Select Infrastructure Pvt. Ltd Vs. Addl. CIT (ITAT Delhi)
Here in this case, qua the retail space, the assessee was not carrying on any systematic or organized activity of providing service to the occupiers of the shops, albeit other service charges pertaining to the common maintenance, event and advertising, parking fees, etc., has been offered separately for tax under the head profits and gains of business of profession. So far as retail space is concerned, it is lease rent simplicitor, which is evident from the copy of sample lease deed which has been placed by the assessee in its paper book from pages 157 to 187 and also the copies of MoU, the copy of which are appearing at pages 149 to 156 of the paper book. Thus, on the facts of the present case and also relying upon the principle laid down by the latest Supreme Court judgment in the case of Raj Dadarkar & Associates vs. ACIT (supra), we hold that the receipts from the lease rent/ license fee from lease of retail space in the shopping mall is to be taxed under the head “income from house property”under section 22; and consequently, the assessee is liable for deduction under section 24(a) and other deductions of interest of pre- construction period and interest on loan which are to be allowed while computing the income from house property. Accordingly, dis allowance made by the Assessing Officer for the sums aggregating to Rs. 18,19,71,202/- is directed to be deleted.
Full Text of the ITAT Order is as follows:-
The cross-appeals for assessment year 2008-09 have been filed by the assessee as well as by the Revenue against the impugned order dated 28/3/2013, passed by the Ld. CIT(Appeals)-XI, New Delhi for the quantum of assessment passed under section 143(3) of the Act; appeal for assessment year 2009-10 has been filed by the assessee against the impugned order dated 28/3/1013; appeal for assessment year 2010-11 has been filed by the assessee against the impugned order dated 31/7/2014; cross-appeals for the assessment year 2011-12 have been filed by the assessee as well as by the Revenue against the impugned order dated 31/7/2014.
2. Since the issues involved in all the appeals are common arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of this consolidated order.
3. In order to understand the facts and the issues involved in the impugned appeals and the implication thereof on the grounds raised by the respective parties, we are taking up the cross-appeals for the assessment year 2008-09, the finding on major issue would apply mutatis mutandis in all the succeeding appeals, as similar facts are permeating through in all the years. In the assessee appeal following grounds of appeal have raised:-
“1. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in treating rental income of Rs. 27,37,99,940 received by the appellant from letting out of retail space in mall, as “business income”, as opposed to “income from house property” declared by the appellant in the return of income.
1.1 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that where house property constitutes commercial asset, rental income earned from letting out thereof, would always partake character of business income.
1.2 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that the intention of the appellant was to exploit the mall commercially to earn profit, and, therefore, rental income earned from letting out retail shops, was taxable under the head “business income” instead of “income from house property” under section 22 of the Income Tax Act, 1961 (‘the Act”).
1.3 That the Commissioner of Income-Tax (Appeals) officer erred on facts and in law in consequentially upholding dis-allowance of deduction aggregating to Rs. 20,49,46,6191-, claimed on account of 30% of the annual value, interest on borrowed capital, from the rental income under section 22 read with section 24 of the Act.
2. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in confirming dis allowance under section 14A of the Act read with Rule 8D of the Income-tax Rules. 1962 (“the Rules) to the extent of Rs. 12,45,053/-.
2.1 The Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that dis allowance under section 14A of the Act was mandatorily to be computed as per Rule 8D of the Rules in assessment years 2008-09 and on wards.
2.2 The Commissioner of Income-Tax (Appeals) erred on facts and in law in not appreciating that application of Rule 8D was not automatic in the present case, since the preconditions for applying the said rule as prescribed in sub- sections (2)/ (3) of section 14A of the Act were not satisfied in as much as the assessing officer did not record any satisfaction as to the incorrectness of the amount of suo- moto dis allowance made by the appellant in the return of income.
2.3 Without prejudice that the Commissioner of Income- Tax (Appeals) erred on facts and in law in not deleting the amount of Rs. 7,63,867/- suo-moto surrendered for disallowed by the appellant in the return of income, while sustaining dis allowance made by the assessing officer under section 14A of the Act in the assessment order.
4. The brief facts qua the issues raised in ground No. 1 to 1.3 are that the assessee is a Public Limited Company engaged in the business of development/ construction of shopping malls, office complex and multiplex, etc. During the relevant previous year, the assessee company has completed construction of complex called as “Select City Walk” at Saket, New Delhi, which became operational from 29th September, 2007. The commercial area of the said complex was divided into following categories by the assessee:-
> Shopping mall / Retail space
> Service apartments
> Office space
> Multiplex
> Parking
> Surplus business space for general/common use.
