2020 (7) TMI 339 - HC - Income Tax

Rental income with amenities deemed business income; Disallowance under Section 14A restricted

Commissioner of Income Tax, Corporate Circle – III (1), Chennai Versus M/s. Tidel Park Limited

The High Court determined that income from letting out property with amenities qualifies as business income, not income from house property. The appeal by ... Disallowance u/s 14A - procedure to be followed by AO under Section 14A - as per tribunal Assessing Officer is not justified in making excessive disallowance and that the CIT(A) rightly restricted the disallowance to the extent the dividend income declared by the assessee - HELD THAT:- AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. Sub-s. (3) of s. 14A provides for the application of sub-s. (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. See GODREJ AND BOYCE MFG. CO. LTD [2010 (8) TMI 77 - BOMBAY HIGH COURT] - Decided in favour of assessee. Income derived from letting out of property to the tenants - Property in an industrial park/SEZ including the amenities - income from other sources or business income or income from house property - HELD THAT:- We need not labour much on this issue, on account of the circular No.16 of 2017 issued by the CBDT dated 25.04.2017. The CBDT after taking note of the two decisions of the Karnataka High Court held that it is now a settled position that in the case of an undertaking which develops, develops and operates or maintains and operates an industrial park/SEZ notified in accordance with the scheme framed and notified by the Government, the income from letting out the premises / developed space along with other facilities in an industrial park/SEZ is to be charged to tax under the head 'Profits and Gains of Business'. As rightly pointed out by Mr.R.Vijaya Raghavan, the emphasis is on not only letting out of the premises / developed space but along with other facilities in an industrial park/SEZ. The tribunal in this regard followed a decision of the Division Bench of this Court in the case of CIT Vs. Elnet Technologies Limited [2012 (11) TMI 671 - MADRAS HIGH COURT] - Decided in favour of assessee. Issues:1. Determination of income from letting out property as business income.2. Disallowance under Section 14A read with Rule 8D - restriction to exempted income.Issue 1: Determination of income from letting out property as business income:The High Court considered whether the income derived from letting out property to tenants should be classified as business income in the hands of the property owner. The Court referred to Circular No.16 of 2017 issued by the CBDT, which clarified that income from letting out premises in an industrial park/SEZ, along with amenities, should be taxed under the head 'Profits and Gains of Business.' The Court highlighted the importance of including other facilities in an industrial park/SEZ for this classification. It also cited a decision by the Division Bench regarding the nature of the business and the classification of receipts under different income heads. The Court concluded that income from letting out property with amenities and facilities qualifies as business income, not falling under income from house property or other sources. The appeal by the revenue was dismissed, and the substantial question of law No.1 was answered in favor of the assessee.Issue 2: Disallowance under Section 14A read with Rule 8D - restriction to exempted income:The Court examined whether the disallowance under Section 14A read with Rule 8D should be limited to the extent of exempted income, even though neither the Section nor the Rule explicitly provide for such a restriction. The Tribunal had held that the Assessing Officer was not justified in making excessive disallowance and that the CIT(A) correctly restricted the disallowance to the extent of dividend income declared by the assessee. The Court noted that the revenue could not challenge the findings of the Delhi High Court in a related case. It also referenced decisions by the Delhi High Court and the Bombay High Court regarding the principles of Section 14A. The Court agreed with the Tribunal's approach in determining the expenditure incurred in relation to income not forming part of the total income. Consequently, the Court dismissed the appeal filed by the revenue, answering the substantial question of law No.2 against the revenue and in favor of the assessee.In conclusion, the High Court's judgment addressed the issues of determining income from letting out property as business income and the disallowance under Section 14A read with Rule 8D. The Court provided detailed analysis, considering relevant legal principles, circulars, and precedents to reach its decisions, ultimately ruling in favor of the assessee on both issues.