2011 (6) TMI 771 - AT - Income Tax

Income from Letting out of Studio - Complex Commercial Activities - Profits and Gains of Business or Profession or Income from House Property? - Assessee lets out the property on hourly basis for use as shooting location - AO considered income derived as income as Income From House Property by following the decision of SULTAN BROTHERS PRIVATE LIMITED VERSUS COMMISSIONER OF INCOME-TAX, BOMBAY CITY II 1963 (12) TMI 4 - SUPREME COURT HELD THAT - We find that in SHAMBHU INVESTMENT P. LTD. VERSUS COMMISSIONER OF INCOME-TAX 2003 (1) TMI 99 - SC ORDER , which is approved by Hon ble Supreme Court, it was held that merely because income is attached to any immovable property cannot be the sole factor for assessment of such income as income from property; what has to be seen is what was the primary object of the assessee while exploiting the property. If it is found, applying such test, that main intention is for letting out the property, or any part thereof, the same must be considered as rental income or income from property. In case, it is found that the main intention is to exploit the immovable property by way of complex commercial activities, in that event, it must be held as business income. It is thus clear that when a property is exploited by way of complex commercial activities , income so earned by exploiting the property is to be taxed as business income. Viewed in this perspective, and having regard to the fact that it is not a case of significant value addition to premises by providing all incidental and support services to facilitate cine shooting and related activities, the income is earned by complex commercial activities which can only be taxed under the head business income. The fact that it is clearly a commercial adventure, involving marketing and promotions as also appropriate improvisations on a case to cases basis, takes these receipts out of the ambit of income under the head property income. Hon ble Calcutta High Court s judgment in the case of Shambhu Investments Ltd., has duly taken into account Hon ble Supreme Court s judgment in the case of Sultan Brothers and yet reached the conclusion that where complex commercial activities are involved in exploiting a property, income can only be taxed as business income. Also, hon'ble Supreme court's case upon which AO relied have different facts from the present case, thus have no relevence in present context. The conclusions arrived at by the Ld. CIT (A) i.e such income comes under the head PGBP, thus do no call for any interferene - Decision in favour of Assesee.

Summary

Issues Involved:
1. Classification of income from letting out a studio as 'Profits and Gains of Business or Profession' versus 'Income from House Property'.
2. Applicability of the Supreme Court judgment in CIT vs. Sultan Brothers Pvt. Ltd. and CIT vs. Shambhu Investments Ltd.

Detailed Analysis:

1. Classification of Income:
The primary issue was whether the income from letting out a studio should be classified under 'Profits and Gains of Business or Profession' or 'Income from House Property'. The Assessing Officer (AO) argued that the income should be treated as 'Income from House Property', relying on the Supreme Court decision in CIT vs. Sultan Brothers Pvt. Ltd. The AO noted that the receipts were shown as 'rent' in TDS certificates and believed the services rendered were not separately charged, thus qualifying as rental income.

The assessee contended that the income should be classified under 'Profits and Gains of Business or Profession' due to the complex commercial activities involved, such as modifying furniture and fixtures, providing security, setting up temporary structures, and offering various services like plumbing and electricity. The CIT (A) agreed with the assessee, stating that the activities constituted a commercial exploitation of the property, thus qualifying as business income.

2. Applicability of Supreme Court Judgments:
The AO cited the Supreme Court judgment in CIT vs. Sultan Brothers Pvt. Ltd., which provided guidelines for determining the nature of receipts attached to a property. The AO believed that the case was similar to the current situation and concluded that the income should be treated as rental income. However, the CIT (A) and the ITAT found that the case of CIT vs. Shambhu Investments Ltd., which was approved by the Supreme Court, was more applicable. This judgment emphasized that if the primary objective was to exploit the property through complex commercial activities, the income should be classified as business income.

The ITAT noted that the Sultan Brothers case dealt with whether income from a hotel let out with furniture should be taxed as 'Income from Other Sources' or 'Income from House Property', not whether it should be classified as business income. The ITAT found that the assessee was engaged in organized business activities and rendered significant services, making the income from the studio a result of complex commercial activities, thus qualifying it as business income.

Conclusion:
The ITAT upheld the CIT (A)'s decision to classify the income from letting out the studio as 'Profits and Gains of Business or Profession'. The ITAT found that the AO's reliance on the Sultan Brothers case was misplaced and that the Shambhu Investments case provided the correct legal framework for the issue at hand. The appeal was dismissed, affirming the CIT (A)'s conclusion that the income should be treated as business income due to the commercial exploitation of the property.