TaxTMI 
TaxTMI 
2024 (5) TMI 1416
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....x and to act as builders, colonizers etc. The case of assessee is that it has constructed a commercial complex on a plot of land measuring 1.447 acres in Shikandarpur Chowk, Sector-28, Gurgaon, Haryana, consisting of offices spaces along with amenities and other infrastructure facilities. Since the complex could not be sold at due to lull period prevailing in the real estate market the assessee vide a 'Commercial Lease Agreement' dated 14.07.2008 leased a part of the commercial complex measuring 1,56,451 per sq feet of the area to Emaar MGF Land Ltd., (hereinafter further referred as 'Emaar MGF') @ Rs. 80 per sq feet, which was later on reduced retrospectively w.e.f 01.04.2009 to Rs. 60 per sq feet vide a rectification deed of lease dated 10.01.2010. During the year under consideration the assessee offered lease rental of Rs. 10,87,64,735/- for A.Y. 2010-11 and Rs. 5,00,09,463/- for AY 2012-13 received from Emaar MGF. 3. The Assessing Officer was of the view that the rental income is actually income from house property and not business income or income from other sources. The Assessing Officer granted standard deduction of 30% as per Section 24 of the Act. The Assessing Officer ....
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....ther submitted that leasing out of commercial property should be considered under the head business income as the object of the assessee is to lease out the commercial complex for the purpose of commercial use which is based on the intention of the assessee to remain in its business and to exploit the commercial asset for commercial purpose only. It is also submitted that the lease income from other assets i.e. other than building cannot in any way be taxed under the head income from house property and they can be taxed either under the head business income or income from other sources. It was submitted that the action of AO in not accepting the composite rent of all assets and treating the same as income from house property is beyond the provisions of Act. In this context, it was submitted that in A.Y. 2010-11 AO has disallowed the depreciation of Rs. 6,98,81,906/- which includes depreciation of Rs. 2,81,24,572/- on assets other than building on the belief that entire income from leasing of business assets is income from house property. The CIT(A) was not satisfied and concluded as follows:- 5.3 I have carefully considered the submissions of the Ld. AR and perused the ord....
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....e appellant that the rent received was a composite income is not correct and not borne from the facts on record. The lease deed was in respect of the building and lease rent was fixed @ Rs. 80 per square feet vide lease deed dated 14.7.2008 which was later on reduced to Rs. 60 per square feet vide amendatory lease deed dated 10.1.2010 with retrospective effect from 1.4.2009. The lease deed does not mention that the rate fixed per square feet was partly for the building and partly for any other assets. I find that the kind of services being provided by the appellant company are routine in nature and none of the services so provided are of such kind that they can be considered inseparable from the letting out of the building for rent. I further find that the lease deed was in respect of the building and in order to lease out the building, the appellant provided certain amenities as part of the building as without these amenities, the user would have not taken the building on rent. Therefore, I do not find any merit in the submissions of the Ld. AR that the rent received by the appellant was a composite income and should be apportioned between the building and other assets. In view of....
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....rading operation The dividing 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 I with, its property, it: is possible to say on which side the operations fall, and to what head the income is to be assigned. Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the Act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the Appropriate head to apply is "income from property" (s. 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business cannot be said to treat them as landowner but as trader The cases which have been cited in this case both for and against the assessee company must be applied ....
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....building alone but an income which though arising from a building would not have arisen if the plant, machinery and furniture had not also been let along with it. ** ** ** whether a particular letting is business has to be decided in the circumstances of each case. Each case has to be looked at from a businessman's point of view to find out whether the letters was the doing of a business or the exploitation of his property by its owner." 8. In S G. Mercantile Corpn. (P.) Ltd. v. CIT AIR 1972 SC 732 it was held that: "It is noteworthy that the liability to tax under section 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under the above provision even if the object of the assessee in purchasing the landed property was to promote and develop market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting no markets thereon. The income derived by such a company from the tena....
