The appellant has not recovered major cost of the building and infrastructure and further provided a host of services/ specific requirements as its own cost. Hence we are of the opinion that warehouses constructed by the assessee are commercial assets and leasing out commercial property constitutes business income.
The question for consideration before us is regarding the treatment of income from letting out of warehouse; whether as ‘business income’ as returned by the assessee or as ‘income from house property’ as was the view of the AO. We find that this very issue has been considered and decided by a co-ordinate bench of this Tribunal in favour of the assessee by holding that lease rental income from letting out of warehouse constitutes business income, in its order in ITA No.693/Bang/2015 dated 5/8/2016 in the assessee’s own case for asst. year 2011-12.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This appeal by Revenue is directed against the order of the CIT(A)-1, Bangalore dated 31.7.2017 for Assessment Year 2013-14.
2. Briefly stated, the facts of the case are as under:-
2.1 The assessee, a company engaged in deriving rental income from letting out of warehouse, filed its return of income for asst. year 201314 on 29/8/2013 declaring income of Rs.26,97,860/- treating the rental income received there form as business receipts and offering the same for taxation of business income. The case was taken up for scrutiny and the assessment was completed u/s 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) vide order dated 24/3/2016, wherein the assessee’s income was determined at Rs.90,94,862/- as the Assessing Officer (‘AO’) treated the rental income received from letting out of warehouse as ‘Income from House Property’ as against the assessee’s claim that it constituted business income.
2.2 Aggrieved by the order of assessment for asst. year 2013-14 dated 24/3/2016, the assessee preferred an appeal before the CIT(A)-1, Bangalore. The ld CIT(A) allowed the assessee’s appeal, holding the lease rental income received by assessee from letting out of warehouses to be business income and thereby reversing the AO’s decision that it constitutes income from house property. In coming to this finding, the ld CIT(A) followed the decision of the co-ordinate bench of this Tribunal in the assessee’s own case for asst. year 201112 rendered in ITA No.693/Bang/2015 dated 5/8/2016. The relevant portion of the aforesaid ld CIT(A), order is extracted hereunder:-
“Having considered the submissions, it is seen that the main ground of appeal is regarding the treatment of income from the letting of warehouse as business income returned by the Appellant as “property income” by the AO in the assessment order under appeal. In the case of the Appellant, an identical issue came up for adjudication before the
Hon’ble ITAT for the AY 2011-12 in ITA No. 693/Bang/2015, wherein, the Hon’ble ITAT has held that considering the objectives of the company and other attending facts of the case, has held in Para 33 that the warehouses constructed by the assessee are commercial assets and the income from leasing out commercial property constitutes business income. While reaching this conclusions, the ITAT had relied on the Supreme Court’s decision affirming the decision of Bombay High Court (1963), 48 ITR 577 (Born). Following the above ITAT order my predecessor, on identical facts far thAY201243 has allowed the appeal of assessee, by treating the income from leasing out commercial property as business income.
3.2 Further, it is seen that the Hon’ble Supreme Court of India in the case of M/S Chennai Properties & Investments Ltd, in Civil Appeal No. 4494 OF 2004, wherein on similar facts, it was J as under:
“The appellant-assessee is a company incorporated under the Indian Companies Act. Its main objective, as stated in the Memorandum of Association, is to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business in the return filed by the assessee. The assessing officer, however, refuse to tax the same as business income. According to the assessing officer, since the income was received from letting out of the properties, it was in the nature of rental income. He, thus, held that it would be treated as income from house property and taxed the same accordingly under that Head.
No doubt in Sultan Brothers (P) Ltd.’s case, Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: “We think each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature.” We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as income from the house property’. We, accordingly, allow this appeal and set aside the judgment of the High Court and restore that of the Income Tax Appellate Tribunal. No orders as to costs.”
3.1 Revenue, being aggrieved by the order of the CIT(A)-1, Bangalore dated 31/7/2017 for asst. year 2013-14, has filed this appeal wherein it has raised the following grounds:-
“1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The Ld. CIT (A) erred in treating the lease rental income received by the assessee on letting out of its warehouses as Income from Business and not as Income from House Property by relying on the judgment of Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd., the facts of which are not similar to the facts of the case in question.
3. The Ld. CIT (A) erred in treating the lease rental income received by the assessee on letting out of its warehouses as Income from Business and not as Income from House Property by ignoring the judgments in the case of Indian Warehousing Industries Ltd. and East India Housing & Land Development Trust Ltd., the facts of which are akin to that of the case in question.
4. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored.
5. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.
3.2.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncements cited. The question for consideration before us is regarding the treatment of income from letting out of warehouse; whether as ‘business income’ as returned by the assessee or as ‘income from house property’ as was the view of the AO. We find that this very issue has been considered and decided by a co-ordinate bench of this Tribunal in favour of the assessee by holding that lease rental income from letting out of warehouse constitutes business income, in its order in ITA No.693/Bang/2015 dated 5/8/2016 in the assessee’s own case for asst. year 2011-12. The relevant portion of the aforesaid orduiier of the co-ordinate bench (Supra) at paras 25 to 33 thereof are extracted hereunder:-
“25. From the lease agreements with M/s Closure Systems International Pvt. Ltd. and M/s Raymond Apparel Ltd., it is noted that a large number of individual requirements of the respective companies were listed out therein. For eg., in the case of M/s Closure International Pvt. Ltd. there were as many as 39 specific requirements of the said company annexed to the lease agreement. To name a few, there were specifications with regard to electrical drawings, main panel room\with underground ducts to be constructed with complete concrete structure, separate diesel generator and air compressor room to be provided with corrugated steel/aluminum ceiling, fire pump house complete RCC structure with 2,00,000 ltr water capacity overhead water tank made of HDPE 5000 Ltr capacity for sanitary water supply required no. of vehicle parkings, floor, tiles in pedestrian area construction of landscape area as shown in drawing fabrication of motor operated main gate for access of diesel truck pipe line and a separate manually operated main gate with a distance of 8 feet between them, construction of brick wall structure for engineering store maintenance store, civil construction of raw material dock area separate finished goods dock area exit ramp for entrance of workshop and hot work area, extra noise insulation in the common wall, providing separate office area with column structure covering up to l0ft to improve aesthetics providing column guards in warehouse areas to prevent damage to colunms etc. These are only a few items listed out for the basic understanding that the additional-improvements to the premises and the services to be rendered by the appellant to the client are specific in nature. Similarly, in the case of M/s Raymond Apparels (P) Ltd., also there were as many as 23 requirements listed out in annexure to lease deed. Some of the specifications were with regard to the materials to be used and height and width of the warehouse and platforms. For the sake of brevity, the requirements are not discussed in detail. However, the same are placed at pages 123 to 125 and 145 to 146- of the paper 1ok no. 1. kept on record.
