M/s. Sun Enterprise Vs ITO (ITAT Mumbai)
Assessee is engaged in the business of builder and developer. The assessee was in the possession of Datar Block property which it was in the process of developing. The said property had some tenants. The assessee had to pay large amounts of money in order to get the property vacated. These sums paid have been capitalized in work-in-progress which has been accepted by the Assessing Officer. However, for the same property, the tenants had paid rent also which were treated by the assessee by crediting to the work-in-progress. However, the Assessing Officer holds the same to be income from house property. In this regard, we note that the assessee’s business is development of property. For the same property, for getting vacation, the sums paid are being debited to the work-in-progress which is being accepted by the Assessing Officer. However, pending vacation, the rent receipt from the tenants of the said property is not being given the same treatment by the Assessing Officer. He is treating the same as income from house property. In our considered opinion, the rent received is inextricably linked with the business of the assessee, i.e., development of the property. Hence, in our considered opinion, the rent received cannot be treated as income from house property and the assessee’s treatment of crediting the same towards work-in-progress is justified. For this proposition, the case laws relied upon by the ld. Counsel of the assessee referred in the submissions hereinabove are germane and support the case of the assessee, particular the case law from the Hon’ble Bombay High Court in the case of Lokholdings (supra) is of particular emphasis. Accordingly, in the background of the aforesaid discussion and precedent we set aside the orders of the authorities below and decide the issue in favour of the assessee.
FULL TEXT OF THE ITAT JUDGMENT
This appeal by the assessee is directed against the order of ld. Commissioner of Income tax(Appeals) dated 01/05/2014 and pertains to assessment year 2010-11.The Grounds of appeal read as under :-
Being aggrieved by the order of the Commissioner of Income-tax (Appeals)-25, Mumbai (hereinafter referred to as Learned CIT (A)) dated 01.05.2014 under section 250 of The Income Tax Act, 1961 (herein after referred as ‘IT Act’), the appellant submits this appeal on the following grounds each of which may please be considered without prejudice to one another:
ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW:-
1.Income from House Property
The learned CIT (A) erred in considering the rental income under the head ‘Income from House Property.
1.2 The learned CIT (A) failed to appreciate that the rent was earned from v persons living on the land which has been used by the Appellant for its business purposes.
1.3 The learned CIT (A) failed to appreciate that rental income from property which is mainly “land along with some dilapidated buildings”‘cannot be taxable under the head of income from house property.
1.4 Without prejudice to the above, the learned CIT (A) failed to appreciate that the Appellant is entitled to deduction of municipal taxes of Rs. 4,648 from its gross annual value and interest expenditure u/s 24(b) in respect of borrowings for acquisition of property, income of which is chargeable to tax under the head of income from house property.
2. Income from assignment of Development Rights of Chaudhary Plot at Thane:
2.1 The learned CIT (A) erred in considering the monetary consideration of Rs. 25,00,000 and non-monetary consideration of 10,500 saleable built up area ( Valued at Rs. 2,62,50,000) from assignment of Development Rights of Chaudhary Plot net of expenses incurred in relation to the same as income for the financial year 2009 -10.
2.2. Without prejudice to the above, the learned CIT (A) also erred in considering the total consideration from assignment of Development Rights of Chaudhary Plot at Rs. 2,87,50,000 (monetary consideration of Rs. 25,00,000 and non-monetary consideration of 10,500 saleable built up area at Rs. 2500 per feet of Rs. 2,2,50,000), as against stamp duty valuation of Rs. 1,64,09,000.
3.General
3.1. The appellant craves leave to add, delete, withdraw and or modify any one/more or all the above grounds of appeal.”
2. Apropos ground no 1:
Brief facts of the case are that the AO observed that the assessee had received rent income from Datar Block aggregating to Rs.1.67.613/- which was credited to the construction account. On being asked as to why the rent income should not be assessed under the head ‘Income from House Property”, the assessee submitted that the rental income received from Datar Block was towards tenancy charges received from tenants in the course of business of the assessee as a builder and developer. The assessee submitted that these incomes and expenses being incidental to the business, the same have been transferred to -in-progress. The AO observed that no construction/ development activities were shown. The AO opined that the rent income needs to be taxed under the head “Income from House Property’, and accordingly, the income of assessee was computed under the head “Income from House Property” at Rs.1,1,327/-, after allowing deduction u/s.24(a) @30% of rent received.
2.1. Upon assessee’s appeal ld. CIT(A) confirmed the action of the Assessing Officer by holding as under:
“I have carefully perused the facts of present case. As per Section 22 of the Act, “The annual value of property consisting of any buildings or land appurtenant thereto which the assesses is the owner, other than such portions of such properly as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income tax, shall be chargeable to income tax under the head “Income from home property” In the present case, the appellant is the owner of the property “Datar Block,” and the property is not used for the purpose of business or profession as the same is rented by the appellant. The appellant has contended that it had acquired the said property, being land with structures comprising four chawls standing thereon, with a view to develop and construct thereon commercial property by demolishing all the existing structures. The appellant has further submitted that it had not constructed any of the chawls from which rental are received but the said structures along with the tenants already exist at the time of acquisition of the land, and that the said land is the inventory for carrying on business in normal course as builders and developers. I do_not find merit in said contentions of appellant, as far as the chargeability of rental income under the head “income from House Properly” is concerned. I find that there is no stipulation in Section 22 that the rented out structures should be of any particular standards, or that the same should have been constructed by the assessee himself. The Section 22 stipulates the “Annual Value” of property to be charged under that section, and the Annual Value is determined as per Section 23 of the Act. As per Section 23, even if any particular owned property is not rented out, still it may be considered as deemed rented out in certain cases, and the Annual Value of such property is charged to tax u/s 22, Hence there is no question of not charging the Annual value of owned & actually rented property to tax u/s 22. The exclusion of property which the assessee “may occupy for the purpose of any business or profession carried on by him ” is only to exclude such property from the deeming provisions of Section 23 for the purpose of determining its Annual Value. H cannot be construed to mean that any owned business property even if out for a temporary period would not be taxable u/s 22. Relying upon the decision of Hon’ble Supreme Court in the case of Shambhu Investment (P.) Ltd. vs. CIT (2003) 263ITR 143 (SC,. I observe that the prime object of rent agreement was to let out the property,and hence it would be wrong to say that the appellant was exploiting property for its commercial business activities. Therefore, I find no infirmity in the action of AO in taxing the rental income of “Datar Block” owned by the appellant after already allowing deductions u/s. 24(a) under the head “Income from House Property.
The appellant has further contended that if the rental income is charged to tax under Income from House Property, it is entitled to interest expenditure u/s 24(b) in respect of borrowings for acquisition of property, I find that the appellant has charged the entire interest expenditure to work-in-progress as its business expenditure, and hence the same cannot be allowed again against the Income from House Property.
In view of the above. I confirm the addition of Income from House Property of Rs.1,17,327/-and therefore, the ground no. 1 of appeal is dismissed.”
3. Against the above order, assessee is in appeal before us.
4. We have heard both the counsel and perused the records. The submission of the ld. Counsel of the assessee in this regard are summarized as under :-
(i) The appellant is a partnership firm and the main object as per partnership deed is to do business of trading, developing, constructing and selling real estate.
(ii) The appellant’s predominant activity is of development and construction of properties which is clear from following facts;
The firm had purchased two properties (1) Datar Block property and (2) Choudhary Plot.
For purchasing such properties which represents stock in trade, or business asset the appellant has taken huge loans and same were invested in purchase of said two properties:
