. That new plea was taken saying that there was give and take arrangement , insofar as interest-free loan was received by assessee and that it was factored into quantum of impugned payment. 39. Shri Atul Pranay, learned Departmental Representative supported orders of AO and CIT(A). He contended that CIT(A) had correctly worked out fair market value of services in respect of which payments were made to M/s Shree Industrial Suppliers. He submitted that method adopted by CIT(A) was akin to recognized method known as cost plus method. 40. cost plus method measures arm s length price of services by gross profit mark up to its cost. starting point under this method is cost incurred by provider of services in transaction between related enterprises. This cost is increased by gross profit mark up in light of services rendered and market conditions, etc. sum gives arm s length price and we do not see any infirmity in this approach. 41. We have considered rival submissions in light of material on record. We are of opinion that, on facts of case, order of CIT(A) cannot be found fault with. It was felt by Government that sometimes taxpayers artificially reduced their tax liability by diverting part of business profit to relatives and associate concerns in form of excessive payments for goods and services etc. In order to stop such evasion, s. 40A(2) was inserted by Finance Act, 1968 with effect from 1st April, 1968. 42. provisions of s. 40A have been declared to be of overriding nature because of non obstante clause with which s. 40A(1) starts. Under sub-s. (2) of new s. 40A, expenditure incurred in business or profession, for which payment has been made or is to be made to assessee s relatives or associate concerns, is liable to be disallowed in computing profits of business or profession, to extent expenditure is considered to be excessive or unreasonable. 43. crucial words in s. 40A(2)(a) are fair market value of goods, services or facilities . reasonableness of any expenditure is to be judged having regard to fair market value of goods, services or facilities for which payment is made or legitimate needs of business or profession or benefit derived by, or accruing to, assessee from expenditure. Such portion of expenditure which, in opinion of AO, is excessive or unreasonable according to these criteria is to be disallowed in computing profits of business or profession. 44. In case of CIT vs. Shatrunjay Diamonds (2003) 183 CTR (Bom) 86 : (2003) 261 ITR 258 (Bom) it was held by Bombay High Court that in cases falling under s. 40A(2)(b) burden of proof shifts to assessee and that in such cases it is duty of assessee to prove and discharge its burden by leading proper evidence. 45. In case of Keltron Component Complex Ltd. vs. Dy. CIT & Anr. (2003) 182 CTR (Ker) 58 : (2003) 264 ITR 352 (Ker), Kerala High Court observed as under : "....... Sec. 40A(2)(b) of Act clearly provides for disallowance of amounts which assessing authority considered to be in excess of requirements of business. AO in fact had limited commission to 50 per cent of profit accruing to company before commission. first appellate authority had considered circumstances and limited disallowance beyond 7 per cent. Tribunal had also agreed with view taken by first appellate authority. On face of provisions of s. 40A(2)(b) of Act and factual circumstances, we are of view that two appellate authorities were perfectly justified in limiting commission to 7 per cent, as against 7.5 per cent provided in agreement. According to us, conclusion reached by Tribunal are based on findings of fact on which no substantial question of law much less any question of law arises." 46. In case of Khan Carpets vs. CIT (2004) 187 CTR (All) 668 : (2003) 262 ITR 325 (All) it was held by Allahabad High Court that reasonableness within meaning of sub-s. (2) of s. 40A of Act was to be determined after taking into account legitimate needs of business or profession of assessee and fair market value of services rendered by such persons. 4 7 . In view of facts and legal position discussed in above paragraphs we have no doubt in our mind that fair market value of services rendered by M/s Shree Industrial Suppliers was not basis for paying Rs. 27,02,000. assessee company failed to discharge burden of proving that impugned payment of Rs. 27,02,000, represented fair market value of services rendered by M/s Shree Industrial Suppliers and that expenditure of Rs. 27,02,000 was incurred for legitimate needs of its business. new plea of give and take arrangement was self-serving argument and had no merit. CIT(A), after taking into consideration facts of case, restricted claim to Rs. 3,74,408. Shri. Pranay, learned Departmental Representative, explained that method adopted by CIT(A) for estimating fair market value of services rendered by M/s Shree Industrial Suppliers was akin to Cost Plus Method which was recognized method. In view of above discussions we are of considered opinion, that order of CIT(A) does not call for any interference and is accordingly upheld. grounds Nos. 7 and 8 are accordingly rejected. 48. In result appeal filed by assessee is partly allowed. *** NUTAN WAREHOUSING CO. (P) LTD. v. INCOME TAX OFFICER