2016 (5) TMI 967 - AT - Income Tax

ITAT decision: Rental income from malls classified as business income, fit-out hire charges as other sources

M/s Prestige Estates Projects Ltd. Versus The Deputy Commissioner of Income-tax

The ITAT upheld the classification of rental income from malls as business income and hire charges from fit-outs as income from other sources. It also ... Income received from letting out of Malls - assessable under the head “Income from business or profession” or under the head “ Income from house property” - Held that:- There should be no consideration of primary and secondary lettings in construing the section 12(4) of 1922, which has analogy to 56(iii) of IT Act of 1961. In this case, the letting of building is along with letting machinery, plant or furniture required for ancillaries services and therefore, we hold that the alternative plea of the appellant that in case the income is not to be assessed under the head “income from house property” then it is required to be assessed under the head income from other sources” this is without prejudice to our basic finding that in the instant case, the income from Mall is assessable under the head “income from business”. Income received from letting out of fit-outs is assessable under the head “Income from other sources” Disallowance of compounding fees - Held that:- We have considered the submissions of the assessee and orders of the authorities below. At the time of hearing, the ld. DR submitted that the very same issue has been decided against the assessee in assessee’s own case for the assessment year 2009-10. Thus we upheld the disallowance of compounding fees. Deduction u/s 80-IB(10) - Held that:- Any disallowance of expenditure would certainly enhance the profits of eligible business. If assessee is carrying on eligible business, then, the total profits of the business shall be eligible for deduction under the provisions of Act. In the present case, there is dispute about the activity of the assessee which is eligible for deduction under sec.80-IB(10) of the IT the Act, 1961. However, the assessee has raised the issue before the Tribunal for the first time. The lower authorities have not had an occasion to consider the plea of the assessee in the light of the provisions of sec.80-IB(10) of the Act. Therefore, we deem it appropriate to remit the issue to the file of the AO and direct the AO to examine the claim of assesee in the light of the provisions of sec.80-IB(10) of the IT Act, 1961. Accordingly, we set aside the issue to the file of the AO and direct the AO to re-compute the deduction available u/s 80-IB(10) of the Act, in accordance with the provisions of the Act. Disallowance u/s 14A - whether the interest and other indirect expenditure relatable to earning exempt income is disallowable u/s 14A - Held that:- AO was not correct in disallowing the proportionate interest by invoking provisions of Rule 8D of IT Rules, 1962. As regards the disallowance of administrative expenditure, the AO has disallowed proportionate administrative expenditure by invoking the provisions of Rule 8D (2)(iii). Although, the assessee contended that it has not invested borrowed funds for the purpose of investments in earning exempt income, the assessee cannot get away with the plea it did not incur any administrative expenditure for day today management and monitoring such investment portfolios. Therefore, we are of the view that once there is exempt income relatable administrative expenditure should be disallowed in proportion to the exempt income. The AO after considering the relevant facts, disallowed the administrative expenditure by invoking provisions of Rule 8D(2)(iii) of IT Rules, 1962. Therefore, we upheld the disallowance made by the AO in respect of administrative expenditure Issues Involved:1. Classification of rental income from malls.2. Classification of hire charges from fit-outs.3. Disallowance of compounding fees.4. Deduction under section 80-IB(10) of the IT Act.5. Disallowance under section 14A of the IT Act.Issue-wise Detailed Analysis:1. Classification of Rental Income from Malls:The primary issue was whether the income received from letting out malls should be classified under 'Income from business or profession' or 'Income from house property.' The assessee argued that the rental income should be treated as business income, supported by previous ITAT rulings in their favor for assessment years 2005-06 to 2009-10. The AO, however, treated it as income from house property, referencing the Supreme Court decision in M/s Shambu Investment Pvt. Ltd Vs CIT. The ITAT upheld the CIT(A)'s decision, which followed the previous ITAT rulings, concluding that the rental income from malls should be assessed under 'Income from business or profession.'2. Classification of Hire Charges from Fit-outs:The second issue was whether hire charges from fit-outs should be classified under 'Income from other sources' or 'Income from house property.' The assessee contended that these charges were independent and should be considered as income from other sources, citing previous ITAT rulings in their favor. The AO disagreed, treating it as part of the rental income from house property. The ITAT, following previous decisions and the High Court of Karnataka's ruling, upheld the CIT(A)'s decision to classify hire charges from fit-outs under 'Income from other sources.'3. Disallowance of Compounding Fees:The AO disallowed compounding fees paid to local authorities, considering it a penalty not allowable under section 37(i) of the IT Act. The assessee argued that these fees were for regularizing construction deviations and should not be treated as penalties. The CIT(A) upheld the AO's disallowance, referencing the assessee's own case for the assessment year 2006-07. The ITAT, following the jurisdictional High Court's decision in Mamta Enterprises, upheld the disallowance, confirming that compounding fees are in the nature of fines or penalties and thus not deductible.4. Deduction under Section 80-IB(10) of the IT Act:The assessee raised an alternative plea that if compounding fees were disallowed, they should be considered for deduction under section 80-IB(10). The ITAT found merit in the argument that disallowed expenditures enhancing eligible profits should be considered for deduction under section 80-IB(10). However, since this issue was raised for the first time before the Tribunal, the ITAT remitted it to the AO for re-examination in light of section 80-IB(10).5. Disallowance under Section 14A of the IT Act:The AO disallowed proportionate interest and indirect expenditure under section 14A read with Rule 8D, arguing that the assessee earned exempt income but did not allocate related expenditures. The assessee contended that it had sufficient own funds for investments and did not use borrowed funds for earning exempt income. The ITAT, upon reviewing the financial statements, agreed that the assessee had sufficient own funds, thereby disallowing the interest expenditure but upheld the disallowance of administrative expenditure under Rule 8D(2)(iii), as some administrative costs are inevitably incurred in managing investments.Conclusion:The ITAT upheld the CIT(A)'s classification of rental income from malls as business income and hire charges from fit-outs as income from other sources. It also upheld the disallowance of compounding fees as penalties. The issue of deduction under section 80-IB(10) was remitted to the AO for re-examination. The ITAT disallowed interest expenditure under section 14A but upheld the disallowance of administrative expenditure related to exempt income. The appeal by the revenue was dismissed, and the appeal by the assessee was partly allowed for statistical purposes.