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2017 (12) TMI 521 - AT - Income TaxService charges received by the assessee from tenants - whether are not an integral part of the rental income and the same are assassable under the head business income instead of income from house property - Held that - The assessee in the present case, on the other hand, has charged rent and service charges separately and it is not a case of receipt of rent for furniture and fixture provided in the property simplicitor but the case of receipt of service charges from the activity of rendering various services that was carried on in the continuous and organized manner. As rightly held by the Ld. CIT(A), the decision of Hon ble Apex Court in the case of Karnani Pvt. Ltd. (1971 (8) TMI 18 - SUPREME Court) and Attukal Shopping Complex (P) Ltd. (2002 (10) TMI 80 - KERALA High Court) thus is clearly applicable to the facts of the present case and we find no infirmity in the impugned order of the Ld. CIT(A) holding that the service charges received by the company from the tenants is assessable under the head business income by relying on the said decision. The same is therefore upheld dismissing ground no 1 of revenue s appeal. Interest on fixed deposit is to be assessed in the hands of the assessee under the head business income instead of income from other sources - Held that - The assessee company had collected the refundable security deposit from the tenants in order to cater to this requirement and the amount of such deposits partly was deposited in bank to earn interest. Such interest earned by the assessee company was a source, in addition to the service charges levied, to meet the expenses involved in rendering of services and amenities to tenants. The interest income earned by the assessee company thus was inextricably linked with the business of the assessee company of providing services and amenities to the tenants and as rightly noted by the Ld. CIT(A) in his impugned order, the activity of rendering services had resulted into profit only because of interest income earned by the assessee company. Having regard to all these facts of the case, we are of the view that the interest income earned by the assessee company is chargeable to tax as business income as rightly held by the Ld. CIT(A). and not as income from other sources . Rental income received by the assessee company from its subsidiary company - whether be assessed on actual basis instead of considering the fair rent as provided under section 23 - Held that - As regards the allegation made by the A.O. that no rent was being charged by the assessee company to its sister concern M/s. KCT to avoid tax, the Ld. CIT(A) has found the same to be baseless and incorrect after having noted that the said sister concern had declared income running into crores and was assessed to tax at maximum marginal rate. Keeping in view all these observations and findings recorded by the Ld. CIT(A), which have remained uncontroverted by the learned DR, we find no infirmity in the impugned order of the Ld. CIT(A) deleting the addition of ₹ 1,61,52,877/- made by the A.O. on account of the deemed rent allegedly receivable by the assessee company from its tenant namely KCT and upholding the same, we dismiss ground of revenue Addition on account of notional interest earned by the assessee on refundable security deposit taken from the tenants - Held that - Addition made by the A.O. to the total income of the assessee under the head income from house property on account of notional interest on security deposits received from tenants was not sustainable and the Ld. CIT(A) is fully justified in deleting the same. See CIT vs Satya Co. Ltd. 1993 (8) TMI 293 - CALCUTTA HIGH COURT Computation of disallowance under section 14A of the Act r.w.r. 8D by taking into consideration only the dividend yielding investment - Held that - This issue is squarely covered in favour of the assessee by the decision of Hon ble Kolkata High Court in the case of REI Agro Ltd. 2014 (4) TMI 713 - CALCUTTA HIGH COURT wherein it was held that only the investment which yield dividend during the relevant previous year that has to be considered while adopting the average value of investment for the purpose of computing disallowance to be made under section 14A as per the Rule 8D(2)(ii) & (iii) of the rules.
Issues Involved:
1. Classification of service charges received from tenants. 2. Classification of interest on fixed deposits. 3. Assessment of rental income from subsidiary company. 4. Addition of notional interest on refundable security deposits. 5. Computation of disallowance under section 14A. Issue-wise Detailed Analysis: 1. Classification of Service Charges Received from Tenants: The revenue challenged the CIT(A)'s decision to classify service charges received by the assessee from tenants as "business income" instead of "income from house property." The assessee, a real estate company, earned service charges separately from rent for providing amenities like electricity, water, and security. The CIT(A) held that these charges were for services rendered in a continuous and organized manner, thus qualifying as business income. The Tribunal upheld this view, distinguishing the case from CIT vs Shambhu Investment Pvt. Ltd., where a composite rent was bifurcated artificially. The Tribunal found that the assessee's separate charges for rent and services aligned with precedents set by the Supreme Court in Karnani Properties Ltd. and Kerala High Court in Attukal Shopping Complex, supporting the classification as business income. 2. Classification of Interest on Fixed Deposits: The revenue contested the CIT(A)'s decision to treat interest on fixed deposits as "business income" rather than "income from other sources." The assessee argued that the interest earned on deposits made from refundable security deposits was integral to its business of providing services and amenities. The CIT(A) agreed, noting that the interest income was used to offset costs related to the business. The Tribunal upheld this decision, emphasizing the inextricable link between the interest income and the assessee's business activities, thus classifying it as business income. 3. Assessment of Rental Income from Subsidiary Company: The revenue argued that rental income from the assessee's subsidiary should be assessed based on fair rent under section 23 of the Income Tax Act, rather than actual rent received. The CIT(A) found that the properties had been let out decades ago, and the rent was protected under rent control laws, making unilateral increases impossible. The Tribunal upheld this, citing the Calcutta High Court's decision in CIT vs Bhaskar Mitter, which established that annual value for tax purposes should not exceed the standard rent under rent control laws. The Tribunal also noted that the rent charged was higher than the municipal valuation, reinforcing the CIT(A)'s decision. 4. Addition of Notional Interest on Refundable Security Deposits: The revenue's addition of notional interest on security deposits as rental income was challenged. The CIT(A) found no evidence supporting the AO's claim that deposits were taken to avoid showing rental income. The interest earned on these deposits was already taxed, making the notional interest addition a case of double taxation. The Tribunal upheld the CIT(A)'s decision, referencing the Calcutta High Court's ruling in CIT vs Satya Co. Ltd. and the Delhi High Court's decision in CIT vs Moni Kumar Subba, both of which rejected the inclusion of notional interest in determining annual value for tax purposes. 5. Computation of Disallowance under Section 14A: The revenue's ground regarding the computation of disallowance under section 14A was addressed by referencing the Kolkata High Court's decision in REI Agro Ltd., which dictated that only dividend-yielding investments should be considered for calculating disallowance under Rule 8D. The Tribunal followed this precedent, dismissing the revenue's appeal on this ground. Conclusion: The Tribunal dismissed the revenue's appeals for A.Y. 2009-10 and 2011-12, upholding the CIT(A)'s decisions on all issues. For A.Y. 2010-11, the Tribunal partly allowed the revenue's appeal, specifically setting aside the CIT(A)'s decision on the protective addition of deemed dividend.
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