9911796707
TMI Blog2024 (5) TMI 1416X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of assessee is that it has constructed a commercial complex on a plot of land measuring 1.447 acres in Shikandarpur Chowk, Sector-28, Gurgaon, Haryana, consisting of offices spaces along with amenities and other infrastructure facilities. Since the complex could not be sold at due to lull period prevailing in the real estate market the assessee vide a 'Commercial Lease Agreement' dated 14.07.2008 leased a part of the commercial complex measuring 1,56,451 per sq feet of the area to Emaar MGF Land Ltd., (hereinafter further referred as 'Emaar MGF') @ Rs. 80 per sq feet, which was later on reduced retrospectively w.e.f 01.04.2009 to Rs. 60 per sq feet vide a rectification deed of lease dated 10.01.2010. During the year under consideration the assessee offered lease rental of Rs. 10,87,64,735/- for A.Y. 2010-11 and Rs. 5,00,09,463/- for AY 2012-13 received from Emaar MGF. 3. The Assessing Officer was of the view that the rental income is actually income from house property and not business income or income from other sources. The Assessing Officer granted standard deduction of 30% as per Section 24 of the Act. The Assessing Officer further disallowed certain expenses claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty should be considered under the head business income as the object of the assessee is to lease out the commercial complex for the purpose of commercial use which is based on the intention of the assessee to remain in its business and to exploit the commercial asset for commercial purpose only. It is also submitted that the lease income from other assets i.e. other than building cannot in any way be taxed under the head income from house property and they can be taxed either under the head business income or income from other sources. It was submitted that the action of AO in not accepting the composite rent of all assets and treating the same as income from house property is beyond the provisions of Act. In this context, it was submitted that in A.Y. 2010-11 AO has disallowed the depreciation of Rs. 6,98,81,906/- which includes depreciation of Rs. 2,81,24,572/- on assets other than building on the belief that entire income from leasing of business assets is income from house property. The CIT(A) was not satisfied and concluded as follows:- 5.3 I have carefully considered the submissions of the Ld. AR and perused the order passed by the AO. I find that the assessee has rented ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in respect of the building and lease rent was fixed @ Rs. 80 per square feet vide lease deed dated 14.7.2008 which was later on reduced to Rs. 60 per square feet vide amendatory lease deed dated 10.1.2010 with retrospective effect from 1.4.2009. The lease deed does not mention that the rate fixed per square feet was partly for the building and partly for any other assets. I find that the kind of services being provided by the appellant company are routine in nature and none of the services so provided are of such kind that they can be considered inseparable from the letting out of the building for rent. I further find that the lease deed was in respect of the building and in order to lease out the building, the appellant provided certain amenities as part of the building as without these amenities, the user would have not taken the building on rent. Therefore, I do not find any merit in the submissions of the Ld. AR that the rent received by the appellant was a composite income and should be apportioned between the building and other assets. In view of the above discussion, the submissions of the Ld. AR are rejected. 5.4 find that the case laws relied upon by the Ld AR are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of its dealings I with, its property, it: is possible to say on which side the operations fall, and to what head the income is to be assigned. Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the Act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the Appropriate head to apply is "income from property" (s. 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business cannot be said to treat them as landowner but as trader The cases which have been cited in this case both for and against the assessee company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner,, one must see not to the form which it gave t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ** whether a particular letting is business has to be decided in the circumstances of each case. Each case has to be looked at from a businessman's point of view to find out whether the letters was the doing of a business or the exploitation of his property by its owner." 