IN THE ITAT MUMBAI BENCH ‘F’
Assistant Commissioner of Income-tax, 20(3), Mumbai
Vijay S. Mallya
IT APPEAL NOS. 4518 (MUM.) OF 2009 & 4131 (MUM.) OF 2010
CROSS OBJECTION NOS. 30 (MUM.) OF 2010 & 58 (MUM.) OF 2011
[ASSESSMENT YEARS 2006-07 AND 2007-08]
JUNE 8, 2012
Vijay Pal Rao, Judicial Member
These appeals by the revenue and the Cross Objections by the assessee are directed against two separate orders of the Commissioner of Income-tax (Appeals) dated 13.5.2009 and 22.3.2010 for the Assessment Years 2006-07 and 2007-08 respectively.
2. Revenue has raised common grounds in these appeals; therefore, the grounds raised for Assessment Year 2006-07 are reproduced as under:
I. The learned CIT(A) has erred on facts and in law and in the circumstances of the case in directing the AO to treat 40% of income from letting out balance portion excluding the banquet hail “Ambrosia” of the premises as business income, instead of income from house property as adopted by the Assessing Officer.
II. The learned CIT(A) has erred on facts and in law and in the circumstances of the case in not appreciating the facts that this issue has been settled by the Apex Court in favour of the revenue in its landmark judgement rendered in the case of M/s Shambhu Investment Pvt. Ltd. v. CIT 263 ITR 143 and East India Housing and Land Development Trust Ltd. 42 ITR 49.
3. In the Cross Objections, the assessee has raised common grounds as under:
(i) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in bifurcating the receipts from business centre from M/s. I-Flex Solutions Ltd., in respect of the portion of business centre excluding premises taken from M/s. Sanmou Motels Pvt. Ltd., in two parts namely (a) as 40% pertaining to income from business on account of receipt of service charges and (b) 60% on account of lease of property, when the agreement of business centre with M/s. I-Flex Solutions Ltd., did not provide for any separate charges for property and other services provided as a part of business centre by the Respondent.
(ii) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in considering the 60% as income from House Property.
(iii) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in reducing the disallowance of various expenses from Rs. 3,31,856/- to Rs. 2 Lacs on ad-hoc basis instead of deleting the entire addition of Rs. 3,31,856/-.
3.1 Thus, the only issue arising from the appeals as well as in the Cross Objections of the assessee is regarding treatment of business centre income. Since the CIT(A) has treated 40% of the said income as business income and 60% as income from house property ; therefore, both the revenue as well as the assessee are aggrieved by the order of the Commissioner of Income-tax (Appeals) on this issue.
4. The Assessing Officer noted that the assessee has declared gross receipt of Rs. 58,40,000/- as business centre receipt against which the assessee has claimed various expenses on account of repairs and maintenance of business centre, insurance, car hiring charges and amortisation of temporary shed. After debiting the above expenses, the assessee worked out net loss of Rs. 12,87,799/- from running of the business centre. The Assessing Officer was of the view that the business centre income declared by the assessee under the head ‘income from business and profession’ cannot be said to have been generated from the activity in the nature of trade or business. Accordingly, the Assessing Officer called upon the assessee to explain as to why the income from business centre should not be taxed as income from house property as against income from business claimed by the assessee.
4.1 In reply, the assessee has submitted that the assessee is engaged in real estate development business and the property had been held by the assessee as stock in trade with the clear intention to attract customer for the assessee’s proposed IT Project and not for earning rental income. Accordingly, the assessee submitted that the income has to be taxed as business income and not as income from house property. The assessee has relied upon the decision of the Hon’ble Gujarat High Court in the case of CIT v. Neha Builders (P.) Ltd.  296 ITR 661/ 164 Taxman 342 (Guj.).
4.2 The Assessing Officer did not agree with the contention of the assessee and held that the income declared by the assessee is income from house property. Accordingly, the Assessing Officer treated the gross receipts of Rs. 58,40,000/- as income from house property and allowed 30% deduction u/s 24 of the IT Act.
4.3 On appeal, the Commissioner of Income-tax (Appeals) has noted the facts that the assessee is not full owner of the property admeasuring 70000 sq.ft which was leased out to M/s I-Flex Solutions Ltd because the same was taken by the assessee on lease from M/s Sanmou Motels Pvt. Ltd., and the remaining property admeasuring 25000 sq.ft constructed area was owned by the assessee. Therefore, the Commissioner of Income-tax (Appeals) held that the rental income received from the acquired property admeasuring 25000 sq.ft and the assessee is the owner of the same is to be assessed as income from house property. Since the assessee is also providing services against the service charges, which is in the nature of business income; therefore, the only rental portion of the total receipt in respect of the leased out property, measuring 2500 sq,.ft, is to be assessed as income from house property. The Commissioner of Income-tax (Appeals) has accordingly held that 60% of the gross lease rental shall be treated as income from house property and rest 40% to be on account of services charges which is in the nature of business income.