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....of the proceedings to assess the assessee to income-tax." 10. In Karan Pura Development Co. Ltd. v. CIT[1962] 44 ITR 362 (SC) the Supreme Court indicated the possibility that the ownership of property and leasing it out may be done either as part of business or as landowner. The relevant observations, are as follows: "Ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens the appropriate head to apply is "Income from property" (s. 9) even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view of leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of the business, cannot be said to treat them as landowner but as trader." 11. This court is conscious about indivisibility of the levy of incom....
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....ts, here there is no letting out and that deemed income - which is the basis for assessment under the ALV method, should not be attributed. This Court is of the opinion that the argument, though attractive cannot be accepted. As repeatedly held, in East India, Housing & Land Development Trust's case (supra) Sultan Bros's case (supra) and Karan Pura Development Co. Ltd.'s case (supra) the levy of income tax in the case of one holding house property is premised not on whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership. Undoubtedly, the decision in Vikram Cotton Mills Ltd.' case (supra) indicates that in every case, the Court has to discern the intention of the assessee; in this case the intention of the assessee was to hold the properties till they were sold. The capacity of being an owner was not diminished one whit, because the assessee carried on business of developing, building and selling flats in housing estates. The argument that income tax is levied not on the actual receipt (which never arose in this case) but on a notional basis, i.e. ALV and that it is therefore not sancti....
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....ax authorities, and what was in fact considered as well as decided was the correct method of computation. 5.5 In view of the facts and circumstances of the case as discussed in para 5.3, para 5.3.1 and judicial pronouncement on the issue, respectfully following the judgment of Hon'ble High Court reproduced above, I hold that the AO was fully justified in treating the income from the renting out the commercial complex as income from house property and in making the addition. The same is, therefore, confirmed. Ground no. 3 & 4 are rejected. 6. Assessee is in appeal raising following grounds in A.Y. 2010-11 which cover the other year also:- "Ground No.1: The Ld. Commissioner of Income Tax (Appeals) - IV, New Delhi (hereinafter referred to as 'CIT(A)') has erred in law and in the fact & circumstances of the case by passing the order dated 10.06.2014 under section 250 of the Income Tax Act, 1961 (hereinafter referred to as "The Act') as the order passed by the CIT(A) is against the provisions of the Act. Ground No. 2: The Ld. CIT(A) has erred in law and on facts of the case in confirming the addition made by the Assessing O....
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....ellant prays that he may be allowed to add, amend, alter or forego any of the above grounds of appeal as the circumstances may warrant. Ground No. 7: The above grounds are without prejudice to each other." 7. Heard and perused the record. 8. The ld. AR challenging the conclusions drawn by ld. Tax Authorities below as submitted that the appellant was incorporated to construct and sell properties) and never intended to exploit such properties) through lease thereof. However, due to lull in the real estate market, the appellant was not able to find an appropriate buyer offering a suitable price bid/offer for the property. Thus, the appellant, with a view to ease its liquidity and cash flow position, decided to lease out the building to Emaar MGF vide 'Commercial Lease Agreement' dated 14.07.2008 (w.e.f. 01.01.2009) for a temporary period of 9 years. The appellant, it is submitted, leased out the property to avoid keeping the property idle and earn lease rental, till any potential buyer offering the right price was found. 8.1 It was further submitted that under the aforesaid Commercial Lease agreement, the appellant never intended to part away with th....
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....ribunal was either perverse or not sustainable." 8.2 Reference, in this regard was also made to the decision of Hon'ble Supreme Court in the case of Universal Plast Ltd. vs. CIT: 237 ITR 454 (SC), wherein, the apex Court laid down the following test in order to determine whether lease rental would be taxable as 'business income': "In the light of various decisions of the Supreme Court, the propositions are- 1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head 'Profits and gains of business or profession'; 2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out; 3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find our whether the intention of the assessee is to go out of business altoge....
