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TMI Blog2022 (11) TMI 1464X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 28. Hon ble Apex Court in the judgment passed in the matter of Chennai Properties Investment Ltd. [ 2015 (5) TMI 46 - SUPREME COURT] categorically held that where an income has been derived by the assessee for the commercial exploitation of the properties and in lieu of its professed objects then the same is required to be recorded as business income and not income from house property. The same view has been reiterated in the case of Rayala Corporation Pvt. Ltd. [ 2016 (8) TMI 522 - SUPREME COURT] by the Apex Court. The Hon ble Kerala High Court in the case of CIT vs. Oberon Edifices and Estates Pvt. Ltd., [ 2019 (3) TMI 1468 - KERALA HIGH COURT] on an identical facts and circumstances of the case has been pleased to hold that income derived by the assessee by letting out of the shops in the Mall has to be assessed as income from business and not income from house property. Thus no irregularities and/or ambiguity in the order passed by the Ld. CIT(A) considering the income derived by the appellant company from leasing out properties in the mall falls under the head income from business and not under the head income from house property so as to warrant interference. Addition on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. CIT(A) is hereby upheld. This ground of appeal preferred by the Revenue is found to be devoid of any merit and thus dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... ppingcum-Entertainment mall and named & styled as 'Malhar Mega Mall' situated at Indore. The assessee company has derived its income mainly from carrying out the operation and maintenance of that particular mall in the relevant Assessment Year. The assessee has furnished its return of income under Section 139(4) of the Act on 31.03.2012 declaring business loss of Rs. 1,02,098/- book loss of Rs. 1,81,15,601/- and claiming carry forward of unabsorbed depreciation at Rs. 1,55,95,905/-. In the P&L account of the assessee total receipts showed at Rs. 67,06,781/- consisting of rental receipts of Rs. 7,95,526/- common area maintenance of Rs. 32,53,311/-, HVAC charges of Rs. 13,04,535/- and interest income of Rs. 13,53,409/-. After deducting expenses of Rs. 2,48,22,382/-, book loss was computed at Rs. 1,81,15,601/-. 4. During the course of assessment proceeding the assessee duly filed the Tax Audit Report and the copy of the Audited Financial Statements for the year under consideration and also complied with all the notices issued under Section 143(2) and 142(1) of the Act by filing written submission and relevant documentary evidences from time to time. The assessment was finalized under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acilities and/or multiplex, cineplex, cinema halls, theatres, shops, shopping mall, shopping junctions, circus or centers for offering sports facilities, pool and billiards tables, or centers offering entertainment etc. Needless to mention, that carrying out of business of shopping Mall has been included in the main object of the Memorandum of Association as above. 10. In this respect the assessee filed a written note of submission on 30.05.2022 the relevant portion whereof is as follows: "1.05 SHOPPING MALL CONSTRUCTED BY ASSESSEE FOR CARRYING OUT BUSINESS - INTENT & PURPOSE It is reiterated that the subject Mall has been constructed by the assessee company, exclusively and necessarily, during the course of and for the purpose of carrying out its business, for the achievement of its predominant main object for which it has come into existence. 2.00 ASSESSEE DERIVED LEASE INCOME FROM UNITS IN MALL - PB 48 & 24 Since the appellant company had derived lease income from leasing out a part of the, Mall and further since, the deriving of lease income was a result of carrying out systematic, organized, synchronized and recurring activities of the nature of trade and venture, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO 295 The assessee company has to necessarily provide certain amenities and facilities to occupants of the Mall under contractual agreement. Specimen copies of agreements entered into by the appellant company with the lessees of the Mall are placed at 238 to 295 of our Paper Book for A. Y. 2011-12. 3.05 VARIOUS SERVICES PROVIDED BY THE ASSESSEE The assessee has to provide various services to the lessees in the Mall. Some of the essential services are enlisted as under : i) Electricity, water charges for common area; ii) HVAC for Common Area; iii) AMC's for all plant and machinery facilities and amenities provided in the Mall; iv) Lifts, escalators and other utilities; v) Civil, plumbing, structural and all other repairs replacements and maintenance; vi) Maintenance and upkeep of building; vii) Mall Management Charges; viii) Insurance of entire building; ix) Housekeeping/ Sanitation Services; x) General Security Services in the Mall; xi) All other costs and expenses attributable to the Mall 4.00 ASSESSEE CARRIED OUT SYSTEMATIC BUSINESS ACTIVITY The assessee company has been carrying out a systematic business activity with an intent to earn pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee acquired two properties known as "Chennai House" & "Firhavin Estate" and has let out those properties. In Rayala Corporation the assessee was having house property which has been let out on rent. The assessee company obtained a land on leasehold basis and constructed a multiplexcum- shopping mall. Units in the Mall have been leased out by the assessee. Relevant Para of the Order Para 7 of Calcutta HC Order in