8. In S G. Mercantile Corpn. (P.) Ltd. v. CIT AIR 1972 SC 732 it was held that: "It is noteworthy that the liability to tax under section 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under the above provision even if the object of the assessee in purchasing the landed property was to promote and develop market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting no markets thereon. The income derived by such a company from the tenants of the shops and stalls, constructed on the land for the purposes of setting up market, would not be taxed as "business income" under section 10 of the Act... " 9. Again, in the case of CIT v. Vikram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as part of business or as landowner. The relevant observations, are as follows: "Ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens the appropriate head to apply is "Income from property" (s. 9) even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view of leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of the business, cannot be said to treat them as landowner but as trader." 11. This court is conscious about indivisibility of the levy of income tax, which are neither general or specific for the purpose of any source of income, as held in United Commercial Bank Ltd. v. CIT[1957] 32 ITR 688. where the Supreme Court observed that: "No one of those sections can be treated to be general or specific for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) Sultan Bros's case (supra) and Karan Pura Development Co. Ltd.'s case (supra) the levy of income tax in the case of one holding house property is premised not on whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership. Undoubtedly, the decision in Vikram Cotton Mills Ltd.' case (supra) indicates that in every case, the Court has to discern the intention of the assessee; in this case the intention of the assessee was to hold the properties till they were sold. The capacity of being an owner was not diminished one whit, because the assessee carried on business of developing, building and selling flats in housing estates. The argument that income tax is levied not on the actual receipt (which never arose in this case) but on a notional basis, i.e. ALV and that it is therefore not sanctioned by law, in the opinion of the Court is meritless. ALV is a method to arrive at a figure on the basis of which the impost is to be effectuated. The existence of an artificial method itself would not mean that levy is impermissible. Parliament has resorted to several other presumptive methods, for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, I hold that the AO was fully justified in treating the income from the renting out the commercial complex as income from house property and in making the addition. The same is, therefore, confirmed. Ground no. 3 & 4 are rejected. 6. Assessee is in appeal raising following grounds in A.Y. 2010-11 which cover the other year also:- "Ground No.1: The Ld. Commissioner of Income Tax (Appeals) - IV, New Delhi (hereinafter referred to as 'CIT(A)') has erred in law and in the fact & circumstances of the case by passing the order dated 10.06.2014 under section 250 of the Income Tax Act, 1961 (hereinafter referred to as "The Act') as the order passed by the CIT(A) is against the provisions of the Act. Ground No. 2: The Ld. CIT(A) has erred in law and on facts of the case in confirming the addition made by the Assessing Officer (hereinafter referred to as "AO") by treating the rental income earned by the assessee from commercial properties as Income under the head House Property instead of Income from business. Ground No. 3: The Ld. CIT(A) has erred in Law and on facts of the case in confirming the disallowance amounting to Rs. 10,55,911 made by the AO on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exploit such properties) through lease thereof. However, due to lull in the real estate market, the appellant was not able to find an appropriate buyer offering a suitable price bid/offer for the property. Thus, the appellant, with a view to ease its liquidity and cash flow position, decided to lease out the building to Emaar MGF vide 'Commercial Lease Agreement' dated 14.07.2008 (w.e.f. 01.01.2009) for a temporary period of 9 years. The appellant, it is submitted, leased out the property to avoid keeping the property idle and earn lease rental, till any potential buyer offering the right price was found. 8.1 It was further submitted that under the aforesaid Commercial Lease agreement, the appellant never intended to part away with the property and the same was leased out for a temporary period to tide over the crisis condition prevailing in the real estate market. Ld. AR submitted that it is a well settled legal position that in cases where the property is leased out only for the purpose of meeting the business requirements of the assessee for a limited period of time and to tide over a difficult period/market crisis, the lease rentals would be taxed under the head ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head 'Profits and gains of business or profession'; 2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out; 3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find our whether the intention of the assessee is to go out of business altogether or to come back and restart the same; and 4) if only or a few of the business assets are let out temporarily while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing. them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration also. Secondly, on merits it is the contention of the assessee that looking into the shorter period of leasing out that too for the reasons of difficult market conditions and poor health of the Director, the activity of leasing out the premises cannot be held to be non-business, activity in the light of the decisions referred to in earlier part of this order. 