ITO 10(1)-1, MUMBAI V. KHANDELWAL ESTATE P. LTD, MUMBAI

ITA 2692/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75480 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 30-01-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 07-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S J SINGH
• Keywords: Business income; Depreciation; Business expenditure

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ./I.T.A. NO.2692/M/2010 ( / ASSESSMENT YEAR: 2003 - 2004 ) ITO - 10(1) - 1, R.NO.455, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. / VS. M/S. KHANDELWAL ESTATE P. LTD., 159, CST ROAD, KALINA, SANTACRUZ (E), MUMBAI - 98. ./ PAN : AAACK 2613 E ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI S.J. SINGH, DR / RESPONDENT BY : SHRI NARESH JAIN / DATE OF HEARING : 30.1.2014 / DATE OF PRONOUNCEMENT : 0 7 .2.2014 / O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL IS FILED BY THE REVENUE ON 7.4.2010 IS AGAINST THE ORDER OF THE CIT (A) - 21, MUMBAI DATED 25.1.2010 FOR THE ASSESSMENT YEAR 2003 - 2004. 2. IN THIS APPEAL, REVENUE RAISED THE FOLLOWING GROUNDS WHICH READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN HOLDING THAT THE RENT OF RS. 1,38,48,179/ - RECEIVED FROM SHOPPERS STOP LTD AND MOVIE TIMES WAS ASSESSEES INCOME FROM BUSINESS AND NOT INCOME FROM HOUSE PROPERTY AS ASSESSED BY THE AO WITHOUT APPRECIATING THAT ASSESSEE WAS NEITHER ENGAGED IN ANY BUSINESS ACTIVITY NOR HANDED OVER ANY RUNNING BUSINESS TO ITS TENANT BUT WAS SIMPLY RECEIVED RENT FROM ITS TENANTS FOR THE PORTION OF BUILDING LET OUT OF WHICH ASSESSEE WAS TH E OWNER. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD CIT (A) ERRED IN DIRECTING TO ALLOW THE ENTIRE CLAIM OF DEPRECIATION ON BUILDING BY HOLDING THAT THE RENTAL INCOME WAS INCOME FROM BUSINESS AND NOT INCOME FROM HOUSE PR OPERTIES AS ASSESSED IN THE ASSESSMENT ORDER. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD CIT (A) ERRED IN DELETING THE DISALLOWANCE OF EXPENSES INCURRED WITHOUT APPRECIATING THAT THE ASSESSEE WAS NOT ENGAGED IN ANY BUSIN ESS ACTIVITY BUT HAD SIMPLY LET OUT THE HOUSE PROPERTY. 2 3. IN THIS CASE THE BRIEF FACTS ARE DISCUSSED IN PARA 2.1 OF THE IMPUGNED ORDER WHICH READ AS UNDER: 2.1. THE FACTS OF THE CASE WERE THAT DURING THE YEAR, THE ASSESSEE CONSTRUCTED MULTI - STOREYED BU ILDING CONSISTING OF BASEMENT, LOWER GROUND FLOOR (STORAGE), UPPER GROUND FLOOR AND SIX UPPER FLOORS, FACING LINKING ROAD AND LOWER GROUND FLOOR (STORAGE), UPPER GROUND FLOOR AND THREE UPPER FLOORS FACING S.V. ROAD. THE ASSESSEE COMPANY LET OUT THE UPPER G ROUND FLOOR TO 5 TH FLOOR OF LINKING ROAD FACING ARE TO M/S. SHOPPERS STOP LTD ADMEASURING 35,516 SQ FT AND 3,585 SQ FT AT 3 RD FLOOR FACING S.V. ROAD TO M/S. MOVIE TIMES. THE ASSESSEE LET OUT 42,000 SQ FT AREA OUT OF THE TOTAL AREA OF 64,976 S Q FT CONSTRUCTED IN THE BUILDING TO M/S. SHOPPERS STOP AND MOVIE TIMES AND RECEIVED RS. 1,38,48,179/ - AS A RENT. THE UNUSED PORTION OF BUI LT UP AREA REMAINED 22,475 SQ FT THE ASSESSEE ALSO RECEIVED SERVICE CHARGES OF RS. 3,15,38,208/ - FROM THE LESSEE FOR S ERVICES RENDERED. THE APPELLANT COMPANY DECLARED BOTH THE RECEIPTS I.E., RENT AND SERVICE CHARGES UNDER THE HEAD INCOME