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2016 (9) TMI 386 - ITAT HYDERABAD

2016 (9) TMI 386 - ITAT HYDERABAD - TMI - Rental income - income from house property or business income - Held that:- The important is the intention of the assessee whether the asset was used to earn the rental income or the intention was to exploit the property for commercial purpose. In the given case, assessee had leased out the property only to be used for the purpose of IT & ITES business purpose. Moreover, there is a condition from the GoWB that it has to be leased out only to the IT & I .....

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Commissioner of Income-tax(A) - V, Hyderabad, both, dated 01/11/2011 for AYs 2007-08 and 2008-09. As common issue is involved in both the appeals, they are clubbed and heard together and, therefore, a common order is passed for the sake of convenience. 2. To dispose of these appeals, we refer to the facts from AY 2007-08 being ITA No. 355/Hyd/12. 3. Briefly the facts of the case are that the assessee company is a special purpose vehicle of L&T Infocity ltd. for development of custom built fa .....

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e rentals. Although the articles of association of the company indicated that it was in the business of development and operation of industrial park/software technology parks, however, the Assessing Officer noticed that during the year the company only received lease rent from M/s HDPI Limited to whom it had given its building on lease for 9 years. The background is that a land of 3.542 acres was allotted to the assessee by West Bengal Electronic Industry Development Corporation for a period of .....

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he assessee submitted as under: The issue of classification of Income has been a subject matter of extensive litigation and is a very contentious issue. In the case of Sultan Brothers Pvt.Ltd. v.CIT[1964] 51 ITR 353, 354 and in Universal Plast Ltd. v. CIT [1999-] 237 ITR 454,459 [the principle formulated by the apex court is as under: "Whether a particular letting is business, has to be decided in the circumstances of each case. Each case has to be looked at from a businessman's point o .....

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ditions for use of land have been laid down in the land lease document and LTIIL can not have any other intention different from that of the Government. Thus, the foundation of the business is the 'bouquet' of infrastructure facilities needed for carrying out IT/ITES business activity. It is a systematic and sophisticated business activity through which assessee supports business function of its customers. It is a contemporaneous commercial activity wherein the assessee has to keep itsel .....

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ned whether the assessee intended to use the asset as a business asset or otherwise during the relevant period. The yield of income by a commercial asset is the profit of a business irrespective of the manner in which the asset is exploited by the owner of the business. Further the nature of property as per records of Municipal Corporation is also 'Commercial Property Assessee submitted a plethora of judicial precedents which have held in cases similar to that of assessee company, that where .....

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ssessment Year 1996-1997). PFH Malland Retail Management Ltd. Vs. ITO [2008J 110 ITO 337 (Kol) • In Commissioner of Income-tax Vs. Halai Memon Association [2000J 243 ITR 439 (Mad) Balaji Enterprises Vs. Commissioner of Income-tax [1997] 225 ITR 471 (Kar.) 3.3 The AO gave the following reasons for treating the rental income shown by the assessee as the income from house property : i. There is a single tenant occupying the building for whom the construction has been made and the tenancy is fo .....

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construction which enable interpretation of the construction as business activity. v. The tenant has deducted tax at source under section 194I. vi. The Company is a Special Purpose Vehicle of L & T. Infocity Limited for construction of a stand alone building that could be rented out; albeit for I.T. purposes. vii. In this connection, reliance is placed on the decisions of the jurisdictional Tribunal. in the case of B. Rama Chandra Reddy in ITA No. 171/Hyd/2006 dated 25.01.2008 and also the .....

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Veerabhadra Industries (1999) 240 ITR 5. Reliance is also placed on the decision of the Hon'ble Supreme Court of India in the case of CIT Vs. Shambhu Investments Pvt. Ltd. reported in (2001) 263 ITR 143. 3.4 AO further observed as below: i. The Government of West Bengal entered into an agreement with the assessee company through the Information Technology Department, Government of West Bengal for the, development of 1,80,000 sq.ft. of building with respect to back office processing / call ce .....

