2018 (11) TMI 127 - AT - Income Tax

Income derived from leave and license fee - Nature of income - to be treated as income from house property OR income from business - Held that - Accounting entry or accounting treatment given by the assessee in its books of account is not conclusive. What is required to be examined is the intention of the assessee whether to exploit the property as owner or engage itself in an organized and systematic activity of constructing, developing and building house property and giving them on lease along with other services for earning rental income. As can be seen from the objects of the assessee as contained in the Memorandum and Articles of Association, the primary object of the assessee is not to construct, develop and lease them out for earning rental income but to engage itself as real estate developer. Therefore, as it appears from the facts on record, the business of the assessee is not letting out properties for earning rental income. As rightly observed by the learned CIT(A) in the appellate order passed for ay 2010-11, in case the Department treats the income generated from leave and licence fees as business income, the AO is duty bound to allow depreciation to the assessee on the asset generating such income. In such eventuality, the income which would ultimately be determined would be lesser than the income offered by the assessee, hence, prejudicial to the interest of Revenue. It is also relevant to observe, in assessee s own case for A.Y. 2009-10 the AO while completing the assessment under Section 143(3) of the Act has accepted the income generated from leave and licence fees of the building as income from house property. The assessment order so passed has neither been revised nor reopened. That being the case, the Department cannot be allowed to take different stand in different assessment years with regard to head of income generated from leave and licence fees. Allowance of assessee s claim of deduction under Section 24(b) on account of interest on borrowed capital - Loan availed by the assessee was for the purpose of construction of building - Held that - It is a clearly established fact that vide sanction letter dated 20.04.2006 the HDFC bank did not disburse any fresh loan to the assessee but the outstanding amount out of the loan granted earlier to the assessee for construction of the building was converted into a fresh loan. That being the case, there cannot be any doubt that the loan availed by the assessee was for the purpose of construction of building, hence, interest paid on such loan is allowable under Section 24(b) of the Act. AO has observed that the fresh loan sanctioned to the assessee vide letter dated 20.04.2006 was for working capital. Such fact is not forthcoming either from the sanction letter or from the agreement between the assessee and the bank. Therefore, the conclusion reached by the AO is purely on conjecture and surmises. As regards the pre-payment charges paid to the bank, there is no doubt that such pre-payment charges are connected/ attached to the loan availed by the assessee for construction purposes. Therefore, has to be considered as part of the cost of loan. Hence it is allowable as deduction under Section 24(b) of the Act. - Decided against revenue

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Classification of income derived from leave and license fees as income from house property or business income.
3. Allowance of the assessee’s claim of deduction under Section 24(b) of the Income Tax Act on account of interest on borrowed capital.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147 of the Income Tax Act, 1961:
The core issue in the appeals, except for the assessment year 2009-10, concerns whether the reopening of the assessment under Section 147 of the Act is valid. The assessee had originally filed its return of income, which was assessed under Section 143(3) of the Act. The Assessing Officer (AO) later reopened the assessment, believing that the leave and license fee should be assessed as business income rather than house property income. The Commissioner (Appeals) found that the AO had already examined this issue during the original assessment and concluded that reopening the assessment based on a mere change of opinion is legally unsustainable. The Tribunal agreed with this view, stating that the reopening of the assessment without any tangible material to suggest income had escaped assessment is impermissible. This conclusion aligns with judicial precedents, including the Supreme Court's decision in CIT v/s Kelvinator of India Ltd., [2010] 320 ITR 561 (SC).

2. Classification of Income Derived from Leave and License Fees:
The dispute centers on whether the income from leave and license fees should be classified as income from house property or business income. The AO argued that since the property was shown as stock-in-trade, the income should be treated as business income. However, the Commissioner (Appeals) and the Tribunal disagreed, noting that the primary business of the assessee is real estate development, not leasing property for rental income. The Tribunal emphasized that the accounting treatment in the books is not conclusive; what matters is the intention behind the income generation. The Tribunal cited various judicial precedents, including the Supreme Court's decisions in Chennai Properties and Investment Ltd. v/s CIT and Rayala Corporation v/s ACIT, to support the view that the rental income should be treated as income from house property. The Tribunal also noted that in the assessment year 2009-10, the AO had accepted the rental income as house property income, and the Department cannot take a different stand in other assessment years.

3. Allowance of Deduction under Section 24(b) of the Income Tax Act:
For the assessment year 2009-10, the issue involved the allowance of the assessee’s claim of deduction under Section 24(b) for interest on borrowed capital. The AO had disallowed the interest payment, arguing that the loan was not for the purchase or construction of the property but for working capital. The Commissioner (Appeals) found that the loan was indeed for construction purposes and that the outstanding loan was converted into a new loan, not a fresh one. The Tribunal upheld this view, stating that the interest on the loan for construction purposes is allowable under Section 24(b). Additionally, the Tribunal agreed that pre-payment charges related to the loan should be considered part of the cost of the loan and are therefore deductible under Section 24(b).

Conclusion:
All the appeals by the Revenue were dismissed. The Tribunal upheld the Commissioner (Appeals)' decisions that the reopening of the assessment under Section 147 was invalid, the rental income should be classified as income from house property, and the interest on borrowed capital for construction purposes is deductible under Section 24(b). The Tribunal emphasized the importance of the assessee's intention and the consistency of the Department's stance across different assessment years.

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