2013 (11) TMI 213 - AT - Income Tax

Renting of cinema hall (buildings) - Income from House property or Income from other sources - Classification of head of Income for availing benefit attached to a particular head of Income - The AO held that there is no rent agreement nor lessor and lessee relation between the assessee and PVR Ltd. The AO also observed and held that the income of the assessee is to be assessed under the head Other Sources and accordingly statutory deduction of 30% provided for income from house property was disallowed. The AO finalized the assessment by holding income receipt from PVR Ltd. as income under the head of Other Sources in terms of operation and management agreement Held that - On careful reading of the agreement between assessee and PVR LTD. and other documents available, there is no hesitation to hold that the intention of the parties while executing and entering in the agreement was not to share the profits of the cinema business as partners, joint venture or franchise but the intention of the parties was to rent out the property on minimum fixed consideration in one part and second part was related to the amount of sales of tickets. This arrangement cannot be said as partner ship, joint venture or franchise in any manner. From the copy of the agreement on the next date of agreement, the PVR Ltd. returned furniture, fittings and other equipments to the assessee with specific foot note to the list that no assets, equipments, furniture, fixture other than building has been retained by M/s Priya Village Roadshow limited. This recitals and documents specifically show that only cinema building was handed over to PVR Ltd. by the assessee for fixed consideration as mentioned in schedule second of the agreement. After taking over vacant possession of cinema building from assessee to the PVR Ltd. converted it into four screens multiplex with all modern fittings, fixtures and furniture therein - Overall risk/control of the management, operation and development of the cinema rests with PVR Ltd. and assessee is not bearing any kind of risk under the agreement - PVR Ltd. independently obtained the cinema license, entertainment tax registration etc. in its name and started its business - From the orders of the authorities below, this fact has not been controverted that the multiplex business is being independently operated by PVR Ltd. at its own and there is no element of joint venture, partner ship or franchise with the assessee. Following the judgment of Hon ble High Court of Bombay in the case of Parekh Traders vs. CIT (Poona), 1983 (9) TMI 39 - BOMBAY High Court , it is held that income derived as rent from property must be computed under that specific head regardless of the fact that property had at one point of time bean utilized by the assessee for business purposes. Such property cannot be treated as a business asset and rent thereof as income from business - The Hon ble Bombay High Court has clearly held that plant and machinery are commercial assets and their exploitation even by means of letting out, yields or bring income from business and per contra, income earned from letting out the building is income from property. In the case in hand the PVR Ltd. taken over only cinema buildings on rent and remains furniture, fixtures and other equipments have been returned by the PVR Ltd. to the assessee, accordingly fixed rental earned therefrom deserves to be treated as rental income from house property - Receipts from PVR Ltd. by the assessee to be treated as income from house property and all consequential benefits and deductions be allowed to the assessee in this regard Decided in favor of Assessee.

Summary

Issues Involved:
1. Classification of income received from PVR Ltd.
2. Admission of additional evidence under Rule 46A of Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Classification of Income Received from PVR Ltd.:

The core issue in this appeal was whether the income received by the assessee from PVR Ltd. should be classified under "Income from House Property" or "Income from Other Sources." The assessee argued that the income was from house property, as the property was leased out to PVR Ltd. after closing down its cinema business. The Commissioner of Income Tax (Appeals) [CIT (A)] and the Assessing Officer (AO) had previously classified the income under "Other Sources," arguing that the agreement with PVR Ltd. was an "Operation and Management Agreement" rather than a rent agreement, implying a joint business operation.

The Tribunal noted that the AO had accepted the income as "Income from House Property" in the preceding three assessment years (2004-05, 2005-06, and 2006-07) under Section 143(3) of the Income Tax Act, 1961. The Tribunal emphasized the principle of consistency, stating that while the principle of res judicata does not apply to income tax proceedings, the rule of consistency should be maintained unless there is a rational and reasonable cause for deviation. The Tribunal found no new facts or material evidence presented by the AO to justify the reclassification of income for the assessment year 2007-08.

The Tribunal also examined the agreement and concluded that the intention of the parties was to rent out the property, not to enter into a joint venture or partnership. The Tribunal held that the income derived from letting out the cinema building should be classified as "Income from House Property" and not "Income from Other Sources."

2. Admission of Additional Evidence under Rule 46A:

The second issue was whether the CIT (A) was justified in not admitting additional evidence under Rule 46A of the Income Tax Rules, 1962. The assessee sought to submit a certificate from PVR Ltd. as additional evidence to clarify the nature of the agreement. The CIT (A) had rejected this evidence, arguing that it was self-serving and that the assessee had not been prevented by any sufficient cause from producing it during the assessment proceedings.

The Tribunal found that the CIT (A) had erred in rejecting the additional evidence. It noted that the powers of the CIT (A) are coterminous with those of the AO, and the CIT (A) can do what the AO is competent to do. The Tribunal observed that the certificate from PVR Ltd. was a vital piece of evidence that clarified the nature of the agreement and should have been admitted. The Tribunal held that the CIT (A) was not justified in rejecting the additional evidence and allowed the assessee's ground on this issue.

Conclusion:

The Tribunal allowed the appeal in favor of the assessee. It directed that the income received from PVR Ltd. be treated as "Income from House Property" and that all consequential benefits and deductions be allowed to the assessee. The Tribunal also held that the CIT (A) was not justified in rejecting the additional evidence under Rule 46A. The order was pronounced in open court on 31st May 2013.