2016 (4) TMI 1398 - AT - Income Tax

Characterization of income - nature of income - rental receipts of the assessee - business receipt or income from house property - HELD THAT - For Asst. Year 2006-07 in assessee s own case 2015 (10) TMI 2743 - ITAT MUMBAI tribunal has confirmed the order of CIT(A) and considered the business centre service charges as business receipts - premises are in the control of the assessee and the assessee is required to provide services as per the agreement for which personnel on permanent basis were to be employed. Thus, the management and administration of the mall vested with the assessee. The detailed finding recorded by the CIT(A) has not been controverted by the department by bringing any positive material on record. Issue in favour of the assessee for holding that such commercial exploitation renders income from business rather than income from house property. - Decided against revenue. Disallowance of interest u/s. 36(1)(iii) - assessee has failed to substantiate the commercial expediency of giving interest free advances to the sister concerns out of its interest bearing borrowings - HELD THAT - Assessee before us clearly stated that the assessee and its sister concerns are engaged in the business of real estate and this fact was argued before CIT(A) by assessee. He explained that the assessee has embarked upon setting up malls/business centre in a very big way in India . Developing and managing malls/shopping complexes is a very complex specialized business activity. It requires huge capital investment, manpower and, above all, expertise and knowledge in retail market and consumer behavior. The sister concerns of the assessee were in mall management and development business since many years due to which they had acquired relevant expertise and knowledge in the field of Mall Management Co. Ltd. As these concerns were already in mall business and the assessee had advanced amounts to these concerns as a part of its short term and long term strategy to expand its mall business, including construction of premises for the assessee in popular commercial centre for enabling the assessee to establish itself mall business. In view of the above facts and circumstances, we are of the view that the CIT(A) has rightly deleted the disallowance of interest - Decided against revenue.

Summary

Issues:
1. Classification of rental receipts as business income or income from house property.
2. Disallowance of interest under section 36(1)(iii) of the Income Tax Act.

Issue 1: Classification of Rental Receipts
The primary issue in this appeal was the classification of rental receipts of the assessee as either business income or income from house property. The Assessing Officer (AO) treated the business centre service charges credited by the assessee as income from house property, considering it as rental income. However, the CIT(A) allowed the claim of the assessee, following the appellant's own case for the assessment year 2006-07. The CIT(A) held that the rental income should be classified as business income, as the appellant was deemed a property manager rather than a passive owner, exploiting the property by rendering commercial services systematically. The Tribunal, after considering the appellant's case for the assessment year 2006-07, dismissed the revenue's appeal, as the issue was already settled by the Tribunal's previous decision in the appellant's own case.

Issue 2: Disallowance of Interest under Section 36(1)(iii)
The second issue revolved around the disallowance of interest under section 36(1)(iii) of the Income Tax Act. The AO disallowed the interest paid by the assessee on a term loan, as the loan amount was utilized for advancing interest-free loans to sister concerns not engaged in real estate business at the time of borrowing. The CIT(A), however, allowed the claim of the assessee, stating that the interest was advanced for business purposes, considering the appellant's strategy to expand the mall business. The Tribunal upheld the CIT(A)'s decision, noting that the appellant and its sister concerns were engaged in real estate business, specifically mall management and development. The Tribunal confirmed the deletion of the interest disallowance, as the loans were part of the short and long-term strategy to expand the mall business, including constructing premises for the appellant in popular commercial centers.

In conclusion, the Appellate Tribunal ITAT Mumbai addressed the issues of classifying rental receipts and the disallowance of interest under the Income Tax Act. The judgment highlighted the importance of considering the nature of activities and business strategies while determining the classification of income and the allowability of expenses. The Tribunal's decision emphasized consistency with previous rulings and the necessity of establishing a clear nexus between borrowed funds and business purposes to justify interest deductions.