Composite rental income for letting out school building with infrastructure and amenities taxable under house property

Kanakia Gruhnirman Pvt Ltd Vs DCIT (ITAT Mumbai)

ITAT Mumbai held that composite rental income received by letting out school building with infrastructure and amenities is taxable under the head ‘Income from House Property’ and not under ‘Income from income from other sources’ in view of section 56(2)(ii) of the Income Tax Act.

Facts- During the year under consideration, the assessee has shown rental income of ₹.3,24,37,720/- from Babubhai Kanakia Foundation & ₹. 91,66,360/- from M/s RBK Education Solution Pvt Ltd for letting out of school building along with complete infrastructure and amenities which has been constructed by it after acquiring the development rights from M/s. Natvar Parikh & Co, on 11.08.2006. During the construction period, a lease deed was entered into with Babubhai Kanakia Foundation at a monthly lease rent as provided in the lease deed plus taxes, electricity charges and outgoings. The said lease deed was not registered.

AO observed that as lease deed to let out the school building with infrastructure and amenities was entered into for composite in-separable rent in respect of letting out of school building with infrastructure. The assessee was asked to show cause as to why the composite rent income received under the head house property should not be brought to tax under the head other sources in view of section 56(2)(ii) of the Act.

AO adopted lease rental income shown at ₹.4,16,04,080/- to be treated as income from other sources u/s 56(2)(ii). Accordingly, AO proceeded to compute the income of the assessee at ₹.4,27,63,941/- by adding ₹.4,16,04,080/- as income from other sources and also added ₹. 11,59,861/- (under income from business ₹.10,97,013/-, Demat Charges and Insurance charges of ₹.2,848/-, ₹.60,000/- respectively).

CIT(A) dismissed the appeal of the assessee.

Conclusion- The issue involved in this appeal is, the assessee declared the income earned from letting of school building with amenities under the Head “income from House Properties” from A.Y. 2009-10. This issue was decided by the Ld.CIT(A) and ITAT in favour of the assessee till A.Y.2012-13.

CIT(A) has relied on the decision of Coordinate Bench to give relief to the assessee and it is fact on record that this issue is settled in favour of the assessee. Therefore, we are inclined to allow the grounds raised by the assessee in this regard. With regard to Ground No. 2, since we decided the issue of taxability of income under the Head “Income from House property” in favour of the assessee, therefore this ground becomes infructuous.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 10.11.2022 for the A.Y.2013-14.

2. Brief facts of the case are, assessee is engaged in the business of ‘Real Estate Development’. Return of income was filed on 27.08.2013 declaring total loss at ₹.1,36,51,953/- and return was processed u/s. 143(1) of Income-tax Act, 1961 (in short “Act”). Subsequently, case was selected for scrutiny and notices u/s. 143(2) and 142(1) of the Act were issued and served on the assessee. In response Authorised Representative of the assessee attended and submitted the relevant information as called for.

3. The assessee is engaged in the business of construction and development of properties. During the year under consideration, Assessing Officer noticed that no real estate development activity was carried out by the assessee and assessee has shown rental income from letting out of school building, capital gain on redemption of preference shares, interest on fixed deposits and interest from partnership firm and dividend on shares.

4. During the year under consideration, the assessee has shown rental income of ₹.3,24,37,720/- from Babubhai Kanakia Foundation & ₹. 91,66,360/- from M/s RBK Education Solution Pvt Ltd for letting out of school building along with complete infrastructure and amenities which has been constructed by it after acquiring the development rights from M/s. Natvar Parikh & Co, on 11.08.2006. During the construction period, a lease deed was entered into with Babubhai Kanakia Foundation at a monthly lease rent as provided in the lease deed plus taxes, electricity charges and outgoings. The said lease deed was not registered. The school building was constructed with the above referred infrastructure and amenities and the lease rent was ₹.30/- per sq. ft. per month for all the ten (10) academic years without any subsequent upward variation. The cost composition of the school is as under: –

5. Assessing Officer observed that, in view of the above and as lease deed to let out the school building with above referred infrastructure and amenities was entered into for composite in-separable rent in respect of letting out of school building with infrastructure. The assessee was asked to show cause as to why the composite rent income received under the head house property should not be brought to tax under the head other sources in view of section 56(2)(ii) of the Act.

6. In response, assessee furnished a reply wherein it has been stated that lease rental is taxable under the head house property and not other sources and hence depreciation is allowable as a deduction. Assessing Officer verified from the details filed wherein it was found that depreciation was worked out on gross value without taking into consideration that the assets were let out and the depreciation needs to be worked out from the date of leasing. In the absence of any such working, Assessing Officer rejected the claim of the assessee.

