ITAT PUNE BENCH ‘B’
Deputy Commissioner of Income-tax
versus
Magarpatta Township Development & Construction Co.
IT Appeal No. 822 (PN) OF 2011
C.O. No. 4 (PN) OF 2012
[ASSESSMENT YEAR 2007-08]
SEPTEMBER 18, 2012
ORDER
Shailendra Kumar Yadav, Judicial Member
The Revenue’s appeal and the cross objections of the assessee are arising from the same order of CIT(A). So they are being disposed of by this common order for the sake of convenience. The appeal of the Revenue has been filed on the following grounds:
1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case.
2. The learned Commissioner of Income-tax (Appeals) grossly erred in holding that the income derived by the assessee from the letting out of premises of the ‘Cyber City’ has to be assessed as business income and not as income under the head “House Property” as had been taken in the assessment.
3. The learned Commissioner of Income-tax (Appeals) grossly erred in holding that the services provided by the assessee to the tenants in Cyber City were in the nature of extensive and specialize services and, therefore, the premises let out by the assessee could not be regarded as bare tenement but the complex one with infrastructure facilities, the income derived there from which is not separable from letting out of the building.”
4. The learned Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that the assessee had let out the premises in exercise of the property rights vested in it, i.e., as any ordinary house owner would turn his property to profitable account, and also the assessee had neither occupied not let out the premises for the purpose of any business carried on by it and, in the circumstances, the profits derived from the premises could only be assessed under the head “Income from House Property” within the provision of Sec. 22 of the Income-tax Act, 1961.
5. The learned Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that the primary object of the assessee was to let out the properties in order to derive income there from and not to exploit them commercially and merely because certain infrastructure has been provided to facilitate such letting out, such provision can by no means amount to carrying on complex commercial activities so as to invest the letting out with the character of business.
6. The learned Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that the infrastructure and services provided by the assessee to the tenants were such as any ordinary house owner would provide depending on the nature of the tenement and, therefore, the mere factum of such provision would not alter the nature of the income derived from the property when the dominant intention is to derive income there from.
7. The learned Commissioner of Income-tax (Appeals) grossly erred in attaching undue importance to a clause in the agreement as per which the cost involved in the services is built into the cost per sq.ft. as per the tenancy agreement and without appreciating that the assessee has provided the services in the properties so that the same could be let out to the target groups.
8. The learned Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that the infrastructure and services provided by the assessee were incidental to the letting out of the properties and also in failing to appreciate that the very fact that substantial income as per the agreement was towards rent on the let out of the super area and not towards provision of services would testify to the above.
9. The learned Commissioner of Income-tax (Appeals) grossly erred in holding that if any dis allowances u/s. 43B, 40(a)(ia) and 35(1)(va) relates to the ‘Helliconia’ project, then the assessee’s claim of deduction u/s. 80-IB(10) in respect of this project would have to be considered on the correspondingly enhanced income.
