2015 (6) TMI 1089 - AT - Income Tax

Leave & License fees and Maintence & Amenities charges - Income from other sources or profit and gains of business or profession - Held that - The assessee had taken premises on lease from M/s. Mahalaxmi Engineering Company Pvt. Ltd and had subleased same to M/s. Rediff.com India Ltd. and in addition to the leave and license fee, had received maintenance charges. The said maintenance charges were for providing additional services to the sub lessee, which was in addition to the lease charges received for the occupation of the said premises. The assessee being engaged in a systemic activity of exploiting its asset, which in turn it had taken on lease, is thus involved in carrying on business activity. The income arising from such business activity is assessable in the hands of the assessee under the head income from business. The assessee is entitled to the claim of expenditure including the depreciation of assets but not the building, as the building was leased out, as deduction against such business income. Accordingly, we direct the AO to assess the income in the hands of the assessee under the head income from business after allowing the claim of expenditure in respect of the expenses and depreciation on assets.

Summary

Issues Involved:
1. Classification of "Leave & License fees and Maintenance & Amenities charges" as "Income from business" or "Income from other sources."
2. Disallowance of personnel expenditure.
3. Denial of depreciation claim.

Detailed Analysis:

1. Classification of Income:
The primary issue revolves around whether the income from "Leave & License fees and Maintenance & Amenities charges" should be classified as "Income from business" or "Income from other sources." The assessee contended that leasing the premises and sub-leasing it, along with providing additional services, constituted a business activity. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the income as "Income from other sources" and disallowing related expenses under section 57(iii) of the Income Tax Act.

The Tribunal, referencing the Supreme Court's decision in *Chennai Properties and Investment Ltd. vs. CIT*, ruled that the assessee's activities were systematic and organized, aimed at exploiting the leased asset. The Tribunal concluded that the income should be classified as "Income from business," allowing the assessee to claim related expenditures and depreciation on assets.

2. Disallowance of Personnel Expenditure:
In the assessment year 2006-07, the CIT(A) upheld the disallowance of Rs. 13,56,776/- out of personnel expenditure incurred by the assessee. The Tribunal admitted this additional ground of appeal for adjudication, finding it related to the original ground concerning the classification of income. Given the Tribunal's decision to classify the income as "Income from business," the related personnel expenditure would be allowable as a business expense.

3. Denial of Depreciation Claim:
The CIT(A) also disallowed the depreciation claimed by the assessee. For the assessment year 2008-09, the CIT(A) enhanced the assessment by disallowing depreciation of Rs. 3,43,935/-. The Tribunal, however, directed the AO to allow the depreciation on assets (excluding the building, as it was leased out) as part of the business expenses, following the reclassification of the income as "Income from business."

Conclusion:
The Tribunal's consolidated order allowed both appeals filed by the assessee. It directed the AO to assess the income under the head "Income from business," permitting the deduction of related expenditures and depreciation on assets. The Tribunal's decision was influenced significantly by the precedent set in *Chennai Properties and Investment Ltd. vs. CIT*, emphasizing the systematic and organized nature of the assessee's leasing activities as a business operation.