FROM BUSINESS . DURING THE ASSESSMENT PROCEEDINGS THE ASSESSEE COMPANY FILED COPIES OF AGREEMENT MADE WITH THE TENANTS FOR LEASE AS W ELL AS FOR THE AMENITIES PROVIDED. FROM THE AGREEMENTS THE AO NOTED THAT ASSESSEE GIVEN THE PART OF BUILDING TO TENANTS ENGAGED IN THEIR OWN BUSINESS OF TRADING IN CONSUMER ITEMS AND RUNNING CINEMA RESPECTIVELY IN THE PREMISES OF THE ASSESSEE COMPANY BUIL DING ON LEASE BASIS PAYING MONTHLY RENT AS PER THE LEASE AGREEMENT. FROM THIS FACT THAT AO CONCLUDED THAT ASSESSEE COMPANY WAS RECEIVING RENT FROM THE PORTION OF THE BUILDING LET OUT FROM ITS TENANTS BUT NEITHER ENGAGED IN ANY BUSINESS ACTIVITY NOR HANDED OVER ANY RUNNING BUSINESS TO ITS TENANTS. THE ASSESSEE COMPANY SIMPLY CONSTRUCTED A BUILDING ON THE PLOT OF HANDED OVER THE BARE HOUSE PROPERTY TO TENANTS ON LEASED BASIS. TH E AO ALSO NOTED THAT TENANTS MADE INTERNAL ARRANGEMENTS OF THE FURNITURE AND FIX TURES AND FITTINGS, DECORATED THE PREMISES INTERNALLY AS PER THEIR BUSINESS REQUIREMENTS. THE TENANTS WERE ALSO RESPONSIBLE TO PAY CHARGES OF INTERNAL ELECTRICITY AND WATER CONSUMED IN THE PREMISES FROM THE TIME TO TIME AS PER AGREEMENT. THIS PROVED THAT THE ASSESSEE COMPANY NEVER CARRIED OUT ANY BUSINESS ON THE PORTION OF LET OUT HOUSE PROPERTY TO M/S. SHOPPERS STOP LTD AND M/S. MOVIE TIMES AND EARNED INCOME FROM HOUSE PROPERTY. THEREFORE, THE AMOUNT OF RENT OF RS. 1,38,48,179/ - RECEIVED FROM THOSE TWO TE NANTS WAS TREATED BY AO AS INCOME FROM HOUSE PROPERTY. AS REGARDS THE RECEIPT OF RS. 3,15,38,208/ - RECEIVED AGAINST SERVICE CHARGES THE SAME WERE TREATED BY AO UNDER THE HEAD INCOME FROM BUSINESS , SINCE THOSE RECEIPTS WERE CHARGES FOR SERVICES RENDERED FO R FACILITIES AND AMENITIES PROVIDED AS PER SEPARATE AGREEMENTS MADE WITH ITS TENANTS. 3.1. AGGRIEVED WITH THE ABOVE ACTION OF THE AO, ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE TRIBUNAL. 4. DURING THE PROCEEDINGS BEFORE THE CIT (A), ASSESSEE SUBM ITTED THAT THE ENTIRE ACTIVITY OF LETTING AND RENDERING SERVICES TO THE TENANTS IS COMPLEX COMMERCIAL ACTIVITY. ASSESSEE ENGAGED IN THE BUSINESS OF CONSTRUCTION, DEVELOPMENT, SALE AND LEASE OF REAL ESTATE PROPERTIES. HE RELIED ON MEMORANDUM OF ASSOCIAT ION IN THIS REGARD. THE PROPERTY IN QUESTION WAS CONSTRUCTED AND DESIGNED TO SUITE TO COMMERCIAL ESTABLISHMENTS FOR THEIR BIG SHOWROOMS HAVING PRIME LOCATION ADVANTAGE. THE PROPERTY WAS CONSTRUCTED TO BE USEFUL FOR SHOPPING MALLS FOR RETAIL 3 CHAIN. ASSESS EE NEVER SOLD THE PROPERTY TO ANYBODY. ASSESSEE DESIRES TO EARN REGULAR INCOME BY COMMERCIAL EXPLOITATION FROM THE SAID PROPERTY. IN THE RELEVANT PERIOD, THE ASSESSEE LEASED OUT THE PROPERTIES TO RETAIL CHAINS LIKE SHOPPERS STOP, M/S. MOVIE TIMES LTD, FOR RESTAURANTS (M/S. ASIAWALK AND M/S. SHEESHA HOSPITALITY SERVICES), FOR INSURANCE BUSINESS (M/S. METLIFE INDIA INSURANCE COMPANY) AND FOR DOCTORS. BEFORE THE CIT (A), ASSESSEE ENLISTED THE LEASED SERVICES RENDERED TO THE LESSEES AS PER THE DETAILS DISCUSS ED IN PARA 2.2(C) OF THE IMPUGNED ORDER. IT IS THE CASE OF THE ASSESSEE THAT WHEN THE PROPERTY WAS COMMERCIALLY UTILIZED IN FURTHERANCE OF THE COMPANY, THE INCOME RECEIVED THEREON AS A RESULT OF THE SYSTEMATIC ACTIVITY CONSTITUTES BUSINESS