Case Law Details

Case Name : ACIT Vs Ashapura Developers (ITAT Mumbai)
Appeal Number : ITA No. 1466/Mum/2017
Date of Judgement/Order : 01/03/2019
Related Assessment Year : 2012-13
Courts : All ITAT (7457) ITAT Mumbai (2138)

ACIT Vs Ashapura Developers (ITAT Mumbai)

Conclusion: Assessee was in the business of development of real estate projects and letting of property was not the exclusive business of assessee, therefore, the rental income earned by assessee was rightly treated as income under the head ‘House Property’ instead of ‘business income’.

Held: Assessee was in the business of developers and during the year under consideration, assessee earned income from units leased out to certain parties and such leasing was done for long tenures. Assessee had claimed the lease rental income to be income from house property, but the same was rejected by AO by holding that the intention of assessee was to exploit the immovable property by way of commercial activity. It was held the units provided on tenancy had been made for a tenure ranging between 3 to 9 years, which showed that the intention of assessee was to earn lease rental income and not to exploit the immovable property. Moreover, assessee was in the business of development of real estate projects and letting of property was not the exclusive business of assessee, therefore, the rental income earned by assessee was rightly treated as income under the head ‘House Property’.

FULL TEXT OF THE ITAT JUDGEMENT

These two appeals filed by the revenue as well as assessee are against the order of Ld. CIT(A) – 44, dated 14.12.16 & 17.03.16 for AY 2012-13 & 2011-12 respectively.

2. Since all the issues involved in these two appeals are common, therefore, they have been clubbed, heard together and a consolidated order is being passed for the sake of convenience and brevity.

ITA No. 1466/Mum/2017 (AY 2012-13)

3. First of all we take up revenue’s appeal in ITA No. 1466/Mum/2017 for assessment year 2012-13 as lead case. The ground of appeal are mentioned herein below:-

1. “On the facts and in the circumstances of the case, and in law, the Ld. CIT(A), erred in allowing the claim of assessee to treat rental income of Rs.34, 13,95,611/- as income from House Property instead of Business Income as assessed by the AO, without appreciating the fact that rental income was received from the business asset of unsold flats shown as stock-in-trade. The Ld. CIT(A) also failed to appreciate the fact that the assessee has included rental income in arriving at its gross sales appearing in its building and construction account and thereby arriving at the gross profit which in turn taken to the Profit & Loss account to arrive at Net Profit.”

2. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate the decisioRLof H RILIe Apex Court dated 9th April 2015 in the case of Chennai Properties and Investments Ltd. CIT, Central-Ill, Tamil Nadu (2015) reported in 373 ITR 673, as reiterated in the case of M/s. Rayala Corporation Pvt. Ltd. Vs. ACIT (Civil Appeal No.6473 of 2016 dated 11.08.20146) has held that “if an assessee is having his house property and by way of business he is giving the property on rent and if he is receiving rent from the said property as his business income, the said income, even if in the nature of rent, should be treated as business income.”

3. “The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.

4. “The appellant craves leaves to amend or alter any ground or add a new ground.”

4. As per the facts of the present case are that the assessee filed its return of income on 30.09.20 12 showing total income of Rs. 29,62,86,490/-. The assessee is a firm engaged in the business of builders & developers. The only issue in both appeal is regarding the treatment of income from renting of immovable properties as income from business. The assessee firm had shown rental income of Rs 34,13,95,6117-. The assessee categorized this income as falling under the head of Income from house property’. The assessee also claimed 30% deduction u/s 23 against such rental income. On the other hand, the AO stated that the mere fact that income is attached to immovable property cannot be the sole criterion for taking it as income. The AO therefore treated the rental income as ‘income from business’ and allowed the deduction of only the property tax paid.

Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties, allowed for statistical purposes the appeal of the assessee by holding that rental income earned by the assessee be treated under the head ‘House property’ in AY 2012-13.

Now before us, the revenue as well as assessee have preferred their respective appeals. Firstly we are dealing with the appeal filed by the revenue for AY 2012-13.

Ground No. 1 & 2

5. These grounds raised by the revenue are inter connected and inter related and relates to challenging the order of Ld. CIT(A) in allowing the claim of the assessee to treat rental income as income from ‘House Property’ instead of ‘Business Income’ as assessed by the AO, therefore we thought it fit to dispose of the same by this common order.

6. DR appearing on behalf of the department relied upon the orders passed by AO and submitted that Ld. CIT(A) had erred in allowing the claim of assessee to treat rental income of Rs.34,13,95,61 1/- as income from ‘House Property’ instead of ‘Business Income’ as assessed by the AO, without appreciating the fact that rental income was received from the business asset of unsold flats shown as stock-in-trade. It was submitted that the Ld. CIT(A) also failed to appreciate the fact that the assessee had included rental income in arriving at its gross sales appearing in its building and construction account and thereby arriving at the gross profit which in turn taken to the Profit & Loss account to arrive at Net Profit.

