2017 (10) TMI 314 - AT - Income Tax

Rental income received by the appellant from letting out of retail space in mall - business income or income from house property - legal owner - Held that - Qua the retail space, the assessee was not carrying on any systematic or organized activity of providing service to the occupiers of the shops, albeit other service charges pertaining to the common maintenance, event and advertising, parking fees, etc., has been offered separately for tax under the head profits and gains of business of profession. So far as retail space is concerned, it is lease rent simplicitor, which is evident from the copy of sample lease deed which has been placed by the assessee and also the copies of MoU. Thus, on the facts of the present case and also relying upon the principle laid down in the case of Raj Dadarkar & Associates vs. ACIT (2017 (5) TMI 586 - SUPREME COURT OF INDIA), we hold that the receipts from the lease rent/license fee from lease of retail space in the shopping mall is to be taxed under the head income from house property under section 22; and consequently, the assessee is liable for deduction under section 24(a) and other deductions of interest of pre-construction period and interest on loan which are to be allowed while computing the income from house property. Accordingly, disallowance made by the Assessing Officer for the sums aggregating to ₹ 18,19,71,202/- is directed to be deleted. Disallowance under section 14A read with rule 8D - Held that - Since the assessee s only grievance before us is that, the disallowance under section 14A should be restricted to the extent of exempt income of ₹ 7,63,867/-, therefore, following the ratio and principle laid down by the Hon ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT), we restrict the disallowance at ₹ 7,63,867/- as disallowance of expenses cannot exceed the income earned. Thus, ground No.2 of the assessee is partly allowed. Deemed dividend under section 2(22)(e) - interest payment on OFCD held by Select Holiday Resorts Pvt. Ltd. which is one of the holding company of the assessee-company - Held that - We are unable to appreciate such a hypothesis of the Revenue to approach the payment of interest to holding company/ sister concern; firstly, payment of interest on OFCD can never be reckoned as loan or advance given as stipulated in section 2(22)(e), as OFCD is one of the mode of securing an unsecured loan and there is no payment of loan or advance from accumulated profits; and secondly, there is no diversion of any interest bearing fund, because assessee has offered OFCD to a separate entity which has been subscribed by them, on which assessee is paying interest. Hence, there could be no case of diversion of any interest bearing loan or advance of fund to sister concern for non-business purposes. Thus, the ground raised by the Revenue has no merits and the addition has rightly been deleted by Ld. CIT (A). Accordingly, ground raised by the revenue is dismissed. Disallowance of depreciation on plant and machinery - assessee had not produced relevant purchase bills and evidences and assessee did not put to use the aforesaid assets during the relevant previous yea - Held that - Journal entry for capitalization of plant and machinery from capital work-inprogress passed on 31/3/2008 does not in any manner can lead to an inference that assets were installed and put to use on that date only and were not installed or put to use on 29/9/2007, because the assessee had shown the revenue in the form of rent and maintenance charges in relation to the said complex and also filled various contemporaneous evidences which have been highlighted at page 31 of the impugned appellate order. Based on these facts and evidences, the ld. CIT (A) has given a finding of fact that, since the assessee has shown income from business during the year and there is no way income would have been earned without utilizing the assets like lift, parking equipments, etc. and such income has been accepted by the Assessing Officer, then depreciation on such assets cannot be disallowed. Such a finding of the ld. CIT (A) is based on correct appreciation of facts and law and we do not find any reason to deviate from such a finding or set aside the issue to the file of the AO as contended by the Ld. CIT-DR, because all the relevant material to corroborate the claim are already on record and confronted to the AO. Accordingly, ground No.2 is dismissed.

Summary

Issues Involved:
1. Classification of rental income from letting out retail space in a mall as "business income" vs. "income from house property."
2. Disallowance under section 14A of the Income-tax Act.
3. Addition on account of interest on optionally fully convertible debentures under section 2(22)(e) of the Income-tax Act.
4. Disallowance of depreciation on plant and machinery.

Issue-wise Detailed Analysis:

1. Classification of Rental Income:
The primary issue was whether the rental income of ?27,37,99,940 from letting out retail space in a mall should be classified as "business income" or "income from house property." The assessee argued that the income should be treated as "income from house property" as the retail space was intended to be leased out from the beginning, and this intention was evident from the Director’s report and Notes to Accounts. The Assessing Officer (AO) and Commissioner of Income-Tax (Appeals) (CIT(A)) treated the income as "business income," arguing that the mall was a commercial property and the assessee was engaged in a systematic business activity. However, the Tribunal, referencing the Supreme Court judgment in Raj Dadarkar & Associates vs. ACIT, concluded that the rental income from retail space should be taxed as "income from house property" since the primary intention was to lease out the property and earn rental income. Consequently, the assessee was entitled to deductions under section 24(a) of the Income Tax Act.

2. Disallowance under Section 14A:
The second issue involved the disallowance of ?12,45,053 under section 14A read with Rule 8D of the Income-tax Rules. The assessee contended that the disallowance should be restricted to the extent of the exempt income earned, which was ?7,63,867. The Tribunal agreed with the assessee, citing the Delhi High Court judgment in Cheminvest Ltd. vs. CIT, and restricted the disallowance to ?7,63,867, as disallowance of expenses cannot exceed the income earned.

3. Addition on Account of Interest on OFCDs:
The AO added ?2,63,55,191 on account of interest on optionally fully convertible debentures (OFCDs), treating it as deemed dividend under section 2(22)(e) and disallowed the interest, arguing that it was a diversion of interest-bearing loan to a related company. The CIT(A) deleted the addition, stating that the payment of interest on OFCDs cannot be considered as a loan or advance, and hence, section 2(22)(e) was not applicable. The Tribunal upheld the CIT(A)’s decision, noting that the payment of interest on OFCDs was a legitimate business expense and could not be treated as deemed dividend.

4. Disallowance of Depreciation on Plant and Machinery:
The AO disallowed ?8,16,38,515 claimed as depreciation on plant and machinery, citing lack of evidence for the purchase and use of the assets. The CIT(A) allowed the depreciation, noting that the assessee provided sufficient evidence of the purchase and use of the assets. The Tribunal affirmed the CIT(A)’s decision, stating that the assessee had shown the assets were installed and put to use when the mall became operational, and the income generated from the use of these assets was duly reflected in the business income.

Other Appeals:
For the assessment years 2009-10, 2010-11, and 2011-12, the Tribunal applied the same findings as for the assessment year 2008-09, treating the rental income from retail space as "income from house property" and allowing the related deductions. The Revenue’s appeal for the assessment year 2011-12 was dismissed due to the tax effect being below the monetary limit prescribed by the CBDT Circular No.21/2015.

Conclusion:
The Tribunal ruled in favor of the assessee on most issues, treating the rental income from retail space as "income from house property," restricting the disallowance under section 14A to the exempt income earned, and allowing the depreciation on plant and machinery. The Revenue’s appeals were dismissed.