TaxTMI 
TaxTMI 
2022 (11) TMI 1464
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....ce. ITA No. 117/Ind/2017 (A.Y. 2011-12) is taken as a lead case. 2. The Revenue has raised the following grounds of appeal are as under: "1. Whether on the facts and circumstances of the case Ld. CIT(A) erred in law in holding that income derived by the company from leasing out properties in the mall falls under the head income from business and not under the head from income from house property, relying on Hon'ble Apex Court's decision in the cases of M/s. Rayala Corporation Pvt. Ltd. vs. ACIT (2016) 386 ITR 500 (SC) and M/s. Chennai Properties & Investments Ltd. vs. CIT (2015) 373 ITR 673 (SC) which are in respect of the assessee company involved in earning of rental income from letting out of properties only and are distinguishable on facts & circumstances of the present case and the decision of Shambhau Investment relied on by the AO is neither discussed nor over ruled. 2. Whether on the facts and circumstances of the case Ld. CIT(A) erred in law in deleting the addition made under head income from house property of Rs. 4,69,34,191/- after considering that the provisions of section 22 of the I.T. Act, 1961 and held that the income from leasing out of pro....
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....mplied with all the notices issued under Section 143(2) and 142(1) of the Act by filing written submission and relevant documentary evidences from time to time. The assessment was finalized under Section 143(3) of the Act on 29.03.2014 by determining the total income of the assessee at Rs. 4,71,42,454/-. Further that the Ld. AO re-characterised the income from operation of the mall as shown by the assessee in its computation of income under the head "Income from Business Profession" to the head "Income From House Properties" and estimated rental income as against the same shown by the assessee in its books of account. 5. The Ld. CIT(A) in appeal held that running and operating of the shopping mall is predominant object of the assessee company in terms of the Memorandum & Articles of Association and the entire income derived by the assessee company from leasing out properties in the malls falls under the head "Income from Business". The other two additions were also deleted by the Ld. CIT(A). Hence, the instant appeal before us. 6. We have heard the rival submissions made by the respective parties, and we have also perused the relevant materials available on record. The assess....
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....derived lease income from leasing out a part of the, Mall and further since, the deriving of lease income was a result of carrying out systematic, organized, synchronized and recurring activities of the nature of trade and venture, the assessee company, while furnishing its return of income, regarded the lease income as its income from carrying out the business [kindly refer Computation of total income and Profit & Loss Account respectively at PB Page No. 48 & 74]. 3.01 ASSESSEE CARRIED OUT COMPLEX SERIES OF ACTIVITIES In the instant case, the assessee company has not merely constructed a super structure and leased it out. In contrast, the assessee company envisaged construction of a huge Multiplex-cum-commercial Complex and made the construction by observing all the rules and regulations prescribed specifically by the local authorities for a commercial shopping mall. The assessee equipped its Mall with all the facilities such as provisions of parking, elevators, escalators, fire fighting systems, common toilets, electromechanical maintenance, etc. The assessee had also deputed man power for housekeeping, cleaning, securing the entire Mall premises and ensuring sy....
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.... viii) Insurance of entire building; ix) Housekeeping/ Sanitation Services; x) General Security Services in the Mall; xi) All other costs and expenses attributable to the Mall 4.00 ASSESSEE CARRIED OUT SYSTEMATIC BUSINESS ACTIVITY The assessee company has been carrying out a systematic business activity with an intent to earn profit by providing host of services to the lessees of the Mall and by employing large number of permanent staff to carry out such activities on day to day basis. In such a situation, it has to be necessarily held that the activities of the assessee company fall in the category of carrying out the business of running the Mall and consequently, income is to be assessed only under the head 'Income from Business or Profession', under s.28 of the Income-Tax Act, 1961. For such proposition, we wish to place reliance on the judicial pronouncement of the Hon'ble Apex Court in the case of Karnani Properties Ltd. vs. CIT (1971) 82 ITR 0547 (SC) [kindly refer Judgments Compilation Book (JCB) Page No. 26 to 30]. 5.00 CASE OF CHENNAI PROPERTIES - HON'BLE SUPREME COURT The Hon'ble Apex....
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....any immovable property cannot be the sole factor for assessment of such income as income from property, what has to be seen is what was the primary object of the assessee while exploiting the property. In Raj Dadarkar, the Hon'ble Court, at para 18, held that the assessee failed to produce sufficient material on record to show that its entire income was from letting out of property which was principal business activity of the assessee. In Chennai Properties, the Hon'ble Court, at para 5, held that the main object of the assessee in its MOA : was to acquire & hold properties and to let out such properties. Further, at para 11, it has been held that since the letting of properties is the business of the assessee, the income will be classified under the head 'Income from business'. In Rayala Corporation. at para 10, the Court held that the rent should be the main source of income or the purpose for which the company is incorporated should be to earn income from rent so as to make the rental income to be taxable under the head 'Income / from business'. The facts of the case of assessee company are identical to that of Chennai Properties & Rayala Corp....
