2017 (5) TMI 1033 - AT - Income Tax

Deduction u/s. 80-IAB - eligibility criteria - house property income of a developer of a SEZ - Held that - Surely, leasing of house property, inasmuch as the lessees (who are to be, or presumably so, in info-tech business) would be able to undertake their businesses only on the developed property being made available to them, could not therefore but be regarded as the principal activity yielding income from the development of a SEZ. In fact, even the income (to the assessee) from providing ancillary and maintenance services to these businesses arises or stands to arise only on account of, or by virtue of, their being lessees. The lease rental income, on the lease of the house property thereto, would thus, in our view, notwithstanding the use of the words profits and gains and business in section 80-IAB(1), qualify to be eligible for deduction there-under. That is, the lease rental is within the contemplation of the profits derived by a developer of a SEZ from the business of developing it, eligible for deduction u/s. 80-IAB. The head of income under which the said income is assessable, which is on the basis of the source from amongst the specified sources under the Act, most appropriate for the said income, so that it is not assessable as business income but as income from house property, would not be a limiting or debilitating factor. We decide accordingly, and the assessee succeeds qua it s alternate ground, i.e., in principle. The assessee s eligibility for deduction u/s. 80 IAB, to which the house property income of a developer of a SEZ has been opined by us as exigible. In this regard, we observe no finding by the assessing authority on the assessee satisfying the condition/s of s. 80-IAB. True, it has been allowed deduction in assessment in respect of the income assessable as business income, so that the said conditions are impliedly met. We yet consider it necessary that a definite finding in the matter should precede the allowance of the said deduction/s. The reason is that, firstly, the units in the info tech park should presumably be set up by firms engaged in IT/IT enabled services, while one of them, as afore noted, is a bank (SBI). Two, the lease period as per the SEZ Rules, 2006 (r. 11(5)), as mentioned in Coimbatore Hitech Infrastructure Pvt. Ltd. (2012 (7) TMI 464 - ITAT CHENNAI ), to which reference was made by the assessee, is to be for a period of five years while the lease agreement with TCS Ltd. is for three years. This gives rise to a doubt if the assessee qualifies for deduction u/s. 80IAB on its lease rental income and, further, in its entirety, i.e., including the units for which the lease period may be five years or more. We have already expressed a view of eligibility of the house property income to deduction u/s. 80IAB. Subject to therefore a positive finding, which the AO shall cause upon been satisfied, per a speaking order, and after allowing the assessee a reasonable opportunity to present its case, recording his reasons either way, we allow the assessee s claim for deduction u/s. 80IAB

Summary

Issues Involved:
1. Classification of income from lease rental.
2. Eligibility for deduction under Section 80-IAB of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Classification of Income from Lease Rental:
The primary issue in this case revolves around whether the lease rental income earned by the assessee should be classified under 'Income from house property' or 'Income from business or profession.' The assessee, a co-developer of an info park (SEZ), claimed deduction under Section 80-IAB on the entire income from the Tejomaya building, leased to three entities during the relevant year. The Assessing Officer (AO) assessed the lease rental income under 'Income from house property' and denied the deduction under Section 80-IAB.

The CIT(A) reversed this decision, classifying the lease rental income under 'Income from business or profession,' citing decisions from Coimbatore Hitech Infrastructure Pvt. Ltd. and the Karnataka High Court in Global Tech Park Pvt. Ltd. The Revenue appealed, relying on the Supreme Court decisions in Shambhu Investments (P) Ltd. v. CIT and Keyaram Hotels Pvt. Ltd. v. Dy. CIT, which clarified that rental income from letting out a commercial complex should be classified as 'Income from house property' if the assessee is not engaged in a business activity.

The Tribunal examined the facts and legal precedents, emphasizing that the heads of income under the Income Tax Act are mutually exclusive. Ownership of house property, regardless of profitability, cannot be considered a business or trade under the Act. The Tribunal also noted that the assessee's services and assets provided to tenants were subservient to the main objective of enabling the proper use of the building, thus not constituting a complex letting. Therefore, the lease rental income is rightly classified under 'Income from house property.'

2. Eligibility for Deduction under Section 80-IAB:
The assessee's alternate claim was that even if the lease rental income is classified under 'Income from house property,' it should still qualify for deduction under Section 80-IAB, which provides deductions for profits and gains derived from developing a Special Economic Zone (SEZ).

The Tribunal agreed with the assessee's contention, stating that the word 'business' in Section 80-IAB should be construed broadly. The lease rental income, derived from developing and leasing the SEZ, is considered profits and gains from the business of developing a SEZ. The Tribunal noted that the assessee had been allowed deductions under Section 80-IAB for other income assessable as business income, indicating compliance with the section's conditions.

However, the Tribunal observed that the Assessing Officer had not made a specific finding on the assessee's eligibility for deduction under Section 80-IAB for the lease rental income. The Tribunal directed the AO to verify the assessee's compliance with the conditions of Section 80-IAB, particularly regarding the lease period and the nature of the tenants' businesses. Subject to a positive finding, the assessee's claim for deduction under Section 80-IAB was allowed.

Conclusion:
The Tribunal concluded that the lease rental income should be classified under 'Income from house property.' However, the assessee is eligible for deduction under Section 80-IAB, subject to verification of compliance with the section's conditions by the Assessing Officer. The Revenue's appeal was disposed of on these terms.