INCOME AND IT IS NOT INCOME FROM HOUSE PROPERTY AS HELD BY THE AO. ASSESSEE FILED VARIOUS WRITTEN SUBMISSIONS EXPLAINING THAT THE SAID PROPERTY IS EXPLOITED COMMERCIALLY BY ORGANIZED METHOD OF EARNING INCOME. IT IS NOT A CASE OF CONSTRUCTION OF MERE GALAS AND GIVIN G THEM ON RENT. THE RENTING OF GALAS IS MUCH BIGGER COMMERCIAL ACTIVITY WHICH INVOLVES NOT ONLY LETTING OF PROPERTY, LEASING OUT OF PROPERTY TO VARIOUS CUSTOMERS BUT ALSO TO MAINTAINING THE PROPERTY SYSTEMATICALLY, MANAGE THE PROPERTY ON REGULAR BASIS, TA KING STEPS FOR SAFETY AND SECURITY OF THE CUSTOMERS VISITING THE SAID SHOPS IN THE MALL. FURTHER, PROVIDING SAFETY AND SECURITY FOR BOOSTING THE COMMERCIAL IMPORTANCE OF THE M ALL SHOULD ALSO THE COMMERCIAL DUTY OF THE ASSESSEE, THE LESSER OF THE COMMERCIAL COMPLEX THE MALL. IN SUPPORT OF THE ABOVE, ASSESSEE RELIED ON THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. NEW INDIA INDUSTRIES 201 ITR 208. FURTHER, ASSESSEE SUBMITTED THAT IT IS A MATTE R OF FACT THAT THE TAXABILITY OF INCOME ON LEASING OUT THE PROPERTIES OF THIS KIND REQUIRES TO BE DECIDED BASED ON THE FACTS OF EACH CASE. INCOME EARNED ON A COMMERCIAL EXPLOITATION OF A PROPERTY AND ON LETTING THEM OUT FOR THE PURPOSE OF ENJOYING THE REN T ARE TWO DIFFERENT ACTIVITIES AND THE DISTINCTION BETWEEN THE TWO IS VERY THIN AND THE DECISION HAS TO BE TAKEN BASED ON THE PECULIAR FACTS OF EACH CASE. ASSESSEE DISTINGUISHED THE FACTS OF THE PRESENT CASE FROM THAT OF THE JUDGMENT OF THE HONBLE SUPREM E COURT IN THE CASE OF CIT VS. SHAMBU INVESTMENT 263 ITR 143 (SC) WHICH IS RELEVANT FOR THE PROPOSITION THAT IF THE INTENTION IS TO EXPLOIT THE HOUSE PROPERTY COMMERCIALLY, IT SHOULD BE ASSESSED UNDER BUSINESS HEAD. FURTHER, ASSESSEE HEAVILY RELIED ON TH E DECISION S OF THE ITAT, CALCUTTA IN THE CASE OF PFH MALL AND RETAIL MANAGEMENT LTD 110 ITD 337 AND NARAYANA MARKET COMPLEX (21 4 TAXMANN.COM 325) (CUTTACK) VIDE ITA NO.490/CTK/2001, WHEREIN THE TRIBUNAL HELD THAT IF THE MAIN INTENTION OF LETTING OUT IS FOUN D TO BE EXPLOITATION OF THE IMMOVABLE PROPERTY BY WAY OF COMMERCIAL ACTIVITIES THEN THE RESULTANT INCOME MUST BE HELD AS BUSINESS INCOME. WHILE DECIDING THE CASE, THE TRIBUNAL HAS RELIED ON THE JUDGMENTS OF THE HONBLE SUPREME COURT IN THE CASES OF (I) NA TIONAL STORAGE PVT. LTD 66 ITR 596; (II) KARNANI PROPERTIES PVT LTD 82 ITR 547 AND ALSO CONSIDERED THE JUDGMENT IN THE CASE SHAMBU INVESTMENT PVT L TD (SUPRA). AS PER THE LD COUNSEL , THE FACTS OF THE ASSESSEES CASE ARE IDENTICAL TO THAT OF THE CASE DECIDE D BY THE ITAT, CALCUTTA IN THE CASE OF PFH MALL AND RETAIL MANAGEMENT LTD (SUPRA). ASSESSEE ALSO RELIED ON THE JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SOUMAR HOLDINGS LTD 272 ITR 341 (MAD.), WHEREIN IT WAS HELD THAT THE LETTING OU T SHOPPING MALL CONTAINING RETAIL CHAIN OF STORES, CINEMA, RESTAURANTS, AIR CONDITIONING SYSTEM, COMPLEX PARKING SYSTEM ETC CONSTITUTES BUSINESS INCOME . ASSESSEE ALSO RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ASSOCIA TED BUILDING 137 ITR 339 (BOM) FOR THE PROPOSITION THAT LETTING OUT OF AUDITORIUM ALONG WITH AIR CONDITIONING AND OTHER SERVICES WAS ASSESSABLE AS BUSINESS INCOME. IDENTICAL PROPOSITION WAS UPHELD BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF BALAJI ENTERPRISES VS. CIT 225 ITR 471 (KAR). FURTHER, ASSESSEE ALSO RELIED ON VARIOUS DECISIONS AND PARA 2.2.