TMI Blog2021 (11) TMI 768X X X X Extracts X X X X X X X X Extracts X X X X ..... The tests to be applied are; 1) the tenure of the lease, 2) the objects of the company; 3) the intention of the company; and 4) the services provided or activities carried on by the assessee after letting out of the property. Though one of the objects of the company is to let out the properties on lease/rent, it is not clear whether the intention is to earn rental income only from the properties constructed/developed by it. On perusal of the returns of income for earlier assessment years, we find that the assessee had let out properties at Hyderabad, Mumbai Delhi, but the income from said properties is not offered during the relevant assessment year. So, whether such properties were let out since they were unsold during the relevant period and whether they were sold subsequently to which, there is no rental income during the relevant assessment year is not clear from the details filed before us. As held by the Hon'ble Bombay High Court in the case of Gundecha Builders (supra), rental income from unsold flats is to be assessed on 'income from house property'. Further, as held by the Hon'ble Courts in cases cited supra, unless the assessee is carrying on a system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;income from house property' declared by the assessee has to be treated as 'income from business'. He accordingly computed the income from business at ₹ 8,70,50,364/- and brought it to tax. 2.1. Aggrieved, the assessee preferred a appeal before the CIT(A) who allowed the same partly by following the order of ITAT in assessee's own case for the AY 2014-15 wherein ITAT has directed to treat the income from letting of flats as 'income from house property' and income from furniture fixtures as 'income from business'. Against the relief given by the CIT(A) the Revenue is in appeal before us by raising the following grounds of appeal. i. The order of the Ld. CIT(A) is erroneous on facts as well as in law. ii. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that income earned from exploitation of commercial space has to be assessed under the head 'income from House Property' instead of 'Profits and Gains of Business/Profession and had incorrectly and unjustifiably deleted the action of Ld. AO. iii. Any other ground that may be urged at the time of hearing of appeal. 2.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are allowable expenses under the head 'Income from business' and that the same was offered to tax. The Assessing Officer, however, was not convinced with the contentions of assessee and held that the assessee's main intention is to commercially exploit its properties by letting them out on rent and that the property has been given on rent along with car parking place and electricity supply amenities and the rent has been received inclusive of all the facilities. He relied upon the judgement of the Hon'ble Apex Court in the case of Sultan Brothers (P.) Ltd., Vs. CIT [51 ITR 353] (SC), Rayala Corporation (P.) Ltd., Vs. ACIT [386 ITR 500] (SC) and Chennai Properties and Investments Ltd., Vs. CIT [373 ITR 673] (SC) to hold that where the intention of assessee is to commercially exploit the property and the business of the assessee is to let out the properties, the income has to be treated as business income of the assessee. Accordingly, he brought the income declared by the assessee as income from the house property, to tax as 'business income'. 3.2. Aggrieved, assessee preferred an appeal before the CIT(A), who confirmed the order of Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e property on lease/rent. 10. The Ld. CIT(A) erred in not appreciating the fact that the case of the Appellant is covered u/s. 44AB of the Act and got his books of accounts audited by Certified Chartered Accountants and no discrepancies were identified in the Books of accounts. 11. The Ld. CIT(A) ought to have appreciated the fact that there was no change in the accounting policies or method of accounting followed by the assessee during the year under consideration when compared to earlier years. 12. The Ld. CIT(A) erred in not appreciating the fact that without there being any mistake or discrepancy noticed in the books of account, the AO has changed the head of rental income from Income from House Property to Income from Business , 13. The Assessee may add, alter or modify any other points to the grounds of appeal at any time before or at the time of hearing of the case . 4. Both the Ld. Counsel for the assessee and the Ld. DR filed detailed written submissions in support of their contentions and have placed reliance upon the relevant case law. 5. Ld. Counsel for the assessee submitted the following points in brief: i. Main object clause of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letting out of the asset has to be viewed as commercial exploitation of the assets. In this regard, we have attempted to cull the intention of the assessee while letting out the property in question. It is evident from perusal of the same that the property in question was given over for use for a period of 12 years which was renewable for a further period of 12 years as mutually agreed upon by both the parties. From such an arrangement, it does not show that the intention to let out was only for a temporary period. No doubt, the property has been put to use by the lessee also for running a restaurant business as done by the assessee, so however, the lease cannot be termed to be for a short period or temporary. What is of relevance is to cull out the intention of the assessee at the time of letting out of the property which clearly does not show that the letting out was for a temporary period. Thus, in our view, having regard to the facts and circumstances of the case, the CIT(A) was not justified in inferring that the letting out in this case was to be taken as commercial exploitation of the property. The intention was clearly to enjoy income from the letting out of the property w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 contest 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 from the house property had not altered because it was received by the company formed with the object of developing and setting up properties . 