2014 (7) TMI 1171 - AT - Income Tax

Entertainment Center Income Classified as Business Income: Tribunal Decision Upheld

The Dy. Commissioner of Income Tax – 8 (1) & Jt. Dy. Commissioner of Income Tax – (OSD) Versus M/s E-City Project Construction Pvt. Ltd.

The Tribunal dismissed the Revenue's appeals, affirming that operational income from running the 'Family Entertainment Centre cum Mall,' including rent ... Operational income (rent) from running and operations “Family Entertainment Centre cum Mall” and service charges recovered - chargeable to tax in the hands of the assessee under the head “profits and gains of business or profession” as per assessee or under the head “income from house property” as held by the A.O. - Held that:- The facts of the present case as borne out from the record clearly shows that the cases of the assessees fall under the latter category as the intention of the assessees clearly was to exploit the commercial property by way of complex commercial activities and it was not a case of letting out the property owned by the assessee companies simpliciter. The rental income was not received by the assessee companies merely because of the ownership of the property but the same was received because of the complex commercial activity carried on by them of operating and running Malls which brought that rental income. The rental income and service charges thus were received by the assessee company as business income during the course of its business carried on by them of operating and running the Malls as a commercial activity and as rightly held by the ld. CIT(A), the said income primarily arising from the exploitation of commercial assets by way of complex commercial activity constituted the business income of the assessee company. It is observed that the decision of the co-ordinate bench of this Tribunal in the case of M/s Khandelwal Estate P. Ltd. (2014 (2) TMI 1227 - ITAT MUMBAI ) cited by the ld. Counsel for the assessee also supports the case of the assessees. In the said case, the income received by the assesse from the operation of shopping malls in the form of rent and service charges was held to be business income of the assessee by the Tribunal holding that giving space with services and facilities of varied and wide nature would definitely constitute a business and the relationship between the parties in such case is distinguished from that merely of a landlord and tenant relationship. We therefore find no infirmity in the impugned orders of the ld. CIT(A) treating the operational income received by the assessee companies from running of Malls in the form of rent and service charges as their business income and upholding the same on this issue, we dismiss these appeals filed by the Revenue. - Decided in favour of assessee. Issues Involved:1. Classification of operational income (rent) from running and operating a 'Family Entertainment Centre cum Mall' and service charges for tax purposes.2. Determination of whether such income should be taxed under 'profits and gains of business or profession' or 'income from house property.'Issue-wise Detailed Analysis:1. Classification of Operational Income:The core issue in these appeals is whether the operational income (rent) received by the assessee from running and operating a 'Family Entertainment Centre cum Mall' and the service charges recovered should be taxed under 'profits and gains of business or profession' or 'income from house property.' The assessee declared this income under 'profits and gains of business or profession,' claiming various expenses, while the Assessing Officer (A.O.) contended it should be taxed under 'income from house property,' arguing that the primary objective was to earn rental income.2. Analysis of Assessee's Business Activities:The assessee companies emerged from the demerger of E-City Project Construction Pvt. Ltd., which was engaged in acquiring, constructing, developing, and managing 'Family Entertainment Centre cum Malls.' The companies continued the same business, earning substantial operational income from renting and service charges. The assessee argued that their primary objective was commercial exploitation of the property through complex activities, providing integrated facilities like electricity, air conditioning, and basic interiors, making the income chargeable under 'profits and gains of business or profession.'3. Assessing Officer's (A.O.) Stand:The A.O. rejected the assessee's claim, arguing that the facilities provided were incidental to earning rental income, which should be taxed under 'income from house property.' The A.O. relied on the decision of the Hon'ble Supreme Court in Shambhu Investments Pvt. Ltd., asserting that the primary intention was to earn rent, and thus, the income should be classified as 'income from house property.'4. CIT(A)'s Decision:The CIT(A) disagreed with the A.O., holding that the assessee's activities were commercial in nature, involving complex activities beyond mere letting out property. The CIT(A) examined the agreements and found that the assessee provided numerous services integral to the business operations, indicating a business activity rather than mere rental income. The CIT(A) also noted that the demerged company had similar income assessed as business income in earlier years, supporting the assessee's claim.5. Tribunal's Analysis and Conclusion:The Tribunal upheld the CIT(A)'s decision, emphasizing that the intention behind exploiting the property was crucial. It found that the assessee's primary objective was commercial exploitation through complex activities, not mere letting out property. The Tribunal noted that the income was derived from a business activity involving providing various services and facilities, making it business income. The Tribunal also highlighted the consistency rule, stating that the A.O. should not have deviated from the earlier assessments of the demerged company without any change in facts.6. Supporting Judicial Pronouncements:The Tribunal referred to several judicial pronouncements, including the case of PFH Mall & Retail Management and Everest Hotels Limited, which supported the view that income from complex commercial activities should be treated as business income. The Tribunal also distinguished the present case from Shambhu Investments Pvt. Ltd., noting that the latter involved letting out furnished accommodation without additional services, unlike the present case.7. Final Judgment:The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s orders that the operational income from running the Malls, including rent and service charges, should be treated as business income. The Tribunal found no infirmity in the CIT(A)'s decision, concluding that the income arose from commercial exploitation of the property through complex activities, justifying its classification under 'profits and gains of business or profession.'Order Pronounced:The appeals of the Revenue were dismissed, and the judgment was pronounced in the open court on 30th July 2014.