2013 (12) TMI 66 - AT - Income Tax

Income from letting out of fit outs - Held that - The fit out rent was earned from letting various facilities such as interiors, furniture and fixtures, electrical fittings etc. - The fit outs form an integral part of the structure owned by the assessee - Following Addl. CIT v. Hindustan Machine Tools Ltd 1979 (6) TMI 27 - KARNATAKA High Court - The intention of the parties in entering into the lease transaction - It is not the number of agreements which are entered into between the parties which is decisive in determining the nature of transaction - The object is to enjoy the entire property viz., building furniture and the accessories as a whole which is necessary for carrying on the business, then the income derived there from cannot be separated based on the separate agreement entered into between the parties. What has to be seen is, what was the primary object of the assessee while exploiting the property. If it is found applying such principle that the intention is for letting out the property or any portion thereof, the same may be considered as rental income or income from properties. In case, if it is found that the main intention is to exploit immovable property by way of complex commercial activities, in that event it must be held as business income - The income derived from letting out the out-fits, fixtures, furniture etc., is not chargeable under the head income from house property - Decided in favour of assessee. Maintenance charges - Held that - Following CIT v. Model Manufacturing Co. P. Ltd 1984 (12) TMI 29 - CALCUTTA High Court - The services rendered by the assessee in providing electricity, use of lifts, supply of water, maintenance of staircases and watch and ward facilities to the tenants constituted separate activities distinct from the letting out of the property and were not incidental to such letting out. It was further held that the service charges realised by the assessee were not part and parcel of income derived from house property assessable under section 22 of the Act and that they were assessable under the head income from other sources - Decided in favour of assessee. Professional charges - Held that - The CIT (A) on its part has not discussed the facts of the case in detail for deleting the additions made by the Assessing Officer - The issue is restored for fresh adjudication. Interest - Held that - The Assessing Officer has not given any reason while disallowing the expenditure claimed by the assessee - The CIT (A) has merely narrated that the above said expenses are business expenditure and the same is to be allowed - The facts of the issue was not considered either by the Assessing Officer or by the CIT (A) - The issue is restored for fresh adjudication. Rent to guest house - Held that - The CIT (A) has allowed the relief to the assessee without passing a speaking order and without appreciating the applicability of the provisions of section u/s 40A(2) - The issue is restored for fresh adjudication.

Summary

Issues Involved:
1. Classification of rent received on fit-outs, fixtures, and equipment.
2. Classification of income from maintenance charges.
3. Allowability of professional charges as business expenditure.
4. Allowability of interest and other expenses as business expenditure.
5. Allowability of rent paid to the guest house as business expenditure.

Issue-wise Detailed Analysis:

1. Classification of Rent Received on Fit-outs, Fixtures, and Equipment:
The assessee contended that rent received from fit-outs, fixtures, and equipment should be classified as 'business income' rather than 'income from house property'. The CIT (A) treated this income as 'house property' income, reasoning that fit-outs are an inextricable part of the premises. However, the Tribunal found that the fit-outs were provided separately with distinct rent fixed for them, and thus, they should not be considered an integral part of the building. The Tribunal relied on various judicial precedents, including the Hon'ble Jurisdictional High Court's rulings, which supported the view that such income should be classified as 'business income' or 'income from other sources' if not inseparable from the building.

2. Classification of Income from Maintenance Charges:
The assessee argued that maintenance charges should be treated as 'business income' because they were for services provided to tenants, independent of the property ownership. The CIT (A) initially conceded that maintenance charges could be considered as business income but ultimately upheld the AO's classification as 'house property' income. The Tribunal, citing judicial precedents, concluded that maintenance charges are for services rendered and should be classified as 'business income' or 'income from other sources'.

3. Allowability of Professional Charges as Business Expenditure:
The AO disallowed professional charges of Rs. 1,76,50,000, but without providing reasons. The CIT (A) allowed the expenditure, noting it consisted of compensation for termination of a project, legal fees, and payments to Embassy Management Services for property maintenance. The Tribunal found the AO's disallowance lacked reasoning and remanded the matter back to the AO for proper adjudication.

4. Allowability of Interest and Other Expenses as Business Expenditure:
The AO disallowed interest and other expenses amounting to Rs. 42,86,866 without providing reasons. The CIT (A) allowed the expenditure, stating it was related to compensation for project termination. The Tribunal found that neither the AO nor the CIT (A) had adequately addressed the facts and remanded the issue back to the AO for fresh consideration.

5. Allowability of Rent Paid to the Guest House as Business Expenditure:
The AO disallowed guest house rent of Rs. 15,60,000, citing it was paid to a trust related to the company's directors. The CIT (A) allowed the expenditure, stating the guest house was used for business purposes. The Tribunal noted the lack of detailed discussion by both the AO and CIT (A) and remanded the issue back to the AO for fresh consideration, specifically addressing the applicability of Section 40A(2) of the Income Tax Act.

Conclusion:
The assessee's appeals for AY 2006-07 and 2007-08 were allowed, while the Revenue's appeal for AY 2007-08 was allowed for statistical purposes. The Tribunal ordered a remand for proper adjudication on the issues concerning professional charges, interest and other expenses, and guest house rent.