2019 (6) TMI 468 - AT - Income Tax

Nature of income - rental income - income under the head Income from house property or Income from other sources - Addition of rent service charges - Letting out of property to a corporate member of the appellant-club - benefit of mutuality principle - HELD THAT - As in assessee s own case 2016 (12) TMI 1718 - ITAT KOLKATA held that the principle of mutuality will not have application to the appellant s transaction with M/s Reliance Industries Limited for letting out its premises for the purpose of using the same for its business purposes. Since the factual matrix of the case and the legal provisions governing the principles of mutuality have remained same in the year under consideration we are not inclined to depart from the view already taken by this Tribunal in the appellant s case for the latter year. Accordingly we uphold orders of the authorities below denying the benefit of mutuality principle in respect of receipts by way of rent service charges from M/s Reliance Industries Ltd. Taxability of service charges - part of rental income - HELD THAT - From perusal of the service agreement we note that appellant was under no obligation to provide any service facility or amenity to M/s Reliance Industries Ltd for earning service charges. Moreover we find that both the agreements were co-terminus and ran concurrently. It was expressly provided that the service agreement will remain valid so long as license agreement was in force. We therefore agree with the Ld. AR s submissions that both rent service charges were having the same character and both were being charged on per square feet basis without incurring any corresponding expenditure. Therefore Ground No. 1 is dismissed and Ground No. 2 is partly allowed. Addition on account of letting out of property to M/s. Organon India Ltd. - HELD THAT - From Note No. 23.1 of the annual audited accounts of the appellant we find that the assessee had made a disclosure about institution of legal case against M/s Organon India Ltd for vacating the club premises occupied by them. It was clarified that amount of 5, 80, 879/- received till 31.03.2011 from M/s Organon India Ltd was shown under Liability . We find that nowhere in the audited accounts Here was an admission that sum was received from M/s Organon India Ltd during FY 2011-12. We also note that even though the assessee had instituted eviction suit against the tenant it continued to retain possession and did not pay any rent. In the circumstances notional annual value of the property was also not assessable as the property was not capable of being let on the ground of adverse possession - the authorities were not justified in assessing sum under the head House Property Treatment of hoarding rent - Business income OR Income from House Property . - HELD THAT - Since even in the case of M/s. Sai Media Ventures P. Ltd the amount was received for letting out specified area for display of advertisements there was no reason for the AO to assess the amount received from M/s. Sai Media Ventures P. Ltd under the head Business income when in the case of M/s Tapan Art Centre the identical receipt was assessed under the head House Property . For the reasons set out in the foregoing therefore the AO is directed to assess the hoarding rent received from M/s. Sai Media Ventures P. Ltd under the head House Property . Addition of commission received - commission received from M/s. Agarwal Merchandise Tie-up Pvt. Ltd out of the sales made by them to the club members - principle of mutuality applicability - HELD THAT - On consideration of permitting a vendor to operate within the club premises it is common to charge a percentage of their revenues derived from the members as fees / commission which is then utilized by the club for the benefit of its members. This question whether such commission / fee qualifies for the benefit of mutuality principle in the hands of the club was considered by the coordinate Bench of this Tribunal in the case of ITO Vs Kamala Vihar Sports Club 2013 (12) TMI 302 - ITAT MUMBAI and answered in favour of the assessee. Netting off of expenses against receipts by way of sponsorship/advertisement - HELD THAT - Sponsorship fees are paid to enable social organizations like clubs to meet part of the costs that they incur for organizing the events or festivals for their members. Being sponsors these corporate are also permitted to display their advertisements or promote their products at these events. Having regard to these facts we are of the considered opinion that the lower authorities were unjustified in considering the receipts by way of sponsorship fees / advertisement fees in isolation and without allowing the benefit of set off of the department wise expenses accounted in the books of the appellant. We also note that in all the past assessments as well as in the subsequent assessments the Revenue had allowed the benefit of netting off of receipts against expenses and only the net amount was considered for taxation purposes without allowing the benefit of mutuality principle. It was only in AY 2009-10 when the AO did not allow the benefit of netting off but on appeal this Tribunal in 2016 (12) TMI 1718 - ITAT KOLKATA allowed the deduction. Following the same we direct the AO to allow the deduction for department-wise expenses against the sum received by way of sponsorship fees / advertisement fees - Ground No. 7 is therefore allowed.

Summary

Issues Involved:
1. Disallowance of rent received from M/s. Reliance Industries Limited.
2. Disallowance of service fees received from M/s. Reliance Industries Limited.
3. Disallowance of rent received from M/s. Organon India Private Limited.
4. Addition of amount received from Tapan Kumar Biswas.
5. Addition of amount received from M/s. Sai Media Ventures (P) Ltd.
6. Addition of commission received from Agarwal Merchandise.
7. Addition of sponsorship/advertisement receipts from various parties.

Issue-wise Detailed Analysis:

1. Disallowance of Rent Received from M/s. Reliance Industries Limited:
The Tribunal upheld the lower authorities’ decision that the principle of mutuality does not apply to the receipts by way of rent from M/s. Reliance Industries Limited, a corporate member. The rent received was considered income chargeable under the head 'Other Sources' as the premises were used by the corporate member for its commercial operations.

2. Disallowance of Service Fees Received from M/s. Reliance Industries Limited:
The Tribunal agreed with the assessee's alternate submission that the service charges received should be considered as rent and assessed under the head 'House Property'. Both rent and service charges were charged on a per square foot basis and were co-terminus with the license agreement. Thus, the AO was directed to assess both receipts under the head 'House Property'.

3. Disallowance of Rent Received from M/s. Organon India Private Limited:
The Tribunal found that the appellant did not receive any sum from M/s. Organon India Limited during the relevant financial year. The amount of ?5,80,879/- received till 31.03.2011 was shown as liability, and no further sums were received in FY 2011-12. The Tribunal held that the authorities were not justified in assessing ?3,27,676/- under the head 'House Property'.

4. Addition of Amount Received from Tapan Kumar Biswas:
This ground was not pressed by the appellant and was therefore dismissed.

5. Addition of Amount Received from M/s. Sai Media Ventures (P) Ltd.:
The Tribunal found that the nature of rent received from M/s. Sai Media Ventures P. Ltd. was identical to that received from M/s. Tapan Art Centre, which was assessed under the head 'House Property'. Therefore, the AO was directed to assess the hoarding rent of ?3,03,324/- received from M/s. Sai Media Ventures P. Ltd under the head 'House Property'.

6. Addition of Commission Received from Agarwal Merchandise:
The Tribunal noted that the commission received from M/s. Agarwal Merchandise, which operated a shop within the club premises, was indirectly received from the club members. The commission was calculated at 5% of the sales made to the club members. The Tribunal held that the principle of mutuality applied and directed the deletion of the addition of ?13,76,606/-.

7. Addition of Sponsorship/Advertisement Receipts from Various Parties:
The Tribunal held that the receipts by way of sponsorship/advertisement fees should not be considered as income in isolation. The corresponding expenses incurred for organizing the events should be deducted. The Tribunal directed the AO to allow the deduction for department-wise expenses against the sum of ?77,90,076/- received by way of sponsorship/advertisement fees, and only the net income, if any, should be charged to tax under the head 'Other Sources'.

Conclusion:
The appeal was partly allowed, with specific directions for reassessment under appropriate heads and consideration of mutuality principles where applicable. The Tribunal emphasized the need for consistency in the assessment of similar receipts and expenses across different assessment years.