10. The learned Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that dis allowances u/s. 43B, 40(a)(ia) and 35(1)(va) do not give rise to any income “derived from” the undertaking and, therefore, such income can by no means be considered for computing deduction u/s. 80-IB(10) as per the ratio of the decision of the Hon’ble Apex Court in the case of Sterling Foods Ltd. 237 ITR 579 (SC) and Pandian Chemicals , 262 ITR 278 (SC)
2. The main issue in Revenue’s appeal is with regard to treatment of rental receipts for letting out the premises in Cyber City in Magarpatta City Project. The Assessing Officer noticed that assessee had shown receipts of Rs. 36,97,05,084/- under the head other income which was in the nature of rental receipts for letting out premises in the Cyber City in the Magarpatta City Project. These receipts were treated by the assessee as business income and depreciation was claimed for the assets of Cyber City amounting to Rs. 24,87,04,429/-. The proportionate expenses which could be apportioned to the activity of letting out of Cyber City was computed in the order at Rs. 6,11,56,123/-. It was observed by Assessing Officer that actually the assessee was incurring losses if the expenses on account of interest are also considered. The Assessing Officer asked the assessee as to why income on account of the receipt from letting out of the premises in Cyber City should not be treated as income from house property. It was explained on behalf of the assessee before the Assessing Officer that the Magarpatta City Project of the assessee consisted of I.T. Park, commercial complexes, schools and residential complexes, etc., and the Memorandum of Articles of the company was to develop and maintain I.T. Parks, which was therefore a systematic business activity of the assessee. This I.T. Park had been for use to various software/other companies and the I.T. Park of the company was recognized/sanctioned u/s.80IA of the Act. Further, the buildings in the I.T. Park were shown as business assets in the schedule of fixed assets of the company, and were depreciable assets. It was also contended on behalf of assessee that the I.T. Park was well equipped with the required infrastructure, and various facilities and services like provisions of furniture and fixture, Air-conditioner Plant, various machineries, 24-hours’ security guards, provision for electricity in the common I.T. Park campus etc. It was also submitted that these points were explained during the assessment proceedings of the earlier years as well wherein such income has been accepted as business income in said earlier years. Further, the local authority, i.e., Pune Municipal Corporation and the Maharashtra State Electricity Development also considered the I.T. Park projects as commercial projects and accordingly the taxes and rates were applied.
3. The Assessing Officer relying on the provisions of section 22 of the Act regarding charge ability under the head income from house property, examined this charge ability in the assessee’s case under this head as business income. For this purpose, the Assessing Officer analyzed the issue in light of legal preposition on this issue and following main conclusions were drawn by the Assessing Officer:
(i) The rental income from a building whether a commercial or residential was to be assessed under the head income from house property.
(ii) If the main intention was to let out property then it was to be considered as income from house property.
(iii) This was true even it was derived from shops and stalls, and even if it was earned by company formed with the object of developing and setting up of markets.
(iv) If the main intention was to exploit the property by way of own complex commercial activities, in that event alone it should be treated as business income.
(v) When income obtained is not so much because of bare letting of tenements but because of facilities and services rendered in such case, the nature of business income. When the letting was only incidental to the main business of the assessee, then also it was income from business.
(vi) When income was due to exercise of property rights, it should be assessable under the head income from property.
(vii) If income falls under the head income from property, it was to be taxed u/s.22 only, and cannot be taken on section 28 on the ground that the business of the assessee was to exploit property.
(viii) If the property was given on leave and license basis, it is to be treated as income from house property. This character is not changed even if the hiring is inclusive of certain insignificant and incidental services like heating, cleaning, lighting and sanitation.
(ix) If the property was let out for a fixed amount for a fixed period, the likelihood of it being income from house property is more.
4. The Assessing Officer then analyzed the provisions of lease agreement entered between the assessee and the software companies. The Assessing Officer observed that while lease rent from the premises was charged at Rs. 14.30 per sq.ft., the amount charged towards maintenance was only Rs. 0.50 per sq.ft. Therefore, it was stated that the rent was predominantly for the space and the prime intention was to let out the property on a monthly rent, and there was no complex commercial activity involved in this letting out. He also observed that it was not a case that the leasing of the property was incidental or subservient to the main business of the assessee. The maintenance charges received were subservient to the exploitation of the properties. The Assessing Officer further observed that the assessee’s contention that it was in the business of running and maintenance of I.T. Park, and therefore, it was a business income, was also not tenable, since the properties were exploited in a basic and simple way of letting out on a monthly basis and there was no complex commercial activity involved as envisaged in the Apex Court judgement in the case of Shambhu Investment (P.) Ltd. v. CIT[2003] 263 ITR 143. It was stated that though the properties collectively formed an I.T. Park and was recognized as such, it did not alter the basic nature of activity of letting out of the properties. The Assessing Officer also relied on the decision of the ITAT Pune Bench in the case of Nutan Warehousing Co. (P.) Ltd. v. ITO [2007] 13 SOT 19 (Pune) (URO) to hold that income derived from the letting out of the premises of the I.T. Park known as Cyber City was assessable under the head Income from House Property which was computed as under:
