Temporary letting of property till Approval of Real Estate Project is Business Income

ITO Vs M/s. United White Metal Ltd. (ITAT Mumbai)

We noticed that the rental income of the assessee was to the tune of Rs.2,16,00,000/- which has been shown as income from business. However, the AO declined the claim of the assessee on the basis of this fact that the no activity of business was going on, therefore, the said rental income was treated as income from house property and accordingly, the deduction u/s 24(a) and 23(1) of the Act was allowed and the remaining income in sum of Rs.1,19,73,405/- was treated as income from house property and accordingly taxed. Initially the business of the assessee was of the manufacturing of engineering goods/components/spares which was discontinued since many years ago. Thereafter, the assessee changed its business for development of real estate. The assessee converted its land into stock in trade w.e.f 07.08.2008. Schedule 8 on the balance-sheet shows Rs.109,94,65,193/- as inventory of property.

The assessee entered into the development agreement with Rajesh Real Estate Development P. Ltd. on 12.07.2010 for the development of the land. Earlier the assessee also agreed to alienate the larger portion of the land to Rajesh Estate and Nirman Limited by virtue of letter dated 20.12.2007. The assessee has also converted its land from industrial zone to residential use and necessary permission was also talen. All the activity speaks that the assessee was in the business activity. The assessee was maintaining the office and also the paying the salary to its employee and also incurring the other expenses such as travelling and other administrative expenses etc.

The assessee temporarily letting out the premises to Broker India P. Ltd. by virtue of leave and license agreement dated 17.04.2009. The property was given on leave and licence basis till the approval of the real estate project. The memorandum and Articles of Association permits letting and leasing of property which is the business of the appellant company. The CIT(A) has relied upon the case decided by Hon’ble Apex Court titled as Chennai Properties & Investment Ltd. V. CIT (2015) 277 CTR 0185 (SC).

It also came into notice that in the earlier assessment order u/s 143(3) of the Act, the revenue has accepted the rent as business income. The facts are not distinguishable at this stage also. There is no other distinguishable material on record to which it can be assumed that the income of the assessee on letting out the property falls within the purview of house property. Taking into account, all the facts and circumstances, we are of the view that the finding of the CIT(A) is quite correct and in accordance with law which is not liable to be interfere with at this appellate stage. Accordingly, these issues are being decided in favour of the assessee against the revenue.

FULL TEXT OF THE ITAT JUDGMENT

The revenue has filed the present appeal against the order dated 20.09.2016 passed by the Commissioner of Income Tax (Appeals) -20, 1Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2012-13.

2. The revenue has raised the following grounds: –

“1.Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A} was justified in allowing the income under contention, as income under the head “Profits and Gains of Business or Profession” instead of “Income from House Property” as considered by the AO without appreciating that the decision of Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd. Vs. CIT (2015) 373 ITR 673(SC) is not applicable to the facts of the assesses as the assessee is in the business of manufacturing of engineering goods during the financial year under consideration.

2. The appellant prays that the order of the Id. ClT (A) on the grounds be set aside and that of the Assessing Officer be restored.

3. The appellant craves leave to add, amend or alter all or any of the grounds of appeal which may be necessary.”

3. The brief facts of the case are that the assessee filed its return of income on 20.09.2012 declaring total income to the tune of Rs.2,14,090/-claiming TDS credit to the tune of Rs.21,60,000/-. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was selected for scrutiny and notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee company was earlier engaged in the manufacturing business of engineering goods/components/spares. The manufacturing activity was discontinued since many years ago. At the present, assessee company has claimed that he was in the business of development of real estate. The assessee company was not found to the carried out any real estate development business activity, therefore, his rental income to the tune of Rs.2,16,00,000/- was treated as income from house property and after further deduction u/s 24(a) of the Act and 23(1) of the Act, the rental income to the tune of Rs.1,19,73,405/- was brought to tax as income from house property. The total income of the assessee was assessed to the tune of Rs.1,24,48,466/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee, therefore, the revenue has filed the present appeal before us.

4. We have heard the argument and advanced by the Ld. Representative of the parties and perused the record. The revenue has challenged the acceptance of the claim of rental income of the assessee as income from business or profession instead of income from house property. Before going further, we deemed it necessary to advert the finding of the CIT(A) on record.: –

“11 I have considered the submissions of the appellant carefully. The profit and loss account shown for current and preceding year is summarized below.

12. The AO has treated the rental income of Rs.216,00,000/- as income under House Property and Interest on tax refund and dividend of Rs.5,40,587/- as Income from other sources. Barring property taxes of Rs.44,95,136/- allowed under the head income from House Property, the all the remaining expenses has been disallowed holding that there was no business carried out during the year.

