2024 (7) TMI 1648 - AT - Income Tax

Correct head of income - reclassifying income from service centre business as income from business as against income from house property - HELD THAT - We find that this issue is recurring issue which has been earlier adjudicated by the ITAT in the case of the assessee pertaining to A.Y. 2010-11 to 2014-15 by holding that income from service centre is to be assessed under the head business income. Decided against revenue. Allowing claim of interest expenses u/s 24(b) on the basis of area allocation for portion of property used for letting purpose - HELD THAT - similar issue on identical facts in the case of the assessee itself has been decided in favour of the assessee by the ITAT 2019 (9) TMI 1198 - ITAT MUMBAI wherein as clear that the AO has not pointed out any major deficiency in allocation of interest expenditure between the area used for commercial purpose and area let out. The allegation of the AO that the assessee at its own will changes the area let out is on a mere presumption. We do not find any material on record to indicate that the AO had carried out any specific enquiry to disprove assessee s claim regarding the area let out. Moreover when the allocation of interest expenditure in identical manner has been accepted by the Assessing Officer in past assessment years there is no valid reason for not accepting it in the impugned assessment year when the facts are identical. In any case of the matter the expenditure incurred by the assessee would be allowable either u/s 24(b) or u/s 36(1)(iii) of the Act. That being the case it will make no difference to the Revenue. Disallowance u/s 14A pursuance of exempt income earned during the year - assessee has made suo moto disallowance - HELD THAT - It is undisputed fact that assessee has not earned any exempt income from the investment made during the year under consideration. We find that on similar issue on the identical fact in the case of the assessee itself for A.Y. 2009-10 2019 (9) TMI 1198 - ITAT MUMBAI the ITAT Mumbai has decided the issue in favour of the assessee on the proposition that no disallowance u/s 14A r.w.r. 8D can be made in absence of any exempt income earned during the year. We further find that in the case of Pr. CIT vs Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT held that amendment inserted by Finance Act 2022 is prospective in nature and that cannot be applied retrospectively u/s 14A in case the assessee has not earned any exempt income. Since this issue is recurring issue which has been adjudicated in favour of the assessee by the ITAT in the earlier years as discussed supra in this order. Sale promotion expenses allowed u/s 37 - AO has not agreed with the submission of the assessee and stated that all the advertisements were carried out exclusively for the purpose of Thane project which was under construction at that time - CIT(A) allowed the appeal of the assessee holding that the advertisement expenses were incurred for branding / advertising the Thane project and same was not incurred for the purpose of construction contract - HELD THAT - We find that assessee has incurred such advertisement expenses as a real estate developer for promotion of its Thane project. The assessing officer has not disproved the fact that assessee has not carried out construction work in pursuance of any contract with the contractee but it has carried out the construction of Pune project on ownership basis. Looking to the above fact we consider that the observation of the assessee to apply Accounting Standard AS-7 to the case of the assessee is not justified. No infirmity in the decision of ld. CIT(A) in allowing the claim of advertisement expenditure incurred by the assessee towards promotion of its Thane project carried out during the year under consideration. Therefore we do not find any merit in the ground of appeal of the revenue and the same is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeals filed by the revenue against the orders of the CIT(A), NFAC for A.Y. 2015-16 and 2016-17 are as follows:

(i) Whether income earned from the service centre business should be classified as income from business or as income from house property, particularly in light of the precedent set by the Supreme Court in Shambhu Investments Pvt. Ltd. v. CIT and related tests established therein.

(ii) Whether the three tests laid down in Shambhu Investments Pvt. Ltd. are fulfilled by the assessee's case to treat the service centre income as income from house property.

(iii) Whether income from providing services under separate agreements from letting of premises should be taxed as business income.

(iv) Whether income from car parking and service centre should be treated as income from house property, and the consequent allowability of depreciation.

(v) Whether interest expense claimed under section 24(b) of the Income Tax Act can be allowed based on apportionment by area utilized for letting, rather than actual utilization of funds.

