2019 (3) TMI 1468 - HC - Income Tax

Taxability of rental income - letting out the shop rooms in the mall constructed by it - correct head of income income from house property or profits and gains of business - HELD THAT - In the instant case, it is not a letting out of property simpliciter, without anything more. A host of services are being provided by the assessee at the shopping mall. The assessee is engaged in a complex set of activities at the shopping mall. Management of the shopping mall is done by the assessee. The basic purpose is commercial exploitation of the property. The assessee has earned the income not merely by letting out the shop rooms but also by providing amenities and facilities at the shopping mall. Such amenities and facilities are not the basic facilities required for occupation of a shop room by a tenant. They are the special facilities for running the shopping mall and are meant to attract the customers and provide them the comfort and convenience of shopping. In cases where the income received is not from the bare letting out the property but on account of the facilities and services rendered, the operations involved in such letting out is in the nature of business and the income derived therefrom has to be treated as business income and not income from property. The income derived by the assessee cannot be regarded as simply from the exercise of property right. Where the assessee company has developed the shopping mall and let out the same by providing a variety of services, facilities and amenities in the mall, it can be found that the primary intention of the assessee was commercial exploitation of the property and where it has derived substantial part of its income by such activity, which constitutes its main business, the income so derived would be business income of the assessee. We, therefore, agree with the view of the Tribunal that the income derived by the assessee by letting out the shops in the mall has to be assessed as income from business and not as income from house property. - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of rental income from letting out shop rooms in a shopping mall: "Income from house property" vs. "Profits and gains of business".

Detailed Analysis:

Issue 1: Classification of Rental Income

The primary issue in this case is whether the rental income received by the assessee company from letting out shop rooms in the shopping mall should be classified under "income from house property" or "profits and gains of business" under the Income Tax Act, 1961.

The assessee, a company engaged in the construction and promotion of residential and commercial complexes, constructed a shopping mall named 'Oberon Mall' and let out shop rooms. In the revised return of income for the assessment year 2009-10, the assessee declared ?80,09,364/- as business income. However, the assessing officer treated this amount as income from house property, applying deductions for municipal taxes and statutory benefits, and computed tax on the balance amount of ?54,41,293/-. The assessee's appeal to the Commissioner of Income Tax (Appeals) was dismissed, but the Income Tax Appellate Tribunal ruled in favor of the assessee, treating the income as business income. The revenue challenged this order.

Legal Provisions and Precedents:
Section 22 of the Act specifies that the annual value of property consisting of buildings or lands appurtenant thereto, owned by the assessee, shall be chargeable to income tax under the head "Income from house property," except portions occupied for business or professional purposes. The Supreme Court in Commissioner of Income Tax v. M/s Poddar Cement Private Limited clarified that 'owner' under Section 22 refers to a person entitled to receive income from the property in their own right.

Case Analysis:
The court examined whether the letting out of shop rooms was part of the assessee's business activity. The Constitution Bench in Sultan Brothers Private Limited v. Commissioner of Income Tax stated that whether a particular letting is business depends on the circumstances of each case. The Supreme Court in Karanpura Development Company v. Commissioner of Income Tax emphasized examining the company's professed objects and activities. In Karnani Properties Limited v. Commissioner of Income Tax, the Supreme Court held that services rendered to tenants could constitute business activity if carried out continuously and systematically with a profit motive.

Tribunal's Findings:
The Income Tax Appellate Tribunal found that the assessee exploited the property for commercial activities, providing various services and amenities, and managing the mall's operations. The Tribunal concluded that the income was from business activities, not merely from letting out property.

Court's Decision:
The court agreed with the Tribunal's findings, noting that the assessee's primary intention was commercial exploitation of the property. The court distinguished this case from precedents cited by the revenue, such as Shambhu Investment Private Limited and Raj Dadarkar, where the facts differed significantly. The court emphasized that the assessee's activities went beyond mere letting out of property, involving substantial management and provision of services, thus constituting business income.

Conclusion:
The court concluded that the income received by the assessee from letting out shop rooms in the shopping mall should be assessed as "profits and gains of business" and not "income from house property." The substantial question of law was answered in favor of the assessee, and the revenue's appeal was dismissed.

Final Judgment:
The appeal was dismissed, and the income derived from letting out shop rooms in the shopping mall was to be treated as business income.