5.1 Thus, according to the Ld. Counsel for the assessee, the judgment of the Apex Court in the case of East India Housing and Dev Trust Ltd., Vs. CIT (supra) would apply to the assessee's case as facts are similar. He also placed reliance upon the judgment of the Hon'ble Supreme Court in the case of Keyaram Hotels (P.) Ltd., Vs. DCIT [63 taxmann.com 301] (SC), wherein it was held that - Where assessee was not engaged in any business activity, rental income earned from letting out of commercial complex would be assessed as income from house property and not as business income'. He also placed reliance on the decision of the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial and commercial properties. Therefore, according to him, the rental income has to be treated as 'business income of the assessee'. Ld. DR also placed reliance on the following judgments in support of his contentions: i. Rayala Corporation (P.) Ltd., Vs. ACIT [386 ITR 500] (SC), wherein it was held that - the assessee-company was engaged in the business of leasing out its house properties to earn rent, income so earned should be treated as 'business income' and not as 'income from ii. Chennai Properties and Investments Ltd., Vs. CIT [ 373 ITR 673] (SC), wherein it was held that - in terms of MOA, main object of the assessee-company was to acquire properties and earn income by letting out of the same, said income was to be brought to tax as business income and not as income from house property; 6.1. Ld. DR also submitted that assessee's reliance on the decision of the Hon'ble Supreme Court in the case of Raj Dadarkar Associates Vs. ACIT, (cited supra) is misplaced. According to him this deletion is not squarely applicable to the facts of the present case, since in the said case, the assessee has given only some properties on sub-licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with our directions, the Ld. Counsel for the assessee has filed a copy of the memorandum of association of the assessee and has also filed the copy of memorandum of association of Chennai properties Ltd. to distinguish the said case from the case of the assessee. The main objects of the assessee company as per memorandum of association are as under: 1. To carry on the business of builders, developers, real estate agents and contractors for construction or demolition work of any kind; and to purchase or otherwise acquire lands, houses, offices, workshops, buildings and premises for the purpose of that business. 2. To erect and construction roads, sewers, houses, buildings or works of every description on any land whether or not owned by the company and to demolish rebuild, enlarge, alter and improve existing plots, houses, buildings or works, to convert and appropriate any such land into and for roads and other facilities, and generally to deal with the develop the property of the company. 3. To purchase or otherwise acquire and to manufacture and deal in bricks, stone and other building materials of any kind and all implements, machinery, vehicles scaffolding an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has derived rental income from only one property i.e. Gumidelli Towers during the relevant previous year. We have verified the assessee's computation of income for the A.Ys 2010-11 to 2016-17 (filed by the assessee) and we found that the assessee has derived rental income only and there is no other source from which business income has been earned. There is 'income from other sources' such as interest income etc. Therefore, it is clear that in all the above years the assessee has not derived income from any other source except the rental income from the properties let out by the assessee. It is also noticed that from the A.Y 2010-11 onwards, the assessee has been deriving only rental income from the properties at Hyderabad, Mumbai, Delhi etc., and a perusal of lease deeds also shows that the assessee has been letting out the properties to the lessees for long period along with the furniture and fittings including the power back up and AC facility. Thus, there appears to be no other activity carried on by the assessee after initial set up of infrastructure required by the lessee. The annexure - A to the lease deeds lists out the facilities to be provided by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty'. The Tribunal had held that the assessee's income was to be treated as income from house property which was confirmed by the Hon'ble High Court and the Hon'ble Supreme Court confirmed the order of the Tribunal holding it to be income from house property. For coming to this conclusion, the Hon'ble Supreme Court has considered the factual findings of the ITAT that the assessee there in had let out the shops/stalls to various occupants on a monthly rent and collected charges for minor repairs, maintenance, water and electricity and as per the allotment letter, the assessee was bound to incur all these expenses and the assessee had collected extra money from the lessees. The ITAT also held that the assessee collected 20% of monthly rent as service charges which were used for services like providing electricity, water etc. which was inseparable from basic charges on rent. The Tribunal had held that the assessee has not established that he was engaged in any systematic or organized activities of providing services to the occupiers of the shops/stalls so as to construe the receipts from them as business income and it was held to be 'income from house proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by it. On perusal of the returns of income for earlier assessment years, we find that the assessee had let out properties at Hyderabad, Mumbai Delhi, but the income from said properties is not offered during the relevant assessment year. So, whether such properties were let out since they were unsold during the relevant period and whether they were sold subsequently to which, there is no rental income during the relevant assessment year is not clear from the details filed before us. As held by the Hon'ble Bombay High Court in the case of Gundecha Builders (supra), rental income from unsold flats is to be assessed on 'income from house property'. Further, as held by the Hon'ble Courts in cases cited supra, unless the assessee is carrying on a systematic and organized activity to exploit the property commercially, it cannot be taxed as business income. We find that except for creating the infrastructure as per the requirement of the lessee, the assessee is not providing any other service during the year as is evident from the profit and loss account of the assessee for the relevant assessment year. The only expenses claimed by the assessee are interest, salaries ..... X X X X Extracts X X X X X X X X Extracts X X X X
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