2017 (7) TMI 779 - HC - Income Tax

Income received by way of rent - ITAT treated as business income - nature of income - Held that - The various malls are built by Assessee and are operated from the year 2001. The operational income received from the said activity, in the form of rent, and other service charges was consistently offered to tax as its business income in the earlier years and the same was accepted by the Department as a business income. After demerger, both the Assessee Companies took over the assets and liabilities of the demerged Company and continued the same business of operating and running the malls. The Tribunal has correctly considered the nature of the business activities of the Assessee Company, as well as, terms and conditions of the relevant agreements, under which the commercial space in the mall was given on hire by the Assessee Companies to the concerned parties. It also considered the various services provided by the Assessing Companies during the course of operation and running of the Family Entertainment Centre-cum-malls. Commissioner (Appeals) and the Tribunal have concurrently arrived at a conclusion that the intention of the Assessing Companies was to commercially exploit the property by way of complex commercial activities and it was not a case of letting out the property simplicitor. The rental income and the service charges thus were received by the Assessee Company as business income during the course of business carried out by them of operating and running a Mall as a commercial activity. The facts of the present case are much similar to the case of Chennai Properties and Investments Limited, Chennai 2015 (5) TMI 46 - SUPREME COURT . We find that the appreciation of evidence by the Commissioner (Appeals) and Tribunal is not perverse and the finding arrived at by them is plausible one. - Decided against revenue

Summary

Issues:
1. Determination of income received by the Respondent as business income or house property income.

Analysis:
The Appeals before the Bombay High Court involved a dispute regarding the nature of income received by the Respondent/Assessee through rent - whether it should be classified as business income or house property income. The Commissioner (Appeals) and the Tribunal had both concluded that the income derived from rent should be considered as business income. The Revenue, however, contested this decision, arguing that the Assessing Officer should have the right to reevaluate the issue due to the demerger of the original Company. The Appellant's counsel relied on various judgments, including those of the Apex Court, to support the argument that the income should be assessed as house property income based on the predominant object and intention of the Assessee Company.

The Respondent's counsel, on the other hand, contended that the income from rent should indeed be classified as business income, as supported by the object clause in the Memorandum of Association, which outlined the business of constructing malls/commercial complexes and leasing them out. The counsel highlighted that even in previous years, the income from rent had been assessed as business income. The Respondent's business primarily involved leasing and rentals of properties, further reinforcing the argument for considering the income as business income.

The High Court noted that there is no fixed formula to determine whether income should be categorized as 'income from house property' or 'business income,' and each case must be assessed based on its unique circumstances. The Court acknowledged the historical acceptance of the income as business income by the Assessing Officer until a deviation in the Assessment Year 2007-08. The Court also considered the demerger of ECity Entertainment Pvt. Ltd., whose properties were divided among the present Assessing Companies, with the income from rent consistently treated as business income for the demerged Company until the Assessment Year 2005-06.

Referring to relevant judgments, the High Court emphasized that the principle of consistency should be considered, even though the principle of res judicata may not apply. The Court highlighted the importance of examining the main object of the Company and the nature of its activities to determine the classification of income. Ultimately, after reviewing the facts and submissions, the Court upheld the decisions of the Commissioner (Appeals) and the Tribunal, concluding that the income received from rent should be treated as business income due to the commercial exploitation of the property through complex commercial activities, similar to the case of Chennai Properties and Investments Limited, Chennai.

In light of the above analysis, the High Court dismissed the Appeals, stating that no substantial question of Law arose, and no costs were awarded.