TMI Blog2009 (9) TMI 627X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the assessee - When the guidance note provided that revised AS-7 is applicable to real estate developers, the assessee has itself changed the method of accounting - Appeal is allowed by way of direction to AO to adopt project completion method Regarding business income or house property - As per the lease agreement, the assessee agreed to create a lease in favour of the tenant in respect of the premises, which is part of the building known as 'The Forum - The person concerned taking the property cannot use for any business except for the specified business - the assessee company is not only managing the property but is also providing common services and common area - assessee is getting composite lease rent payable for all the services under Group-I, Under Group-I, there are nine types of services - held that the rent relating to the building is to be taxed under the head 'Income from house property - In the result, the appeal is partly allowed - ITA No. 218/Bang/2009 - - - Dated:- 11-9-2009 - Member(s) : K. P. T. THANGAL., N. L. KALRA. ORDER-N.L. KALRA, A.M.: The assessee has filed an appeal against the order of learned CIT(A)-VI, Bangalore, dt. 7th Jan. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her notice under s. 142(1) on 17th Dec., 2007 and in response to that notice, the assessee filed reply vide letter dt. 19th Dec., 2007. It was submitted that the earlier submission has not been considered by the AO. Attention of the AO was drawn towards the reply filed by the assessee on 14th March, 2000 to the learned CIT in proceedings under s. 263 for the asst. yr. 1997-98. The project completion method was accepted in the asst. yr. 1997-98. Attention of the AO was drawn towards the opinion rendered by an eminent authority on the method of accounting in the implications of the completed contract method, the AS-7 after its implications in 2002 and its impact upon pure and simple contractors vis-a-vis developers who embark upon a venture of a commercial nature was given. The modified AS-7 in view of the terminology as distinct from the terminology used in the earlier AS-7 clearly implies and indicates that the new AS-7 is applicable to contractors pure and simple and not to those who embark upon the venture of a commercial nature where enterprises enter into agreements for sale. It was therefore argued that the new format AS-7 does not apply to the assessee for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ........... On the completion of the building the architect will specify architectural features, landscaping, compound wall, ornamental gates, elevation and the like which are not foreseen. The customer may also seek changes in the specifications and design of the apartment and are willing to pay extra consideration therefore which is also not foreseen in the beginning and which is not spread over. There could be cancellation of the apartment by the customer even premature, the construction being not satisfactory to them, in which case the moneys are to be refunded. Had the moneys been appropriated as profit, it will not be possible to claim the refund as a loss. In short, the correct profits can be determined only on the completion of the project and also can be appropriated by us on such completion." 3.3 The Hon'ble Karnataka High Court in the case of CIT vs. Khoday Distilleries Ltd. in ITRC Nos. 19, 20 and 21 of 1993 held that the method of accounting employed by the assessee is a matter entirely for the assessee. It may be that the method of accounting employed by the assessee would give him benefit in certain years. The law permits the assessee to so arrange his affairs as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iced that the assessee has followed percentage completion method for the asst. yr. 2006-07. The assessee company was asked as to why they have followed percentage completion method for asst. yr. 2006-07 then the assessee has stated that such method was followed because a guidance note was issued by ICAI and from that guidance note he came to know the percentage completion method is applicable and therefore, they started following the same for the financial year 2005-06. The learned AO relied on the decision of the Hon'ble apex Court in the case of J.K. Industries Ltd. vs. Union of India [(2007) 213 CTR (SC) 301-Ed.]. The AO in his assessment. order has reproduced the relevant portion of the judgment. The Hon'ble apex Court observed that adoption of Accounting Standard and of accounting income as taxable income will avoid distortion of accounting income which is the real income. The AO therefore held that percentage completion method of accounting is to be adopted. 3.6 The assessee filed an appeal before the learned CIT(A). The learned CIT(A) observed that the decision of the Supreme Court as referred by the AO is binding and as per that decision, adoption of Accounting Standard i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was made clear that the contractor may use both methods simultaneously for different contracts depending upon circumstances. Accounting Standard-7 was revised in 2002 and such revised Accounting Standard is available at pp. 9 to 28 of the paper book No. 2. As per this revised Accounting Standard, it was made clear that it will come into effect in respect of contracts entered into during the accounting period commencing on or after 1st April, 2003 and is mandatory in nature from that date. While discussing the scope of such Accounting Standard, it was mentioned that statement will be applicable in accounting for construction contracts in the financial statement of contractors. 