2019 (8) TMI 1431 - AT - Income Tax

Correct head of income - Income from House Property or Income from Business and Profession - consideration received by the assessee for commercial space given in the mall to various persons - characterization of income - HELD THAT - The maintenance charge for common area maintenance is only one of the segments of services provided to the unit holders in the mall. The common area maintenance is one aspect where costs are shared but that does not mean that all other services and amenities essential to smooth functioning and conducive to business, can be ignored for the purpose of ascertaining the nature of business model. It, therefore, cannot be said, on the facts and circumstances that all the services which have been provided to the unit holders have been separately taxed as business income. The fact remains that even though common area maintenance services are charged for certain services, there are larger number of services such as round-the-clock security, electrification, cleanliness, parking services and most of other services which are integrated and essential for successful operation of mall, consideration for which is included in the charges received from unit holders. The fact that these unit holders treat these charges as rent simpliciter and tax deducted at source u/s 194-I cannot determine the question of taxability in the hands of the recipient. In the business model embedded by the operation of the shopping mall, as we have pointed out earlier, a complex web of integrated services are to be provided and the consideration received from those occupying the business premises is not simply as such rent for the premises. We are of the considered view that the authorities below were indeed in error in treating the consideration received by the assessee for commercial space given in the mall to various persons as income from house property. We vacate the action of the authorities below and direct that the said income be treated as profits and gains from business or profession. As this core issue has been decided by us in favour of the assessee

Issues Involved:
1. Computation of income by the CIT(A).
2. Classification of income from house property versus profit and gains of business.
3. Alternative classification of income under income from other sources.
4. Deduction of business expenses and depreciation.
5. Restriction on deduction of interest on borrowed funds.
6. Allowance of various business expenses and depreciation.
7. Legitimacy of demand raised by the assessing officer.

Detailed Analysis:

1. Computation of Income by the CIT(A):
The appellant contended that the CIT(A) erred in upholding the computation of income at ?15,37,872/- against a returned loss of ?7,63,06,820/-. The appellant argued that the computation of the loss was in accordance with the law and facts of the case.

2. Classification of Income from House Property vs. Profit and Gains of Business:
The primary issue was whether ?9,28,81,991/- should be assessed under the head income from house property or profit and gains of business. The Assessing Officer (AO) treated the income from leasing various mall spaces as income from house property, despite the appellant's claim that it involved complex integrated services beyond mere leasing. The AO's reasoning included the collection of deposits from tenants and the nature of income as rent, supported by TDS deductions under section 194-I. The CIT(A) upheld the AO's decision, noting that the income included Common Area Maintenance charges and the tenants made TDS under section 194-I, indicating it as income from house property.

The Tribunal, however, noted that in the previous assessment year (2009-10), the AO had accepted the income as business income, and the principle of consistency should apply. The Tribunal emphasized the complexity of services provided in the mall, which included security, electrification, cleanliness, and parking services, essential for the mall's operation. It cited the Supreme Court's judgment in CIT vs. E City Real Estate (P.) Ltd., which supported the treatment of such income as business income due to the commercial exploitation of the property.

3. Alternative Classification under Income from Other Sources:
The appellant argued that if the income was not considered as business income, it should be classified under income from other sources under section 57(2)(iii), allowing deductions for expenses and depreciation. However, this issue became academic as the Tribunal decided in favor of treating the income as business income.

4. Deduction of Business Expenses and Depreciation:
The appellant claimed that all expenditures debited to the Profit and Loss account were incurred wholly and exclusively for business purposes and should be allowed as deductions. The AO had disallowed certain expenses and depreciation, which the appellant contested.

5. Restriction on Deduction of Interest on Borrowed Funds:
The appellant contended that the AO erred in restricting the deduction of interest on borrowed funds to ?6,33,86,149/- instead of ?7,87,11,753/-. The appellant argued that the entire interest expense was incurred for constructing the house property and acquiring plant and machinery, and should be allowed in full.

6. Allowance of Various Business Expenses and Depreciation:
The appellant argued that the AO erred in not allowing deductions for various business expenses and depreciation on fixed assets against the computed income of ?15,37,872/-. The appellant maintained that all expenses and depreciation were incurred for business purposes and should be allowed.

7. Legitimacy of Demand Raised by the AO:
The appellant contested the demand of ?5,64,482/- raised by the AO, arguing that it was erroneous and not enforceable. The appellant also requested a correct computation of tax and credit for all tax payments, and quashing of any interest charged by the AO.

Conclusion:
The Tribunal concluded that the authorities below erred in treating the income from leasing mall spaces as income from house property. It directed that the income be treated as profits and gains from business or profession. Consequently, all other issues became academic. The appeals for both assessment years 2010-11 and 2011-12 were allowed in favor of the appellant.

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