5. Before us, the ld. AR of the assessee has submitted that the assessee has developed the IT Park, which was given to M/s I-Flex Solutions Ltd. vide agreement dated 12.4.2004. He has further submitted that the property in question situated at a distance of 12 km from Pune City. In the course of carrying out of the business as a developer, the assessee had acquired development rights of the property approximately 12.79 acres of land from M/s Sanmau Motels Pvt. Ltd. In order to attract the customers to come to the site, it was decided that initially the property should be developed on a temporary basis and leased out the same to some company having large scale business. Accordingly, the assessee has given the property in question admeasuring 7000 sqft to M/s I-Flex Solutions Ltd vide agreement dated 12.4.2009. Subsequently, the assessee as also agreed to provide additional area of 25000 sq.ft vide agreement dated 1.9.2004 for construction of a temporary shed on the said part of the plot of the land. The ld AR has referred the clauses of the agreement dated 12.4.2004 and 1.9.2004 and addendum dt. 12.4.2005.
5.1 He has referred the preamble clause of agreement dated 12.4.2004 and submitted that the assessee acquired the rights in the property including use of 35 car parking, 110 two wheelers parking area. The assessee has given a business centre together with facilities and services which includes, cabins/work stations (table spaces and conference rooms which are ready to use. The assessee is also engaged staff services at its own costs and expenses for providing upkeep of business faculties and services for certain hours per working day. The assessee has also agreed to provide transport services for the employees/consultants of the client round the clock between destinations (to & fro) as may be communicated from time to time by the clients.
5.2 The ld. AR has referred Clause 11 of the agreement and submitted that the assessee has also proposed to set out a new commercial premises in Pune and the clients have been offered to convey its acceptance or rejection of the proposal within 6 months from the date of singing of this agreement.
5.3 The ld. AR then referred the agreement dated 1.9.2004 and submitted that as per the requirement of M/s I-Flex Solutions, the assessee has constructed centrally air-conditioned shed admeasuring 25000 sq.,ft built up area. This additional space was given for better utilisation of earlier accommodation given by the assessee. Thus, the ld. AR has submitted that the assessee is running a business centre and therefore, the rental income received from M/s I-Flex Solutions Ltd., is to be treated as business income and not as income from house property. Since the assessee is holding the property in question as stock in trade; therefore, the income derived from the stock would be business income and not income from house property. The intention of the assessee was to attract the customers for their proposed IT project as it was far away from the city of Pune and therefore, the assessee has given some part of the project to I-Flex Solutions. He has further submitted that subsequently the business centre was purchased by M/s I-Flex Solutions Ltd., which shows the assessee’s intention was not to earn rental income to lease out the property but to promote and develop the IT park and attract the clients by giving part of the project on rent.
5.4 The ld DR on the other hand has submitted that the assessee is a developer and not service provider or in the business of leasing out the premises. This is clear from the fact that the assessee ultimately sold the IT Park. He has relied upon the order of the Assessing Officer and submitted that the Assessing Officer has relied upon the decision of the Hon’ble Supreme Court in the case of Shambhu Investment (P.) Ltd. v. CIT  129 Taxman 70 and therefore, the rental income derived by leasing out the property is assessable only under the head ‘income from house property’ and not as ‘business income’. He has further submitted that it is immaterial whether the property leased out is residential or commercial property; but the material is income earned by letting out of the property and not doing any business activity. He has relied upon the decision of the Hon’ble Punjab & Haryana High Court in the case of Sheetal Khurana Foods (P.) Ltd. v. ITAT  335 ITR 1/200 Taxman 33 (Mag.)/11 taxmann.com 58.
6. We have considered the rival contention as well as the relevant material on record. The issue raised by the revenue in these appeals and the assessee in the Cross Objections is regarding bifurcation of rental income from the premises in question in the ratio of 60:40 being income from house property and business income respectively by the Commissioner of Income-tax (Appeals). Therefore, as far as the issue of rental income with respect to the property admeasuring 7000 sq.ft treated by the Commissioner of Income-tax (Appeals) as business income is concerned, the same is not before us. The Commissioner of Income-tax (Appeals) proceeded on the premise that the assessee has taken on lease the property admeasuring 7000 sq.ft and again let out the same to M/s I-Flex Solutions Ltd as business centre. Therefore, when the assessee is not the owner of the property, the income from the same was held by the CIT(A) as business income; whereas the property admeasuring 25000 sq.ft belonging to the assessee and the assessee has let-out the same to I-Flex Solutions Ltd., has provided various services and facilities. The Commissioner of Income-tax (Appeals) by bifurcating the rental income and lease rental had treated the expenses in the ratio of 60:40. Thus, 60% of lease rental was held to be assessed under the head ‘income from house property and the balance 40% of the lease rental was held as assessed as business income and proportionate expenses shall be allowed against the business income.