5. Out of the aforesaid categories of constructed /developed space, the assessee; firstly, had given retail space on lease to various lessees, on which it has charged rent /license fee aggregating to Rs. 27,37,99,940/- during the year. This amount of license fee received from lease of retail space has been offered to tax under the head “income from house property” in accordance with the provisions of section 22. Secondly, so far as other spaces such as office space, multiplex and service apartments, etc. which were constructed/ developed for outright sale, were shown as “stock-in-trade” in the books of account. The incomes earned from sale of such stock-in-trade have been offered to tax under the head “business income”. Lastly, the income arising from the balance space, which were retained by the assessee and used for the purpose of business, viz., common maintenance charges, advertising revenue, parking fees, etc., were offered to tax as business income under the head “profits and gains of business or profession”. Thus, the assessee had bifurcated its income from various commercial areas of the said complex into two categories; (i) license fee/ rental income from lease of shopping mall/ retail space as ‘income from house property’; and (ii) for exploiting of other spaces either for the purpose of sale or for the purpose of business, the assessee have been showing the income under the head ‘profits and gains of business or profession’.
6. However the Assessing Officer, was of the view that the amount of lease rent of Rs. 27,37,99,940/- is to be taxed as ‘business income’ on the ground that, firstly, Select City Walk is a very famous shopping mall in Saket, New Delhi, which is purely a commercial property and not a residential property; and secondly, the assessee has developed the entire complex for multi use and sale of the spaces and, therefore, the entire receipts have to be taxed under the head business income. He also noted that during the year the assessee had sold constructed space for Rs. 154.74 crores and the same has been reflected in the Income & Expenditure account, which is much higher than the receipts from lease license fee which is Rs. 27.38 crores. AO further observed that sale of land rights as well as constructed space in various forms is only a beginning of business of purchase and sale as well as activity of dealer in land by the assessee company and hence, the income from such activity is to be taxed as business income. He also scrutinized the specimen copy of certain lease license agreement and noted that these were generally for a period of three years which may or may not be extended and also had certain terms and conditions, but these lease license agreement does not prevent the assessee in selling the balance constructed space. After referring to various judgments like; Karanpura Development Co. Ltd. Vs. CIT reported in 44 ITR 362 (SC); CIT vs. Halai Nemon Association reported in 243 ITR 439 (Mad.) and some Tribunal decisions, AO held that the income shown by the assessee under the head ‘income from house property’ should be taxed as ‘business income’ and accordingly, disallowed the statutory deduction claimed by the assessee under section 24(a) of Rs. 8,11,43,540/-. He also disallowed 1/5th interest for pre- construction period amounting to Rs. 1,32,43,886/- and also deduction of interest on loan of borrowed funds for Rs. 8,75,83,776/-. Accordingly, total dis allowance worked out by the Assessing Officer on this score aggregated to Rs. 18,19,71,202/-.
7. Before the ld. CIT (A), the assessee, after explaining the entire facts and background of the case, submitted that the assessee was granted perpetual lease in respect of commercial plot in District Center, Saket, New Delhi, vide lease deed dated 14/10/2004 for the purpose of construction and development of retail space, service apartments, multiplex, etc. It was submitted that in order to retain the ownership in the shopping mall and to ensure better control and continued management interest, the assessee right from the construction of the project had decided to adopt a model whereby the ownership in retail space was to be retained by the assessee with a view and intention to let out the same on lease and sell other spaces, viz., multiplex, service apartments and office space on completion of construction. This intention is also gathered from the Director’s report and Notes to Accounts of the earlier years when the construction of the project was in progress, wherein it was categorically disclosed that the retail space in the proposed project would be provided only on lease and license and other area would be sold out rightly. The assessee also referred to the relevant portion of disclosure in the accounts for the financial year 2005-06 which has a great significance in understanding the intention and purpose for constructing the Mall. The same reads as under:-
“Space at Select CITY WALK is only being licensed and not sold like most other malls In National Capital Region. …
… it is also India’s first turnover-rental-based up-market shopping destination. The fully licensed and turnover-rental-based model ensures better control, continued management interest, a well regulated and disciplined environment, and a strategically controlled Tenant Mix with the shopper in focus.