14. Looking into the fact that leasing is for a shorter period and it has not been shown that the intention of the assessee was to go out of the business altogether, the contention of the assessee has to be accepted that it cannot be considered to be a non-business activity. Reference can be made to the decision of the Hon'ble Supreme Court in the case of Universal Plast Ltd. (supra) wherein their Lordships after considering various case laws have summarized the position of law on this issue as follows :- 1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head 'Profits and gains of business or profession'; 2) it is a mixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come' or 'income from house property'. Relevant finding of the Court as relied reads as under: "It is true that the period for which the business assets are let out is always a relevant factor in finding out whether the intention of the Assessee is to let out the business assets permanently and if the Assessee had never started the business, an inference may be drawn that the Assessee intended to exploit the property and not the business assets but the intention of the parties has to be gathered from the over- all facts and not the isolated circumstances. It is settled legal position that each case has to be decided on its own facts including the construction of the agreement under which the assets have been let out or handed over to a third party and no precise test can be applied to ascertain as to under which head the income received by the asses see from leasing or letting out the assets should fall. The longer duration of the agreement could have been for many reasons." To similar effect are the following decisions: * CEPT v. Shri Lakshi Silk Mills Ltd 20 ITR 451 (SC) * Maltex Malsters Ltd. CIT 243 Taxman 581 (P&H) * Sri Hanuman Sugar & Industries Ltd. vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter. The Californian Copper Syndicate case (supra) illustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in other words, in the holding of the business. The Calcutta cases and the case of Fry v. Salisbury House Estates Ltd. [1930] AC 432; 15 Tax Cas. 266 (H)illustrate the contrary proposition. There, the property, though dealt with by a company intending to do business, was dealt with as landowner. The intention in those cases was not to derive profit by business done with those properties but to derive income by renting them out. Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RETO AS FOLLOWS: 19. The owner hereby gives on lease to the User and the User hereby take on commercial lease for a period of 9 years, from I" January, 2009 till 31" December, 2017, with reset after every three years, office space comprising of 156,451/- sq. ft area on various floors, as earmarked by the User marked as Exhibit B of agreement in the said Building with provision of facilities and amenities (description amended as Exhibit "A" to this Agreement), situated at Sikandarpur Chowk, Sector,28, Gurgaon, Haryana for running and operating its office for commercial purpose. However the owner will handover space as ear marked by the user immediately on signing of this lease deed for fit outs and installation of various facilities by the user as per its requirements. 23. The above charges specified under clause 3 is inclusive of House Tax/ Property Tax or any other levies as currently imposed by the local authorities or may be imposed by the local authorities in the future, back up power for running DG sets, other facilities and amenities including the car parking space in the basement and other administration expenses for the leased office space as agreed between the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of services/facilities provided by the appellant by way of renting out a complex commercial structure. 10.4 Attention was invited to the provisions of section 22 of the Act which provides that the annual value of any building or land appurtenant thereto, other than the portion of such building/land occupied by the assessee for the purposes of the business would be taxable under the head 'income from house property'. 