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....ave been assessed under the head 'Income from house property' only on the basis that the assets were leased out. As pointed out earlier the contention of the assessee that such receipts are assessable under the head 'Profit and gains of business or profession' are two fold. Firstly, on the ground that a consistent approach should be adopted by the department and as this income has been assessed in earlier and subsequent years as income from business it should be assessed as income from business for the year under consideration also. Secondly, on merits it is the contention of the assessee that looking into the shorter period of leasing out that too for the reasons of difficult market conditions and poor health of the Director, the activity of leasing out the premises cannot be held to be non-business, activity in the light of the decisions referred to in earlier part of this order. 14. Looking into the fact that leasing is for a shorter period and it has not been shown that the intention of the assessee was to go out of the business altogether, the contention of the assessee has to be accepted that it cannot be considered to be a non-business activity. Refe....
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....Court in the case of Universal Plast Ltd. (supra) it is to be held that such income was assessable as income from business." 8.4 Reliance was also placed on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Mohiddin Hotels P. Ltd. & Ors.: 284 ITR 229, wherein, the Hon'ble Court while holding rental income to be 'business income' held that period (in this case, tenure of the agreement was 20 years) for which a business asset is let out is a relevant factor for determining whether such income would fall under the head 'business income' or 'income from house property'. Relevant finding of the Court as relied reads as under: "It is true that the period for which the business assets are let out is always a relevant factor in finding out whether the intention of the Assessee is to let out the business assets permanently and if the Assessee had never started the business, an inference may be drawn that the Assessee intended to exploit the property and not the business assets but the intention of the parties has to be gathered from the over- all facts and not the isolated circumstances. It is settled legal position that each case h....
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....g the use of it ta another on rent. Where this happens, the appropriate head to apply is "income from property" (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter. The Californian Copper Syndicate case (supra) illustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in other words, in the holding of the business. The Calcutta cases and the case of Fry v. Salisbury House Estates Ltd. [1930] AC 432; 15 Tax Cas. 266 (H)illustrate the contrary proposition. There, the property, though dealt with by a comp....
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....ion of facilities and amenities (description appended as Exhibit "A" to this agreement), has approached Owner to lease commercial complex comprising of 156,451/-sq. ft marked as Exhibit "B", to the agreement, in the said Building, situated at Sikandarpur Chowk, Sector,28, Gurgaon, Haryana for running and operating its office for commercial purpose. The Owner agreed to make available for lease of the office space along with facilities and amenities (hereinafter referred as "leased commercial premises" or "leased commercial premises and utilities") for 9 years on the terms and condition mentioned below. NOW THEREFORE IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS: 19. The owner hereby gives on lease to the User and the User hereby take on commercial lease for a period of 9 years, from I" January, 2009 till 31" December, 2017, with reset after every three years, office space comprising of 156,451/- sq. ft area on various floors, as earmarked by the User marked as Exhibit B of agreement in the said Building with provision of facilities and amenities (description amended as Exhibit "A" to this Agreement), situated at Sikandarpur Chowk, Sector,28, Gurg....
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....t to Rs. 60 per square feet on the stipulation that Emaar MGF would be liable to pay electricity charges (as per meter billing) and power back up charges for running D.G. set and water charges, which were hitherto incurred and borne by the appellant. 10.3 Ld. AR submitted that on perusal of various clauses of the 'Amendatory and Rectification Deed of Lease', it is clearly evident that there has been no change in the primary intention/ object of the appellant qua leasing out the commercial complex for the purpose of commercial use to maar MG for commercial purposes alongwith facilities/amenities and the only amendment was with respect to reduction in the rate of rent, without any change in the nature of services/facilities provided by the appellant by way of renting out a complex commercial structure. 10.4 Attention was invited to the provisions of section 22 of the Act which provides that the annual value of any building or land appurtenant thereto, other than the portion of such building/land occupied by the assessee for the purposes of the business would be taxable under the head 'income from house property'. 10.5 Ld. AR submitted that in the present case....