Operations
We have adopted a business model whereby the Retail Podium is proposed to be retained by the company and licensed/leased in order to preserve the quality of trade and tenant mix, instead of
being sold in small fragmented pieces. In view of the possibility of sale of certain components of the project, they have been bifurcated as Inventory being project components intended to be sold and Capital Work in progress being components intended to be retained by the Company. Accordingly, the cost of construction has been appointed and allocated to the constituents of the project on the basis of technical evaluation of area intended to be used for respective purposes.
We shall be one of the first few Retail Shopping Centers in India that would be fully license/lease based. We have already, by the end of the year under review, entered into MOU’s for License/ Lease of about 60% of the Leasable / Licensable area in the Retail Podium…”
8. Consistent with the said intent/object, the assessee during the construction period itself had entered into Memorandum of Understanding (MoU) with various prospective lessees, to provide the retail space on lease on completion of construction thereof. The sample copies of the MoU entered with various lessees were also filed before the ld. CIT(Appeals) just to point out that the intention of the assessee was always to own the retail space. Thus, from these facts and material, the assessee pointed out that rental income earned by the assessee from letting out retail space has rightly been offered under the head income from house property. In support, the assessee had also relied upon catena of decisions, which have been dealt and incorporated by the ld. CIT (A) from pages 8 to 16 of the appellate order.
9. The ld. CIT (A) after analyzing the entire facts and material placed on record held that the income from ‘license fee’ from retail space has rightly been taxed as business income by the Assessing Officer. His relevant conclusion on this issue is as under:-
“The issue to be considered is whether the appellant is intrinsically using the asset owned by it for the purpose of business or exploiting the property for earning rent.
The appellant is the owner of a mall, which is the only commercial asset it owns. The appellant is also using portions of the mall for its business. The appellant has given on rent retail shops situated in the mall. The appellant provides services to the tenants for which it charges amounts which are offered to tax under the head profits and gains of business and profession. The mall is being used mainly for the business of the appellant. The main intention of the appellant is not to earn rental income from the mall by letting out the retail shops. The appellant is not renting out shops to maximize its profits. The main business of the appellant is to use the commercial asset – the mall to earn profits.
The mall was constructed with a business purpose to earn profits and not for earning rental income. The other activities of the company i.e. marketing and advertising, holding events, arranging weekly bazaars are all linked to the earning of business profits. It is^ evident that the company is not letting out space with a view to earn income by exploitation of ownership of property, but to earn business income by exploitation of the commercial asset.
If the appellant derived income from a commercial asset which was capable of being used as a commercial asset, then it would partake character of income from his business, whether he uses that commercial asset himself or lets it out to somebody else to be used. The asset would not cease to be a commercial asset simply because temporarily it was let out to another person for their use.
So long as the commercial asset is capable of being exploited as such, its income is business income irrespective of the manner in which the asset is exploited by the owner of the business. The owner is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. It is therefore, apparent that the appellant is earning business income from the mall.
I therefore, uphold the action of the AO in treating the entire income of the appellant as income from business and profession and not from House Property. The addition made is confirmed. The ground of appeal is ruled against the appellant.”
10. Before us, the ld. Sr. Counsel for the assessee, Shri Ajay Vohra, submitted that the main distinctive feature in the assessee’s case is that it has divided the entire complex into various categories and only leasing of retail space alone has been treated as income from house property and receipts from sale and exploitation of other commercial space has been treated as business income. So far as the Assessing Officer’s contention that the assessee had made a huge chunk of sale of constructed space for a sum of Rs. 154.72 crores, he pointed out that the same was done only in the first year when the complex was ready, i.e., relevant to the previous year of the assessment year 2008- 09. Thereafter, there has been no sale and assessee has been constantly showing license fee from retail as income from house property and the balance receipts from other spaces have been shown as business income. Mr. Vohra submitted that now this issue stands squarely covered by the judgment of the Hon’ble Supreme Court in the case of Raj Dadarkar & Associates vs. ACIT, reported in [2017] 248 Taxman 1 (SC). In the said judgment, the Hon’ble Apex Court has analyzed this issue threadbare and has also discussed and distinguished its earlier judgments in the case of Chennai Properties and Investments Ltd. vs. CIT, reported in [2015] 231 Taxman 336 (SC) and also the judgment in the case of Rayala Corporation (P.) Ltd. vs. ACIT, reported in [2016] 243 Taxman 360 (SC). In this also the substantial question of law for consideration before their Lordships was, whether the Tribunal was right in holding that the income earned by the appellant from shopping center was required to be taxed under the head income from house property instead of under the head income from profits and gains from business of profession as claimed by the appellant. After referring to the facts of that case as discussed in para 3, he pointed out that the Hon’ble Apex Court held that, wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, if the provisions of section 22 are satisfied. Their Lordships further held that merely there is an entry in the object clause of the business showing a particular object, would not be the determinative factor to arrive at a conclusion that the income is to be treated as income from business or otherwise. It would all depend upon the facts and circumstances of each case. Thus, the Hon’ble Apex Court concluded that where assessee having obtained a property on lease, constructed various shops and stalls on it and gave the same to various persons on sub- licensing basis, then the income from sub-licensing was to be taxed as income from house property and not as business income. Thus, Mr. Vohra submitted that this judgment clearly clinches the issue in
favour of the assessee.