10.5 Ld. AR submitted that in the present case, let out is not of merely land or building appurtenant thereto, but let out of land and building coupled with various facilities, which constitutes dominant part of lease agreement, in lieu of composite/inseparable rent. Analogy for the aforesaid can be drawn from the provisions of clause (ili) of sub section (2) of section 56 of the Act, which provides that in case an assessee lets on hire plant and machinery or furniture alongwith building and the letting of such building is inseparable from letting of the said machinery/furniture, then the income from such letting, if not chargeable to income tax under the head 'Profits and gains of business or profession'; would be taxed as income from othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 'profits and gains of business or profession'. Clause (iti) 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, 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. The provision is clear, i.e. if the letting of building, plant, machinery and furniture is inseparable, the income from such letting should ordinari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Velankani Information Systems (P.) Ltd.: 265 CTR 250 (Kar) * CIT vs. Mohiddin Hotels P. Ltd. & Ors.: 284 ITR 229 (Bom) * CIT vs. Goel Brothers: 331 ITR 344 (All) * PCIT vs. M/s Krome Planet Interiors Pvt. Ltd.: ITA No. 282 of 2017 (Bom) * CIT vs. M/s Oberon Edifices & Estates (P) Ltd.: ITA No. 166 of 2016 (Ker) * Pr. CIT vs. M/s Krome Planet Interiors Pvt. Ltd.: ITA No. 282/2017 (Bom) * CIT vs. M/s Oberon Edifices & Estates (P) Ltd.: ITA No. 166/2016 (Ker) * M.M. Creations vs. ACIT: 165 ITD 534 (Del Trib) * M.S. Luvish Projects (P.) Ltd. vs. DCIT: 175 TTJ 153 (Mum Trib) * DCIT vs. Magarpatta Township Development & Construction Co.: 150 TTJ 590 (Pun) (Refer Pg 132-153, r.f.@Pg 142) * ENN ZEN Enterprises (P.) Ltd. vs. ACIT: 45 ITRT) 382 (Chandigarh ITAT) * Global Tech Park (P.) Ltd. vs. ACIT: 119 TTJ 421 (Bang) 11. Ld. AR, without prejudice submitted that lease rental is taxable under section 56 of the Act. He submitted that as per the provisions of clause (iti) of sub section (2) of section 56 of the Act, in case an assessee lets on hire plant and machinery or furniture alongwith building and the letting of such building is inseparable from letting of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.3 To the similar effect the following decisions, wherein, the Court/Tribunal allowed deduction of expenditure incurred for earning lease rental, taxed as 'income from other sources were relied: * Garg Dyeing & Processing Industries vs. ACIT: ITA 319/2012 (Del) * Oriental Building & Furnishing Co. Ltd. vs. DCIT: 53 ITD 198 (Del Trib.) * Serendipity Apparels (P.) Ltd. vs. ITO: 78 Taxmann.Com 154 (Ahmedabad - Trib.) * M.M. Creations v ACIT: 165 ITD 534 (Delhi - Trib.) 11.4 In that view of the matter, it was submitted that in case lease rental is assessed as 'income from other sources', expenses incurred for earning such income needs to be allowed against such income in terms of provisions of clause ii) of section 57 of the Act. 12. In the rebuttal submissions Ld. SR.DR contended that Assessee is not engaged in business of leasing of commercial complexes as the main object of the assessee is not leasing of object of the assessee is not leasing of building/. complex etc. Support for the same was drawn from the main objects of Memorandum of Association '(MOA) and report of the Tax Auditor. The Ld. Sr. DR then submitted that MOA is not placed on the paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial building was not the main object contained in MOA of the appellant company. The complex at Sikanderpur was constructed with the main object of selling the same and not for leasing. However, as we go through the amended MOA, copy of which is filed by Ld. Sr. DR only, it can be seen that the company had one of its objects: "75. To carry on the business of contractors, builders, housing finance, broker dealers and estate agents. ....... 79. To carry on the business of construction, maintenance and development of buildings including residential, commercial and industrial buildings, colonies, hotels, mills and factory's sheds and buildings, workshop's buildings, cinema's houses buildings, bungalows, quarters, offices, flats, plots, chawls, club, resorts, banquet halls, tenements, roads, bridges and other immovable properties." 13.1 The claim of appellant is that due to lull in the real estate market, the appellant was not able to find an appropriate buyer offering a suitable price bid/offer for the property. Thus, the appellant, as part of its business activity, and with a view to ease its liquidity and cash flow position, decided to lease out the commercial complex e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s' of audited financial statements (page 16 of PB) shows various expenses aggregating to Rs. 1.74 crores incurred by the appellant and same is attributable to its part such as rates and taxes, insurance expenses, fuel charges, repairs and maintenance etc. Indeed certain expenses/ payments were made by the lessee (holding company) on behalf of the appellant company, which was later reimbursed to by the assessee. But that does not hamper the case of the assessee rather strengthens the same as the amount spent was not set off against the consideration receivable