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TMI Blog2017 (12) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore 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”. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) 2, Kolkata all dated 23.06.2015 for A.Y. 2009-10, 2010-11 and 2011-12 and since the issues involved therein are common, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience. 2. First we shall take up the revenue s appeal for A.Y. 2009-10 being ITA No. 1183/Kol/2015. In ground no 1 raised in this appeal, the revenue has challenged the action of the Ld. CIT(A) in holding that the service charges received by the assessee from tenants 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 . 3. The assessee in the present case is a real estate company with its principal business being collection of rent from the properties let out. The return of income for the year under consideration i.e. A.Y. 2009-10 was filed by it on 29.09.2009 declaring a total income of ₹ 13,39,22,690/-. During the year under consideration, service charges of ₹ 32,61,829/- were earned by the assessee from the tenants and after claiming expenses against the same, net loss of ₹ 72,66,056/- was claimed by the assessee as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges received from the tenants are not towards the use/let-out of the property but are received in the course of rendering contractual services amenities to its tenants and is therefore not covered under the provisions of Section 23 of the Act. The appellant has further submitted that this particular issue had been dealt with by the Inspecting Appellate Commissioner (IAC) in its own case for AY 1978-79; copy of which was placed on record. In that year the AO had taxed the service charges received from tenants under the head house property along with the rent treating it to be composite instead of business income . The Ld. IAC after giving due consideration of facts and referring to the decision of the Apex Court in the case of Karnani Properties Ltd. vs CIT (82 ITR 547) held that the rental income simplicitor is assessable under the head House Property but service charges received from rendering services in a continuous and organized manner was assessable as Business Income . The appellant submitted that the said appellate order of the IAC was accepted to the Department and in all the subsequent assessments which were framed u/s 143(3), the services charges were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Supreme Court and Kerala High Court as well as the appellate order of the Ld. IAC in appellant s own case for AY 1978-79, I hold that the service charges received from tenants for rendering services providing amenities is assessable under the head Business Income and not House Property . The AO is accordingly directed to assess the service charges as business income and allow the expenses as claimed by the appellant against it. Ground Nos. 1 2 are therefore allowed. 5. The learned DR strongly relied on the order of the Assessing Officer in support of the revenue s case on this issue and submitted that the decision of Hon ble Kolkata High Court in the case of CIT vs Shambhu Investment Pvt. Ltd. 249 ITR 47 relied upon by the A.O. is squarely in favour of the revenue. He contended that the Ld. CIT(A) however has ignored the said decision of the Hon ble Jurisdictional High Court while giving relief to the assessee on this issue. 6. The learned counsel for the assessee, on the other hand, strongly supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and submitted that the reasons given by the Ld. CIT(A) on page 10 and 11 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te rental income was held to be chargeable to tax in the hands of the assessee under the head income from house property. 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. (supra) and Kerala High Court in the case Attukal Shopping Complex (P) Ltd. (supra) 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. 8. In ground no 2, the revenue has challenged the action of the Ld. CIT(A) in holding that interest on fixed deposit is to be assessed in the hands of the assessee under the head bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eet and any unexpected events or capital investment in future. I note that this was a prudent business arrangement between the appellant and the tenants so that the appellant which is the service provider is not required to make capital investment in one go and correspondingly the tenant is also not required to directly invested in such common assets. I note that this is a common business arrangement between the landlord and the tenants and prevalent practice in let-out commercial properties. I find force in the appellant s submission that the bank interest earned on the fixed deposits which were made out of the refundable security deposits received from the tenants was inextricably linked with the business of the appellant involving rendering of services amenities to the tenants. The interest earned by investing the interest free security deposits and the service charges received from the tenants taken together formed the revenues earned by the appellant in the business of rendering of services providing amenities. According to AO the appellant had claimed expenses were 178% of the service charges received from the tenants. I however note that the finding of the AO was m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittings etc. and even the required manpower was also to be maintained. 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 . In that view of the matter, we uphold the impugned order of the Ld. CIT(A) and dismiss ground no 2 of the revenue s appeal. 13. In ground no 3, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bros (Coal Sales) Limited more than 3 to 4 decades ago is not in dispute. This fact has been admitted by the AO in his remand report as well. I therefore find that the bonafide of the tenancies of M/s. KCT Bros (Coal Sales) Limited is undoubtedly genuine. It is the appellant s plea that the properties which were let out to M/s. KCT Bros (Coal Sales) Limited were on monthly tenancy and was protected under the respective State Tenancy Acts as well as under the Rent Control laws. The appellant explained that under the laws of the respective States Rent Control Act, it could not have unilaterally increased the rent charged from M/s. KCT Bros (Coal Sales) Limited. The appellant thus contended that when the bonafide of the tenancies were not in dispute, the rent charged from KCT Bros (Coal Sales) Limited which was protected under the Rent Control Laws was justified and could not be tinkered with. After going through the facts of the case and the submissions, I find merit in the submissions of the appellant. Undeniably the properties were let out to KCT Bros (Coal Sales) Limited more than 3 to 4 decade ago and the tenancies have been held to be genuine by the Department. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - CIT vs Poddar Bros (P) Limited (240 ITR 925) - CIT vs Prabhabati Bhansali (141 ITR 419) - CIT vs Satya Co. Ltd. (173 Taxman 193) Applying the principle laid down in the above judgments of jurisdictional Calcutta High Court which I am bound to follow and taking into account the facts of the present case, I am in agreement with the appellant that the annual letting value of the property let out KCT Bros (Coal Sales) Limited should be determined with reference to annual value determined by the Municipal Corporation. According to AO, the tenancies were with sister concern, KCT Bros (Coal Sales) Limited and therefore the appellant could have disregarded the tenancies and the rental rates should have been as per prevailing market rates. I find that this proposition of the AO is untenable. As stated above, when the bonafide of the tenancies had been accepted and found to be genuine then merely because the tenancies which are otherwise protected under the Rent Control Acts are with sister concern, it could not be disregarded or treated as null or void. In fact the Income-tax Act endorses the proposition that transactions inter se amongst related concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e annual value of the property u/s 23 of the Act. I therefore hold that the addition of ₹ 1,61,52,877/- as deemed rent was completely unjustified and the AO is directed to delete the same in full. Ground Nos. 5 to 7 are therefore allowed. 16. The learned DR relied on the order of the Assessing Officer in support of the revenue s case on this issue. 17. The learned counsel for the assessee, on the other hand, strongly supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue. He submitted that the rent charged by the assessee company during the year under consideration for the relevant properties was more than municipal valuation and even the A.O. himself had accepted income declared by the assessee under the head income from house property on the basis of actual rent received in A.Y. 2008-09. He also contended that the tenancy was found to be bonafide and there was no case of tax evasion by the assessee company as found by the Ld. CIT(A). Relying on the decision of Hon ble Kolkata High Court in the case of CIT vs Bhaskar Mitter 73 Taxman 437 and that of Coordinate Bench of this Tribunal in the case of ITO vs Wellworth Suppliers Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 no 3 of the revenue s appeal. 19. In ground no 4, the revenue has challenged the action of the Ld. CIT(A) in deleting the addition made by the A.O. on account of notional interest earned by the assessee on refundable security deposit taken from the tenants. 20. The assessee company had taken security deposit of ₹ 16.27 crores from the tenants / licensees. According to the A.O., the said security deposit was taken by the assessee company interest free to avoid showing rental income and paying tax thereon. He, therefore, treated the notional interest on such deposits calculated @ 10% p.a. as the rental income of the assessee and after allowing deduction of 30%, an addition of ₹ 1,13,93,565/- was made by the A.O. to the total income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respectfully following the binding decision of the Calcutta High Court as well as the Delhi High Court, I direct the AO to delete the addition of ₹ 1,62,76,521/- on account of notional interest on security deposits. Ground Nos. 8 9 are therefore allowed . 22. The learned DR relied on the order of the Assessing Officer in support of the revenue s case on this issue and also relied on the decision of Hon ble Kolkata High Court in the case of CIT vs Satya Co. Ltd. 23. The learned counsel for the assessee, on the other hand supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and submitted that the decision of Hon ble Kolkata High Court in the case of Satya Co. Ltd. (supra) relied upon by the learned DR actually supports the case of the assessee on this issue. 24. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the revenue in the ground raised in its appeal on this issue as well as at the time of hearing before us has relied on the decision of Hon ble Kolkata High Court in the case of CIT vs Satya Co. 75 taxman 193 in support of its case. It is however obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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. Respectfully following the said decision of the Hon ble Jurisdictional High Court, we uphold the impugned order of the Ld. CIT(A) on this issue and dismiss ground no 5 of the revenue s appeal. 26. Now we take up the appeal of the revenue for A.Y. 2010-11 being ITA No. 1184/Kol/2015. Grounds raised by the revenue in this appeal read as under: 1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) erred in law in holding that the service charges received from tenants are as integral part of the rental income assessed under the head Business Income instead of Income from Houses Property ignoring the decision of the Jurisdictional High Court in CIT vs Shambhu Investment in 249 ITR 47, Kol. 2. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law holding that rental income received from its subsidiary company be assessed on actual basis instead of considering the fair rent as expressly provided u/s 23 of the IT Act, 1961? 3 Whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Ld. CIT(A) on this issue and allow ground no 3 of revenue s appeal for A.Y. 2010- 11. 30. As regards the issue raised in ground no 4 of the revenue s appeal for A.Y. 2010-11, it is observed that the same is similar to the one involved in ground no 4 of revenue s appeal for A.Y. 2009-10 which has already been decided by us in the foregoing portion by us. Following our conclusion drawn in A.Y. 2009-10 on a similar issue, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 4 of revenue s appeal for A.Y. 2010-11. 31. Now we take up the appeal of the revenue for A.Y. 2011-12 being ITA No. 1185/K/2015. Grounds raised by the revenue in this appeal read as under: 1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) erred in law in holding that the service charges received from tenants are as integral part of the rental income assessed under the head Business Income instead of Income from Houses Property ignoring the decision of the Jurisdictional High Court in CIT vs Shambhu Investment in 249 ITR 47, Kol. 2. Whether on the facts and circumstances of the case, Ld. CIT(A) erre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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