13. It is clear that after the manufacturing operations were discontinued, the appellant has decided to get into real estate activity. It has converted its landinto stock in trade w.e.f 7.8.2008. Schedule 8 on the balance Sheet shows Rs.109,94,65,193/- as inventory of property. It has entered into a development agreement dated 12.7.2010 with Rajesh Real Estate Developers Pvt. ltd. for the purpose of development of the land. Earlier, vide development agreement dated 20,12,2007 a portion of the larger property was agreed to be sold to Rajesh Estate and Nirman limited. The appellant had made application for conversion of the land falling in J Industrial zone lo residential use. Various other permissions were sought “for the development project and real estate activity.

Thus, it cannot be said that there is no business activity being carried out, though there may not have been any direct real activity income. The office, is maintained and expenses such as salary expenses, travelling and other administrative expenses are incurred.

14. There is merit in the contention that merely because the licensee deducts TDS u/s 194I, it does not determinative of the head under which the income is to be assessed in the hands of the licensor. It only means that the nature of payment is of rent and not that it has to be assessed as house property income.

15. While the office/factory building was to be demolished before development, the appellant to exploit the property temporarily let out the premises as per agreement of leave and license dated 17.04.2009 with Booker India Pvt. Ltd. (Booker). The purpose is not letting out of property but rather exploiting it commercially till the time approvals are received and property is demolished for the real estate project. The Memorandum and Articles of Association permits letting and leasing of property as the appellant company’s business. In the case of Chennai Properties and Investments Ltd. vs CIT (2015) 277 CTR 0185 (SC) the Apex Court upheld the assessment of rental income as business income instead of income as House Property

16. It is further noticed that the appellant offered the rental income as business income in earlier years when it was let out to Hindustan Cocacola Marketing P. Ltd. vide agreement dated 8.3.2007 till 7.12.2007. Again when it was let out to Booker vide agreement dated 17.4.2009, the rental income was offered as business income. The offer as business income had been accepted in earlier years even in scrutiny assessments u/s 143(3). While res-judicata does not apply to income tax proceedings, the principle of consistency of approach on identical facts has been upheld in Radhasoami Satsang vs. CIT (1991) 100 CTR 0267 (SC).”

5. On appraisal of the above said finding, we noticed that the rental income of the assessee was to the tune of Rs.2,16,00,000/- which has been shown as income from business. However, the AO declined the claim of the assessee on the basis of this fact that the no activity of business was going on, therefore, the said rental income was treated as income from house property and accordingly, the deduction u/s 24(a) and 23(1) of the Act was allowed and the remaining income in sum of Rs.1,19,73,405/- was treated as income from house property and accordingly taxed. Initially the business of the assessee was of the manufacturing of engineering goods/components/spares which was discontinued since many years ago. Thereafter, the assessee changed its business for development of real estate. The assessee converted its land into stock in trade w.e.f 07.08.2008. Schedule 8 on the balance-sheet shows Rs.109,94,65,193/- as inventory of property. The assessee entered into the development agreement with Rajesh Real Estate Development P. Ltd. on 12.07.2010 for the development of the land. Earlier the assessee also agreed to alienate the larger portion of the land to Rajesh Estate and Nirman Limited by virtue of letter dated 20.12.2007. The assessee has also converted its land from industrial zone to residential use and necessary permission was also talen. All the activity speaks that the assessee was in the business activity. The assessee was maintaining the office and also the paying the salary to its employee and also incurring the other expenses such as travelling and other administrative expenses etc. The assessee temporarily letting out the premises to Broker India P. Ltd. by virtue of leave and license agreement dated 17.04.2009. The property was given on leave and licence basis till the approval of the real estate project. The memorandum and Articles of Association permits letting and leasing of property which is the business of the appellant company. The CIT(A) has relied upon the case decided by Hon’ble Apex Court titled as Chennai Properties & Investment Ltd. V. CIT (2015) 277 CTR 0185 (SC). It also came into notice that in the earlier assessment order u/s 143(3) of the Act, the revenue has accepted the rent as business income. The facts are not distinguishable at this stage also. There is no other distinguishable material on record to which it can be assumed that the income of the assessee on letting out the property falls within the purview of house property. Taking into account, all the facts and circumstances, we are of the view that the finding of the CIT(A) is quite correct and in accordance with law which is not liable to be interfere with at this appellate stage. Accordingly, these issues are being decided in favour of the assessee against the revenue.

6. In the result, the appeal filed by the revenue is hereby ordered to be dismissed.