TMI Blog2013 (12) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... or income from properties. In case, if it is found that the main intention is to exploit immovable property by way of complex commercial activities, in that event it must be held as business income - The income derived from letting out the out-fits, fixtures, furniture etc., is not chargeable under the head 'income from house property' - Decided in favour of assessee. Maintenance charges - Held that:- Following CIT v. Model Manufacturing Co. P. Ltd [1984 (12) TMI 29 - CALCUTTA High Court] - The services rendered by the assessee in providing electricity, use of lifts, supply of water, maintenance of staircases and watch and ward facilities to the tenants constituted separate activities distinct from the letting out of the property and were not incidental to such letting out. It was further held 'that the service charges realised by the assessee were not part and parcel of income derived from house property assessable under section 22 of the Act and that they were assessable under the head 'income from other sources' - Decided in favour of assessee. Professional charges - Held that:- The CIT (A) on its part has not discussed the facts of the case in detail for deleting the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cond issue raised by the assessee (supra) is not maintainable for the assessment year 2006- 07 since the assessee itself in its written submission before the CIT (A) conceded that "8. The maintenance activity has been outsourced to Embassy Services Limited, income in respect of which has accrued from the following year." [Source: Page 26 of PB AR for AY 2006-07]. Accordingly, the issue raised by the assessee is not adjudicated as the same does not arise for assessment year 2006-07. 5. We shall now proceed to deal with the issues raised by the assessee for both the assessment years, chronologically, as under: 5.1. Briefly stated, the facts of the issues are that the assessee is engaged in the business of real estate development. It had developed an Industrial Park in the name of 'Kirloskar Business Park' and during the previous year relevant to the AY 2006-07, a portion of the building was let out to Columbia Asia Hospitals Private Limited. In addition to letting out of buildings in the industrial park, the assessee also undertook to provide various amenities and services to tenants such as maintenance of roads and among others fit outs comprising of furniture, plant and machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the head 'income from house property', as (i) fit outs are inextricable part of the premises let out to tenants; (ii) fit outs cannot be regarded as stock-in-trade of the assessee; and (iii) since rent from property is accepted as income falling under the head 'income from house property', rent from outfits cannot be treated as 'business income'. Whether maintenance charges are taxable under the head 'house property'? 5.3.2. With regard to taxability of maintenance charges, the CIT (A) had held that (i) the assessee had entered into an agreement for maintenance of the industrial park with M/s. Embassy Management consultants P. Ltd., (ii) the assessee collects maintenance charges at cost + 15% as property management fee and pays 12% of project management fees to the property manager, (iii) the assessee is not engaged in providing services mentioned in the lease deed; (iv) maintenance charges to the extent of 3% is earned as owner of the house property and, thus, according to the CIT (A), the maintenance charges are taxable as income from house property. 6. Aggrieved, the assessee has come up before us with the present appeals. During the course of hearing, the submissions m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r fit-outs was not separately fixed, but was a composite rent for let out of the property and fixtures, but, in the present case, rent for property and fit outs were fixed separately; (b) in that case, no rent was charged separately for letting out of furniture and fixtures; that the tenants were paying consolidated sum for the usage of both premises and facilities and there was also no demarcation of rent towards the usage of facilities whereas in the present case, rent was determined, charged and collected separately for the let out of the premises and also the facilities, respectively; (c) in that case, cost of the building had been recovered by way of receipt of interest free advances from tenants, however, such practice was not followed in the present case; (d) in that case, based on the fact that there was no separate rent for letting of fit-outs, the Hon'ble Court held that the letting was an inseparable one wherein in the instant case, rent for fit-outs was fixed separately and rental income from the premises and fit-outs was agreed to be taxable under the heads, 'income from house property' and 'income from business' respectively; (e) in that case, the Hon'ble High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 'income from other sources', if it is not taxable under the head 'profit and gains of business. It was, therefore, asserted that the income from maintenance charges are to be taxed under the head 'profits and gains of business' and not under the head 'income from house property'. 