2024 (5) TMI 1416 - AT - Income Tax

Correct head of income - rental income receipts - income from house property or business income or income from other sources - AO granted standard deduction of 30% as per Section 24 - assessee as submitted it leased out the property to avoid keeping the property idle and earn lease rental till any potential buyer offering the right price was found - HELD THAT - Lease deed when read with Exhibit-A makes it very apparent that the user was not given possession of the premises as a tenant alone but was given the possession of the premises which was held as a commercial asset by the appellant and the charges agreed to be paid were not for occupation of the building along but for all the facilities and amenities mentioned in the aforesaid Exhibit-A. Various substantial infrastructure apart from the building such as AC plants DG Sets. lifts and escalators internet lines fax lines EPABX fire extinguishers electrical purchases water system hand dryers shredders CO2 flooding system carpets etc. were leased by the appellant company along with the building which added substantial value to the building and the lease rentals. The same cannot be said to be inseparable from letting out of the building premises. Assessee is no expected to establish that if these services amenities and facilities were not available the other party would not have accepted the letting out. The tax authorities should not expect that business entities were supposed to explain with precision and accuracy every decision they make to based on commercial expediency as understood by the said authority. The tax authority should take notice of transformation of business needs based on new business culture and environment. The user here is not mere tenant but had accepted the possession of building as a whole with desired services and amenities made available by the appellant so that no time energy and resources are wasted in customizing the building to the needs of user occupant. The fact that in respect of certain facilities limits were put up and the user was supposed to pay over and above the limits on consumption basis firmly establishes the fact that it was not merely a tenancy/lease agreement but the intention was to exploit the commercial asset. Tax Authorities have fallen in error in changing the head of income from Business income to Rental income and accordingly the disallowance of expenditure and denial of depreciation on this account is not sustainable. The grounds raised in both the appeals are allowed.

Summary

Issues Involved:
1. Classification of rental income: Whether the rental income received by the assessee should be classified as "income from house property" or "business income."
2. Allowability of expenses: Whether the expenses incurred for providing various services and amenities should be allowed as deductions.
3. Depreciation claim: Whether the depreciation claimed on assets, including those other than the building, should be allowed.

Summary of Judgment:

1. Classification of Rental Income:
The primary issue was whether the rental income received by the assessee from leasing out a commercial complex should be classified as "income from house property" or "business income." The assessee argued that the rental income should be treated as business income because the property was leased out due to a lull in the real estate market and was equipped with various amenities and services, making it a commercial asset. The Tribunal agreed with the assessee, stating that the property was not merely a building but a commercial complex with substantial infrastructure and services, and thus the rental income should be classified as business income. The Tribunal relied on various judicial precedents, including the Supreme Court's decision in CIT v. Vikram Cotton Mills Ltd. and Universal Plast Ltd. vs. CIT, which emphasized the intention behind leasing out the property and whether it was part of the business activity.

2. Allowability of Expenses:
The assessee claimed various expenses incurred for providing services and amenities as part of the composite rent. The Assessing Officer had disallowed these expenses, treating the rental income as income from house property. The Tribunal, however, allowed these expenses, stating that since the rental income was classified as business income, the expenses incurred for providing services and amenities should be allowed as deductions. The Tribunal also noted that even if the rental income were to be classified u/s 56(2)(iii) as "income from other sources," the expenses would still be allowable under section 57(ii) of the Act.

3. Depreciation Claim:
The assessee claimed depreciation on assets, including those other than the building. The Assessing Officer had disallowed the depreciation, treating the rental income as income from house property. The Tribunal allowed the depreciation claim, stating that since the property was used for business purposes, the depreciation should be allowed. The Tribunal also noted that even if the rental income were to be classified as "income from other sources," depreciation would be allowable under section 57(ii) of the Act. The Tribunal relied on the Delhi High Court's decision in Jay Metal Industries (P) Ltd. vs. CIT, which allowed depreciation on assets used for earning rental income classified as "income from other sources."

Conclusion:
The Tribunal concluded that the rental income should be classified as business income, the expenses incurred for providing services and amenities should be allowed as deductions, and the depreciation claimed on assets should be allowed. The appeals were allowed in favor of the assessee.