26. That apart, the appellant has placed on record a brief summary of design engineering supply and erection of pre-engineered steel construction of the warehouse constructed by the appellant in a separate paper book containing 150 pages. Services rendered by each of the sub-contractors in constructing the warehouse, technical designs thereof., invoices raised and details of payment made are placed in the paper book no. 2 in a very detailed manlier. That apart- the appellant has also placed on record the actual photographs of the said warehouse externally as well as internally-. evidencing the fact that the same were built as per the requirements of the clients. Thus, the appellant has placed on record the voluminous materials and has taken pain to explain that the services provided by them to the clients are not ordinary services of merely renting out the property.
27. The appellant has taken all the risks and rewards associated with the business viz., the warehouses were constructed on a leased land with the uncertainty of the lease to be further extended or not, obtained the bank loan and employed its own capital and incurred interest burden as well as opportunity cost thereon, constructed the warehouses to the specific requirements of the clients in different lines of business and such requirements not being useful to new clients in case the existing clients decide to terminate the lease, the clients being MNCs or large corporate houses and the appellant having the least control in their management decisions to continue or terminate the lease period at the same time appellant receiving a handsome rent as compared to the landlord whose land has a very high market value but not being capable of exploiting the same as the land lord is not willing to take the risks etc..,
28. The appellant indulged in complex activities/services from the stage construction itself that each warehouse is custom built to the specific requirements and it is to be maintained as such during the life of lease period.
29. The agreement for lease of land itself speaks of diverse activities proposed/allowed to be taken up thereon like art is hereby agreed between the Lessor and the Lessee that during the currency of this Lease Arrangement and any extension thereof., the premises shall bused For all activities necessary for carrying on the business of the Lessee, which is construction and renting of warehousing to their clients, which is their core are of operation. Such activities may, for the purposes of this Deed, he deemed to include but would not he Limited to transportation, pickup and delivery of goods, Logistics support, C & F activities,
Warehousing, Third Party Logistics Solutions and other related services, etc.
30. It is also stated in the lease agreement that the Lessee shall be entitled to utilize the premises for any of the activities including Logistics, C & F activities, Warehousing, Third Party Logistics Solutions, Office Use, Dormitory, and other usage for its temporary/permanent staff, Vendors, Transhipment hub, parking of trucks an other vehicles.”
31. Demand for high-end services and infrastructure, driven by the greater presence of MNCs and maturity in end-user industries (such as food, textile, pharmaceutical, automotive and engineering goods), is creating new storage space requirements. This has, in turn, prompted the growth of more organized warehouses 4itli better value-added services and facilities. Further, as key end users are increasingly outsourcing their warehousing services, warehousing players are recognizing the need to be a part of the customers’ logistics chain, as against being a landlord leasing out space. The characteristics of modern warehouses are different from the traditional ones, requiring a whole lot of complex services associated with the renting of the same.
32. Viewed from the above perspective, appellant company has indulged in a large number of complex activities form the stage of warehouse construction to its day to day maintenance and providing the logistic and warehousing Infrastructure under one shelter for specified clienteles with specified fitments for easy access and its storage, with automatic fire proof equipments, specific electrical drawings, production area flooring, with specific floor strengths, epoxy flooring, Dock Shelter, Racking System, custom made structure for labour quarters etc and a whole lot of complex services as listed out in the annexure to the lease agreements. Reference can be taken to details available in the paper books placed on record including the photos by appellant have better features. The warehouse constructed the international standards are met in all respects. these services cannot be regarded as routine services to be rendered by any ordinary property owner as part of lease.
Further, the company has obtained prior approvals for conducting the warehousing activity from competent authorizes besides approval from Karnataka State Pollution Control Board as per the Rules and regulations as applicable to Warehousing Infrastructure and did the work as per specification of the Clientele which includes infrastructure faculties, panel up-gradation, site works, civil works and Higher loaded power supply (100 KVA -. 1500 KV) and its approval from Karnataka Electricity Board.
33. The appellant has not recovered major cost of the building and infrastructure and further provided a host of services/ specific requirements as its own cost. Hence we are of the opinion that warehouses constructed by the assessee are commercial assets and leasing out commercial property constitutes business income.
3.2.2 Following the decision of the co-ordinate bench of this Tribunal in the assessee’s own case for asst. year 2011-2 in ITA No.693/Bang/2015 dated 5/8/2016 (Supra); we hold that the lease rental income earned by the assessee from warehouses constitutes business income of the assessee. Consequently, we dismiss the grounds raised by Revenue.
4. In the result, Revenue’s appeal for Assessment Year 2013-14 is dismissed.
Order pronounced in the open court on 23rd March, 2018.