2017 (1) TMI 1197 - AT - Income Tax

Income earned from running and operation of a Mall and service charges - income from profits and gains of business or as income from house property - Held that - We find that the issue of whether or not the income earned by the assessee from leasing out of its property and for offering a host of other complex services is to be construed as commercial exploitation of its properties as stated in its objects and therefore to be held to be exigible to tax as business income as declared by the assessee or as income from house property as held by Revenue, has been considered and adjudicated by a Coordinate Bench of the Tribunal in the assessee s own case for A.Y. 2009-10. Also see Chennai Properties & Investments Ltd. vs. CIT (2015 (5) TMI 46 - SUPREME COURT) Recovery of common area maintenance and utility expenses - whether constitutes business income from which Municipal taxes paid and the same is allowable as a deduction from business income - Held that - In view of our holding that the income earned by the assessee from running and operation of Mall and a provision of host of other services and utilities is to be construed as commercial explanation of its properties and is exigible to tax as business income as declared by the assessee, we hold that the assessee is entitled to be allowed deduction of Municipal taxes from its business income. Depreciation claimed on the Mall building - Held that - Following the order of the Coordinate Bench for A.Y. 2009-10 and having held that the assessee s income earned from running and operation of Mall and service charges etc. is to be taxed under the head profits and gains of business, we hold that in this regard the assessee is entitled for claim of depreciation on Mall building and also brokerage expenses incurred for grant of licence to various users. Disallowance made u/s 14A r.w.r. 8D - Held that - Following the decision of the Coordinate Bench of the Tribunal in the assessee s own case for A.Y. 2009-10 which followed the decisions of the Hon ble Bombay High Court in Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ) and HDFC Bank Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT), we direct the AO to delete the impugned disallowance made under section 14A r.w. Rule 8D on account of interest expenditure.

Issues Involved:
1. Classification of Property Lease Income
2. Notional Lease Rental Income
3. Deduction of Municipal Taxes from Business Income
4. Depreciation on Mall Building
5. Disallowance of Brokerage Expenses
6. Disallowance under Section 14A

Comprehensive Issue-wise Analysis:

1. Classification of Property Lease Income:
The primary issue was whether the property lease income should be classified under 'income from house property' or 'profits and gains from business'. The assessee argued that the income should be classified as 'profits and gains from business' because the company was engaged in commercial exploitation of the premises, providing complex services beyond mere letting out of property. The Tribunal referenced a previous decision in the assessee's own case for A.Y. 2009-10, where it was held that such income should indeed be treated as 'business income' in line with the Supreme Court's ruling in Chennai Properties & Investments Ltd. vs. CIT. Consequently, the Tribunal directed the Assessing Officer to treat the income as 'profits and gains from business' for both A.Y. 2010-11 and A.Y. 2011-12.

2. Notional Lease Rental Income:
This issue was raised as an alternate ground, concerning the addition of notional lease rental income computed on a straight-line basis as per Accounting Standard 19. Given the Tribunal's decision to classify the primary income as 'business income', it was deemed unnecessary to adjudicate this alternate ground for A.Y. 2010-11.

3. Deduction of Municipal Taxes from Business Income:
For A.Y. 2011-12, the assessee contended that municipal taxes recovered from lessees should be deducted from business income. The Tribunal agreed, holding that since the income from running and operating the Mall was considered 'business income', the municipal taxes paid were allowable as a deduction from this income.

4. Depreciation on Mall Building:
The assessee claimed depreciation on the Mall building under Section 32 of the Income Tax Act, asserting it as part of the commercial assets. The Tribunal, following its decision for A.Y. 2009-10, agreed that the assessee was entitled to claim depreciation on the Mall building, thereby allowing the grounds for both A.Y. 2010-11 and A.Y. 2011-12.

5. Disallowance of Brokerage Expenses:
The assessee argued that brokerage expenses incurred for granting licenses to various users should be allowed as deductions under Section 37(1) of the Act. The Tribunal upheld this claim, referencing its previous decision for A.Y. 2009-10, and allowed the brokerage expenses as deductions for both assessment years.

6. Disallowance under Section 14A:
The assessee contested the disallowance under Section 14A r.w. Rule 8D, arguing that the term loan was obtained for the construction of the Mall, and hence, interest expenditure should not be disallowed. The Tribunal referenced its decision for A.Y. 2009-10, where it followed the Bombay High Court's rulings in Reliance Utilities and Power Ltd. and HDFC Bank Ltd., and directed the AO to delete the disallowance on account of interest expenditure, thereby allowing the grounds for A.Y. 2010-11.

Conclusion:
The Tribunal allowed the appeals for both assessment years 2010-11 and 2011-12, directing the income to be treated as 'profits and gains from business', allowing deductions for municipal taxes, depreciation on the Mall building, brokerage expenses, and deleting the disallowance under Section 14A.

Order pronounced in the open court on 20th January, 2017.

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