11. So far as reliance placed by the ld. CIT(A) in the case of S.G. Mercantile Corporation P. Ltd. Vs. CIT reported in [1972] 83 ITR 700 (SC), he submitted that in that case assessee was not the owner of the property and on this background the judgment was rendered and would be inapplicable on the present case.
12. On the other hand, the ld. CIT-D.R., strongly relying upon the orders of the Assessing Officer as well as the ld. CIT(A), submitted that, what is to be seen here in this case is, whether the assessee was systematically engaged in the exploitation of commercial property for earning income or not. The Assessing Officer has categorically noted that the intention was to carry on the business for sale of commercial space and it was in this background the Assessing Officer has treated the entire receipts to be taxed under the head business income. In any case running and operating of shopping mall is always a business adventure and renting of space is part of such activity. Ld. CIT-DR also tried to distinguish the judgment of the Hon’ble Supreme Court in the case of Raj Dadarkar & Associates vs. ACIT (supra) on the ground that in that case there was no intention by the appellant to sell the said shop as he got the license/lease for managing the market for 12 years which he had constructed and sub-licensed to various shopkeepers. He also strongly relied upon the judgment of the Hon’ble Delhi High Court in the case of Jay Metal Industries Pvt. Ltd. Vs. CIT reported in [2017] TIOL 1338 and also the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Ansal Housing and Construction reported in [2016] 389 ITR 373.
13. We have heard the rival submissions, perused the relevant finding given in the impugned order as well as the material referred to before us. The core issue before us for adjudication is, whether the income shown by the assessee as ‘license fee’ from lease of retail space is to be taxed under the head ‘income from house property’ or ‘business income’? Briefly recapitulating the relevant facts which have a very vital bearing on the issue involved are that, during the relevant financial year 2007-08, the assessee completed the construction of complex known as “Select City Walk” in Saket, New Delhi which became operational from 29th September 2007. The commercial area of the aforesaid complex has been bifurcated by the assessee into following categories:-
> Shopping mall / Retail space
> Service apartments
> Office space
> Multiplex
> Parking
> Surplus business space for general/common use.
During the year, assessee had sold certain constructed space which were developed for outright sale and was shown as stock-in-trade in the books of account had been offered as business income. These spaces included service apartments, office space, multiplex, etc. The income arising from the balance spaces, which were retained by the assessee- company for common maintenance, event and advertising revenue, parking fees, etc., was again offered to tax under the head profits and gains of business of profession. So far as the taxability of receipts from these activities and spaces are concerned, there is absolutely no dispute that they are to be taxed as business income. So far as the ‘license fee’ from letting/ lease of retail space is concerned, it is seen from the records that right from the conception of the complex and the initial years when the complex was under construction, assessee had always intended to keep the retail space under its control and possession so as to give it on lease and earn regular income. This is quite evident from the Director’s report and Notes of Accounts in the financial year 2005-06, which has been incorporated in the foregoing paragraphs. The said disclosure at the initial stage assumes great significance to gauge the intention of the assessee and purpose of constructing the complex. Consistent with the said intend/ object, the assessee during the construction period only had entered into a MoU with various prospective lessees to provide retail space on lease and to earn rental income. These facts have not been disputed either by the Assessing Officer or by the ld. CIT (A). Ostensibly when assessee has constructed a property solely with an intention and purpose to give it on lease and to earn rental income/ license fee, then the income has to be assessed under the head ‘income from house property’, because right from the stage of conception of the project and construction, the intention was only to exploit the property for lease rent. Before us, the ld. Sr. Counsel for the assessee has given a comparative chart showing gross income earned during assessment years 2008-09 to 2012-13 to show that how the assessee had been showing income under various heads, which is reproduced as under:-