(K) OF THE IMPUGNED ORDER IS RELEVANT IN THIS REGARD. LD COUNSEL ALSO SUBMITTED THAT THE ASSESSEE BORROWED FUNDS TO THE TUNE OF RS. 74.22 CRS FOR INVES TMENT IN THE SAID PROPERTY FOR GENERATING COMMERCIAL VIABILITY FOR EARNING REGULAR INCOME BY SYSTEMATIC EXPLOITATION OF THE SAID PROPERTY. ASSESSEE RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SATLAJ COTTON MILLS 100 ITR 706 (SC) FOR THE PROPOSITION THAT THE ASSESSEE TAKES HUGE RISK BY FINDING THE ENTIRE PROJECT BY BORROWED FUNDS AND SUCH RISK TAKING IS A BUSINESS STRAIT AND INCOME THEREON SHOULD BE TAXABLE AS BUSINESS INCOME. CIT (A) PERUSED THE SAID SUBMISSIONS OF THE ASSESSEE AND CONCLUDED IN HIS FAVOUR. RELEVANT DISC USSION ARE GIVEN IN PARA 2.3(A) TO 2.3(M) OF THE IMPUGNED ORDER. IN THESE PARAS, THERE IS A DISCUSSION ABOUT THE FACTS RELATING TO EARNING OF RECEIPTS OF SERVICES CHARGES OF RS. 3.15 CRS TO REJECT THE OTHER LIMB OF THE RENTAL INCOME OF RS. 1.38 CRS. IN P ARA 2.3(D) OF THE IMPUGNED ORDER, THERE IS AN ANALYSIS HOW THE SERVICES AND THE RENTAL CHARGES ARE INSEPARABLE AND INTERCONNECTED. THERE IS A DISCUSSION OF THE NECESSITY OF 5 TREATING BOTH THESE CHARGES AS BUSINESS INCOME OF THE ASSESSEE. AS PER THE ASSE SSEE, THE WHOLE VENTURE OF CONSTRUCTION AND RENTING AS A MALL FROM THE STARTING OF ITS CONSTRUCTION BEING A BUSINESS ACTIVITY CONSTITUTES BUSINESS UNDERTAKING FOR THE INTEREST OF COMMERCIAL EXPLOITATION. THE FACT OF INCURRING ADVERTISEMENT AND MARKETING E XPENSES FOR ATTRACTING THE NEW TENANTS WAS ALSO MENTIONED. FINALLY, CIT (A) CONCLUDED BY MENTIONING THAT THE RENTAL RECEIPTS SHOULD BE TREATED AS BUSINESS INCOME ON PAR WITH THE SERVICES CHARGES. PARA 2.3(M) IS RELEVANT IN THIS REGARD AND THE SAME REA DS AS UNDER: 2.3(M) TAKING INTO CONSIDERATION THE ENTIRETY OF FACTS AND CIRCUMSTANCES, IT IS HELD THAT THE APPELLANT WAS ENGAGED IN A SYSTEMATIC AND REGULAR ACTIVITY OF COMMERCIALLY EXPLOITING THE ASSETS I.E., BUILDING. THE ACTIVITIES OF SPACE LET OUT TO VARIOUS TENANTS AND THE SERVICES PROVIDED TO TENANTS AND THE COMMON CUSTOMERS AND PUBLIC WERE INSEPARABLE FROM EACH OTHER. THUS, THE APPELLANT WAS ENGAGED IN A COMPLEX COMMERCIAL ACTIVITY. IT WAS NOT A CASE OF SIMPLE LET OUT OF THE PROPERTY BUT WAS A CA SE OF COMPLEX COMMERCIAL ACTIVITY. THUS, THE RENTAL INCOME EARNED BY APPELLANT WAS ALSO GENERATED AS A RESULT OF COMPLEX COMMERCIAL ACTIVITY AND WAS NOT SEPARATE FROM THE REVENUE GENERATED FROM PROVIDING OF COMMON FACILITIES / SERVICES. SINCE BOTH THE AC TIVITIES WERE INSEPARABLE, THEREFORE, THE INCOME EARNED FROM BOTH THE ACTIVITIES WERE OF A COMMON NATURE I.E., BUSINESS ACTIVITY. THE AO HIMSELF HAS ADMITTED THAT THE REVENUE GENERATED FROM THE ACTIVITY OF PROVIDING AMENITIES / FACILITIES WAS BUSINESS INC OME. IN THE FACTS AND CIRCUMSTANCES, IT IS HELD THAT THE REVENUE GENERATED FROM LETTING OUT WAS ALSO A BUSINESS INCOME EARNED ON ACCOUNT OF USE OF COMMERCIAL ASSETS BY COMMERCIAL EXPLOITATION OF THE SAME ON ACCOUNT OF SYSTEMATIC AND REGULAR ACTIVITY CARRI ED OUT. THE AO IS DIRECTED TO TREAT THE RENTAL RECEIPT AS BUSINESS INCOME AND CONSEQUENTIALLY, ALLOW THE RELATED EXPENSES, INCLUDING DEPRECIATION AS BUSINESS EXPENSES. IN THE RESULT, THIS GROUND OF APPEAL IS ALLOWED. 