2017 (12) TMI 1894 - AT - Income Tax

Correct head of income - rental receipts - Business Receipts or Income from House Property - HELD THAT - As decided in own case 2017 (11) TMI 369 - ITAT MUMBAI we find that the facts of the present case are identical in nature since the main objective of the assessee company was to deal in real estate of varied nature and the rental income was the main source of income for the assessee. Our view is further fortified by the cited CBDT circular No. 16/2017 and judgment of this Tribunal rendered in the case of assessee s sister concern under identical situation. Even otherwise the revenue has accepted the stand of assessee in several other years and rule of consistency demands that similar stand be taken under identical circumstances. Therefore we conclude that rental income earned by the assessee was chargeable under the head Business Income only as against Income from House Property taken by lower authorities. Interest received on account of advances to sister concerns - Income from Other Sources OR Business Income - HELD THAT - We find that the identical issue has already been decided by the Hon ble ITAT in assessee s own case 2017 (11) TMI 369 - ITAT MUMBAI granted partial relief to the assessee by holding that rental income was assessable under the head Business Income. Since we have already restored the identical issue in earlier years to the file of Ld. AO taking the same stand this issue is also remitted back to the file of Ld. AO with similar directions. Interest on fixed deposits with bank and interest on corpus deposit - HELD THAT - As in 2017 (11) TMI 369 - ITAT MUMBAI identical worded grounds has been raised. The revenue is aggrieved by the stand of Ld. CIT (A) that certain interest income earned by the assessee on advances and FDRs was assessable under the head Business Income as against Income from other sources taken by Ld. AO. Since we have restored the issue of interest in all other appeals to the file of Ld. AO the same is also restored back to the file of Ld. AO to re-adjudicate the same in the light of our decision in this appeal. Computation of income and set off business loss - We find that CIT (A) has rightly directed the AO to compute the income and allow the set off of business loss if any as per law.

Summary

The core legal questions considered in this appeal are as follows:

1. Whether rental receipts received by the assessee for allowing use of property constitute business receipts or income from house property, considering the nature of the activity carried out by the assessee.

2. Whether reliance on precedents treating similar receipts under the head 'Income from House Property' is appropriate in the facts of the present case.

3. Whether the facts of cited precedents involving deductions under section 80IA(4)(iii) are distinguishable from the present case and thus affect the classification of rental income.

4. Whether amenities and specifications of the leased building justify treating rental income as business income when the commercial exploitation is by the tenant.

5. Whether interest income on advances to sister concerns constitutes business income or income from other sources, given that the assessee is not engaged in financing business.

6. Whether interest on fixed deposits and corpus deposits bears a sufficient nexus with the business to be treated as business receipts.

7. Whether unabsorbed depreciation can be set off against income when rental income is treated as business income instead of income from house property.

8. General challenge to the appellate order and prayer for restoration of the assessment officer's order.

Issue-wise Detailed Analysis:

Issues 1 to 4: Classification of Rental Receipts

The legal framework revolves around the classification of income under the Income Tax Act, particularly the distinction between 'Income from House Property' and 'Income from Business or Profession'. The Supreme Court's decision in Chennai Properties & Investments Limited is pivotal, holding that if the main objective of an assessee is earning income by leasing properties and such leasing is the principal source of income, the income should be treated as business income.

The Court examined the Memorandum of Association of the assessee, which explicitly includes acquisition, development, leasing, and maintenance of various types of properties as its main objects. The rental income was the sole source of income as per financial statements.

The Tribunal relied heavily on the principle that systematic activity and business objective are critical to classify rental receipts as business income. It distinguished the present facts from precedents cited by the revenue, such as CIT vs. Runwal Developers Pvt. Ltd., where business conducting fees and facility charges were treated as rent and taxable under house property income. Similarly, the case of Krishna Land Developers Pvt. Ltd., involving deduction eligibility under section 80IA(4)(iii), was found factually distinguishable.

The Tribunal also noted that amenities and specifications of the building, though provided by the assessee, do not negate the fact that the commercial exploitation is by tenants, which is consistent with business activity of leasing.

Consistency was emphasized, as the revenue had accepted the assessee's classification of rental income as business income in prior years, and the principle of consistency was invoked to uphold the same treatment. The CBDT Circular No. 16/2017 and earlier Tribunal decisions in the assessee's own case reinforced this stance.

Conclusively, the Tribunal affirmed the appellate authority's decision that rental income is rightly taxable under the head Business Income, not Income from House Property.

Issue 5: Interest Income on Advances to Sister Concerns

The question was whether interest income on advances to sister concerns should be treated as business income or income from other sources, given the assessee is not engaged in financing business.

The Tribunal reviewed prior decisions in the assessee's own case, particularly ITA No. 1992/M/13 for AY 2009-10, where similar issues were adjudicated. The appellate authority had partially allowed the claim, disallowing interest on interest-free advances but otherwise treating interest income as business income.

The Tribunal remitted the issue back to the Assessing Officer for fresh adjudication consistent with the prior decisions, thereby allowing the ground raised by the revenue for statistical purposes. This indicates the need for detailed factual examination to determine the nexus of interest income with business activity.

Issue 6: Interest on Fixed Deposits and Corpus Deposits

The legal question was whether interest earned on fixed deposits and corpus deposits has an immediate nexus with the assessee's business to be treated as business income.

The Tribunal noted that this issue had been previously decided in favor of the assessee in earlier years (ITA Nos. 2745/M/13 & 2748/M/13). Following the principle of consistency and prior precedents, the matter was remitted to the Assessing Officer to re-adjudicate in light of the prior decisions.

This approach suggests that interest income on such deposits may be treated as business income if a sufficient nexus with business operations is established, otherwise as income from other sources.

Issue 7: Set Off of Unabsorbed Depreciation

The revenue challenged the direction to allow set off of unabsorbed depreciation against income classified as business income rather than income from house property.

The Tribunal upheld the appellate authority's direction, emphasizing that no new facts or contrary judgments were presented to overturn the finding. The direction to allow set off of business loss and unabsorbed depreciation as per law was considered judicious and well reasoned.

Issue 8: General Ground

This ground was general in nature and did not require specific adjudication.

Significant Holdings:

Regarding the classification of rental income, the Tribunal held:

"If the main objective of the assessee was to make earning by leasing of property and the leasing was the main source of income, then lease income earned by the assessee shall be taxed under the head 'business and profession'."

Further, the Tribunal stated:

"The facts of the present case are identical in nature since the main objective of the assessee company was to deal in real estate of varied nature and the rental income was the main source of income for the assessee."

On interest income from advances and fixed deposits, the Tribunal emphasized the need for factual determination of nexus with business and remitted the issues to the Assessing Officer for fresh consideration consistent with prior decisions.

On set off of unabsorbed depreciation, the Tribunal confirmed the appellate authority's direction to allow such set off against business income.

In conclusion, the Tribunal dismissed the revenue's appeal on classification of rental income and set off of depreciation, while allowing the appeal on interest income issues for statistical purposes, remitting them for fresh adjudication.