2023 (12) TMI 1450 - 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 - Where the Assessee has been carrying on the activity of service centre on year to year basis and the income there from has been offered to tax as business income and also accepted by the Department after detailed scrutiny the department is bound by the principles of consistency and ought to accept the same as business income in absence of any change in facts. Considering the factual matrix of the case and even the position of the assessee prior to demerger the holding company i.e. primal holdings Ltd. (PHL) was also showing the income under the head business and the same was accepted by the revenue consistently. In addition to this fact PHL was the owner of the property under consideration whereas in this case the assessee was owner up to 9th floor only and under the scheme of demerger assessee got ownership up to 9th floor only and 10th floor and annexe of Piramal Tower was not owned by the assessee. Despite the fact that in substance transaction of the assessee falls under the head income from house property still as assessee is not the owner of 9th floor and annexe same cannot be taxed under the head house property. In view of this we confirmed the decision of Ld. CIT (A) treating the same as income from business. Characterization of income - Treating Interest Income as Income from other sources or Income from Business - HELD THAT - Where the Assessee has been carrying on the activity of service centre and financing on year-to-year basis and the income there from has been offered to tax as business income and also accepted by the Department after detailed scrutiny the department is bound by the principles of consistency and ought to accept the same as business income in absence of any change in facts. We do not find any inconsistency in the order of Ld. CIT (A) while deciding the matters of the assessee and holding that the net income from interest is chargeable to tax under the head business. In these terms we are not inclined to disturb the order of Ld. CIT (A). Not allowing the claim for interest expense u/s. 24(b) - Assessee had incurred interest expense on loan borrowed by it for construction of Piramal Tower and has apportioned the interest expense on the basis of the area leased out to the total area of the tower - HELD THAT - The interest allocation made by the Assessee cannot be disturbed and thus the interest worked out by the Assessee for the purpose of section 24(b) cannot be disturbed. As regards to the question that there is double deduction of interest the Assessee would like to submit that as a general process the Assessee has apportioned the interest expense on the basis of the area leased out to the total area of the tower. Thus the Assessee claims the apportioned expense u/s. 24(b) of the Act and disallows the same under the head business income. The residual interest (i.e total interest for Piramal Tower - interest apportioned u/s. 24(b)) is claimed as an expense under the head business income. Thus to conclude there is no double deduction of the same interest being claimed by the Assessee. Interest expense u/s 24(b) to be allowed as deduction on the basis of consistency - AO in A.Y. 2005-06 2006-07 2007-08 and 2008-09 has allowed the claim of interest expense u/s. 24(b) on the basis of the same submissions made by the Assessee. Thus the AO cannot take a different view now which is already taken by him in the earlier years. Suo-moto disallowance u/s. 14A - HELD THAT - As in view of Hon ble Mumbai Tribunal s order in Assessee s own case for A.Y. 2009-10 2021 (9) TMI 1575 - ITAT MUMBAI the Assessee s contention that the suo moto disallowance made by the Assessee under Section 14A of the Act be deleted entirely in absence of any exempt income earned during various years under consideration is accepted and order of Ld. CIT(A) on this issue is sustained. Restricting the disallowance u/s. 14A to the extent of exempt income earned by the Assessee - Disallowance u/s. 14A of the Act ought to be restricted to the actual exempt income earned by the Assessee and hence the suo moto disallowance inadvertently made by the Assessee should be restricted to the tune of exempt income earned. Amendment inserted vide Finance Act 2022 is prospective in nature - As the explanation and Non-Obstante clause inserted under Section 14A of the Act vide Finance Act 2022 and would not apply retrospectively and thus the disallowance made under Section 14A of the Act liable to be deleted and order of Ld. CIT (A) is sustained on this count. Resultantly ground raised by the revenue is dismissed. Profit from sale of flats - to be treated as business income or Income from Other Sources - HELD THAT - Admittedly it is a clear position that profit from sale of flats cannot be treated as Income from Other Sources and the same should be treated as business income. However in case the same was not acceptable to the AO than at best he could have treated the same as capital gains. We find that MOA of the assessee company and the overall business model confirms the activities of the assessee. Transaction entered into by the assessee in no way can be treated as income from other sources as an alternative plea assessee offered the same under the head Capital Gains which is ultimately not in benefit of revenue. Hence transaction declared by the assessee under the head Business as analyzed and accepted by Ld. CIT (A) also is confirmed. In view of the above facts Ground raised by the revenue is dismissed. Claim of long term capital loss on sale of shares - whether the Ld. CIT (A) was justified in allowing the claim of Assessee which was not claimed by filing a revised return of Income? - HELD THAT - Relevant judicial pronouncement in favor of revenue is Goetze (India) Ltd. 2006 (3) TMI 75 - SUPREME COURT wherein it was held that before the assessing authority other than by filing of revised return assessee can t make any fresh claim as in this case instead of filing the revised return assessee simply filed a letter to claim long term capital loss on sale of shares as mentioned (supra). AO rightly denied the same but the ratio Goetze (India) Ltd. (supra) is not applicable first appellate authority and Tribunal. In view of this without commenting on the merits of the matter we confirm the decision of Ld. CIT (A) resultantly ground raised by the revenue is dismissed. Treating other receipts as Income from Business - We found force in the contentions of the assessee that when all the receipts are treated under the head business and there is no activity which can be said to be other than main object of the assessee these receipts although nomenclature as Other Receipts but are part and parcel of main business activity and consequential in nature. Hence the same is to be taxed under the head Business . Resultantly this ground of appeal of revenue is also dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

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

(ii) Whether the assessee's service centre income meets the three tests laid down in Shambhu Investments for classification as income from house property.

