Case Law Details
Rao Computers Consultants Pvt. Ltd. Vs DCIT (Karnataka High Court)
We have to find out in that context what was the intention of the parties in entering into the lease transaction. It is not the number of agreements, which are entered into between the parties which is decisive in determining the nature of transaction. What is the object of entering into more than one said transactions is to be looked into. However, if for enjoyment of lease, the subject matter of all the agreements is necessary, then notwithstanding the fact that there are more than one agreement or one lease deed, the transaction is one. As all the agreements are entered into contemporaneously and the object is to enjoy the entire property, viz., building, furniture and the accessories as a whole which is necessary for carrying on the business, then the income derived therefrom 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 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.
Sub-section (1) of Section 56 makes it clear that income of every kind which is not to 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 income 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 furniture belonging to the assessee and let on hire, if the income is not chargeable to Income-tax under the head profits and gains of business or profession. Clause (iii) also provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to Income-tax under the head “Profits and gains of business or profession”. Therefore, the intention of the Legislature is explicit. The provision is clear, i.e., if the letting of building, plant, machinery and furniture is inseparable, the income from such letting should ordinarily fall within the head “Profits and gains of business or profession”. But for any reason, if it does not fall under that head, it shall fall under the head “Income from other sources”, but certainly not under the head “income from house property”. If the intention is to exploit commercial property by putting up construction and letting it out for the purpose of getting rental income, then notwithstanding the fact that the furniture and fittings are provided to the lesses, the income from the building fall under the head “Income from house property”. But if the assessee is in the business of taking land, putting up commercial buildings thereon and letting out such buildings with all furniture as his profession or business, then notwithstanding the fact that he has constructed a building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the heading of “Income from house property”. Therefore, firstly, what is the intention behind the lease and secondly what are facilities given along with the buildings and documents executed in respect of each of them is to be seen. Thirdly, it is to be found out whether it is inseparable or not. If they are inseparable and the intention is to carry on the business of letting out the commercial property and carrying out complex commercial activity and getting rental income therefrom, then such a rental income falls under the heading of “Profits and gains of business or profession”. In fact, any other interpretation would defeat the very object of introduction of section 80-IA as well as the scheme which is framed by the Government for development 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 Nos.1 and 2 are answered in favour of the assessee and against the Revenue.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assesse against the order dated 24.03.2017 passed by the Income Tax Appellate Tribunal (hereinafter referred to as ‘the tribunal’ for short). The subject matter of the appeal pertains to the Assessment year 2010-11. The appeal was admitted by a bench of this on the following substantial questions of law:
“(1) Whether on the facts and circumstances of the case, the Appellate Tribunal was justified in remanding the matter to the assessing authority to pass a speaking order by considering the objections as to the reopening of assessment at this juncture especially when the assessing authority records that he has not considered the objections for want of supporting evidence?
(2) Whether on the facts and circumstances of the case, the Appellate Tribunal was justified in directing the respondent to take necessary action for disposing of the objections ignoring the fact that the impugned assessment order is void in view of the law laid down by the Hon’ble Apex Court in the case of GKN Driveshafts?
(3) Whether on the facts and circumstances of the case, the findings of the Appellate Tribunal that income earned by the appellant from letting out of the building along with other amenities in the industrial park shall be treated as ‘income from house property’ are perverse and illegal?
(4) Whether on the facts and circumstances of the case, the authorities below erred in treating the business income derived from complex commercial activities of letting out buildings along with the other amenities in an industrial park partly as income from house property and partly as income from other sources ignoring the law laid down by this Hon’ble Court in the case of Velankani Information Systems and the Circular issued by the Department?
(5) Whether on the facts and circumstances of the case, the authorities below erred in disallowing the expenditure incurred wholly and exclusively for the purposes of the business of complex commercial letting out services and whether the findings of the Appellate Tribunal in this regard are perverse?
(6) Whether on the facts and circumstances of the case, the findings of the authorities below that, receipts on account of sale of software technical services being meager cannot be considered as income from business, are perverse?”
2. When the matter was taken up today, learned counsel for the assessee submitted that the assessee does not want to press substantial question of law Nos.1 and 2. It is further submitted that substantial question of law Nos.3 to 6 have already been answered by a bench of this court in ‘CIT VS. VELANKANI INFORMATION SYSTEM PRIVATE LIMITED, (2014) 2 ITR-OL 138 KAR. On the other hand, learned counsel for the revenue was unable to dispute the same.
3. We have considered the submissions made by learned counsel for the parties and have perused the record. It is not necessary for us to answer substantial question of law Nos.1 and 2 as they have been not pressed by the assessee. A division bench of this court in ‘CIT VS. VELANKANI INFORMATION SYSTEM PRIVATE LIMITED’ (2014) 2 ITR-OL 138 KAR has held as under:
25. The doctrine of inseparability finds a place in these two provisions. The inseparability referred to in the said provision is arising from the intention of the parties.
26. We have to find out in that context what was the intention of the parties in entering into the lease transaction. It is not the number of agreements, which are entered into between the parties which is decisive in determining the nature of transaction. What is the object of entering into more than one said transactions is to be looked into. However, if for enjoyment of lease, the subject matter of all the agreements is necessary, then notwithstanding the fact that there are more than one agreement or one lease deed, the transaction is one. As all the agreements are entered into contemporaneously and the object is to enjoy the entire property, viz., building, furniture and the accessories as a whole which is necessary for carrying on the business, then the income derived therefrom 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 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.
27. Sub-section (1) of Section 56 makes it clear that income of every kind which is not to 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 income 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 furniture belonging to the assessee and let on hire, if the income is not chargeable to Income-tax under the head profits and gains of business or profession. Clause (iii) also provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to Income-tax under the head “Profits and gains of business or profession”. Therefore, the intention of the Legislature is explicit. The provision is clear, i.e., if the letting of building, plant, machinery and furniture is inseparable, the income from such letting should ordinarily fall within the head “Profits and gains of business or profession”. But for any reason, if it does not fall under that head, it shall fall under the head “Income from other sources”, but certainly not under the head “income from house property”. If the intention is to exploit commercial property by putting up construction and letting it out for the purpose of getting rental income, then notwithstanding the fact that the furniture and fittings are provided to the lesses, the income from the building fall under the head “Income from house property”. But if the assessee is in the business of taking land, putting up commercial buildings thereon and letting out such buildings with all furniture as his profession or business, then notwithstanding the fact that he has constructed a building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the heading of “Income from house property”. Therefore, firstly, what is the intention behind the lease and secondly what are facilities given along with the buildings and documents executed in respect of each of them is to be seen. Thirdly, it is to be found out whether it is inseparable or not. If they are inseparable and the intention is to carry on the business of letting out the commercial property and carrying out complex commercial activity and getting rental income therefrom, then such a rental income falls under the heading of “Profits and gains of business or profession”. In fact, any other interpretation would defeat the very object of introduction of section 80-IA as well as the scheme which is framed by the Government for development 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 Nos.1 and 2 are answered in favour of the assessee and against the Revenue.
4. In view of the aforesaid enunciation of law, substantial question of law Nos.3 to 5 are answered in favour of the assessee and against the revenue. It is further submitted that substantial question of law No.6 has been answered by the Supreme Court in ‘PEERLESS GENERAL FINANCE AND INVESTMENT COMPANY LTD. VS. CIT‘, (2019) 416 ITR 1 SC. The order dated 24.03.2017 insofar as it pertains to Assessment Year 2010-11 is hereby quashed.
In the result, the appeal iS allowed.