4.1. AGGRIEVED WITH THE ABOVE DECISI ON OF THE CIT (A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL BY RAISING THE ABOVE MENTIONED GROUNDS. 5. DURING THE PROCEEDINGS BEFORE US, LD DR MADE VARIOUS ARGUMENTS AND SOME OF THEM ARE (I) THE EXISTENCE OF TWO AGREEMENTS SEPARATING THE SERVICES (II) ANY INCOME ATTACHED TO THE BUILDING SHOULD BE BROUGHT TO TAX UNDER THE HEAD INCOME FROM HOUSE PROPERTY; (III) LD DR RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF EAST INDIA HOUSING AND LAND DEVELOPMENT TRUST LTD VS. CIT [1961] 42 ITR 49 (SC) FOR THE PROPOSITION THAT INCOME DERIVED FROM SHOPS AND STALLS IS THE INCOME RECEIVED FROM PROPERTY AND FALLS UNDER THE HEAD INCOME FROM HOUSE PROPERTY. HE AGREED TO THE ASSESSEES REBUTTAL THAT THE SAID JUDGMENT DOES NOT INDICATE THE CORE ASPEC T OF COMMERCIAL EXPLOITATION OF PROPERTY WITH SYSTEMATIC BUSINESS OPERATIONS. FURTHER, LD DR RELIED ON THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF BATRA GULATI HOTELS VS. ITO [2010] 40 SOT 406 (MUM) FOR A LIMITED 6 PURPOSE BUT EVENTUALLY THE SAID JUDGME NT IS IN FAVOUR OF THE ASSESSEE. IT IS THE SUBMISSION OF THE LD DR THAT THE INCOME EARNED ON LEASING OUT OF THE ESTABLISHMENTS IN THE MALL IS TAXABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. 6. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE HEAVILY RE LIED ON THE ORDER OF THE CIT (A) AND REITERATED THE SUBMISSIONS MADE BEFORE HIM. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE PAPERS / COPIES OF THE JUDGMENTS FILED BEFORE US. THE LIMITED ISSUE FOR ADJ UDICATION BEFORE US IS THE PROPER HEAD OF INCOME FOR TAXING THE RENTAL INCOME EARNED BY THE ASSESSEE IN RESPECT OF THE COMMERCIAL COMPLEX IN THE FORM OF MALL CONSTRUCTED AND LEASED BY THE ASSESSEE TO VARIOUS LESSEES. THERE IS NO DISPUTE ABOUT THE TAXABILIT Y OF THE INCOME EARNED ON PROVIDING OF CERTAIN SERVICES AND THEY ARE TAXED BY THE REVENUE AS TAXABLE INCOME UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS OR PROFESSION. THE CASE OF THE REVENUE IS THAT SUCH LEASED INCOME FROM COMMERCIAL COMPLEX / MALL I S TAXABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF EAST INDIA HOUSING AND LAND DEVELOPMENT TRUST LTD (SUPRA). THIS JUDGMENT IS DELIVERED IN THE CONTEXT OF RENTING OUT THE SHOPS AND THE STALLS UNDER THE OLD INCOME TAX ACT, 1922 , WHEN THERE IS NO ASPECT OF LEASING OF THE SHOPPING MALLS AND THE SERVICES WHICH ARE INSEPARABLY LINKED. WHEREAS, THE CASE OF THE ASSESSEE IS THAT THE SAID LEASED INCOME IS TAXABLE AS BUSINESS INCOME ON PAR WITH THE OTHER INCOME RECEIVED OUT OF RENDERING OF VARIOUS SERVICES VIDE SEPARATE AGREEMENT. IN THIS REGARD, WE HAVE PERUSED THE LEGAL PROPOSITION AVAILABLE AS ON DATE AND SOME OF THEM ARE REPRODUCED AS UNDER: DECISION OF THE ITAT, MUMBAI IN THE CASE OF GESCO CORPORATION LTD. VS. ACIT CONCLUSION: - WHERE ASSESSEE OPERATED BUSINESS CENTERS AND COMMERCIAL COMPLEXES AND PROVIDED SPACE AND VARIOUS SERVICES, INCOME FROM SUCH ACTIVITIES CONSTITUTED BUSINESS AND NOT INCOME FROM HOUSE PROPERTY AND CONSEQUENTLY ASS ESSEE IS ENTITLED TO DEPRECIATION IN RESPECT OF SUCH ASSETS AND DEDUCTION OF ADMINISTRATION EXPENSES. 