(iii) Whether the existence of two separate agreements for letting of premises and provision of services mandates treating service income as business income.

(iv) Whether interest income earned by the assessee should be treated as business income or income from other sources, especially when no business activity is shown during the year.

(v) Whether the claim for interest expense under section 24(b) of the Income Tax Act should be allowed based on apportionment by area or actual utilization of funds.

(vi) Whether disallowance under section 14A of the Act, including suo-moto disallowance, is sustainable in the absence of exempt income during the relevant years.

(vii) Whether the amendment to section 14A by Finance Act 2022 applies retrospectively or prospectively.

(viii) Whether profit from sale of flats can be treated as business income when no business activity exists during the year.

(ix) Whether long-term capital loss on sale of shares can be claimed during appellate proceedings despite not being claimed in the original return or revised return of income.

(x) Whether other receipts should be treated as business income when service centre income and interest income are classified as business income.

2. ISSUE-WISE DETAILED ANALYSIS

Issues (i), (ii), and (iii): Classification of Service Centre Income

Legal Framework and Precedents: The Tribunal examined the decision in Shambhu Investments Pvt. Ltd. v. CIT, where the Supreme Court held that income attached to immovable property is not necessarily income from house property; the primary object of exploitation of the property must be examined. If the property is exploited by complex commercial activities, the income should be treated as business income.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee operates two distinct businesses: leasing of premises and service centre business. The Piramal Tower comprises 10 floors, with 9 floors leased out and income assessed under house property, while the 10th floor is used for service centre business.

The service centre agreement is distinct from lease/license agreements. The service centre agreement explicitly provides various exclusive services and facilities beyond mere leasing, such as exclusive elevator use, central air-conditioning, janitorial services, dedicated telephone lines, security systems, and amenities like gym, auditorium, and restaurants. The agreement clearly states that no tenancy or leasehold rights are created.

The Tribunal noted that the assessee is not the owner of the Piramal Tower Annexe where it provides services, thus income from that cannot be treated as income from house property under section 22, which requires ownership.

The Tribunal further noted the consistency in treatment of service centre income as business income in earlier years, accepted by the Department after scrutiny.

Key Evidence and Findings: Detailed agreements, Memorandum of Association (MOA) clauses authorizing service centre business, and consistent past treatment of income were examined. The Tribunal rejected the AO's reliance on the security deposit covering the entire cost of property, finding that the deposit was only 34.68% of the apportioned cost, thus insufficient to treat income as house property.

Application of Law to Facts: Applying the tests from Shambhu Investments, the Tribunal found that the primary object was to exploit the property through complex commercial activities, thus income from the service centre is business income.

Treatment of Competing Arguments: The AO's contention that income should be house property was rejected due to lack of ownership and the nature of agreements. The Tribunal upheld the CIT(A)'s order allowing income to be treated as business income.

Conclusion: Grounds (i), (ii), and (iii) raised by the revenue were dismissed, confirming service centre income as business income.

Issue (iv): Classification of Interest Income

Legal Framework and Precedents: The Tribunal considered the assessee's financing business activity, MOA clauses permitting borrowing and lending, and prior acceptance of interest income as business income.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee systematically borrows funds and advances loans, demonstrating a financing business by conduct. The AO's reclassification of interest income as income from other sources without cogent reasons or opportunity to the assessee was found improper.

Key Evidence and Findings: Charts showing borrowing and lending activities, MOA clauses, and prior assessment orders accepting interest income as business income.

Application of Law to Facts: The Tribunal applied the principle that income from financing business is business income and upheld the CIT(A)'s order directing AO to treat interest income as business income.

Treatment of Competing Arguments: The AO's failure to demonstrate any change in facts or valid reason for reclassification was noted. Reliance on judicial precedents supporting treatment of interest income as business income was accepted.

Conclusion: Ground (iv) raised by the revenue was dismissed.

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

Legal Framework and Precedents: Section 24(b) permits deduction of interest on borrowed capital used for construction of property. The Tribunal considered prior decisions including coordinate bench rulings allowing apportionment of interest on the basis of area leased out.

Court's Interpretation and Reasoning: The Tribunal held that the apportionment of interest expense based on the ratio of leased out area to total area is a scientific and rational method, especially where the entire loan was utilized for construction initially. The AO's objection that deduction must be based on actual fund utilization during the year was rejected.

Key Evidence and Findings: Past consistent acceptance of the method by AO, absence of any evidence disproving area calculations, and no withdrawal of loan by lender.

Application of Law to Facts: The Tribunal applied the principle of consistency and found no valid reason to disturb the earlier accepted method of apportionment.