Ld. DR further submitted that Ld. CIT(A) had failed to appreciate the decision of Hon’ble Apex Court dated 9th April 2015 in the case of Chennai Properties and Investments Ltd. Vs. CIT, Central-III, Tamil Nadu (2015) reported in 373 ITR 673, as reiterated in the case of M/s. Rayala Corporation Pvt. Ltd. Vs. A CIT (Civil Appeal No.6473 of 2016 dated 11.08.2014), wherein it was held that “if an assessee is having his house property and by way of business he is giving the property on rent and if he is receiving rent from the said property as his business income, the said income, even if in the nature of rent, should be treated as business income.”

7. On the other hand, Ld. AR relied upon the orders passed by the Ld. CIT(A) and reiterated the same arguments as were raised by him before Ld. CIT(A) and also referred to the decision of the Coordinate Bench of ITAT in ITA No. 7119/Mum/1 3 for AY 2010-11 inQassDssDD’sVVHn casD CIT Vrs. Gundecha Builders in ITA No. 347 of 2016 & 4475/Mum/2011 for AY 2008-09, CIT Vrs. Sane & Doshi Enterprises (2015) 377 ITR 165 (Bom-HC), East India Housing and Land Development Trust Ltd. Vrs. ACIT (1962) 42 ITR 49 (SC) and CIT vrs. Quest Investment Advisors Pvt. Ltd. (2018) 257 taxman 211 (Bom-HC).

8. We have heard counsels for both the parties and we have also perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities.

Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above ground raised by the assessee in para no. 3.3 & 3.4 of its order and the same is reproduced below:-

3.3 I have carefully gone through the assessment order as well as the written submission of the AR. I have also perused the details filed by the AR. I have also carefully studied the order of the Hon ‘ble ITA T A Bench Mumbai in appellant’s own case for the AY 2010-11. In its order the Hon’ble ITAT A Bench, Mumbai made inter alia the following comments.

“Since the AO was of the view that the assessee was commercially exploiting his shops cum office complex, therefore the income of the assessee is liable to be treated as business income. Hence the AO declined the contention of the assessee and treated the income from business income despite income from house property. Undoubtedly the Ld CIT(A) has confirmed the same. The Ld. representative of the assessee has relied upon the law settled by the Hon ‘ble Bombay High Court in case of Commissioner of Income tax 12 Vs M/s Sane & Doshi Enterprises decided on 9 April, 2015. Now it is to be seen whether the facts of the case is identical to the facts of this case or not. The said order perused which speaks that the assessee was engaged in the real estate business and constructed a compled viz. May Fair Tower. It is stated to be a partnership firm register under the Indian Partnership Act, 1932. He has also shown the rental income, but the authority treated the same as income from business. Therefore, the matter went up to the Jurisdictional High Court and the Hon ‘ble High Court in the case cited above decided the matter in favour of the assessee. The facts and circumstances of this case is quite similar to the facts and circumstances of the present case. In both the case the assessee have constructed commercial complex and rented out the unsold shops! offices on lease. In case of +Pe %o Hle [EOHL1 %RgP D our+Commissioner of Income Tax 12 Vs M!s Sane & Doshi Enterprises decided on 9 April, 2015 the income of the assessee was treated as income from house property. Finding identical facts and circumstances of the present case, we are of the view that in the present case the law is quite applicable and the income of the assessee is liable to be treated as income from the house property and accordingly he would be entitled exemption u/s 22 of the Act. Hence in view of the above said law we set aside the finding of the CIT(A) in question and direct the AO to re-assess the income of the assessee in view of the observation made above. “

3.4 Since, on similar facts the highest fact finding authority i.e. the ITAT has already decided that the rental income shown by the appellant is liable to be treated as income from house property, following the judgment of the Hon ‘ble ITA T the grounds of appeal no. 1 (1.1 to 1.7) is allowed. The AO is accordingly directed to treat the rental income of Rs 34,13,95,611/- as income under the head house property.

9. After hearing the parties at length and after having gone through the orders passed by revenue authorities and considering the facts of the present case, we find that the assessee is in the business and developers and during the year under consideration, the assessee earned income from units leased out to certain parties and such leasing is done for long tenures. The assessee had claimed the lease rental income to be income from house property, but the same was rejected by the AO and the & Coordinate Bench of ITAT in assessee’s own case in ITA No. 7119/Mum/13 for AY 2010-11 had passed orders in favour of assessee, wherein it was held that the lease rental income be assessed under income from house property. Whereas on the contrary, the AO rejected the claim of the assessee by holding that the intention of the assessee is to exploit the immovable property by way of commercial activity. In this regard, we noticed that the units provided on tenancy had been made for a tenure ranging between 3 to 9 years, which shows that the intention of the assessee was to earn lease rental income and not to exploit the immovable property.

