2017 (5) TMI 1097 - AT - Income Tax

Assessee's Rental Income Rejected, Deduction Denied Under Section 80-IA(4)(iii)

Asst. Commissioner of Income Tax, Company Circle-4 (2), Chennai Versus Khivraj Motors Pvt. Ltd.

The Tribunal dismissed the assessee's appeal and allowed the Revenue's appeal, holding that the rental income should be assessed as income from other ... Eligibility for deduction u/s. 80-IA - whether lease rental income shall continue to be eligible for deduction under section 80-IAB ? - Held that:- Leasing of house property, inasmuch as the lessees (who are to be, or presumably so, in info-tech business) would be able to undertake their businesses only on the developed property being made available to them, could not therefore but be regarded as the principal activity yielding income from the development of a SEZ. In fact, even the income (to the assessee) from providing ancillary and maintenance services to these businesses arises or stands to arise only on account of, or by virtue of, their being lessees. The lease rental income, on the lease of the house property thereto, would thus, in our view, notwithstanding the use of the words ‘profits and gains’ and ‘business’ in section 80-IAB(1), qualify to be eligible for deduction there-under. That is, the lease rental is within the contemplation of the profits derived by a developer of a SEZ from the ‘business’ of developing it, eligible for deduction u/s. 80-IAB.The head of income under which the said income is assessable, which is on the basis of the source – from amongst the specified sources under the Act, most appropriate for the said income, so that it is not assessable as business income but as income from house property, would not be a limiting or debilitating factor. We decide accordingly, and the assessee succeeds qua it’s alternate ground, i.e., in principle.’ Eligibility for deduction u/s. 80-IA(4)(iii) - Held that:- Besides drawing support from the terms of the relevant provision (s.80- IA(4)(iii)), the Revenue does on the O.M. dated 10/2/2016 by DIPP, GOI, stating the reasons for the non-notification of the assessee’s industrial park by CBDT, i.e., the relevant wing (Department) in the Central Government, which is to notify the same. There is, we are afraid to say, no reference to the satisfaction of the conditions of section 80-IA(4)(iii) in the order by the tribunal for AYs. 2010-11 & 2011-12 (also see r.18C(3)). This, i.e., the non-notification by the CBDT, has in fact been challenged by the assessee before the Hon’ble jurisdictional High Court (refer Gds. 2.2 to 2.4 of the Revenue’s appeal, and as also admitted by the ld. AR before us), so that our order, as that by the tribunal for the earlier years, would, and which is even otherwise the case, subject to the directions and the findings by the H’ble Court. We, accordingly, find no infirmity in the Revenue’ objection, which shall operate to fail the assessee’s claim for deduction under section 80-IA(4)(iii), and which has therefore been rightly denied by the Revenue, whose case is thus sustainable in law. Issues Involved1. Classification of rental income as business income or income from house property.2. Eligibility for deduction under Section 80-IA(4)(iii) of the Income Tax Act, 1961.3. Validity of the assessee's activities under its Memorandum of Association (MOA).4. Notification of the industrial park by the Central Board of Direct Taxes (CBDT).Detailed Analysis1. Classification of Rental IncomeThe primary issue was whether the rental income derived by the assessee from leasing out built-up space with certain facilities should be classified as business income or income from house property. The Assessing Officer (AO) treated the income as rent, thus classifying it as income from house property under Section 22 of the Income Tax Act, relying on the decision in Shambhu Investments (P.) Ltd. v. CIT. The first appellate authority confirmed this view, stating it was a case of composite letting as per the Supreme Court's decision in Sultan Brothers (P.) Ltd. v. CIT. However, the Tribunal found that the rental income should be assessed as business income due to the inseparable nature of the letting, which included specialized infrastructure facilities, citing the Tribunal's earlier decision in the assessee's own case and the Madras High Court's decision in Elnet Technologies Ltd.2. Eligibility for Deduction under Section 80-IA(4)(iii)The assessee claimed a deduction under Section 80-IA(4)(iii) for developing an industrial park. The AO and the first appellate authority denied this deduction, stating that the industrial park was not notified by the CBDT. The Tribunal upheld this view, clarifying that the approval by the Department of Industrial Policy & Promotion (DIPP) is an in-principle approval and does not entitle the deduction unless the park is notified by the CBDT. The Tribunal referenced the Office Memorandum dated 10.02.2016 by DIPP, which explained the non-notification due to the lack of infrastructure facilities before 31.03.2005.3. Validity of the Assessee's Activities under its MOAThe assessee argued that its activities of leasing were within its MOA, citing newly added object clauses 57 and 58, and existing clauses 7, 41, and 46. The Tribunal, however, found that these clauses did not authorize the leasing activities as part of the company's business. The Tribunal concluded that the income from leasing should be classified as income from other sources, as the activities were ultra vires (beyond the powers) of the company.4. Notification of the Industrial Park by CBDTThe Tribunal emphasized that for the deduction under Section 80-IA(4)(iii), the industrial park must be notified by the CBDT. The assessee's application for notification was pending, and the Tribunal noted that the proper remedy for the assessee was to challenge the non-notification before the High Court. The Tribunal found no merit in the assessee's claim for deduction due to the lack of notification, thus supporting the Revenue's position.ConclusionThe Tribunal dismissed the assessee's appeal and allowed the Revenue's appeal, holding that:- The rental income should be assessed as income from other sources.- The assessee was not eligible for the deduction under Section 80-IA(4)(iii) due to the non-notification of the industrial park by the CBDT.- The leasing activities were beyond the powers of the company as per its MOA.