7. The issue whether a particular let out is business or earning rental income by the owner of the premises as to be decided in the facts and circumstances of each case. Therefore, so far as the rental income for the let out premises owned by the assessee is concerned, the issue is settled by the Hon’ble Supreme Court in various decisions and held that the income realized by such owner by way of rental income from a building whether commercial building or residential, is assessable under the head ‘income from house property’. The only exceptional case whether the let out building is inseparable from lease out machinery, plant and furniture. In other words, if a business premises or factory is let out by the assessee for a temporary period, then let out of the factory premises become essential for letting out the machinery and plant and furniture of the factory. Only in such an exceptional case, whether the primary purpose and intention was to let out the machinery, plant or furniture and not the building, the rent received for the building is to be assessed as income from other sources as held by the Hon’ble Supreme court in the case of Sultan Brothers v. CIT  51 ITR 353.
8. In the case in hand, the assessee has let out the premises in question and not any plant, machinery or furniture. Though, some other services, amenities and facilities were also provided by the assessee as per the business requirement of the tenants. Therefore, so far as the rental income representing the letting out of the premises is concerned, the same is assessable as income from house property and on that point, we do not find any reason to interfere with the findings of the Commissioner of Income-tax (Appeals).
9. It is an undisputed fact that the assessee has received charges for providing services and facilities and amenities including transport facilities etc., to the tenants, then, the said proportion of the amount received by the assessee would not constitute the income from house property. As per sec. 23 of the IT Act, the annual letting value of the premises is the sum for which the property might reasonably be expected to let from year to year or the property is let and the actual rent received or receivable by letting out of the premises, whichever is more. Therefore, for computation of annual value, only the rental income and not the service charges for providing the extra facilities and services is relevant.
10. In the case in hand, the facilities provided by the assessee are not in the nature of inseparable from the premises in question and therefore, when the services are provided independently and separately, then the receipt from the service charges are liable to be assessed as income from other sources or business and not income from house property.
10.1 Even otherwise, for computation of annual letting value as per the provisions of sec. 23 of the IT Act, the actual rent received or receivable by the owner has to be taken into consideration and there is no scope for adding any other amount received by the owner for providing any other service or facilities to the tenant which was not directly connected with the letting of the property. It has not been disputed that the assessee was not providing these services.
10.2 None of the parties have disputed the correctness of the ratio of 60:40 for bifurcating the receipts for rental and service charges by the Commissioner of Income-tax (Appeals). Therefore, we are of the view that the Commissioner of Income-tax (Appeals) has taken a just and proper view on this issue.
11. In view of the above facts and circumstances of the case, we do not find any error or illegality in the order of the Commissioner of Income-tax (Appeals), qua this issue and the same is upheld.
12. The assessee has also raised additional ground of Cross Objection which is as under:
“On the facts and in the circumstances of the case and in law, without prejudice to the aforesaid ground (no. 1), the Assessing Officer failed to consider the alternate submission made by the appellant vide letter dated Nil filed on 19.12.2008 to treat the cost of temporary shed as cost of the project carried on by the appellant.”
12.1 The ld. AR has submitted that the assessee raised the ground, being ground no. 2 before the Commissioner of Income-tax (Appeals) which has not been specifically adjudicated by the Commissioner of Income-tax (Appeals) while deciding the ground no. 1, the Commissioner of Income-tax (Appeals) stated in para 4.16 of the impugned order that grounds nos. 1 & 2 are disposed off; whereas ground no. 2 raised by the assessee was an alternate ground and regarding cost of temporary shed to be treated as cost of project carried out by the assessee.
12.2 The ld. DR has opposed the additional ground raised by the assessee and submitted that the assessee has not raised this round in the original ground of cross objection.
13. We have considered the rival contention as well as the relevant material on record. We find that the assessee has raised ground no 2 before the Commissioner of Income-tax (Appeals) which is being raised before us as an additional ground. The Commissioner of Income-tax (Appeals), while deciding the grounds nos. 1 & 2 in para 4 of the impugned order has not adjudicated the alternate ground of the assessee. Thus, the additional ground raised before us is not a fresh ground raised for the first time ; but the same was raised before the Commissioner of Income-tax (Appeals) and was not adjudicated. Therefore, in the interest of justice, we admit the additional ground raised by the assessee for adjudication on merits.
13.1 Since the income has been bifurcated under two heads as income from house property and income from business and profession and accordingly only 40% of the expenses claimed by the assessee were allowed against the income from business. As such, expenditure on temporary shed was not allowable as per the order of the Commissioner of Income-tax (Appeals).
13.2 In the additional ground, the assessee is claiming that the total cost of temporary shed should be treated as cost of the project carried on by the assessee for future purposes. We find merits in the additional grounds of the assessee and therefore, the assessee is entitled for cost of temporary shed to be treated as cost of the project carried by the assessee.
14. In the result, the appeals filed by the revenue are dismissed whereas the Cross Objections of the assessee are partly allowed.