15. THEREFORE, IN OUR VIEW, THE ISSUE INVOLVED IN THE PRESENT APPEALS IS ESSENTIALLY A QUESTION OF FACT AND ONCE THIS QUESTION IS ANSWERED, THE APPLICATIO N OF APPROPRIATE LEGAL PRINCIPLES SHOULD NOT PRESENT MUCH DIFFICULTY. WE FIND CONSIDERABLE STRENGTH IN 7 THE SUBMISSION OF THE ASSESSEE THAT FACTS IN ITS CASE WERE DISTINGUISHABLE FROM THOSE IN THE CASE OF SHAMBHU INVESTMENT (P.) LTD. (SUPRA). SEPARATE AGREE MENTS FOR PROVISION OF SERVICES AND AMENITIES CLEARLY SPELL OUT INTENTION TO RENDER COMMERCIAL SERVICES TO THE OCCUPIERS. FURTHER, ADVANCE RECEIVED FOR THE HIRING OF SERVICES FOR A PERIOD OF 12 MONTHS WAS A NORMAL COMMERCIAL ARRANGEMENT AND BORE NO RELATIO NSHIP WITH THE COST OF THE PROPERTY. FURTHER THE FACTUM OF THE SERVICES RENDERED AND THE FACILITIES PROVIDED TO THE OCCUPIERS WAS NOT IN DISPUTE AT ALL. AGREEMENT FOR HIRING OUT THE SPACE AND AGREEMENTS FOR THE SERVICES AND THE FACILITIES WERE INEXTRICABLY LINKED WITH SIMILAR TENURES . IT IS CLEARLY DISCERNIBLE FOR THESE AGREEMENTS THAT THE PARTIES ENTERED INTO THE ARRANGEMENT WITH THE ASSESSEE WITH THE INTENTION OF USING THE BUNDLED SERVICES AND AMENITIES. ASSESSEE WAS GIVING SPACE WITH SERVICES AND FACILIT IES WHICH WERE VARIED AND WIDE AND SUCH ACTIVITIES TOGETHER WOULD DEFINITELY CONSTITUTE AN ORGANIZED STRUCTURE FOR MAKING PROFITS, AND WOULD NECESSARILY CONSTITUTE A BUSINESS . THUS, IN OUR VIEW THE ASSESSEE HAD CREATED A COMMERCIAL INFRASTRUCTURE AND THE S ERVICES RENDERED WERE COMPLEX COMMERCIAL/BUSINESS ACTIVITY. AS AFORESAID A PERUSAL OF THE AGREEMENTS AND THE STIPULATIONS CONTAINED THEREIN WOULD NOT LEAVE ANY DOUBT ABOUT THE COMMERCIAL CHARACTER OF THE RELATIONSHIP BETWEEN THE PARTIES AS DISTINGUISHED FR OM THAT MERELY OF A LANDLORD AND HIS TENANT . OCCUPATION OF SPACE WAS INSEPARABLE FROM THE PROVISION OF SERVICES AND AMENITIES. IN FACT, THE UNDISPUTED FACTS ON RECORD DO DEMONSTRATE THAT ASSESSEE WAS A PROPERTY MANAGER RATHER THAN A PASSIVE OWNER OF THE PR OPERTY. THE RESPONSIBILITIES ENTRUSTED TO THE OUTSOURCED AGENCY, EXTRACTED HEREUNDER FROM PAGES 151 AND 152 OF THE PAPER BOOK, BRING OUT THIS FACET OF THE CASE. DECISION IN THE CASE OF PFH MALL & RETAIL MANAGEMENT LTD VS. ITO [207] 112 TTJ (KOL) 523 CONCLUSION: - UNDER THE AGREEMENT, WHERE THE ASSESSEE HAD CONTRACTUAL OBLIGATION FOR PR OVIDING SERVICES TO CUSTOMERS ( THE USERS OF SHOPPING MALLS / BUSINESS CENTRES) LIKE ELECTRICITY, TELEPHONE, WATCH AND WARD ETC AND THE USERS HAD NO RIGHT OF OCCUPANCY AND HAD THE RIGHT OF LIMITED ACCESSS TO USE THE SPACE FOR PURPOSE O F THEIR BUSINESS AND THAT TOO IN RESPECT OF CERTAIN ACTIVITIES DURING THE SPECIFIC HOURS OF THE DAY ONLY AND THE KEYS OF THE PREMISES WERE KEPT BY THE ASSESSEE , ALL THESE ACTIVITIES WERE IN TH E NATURE OF COMMERCIAL ACTIVITIES AND INCOME DERIVED BY ASSESSEE FROM SHOPPING MALLS / BUSINESS CENTRE WAS ASSESSABLE AS BUSINESS INCOME AND NOT AS INCOME FROM HOUSE PROPERTY . DECISION OF THE ITAT CUTTACK BENCH IN THE CASE OF NARAYAH MARKET COMPLEX VS. ITO [2012] 21 TAXMANN.COM 325 (CUTTACK) 5. I HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, I FIND THAT