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ects of its incorporation are to promote, setup, etc. infrastructure projects as the present one. However, it is not the memorandum of association which determines the head of the income earned under the Income Tax Act. Rather, it is the nature and extent of actual activities being carried out which determine whether the assessee had conducted any business during the financial year or not. v. The building it has made is for a specific I.T. industry and cannot be used for any other purpose. As pe .....

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ng facilities through chilling plants. It has provided sewerage treatment and disposal arrangements along with water facilities. Telephone and internet cable has also been provided apart from software industry friendly building construction, corridors and room layout plans. The assessee stated that it has also provided security systems and DG sets back up. The assessee has emphasized that the above facilities are completely required in IT. related infrastructure project and therefore, its income .....

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ons. These are not 'facilities' provided by the assessee. The assessee has only provided a DG generator. Assessee does not operate or maintained it. He has provided cabling for telephone connections. Assessee does not maintain or operate such services. 3.5 AO further observed that as per the Memorandum of Understanding between the assessee and the Government of West Bengal, Clause B(v), is reproduced as under: "(v)LTIL is a company possessing a wide experience and is a pioneer in es .....

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is clear that it has never been the intention of the Govt. of West Bengal that the assessee should carryon any business in the building. Read with further clauses of the MOU will make the intent of the entire MOU very clear. "1. LTIL agrees to undertake the construction of GPC at the Site in the time frame and upon and subject to the terms land conditions set out in Part A of the Schedule hereto so as to enable HDPI to establish and operate a GPC at the Site. 2. HDPI agrees to lease the GPC .....

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enter into a contract and does not create an obligation at law and is not and will not become legally binding on the parties. Instead this MOU is intended to provide a means for the parties to set out and understand their respective intentions and expectations with regards to the Project. Accordingly neither party shall be under any obligation to the other to reach any formal, binding agreement or to enter into any contract or commitment in connection with the Project. 5. Each part will bear its .....

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olutely clear that the Govt. of West Bengal wanted HOPI to run its business of back office processing operations. For this end, a land of 3.5 acres was sub leased to the assessee for building an office complex specifically for the requirements of concerns like HDPI. Once this building has been constructed along with DG sets it has been completely handed over to HDPI with no day to day activity being carried out by the assessee. The business in this building is being carried on by the HDPI, the t .....

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, for a back Office process call centre for HDPI (the "Project") in accordance with the specifications and requirements of HDPI." 3.8 The rental agreement between HDPI and the assessee is as below: "1. HDPI is to enter into a lease with LTIL for the lease of the GPC at the Site, the terms of which lease are to include the following terms: (a) Term - Minimum term of 9 year, with a lock-in of 6 years, from the date the GPC is ready for occupation. (b) Deposit - Interest free, r .....

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ion services, if levied by the Government of India. If the service tax is levied, this would increase the month rental by INR 1.80 per square foot. - Following the expiration of the Initial Term, LTIL is entitled to increase the rent payable land the security deposit by 18 % for the next 3 year of the let (a "Subsequent Term") and thereafter shall be entitled to incase the rent payable- security deposit by 18% of the then rental at the end of each such Subsequent Term. - First rental p .....

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that either of the aforementioned 'completion' dates aren't adhered to othenvise than by reason of a 'force majeure' event, including but not limited to political turmoil or any external hindrances to the smooth implementation of construction activities, then: LTIL will pay HDPI a sum byway of liquidated damages equivalent to one day's rent for lone day's delay for the duration of the term of any such delay (being the period commencing on the contracted 'completio .....

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ll as assign it any time during the term of the lease (with the prior approval of IT Department, Government of West Bengal). (j) Signage - HDPI to be have unfettered signage rights at the GPC" AO concluded that it is very clear that the entire agreement is for a rental agreement with no provision for any services whatsoever. The assessee has received a 12 months lease rental 21.75 per sq. ft. along with provisions for increase in lease rental over the years. HDPI is to be responsible for pa .....

