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TMI Blog2015 (6) TMI 1229X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee shall have the right to sale the leased premises without any objection for the lessee except that lease and licence agreement shall continue for the balance period. Holding that mere entry of the object clause showing a particular object would not be the determinative factor to arrive at a conclusion whether the income is to be treated as income from business and such question would depend upon the circumstances of each case i.e. whether a particular business is letting or not. Income derived from property would be termed as income from property but if the property is held as stock in trade, then the said property would become or part take the character of stock and thus any income derived therefrom would be income from business and not income from property. If business of the assessee is to construct the property and sale it or to construct and let out the same then that would be the business income. Disallowances of expenses which were arrived at pro rata basis - AO observed that income from leasing of properties is assessed under the head income from house property and thus part of expenses incurred in creating/building, the stock cannot be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer. On the other hand, the counsel for the assessee, explained that the assessee is a partnership firm is in the business of developer. It was claimed that development was made by the assessee itself and certain units were hold by the assessee and few were leased to lemon brothers. It was claimed that the lease was made for temporary period showing as business income by claiming that leasing is an ancillary activity of the assessee. Reliance was placed upon a later decision from the Hon ble Apex Court in M/s Chennai Properties vs CIT (Civil Appeal No.4494 of 2004 along with Civil Appeal Nos. 4491-4493 of 2004). It was contended that the assessee dealt with as a trader while the leasing is a business income. It was also contended that the case of Ansal property is not applicable to the facts of the present appeal and the decision in Shambhu Investment, wherein, Sultan Brothers was relied upon has been distinguished by the Hon ble Apex Court in Chennai Properties. So far as, disallowance of expenses is concerned, it was contended that if it is treated as business income, then it become in-fructuous and if it is decided as income from house property, then our attention was inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the appellant and proceeded to complete the assessment. 3.1.3 In this respect in appeal proceedings the Ld. A. R. has stated that the appellant is a registered firm engaged in the business of construction and development of property since inception. Since its inception the firm has developed number of properties and dealt with immovable properties only. Some buildings are constructed by the firm for selling the premises in the said buildings and some are constructed purely for giving them on lease. Lease income in case of buildings constructed purely for giving them on lease is considered as Income from House Property and shown accordingly. In case of buildings constructed for sale if some units are unsold, then they are temporarily given on lease and income from the same is considered as Business Income. 3.1.4 During the year the firm has given some premises on temporary lease and has earned lease/license fees from the same. Leasing of premises is also one manner of commercial utilization of immovable property and hence forms part and parcel of business of firm and ,therefore, income from temporary leasing of premises constructed for sale is treated as income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CI Securities Primary Dealership Ltd (reported in itatonline.org), copy enclosed in the paper book. 3.1.11 The appellant, therefore, has submitted that the assessment order u/s. 143(3) r. w.s. 147 itself is without jurisdiction and bad in law and the appellant prayed that the same may be quashed. 3.1.12 Without prejudice, the appellant submitted that the assessing officer erred in passing the assessment order without first dealing with the objections raised by the assessee to reopening and the assessment proceedings have been vitiated and liable to be quashed. The said procedure has been laid down by the Hon'ble Supreme Court in case of GKN Driveshafts, 259 ITR 19 (SC). 3.1.13 I have examined the facts of the case and find that the Assessing Officer has rightly exercised his jurisdiction u/s. 147. The issue for which assessment proceedings have been reopened were not examined in earlier proceedings and it cannot be said that it is mere case of change of opinion. 3.1.14 For the purpose of assuming jurisdiction u/s.148 of the I.T. Act, the AO is required to record his reasons for doing so as laid down under sub sec.2 of sec.148. The order should set out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and development of property since inception. Since its inception the firm has developed number of properties and dealt with immovable properties only. Some buildings are constructed by the firm for selling the premises in the said buildings and some are constructed purely for giving them on lease. Lease income in case of buildings constructed purely for giving them on lease is considered as Income from House Property and shown accordingly. In case of buildings constructed for sale if some units are unsold, then they are temporarily given on lease and income from the same is considered as Business Income. 4.1.2 During the year the firm has given some premises on temporary lease and has earned lease/license fees from the same. Leasing of premises is also one manner of commercial utilization of immovable property and hence forms part and parcel of business of firm and therefore income from temporary leasing of premises constructed for sale is treated as income from business. 4.1.3 The commercial reasons for lease of few developed units instead of sale can be briefly summarized as follows: i) Not whole of the stock is sold immediately and it makes commercial sense t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e licence agreement shall continue for the balance period. 