2016 (2) TMI 82 - AT - Income Tax

Treatment of property lease income as income under the head Profits and Gains of Business or Profession - Held that - The entire dispute has to be considered in the light of the decision of the Hon ble Supreme Court in the case of Chennai Properties & Investments Ltd Vs CIT 2015 (5) TMI 46 - SUPREME COURT wherein held that letting out of the properties being the business of the assessee, the income from which has to be treated as income from business. The Hon ble Supreme Court has further observed that the Memorandum of association of the assessee company clearly mentions that main objects is to acquire and hold the properties and holding the aforesaid properties and earning income by letting out those properties is the main objective of the company. Therefore, any income earned has to be taxed under the head Income from business . In the present case also we find that in A.Y. 2008-09, the AO himself has accepted the nature of business of the assessee as Operation of Mall therefore any income earned by the assessee by the operation of mall has to be taxed under the head Profits & Gains of Business or Profession. The main object of the company as per the Memorandum of Association also refers to such activities as the main object for which the company is incorporated. As the main object itself shows that the assessee-company has been incorporated for running shopping malls /departmental stores, super markets, shopping arcades, shopping outlets, entertainment, recreation and amusement centre therefore any income earned from such activities has to be taxed under the head profits and gains of business.The assessee is entitled for the claim of depreciation and also brokerage expenses. The AO is directed to allow the same - Decided in favour of assessee Addition on account of notional lease rental income - Held that - As relying on Reliance Industrial Infrastructure 2009 (1) TMI 4 - BOMBAY HIGH COURT we direct the AO to exclude the notional lease rental income from the total income of the assessee - Decided in favour of assessee. Disallowance of interest (a) for giving interest free advances (b) for earning exempt income - Held that - A perusal of the factual matrix elsewhere shows that the assessee was having sufficient own funds for making the investments and for giving interest free advances. The facts of the case are squarely covered by the decision of the Hon ble High Court of Bombay in the case of Reliance Utilities and Power Ltd(supra) followed by the Hon ble High Court of Bombay in the case of CIT Vs HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . . Respectfully following the same, we direct the AO to delete the impugned disallowances made on account of interest expenditure. - Decided in favour of assessee

Summary

Issues:
1. Treatment of property lease income under the head "Profits and Gains of Business or Profession."
2. Addition of notional lease rental income.
3. Disallowance of interest expenses for giving interest-free advances and earning exempt income.

Analysis:

Issue 1: Treatment of Property Lease Income
The dispute revolved around the classification of property lease income as either "Income from House Property" or "Profits & Gains of Business." The Assessing Officer (AO) initially treated the income as "House Property" income, disallowing depreciation and brokerage expenses. The CIT(A) upheld this decision. However, the ITAT Mumbai, citing the Supreme Court's decision in Chennai Properties & Investments Ltd Vs CIT, ruled that as the company's main objective was to operate malls, income from such activities should be taxed under "Profits & Gains of Business." The ITAT directed the AO to allow depreciation and brokerage expenses, overturning the CIT(A)'s decision.

Issue 2: Addition of Notional Lease Rental Income
The assessee showed notional lease rental income based on Accounting Standard-19, which was disputed by the Revenue. The ITAT, following the Bombay High Court's decision in Reliance Industrial Infrastructure Ltd, concluded that such entries were not real income but made to comply with accounting standards. Therefore, the notional lease rental income was excluded from the total income of the assessee.

Issue 3: Disallowance of Interest Expenses
Regarding the disallowance of interest expenses for interest-free advances and earning exempt income, the ITAT referred to the balance sheet to highlight the sufficient own funds of the assessee. Relying on the Bombay High Court's decisions in CIT Reliance Utilities & Power Ltd. and CIT Vs HDFC Bank Ltd., the ITAT directed the AO to delete the disallowances, as the assessee had ample own funds for investments and interest-free advances.

In conclusion, the ITAT allowed the assessee's appeal, directing the treatment of property lease income under "Profits & Gains of Business," excluding notional lease rental income, and deleting the disallowances of interest expenses. The Revenue's appeal was dismissed, rendering the grievance on interest expenditure otiose.