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....g enclosed herewith, as Exhibit -P/2. 8.03 Your Honours, the Hon'ble Madras High Court in the case of Ms. PSTS Heavy Lift and Shift Ltd. & Anr. Vs. DCIT & Anr. 2020 (2) TMI 213 (Mad) has also decided the issue in favour of the assessee by discussing the judgment of Raj Dadarkar supra. A copy of the decision of the Hon'ble Madras High Court is being enclosed herewith, as Exhibit -P/3. 8.04 Your Honours, the Hon'ble ITAT Ahmedabad, constituting the then Hon'ble President Justice P P Bhatt, as the Judicial Member and the Hon'ble Vice President Shri Pramod Kumar, as the Accountant Member, in the case of Gulmohar P Mall Pvt. Ltd. vs. ITO 2019 (8) TM 1431 (ITAT Ahd) has held that the income of the assessee engaged in the development and maintenance of immovable properties and mall management, is to be treated under the head profits and gains from business or profession. A copy of the decision of the Hon'ble ITAT is being" enclosed herewith, as Exhibit -P/4. 9.00 In view of the facts and circumstances and as also, on view of the judicial pronouncements, the income of the assessee company would be classified only under the head 'income....
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.... Mall are in the nature of "Income from House Property" and not in the nature of business receipts. The income from common maintenance charges, HVAC Charges etc. were held to be the 'income from business'. The main contention of the Ld. AO is as follows: "i) Generally, in any type of business activity uncertainty of receipts is a basic feature, but in the instant case the assessee was in receipt of constant amount of rent through rent agreements. Even accretion to the rate of rent at regular intervals was found embedded in the agreements. Thus, no element of risk or uncertainty was involved. ii) As per settled position of law, the Memorandum of Association of a company, by itself is not a conclusive factor for determining the nature of income derived by a company. iii) All the infrastructure and amenities provided by the assessee in the mall are for sole purpose of making its letable value more and more attractive so that it can fetch maximum rent. Thus, providing of these facilities cannot alter the rental income character of the property. iv) The rent agreements themselves are calling the receipts as 'Rent'. Further, various clauses of ....
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.... appellant and the supporting documents it appears that main object of carrying out of business of the assessee is of constructing, owning, acquiring, developing, managing, running, hiring, letting out, selling or leasing multiplex, cineplex, cinema halls, theatres, shops, shopping malls, etc. as per the Memorandum of Articles and Associations. The above facilities and amenities provided by the assessee is for carrying out the business of Shopping Mall in a systematic and organized way for earning profit and not particularly letting out the property on rental basis. Considering that particular aspect of the matter the First Appellate Authority accepted the categorization of the income derived from such Shopping Mall of the assessee under head income from "Income from Business" under Section 28 of the Act. 15. In fact, accepting the claim of the assessee in regard to the head of 'income under business or profession', Ld. CIT(A) deleted the addition with the following observation: "4.3 The appellant company has been incorporated, as a private limited company, under the Companies Act, 1956, with the main object of carrying out the business of constructing, owning, acquirin....
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....f the mall operating company. The mall operating company has to manage cleanliness and housekeeping of the mall at all times. It is also required to operate and look after the maintenance of lifts, escalators, elevators etc. Further, a mall running company has to maintain its own staff and establishment and is also required to keep necessary records, to comply with various laws like service tax, PF etc. Thus, in my considered opinion, running a mall involves a series of activities and it is not mere letting out of the properties. This being so, any income from leasing/letting out properties in such mall are essentially required- to be computed only as 'Income from-Business' under section 28 of the Act and cannot be treated as income from house property. 4.4 The Hon'ble Supreme Court in the case of Karnani Properties Ltd, vs. CIT (1971) 82 ITR 0547 (SC) has held that income derived by an assessee, the owner of flats and shops, from services rendered in an organized and systematic manner, with the help of large staff has to be computed as business income. Recently, the Hon'ble Supreme Court in the case of & Investments Ltd. vs. CIT (2015) 373 ITR 673 (SC) has the....
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....ot so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find- but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned." After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd.'s case squarely applies to the facts of the present case. No doubt in Sultan Brothers (P) Ltd.'s case, Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: - ....
