2017 (1) TMI 737 - AT - Income Tax

Dispute over property income classification: business vs. house property. Commercial nature key.

The case involved a dispute over the classification of income from a property as either house property income or business income. The Assessing Officer ... Income on account of licence fees and amenities provided to tenant - business income OR income from house property income - Held that:- We find that the assessee had purchased a property and same was let out to Citigroup, that it had entered into two agreements with its tenant, that it had provided various amenities to the Citigroup, that the rental income received by it was offered under the head business income, that the AO was of the opinion that Leave and license fees and charges received against the amenities were to be taxed under the head income from house property. It is a fact that the main object of the assessee, as evident from the memorandum of incorporation, was to deal in properties as well as to let them out. It had purchased a property, but could not sell it. Later on, it converted the property into commercial asset and provided various amenities to the tenant. Assessee had provided certain amenities and facilities to the tenants. It is a case of exploiting the asset commercially and not the case of mere letting it out. Therefore, in our opinion, the order of the FAA does not suffer from any legal infirmity. In our opinion, facts of JST Reality (2015 (2) TMI 397 - ITAT MUMBAI ) are distinguishable from the facts of the case under appeal. Considering the peculiar facts and circumstances of the case, we decide the effective ground of appeal against the AO. Issues:1. Determination of income from house property vs. business income.2. Taxability of licence fees and amenities charges.3. Interpretation of agreements and nature of asset.Analysis:1. The Assessing Officer (AO) completed the assessment for an assessee-company deriving income from house property, declaring a loss. The AO determined the income at a negative value, raising concerns about the treatment of licence fees and amenities charges as business income instead of income from house property. The AO directed the assessee to justify why the income should not be taxed under the head 'income from house property'. The AO considered the incorporation date of the company, its loan for property acquisition, and the commercial nature of the asset in question, ultimately concluding that the income should be assessed under section 22 of the Act.2. The First Appellate Authority (FAA) reviewed the case, noting the company's main objective of engaging in various property-related businesses. The FAA emphasized that the property was used for specific business purposes and that the income was generated through commercial activities. Citing relevant case laws, the FAA disagreed with the AO's assessment under the head 'income from house property', highlighting the commercial nature of the asset and the business activities conducted by the assessee. The FAA's decision favored the assessee's arguments regarding the treatment of income from licence fees and amenities charges.3. The Appellate Tribunal considered the arguments presented by both parties. It observed that the assessee had purchased a property, let it out to a tenant, and provided amenities, treating the rental income as business income. Referring to legal principles outlined by the Bombay High Court, the Tribunal determined that the income derived from providing amenities and exploiting the asset commercially did not fall under the purview of income from house property. The Tribunal distinguished the facts of a cited case and upheld the FAA's decision, dismissing the AO's appeal. The Tribunal's analysis focused on the commercial nature of the asset and the services provided, leading to the conclusion that the income should be assessed as business income.In conclusion, the judgment highlights the distinction between income from house property and business income based on the nature of the asset, commercial activities conducted, and services provided to tenants. The decision favored the assessee's position, emphasizing the commercial exploitation of the property and the provision of amenities, ultimately leading to the dismissal of the AO's appeal.