7. Assessing Officer observed that similar issue has been involved for earlier assessment years which is sub-judice. Accordingly, Assessing Officer adopted for this year also and the lease rental income shown at ₹.4,16,04,080/- is treated as income from other sources u/s 56(2)(ii). Accordingly, Assessing Officer proceeded to compute the income of the assessee at ₹.4,27,63,941/- by adding ₹.4,16,04,080/- as income from other sources and also added ₹. 11,59,861/- (under income from business ₹.10,97,013/-, Demat Charges and Insurance charges of ₹.2,848/-, ₹.60,000/- respectively).

8. Aggrieved assessee preferred appeal before Ld. CIT(A) challenging that lease rental income received from letting out of school building along with infrastructure and other amenities should be treated as “Income from House property”. CIT(A) dismissed the appeal of the assessee by sustaining the action of the Assessing Officer.

9. Aggrieved, assessee is in appeal before us raising following grounds in its appeal: –

“1. The Commissioner of Income tax (Appeal) erred in law & on facts in treating the rental income of Rs. 4,16,04,080/- received from school building under the head ‘Income from other sources. Appellant prays that the same should be treated as ‘Income from House Property’ since the primary object is to lease school building only. Accordingly, deduction on account of interest paid should be allowed u/s 24(b).

2. The learned Commissioner of Income Tax (Appeal) erred in law & on facts not allowing deduction on account of interest on loan borrowed for the purpose of school building and also depreciation on school building and other infrastructure facilities like plant & machinery, furniture. The same should be allowed as deduction against rental income u/s. 57 of the Income Tax Act,

3. The learned Commissioner of Income Tax (Appeal) erred in law & on facts in not following orders passed by the appellate authorities on similar issue in earlier years. The same should be followed & relief should be granted.

4. Appellant prays to leave, add, alter or amend any or all the grounds of appeal.”

10. At the time of hearing, Ld. AR of the assessee submitted that the lease rental income received from letting out of school building along with infrastructure and other amenities should be treated as “Income from House property”. Ld. AR brought to our notice in the A.Y. 2011-12 and 2012-13, on similar facts Assessing Officer has rejected the claim of the assessee and Ld. CIT(A) allowed the claim of the assessee by treating the same under the head “Income from House Property” and department has agreed to the same and further appeal is not filed by the department. Copy of the orders are placed on record. He also filed a chart highlighting the status of the present issues in earlier assessment years and subsequent assessment years. The same is reproduced below: –

“Chart showing status of earlier and subsequent years in respect of treatment given to rental income received by assessee:-

Note: In all the above years, the assessee has offered rental income under the head ‘Income from House Property’.

11. On the other hand, Ld. DR relied on the order of the lower

12. Considered the rival submissions and material placed on record, the issue involved in this appeal is, the assessee declared the income earned from letting of school building with amenities under the Head “income from House Properties” from Y. 2009-10. This issue was decided by the Ld.CIT(A) and ITAT in favour of the assessee till A.Y.2012-13. The decision of the Ld.CIT(A) in A.Y. 2012-13 is reproduced below: –

“5.2 During the course of appellate proceedings, the A/R has submitted as under: –

“GOA 1 to 4 – Whether income from “House Property” income from Other Sources” or “Business Income” 

The grounds read as under-

1) The learned Assessing Officer erred in law & on facts in treating the rental income of Rs. 4,13,03,520/- received from school building as ‘Income from other sources’. Appellant prays that the same should be treated as ‘Income from house property’..

Without prejudice to above,

2) The same may be treated as ‘Business Income’.

3) If the rental income is treated as ‘Business Income, interest paid should be allowed u/s 36(1)(ii) of the Income Tax Act, 1961 against such business income as also depreciation on school building should be allowed u/s 32 of the IT Act, 1961.

Alternatively,

4) If at all, the income is treated as ‘Income from other interest paid should be allowed u/s 57 of the Income Tax Act, 961 against the said ‘Income from other sources as also depreciation on school building should be allowed u/s 57 of the IT Act, 1961.

BACKGROUND:-

1.1) Kindly refer to the statement of facts wherein at items 1 to 14, the background of the appellant and the property under consideration is given.

1.2) Appellant had taken secured and unsecured loans for construction of the school building. During year under consideration, it paid interest of Rs. 6,91,77,945/- on secured as well as unsecured loans & claimed the same u/s 24 of the IT Act.