10. The Ld. DR had placed having reliance on the judgment of Hon’ble Supreme Court in the case of Chennai Property (supra), wherein the Hon’ble Supreme Court had held that since letting of the property was the business of the assessee and thus the income of rental would be treated as income under the head ‘business’ and not as ‘income from house property’While relying upon the above judgment, it was submitted by Ld. DR that in the present case als , the asse see is carrying out ‘business’ and using immovable property by way of letting out space and earning rental income through it and thus the main intention of the assessee is to exploit the immovable property by way of commercial activity. It was further argued that since the premises are held as stock-in-trade, therefore the premises are being both sold and are being leased out on rent. Thus, the income be treated as ‘bupi\Xss i\cHVe’ of thF RssHs[ e.

11. In order to rebut the contentions of the revenue, it was argued by Ld. AR that in the final computation of income, the asseVsee VadHtreatedGth We\HaD i\HoG as ‘i\coUH froD houLQ SroRertyLJW\[L1 huQ Gla meKXstipulateDLP0HG VuctLo\ Ot waH further submitted that long lease given by the assessee indicates the intention of the assessee is to permanently letting out the propert, which is not the business of the assessee rather the assessee is into the business of development of the property. It was also submitted that AO had made additions without finding any fault or omission in the audited financial statement prepared on the basis of governing accounting standards and the presentation of such financial statements. It was also submitted that AO had not made verification with regard to period of lease which is stipulated in the register leave and license agreements and thus had not considered the intention of the assessee, which is important crieteria for deciding the taxability of a particular income under a significant head of income from among the five heads of income prescribed under the Income Tax Act.

12. From the arguments of the parties as well as from the records, we found that the facts in the present case are not in dispute, but the thrust of the revenue to treat the income of rental as ‘business income’is mainly on the basis of judgement of Hon’ble Supreme Court in the case of Chennai Properties and Investment Ltd vrs. CIT (2015) 373 ITR 673 (SC) and other judgments cited by Ld. DR as mentioned above.

13. On scrutiny of the judgments cited by both the parties, we found that in the case of Chennai Properties and Investment Ltd vrs. CIT (supra), the main object as per the Memorandum of Association of the assessee in that case was to acquire the properties in the city and to let out those properties. In the return, the entire income of the assessee was from letting out these properties, thus it was concluded that the letting out the property is in fact is the business of the assessee and in those circumstances, the rental income was treated as ‘income from business’. Whereas as per the facts of the present case, the assessee is into the business of builders and developers and not exclusively in the business of letting properties. Therefore, in such circumstances, the facts of the present case are distinguishable from the facts of the case of Chennai Properties (supra). The identical proposition was also discussed by the Hon’ble Jurisdictional Bombay High Court in the case of Gundecha Builders, where the facts of the case are similar to that of the assessees, after considering the judgment of Chennai Properties and Investment Ltd vrs. CIT (2015) 373 ITR 673 (SC) as well as Sane & Doshi Enterprises (2015) 377 ITR 165 (Bom HC) had held that the rental income from properties held in stock-in-trade should be assessed under the head ‘Income from house property’, when the intention of the assessee is to earn rental income.

14. In the case of Raj Dadarkar & Associates Vrs. ACIT (2017) 81 193 (SC), wherein it was held where assessee having obtained a property on lease, constructed various shops and stalls on it and gave same to various persons on sub-licencing basis, since assessee was not engaged in systematic or organized activity of providing services to occupiers of shops/stalls, income from sub-licensing was to be taxed as income from house property and not as business income.

15. Therefore, considering the various judgements cited by the respective parties, keeping in view the orders by the Coordinate Bench of ITAT in assessee’s own case for AY 2010-11 and also the facts of the present case that assessee is in the business of development of real estate projects and letting of property is not the exclusive business of the assessee, therefore while relying upon the judgement of jurisdictional High Court in the case of CIT Vrs. Gundecha Builders in ITA no. 347 of 2016 dated 31.07.18 (Bom), we are of the view that the rental income earned by the assessee was rightly treated as income under the head ‘House Property’ by LdCIT(A).

16. Moreover no new facts have been brought on record before us in order to controvert or rebut the findings so recorded by Ld. CIT(A). Therefore, there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT(A). Hence, we are of the considered view that the findings so recorded by the CIT (A) are judicious and are well reasoned. Resultantly, these ground raised by the revenue stands dismissed.

Ground No. 3 & 4

17. These grounds raised by the revenue are general in nature, thus requires no specific adjudication.

18. Consequently, the appeal filed by the revenue stands dismissed.

19. Now we take up assessee’s appeal in ITA No. 3565/Mum/2016 for AY 2011-12. Since we have already upheld the order of Ld. CIT(A) in appeal filed by the revenue in ITA No. 1466/Mum/2017 for AY 2012-13 on merits and treated the rental income earned by the assessee as income under the head ‘House Property’. Therefore, following our own decision in ITA No. 1466/Mum/17, we apply the same findings in the present appeal in order to maintain judicial consistency which is applicable mutatis mutandis in the appeal filed by the assessee.

20. In the net result, the appeal filed by the revenue stands dismissed and the appeal filed by the assessee stands allowed with no order as to cost.

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