THE CASE LAWS CITED AT THE BAR AND CONSIDERED BY THE ASSESSING OFFICER AND THE LEARNED CIT(A) RATHER LEANS IN FAVOUR OF THE ASSESSEE ON THE BASIS OF FACTS AND CIRCUMSTANCES OF THE CASE AS HAVE BEEN BROUGHT ON RECORD. IT APPEARS THE ENDEAVOR OF THE TAXING AUTHORITIES TO REFUSE THE ASSESSEE'S CLAIM OF R ENDERING INCOME FROM BUSINESS ACTIVITIES BY HOLDING THE ANNUAL LETTING OUT VALUE SUBJECT TO DEDUCTION UNDER THE PROVISIONS OF SECTION 24(B). THE ASSESSING OFFICER HAS RATHER MISDIRECTED HIMSELF TO HOLD THE CASE LAWS CITED BY HIM LEANING IN FAVOUR OF THE DE PARTMENT WHEN ACTUALLY THE DEPARTMENT'S APPEAL HAD BEEN DISMISSED BY THE HON'BLE APEX COURT ON THE FINDING AS WAS THAT THE PARTNERS POOLED THEIR RESOURCES FOR CARRYING ON AN ADVENTURE IN THE NATURE OF TRADE AND SUBJECTED TO HIRING OUT THE COMPLEX. THIS PAR TICULAR VENTURE OR CONCERN WAS CONSIDERED TAXABLE AS BUSINESS INCOME WAS HELD BY THE HON'BLE APEX COURT IN THE CASE OF SAMBHU INVESTMENT (P.) ( SUPRA ). HERE AGAIN THE HON'BLE APEX COURT DISTINGUISHED THE METHOD OF FINDING OUT THE INTENTION OF THE INCOME WHETHER BEING TAXED AS INCOME FROM HOUSE PROPERTY OR COMMERCIAL 8 ACTIVITIES WAS MISCONSTRUED BY THE LEARNED CIT(A) ON EXTRANEOUS CIRCUMSTANCES THAT THE ASSESSEE ITSELF COULD NOT HAVE UTILISED THE PROPERTY FOR ITS OWN COMMERCIAL VENTURE WHEN THE MANUFACTURING UNIT HAD BEEN SHIFTED TO MANCHESWAR INDUSTRIAL ESTATE AREA. I AM OF THE CONSIDERED VIEW THAT THIS OBSERVATION OF THE LEARNED CIT(A) RATHER LEANS IN F AVOUR OF THE ASSESSEE'S CLAIM THAT THE BANK TOOK COGNIZANCE OF THE COMMERCIAL VIABILITY OF THIS PROJECT TO GRANT LOAN WHICH PARTNERS POOLED THEIR RESOURCES TO REPAY THE LOAN AND LET OUT THE PROPERTY TO THE COMMERCIAL ORGANIZATIONS FOR EARNING INCOME AGAINS T WHICH INCIDENTAL EXPENSES INCURRED FOR CARRYING OUT SUCH ACTIVITIES WERE DENIED. THE DEPRECIATION AND INTEREST THEREFORE BECOMES AN INTEGRAL PART FOR EARNING THE INCOME CANNOT BE LOST SIGHT OFF WHEN THERE IS SPECIFIC PROVISION FOR CLAIMING THE SAME FROM THE HOUSE PROPERTY . IT IS NOT THE CASE OF THE ASSESSEE TO CLAIM HIGHER DEPRECIATION THAT WHAT IS ALLOWABLE BY LAW. IT IS ALSO NOT THE CLAIM OF THE ASSESSEE TO MAKE PROFIT IN THE FORM OF INCOME FROM BUSINESS BY EARNING MORE INTEREST THAN WHAT HAS BEEN PAID TO THE BANK. THE ASSESSEE'S CONTENTION THEREFORE BECOMES CLEAR INSOFAR AS IT RENDERED ITS INCOME, RESIDUAL TO RECEIPTS FROM THE LESSEES ON ACCOUNT OF ELECTRICITY, WATER CHARGES ETC., WHICH ARE THE BUSINESS ACTIVITIES FROM THE ASSESSEE TO CHARGE FOR THEIR P ORTION AND INCUR THE REMAINING FOR ITSELF ALONG WITH THE MAINTENANCE AND PROVIDING SECURITY WAS IN THE NATURE OF CARRYING OUT COMMERCIAL ACTIVITIES AND NOT FOR THE PURPOSE OF LETTING IT OUT AS HOUSE PROPERTY. ON PERUSAL OF THE ASSESSMENT ORDER AND THE APPE LLATE ORDER, I AM OF THE CONSIDERED VIEW THAT ONCE THE ADOPTION FOR TAXING THE SAME AS INCOME FROM HOUSE PROPERTY WAS MADE THE VARIOUS FACTS AND CIRCUMSTANCES LEADING TO THE INTENTION OF EXPLOITING THE PROPERTY AS COMMERCIAL ACTI VITIES HAS BEEN GIVEN A GO BY BOTH THE AUTHORITIES. THE LEARNED DR'S EMPHASIS ON OBTAINING THE LEASE AGREEMENT WOULD BE OF NO AVAIL TO ESTABLISH THE INTENTION OF EARNING OF INCOME AND NOT ON THE