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....he assessee for granting such subleases are trading receipts and the amount of profit therein is assessable to tax. 4.5.1 The Assessing Officer has also relied upon the decisions of Hon'ble Supreme Court in the case of CIT vs. Panipat Woollen & General Mills Company Ltd. (1976) 103 ITR 66 (SC) and in the case of Sutlej Cotton Mills Ltd. vs. CIT (SC) 116 ITR 1 for the purpose that the entries made by an assessee in his books are not determinative and what is necessary to be considered is the true nature of the transaction. However, I find that in the instant case, the determination of income of the appellant is not based upon the entries made by it in its books of account. 4.5.2 The Assessing Officer has also relied upon the decision of Hon'ble Allahabad High Court in the case of CIT vs. Goel Builders (2011) 331 ITR 344 (All) where the Assessing Officer has distinguished the case of the appellant from that of the decision of Goel Builders supra. I find that the facts of the case of Goel Builders are in fact supportive of the stand of the appellant. In this case the Hon'ble High Court has held that the purpose of assessment under the head "Profit and gai....
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....ent in Karanpura Development Co. Ltd. where in it is held that the diving line is difficult to find but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned. The Constitution Bench judgment in the case of Sultan Brothers (P) Ltd. has also been discussed clarifying that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at a conclusion whether the income is to be treated as income from business. The Hon'ble Court being conscious of the aforesaid dicta laid down in the Constitution Bench judgment arrived at the conclusion that the letting out of the properties is business of the assessee as holding the aforesaid properties arid earning income by letting out those properties is the main objective of the company. 4.6.1 The appellant is running and operating the mall in a systematic and Organized manner by carrying out series of activities by maintaining staff and establishment. The appellant is also engaged in organizing various events....
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....s Ltd. vs. CIT, reported in (1971) 82 ITR 0547 (SC), which is in favour of assessee. The Hon'ble Apex Court in the judgment passed in the matter of Chennai Properties & Investment Ltd. vs. CIT, reported in (2015) 373 ITR 673 (SC) categorically held that where an income has been derived by the assessee for the commercial exploitation of the properties and in lieu of its professed objects then the same is required to be recorded as business income and not income from house property. The same view has been reiterated in the case of Rayala Corporation Pvt. Ltd. vs. ACIT, reported in (2016) 386 ITR 500 (SC) by the Apex Court. The Hon'ble Kerala High Court in the case of CIT vs. Oberon Edifices and Estates Pvt. Ltd., reported in (2019) (3) TMI 1468 (Ker) on an identical facts and circumstances of the case has been pleased to hold that income derived by the assessee by letting out of the shops in the Mall has to be assessed as income from business and not income from house property. It is relevant to mention that the judgment passed by the Hon'ble Apex Court in the case of Shambhu Investment Pvt. Ltd. (supra) as relied upon by the Ld. DR has been distinguished by the Hon'ble Court on the ....
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....he same Minimum Rs. Maximum Rs. (a) (b) (c) (d) (e) (f) UG 15.00 546.88 280.94 280.00 Average Rate. FF 30.00 69.28 49.64 200.00 Rate of first floor can be slightly below than that of UG Floor LG 26.00 26.00 26.00 150.00 Rate of LG floor can be this much below than that of UG floor 23. The Ld. AO was of the opinion that rental receipt from Mobile Tower has been suppressed to a large extent by the assessee. While coming into such conclusion the Ld. AO observed as follows: "4.6 Further, the assessee has shown rent from Bharti Airtel Mobile Tower installed in the mall at only Rs. 1,32,000/-, and from Idea Cellular Mobile Tower at only Rs. 36,000/- during the year under consideration. This minuscule amount of rent shown was not found acceptable. It was observed from the agreement for equipments dated 26/04/2010 between the Assessee Company and Bharti Airtel Ltd. that (i) One time lump sum rental amount of Rs. 96,000/- for the month of April 2008 to Nov. 2010 was agreed to be paid by Bharti Airtel Ltd. (ii) Monthly consideration of Rs. 9,0007- pert month from ....
