2016 (2) TMI 419 - AT - Income Tax

Rental income and service charges derived by the assessee from shopping mall/business centre - whether to be assessed as Income from House Property or Business Income - Held that - The activitivities of the assessee of renting the premises and offering various services was the composite commercial activity and income derived by the assessee from shopping mall/business centre was assessable as business income and not as income from house property. The assessee is accordingly eligible to claim depreciation on the asset and other business expenditure. - Decided in favour of assessee Allocation of cost of amenities - Held that - AO, though noted that out of the total area of 12100 sq. feet, the assessee had completed only 8,298 sq. feet as on 31.03.04. He, however, allocated the entire cost of amenities to the total area of the project and thereafter calculated the average cost per sq. feet and thereafter attributed the said average cost per sq. feet to 8,298 sq. feet of area. We do not find justification in the above method adopted by the AO. Since the constructed area up to 31.03.04 was only 8,298 sq. feet, hence the cost of amenities for the year under consideration was to be allocated to the actual area constructed and not to the total area of 12100 sq. feet. There is no justification on the part of the AO to allocate the cost of amenities even to the area which was not constructed/in existence during the year. We, therefore, direct the AO to allocate the cost of amenities of ₹ 1,31,98,017/- directly to the constructed area of 8,298 sq. feet and not to the total area of 12100 sq. feet. Disallowance u/s 14A - Held that - It is not a case where no exempt income was received by the assessee despite making investments for earning exempt income. It is also not the case of the Revenue that the exempt income earned by the assessee was very less or not in proportion to the investments made by the assessee for this purpose. Under such circumstances the different coordinate benches of this Tribunal have observed that in such cases certain percentage of exempt income can constitute a reasonable estimate for making disallowance for the years earlier to assessment year 2008-09. Hence, considering the overall facts and circumstances of the case we restrict the disallowance u/s 14A in the case of the assessee @ 5% of the tax exempt income earned by the assessee during the year. Computation of income of long term capital gains from the sale of M/s. Movie Times - Held that - he said income cannot be assessed in the year under consideration. However, we agree with the contention of the Ld. D.R. that since it has been contended by the assessee itself that the transfer has taken place in A.Y. 2003-04 and which contention of the assessee has been accepted by the Ld. CIT(A) also hence, in the circumstances, we direct that the proceeds of the sale transaction are to be reduced from the WDV of the block of the assets in A.Y. 2003-04 itself and the assessee will not be entitled to claim of depreciation on the sold part of the asset from the date of sale of the property in A.Y. 2003-04. The deeming fiction of section 50C is not applicable to the transaction in question in the case of the assessee Claim of interest expenditure allowed as revenue expenditure. Treatment of income from car parking charges, compensation and other miscellaneous income - whether the business income or income from other sources - Held that - In view of our discussion made all these activities were relating to the business activity of the assessee. The Ld. CIT(A) has rightly held that the income earned from the above activities was business income of the assessee. We, therefore, do not find any infirmity in the order of the Ld. CIT(A) in this respect.

Issues Involved:
1. Classification of rental income and service charges as 'Income from House Property' or 'Business Income'.
2. Eligibility for depreciation on the building of the business centre/commercial complex.
3. Allowability of property tax and interest under the 'Business Head'.
4. Treatment of maintenance charges and miscellaneous income as 'Business Income'.
5. Computation of cost of property sold and related loss.
6. Disallowance under section 14A read with rule 8D.
7. Computation of notional rent from a specific property.
8. Treatment of income from sale of property as long-term capital gains or business income.
9. Application of section 50C for fair market value assessment.
10. Allowability of interest on borrowed capital.
11. Carry forward of depreciation losses from earlier years.

Detailed Analysis:

Issue 1: Classification of Rental Income and Service Charges
The Tribunal referenced its decision in the assessee's case for A.Y. 2003-04, where it was held that income from commercial exploitation of the property should be treated as 'Business Income' and not 'Income from House Property'. The Tribunal found the activities of renting premises and offering services to be composite commercial activities. Consequently, the income derived from the shopping mall/business centre was assessable as business income.

Issue 2: Eligibility for Depreciation
Given that the income from the business centre/commercial complex was classified as 'Business Income', the assessee was eligible to claim depreciation on the asset. The Tribunal upheld the CIT(A)'s decision allowing the claim of depreciation.

Issue 3: Allowability of Property Tax and Interest
The Tribunal agreed with the CIT(A)'s decision to allow property tax and interest on borrowed capital under the 'Business Head', as the income was considered business income.

Issue 4: Treatment of Maintenance Charges and Miscellaneous Income
The Tribunal found that the collection of maintenance charges and miscellaneous income had a nexus with the assessee's business activity and should be assessed as business income.

Issue 5: Computation of Cost of Property Sold and Related Loss
The Tribunal disagreed with the AO's method of allocating the cost of amenities to the total project area instead of the constructed area. It directed the AO to allocate the cost of amenities to the actual constructed area of 8,298 sq. feet, not to the total area of 12,100 sq. feet.

Issue 6: Disallowance under Section 14A Read with Rule 8D
The Tribunal noted that Rule 8D is not retrospective and applies from A.Y. 2008-09. For earlier years, disallowance under section 14A should be made on a reasonable basis. The Tribunal restricted the disallowance to 5% of the tax-exempt income earned by the assessee during the year.

Issue 7: Computation of Notional Rent
The Tribunal upheld the CIT(A)'s decision that the assessee ceased to be the owner of the property from February 2003, thus no deemed rental income should be assessed for subsequent years.

Issue 8: Treatment of Income from Sale of Property
The Tribunal agreed with the CIT(A) that the transfer of property was completed in A.Y. 2003-04. The proceeds from the sale should be reduced from the WDV of the block of assets in A.Y. 2003-04, and the assessee would not be entitled to claim depreciation on the sold part of the asset from the date of sale.

Issue 9: Application of Section 50C
The Tribunal held that the deeming fiction of section 50C is not applicable to the transaction in question, as it applies only for computing capital gain under section 45 read with section 48.

Issue 10: Allowability of Interest on Borrowed Capital
The Tribunal directed the AO to allow the claim of interest expenditure as revenue expenditure, following the legal position that even if a claim is not made before the AO, it can be made before the appellate authorities.

Issue 11: Carry Forward of Depreciation Losses
The Tribunal upheld the CIT(A)'s decision allowing the carry forward of depreciation losses from earlier years, as the complex was considered a business asset and depreciation was allowable.

Overall Conclusion:
The Tribunal dismissed all the appeals of the Revenue, allowed the cross objections of the assessee, and directed the AO to reassess certain issues in light of the Tribunal's findings and relevant case laws. The Tribunal's decisions were based on consistent application of legal principles and precedents, ensuring that income was correctly classified and deductions were appropriately allowed.

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