ASSESSMENT ORDER AND SUBMISSION OF THE APPELLANT

1.3) The assessing officer is not convinced that the rental income should be treated under the head ‘Income from House Property. He brought to tax the same under the head ‘Income from other sources’ by stating that lease deed to let out school building with infrastructure & amenities is composite & in-separable as also mentioning that the similar issue has been involved for earlier assessment years which is sub judice. Hence, a same line is adopted for this year also and the lease rental income shown at Rs.4,13,03,520/- is treated as “Income from other sources” u/s 56(2)(II).

1.4) Reasons given by the LAO and submission of the appellant against the same are as under:-

On the basis of the above, we request your honour to allow the appeal.”

5.3 I have gone through the assessment order and submissions made in this regard. The only substantive ground of appeal is regarding treatment by the A.O. of rental income of 4,13,03,520/- received from school building as income from other sources instead of the claim of it being income from house property as made by the assessee and consequential disallowance of interest claim of 4,07,03,999/- of assessee. The A.O. had made these disallowances by noting that the assessee was unable to establish that any construction activity was carried out by the assessee during the year. Accordingly all expenses claimed to have been incurred for the building construction were rejected. The assessee has vehemently opposed the disallowance and submitted that A.O. had not correctly appreciated the facts of the case and made additions which may be deleted. In this regard it is noted that the issue of commencement of construction has already been decided in assessee’s own case by this office order dt.07- 11-2012 for A.Y. 2009-10. It has been held in this order by my Ld. predecessor that it is evident that appellant started construction of school building during A.Y. 2007-08 and expenses were debited in the books of accounts from that year and were shown as Work-in-progress. The total expenditure incurred including plot of land increase as on 31.03.2008 showed further expenses and the file number of approvals such as IOD, CC remained the same throughout, that the contention of the AO with regard to invalidity of IOD and CC was not correct, that the certificate of architecture proved that as on 12.4.2008 work up to the 2nd floor of the school was completed in all aspects and RCC work upto 7th Floor was also complete. My Ld. predecessor had perused the number of students of the school in A.Ys 08-09 to 10-11, sample copies of admission forms, academic report of student of each standard and held that these documents were of the address of same place i. e. Chembur, that NOC issued by the Govt. of Maharashtra dt.24. 1.2007 proved that permission was given to start school at Chembur, that the assessment order passed u/s. 143(3) of the Act in case of BKF for A.Y.08-09 and 09- 10 confirmed that the trust was engaged in educational activities in Chembur and was conducting school at Chembur, that there was no basis to hold that school might have functioned from other building, that the details about the students, results, correspondence, deduction of tax at source etc. proved that the school had started functioning during the year under consideration, that the income received by the assessee was to be taxed under the head income from house property. He also held that proportionate Interest of ₹.3.26 crores u/s. 24 of the Act, claimed by the assessee was to be allowed. The Hon ‘ble ITAT Mumbai while deciding assessees appeal in ITA No.853/Mum/2013 for A.Y. 2009- 10 vide order dt. 30-10-2015 has noted that in the assessee case the IOD is dt.10-01-2007 and CC dt.24-04-2007 which establish that the construction work had started prior to 31-03-2007 and the total expenditure incurred till 31-03-2007 was of 10,53,44,733/-. The Hon ‘ble ITAT also noted that further expenses were incurred in subsequent year which were shown in the books of accounts and the assessee had given details of the constructed area. The ITAT upheld the stand taken by the CIT(A) that the school had commenced its activities in A.Yr 2008-09 and the Income could not be taxed as income from other sources and the interest expense had to be allowed u/s 24 of the I.T. Act. Since the facts of the present assessment year are identical, respectfully following the order of my Ld. predecessor and Hon ‘ble ITAT as discussed it is held that in the treatment of rental income as income from other sources by the A..O., is without much basis and cannot be sustained in appeal. Similarly the disallowance of interest expenses claimed against this income cannot be sustained in appeal and is directed to be deleted. Accordingly these grounds of appeal are allowed.”

13. CIT(A) has relied on the decision of Coordinate Bench to give relief to the assessee and it is fact on record that this issue is settled in favour of the assessee. Therefore, we are inclined to allow the grounds raised by the assessee in this regard. With regard to Ground No. 2, since we decided the issue of taxability of income under the Head “Income from House property” in favour of the assessee, therefore this ground becomes infructuous. Ground No. 3 and 4 are consequential, hence these are allowed.

14. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 31^st May, 2023