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....ncome from house property was ultimately determined at Rs. 4,69,34,191/- with the following observation: 5.1 Against the aforesaid amount of Rs. 7,92,90,780/-, the assessee would be entitled for deduction u/s 24(a). Further, in the P&L A/c, the assessee has claimed interest expenses to the tune of Rs. 85,69,3557- [interest on bank loans Rs. 37,96,088/- + interest on unsecured loans Rs. 47,73,267/-]. It has been claimed that all the loans were utilized in construction of the mall. Hence, the aforesaid interest expense of Rs. 85,69,355/- would be deductible u/s 24(b) as interest paid on borrowed capital. (Even if certain loans are found to be not utilized for construction of the mall, and instead utilized for purchase of machineries etc.; in that case also, no difference would be there; since then, that portion of interest would be admissible as business expense.) However, depreciation claimed on building at Rs. 76,46,466/- would be inadmissible, since there is no provision in the Income Tax Act to claim depreciation under the head 'income from house property'. As such, the assessee's income from house property is hereby determined as under - Particulars Am....
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....and during the relevant previous year, a major portion remained vacant. It is submitted that in the instant case, the deemed rent of the entire lettable property under clause (a) of sub-section (1) of section 23 of the Act might have been higher than the meager rent of Rs. 7,95,526/- actually received by the appellant company but since the sole reason for receiving the lesser rent was that a major portion of the lettable property remained vacant during the relevant previous year the clause (c) of sub-section (1) of section 23 would come in to operation and accordingly, the actual rent received shown by the appellant company in it books of account would alone have to be taken as the Annual Value of the house property under the provisions of section 23 of the Act. For our above assertion, we place reliance on the following judicial pronouncements : i) ACIT vs. Dr. Prabha Sanghi (2013) 35 CCH 0002 (DelTrib) ii) Premsudha Exports (P) Ltd. vs. ACIT (2008) UOITD0158 Copies of the above referred decisions are being submitted herewith for kind perusal and ready reference of Your Honour, as Annexure A-17,01 & A-17.02 IPB Page No. 272 to 2901 5.01 Your Hon....
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....wing observations: "5.1 I have gone through the assessment order, submissions made by the appellant as reproduced above and various documentary evidences placed by the appellant in its paper book. 5.2 I find that in the instant case, the Assessing Officer has made the estimation of rent on ALV by invoking the provisions of section 23 of the Act. The provisions of section 23 can be invoked only if the income is computed under section 22 of the I.T. Act, 1961. As it has been held above that in the case of the appellant, income from leasing out of properties in the mall is chargeable to tax under the head from 'Income from Business Profession', under section 28 of the Act, the rental income cannot be estimated under the provisions of section 23 of the Act. Thus, as ground nos. 2(a) and 2(b) are allowed, the income of the appellant cannot be estimated u/s 23 and therefore ground no. 3 and ground nos. 4fa) to 4(f) of the appellant are allowed." 29. Admittedly, the AO has made estimation of rent on ALV upon invocation of provisions of Section 23 of the Act which can only be invoked if the income is computed under Section 22 of the Act. As we have already seen in ....
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.... the appellant company as regard to depreciation on fixed assets at Rs. 74,63,469/- only as against the same claimed by the appellant m its return of income at Rs. 1,55,95,905/-. A comparative chart of the depreciation claimed by the appellant and that allowed by the learned AO is given as under: S. No. Particulars Depreciation Claimed by the appellant Depreciation allowed by the AO Short allowance by the AO Reason assigned for short allowance 1 Building 76,46,466 6,88,182 69,58,284 i) Assessee is not eligible for depreciation on that portion of building, income wherefrom is assessable under the head 'Income from property'. ii) The depreciation cannot be allowed on the entire constructed building but it has to be restricted to the occupancy level. Accordingly, based upon occupancy level of 35%, depreciation has been restricted. iii) The AO presumed the ratio of common area to the rentable area as 6615 : 65585 only. 2. Right of Leasing 17,81,250 6,23,437 11,57,813 The depreciation cannot be allowed on the entire constructed building but it has to be restricted to the occupancy level. Accordingly, based upon occup....
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....(A). 35. The income from leasing out properties in the Mall has been held to be chargeable to tax under the head "Income from Business". In that view of the matter the appellant is eligible for claim of depreciation of all the business assets which were either actually put to use or were ready to be put to use by the appellant for the purpose of its business of leasing out the properties. The assessee has shown the value of building Phase-1 at Rs. 15,29,29,322/- and the amount of Rs. 18,79,15,890/- has been shown under the head "Capital Work in Progress", as it is evident from the Schedule-5 of the fixed asset of the Audited Financial Statement. It is also a fact that the assessee has claimed depreciation only in respect of building which was already constructed and put to use and in respect of the fixed asset under the head "Capital Work in Progress", the appellant has not claimed any depreciation. Further fact, as has been considered by us, is this that the entire property including the right of leasing were owned by the appellant and the same were put to use for business purposes or ready to put use. The assessee has restricted the claim of depreciation at 50% of the prescrib....