3.8 The learned Authorised Representative thereafter drew our attention to the opinion finalised by the expert committee on 16th July, 2003. This is available at pp. 95 to 99 of Compendium of Opinions Vol. XXIII. Copy of such information is filed separately. In that case, a company was permitted as a joint sector enterprise by West Bengal Housing Board and another private sector company. Such company was engaged in the business of developing mass scale housing projects, which, inter alia, include developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he consideration that will be derived from the sale of the goods. 3.10 From the abovereferred opinion, the learned Authorised Representative argued that revised AS-7 was not applicable in the case of the assessee because the assessee was in the activity of projects and was not a construction contractor. Thereafter, the learned Authorised Representative drew our attention to the Guidance Note on Recognition of Revenue by Real Estate Developers as appeared in the journal of the Chartered Accountants, June, 2006. The guidance note recommends principles for recognition of revenue arising from real estate sales by the enterprises engaged in such activities (commonly referred as real estate developers, builders or property developers). In para 4 of such guidance note it is mentioned that once the seller has transferred all the significant risks and rewards of ownership to the buyer and other conditions for recognition of revenue specified in paras 10 and 11 of AS-10 and 11 of AS-9 are satisfied, any further acts on the real estate performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, in case the seller is obliged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Representative thereafter drew our attention to the decision of the jurisdictional High Court in the case of Khoday Distilleries Ltd. (a copy of judgment is available at pp. 123 to 133 of paper book 2). In that case, the question which was referred to the Hon'ble jurisdictional High Court was as under: "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee is following the completed contract method of accounting and in deciding that no part of the profit of Rs. 17,58,737 is assessable in the asst. yrs. 1980-81 and 1981-82 and the whole of such amount is assessable only in the asst. yr. 1982-83?" The Hon'ble jurisdictional High Court while deciding the issue observed that the Department has not made out a case to say that proviso to s. 145 is applicable. It was observed that the assessee was consistently following the method of accounting of completed contract method and that is an accepted method of accounting. 3.13 Thereafter, the learned Authorised Representative drew our attention to the decision of this Bench in the case of H.M. Constructions vs. Jt. CIT (2004) 90 TTJ (Bang) 510 : (2003) 84 ITD 429 (Bang). In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract with each buyer of the flat. The contract agreement contains the following clauses: (a) Contract of construction by which the builder agrees to undertake construction for the owner as per the plans approved by the owner with such variations and such modifications as may be required by the statutory authorities to be made to such plans or as the case may be necessitated due to construction exigencies. (b) The owner mentions the specification of construction including flooring, doors, windows, kitchen, toilets, etc. and according to his necessities and the builder i.e., the assessee company agrees to undertake such works. (c) This part of the construction amounts to 'construction contract'. The assessee also mentions in the agreement as 'contract of construction' only. Thus, the assessee can be classified as a construction contractor to whom AS-7 is applicable. There are few clauses of the agreement which specify the conditions regarding the delivery of possession of the constructed apartment/flat. There is a mention that the builder shall complete the construction of the flat and deliver the possession of the flat on or before the specified period in such circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entions that when the P L a/c and the balance sheet of the company do not comply with the Accounting Standards then such companies shall disclose in its P L a/c and balance sheet, the following, namely- (a) the deviation from the Accounting Standards; (b) the reasons for such deviation; and (c) the financial effect, if any, arising due to such deviation. Thus the Companies Act provided for the deviation from the Accounting Standard also. When the assessee company is required to follow the Accounting Standard as prescribed by ICAI, then naturally it has to take into account the replies given by the Institute for the expert committee on the queries raised by the companies. We had already pointed out that the learned Authorised Representative has filed opinion of the expert committee in respect of applicability of revised AS-7 to an enterprise undertaking construction activities on their own account as a venture of commercial nature. The appellant undertakes construction activity for those persons to whom it intends to sell the super-built area along with undivided share of land in a project which it is developing as a developer. Hence, the assessee is not a construction contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the bona fide belief that it was adopting a method of accounting, which was applicable to it as per the expert committee report. This bona fide belief is evident from the fact contained in letter dt. 3rd Sept., 2007 addressed to AO in which it was stated as under: "During the year under review, the company undertook two projects on contract. The income from said contract works is offered to tax on percentage completion method." In view of this, we do not feel that revised AS-7 can be applied in the case of the assessee. The Hon'ble Bombay High Court in the case of CIT vs. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom) had an occasion to consider the litigation by the Revenue when the only issue was as to whether the expenditure is allowable in one year or the other. The Hon'ble Bombay High Court observed as under: "We have often wondered why the IT authorities, in a matter such as this where the deduction is obviously a permissible deduction under the IT Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dt. 12th June, 2008 observed as under vide para 3.4: "3.4 The other situation may be where the assessee has not changed the method of valuation but the AO comes to the conclusion that stock has not been valued properly. In such a case, the AO changes the method of valuation of the closing stock. In the instant case, we have obtained the copy of the tax audit report. In Col. No. 12 of the tax audit report, it is mentioned that work-in-progress is a direct material cost and manufacture finished goods at prime cost (i.e. direct material and direct wages). There has been no change in the method of valuation of the stock. Under such circumstances, it is necessary to revalue the opening stock because otherwise the profits of the year. which are to be charged under s. 4 of the IT Act will get distorted. The learned senior counsel has relied on a number of judgments as mentioned in earlier paras and we agree that in case the method of valuation of closing stock is changed, then the opening stock is also to be revalued on the same basis. Hence, we accept the alternate plea of the learned counsel that for the asst. yr. 2001-02, the opening stock should also be revalued." 3.25 Hence, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any case be chargeable to tax under s. 56(2)(iii). (vi) On the facts and in the circumstances of the case and law applicable, income from Forum Mall is chargeable to tax under the head 'Profits and gains of business' and not under the head 'Income from house properly'. 4.1 During the course of assessment proceedings, the AO noticed that a loss of Rs. 2,68,59,648 has been debited. in the books of account of assessee on account of receipts from Forum Mall, Koramangala. The assessee company received rental receipt to the extent of Rs. 7,84,50,180. Such rental receipts have been treated as business income. Against such business income, the assessee claimed expenses like commission, insurance, property tax, other expenses and depreciation to the extent of Rs. 12,30,06,672. The AO noticed that the nature of business of the assessee company as reported in Form No. 3CD is builders and developers. The financial statements indicated that Forum Mall is basically an investment made by the company like the other buildings owned by the company from which the company is showing rental income. The asset under reference has no nexus to the actual business carried on by the assessee. The sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant case, the lease agreement shows the assessee as landlord and the lessee as tenant. The assessee might have the predominant intention of commercial exploitation of property at the time of construction of the Forum but in fact, the lease agreement shows it otherwise. The lease agreement of the assessee company with the parties to whom the premises were given shows the assessee as landlord. The lease deeds shows that the lease is effective for three years and it can be renewed for two terms of 3 years each on a rise of 15 per cent hire charges each time. 4.4 As per the lease agreement, deposit equivalent to 7-1/2 months rent is also to be deposited before occupation of the unit allocated to the lessee. The lessee has to pay mall promotion expenses @ Rs. 1.50 per sq. ft. of rentable area. From this, the learned CIT(A) inferred that predominant activity of the assessee is providing space to the shopkeepers on rent. For providing services of securities and amenities like lift, electricity, air-conditioning, the assessee collects the amount in advance on estimate basis and later on, it is adjusted in the subsequent month. The charges for electricity and air-conditioning expenses c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. out of which the landowner's share is 1,10,178 sq. ft. One of the groups owning 13,832 sq. ft. of land entered into an agreement to lease their property to the assessee for a rent of Rs. 22 per sq. ft. The total cost of the project is Rs. 97.49 crores. The project was capitalized on 31st March, 2004 and started its operation from 1st day of April, 2005. The tenants of the said mall are handpicked and systematically placed in suitable locations of the mall. The various facilities provided along with the shell space is broadly classified under two heads: Group I (a) 100 per cent air-conditioning; (b) 100 per cent power back up; (c) Service elevators; (d) Passenger escalators and lifts; (e) Sprinkler systems; (f) Fire detection and alarm systems; (g) Building management system; (h) CCTV systems; (i) Common toilet facilities. Group II (a) Housekeeping and security services; (b) Usage charges for air-conditioning; (c) Usage charges for back up power; (d) Parking management systems; (e) Customer care services; (f) Tenant billing systems; (g) Mall promotional activities. 4.7 The composite lease rent payable for all the services under Group-I is fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge or equipment. 12. The tenant shall not carry out any touting activities in the common area or in any other part of the building. 