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2016 (9) TMI 511 - AT - Income TaxRental/licence fee received in respect of property given on lease to BHL - acquiring and leasing properties in the State of Jammu & Kashmir - liable to be assessed as business income and not as income from house property - Held that - Chennai Properties And Investment Limited (2015 (5) TMI 46 - SUPREME COURT), is directly and squarely applicable on this point. It holds that since the main object of the assessee was to acquire and let out properties, from which letting out, income was earned, such income is to be treated as business income. The ratio laid down by the Hon ble Apex Court is that the nature of the activity of the assessee and the nature of the operation in relation to the leasing out of land, which is the deciding factor as to under which head the profits and gains earned from leasing out are to be assigned. Their lordships have held that so as to interpret such activities, the objects of the company must also be kept in view. Now, as observed, in the present case, undisputedly, the main object of the assessee happened to be acquiring land and buildings in the State of J & K and letting out the same. This is exactly the same object as was that of the assessee in Chennai Properties And Investment Limited (supra). Therefore, in accordance with Chennai Properties And Investment Limited (supra), we hold that the assessee is correct in contending by way of the additional ground taken that the rental/licence fee received by the assessee in respect of the subject property given on lease to BHL is liable to be assessed as business income and not as income from house property, as the assessed by the Taxing Authorities. The additional ground taken by the assessee is thus, accepted.
Issues Involved:
1. Jurisdiction and validity of the assessment order under section 147/143(3) of the Income Tax Act, 1961. 2. Determination of notional annual letting value (ALV) of the property. 3. Classification of rental income as business income or income from house property. Detailed Analysis: 1. Jurisdiction and Validity of the Assessment Order: - The assessee argued that the Commissioner of Income-tax (Appeals) [CIT(A)] erred in not quashing the assessment order dated 25.03.2014, passed under section 147/143(3) of the Income Tax Act, 1961, on the grounds of being beyond jurisdiction, bad in law, and void ab initio. - The CIT(A) held that the 'reasons to believe' recorded by the Assessing Officer (AO) had a direct nexus with the income escaping assessment. - The CIT(A) upheld that the revisionary order dated 02.01.2012 passed under section 263 for assessment year 2008-09 constituted fresh material for the AO to reopen the concluded assessment for the impugned assessment year under section 147 of the Act. 2. Determination of Notional Annual Letting Value (ALV): - The CIT(A) sustained the addition made by the AO to the extent of ?48,04,138 on account of notional ALV of the land under section 23(1) of the Act, on the ground that ALV of said property exceeded the actual rent charged by the appellant. - The CIT(A) held that the ALV of the property has to be independently determined for each assessment year, notwithstanding the amount of rent agreed for a fixed period at the time of entering into a legally binding rental contract. - The CIT(A) concluded that the subsequent enhancement of license fee by both parties indicated that the agreed annual license fee was not the fair rental value of the property for the year under consideration. - The CIT(A) determined the ALV of the subject property by estimating the cost of land and building at ?6,68,30,535 and adopting 10% thereof as the ALV for the year under consideration, purely on an ad-hoc basis. - The CIT(A) rejected the comparable instances brought on record by the appellant in support of the fair market value of the subject property. 3. Classification of Rental Income: - The assessee argued that the rental/license fee of ?5 Lacs received in respect of the subject property given on lease to Bharat Hotels Ltd. should be assessed as business income instead of income from house property. - The Supreme Court in 'Chennai Properties And Investment Limited vs. CIT' held that where the main object of a company, as per its memorandum of association, is to acquire properties and earn income by letting out the same, such income is taxable as 'business income' and not as 'income from house property'. - The Tribunal found that the main object of the assessee company was to acquire and lease properties in the State of Jammu & Kashmir, aligning with the Supreme Court's ruling in 'Chennai Properties And Investment Limited'. - Initially, the assessee had claimed the income from letting out the property as business income, which was accepted under section 143(1) of the Act. However, upon reopening the assessment, the income was offered as income from house property. - The Tribunal concluded that the income earned by the assessee from letting out the properties acquired by it is taxable as business income and not as income from house property, following the Supreme Court's decision. Conclusion: - The Tribunal accepted the additional ground raised by the assessee, determining that the rental/license fee received should be assessed as business income. - Consequently, all other grounds raised became academic and were not further examined. - The Tribunal allowed all the appeals of the assessee and dismissed all the appeals of the Revenue. - The stay applications filed by the assessee were rendered infructuous due to the disposal of the appeals. Order Pronounced: - The order was pronounced in the open court on 26/08/2016.
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