2013 (12) TMI 128 - AT - Income Tax

Renting of immovable property Business income or Income form property Held that - The assessee company has leased out its entire business premises for the use of the holding company - Following Shambhu Investment (P.) Ltd. 2003 (1) TMI 99 - SUPREME Court - Merely because income is attached to any immovable property cannot be the sole factor for assessment of such income as income from property; what has to be seen is what was the primary object of the assessee while exploiting the property If main intention is for letting out the property, or any part thereof, the same must be considered as rental income or income from property - In case the main intention is to exploit the immovable property by way of complex commercial activities, it must be held as business income The assessee has not exploited its business asset for commercial purposes - The shed was never used for its business purpose and immediately after construction, the shed was given to its holding company - Accordingly, for claiming depreciation, the assessee has shown the rental income as business income as there is no other expenses claimed by the assessee in its profit and loss account - The factory shed was constructed by the funds of the holding company and was used by the holding company - The business asset created by the assessee was only for the purpose of holding company and not use of assessee - The holding company was the owner of the shed as the assessee is a hundred percent subsidiary of the holding company Decided against assessee. Rental income Held that - The shed owned by the assessee was a business asset and in case of business asset, provisions of Section 23(1) are not applicable - No notional income can be computed in view of the provision of Section 23(1) Decided in favour of assessee.

Summary

Issues:
- Condonation of delay in filing appeals
- Characterization of rental income as business income or income from house property

Condonation of Delay in Filing Appeals:
The Appellate Tribunal ITAT Mumbai addressed the issue of condonation of delay in filing appeals against the order of the CIT(A) for assessment years 2003-04 to 2009-10. The assessee's appeals were late by 513 days, with the Director of the Company providing an affidavit explaining the delay. The assessee initially did not file appeals based on advice from their former Chartered Accountant, but upon changing counsel, appeals were filed promptly. The Tribunal considered the bonafide belief of the assessee and cited precedents where delay was condoned due to mistakes of counsel. Relying on various decisions, including the case of Phoenix Mills Ltd., the Tribunal concluded that there was a reasonable cause for the delay and thus condoned the delay in filing the appeals.

Characterization of Rental Income:
Regarding the characterization of rental income as business income or income from house property, the Tribunal examined appeals for assessment years 2003-04 to 2006-07 and 2007-08 to 2009-10. In the former period, the AO assessed the lease rent as income from house property instead of business income claimed by the assessee. The Tribunal found that the assessee had not utilized the business asset for commercial purposes, as the shed was immediately rented out to the holding company after construction. Citing the decision in Shambhu Investment (P.) Ltd., the Tribunal held that the rental income should be assessed as income from house property since the asset was not used for business purposes by the assessee. Consequently, the appeals for the earlier years were dismissed. However, for the later assessment years where no rental income was received, the AO assessed notional income. The Tribunal disagreed, stating that as the shed was a business asset, Section 23(1) did not apply, and no notional income could be computed. Therefore, the appeals for the later years were allowed.

In conclusion, the Tribunal dismissed the appeals for assessment years 2003-04 to 2006-07 and allowed the appeals for assessment years 2007-08 to 2009-10 based on the characterization of rental income and the application of relevant legal provisions.