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assessee has constructed the building as per certain specifications which include providing a 2000KV A Gen set and has handed over the same to HDPI. It is further noticed that the tenant HDPI has deducted tax at Source u/s 194-I of the I. T. Act and the entire construction has been done with the purpose of letting it out to HDPI. 3.9 In view of the above observations, the AO held that the claim of the assessee for taxing the rental income under the head "business income" is rejected an .....

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orandum of Association. Accordingly, he confirmed the action of the AO. 6. Aggrieved, the assessee is in appeal before us. 7. Assessee has raised five grounds of appeal, out of which assessee has pressed only ground Nos. 1 & 2, which are as follows: 1) For that on the facts and in the circumstances of the case, the CIT (A) erred in law and on facts in upholding the order passed by the Assessing Officer assessing the income derived by the appellant from leasing of an 1. T. Park under the head .....

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al expertise and experience which the appellant possessed in the field of development of IT Infrastructural projects. Accordingly, ground Nos. 3, 4 & 5 are dismissed as not pressed. 8. The ld. AR of the assessee submitted before us that the revenue authorities failed to appreciate that leasing of the IT infrastructure developed by the assessee was one of the mode in which the assessee exploited its core business expertise and therefore the income derived from such commercial exploitation sho .....

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ld. AR further submitted that the land has been allotted to LTIIL by the Government of West Bengal for the purpose of setting up an IT facility - to promote its policy of development of IT industry in the state for generation of employment and attract investments. Hence it is a commercial business activity undertaken by LTIlL to build and operate the IT facility at the instance of the Government of West Bengal. There is no permission from the Government to take up any activity on the land other .....

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an be more than one lessee only from IT or ITES companies. 8.2 The ld. AR submitted that as stipulated in the Memorandum of Association of the company, the main objects for which LTIlL was incorporated were to carry on the business of "To promote, set up, construct, develop, build, own, lease, sell, transfer, operate, manage, service, upgrade, and for maintain Information Technology Parks, Telecommunication, Engineering and Consultancy Parks, Cities, Complexes, Infrastructure projects, Soft .....

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8.3 Ld. AR submitted that developing, operating and maintaining an IT facility has been clearly regarded as business activity under many of the sections of Income tax Act like 80IA, 80IAB etc and the deductions are allowed from the business income. Hence the buildings of LTIlL are purely commercial assets meant to augment the purposes of commerce and industry and not meant for residential purposes and the company does not possess absolute rights to use the property as per its own discretion. Th .....

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dated 28/06/12. 10. Considered the submissions of the parties and perused the material facts on record as well as the decisions cited. The AO treated the rental income received by the assessee under the head income from house property as against the assessee s claim of business income for taxing purposes, on the ground that providing the complex on lease, the assessee did not carry out any activity which would constitute a business. According to the assessee, it was carrying out business and the .....

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uestion, we would like to recapitulate some seminal features of the present case. The Memorandum of Association of the appellant-company which is placed on record mentions main objects as well as incidental or ancillary objects in clause III. (A) and (B) respectively. The main object of the appellant company is to acquire and hold the properties known as Chennai House and Firhavin Estate both in Chennai and to let out those properties as well as make advances upon the security of lands and build .....

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7; 244030 was filed for the assessment year in question that is assessment year 1983-1984 and the entire income was through letting out of the aforesaid two properties namely, Chennai House and Firhavin Estate . Thus, there is no other income of the assessee except the income from letting out of these two properties. We have to decide the issue keeping in mind the aforesaid aspects. With this background, we first refer to the judgment of this Court in East India Housing and Land Development Trus .....

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or consideration was: whether the rental income that is received was to be treated as income from the house property or the income from the business. This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that the character of that income which was .....

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ee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mi .....

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mputation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under, another head. Thereafter, the Court pointed out that the deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to in .....

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a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned. After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house p .....

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cumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: - We think each 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. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on wi .....

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sent case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as 'income from the house property'. We, accordingly, allow this appeal and set aside the judgment of the High Court and restore that of the Income Tax Appellate Tribunal. No orders as to costs. 10.2 Even as per the MoU of the assesse .....

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