13. The tenant should furnish monthly sales statement by the 10th of every following month on self-declaration basis to the appellant. 14. The tenant shall not close the premises or shut down its operations for any period during business hours without the prior written permission from the landlord. 4.8 From the above terms and conditions, the learned Authorised Representative argued that the assessee is commercially exploiting the property and was doing business with the apparatus of Forum Mall. It was not a simple letting of the premises. The assessee is providing a host of services to the tenants. The assessee dictated, regulated and controlled the manner in which the tenants carried on business in the premises taken on lease. The assessee undertook various activities for promoting the mall. The assessee undertook the overall responsibility for smooth functioning of the entire mall to safeguard the interest of the visitors, customers, tenants and its own business interest and reputation. The assessee is a property manager rather than a passiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chemicals (P) Ltd. (2002) 178 CTR (Guj) 64 : (2002) 258 ITR 519 (Guj) in which the Hon'ble Gujarat High Court held that the assessee has undertaken a business venture as the figures of rent received and the rent paid by the assessee company shows such systematic activities. 4.12 The learned Authorised Representative drew our attention to the decision of the Hon'ble apex Court in the case of Karanpura Development Co. Ltd. vs. CIT (1962) 44 ITR 362 (SC) in which the Hon'ble apex Court observed that ownership of property and leasing it out may be done as part of business or it may be done as landowner. This depends upon the object with which the act is done. If an activity is undertaken with a profit motive, it will amount to a business. The Hon'ble Calcutta High Court in the case of CIT vs. Cossipore Properties (1977) 107 ITR 965 (Cal) concluded that leasing of properties amounted to a business as the assessee was commercially exploiting the asset. The learned Authorised Representative drew our attention to the decision of the jurisdictional High Court in the case of Sri Balaji Enterprises vs. CIT (1997) 140 CTR (Kar) 61 : (1997) 225 ITR 471 (Kar). In this case, the assessee was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinguished: - PFH Mall Retail Management Ltd. vs. ITO; - ITO vs. Skipper Properties (P) Ltd. (2008) 118 TTJ (Del) 111 : (2008) 4 DTR (Del)(Trib) 512 : (2008) 298 ITR 394 (Del)(AT); - Harvindarpal Mehta (HUF) vs. Dy. CIT (2009) 122 TTJ (Mumbai) 163 : (2009) 19 DTR (Mumbai)(Trib) 523; - Gesco Corporation Ltd. vs. Asstt. CIT (2009) 31 SOT 132 (Mumbai). 4.16 On the other hand, the learned Departmental Representative stated that the decision of the Hon'ble apex Court in the case of Shambhu Investment (P) Ltd. is squarely applicable in this case. The learned Departmental Representative further submitted that the amount invested in the mall has been shown in the balance sheet under the head 'Investment'. The Forum Mall is not a stock-in-trade of the assessee. It is one of the fixed assets. The assessee is enjoying the rental income by giving the shops on rent to various tenants. The agreement also refers that the agreement is between the landlord and the tenant. The learned Departmental Representative therefore stated that the lower authorities have correctly taxed the receipts from the tenants under the head 'Income from house property'. 4.17 We have heard both the parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining leases over large areas, developing them as coalfields and then sub-leasing the coal lease to collieries and other companies. The assessee was paying salami of Rs. 40 per bigha while it was realizing salami of Rs. 400 per bigha from the sublessees. In that case, the Hon'ble apex Court held that salami received from sub lessees is income from business. The Hon'ble apex Court observed at p. 377 as under: "Ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is 'Income from property', (s. 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leading them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be aid to treat them as landowner but as trader. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd letting out of the shops and stalls was in the course of investment or whether it was essentially a part of the business and trading operation of the assessee. The paramount consideration which would weigh is whether the acquisition of the property was by way of investment and whether the property was let out because of the assessee having a title in the same or whether the acquisition and letting out of the property constituted the business and trading activity of the assessee. The question as to whether the above activity is being carried on by an individual or a company, and in the latter case, the further question as to whether the carrying on of the said activity was the object of the incorporation of the company as given in the memorandum of association would also have some relevance." 4.21 In view of the abovereferred judgment of the Hon'ble apex Court, the income in respect of a portion of the building, which has been taken on lease by the assessee from the owner of the land and thereafter sub-leased, cannot be taxed under the head 'Income from house property' but is to be taxed under the head 'Income from business'. 