from the user. It shows that expenditure account was separate and entries were made on basis of who had paid for the head of expenditure. No adverse inference can be drawn from such reimbursement. We find substance in the case of appellant that the reimbursement of expenses supports the case of the appellant is as much as, the aforesaid proves that the expenses attributable to the obligation of the appellant as per the terms of the lease were borne by the appellant on reimbursement to the lessee/Emaar MGF. Then during financial year 2011, there was further revision in the terms of lease agreement according to which expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred as "Commercial complex") consisting of offices with basements for parking and services. The said commercial complex is a commercial asset for the owner and has been incorporated in books of accounts accordingly. G. AND WHEREAS Owner is competent to lease the office space with provision of standard facilities and amenities enlisted in Exhibit "A" (hereinafter referred as "facilities and amenities". H. AND WHEREAS User is destrous of taking lease office space with provision of facilities and amenities (description appended as Exhibit "A" to this agreement), has approached Owner to lease commercial complex comprising of 156,451/-sq. ft marked as Exhibit "B", to the agreement, in the said Building, situated at Sikandarpur Chowk, Sector, 28, Gurgaon, Haryana for running and operating its office for commercial purpose. The Owner agreed to make available for lease of the office space along with facilities and amenities (hereinafter referred as "leased commercial premises" or "leased commercial premises and utilities") for 9 years on the terms and condition mentioned below. NOW THEREFORE IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS: 19. The owner hereby giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entry Repairs Plumbing work Random Main Electrical purchases Alba AMC (Annual Maintenance Contract) Projectors AMC Air Conditioners Fire Extinguisher refills Hand dryers Grp 4 Security House keeping Keyboard cleaning Electrical Main Shredders (AMC +Spares) Co2 flooding sys Furniture Main Carpet, Partition & Chairs Dry-cleaning Pest Control Other Administrative services (receptionist, secretarial services, data processing, conference room etc) 15. The aforesaid clauses of the lease deed when read with Exhibit-A makes it very apparent that the user was not given possession of the premises as a tenant alone, but, was given the possession of the premises which was held as a commercial asset by the appellant and the charges agreed to be paid were not for occupation of the building along, but, for all the facilities and amenities mentioned in the aforesaid Exhibit-A. Var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for many reasons. The fact that all licences, permissions and no objection certificates required for leasing the building to be obtained in the name of assessee is a pointer to aspect that assessee intended to exploit business assets. 21. Section 22 of Income-Tax Act deals with income from house property and it reads thus: "22. Income from house property.--The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head 'Income from house property'." 22. It needs no emphasise that when a specific head of charge is provided for income from house property, rents or other income from ownership of house property has to be under this head and no other head. However, for an income from house property it should be covered by section 22. By a catena of decisions, courts, time and again, have held that where subject matter that is let out or given on licence is not a bare tenement but is a complex o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxed under the head business income. The fact that it is clearly a commercial adventure, involving marketing and promotions as also appropriate improvisations on a case to cases basis, takes these receipts out of the ambit of income under the head property income. Similarly, as regards classification of the nature of payments in the TDS certificates, nothing on turns on the same because the nature of payment, as the law is well settled, need not be the same in the hands of the recipient as in the case of the payer. That apart, it is only elementary that definition of 'rent' in Section 194I is not conclusive of taxability of the related income under the head 'income from house property'. The conclusions arrived at by the Ld. CIT (A) thus do not call for any interference." 24. Respectfully following decision of Hon'ble Supreme Court in the case of Shambhu Investment Pvt. Ltd vs CIT (supra) and discussions herein above, we are of considered opinion that rental income earned by assessee from lease of building would be taxable under the head "income from business and profession". Ld. AO is directed to grant depreciation on building while computing income from bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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