(vi) Whether disallowance under section 14A can be made in the absence of exempt income during the year, including suo moto disallowance.

(vii) Whether the retrospective effect of the amendment by Finance Act 2022 to section 14A applies to the assessment years under consideration.

(viii) Whether sales promotion expenses incurred for a real estate project should be allowed as revenue expenses under section 37 or treated as part of construction work-in-progress (WIP) and capitalized.

2. ISSUE-WISE DETAILED ANALYSIS

Issues (i) to (iii): Classification of Service Centre Income

Relevant Legal Framework and Precedents: The revenue relied on the Supreme Court decision in Shambhu Investments Pvt. Ltd. v. CIT, which laid down three tests to determine whether income from letting of property with furniture/equipment should be treated as income from house property or business income. The tests focus on the intention of the parties and the nature of the transaction.

Court's Interpretation and Reasoning: The CIT(A) and subsequently the Tribunal distinguished the present case from Shambhu Investments by emphasizing that the service centre income involves complex services rendered along with the provision of premises, not mere letting of property. The relationship between the assessee and the service users was held to be that of service provider and user, not landlord and tenant. The CIT(A) relied on the Supreme Court decision in Chennai Properties & Investments Ltd. v. CIT, which supports taxing such income under business income.

Key Evidence and Findings: The assessee provided extensive amenities and services beyond mere space rental, including air conditioning, furniture, housekeeping, video conferencing, secretarial and courier services, recreational facilities, and legal/tax libraries. The service centre business was consistently carried on since 2005, with prior years' assessments accepting the income as business income.

Application of Law to Facts: The Tribunal noted that the three tests from Shambhu Investments were originally framed in the context of letting furniture and equipment along with property. Here, the service agreements and nature of the relationship indicated a service contract rather than a lease. The Tribunal also observed that the assessee was owner only up to the 9th floor, while the 10th floor and annex were not owned by the assessee, further negating the application of house property income rules.

Treatment of Competing Arguments: The revenue argued that the facts were identical to Shambhu Investments and that the income should be treated as house property income. The Tribunal rejected this on the basis of factual distinctions and consistent prior acceptance of the income as business income. The revenue's reliance on older Supreme Court decisions was also found inapplicable given the changed factual matrix.

Conclusions: The Tribunal upheld the CIT(A)'s order classifying the service centre income as business income and dismissed the revenue's grounds on this issue.

Issue (iv): Treatment of Car Parking Income and Depreciation

The revenue's ground regarding car parking income was rendered infructuous as the assessee had already offered such income under house property. The Tribunal dismissed this ground accordingly.

Issue (v): Allowability of Interest Expense under Section 24(b)

Relevant Legal Framework and Precedents: Section 24(b) allows deduction of interest on borrowed capital used for acquisition, construction, repair, renewal or reconstruction of a property used for let out. The issue was whether apportionment of interest expense based on area leased versus area used for commercial purposes is permissible.

Court's Interpretation and Reasoning: The Tribunal relied on earlier decisions in the assessee's own case for prior years where the same apportionment method was accepted by the revenue. The Tribunal held that apportionment based on area is a scientific and reasonable basis when part of the building is self-occupied and part is let out. The AO had not pointed out any major deficiency in the apportionment method.

Key Evidence and Findings: The loan was sanctioned for construction of the entire building, and the assessee had consistently apportioned interest expenses based on area let out. The AO's presumption that the assessee arbitrarily changed the area let out was unsupported by evidence.

Application of Law to Facts: Since the facts remained unchanged and the apportionment method had been accepted in earlier years, the Tribunal found no reason to interfere with the CIT(A)'s order allowing the interest expense deduction.

Treatment of Competing Arguments: The revenue contended that interest expense should depend on actual utilization of funds, not mere mathematical apportionment. The Tribunal rejected this as impractical and unsupported by evidence.

Conclusions: The ground of the revenue was dismissed, allowing the interest expense claim.