4.22 We have gone through the memorandum of associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. Though in that case, the hotel given on rent along with furniture and fixtures, the Hon'ble apex Court held that rent in respect of building is to be taxed under the head 'Income from other sources' and the rent from letting of furniture and fixtures is also to be taxed under the head 'Income from other sources'. While holding so, the Hon'ble apex Court held that s. 12(4) of the IT Act, 1922 [which is similar to s. 56(2)(iii) of the IT Act, 1961] does not contemplate that the primary letting should be of machinery, plant or furniture, and that the letting of the building has to be incidental to the letting of the plant, machinery or furniture. The letting of a building can never be incidental to the letting of furniture contained in it, and therefore, no consideration of primary and secondary lettings arise in construing the section. In the instant case, looking to the facilities and amenities provided in the Forum Mall, it is clear that the building could not have been separately let without letting of the amenitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether the vaults were used for the purposes of business and income arising was assessable under s. 10 of the Act. The Supreme Court observed: The question which really arises in the present case is whether the assessee is carrying on any business, i.e., is it carrying on any adventure or concern in the nature of trade, commerce or manufacture? If it is carrying on any adventure or concern in the nature of trade, then s. 9 specifically excludes the income derived from property from computation under s. 9, if the property is occupied for the purpose of adventure or concern.' The High Court had held that the income had to be computed under s. 10 of the Act. The Supreme Court observed: 'The assessee not only constructed vaults of special design and special doors and electric fittings, but it also rendered other services to the vault-holders........ These vaults could only be used for the specific purpose of storing of films and other activities connected with the examination, repairs, cleaning, waxing and rewinding of the films.' It was argued before the Supreme Court that s. 10 could not be applied as the assessee could not be said to be in occupation of the premises for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances in which the transaction took place. In the instant case, the assessee has developed the Forum Mall as per development agreement and provided various amenities and facilities to use it as business asset. Terms and conditions of use of the premises also show the dominant object of the assessee is to exploit it commercially. While leasing the shop the predominant object was to have a self-contained commercial complex dealing in different brands and no two shops should have the goods of the same brand. 4.28 The Hon'ble Delhi High Court in the case of CIT vs. Super Fine Cables (P) Ltd. (1984) 41 CTR (Del) 84 : (1985) 154 ITR 532 (Del) had an occasion to consider as to whether the leasing out of factory building on land is assessable under the head 'Income from business' or 'Income from other sources'. While deciding the issue, the Hon'ble Delhi High Court observed at p. 536 as under: "Thus, in each case, what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend on certain facts peculiar to each case. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting out accommodation to Government Department for allocating facilities is to be assessed under the head 'Income from house property' or 'Business'. In that case, furniture was also made available on hire, both to the employees as well as to the Government. The Hon'ble Madhya Pradesh High Court held that income derived from letting out of accommodation is to be taxed under the head 'Income from business'. 4.31 The Revenue has heavily relied on the decision of the Hon'ble apex Court in the case of Shambhu Investment (P) Ltd. The Hon'ble apex Court was required to consider the decision of the Calcutta High Court in the case of CIT vs. Shambhu Investment (P) Ltd. (2001) 168 CTR (Cal) 237 : (2001) 249 ITR 47 (Cal). The Hon'ble Calcutta High Court noticed the fact that cost of the property was Rs. 5,42,443. A portion of the property was used by himself for his own business purpose. The assessee recovered a sum of Rs. 4,25,000 by way of security-free advance from three occupants. Thus, the entire cost of the property let out to such occupiers was already recovered by way of interest-free advance by the assessee. Therefore it was stated that it cannot be said that the assessee is expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 'Income from business' or 'Property'. 4.34 During the course of proceedings before us, the learned Authorised Representative pointed out that the assessee is getting composite lease rent payable for all the services under Group-I, Under Group-I, there are nine types of services. Considering the services, the average rent was fixed at Rs. 70 per sq. ft. Hence, the income derived from it is not from merely letting out of property. 4.35 The Hon'ble Madras High Court in the case of A.R. Complex vs. ITO (2007) 212 CTR (Mad) 328 : (2007) 292 ITR 615 (Mad) held that receipts are to be bifurcated under business income or income from other sources to ascertain the amount received for providing services. In case it is held that the income is to be taxed under the head 'Income from house property' then the entire rent received cannot be taxed under the head 'Income from house property'. It will require bifurcation. Hence, the matter will have to be reconsidered by the AO in case it is finally held that the rent relating to the building is to be taxed under the head 'Income from house property'. In that case, the AO will have to consider to disallow the depreciation only in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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