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....sories as a whole which is necessary for carrying on the business, then the income derived there from cannot be separated based on the separate agreement entered into between the parties. What has to be seen is, what was the primary object of the assessee while exploiting the property. If it is found applying such principle that the intention is for letting out the property or any portion thereof, the same may be considered as rental income or income from properties. In case, if it is found that the main intention is to exploit immovable property by way of complex commercial activities, in that event it must be held as business income. 26. Sub-section (1) of Section 56 makes it clear that income of every kind which is not be excluded from the total income under this Act shall be chargeable to income tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Sub-section (2) of Section 56 specifically states that the incomes shall be chargeable to income-tax under the head 'Income from other sources'. Clause (ii) of Section 56(2) provides that income from machinery, plant or furn....
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....evelopment of industrial parks in the country. In that view of the matter, the finding recorded by the Appellate Authority as well as the Tribunal is in accordance with law and does not suffer from any legal infirmity which calls for interference. Accordingly, the substantial questions 1 and 2 are answered in favour of the assessee and against the revenue." 10.8 To the similar effect the following decisions, wherein it has repeatedly been held that in cases where primary object of letting out of property with other amenities is exploitation of a commercial asset, lease rental received is not taxable under the head of income from house property, were relied: * Karanpura Development Co. Ltd. vs. CIT: 44 ITR 362 (SC) * CIT vs. Velankani Information Systems (P.) Ltd.: 265 CTR 250 (Kar) * CIT vs. Mohiddin Hotels P. Ltd. & Ors.: 284 ITR 229 (Bom) * CIT vs. Goel Brothers: 331 ITR 344 (All) * PCIT vs. M/s Krome Planet Interiors Pvt. Ltd.: ITA No. 282 of 2017 (Bom) * CIT vs. M/s Oberon Edifices & Estates (P) Ltd.: ITA No. 166 of 2016 (Ker) * Pr. CIT vs. M/s Krome Planet Interiors Pvt. Ltd.: ITA No. 282/2017 (Bom) * C....
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....the Court, under similar circumstances, held that rental income received from letting out of building alongwith furniture, fixtures, etc., would be taxable under the head 'income from other sources' and accordingly, depreciation would be allowable in terms of provisions of section 57(iii) of the Act. The relevant finding of the Court as relied reads as under: "Claim for depreciation 26. However, the last plea made by the Assessee is that in that event the entire income from the letting is treated as 'income from source sources', it cannot be deprived of the corresponding deduction in terms of Section 57 (iii) of the Act. The Revenue too has not disputed the fact that the Assessee has not claimed depreciation. 27. Accordingly, it is directed that while giving the appeal effect, the AO will grant the Assessee the benefit of Section 57 (iii) of the Act." 11.3 To the similar effect the following decisions, wherein, the Court/Tribunal allowed deduction of expenditure incurred for earning lease rental, taxed as 'income from other sources were relied: * Garg Dyeing & Processing Industries vs. ACIT: ITA 319/2012 (Del) * Or....
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....e to lull period in the real estate market, is a new contention nor raised before lower authorities. The appellant must not be allowed to raise such new contention. 12.3 It was Submitted by Ld. Sr. DR that the Commercial lease agreement dated 14.07.2008 dated is incomplete. As regards this we can observe here that Ld. AR had explained that commercial lease agreement dated 14.07.2008, copy placed at pages 82-86 of the paperbook is complete [with relevant Exhibit A]. The numbering at page 83 of the paperbook starts from Point E and Clause 19, which is a typographical error in the original agreement. 12.4 Services, plant and machinery, furniture and fixtures are integral part of building and no additional services has been provided by the appellant to the user lessee. 13. Now as we appreciate the material before us and the submissions in the light of law relied it comes up that there is actually no quarrel to the fact that leasing of commercial building was not the main object contained in MOA of the appellant company. The complex at Sikanderpur was constructed with the main object of selling the same and not for leasing. However, as we go through the amended MOA, copy of whi....