6.2. On the other hand, the learned DR had justified the stand of the authorities below in treating the rents received for the buildings and out-fits as income from 'house property'. For the above proposition, he had placed strong reliance on the judgment of the Hon'ble Bombay High Court in the case of CIT v. J.K. Investor (Bom) Ltd (2012) 48 (1) ITC 2 186 [Bom-HC] and the findings of the Hon'ble Hyderabad Tribunal in the case of CIT v. G Raghuram (2010) 134 TTJ (Hyd) 87. With regard to deduction u/s 80-1A (4)(iii) was concerned, the learned DR asserted that the CIT (A) had not discussed this issue at all, although this issue was raised by the assessee. It was, however, submitted without prejudice that this issue may be remanded back to the CIT (A) for consideration regarding eligibility of deduction u/s 80-1A(4)(iii) of the Act. 7. We have carefully considered the rival submissions, perused the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs etc. The observation of the learned Assessing Officer and the CIT (A) that the fit outs form an integral part of the structure owned by the assessee and hence the rental income from these fit outs is to be treated as income from house property is without merit. Rent is separately fixed for fit outs given on rent. The amount of rent for the let out buildings is fixed based on various factors such as extent of area (in sq.ft, sq.metr etc) let out, location of the building - whether located in an area proximate to civic amenities and facilities, type of construction etc. However, rent for the let out of fit outs are fixed based on other factors such as type of fit out provided, its estimated useful life, the probable maintenance cost of fit outs on account of wear and tear, replacement etc. There was an increment in rent from building in subsequent years. However, there was no such increment in the fit out rent. Fit outs have a shorter useful life than that of the building or superstructure. They are also susceptible to accelerated wear and tear, liable for replacement on account of changes in trends in office decorum etc. On account of the above differences in the inherent nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ads. In other words, the income that should be attributed to the property as such alone should be assessed under section 22. In view of the above discussion, we have no hesitation in holding that the composite rent received by the assessee could be split up...." (ii) CIT v. Sri S Mohan Kumar (HUF) - (2011) 201 Taxman 161 (Kar): The substantial question of law raised before the Hon'ble Court was that - "(1) Whether the Tribunal was justified in holding that the rental income received by the assessee's from letting out the building together with furniture, fixtures and equipment should be bifurcated under the two heads: (a) 'Income from house property'; (b) "income from Other Sources" Insofar as the income from furniture, fixtures and equipment is concerned not the entire rental income under the heading of 'income from house property' the income is to be assessed as income from house property." Referring the cases of (i) CIT v. Shambhu Investment (P) Ltd (2001) 249 ITR 47 (Cal); (ii) Sultan Bros (P) Ltd v. CIT (1964) 51 ITR 353 (SC); (iii) Tarapore Co v. CIT (2003) 259 ITR 389 (Mad) and also analyzing the provisions of sections 22,23,27,56 of the Act, the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gains of business or profession'. Clause (iii) also provides that "where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or profession". Therefore, the intention of the legislature is explicit. If the machinery, plant and furniture are not separate from the letting of the said machinery, the income from such machinery, plant along with the income from the building, the income is chargeable to income-tax under the head of 'Income from other sources', if it does not fall under "profits and gains of business or profession". Therefore, under no circumstance the income from letting out the furniture and fixture becomes chargeable to income-tax under the head of 'Income from house property'. (iii) In the case of CIT v. M/s. Velankani Information Systems Pvt. Ltd others in ITA NO.273/2012 C/W, I.T.A.Nos.274/2012, 275/2012, 276/20122, 374/2011 375/2011 dated 2.4.2013, the issue before the Hon'ble Jurisdictional High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be chargeable to income-tax under the head 'income from other sources', if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Sub-section (2) of section 56 specifically states that the incomes shall be chargeable to income-tax under the head 'income from other sources.' Clause (ii) of section 56(2) provides that income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head 'profit and gains of business or profession.' Clause (iii) also provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head 'profits and gains of business or profession'. Therefore, the intention of the Legislature is explicit. The provision is clear i.e., if the letting of the