the case of Shambhu Investment. Para 1 7 & 1 8 in the case of Raj Dadarkar. Para 5 in the case of Chennai Properties. Para 10 in the case of Rayala Corporation. - Findings of the Court In Shambhu Investment. the Hon'ble High Court of Calcutta, at para 7, has held that merely because income is attached to any immovable property cannot be the sole factor for assessment of such income as income from property, what has to be seen is what was the primary object of the assessee while exploiting the property. In Raj Dadarkar, the Hon'ble Court, at para 18, held that the assessee failed to produce sufficient material on record to show that its entire income was from letting out of property which was principal business activity of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 (3) TMI 1468 (Ker.) has also held that income derived by the assessee by letting out the shops in the mall has to be assessed as income from business and not from income from House property. The Hon'ble Court, while holding so, has also dealt with and distinguished the Order of the Hon'ble Supreme Court in the cases of Shambhu Investment and Raj Dadarkar supra. A copy of the decision of the Hon'ble Kerala High Court is being enclosed herewith, as Exhibit -P/l. 8.02 Your Honours, the Hon'ble Bombay High Court in the case of Pr. CIT vs. Shreeji Exhibitors 2018 (12) TML 656 (Bom.) has also held the same view. A copy of the decision of the Hon'ble Bombay High Court is being enclosed herewith, as Exhibit -P/2. 8.03 Your Honours, the Hon'ble Madras High Court in the case of Ms. PSTS Heavy Lift and Shift Ltd. & Anr. Vs. DCIT & Anr. 2020 (2) TMI 213 (Mad) has also decided the issue in favour of the assessee by discussing the judgment of Raj Dadarkar supra. A copy of the decision of the Hon'ble Madras High Court is being enclosed herewith, as Exhibit -P/3. 8.04 Your Honours, the Hon'ble ITAT Ahmedabad, constituting the then Hon'ble President Justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of running the Mall and the income derived therefrom can be assessed only under the head "Income from Business or Profession" under the provision of Section 28 of the Act. 12. During the course of assessment proceeding the assessee was asked to explain as to why the income derived from letting out of Shopping Mall may not be assessed as "Income from House Property" partly and "Income from Business or Profession" instead of entire income from business only as shown by the assessee. Upon considering the reply in the same line as discussed in the forgoing paragraph filed by the assessee, the Ld. AO held that the rental receipts from letting out the area of Shopping Mall are in the nature of "Income from House Property" and not in the nature of business receipts. The income from common maintenance charges, HVAC Charges etc. were held to be the 'income from business'. The main contention of the Ld. AO is as follows: "i) Generally, in any type of business activity uncertainty of receipts is a basic feature, but in the instant case the assessee was in receipt of constant amount of rent through rent agreements. Even accretion to the rate of rent at regular intervals was found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the head "Income from Business and Profession" under Section 28 of the Act. The assessee further relied upon by the judgment passed by the Hon'ble Apex Court in the case of Chennai Properties and Investments Ltd. vs. CIT, reported in 373 ITR 673 (SC) including the judgment passed by the Hon'ble Kerala High Court in the case of CIT vs. Oberon Edifices and Estates Pvt. Ltd., reported in 2019 (3) TMI 1468 (Ker.), the judgment passed by the Hon'ble ITAT Ahmedabad Bench in the matter of Gulmohar Park Mall Pvt. Ltd. vs. ITO, reported in 2019 (8) TMI 1431 (ITAT Ahd.). 14. Upon perusal of the entire details submitted by the appellant and the supporting documents it appears that main object of carrying out of business of the assessee is of constructing, owning, acquiring, developing, managing, running, hiring, letting out, selling or leasing multiplex, cineplex, cinema halls, theatres, shops, shopping malls, etc. as per the Memorandum of Articles and Associations. The above facilities and amenities provided by the assessee is for carrying out the business of Shopping Mall in a systematic and organized way for earning profit and not particularly letting out the property on rental basis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. Further, the mall should be located at a convenient place and should be designed in such a manner so as to attract optimum number of customers so that the occupants of the mall are commercially benefitted to the maximum. After setting up the mall, the company running the Mall has to attract MNCs and brands of repute so as to capture the maximum footfall in the mall, A mall entrepreneur has to enter into negotiations and agreements with such customers. The mall operator has to ensure that there is adequate and convenient parking and management of parking. The security of the mall is also the responsibility of the mall operating company. The mall operating company has to manage cleanliness and housekeeping of the mall at all times. It is also required to operate and look after the maintenance of lifts, escalators, elevators etc. Further, a mall running company has to maintain its own staff and establishment and is also required to keep necessary records, to comply with various laws like service tax, PF etc. Thus, in my considered opinion, running a mall involves a series of activities and it is not mere letting out of the properties. This being so, any income from