2023 (12) TMI 814 - HC - Income Tax

Characterization of income - income arising from sub-licensing of shops and establishment along with the various services which are rendered to the sub-licensed shopkeepers - house property or business income - Whether it can be treated as income from house property liable to be assessed u/s 22 or composite income arising from part exploitation of shops and establishment which are sub-leased as commercial assets and the services which are rendered to the shopkeepers can be treated as income arising from business falling under Section 28 of the Act? - HELD THAT - The appellant assessee has obtained 5665 sqft. of space under a leave and licence-agreement dated 25.04.1972 from EIH Limited and has sub-licensed the space to several persons under a sub-licence agreement, along with certain services as aforementioned and for that received a composite amount as consideration on monthly basis. The assessee claimed that the sum received by it for sub-licensing, is business income but the assessing officer has not accepted it and taxed the receipts as income from house property. CIT (Appeal) allowed the appeal of the assessee and held the income to be income from business. The ITAT, after referring to section 27 (iiib) of the Income Tax Act defining the term deemed owner and Section 269UA(f) of the Act defining the word transfer ; held that the income derived by the assessee is Income from House Property. While coming to the aforesaid conclusion, the ITAT has committed a manifest error of law to ignore the object and business activity of the appellant assessee company, and misunderstood the nature of transaction of sub-license.. Thus, as per Memorandum of Association the object of the assessee company ancillary to the main object is to acquire on licence premises suitable for housing, accommodating shops, boutiques, stores, offices, showrooms for the purpose of making available on the basis of lease or licence and sub-lisence. The Assessing Officer himself recorded a specific finding in the Assessment Order that during the previous year relevant to the assessment year in question the assessee was engaged in the business of real estate and its income mainly consisted from contribution from shops. Since the object of the assessee company and its activity is the business of renting/lisencing/sub-lisencing shops etc. and it derived income mainly from the aforesaid business activity, therefore, the income from contribution/sub-lisencing derived by the assessee is business income and not income from house property. The law laid down by Hon ble Supreme Court in Chennai Properties and Investment Ltd. 2015 (5) TMI 46 - SUPREME COURT and Royla Corporation Private Limited 2016 (8) TMI 522 - SUPREME COURT are applicable on facts of the present case. Hence, we hold that the income in question of the appellant assessee is business income and not income from house property. Except for the assessment order in question, the appellant assessee s income from sub-letting/sub-licensing the space in question, has always been accepted by the respondent Income Tax Department as, income from business. Under the circumstances when the respondent Income Tax Department has always accepted the income of the appellant assessee from sub-licensing/sub-letting of the space in question, to be income from business, then the respondent cannot take a contrary stand in the present appeal. Assessee appeal allowed.

Summary

Issues Involved:
1. Classification of income from sub-licensing of shops and establishments.
2. Interpretation of the license agreement regarding deemed ownership and transfer under the Income Tax Act.

Summary:

Issue I: Classification of Income from Sub-Licensing of Shops and Establishments

The High Court examined whether the income from sub-licensing shops and establishments, along with various services rendered to sub-licensees, should be treated as "income from house property" under Section 22 of the Income Tax Act or as "income from business" under Section 28. The assessee, a private limited company, had sub-licensed office space obtained under a leave and license agreement with East India Hotels Limited. The assessee treated the income from sub-licensing as business income, which was accepted by the Income Tax Department until the assessment year 2005-06, when the Assessing Officer reclassified it as income from house property.

The CIT (Appeal) sided with the assessee, treating the income as business income, but the ITAT reversed this decision. The High Court, relying on the Supreme Court judgments in Chennai Properties and Investments Limited v. CIT and Royla Corporation Private Limited v. ACIT, held that the nature of the assessee's business, which involved sub-licensing and providing additional services, qualified the income as business income. The court emphasized the business activity and the objects of the company, concluding that the income in question should be treated as business income and not as income from house property.

Issue II: Interpretation of License Agreement Regarding Deemed Ownership and Transfer

The court also addressed whether the license agreement constituted a transfer under Section 269UA(f) and if the assessee could be deemed the owner under Section 27(iiib) of the Income Tax Act. The ITAT had concluded that the assessee was a deemed owner and the transaction constituted a transfer, thereby treating the income as income from house property. However, the High Court found that the ITAT had erred in its interpretation, noting that the sub-licensing agreement was part of the assessee's business operations and not merely an exploitation of property ownership.

Conclusion:

The High Court allowed the appeal, setting aside the ITAT's order and affirming the CIT (Appeal)'s decision, thus treating the income from sub-licensing as business income. The court also ordered the refund of any amount deposited by the assessee towards the demand in question.