4.1.5 Section 22 of the I. T. Act, 1961, charges to tax annual value of any building or land appurtenant thereto as income from house 'property except for such portion of property which is occupied for the purpose of business or profession. As section 22 specifically provides for charge of rent under the head Income from house property and special provisions for computation are provided, income for hiring out of property, in most cases would be assessable under the head income from house property. The law on the subject has been laid down by the Hon'ble Supreme Court in the case of National Storage Pro Ltd., 66 ITR 596, and it was held that House owning, however profitable, cannot be business or trade under the Income Tax Act. 4.1.6 However, the same very judgment further holds the circumstances in which. income from letting out of immovable property is assessable as income. The said judgment upheld the judgment of Hon'ble Bombay High Court reported in 48 ITR 577 and following propositions was laid down: i) If income falls under the head 'income from property , it has to be taxed under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income'. Further if building is also let out and letting out of building is inseparable from letting out of plant, etc., then also income is assessable under the head other sources if it is not chargeable under the head business income. Section 56(2)(iii) applies when plant, etc., is let out alongwith building and letting out of both is inseparable. Further, such activity should not be in nature of business or trade as if it is in nature of trade, it shall be assessable under the head business income. What constitutes inseparable was considered by the Hon'ble Supreme Court in Sultan Bros. Pro Ltd v. CIT (1964) 51 ITR 353 in following words: ' It seems to us that inseparability referred to is an inseparability arising from the intention of the parties. That intention may be ascertained by framing the following questions: was it the intention in making the lease- and it matters not whether there is one lease or two, that is, separate leases in respect of the furniture and the building-that the two should be enjoyed together? Was it the intention to make the letting of the two practically one letting? Would one have been let alone and a lease of it accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd incidental to main business carried out by the assessee, iii) where plant and property are inseparably let out, and iv) where business assets are let out for a temporary period. The case of the appellant is of second and fourth category and judgments on first and third issues would not be applicable to the case of the appellant. 4.1.11 The judgment in Shambhu Investments, 263 ITR 143 (SC) relied on by the AO affirms judgment of Hon'ble Calcutta High Court reported in 249 ITR 47. In the said case, assessee had let out table space and claim was that letting out of premises and table is inseparable, which claim was rejected. In the said case, issue of temporary letting out of business assets was not involved and, therefore, facts are clearly distinguishable. Also the issue of letting out being subservient and incidental to main business was also not before the Hon'ble Supreme Court in the said case. 4.1.12 The appellant submits that the facts as narrated above and evidenced by paper book clearly demonstrate that letting out of units, being stock in trade, is for a temporary period and it is subservient and incidental to main business as developer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r ground and as the income is held to be assessable as business income, depreciation on leased movable asset is allowable as deduction. This ground is allowed. 6. Ground No 4: 6.1 In this ground appellant challenged the' action of the AO in disallowing proportionate expenses amounting to ₹ 1,41,00,0001 -. The AO observed that income from leased of properties has been assessed under the head income from house property and hence part of the expenses incurred in creating building this stock cannot be allowed as business expenditure. 6.2 Appellant on the other hand stated that these expenses are incurred on the projects completed by it. Appellant also submitted details of these expenses together with names and addresses of the vendors. From the said statement it is seen that appellant had transferred certain amount to profit and loss account and balance is in WIP account. Appellant also filed statement showing total area developed divided into sold area and leased area and stock in hand. From the said chart it is seen that almost 94% of the income is derived from sale of flats by the appellant and balance is earned through rental. Appellant on its own has bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions like CIT vs Kohinoor Tobacco Pvt. Ltd. (2005) 149 taxman 620 (MP), CIT vs Anand Rubber Plastics Pvt. Ltd. 178 ITR 301 (P H), CIT vs Ajmera Industries Pvt. Ltd. 169 ITR 597 (SC) etc. and held that since it was temporary commercially utilization of the immovable property, therefore, income derived therefrom should be assessed as income from house property for the purposes of section 22 of the Act. In the case of CIT vs Neha Builders Pvt. Ltd (2008) 296 ITR 661, wherein, identically, the income was held to be assessable as business income. In the present appeal, all the units, leased outs, were developed by the assessee itself and only small portion of the total units were leased out on lease and licence basis, which were held as stock in trade. Let out the premises on lease and licence basis is the ancillary business of development and the rent constitute a small percentage of total revenue/income earned by the assessee. These units were subsequently sold out and in between (when remained to be unsold) were commercially exploited/utilized. Subsequent to sale of such units, the assessee offered the income as business income. In the present appeal, the units were leased out fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould become or part take the character of stock and thus any income derived therefrom would be income from business and not income from property. If business of the assessee is to construct the property and sale it or to construct and let out the same then that would be the business income. However, respectfully following the latest decision from Hon ble Apex Court in M/s Chennai Properties, we affirm the conclusion drawn by the ld. Commissioner of Income Tax (Appeals). This ground of the Revenue, therefore, is having no merit, consequently, dismissed. 3. The next ground pertains to deleting the disallowances of expenses of ₹ 1,41,00,000/- which were arrived at pro rata basis by the Assessing Officer. The ld. DR defended the conclusion arrived at in the assessment order, whereas, the ld. counsel for the assessee defended the conclusion arrived at in the impugned order. 3.1. We have considered the rival submissions and perused the material available on record. We note that the Assessing Officer observed that income from leasing of properties is assessed under the head income from house property and thus part of expenses incurred in creating/building, the stock cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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