leasing/letting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel House of Lords in England and US Courts were taken note of. The position in law, ultimately, is summed up in the following words: "As has been already pointed out in connection with the other two cases where ,, there is a letting out of premises and collection of rents the assessmen.1 on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find- but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned." After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any Ltd. vs. C1T (1962) 44 ITR 362 (SC), I find that the acts of the case of Karanpura Development Company are quite distinguishable and support the stand of the appellant. In this case the question before the Hon'ble Apex Court was whether a company, formed with the specific object of acquiring coal fields for selling them can be said to be deriving business income or not. The Hon'ble Apex Court held that a company formed with the specific object of acquiring properties, developing them and subleasing them without working the same, the sums received as salami by the assessee for granting such subleases are trading receipts and the amount of profit therein is assessable to tax. 4.5.1 The Assessing Officer has also relied upon the decisions of Hon'ble Supreme Court in the case of CIT vs. Panipat Woollen & General Mills Company Ltd. (1976) 103 ITR 66 (SC) and in the case of Sutlej Cotton Mills Ltd. vs. CIT (SC) 116 ITR 1 for the purpose that the entries made by an assessee in his books are not determinative and what is necessary to be considered is the true nature of the transaction. However, I find that in the instant case, the determination of income of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the income of the /appellant is to be treated as business income and not as income from house / property, these case laws are not relevant. 4.6 Though the decision of Hon'ble Kerala High Court in the case of Attukal Shopping Complex Pvt. Ltd (Supra) supports the view of the Assessing Officer but the issue has to be dealt with keeping in view the recent decisions of Hon'ble Supreme Court in Chennai Properties and Investments Private Limited and Rayala Corporation Private Limited (Supra). The Hon''ble Supreme Court has relied upon its own judgment in Karanpura Development Co. Ltd. where in it is held that the diving line is difficult to find but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned. The Constitution Bench judgment in the case of Sultan Brothers (P) Ltd. has also been discussed clarifying that merely an entry in 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. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the rent agreement with those parties. In fact, the composite table space alongwith furniture were given on rent to the occupiers in that particular case. The main consideration in this case should be primary object of the assessee while exploiting the property which has been duly taken care of by the Hon'ble Apex Court in the judgment in the case of Karnani Properties Ltd., Chennai Properties & Rayala Corporation as relied upon by the Ld. AR. 17. We have considered the judgment passed in the matter of Karnani Properties Ltd. vs. CIT, reported in (1971) 82 ITR 0547 (SC), which is in favour of assessee. The Hon'ble Apex Court in the judgment passed in the matter of Chennai Properties & Investment Ltd. vs. CIT, reported in (2015) 373 ITR 673 (SC) categorically held that where an income has been derived by the assessee for the commercial exploitation of the properties and in lieu of its professed objects then the same is required to be recorded as business income and not income from house property. The same view has been reiterated in the case of Rayala Corporation Pvt. Ltd. vs. ACIT, reported in (2016) 386 ITR 500 (SC) by the Apex Court. The Hon'ble Kerala High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the provisions of Section 28 of the Act. The assessee has shown rental receipts of Rs. 7,95,526/- from the four parties. The AO came to a finding that the rental income would come under the head "Income from House Property". 22. The assessee was issued show cause as why floor wise per sq. feet rate of rent may not be determined and adopted as under: Floor Per sq. ft. rent as per rent agreements Per sq. ft. rent as per rent agreements Average rate of rent Rate of rent adopted Reason for the same Minimum Rs. Maximum Rs. (a) (b) (c) (d) (e) (f) UG 15.00 546.88 280.94 280.00 Average Rate. FF 30.00 69.28 49.64 200.00 Rate of first floor can be slightly below than that of UG Floor LG 26.00 26.00 26.00 150.00 Rate of LG floor can be this much below than that of UG floor 23. The Ld. AO was of the opinion that rental receipt from Mobile Tower has been suppressed to a large extent by the assessee. While coming into such conclusion the Ld. AO observed as follows: "4.6 Further, the assessee has shown rent from Bharti Airtel Mobile Tower installed in the mall at only Rs. 1,32,000/-, and from Idea Cellular Mobile Tower at only Rs. 36,000/- during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e para- (iv) The estimated rent in the case of mobile towers will be @ Rs. 50,000/- per month per tenant." 