Case Law Details
Brief of the Case: In the cited case, Delhi High Court held that the building had been developed to be sold or let out with no possibility of the terrace floor being subjected to such utilization. As there is no other purpose to be served by the property held on the terrace floor, except the exploitation of the licensed space for gaining the income, such income cannot be treated as either income from business or income from other sources. The income was thus chargeable as income from house property.
Facts of the Case: The assessee was the absolute owner of the terrace floor of the property and entered into a formal agreement with M/s.Arvind Mills Ltd, wherein the assessee gave on “licence” the terrace floor as the “space for mounting a tower/mast and antenna and gen set in addition to covered space for installation of radio trunking related equipment” on a monthly licence fee on the terms specified in the agreement.
The case of the appellant-assessee was taken up for assessment under Section 143(3) of the IT Act. AO rejected the claim of the appellant regarding the income of Rs.38,23,281/- on account of “rent from space and antenna” being income from house property. AO held that the same should have been taken as business income.
On aggrieved by the order of the AO, the assessee preferred first appeal before the CIT (Appeals), who upheld the contention of the assessee that the income in question was to be assessed as income from house property.
The Revenue questioned the correctness of the order of the CIT (Appeals) before the ITAT. ITAT reversed the order of the CIT (Appeals), treating the income in question as neither “income from house property” nor “income from business” and instead classified it as “income from other sources”.
The Assessee preferred appeal to the High Court questioning the correctness of the view taken by the Income Tax Appellate Tribunal. The question of law arose for consideration was “Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in holding that rental income of Rs.38,23,281/- earned by the appellant from terrace floor/roof area was assessable under the head “Income from other sources”, as opposed to “Income from house property” returned by the appellant?”
Contention of the revenue: Revenue contended that the property in question had been reflected in the fixed assets of the assessee company and the space for antenna shown in the financial statements as “stock-in-trade”. The assessee is a builder/developer, the primary objective of its business being to purchase, develop and sell various properties, renting parts of the property (stock-in-trade) held by it being “only an incidental activity”, and indulged in only till such time such properties were actually sold, and thus, it was engaged primarily in “complex commercial activities”. Further, it was contended that merely because the person is the owner of the property, it does not necessarily follow that income generated therefrom must be assessed as income from house property and since the property was reflected as a “commercial asset”, income derived therefrom will have to be assessed as business income. It was referred to the ruling of Supreme Court in CIT v. National Storage Pvt. Ltd. (1967) 66 ITR 596, wherein it was held that the question of exploitation of the property for purposes of commerce or business is material and that it requires to be seen whether the assessee is carrying on any business in the nature of trade, commerce or manufacture.
Contention of the Assessee: Assessee submitted that the crucial test was as to what was the primary object “in exploiting the property” as against the primary object of the activities in which the assessee “company” was engaged. The assessee pointed out that it had entered upon arrangement in above nature respecting the licensed space as owner of the property and would sell only such portions of the property as it was legally permitted to do and only such portions of the property had been let out, which it was not legally or contractually permitted to sell and, thus, there was no question of “turning the let out property to account”. It was also submitted that the assessee (i.e. licensor vis-à-vis the agency to which the licensed space has been given) was not required to render any services. Hence, it had to be assessed as income from house property.
Held by CIT (A): The CIT (Appeals) rejected the contention of the Revenue on the ground that the property in question is shown as stock-in-trade holding that such classification by itself would not change the true character of the receipts for purposes of taxation and the income on this account had been claimed as “income from house property” and consistently so accepted by the AO while completing the assessment under Section 143(3) for the preceding six years. Observing that nothing had been brought on record to suggest that facts for the period in question in any manner differed from those prevailing in the previous years, CIT (Appeals) upheld the contentions of the assessee and allowed the deduction in terms of Section 24 (a) of the Act.
Held by ITAT: ITAT observed that the asset has been wrongly classified in accounts and for the purpose of law, it should be taken as a fixed asset. The main purpose of hiring terraces is to have open space for mounting antennae and other instruments. The terrace does not have any appurtenant land. Therefore, the agreement of renting and hiring terraces is in essence an agreement of hiring space and not building and land appurtenant thereto. ITAT further observed that it is not a case where systematic activity of lending space is being carried out to render it as a ‘business activity’ as the space was letting out for three years but extendable up to 9 years on the option of the parties. Hence, ITAT reversed the order of the CIT (Appeals), treating the income in question as neither “income from house property” nor “income from business” and instead classifying it as “income from other sources”.
Held by High Court: High Court observed that the crucial test was as to whether the letting out has a definite nexus with the business of the assessee. It opined that the approach of both the AO and the ITAT in this case had been totally misdirected. Wrong classification of the licensed space in the books of account as stock-in-trade cannot change the character of the transaction concerning its eventual exploitation. The use of the expression “leave and licence” in the agreement entered with M/s Arvind Mills Ltd. may be debatable. The fact remains that the use of the terrace floor had been handed over to the licensee not only for setting up the tower/mast on which antenna is to be mounted but also for construction of a room where the watch/ ward staff can be stationed and space used for storage purposes.
After examining the facts and circumstances, the High Court decided the case in favour of the assessee by restoring the view taken by the CIT (Appeals) and held that the building, the top terrace of which is the subject of focal attention here has been developed for its various portions to be sold or let out with no possibility of the terrace floor being subjected to such utilization. The assessee continues to be the owner of the terrace floor. It has conceivably no other purpose to be served by such property as is held on the terrace floor, except the exploitation of the licensed space for gaining the income that cannot be treated as either income from business or income from other sources. The income was thus rightly returned as income from house property.