Issues (vi) to (vii): Disallowance under Section 14A in Absence of Exempt Income

Relevant Legal Framework and Precedents: Section 14A read with Rule 8D provides for disallowance of expenses incurred to earn exempt income. The question was whether disallowance is permissible when no exempt income is earned during the year. The revenue also relied on a recent Guwahati Bench decision holding the 2022 amendment to section 14A retrospective.

Court's Interpretation and Reasoning: The Tribunal followed earlier ITAT decisions in the assessee's case for prior years holding that no disallowance under section 14A can be made in the absence of exempt income. The Tribunal also referred to the Delhi High Court decision holding the 2022 amendment prospective, not retrospective.

Key Evidence and Findings: It was undisputed that the assessee had not earned any exempt income during the relevant year. The CIT(A) had deleted the disallowance accordingly.

Application of Law to Facts: The Tribunal found no merit in the revenue's contention and upheld the deletion of disallowance under section 14A.

Treatment of Competing Arguments: The revenue's reliance on the Guwahati Bench decision was distinguished on the basis of the Delhi High Court ruling and the facts of the case.

Conclusions: The Tribunal dismissed the revenue's grounds on section 14A disallowance.

Issue (viii): Allowability of Sales Promotion Expenses under Section 37

Relevant Legal Framework and Precedents: Section 37 allows deduction of revenue expenses incurred wholly and exclusively for business purposes. Accounting Standard 7 (AS-7) requires contract-specific costs to be capitalized as part of construction work-in-progress. The question was whether sales promotion expenses for a real estate project should be capitalized or allowed as revenue expenses.

Court's Interpretation and Reasoning: The Tribunal held that AS-7 applies to contractors engaged in contract-construction relationships, not to real estate developers constructing on ownership basis. The expenses were incurred for branding and advertising the Thane project and were not contract-specific construction costs. The Tribunal relied on the Guidance Note on Accounting for Real Estate Transactions (Revised 2012) and judicial precedents including CIT vs Somnath Buildtech and DCIT vs Macrotech Developer Ltd. which upheld the allowability of such expenses as revenue expenditure.

Key Evidence and Findings: The assessee was not a construction contractor but a real estate developer. The expenses were incurred post-setting up of business but prior to commencement of sales, and were revenue in nature.

Application of Law to Facts: The Tribunal found that the expenses should not be capitalized and should be allowed as deductible revenue expenses under section 37.

Treatment of Competing Arguments: The revenue's reliance on AS-7 and the contention that expenses should form part of WIP was rejected as inapplicable to the assessee's business model.

Conclusions: The Tribunal upheld the CIT(A)'s order allowing the sales promotion expenses as revenue expenditure.

3. SIGNIFICANT HOLDINGS

"The income from service centre is to be taxed under the head business income and consequential deduction be granted for expenses claimed against business income. The AO is directed to reclassify the service centre income as business income and compute business income as shown in return of income."

"The three tests laid down by the Hon'ble Supreme Court in the case of Sultan Bros. Pvt. Ltd. were in the context of letting of furniture and equipment along with property on which assets were fixed. The question raised was regarding the head of income to tax such proceeds under. The three tests deal with the intention of the parties at the time of entering into an agreement. The income from such letting cannot be taxed under the house property but under the head income from other sources."

"When a part of the building is used for commercial purpose and the rest of it is let out, the interest expenditure on the loan availed for construction of building has to be apportioned between the area let out and area used for commercial purpose, as this is the most scientific basis on which the interest can be allocated."

"No disallowance under section 14A r.w.r. 8D can be made in absence of any exempt income earned during the year."

"The appellant is in the business of real estate development and dealing. The advertisement expenses incurred for branding/advertising the project are not incurred for the purpose of construction contract and hence the same cannot be capitalized. So long as the expenses are revenue in nature, the same must be allowed irrespective of whether there is turnover/revenue once the business is set up."

Final determinations on all grounds raised by the revenue were against the revenue, resulting in dismissal of both appeals. The Tribunal emphasized consistency with earlier orders, factual distinctions from precedents relied upon by revenue, and proper application of legal principles governing classification of income, apportionment of expenses, and allowability of deductions.