9911796707
TMI Blog2013 (12) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the claim of the assessee as 'business income'; - that the CIT (A) also failed to appreciate that the assessee is engaged in developing, operating and maintaining Industrial park as per s. 80IA (4)(iii) of the Act and as such the income received from renting out of fit-outs etc., has to be treated as 'income from business' & (2) That the CIT (A) also erred in treating the income from maintenance charges as income from 'house property' as against the assessee's claim as 'income from business'. 4. Before taking up the issues raised by the assessee for adjudication, we would like to point out that the second issue raised by the assessee (supra) is not maintainable for the assessment year 2006- 07 since the assessee itself in its written submission before the CIT (A) conceded that "8. The maintenance activity has been outsourced to Embassy Services Limited, income in respect of which has accrued from the following year." [Source: Page 26 of PB AR for AY 2006-07]. Accordingly, the issue raised by the assessee is not adjudicated as the same does not arise for assessment year 2006-07. 5. We shall now proceed to deal with the issues raised by the assessee for both the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eved, the assessee took up both the issues, among others, before the CIT (A). At the time of appellate proceedings, the assessee company did not press the ground relating to taxability of rent from letting of property as business income. The other issues dealt with item-wise by the CIT (A) are extracted as under: Whether the fit-out rent is income from house property? 5.3.1. After having considered the reasoning of the AO and also the contentions of the assessee as recorded in his findings, the CIT (A) had decided the issue against the assessee on the premise that the rent from fit outs is taxable under the head 'income from house property', as (i) fit outs are inextricable part of the premises let out to tenants; (ii) fit outs cannot be regarded as stock-in-trade of the assessee; and (iii) since rent from property is accepted as income falling under the head 'income from house property', rent from outfits cannot be treated as 'business income'. Whether maintenance charges are taxable under the head 'house property'? 5.3.2. With regard to taxability of maintenance charges, the CIT (A) had held that (i) the assessee had entered into an agreement for maintenance of the industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is based on factors such as nature of asset, its useful life etc., [source Paragraph 8.3 of AS 10]; - distinguishing the judgments of the Hon'ble Calcutta High Court and the Hon'ble Supreme Court in the case of Shambhu Investment Pvt. Ltd (supra), it was contended that those decisions were based on peculiar facts and circumstances of the case which cannot be generalized and be held as applicable to all cases without considering the relevant facts and circumstances of each case; and, further, that the above decisions are not applicable for the following reasons: (a) in the above case, rent for fit-outs was not separately fixed, but was a composite rent for let out of the property and fixtures, but, in the present case, rent for property and fit outs were fixed separately; (b) in that case, no rent was charged separately for letting out of furniture and fixtures; that the tenants were paying consolidated sum for the usage of both premises and facilities and there was also no demarcation of rent towards the usage of facilities whereas in the present case, rent was determined, charged and collected separately for the let out of the premises and also the facilities, respectively; (c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce services provided by the assessee and that it was an income from service activity and not from property. The annual value of buildings and land appurtenant thereto does not include amount charged for service provided by the owner. It was, further, stressed that the obligation to provide maintenance service was independent from leasing out the buildings which was not incidental to ownership of the property. It was settled law that income from maintenance service or any other service provided to tenants is taxable under the head 'profits and gains of business' or in the alternative 'income from other sources', if it is not taxable under the head 'profit and gains of business. It was, therefore, asserted that the income from maintenance charges are to be taxed under the head 'profits and gains of business' and not under the head 'income from house property'. 6.2. On the other hand, the learned DR had justified the stand of the authorities below in treating the rents received for the buildings and out-fits as income from 'house property'. For the above proposition, he had placed strong reliance on the judgment of the Hon'ble Bombay High Court in the case of CIT v. J.K. Investor (Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the rents received on fit-outs which should be taxable as business income but not under the head 'house property'. This plea of the assessee was, however, turned down by the CIT (A) for the reasons recorded in his findings. 7.1.4 In the present case, the assessee is engaged in the business of development, operation and maintenance of industrial park. The income from fit outs let out was received in course of business carried on by the assessee company. The fit out rent was earned from letting various facilities such as interiors, furniture and fixtures, electrical fittings etc. The observation of the learned Assessing Officer and the CIT (A) that the fit outs form an integral part of the structure owned by the assessee and hence the rental income from these fit outs is to be treated as income from house property is without merit. Rent is separately fixed for fit outs given on rent. The amount of rent for the let out buildings is fixed based on various factors such as extent of area (in sq.ft, sq.metr etc) let out, location of the building - whether located in an area proximate to civic amenities and facilities, type of construction etc. However, rent for the let out of fit out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r); (ii) Karnani Properties Ltd case (1971) 82 ITR 547 (SC); (iii) CIT v. Kanak Investments (Pvt) Ltd (1974) 95 ITR 419 (Cal); & (iv) Indian City Properties Ltd v. CIT (1978) 111 ITR 19 (Cal), the Hon'ble Court had held that - "In case there is inseparability, as stated above, then it will not be income from house property at all but would be income falling under the present section 56 (2)(iii). Further, what follows from this is that in case of separability, the two sets of income attributable to the two separate entities also should be assessed under the respective heads. In other words, the income that should be attributed to the property as such alone should be assessed under section 22. In view of the above discussion, we have no hesitation in holding that the composite rent received by the assessee could be split up...." (ii) CIT v. Sri S Mohan Kumar (HUF) - (2011) 201 Taxman 161 (Kar): The substantial question of law raised before the Hon'ble Court was that - "(1) Whether the Tribunal was justified in holding that the rental income received by the assessee's from letting out the building together with furniture, fixtures and equipment should be bifurcated under the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources"; if it is not chargeable to income-tax under any of the heads specified in s. 14, Items A to E, sub-s. (2) of s. 56 specifically states the rate of income-tax which shall be chargeable to income-tax under the head 'Income from other sources'. Sub-cl. (ii) provides that "income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head 'Profits and gains of business or profession'. Clause (iii) also provides that "where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or profession". Therefore, the intention of the legislature is explicit. If the machinery, plant and furniture are not separate from the letting of the said machinery, the income from such machinery, plant along with the income from the building, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rimary object of the assessee while exploiting the property. If it is found applying such principle that the intention is for letting out the property or any portion thereof, the same may be considered as rental income or income from properties. In case, if it is found that the main intention is to exploit immovable property by way of complex commercial activities, in that event it must be held as business income. 26. Sub-section (1) of section 56 makes it clear that income of every kind which is not be excluded from the total income under this Act shall be chargeable to income-tax under the head 'income from other sources', if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Sub-section (2) of section 56 specifically states that the incomes shall be chargeable to income-tax under the head 'income from other sources.' Clause (ii) of section 56(2) provides that income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head 'profit and gains of business or profession.' Clause (iii) also provides that where an assessee lets on hire machinery, plant or fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.1.6. In totality of the facts and circumstances of the issue as narrated above and in consonance with the rulings of the Hon'ble Jurisdictional High Court (supra), we are of the opinion that the income derived from letting out the out-fits, fixtures, furniture etc., is not chargeable under the head 'income from house property'. It is ordered accordingly. Maintenance charges: 7.2 As pointed out by the CIT (A), the issue has not been elaborately dealt with by the AO in her assessment order for the AY 2007-08. The CIT (A) had also fairly conceded that under normal circumstances, the maintenance charges should have been considered as income from business on the premise that the appellant - landlord had undertaken to deliver the services of lift, security, providing water, electricity, clearing etc., which requires constant and organized activity to keep it busy and active on day-to-day basis and such has to be treated as income from business [refer: Para 6.2 on page 8 of CIT (A)'s order]. However, in conclusion, the CIT (A) justified the AO's stand in treating the same as income from house property on ground that the assessee was not engaged in any business activity to provide the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TTJ 680 (BNG) on a similar issue has ruled in favour of the assessee. The relevant portions of its findings are extracted as under: "6. The fourth grievance of the appellant is that the lower IT authorities have erred in treating the hire charges in respect of fit-outs let out to tenants as income from house property instead of as income from 'other sources'. 6.1. This issue has been decided by this Tribunal in the case of the assessee for the asst. yr. 2004-05. The Tribunal vide order dated 29th May, 2009 in ITA No.851/Bang/2008 vide para 14 of the order held that 'the facts and circumstances brought on record by the assessing authorities and the learned counsel indicate that the intention of the assessee for rendering the same as income from other sources ought not to have been disturbed as in earlier years.' Hence, the receipt on letting of it is to be taxed under the head 'income from other sources' on the basis of the Tribunal in the earlier year and also on the basis of the principle of consistency...." 7.2.2 In view of the judicial pronouncements on a similar issue as discussed (supra), we are of the opinion that the authorities below were not justified in treating the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taining the property at Hebbal which has been let out by the Company. In this connection Embassy may have to incur expenses towards housekeeping, security etc.". 7.1 The above shows that Rs.1,76,50,000/- consists of three expenditures: i) Rs.1,50,00,000 paid to Embassy Management & Consultancy Pvt. Ltd. ii) Rs.6,50,000/- Paid to Advocate iii) Rs.20,00,000/- Paid to Embassy Management & Consultancy Pvt.Ltd. So far as (i) is concerned, the same is allowable because the other part i.e. payment of Rs.50,00,000 paid in A.Y 2004-05 no disallowance had been made by the Assessing Officer. So far as (ii) is concerned, it is allowable as business expenditure. So far (ii) is concerned, such being part of 12% collected from tenants towards maintenance charges as per the terms and conditions of Deed cited supra, is also an allowable expenditure. Hence the addition is deleted." 8.2.1 The Revenue, being aggrieved, is in appeal before us. 8.2.2 The learned DR submitted that the CIT (A) has erred in granting relief to the assessee without appreciating the fact that the professional charges have been incurred for the maintenance of the property let out by the assessee. It was submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid expenses are business expenditure and the same is to be allowed. The facts of the issue was not considered either by the Assessing Officer or by the CIT (A). Therefore, for a proper adjudication of the same, the issue is restored to the Assessing Officer for de nova consideration. It is ordered accordingly. In the result Ground Nos. 5 & 6 is allowed for statistical purposes. Ground Nos. 7 & 8 (Rent paid to Guest House - Rs.15,60,000): 8.4. The Assessing Officer had disallowed a sum of Rs.15,60,000/- being the guest house rent paid to the Trust (some of the Trustees were the Directors of the assessee company). The relevant observations of the Assessing Officer for disallowance of the said sum reads as follows: "11. Disallowances in Busienss Income: 11.1 The assessee has shown an expense of Rs.15,60,000 being paid as guest house rent to the trust related to the Director. During the course of hearing, the necessity of the same was asked and the contention of the assessee is not accepted. Hence, the amount of Rs.15,60,000 is disallowed u/s 40A(2) of the Income Tax Act, 1961". 8.4.1 The CIT (A) deleted the addition by holding that the guest house is used for the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