Treatment of Competing Arguments: The AO's reliance on earlier assessment orders without fresh inquiry was found insufficient to deny the claim.

Conclusion: Ground (v) was dismissed, allowing interest expense deduction as claimed.

Issues (vi), (vii), and (viii): Disallowance under Section 14A and Amendment by Finance Act 2022

Legal Framework and Precedents: Section 14A disallows expenditure incurred to earn exempt income. The Tribunal reviewed judicial precedents holding that no disallowance is permissible if no exempt income is earned. Also, the amendment by Finance Act 2022 introducing a non-obstante clause was considered.

Court's Interpretation and Reasoning: The Tribunal held that suo-moto disallowance under section 14A without exempt income is not sustainable. The amendment by Finance Act 2022 is prospective, effective from A.Y. 2022-23 onwards, and does not apply retrospectively to the years under consideration.

Key Evidence and Findings: Absence or minimal exempt income during the years, reliance on coordinate bench decisions, and authoritative judicial pronouncements including Madras High Court and Supreme Court rulings.

Application of Law to Facts: The Tribunal applied the settled legal position and held that disallowance under section 14A should be deleted or restricted to the amount of exempt income earned.

Treatment of Competing Arguments: The revenue's reliance on a Guwahati Bench decision holding retrospective application of the amendment was rejected in light of binding precedents holding prospective application.

Conclusion: Grounds (vi), (vii), and (viii) were dismissed, sustaining deletion or restriction of disallowance under section 14A.

Issue (ix): Profit from Sale of Flats

Legal Framework and Precedents: The MOA authorizes the assessee to purchase and sell properties. The Tribunal considered the nature of transactions and the business model.

Court's Interpretation and Reasoning: The Tribunal found that sale of flats is part of the assessee's business activities and cannot be treated as income from other sources. At worst, if not business income, the income could be capital gains, which is less favorable to revenue.

Key Evidence and Findings: MOA clauses and multiple sales during the year.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s order treating profit from sale of flats as business income.

Treatment of Competing Arguments: The AO's classification as income from other sources was rejected.

Conclusion: Ground (ix) was dismissed.

Issue (x): Claim of Long-Term Capital Loss on Sale of Shares

Legal Framework and Precedents: Appellate authorities have power to admit additional grounds during appeal if bona fide and supported by facts on record. The Tribunal considered Supreme Court and High Court rulings allowing such claims even if not made in the original or revised return.

Court's Interpretation and Reasoning: The Tribunal noted that the loss was inadvertently not claimed in the return but was brought to AO's notice during assessment proceedings. The AO's denial was based on a precedent restricting fresh claims before AO without revised return. However, this restriction does not apply to appellate authorities.

Key Evidence and Findings: Documentary evidence of shares held for more than 12 months and sale transactions resulting in long-term capital loss.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s order allowing the claim of long-term capital loss during appellate proceedings.

Treatment of Competing Arguments: The revenue's objection was rejected based on binding judicial precedents.

Conclusion: Ground (x) was dismissed.

Issue (xi): Treatment of Other Receipts as Business Income

Court's Interpretation and Reasoning: The Tribunal held that once income from service centre and interest income are held to be business income, other receipts connected with the main business activity are consequential and must be treated as business income.

Conclusion: This ground was dismissed as consequential to earlier findings.

3. SIGNIFICANT HOLDINGS

"Taking into account the various judicial pronouncements, it clearly appears that merely because income is attached to any immovable property, it cannot be the sole factor for assessment of such income as income from property. What has to be seen is, what is the primary object of the assessee while exploiting the property. If it is found applying such test that the main intention is letting out the property or any portion thereof, the same must be considered as rental income or income from property. In case it is found that the main intention is to exploit the immovable property by way of complex commercial activities in that event it must be held as business income."

"Undisputedly, the loan was sanctioned for construction of the entire building. 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 can be made under section 14A of the Act if no exempt income is earned during the year by the Assessee."

"The amendment inserted under Section 14A of the Act vide Finance Act 2022 is prospective in nature and applies from Assessment Year 2022-23 onwards."

"The appellate authorities have powers to admit additional grounds if raised in the course of appellate proceedings, even if not claimed in the original or revised return, provided the claim is bona fide and facts are on record."

Core principles established include:

• The primary object test governs classification of income from immovable property.
• Interest expense apportionment under section 24(b) can be based on area ratio when the entire loan was utilized for construction.
• Disallowance under section 14A is not sustainable without exempt income, and amendments to this section are prospective.
• Consistency in assessment and application of judicial precedents is critical.
• Appellate authorities have discretion to admit additional grounds during appeal.

Final determinations on issues are as follows:

• Service centre income is business income, not income from house property.
• Interest income is business income.
• Interest expense deduction under section 24(b) is allowed based on apportionment by area.
• Disallowance under section 14A is deleted or restricted to exempt income earned; amendments are prospective.
• Profit from sale of flats is business income.
• Long-term capital loss on sale of shares is allowable during appellate proceedings.
• Other receipts connected to business are business income.
• All appeals by the revenue are dismissed.