26. Finally the rent receivable/accrued in the assessee hand was calculated at Rs. 7,92,90,780/- which has been determined as the assessee's income from house property for A.Y. 2011-12 as against the rental income of Rs. 7,95,526/- as shown by the assessee. The income from house property was ultimately determined at Rs. 4,69,34,191/- with the following observation: 5.1 Against the aforesaid amount of Rs. 7,92,90,780/-, the assessee would be entitled for deduction u/s 24(a). Further, in the P&L A/c, the assessee has claimed interest expenses to the tune of Rs. 85,69,3557- [interest on bank loans Rs. 37,96,088/- + interest on unsecured loans Rs. 47,73,267/-]. It has been claimed that all the loans were utilized in construction of the mall. Hence, the aforesaid interest expense of Rs. 85,69,355/- would be deductible u/s 24(b) as interest paid on borrowed capital. (Even if certain loans are found to be not utilized for construction of the mall, and instead utilized for purchase of machineries etc.; in that case also, no difference would be there; since then, that portion of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the corresponding rent at which the property might reasonably be expected to let from year to year. It is submitted that in the case of the appellant, the clause (c) of subsection (1) of section 23 squarely applies as the property was constructed for letting out and during the relevant previous year, a major portion remained vacant. It is submitted that in the instant case, the deemed rent of the entire lettable property under clause (a) of sub-section (1) of section 23 of the Act might have been higher than the meager rent of Rs. 7,95,526/- actually received by the appellant company but since the sole reason for receiving the lesser rent was that a major portion of the lettable property remained vacant during the relevant previous year the clause (c) of sub-section (1) of section 23 would come in to operation and accordingly, the actual rent received shown by the appellant company in it books of account would alone have to be taken as the Annual Value of the house property under the provisions of section 23 of the Act. For our above assertion, we place reliance on the following judicial pronouncements : i) ACIT vs. Dr. Prabha Sanghi (2013) 35 CCH 0002 (DelTrib) ii) Premsu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant company being exorbitantly high, hypothetical, unjustified and unwarranted, deserves to be set aside." 28. The Ld. CIT(A) ultimately deleted the addition with the following observations: "5.1 I have gone through the assessment order, submissions made by the appellant as reproduced above and various documentary evidences placed by the appellant in its paper book. 5.2 I find that in the instant case, the Assessing Officer has made the estimation of rent on ALV by invoking the provisions of section 23 of the Act. The provisions of section 23 can be invoked only if the income is computed under section 22 of the I.T. Act, 1961. As it has been held above that in the case of the appellant, income from leasing out of properties in the mall is chargeable to tax under the head from 'Income from Business Profession', under section 28 of the Act, the rental income cannot be estimated under the provisions of section 23 of the Act. Thus, as ground nos. 2(a) and 2(b) are allowed, the income of the appellant cannot be estimated u/s 23 and therefore ground no. 3 and ground nos. 4fa) to 4(f) of the appellant are allowed." 29. Admittedly, the AO has made estimation of rent on A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "1.00 That, while computing the income of the appellant company under the head 'Income from business', the learned AO restricted the claim of the appellant company as regard to depreciation on fixed assets at Rs. 74,63,469/- only as against the same claimed by the appellant m its return of income at Rs. 1,55,95,905/-. A comparative chart of the depreciation claimed by the appellant and that allowed by the learned AO is given as under: S. No. Particulars Depreciation Claimed by the appellant Depreciation allowed by the AO Short allowance by the AO Reason assigned for short allowance 1 Building 76,46,466 6,88,182 69,58,284 i) Assessee is not eligible for depreciation on that portion of building, income wherefrom is assessable under the head 'Income from property'. ii) The depreciation cannot be allowed on the entire constructed building but it has to be restricted to the occupancy level. Accordingly, based upon occupancy level of 35%, depreciation has been restricted. iii) The AO presumed the ratio of common area to the rentable area as 6615 : 65585 only. 2. Right of Leasing 17,81,250 6,23,437 11,57,813 The depreciation cannot be allowed on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon the order passed by the Ld. CIT(A). 35. The income from leasing out properties in the Mall has been held to be chargeable to tax under the head "Income from Business". In that view of the matter the appellant is eligible for claim of depreciation of all the business assets which were either actually put to use or were ready to be put to use by the appellant for the purpose of its business of leasing out the properties. The assessee has shown the value of building Phase-1 at Rs. 15,29,29,322/- and the amount of Rs. 18,79,15,890/- has been shown under the head "Capital Work in Progress", as it is evident from the Schedule-5 of the fixed asset of the Audited Financial Statement. It is also a fact that the assessee has claimed depreciation only in respect of building which was already constructed and put to use and in respect of the fixed asset under the head "Capital Work in Progress", the appellant has not claimed any depreciation. Further fact, as has been considered by us, is this that the entire property including the right of leasing were owned by the appellant and the same were put to use for business purposes or ready to put use. The assessee has restricted the claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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