Case Law Details
If letting out could be demonstrated as part of complex commercial activity then rental income is to be assessed as income from business
RELEVANT PARAGRAPHS
10. We have considered the rival submissions and perused the record of the case. From the various case laws cited by Id Counsel for the assessee and discussed in detail by the lower revenue authorities, the following two principles are clearly discemable. Firstly, if the income has been earned by mere exploiting of the ownership of the property, then the same is asses sable as income from house property.
However exception to this rule is that if the immovable property has been temporarily let out with the primary object to exploit the same by way of complex commercial activity then the income is asses-sable as income from business. The Honourable Calcutta High Court in the case of Shambhu Investment P. Ltd. (supra) after considering the various case laws, concluded as under:- “the main intention of the assessee is to let out the property or any portion thereof (he income must he considered as rental income or income from property whereas if the primary object is to exploit the immovable property by way of complex commercial activities, in that event it must be held as business income. “
This principle has now been approved by the Honourable Supreme Court in the case of Shambhu Investments (P)Ltd., 263 1TR I43(SC). Thus, primarily, it depends on facts and circumstances of each case whether the assessee is only exploiting the ownership right of the property or letting out the property as a part of complex commercial activities. The complex commercial activity implies that the dominant object of exploitation of the property is for commercial purpose and in order to achieve the same object, the property has been put to some other use e.g. temporarily let out. Before we consider the facts of the present case, we examine the facts in the case of Shambhu Investments P. Ltd (supra). In that case, the cost of the property was Rs. 5,42.443/ -. A portion of the property was used b the assessee itself for its own business purpose. The rest of the property had been let out after duly furnishing the same to various persons and/ or organisations with furniture, fixtures, lights, air-conditioners for being used as table space. Under an agreement with those occupants, the assessee provided services like watch and ward staff, electricity, water and other common amenities. It was noticed that the assessee had already recovered a sum of Rs. 4.25,000 – as and of security advance from three occupants. Hence, the entire cost of the property let out to those occupants had already been recovered as and by way of interest free advance. Therefore, it was held that it could not be said that the assessee was exploiting the property for its commercial business activities and such business activities was the primary motive and letting out of the property was only a secondary one. It was concluded that the only intention was to let out a portion of the premises to the respective occupants. The Honourable Calcutta High Court also considered the decision of the Honourable Supreme Court in the case of Sultan Brothers (supra) and considered the following three questions framed by the Honourable apex Court:
i) Was it the intention in making the lease and it matters not whether there is one lease or two, i.e. separate leases in respect of the furniture and the building -that the two should be enjoyed together?
ii) Was it the intention to make the letting of the two practically one letting?
hi) Would one have been let alone, and a lease of it accepted, without the other?
The Honourable Calcutta High Court answered the first two questions in affirmative and third question in the negative i.e. the letting would be inseparable.
11. The basic principle is that if the dominant object was to sell the flats and in order to achieve the said object, the assessee had temporarily let out the property to Rajinder Hiralal Grovcr. This intention is to be gathered mainly from the lease agreement together with subsequent conduct in pursuance to the lease agreement. If it is discern able from the lease agreement that primary object of lease is to facilitate the sale of property, the leasing of property can be said to be as part of complex commercial activity, thus coming within the exception clause and. accordingly, rent is asses sable as income from business.
12. In the present case also, when we apply the aforementioned tests, we find that as far as property let out to Rajinder Hiralal Grover is concerned, the assessee had sold the property also to the lessee. Therefore, it can be said that the whole transaction was part of composite commercial activity and. therefore, the income derived from the said transaction has to be treated as income from business. However, as far the letting out of the property to M/s. Lear Seating P. Ltd., is concerned, it is a case of letting out of property simplicities and exploitation of ownership of the property. It is not borne out from the record as to whether the said property was sold to Lear Seating Pvt Ltd., so that the letting out of the property could to be treated as part of composite commercial activity. Ld Counsel for the assessee has stated that the letting out of the property was for 2 months only but unless the same comes within the ambit of composite commercial activity, which implies that in order to achieve the dominant object the impugned activity being incidental and subservient to the main object had been carried out. We find that this test is not met in the case of this property.
13. Now coming to the third issue regarding Roam ware (India) Pvt. Ltd. the main objection of the department is that the property has not been sold out to Roam ware (India) Pvt. Ltd. and the lease has been given for 33 months with a locking period of 24 months. In our opinion, the submissions of Ld Counsel that since the property has been sold to sister concern and, therefore, it was part of complex commercial activity needs to be examined by AG afresh as they are not borne out from record. However, in principle we accept the contention of Id Counsel for the assessee that if letting out could be demonstrated as part of complex commercial activity then rental income is to be assessed as income from business. We may further observe that merely because letting was for 33 months is of no consequence. It depends on the facts of each transactions, whether the letting out of the property is incidental and subservient dominant object of selling the property or not. If the property has merely been let out b> the assessee then the same cannot be held to be exploitation of the property for commercial purpose in view of the decision of the Honourable Shambhu Investment (supra). We. therefore, restore this issue to the file of the AC) for fresh consideration in the light of aforementioned observation.