building, plant, machinery and furniture is inseparable, the income from such letting should ordinarily fall within the head 'profits and gains of business or profession' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at under normal circumstances, the maintenance charges should have been considered as income from business on the premise that the appellant - landlord had undertaken to deliver the services of lift, security, providing water, electricity, clearing etc., which requires constant and organized activity to keep it busy and active on day-to-day basis and such has to be treated as income from business [refer: Para 6.2 on page 8 of CIT (A)'s order]. However, in conclusion, the CIT (A) justified the AO's stand in treating the same as income from house property on ground that the assessee was not engaged in any business activity to provide the services mentioned in the lease deed, but the earning of income on maintenance of the buildings from the tenants is as owner of the house property. 7.2.1. However, we find force in the argument of the assessee that the income from maintenance charges was on account of maintenance services provided by it. As rightly explained by the assessee, the annual value of buildings and land appurtenant thereto does not include the amounts charged for amenities provided by the assessee. It is also factual that the obligation of providing, maintaining the servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the order held that 'the facts and circumstances brought on record by the assessing authorities and the learned counsel indicate that the intention of the assessee for rendering the same as income from other sources ought not to have been disturbed as in earlier years.' Hence, the receipt on letting of it is to be taxed under the head 'income from other sources' on the basis of the Tribunal in the earlier year and also on the basis of the principle of consistency...." 7.2.2 In view of the judicial pronouncements on a similar issue as discussed (supra), we are of the opinion that the authorities below were not justified in treating the income from maintenance charges as 'income from house property'. It is ordered accordingly. 8. We shall now proceed to dispose off the Revenue's Appeal: ITA No.685/Bang/2011 (Departmental Appeal) AY 2007-08 8.1 In this appeal, the Revenue has raised ten grounds. Ground Nos. 1, 9 10 are general in nature and no specific adjudication is called for, hence, these grounds are rejected. Ground Nos.2, 3 4 relate to the issue whether the CIT (A) is justified in allowing, as business expenditure a sum of Rs.1,76,50,000 being the professional cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -05 no disallowance had been made by the Assessing Officer. So far as (ii) is concerned, it is allowable as business expenditure. So far (ii) is concerned, such being part of 12% collected from tenants towards maintenance charges as per the terms and conditions of Deed cited supra, is also an allowable expenditure. Hence the addition is deleted." 8.2.1 The Revenue, being aggrieved, is in appeal before us. 8.2.2 The learned DR submitted that the CIT (A) has erred in granting relief to the assessee without appreciating the fact that the professional charges have been incurred for the maintenance of the property let out by the assessee. It was submitted that the rental income received was assessed as income from the house properties and as such these expenses are not to be allowed as business expenditure. 8.2.3 The learned AR on the other hand supported the findings of the CIT (A). 8.2.4 We have heard the rival submissions and perused the material on record. No reason was given by the Assessing Officer in making the impugned additions. The CIT (A) on its part has not discussed the facts of the case in detail for deleting the additions made by the Assessing Officer. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st house rent paid to the Trust (some of the Trustees were the Directors of the assessee company). The relevant observations of the Assessing Officer for disallowance of the said sum reads as follows: "11. Disallowances in Busienss Income: 11.1 The assessee has shown an expense of Rs.15,60,000 being paid as guest house rent to the trust related to the Director. During the course of hearing, the necessity of the same was asked and the contention of the assessee is not accepted. Hence, the amount of Rs.15,60,000 is disallowed u/s 40A(2) of the Income Tax Act, 1961". 8.4.1 The CIT (A) deleted the addition by holding that the guest house is used for the business of the assessee and hence the expenditure incurred on the same is to be allowed as a deduction. The findings of the CIT (A) reads as follows. "9. Issue No.5 Rent paid to Guest House - Rs.15,60,000 - Ground No.3 of A.Y. 2007-08. During the year Company has paid a sum of Rs.15,60,000/- towards guest house rent and TDS on same is deducted. The guest house is used for business purpose and hence allowable. Addition is deleted" 8.4.2 Aggrieved, the Revenue is in appeal before us. 8.4.3 The learned DR submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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