Shopping mall rental income classified as business income under Section 28, not house property income under Section 22

ITAT Indore ruled that rental income from shopping mall properties constitutes business income under Section 28, not house property income under Section 22. The tribunal held that where properties are commercially exploited per company's stated objects, income should be assessed as business income. Following SC precedents in Chennai Properties Investment Ltd. and Rayala Corporation, the tribunal confirmed CIT(A)'s classification. Consequently, AO's estimation under Section 23 was deemed invalid, and depreciation claims on business assets were allowed at 50% prescribed rates for assets used less than 180 days.

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Issues Involved:
1. Classification of income from leasing out properties in a mall.
2. Deletion of addition made under the head income from house property.
3. Determination of gross rent and rental basis.
4. Allowance of depreciation claimed by the assessee.

Issue-wise Detailed Analysis:

1. Classification of Income from Leasing Out Properties in a Mall:
The primary issue was whether the income derived by the company from leasing out properties in the mall should be classified under "income from business" or "income from house property." The assessee argued that the mall was constructed for the purpose of carrying out its business, and the income should be categorized as business income. The assessee provided various amenities and services, such as parking, elevators, security, and organized events to ensure footfall, which indicated a systematic business activity. The CIT(A) and the Tribunal agreed with the assessee, relying on the Supreme Court judgments in the cases of Chennai Properties & Investments Ltd. and Rayala Corporation Pvt. Ltd., which held that income from commercial exploitation of properties should be treated as business income.

2. Deletion of Addition Made Under the Head Income from House Property:
The AO had re-characterized the income from the operation of the mall as "income from house property" and made additions accordingly. However, the CIT(A) deleted these additions, stating that the predominant object of the assessee was running and operating the shopping mall, which involved various activities beyond mere letting out of property. The Tribunal upheld this view, noting that the assessee's activities were systematic and organized, and the income should be assessed under "income from business."

3. Determination of Gross Rent and Rental Basis:
The AO had determined the gross rent at Rs. 7,92,90,780/- based on an estimation method, which the assessee contested. The CIT(A) found that the AO's estimation was not justified as it was based on hypothetical assumptions without considering the actual rent received by the assessee. The Tribunal agreed with the CIT(A), stating that the provisions of Section 23 of the Income Tax Act, which were invoked by the AO, were not applicable as the income was already categorized under "income from business."

4. Allowance of Depreciation Claimed by the Assessee:
The AO had restricted the depreciation claimed by the assessee on the grounds that the rental income was assessable under "income from house property" and not "income from business." The AO allowed depreciation only for the occupied portion of the mall. The CIT(A) allowed the full depreciation claimed by the assessee, noting that the entire building was used for business purposes and that even the unoccupied portions were ready for use. The Tribunal upheld this view, emphasizing that actual user is not a precondition for claiming depreciation if the asset is ready for use.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue, upholding the CIT(A)'s decisions that the income derived from leasing out properties in the mall should be classified under "income from business," the additions made under "income from house property" should be deleted, the gross rent determination by the AO was incorrect, and the depreciation claimed by the assessee should be allowed in full. The judgments relied upon by the CIT(A) and the Tribunal included those from the Supreme Court and various High Courts, which supported the assessee's position.

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