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....ting out was thereof for the purpose of meeting the business requirements of the assessee for a limited period of time and to tide over a difficult period/market crisis. 13.2 Then the case of appellant is that that the appellant had let-out commercial complex equipped with various amenities and facilities as a whole, as opposed to building/house property simpliciter, which was outside the provisions of taxation under the head 'income from house property' under section 22 of the Act. It is at the outset submitted that the incurrence or non-incurrence of such expenses by the appellant is not at all relevant for the issue at hand. It is not the case/ submission of the appellant that since certain services were to be provided by the appellant; therefore the lease income was inclusive of such services charges and thus taxable as business income. 13.3 As we examine the question of expenditures made by the appellant, it comes up that Schedule 14-Other expenses' of audited financial statements (page 16 of PB) shows various expenses aggregating to Rs. 1.74 crores incurred by the appellant and same is attributable to its part such as rates and taxes, insurance expenses, fue....
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....e under the head of income from house property, the latter would be outside the ambit of taxation under that head. 14. After taking into consideration the aforesaid, we are of the considered view that there is substance in the case of the appellant that the premises was not rented out as a building standalone, but, the building was converted into a 'commercial asset' by providing extensive utility services to the occupant. In this context, we take note of the relevant clauses of the lease deed dated 14.07.2008 made available at pages 79-86 of the paper book and we consider it relevant to reproduce the relevant clauses:- "................... Whereas E. The owner owns a plot of land admeasuring 1.447 acres in Sikandarpur Chowk, sector, 28, Gurgaon, Haryana reserved and approved for commercial use by the Haryana Urban Development Authority (HUDA). F. AND WHEREAS Owners has constructed a commercial complex on the said plot named as Business Park (hereinafter referred as "Commercial complex") consisting of offices with basements for parking and services. The said commercial complex is a commercial asset for the owner and has been incorpora....
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....r facilities and amenities fixed as metered charged in addition to the existing charges as herein above provided. 24. The leased commercial premises will be used by the user as its office for commercial purpose only. User will comply with the rules of the Building adopted and altered by Owner from time to time and will cause all of its agents, employees, invitees and visitors to do so; all changes to such rules will be sent by owner to user in writing." "EXHIBIT "A" Accommodation Services for period ____ to ____. Please retain as per actual facilities provided>> Accommodation Services Costs per month (INR) Units Allowed Cost per unit Electricity <> Additional Hours electricity - rate per hour Diesel General Set Mail & Canteen Management Insurance Telephone lines <> <> Fax lines <<> <> EPABX System <> <> Signage boxes Internet lines Water Gym Minor purchases Carpentry Repairs ....
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....ant, so that no time, energy and resources are wasted in customizing the building to the needs of 'user', occupant. 16. The fact that in respect of certain facilities, limits were put up and the user was supposed to pay over and above the limits on consumption basis firmly establishes the fact that it was not merely a tenancy/lease agreement, but, the intention was to exploit the commercial asset. 17. Lastly, the ld. DR has primarily relied two judgements in the case Shambhu Investments (P) Ltd. vs. CIT [2003] 129 Taxman 70 (SC) and East India Housing and Land Development Trust Ltd. vs. CIT [1961] 42 ITR 49 (SC). The judgement of the Hon'ble Supreme Court in the case of Shambhu Investments (P) Ltd. has been considered by the coordinate Bench in the case of M.M. Creations (supra) as relied by Ld. AR and we consider it relevant to reproduce paras 20 to 23 as below:- "20. It is settled legal position that each case has to be decided on its own facts including construction of the agreement, under which assets have been let out or handed over to a third party and no precise test can be applied to ascertain, as to under which head income received by assessee from leasing o....
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....eal with judicial precedents on whether rental income could be taxed under head business profits, and their Lordships concluded as follows: "Taking a sum total of aforesaid discussions, it clearly appears that merely because income is attached to 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. If it is found, applying such test, that main intention is for letting out the property, or any part thereof, the same must be considered as rental income or income from property. In case, it is found that the main intention is to exploit the immovable and property by way of complex commercial activities, in that event, it must be held as business income. 8. It is thus clear that when a property is exploited by way of "complex commercial activities", income so earned by exploiting the property is to be taxed as business income. Viewed in this perspective, and having regard to the fact that it is not a case of simplicitor renting of premises but significant value addition to premises by providing all incidental and support s....