BASIS OF PAYMENT OF LEASE RENT AS THEY THEMSELVES ARE BUSINESS ENTITIES. IT IS NOT THE C ASE OF THE ASSESSING OFFICER THAT THE ANNUAL LETTING VALUE WILL DIFFER FOR THE PURPOSE OF DETERMINING THE INCOME FROM HOUSE PROPERTY AS PROVIDED UNDER LAW. FOR THE REASONS DISCUSSED ABOVE, THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW ARE SET ASIDE WITH A D IRECTION TO THE ASSESSING OFFICER TO ACCEPT THE RETURN OF THE ASSESSEE HOLDING THE SAME AS INCOME FROM BUSINESS AND NOT INCOME FROM HOUSE PROPERTY. 8. WE HAVE ALSO PERUSED THE JUDGMENT OF THE HONBLE SUPREME COURT RELIED UPON BY THE LD DR IN THE CASE OF EAST INDIA HOUSING AND LAND DEVELOPMENT TRUST LTD (SUPRA). IN THIS REGARD, LD COUNSEL FOR THE ASSESSEE FILED WRITTEN SUBMISSIONS AND MENTIONED THAT THE SAID JUDGMENT OF THE APEX COURT (SUPRA) WAS CONSIDERED BY THE ITAT WHILE ADJUDICATING THE ISSUE IN THE CASE OF GESCO CORP (P) LTD (SUPRA) AND DISTINGUISHES THE SAME. PARA 8 FROM THE SAID PAPERS ARE RELEVANT IN THIS REGARD WHICH READS AS UNDER: 8. THE DEPARTMENTAL REPRESENTATIVE HAS HEAVILY RELIED ON HONBLE SC DECISION IN THE CASE OF EAST INDIA HOUSING TR UST LTD, 42 ITR 49. IN THIS CASE, RENTAL INCOME FROM SHOPS AND STALLS WAS HELD TO BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IN THIS CASE, ASSESSEE ARGUED THAT ITS MAIN OBJECTIVE AS PER MEMORANDUM OF ASSOCIATION IS OF EARNING RENT BY LETTIN G OUT HOUSE PROPERTY. SO, ASSESSEE ARGUED THAT RENTAL INCOME SHOULD BE ASSESSED UNDER BUSINESS HEAD. APEX COURT HELD THAT JUST BECAUSE MAIN OBJECT CLAUSE OF BUSINESS CONTAINS PUTTING PROPERTY ON LEASE SHALL NOT MAKE RENTAL INCOME AS BUSINESS INCOME. A SSESSEE IN THIS CASE NEITHER ARGUED NOR MADE A CASE THAT SHOPPING COMPLEX LEASED OUT WAS COMMERCIALLY EXPLOITED BY IT AND THAT CONTENTION NEITHER RAISED NOR EXAMINED BY THE APEX COURT. SUPREME COURT HELD THAT MAIN OBJECT OF THE COMPANY CANNOT SUPERSEDE TH E TAX PROVISIONS CONTAINED IN THE INCOME TAX ACT, 1961. 9 VARIOUS COURTS SUBSEQUENTLY SETTLED THE LEGAL POSITION IN THE CASE OF HOUSE PROPERTY THAT IF THE SAME IS COMMERCIALLY EXPLOITED, IT SHOULD BE ASSESSED UNDER THE BUSINESS HEAD ELSE SHOULD BE ASSESSED UNDER INCOME FROM HOUSE PROPERTY. IN THE CASE OF EAST INDIA HOUSING LTD WHETHER SHOPPING COMPLEX WAS COMMERCIALLY EXPLOITED OR NOT WAS NEVER AN ISSUE AGITATED OR ARGUED. IT MAY BE NOTED THAT THE CASE BELONGS TO ASSESSMENT YEAR 1953 - 54 AND AT THAT TIME SHOPPING COMPLEX WAS SIMPLE AND LANDLORD USED TO EARN RENT JUST AS OWNER OF PROPERTY AND NOT BECAUSE OF ITS COMMERCIAL EXPLOITATION . I T MAY BE NOTED IN THE ABOVE CASE THAT THERE WAS NO ELEMENT OF SERVICE CHARGES AND ONLY RENT WAS CHARGED. SERVICES RENDERED WERE INCIDENTAL TO LEASING AND WERE OF SIMPLE NATURE. THIS CASE IS NOT APPLICABLE IN THE CASE OF RESPONDENT WHO IS OWNING AND MAINTAINING A MALL. IT MAY BE NOTED THAT WHEREAS RENTA L INCOME CHARGED WAS RS. 1.38 CRS WHEREAS SERVICE CHARGES WERE 3.15 CRS IN THE YEAR UNDER APPEAL. THE MAGNITUDE OF THE SERVICES IS TOO HIGH AS WELL AS INTERLINKED WITH LEASING OF SHOPS. IN THE CASE OF GESCO CORP (P) LTD (SUPRA), ITAT HAS CONSIDERED THE C ASE OF EAST INDIA HOUSING LTD AND DISTINGUISHES THE SAME. PLEASE REFER PARA 7 OF THE DECISION IN PAGE NO.5 OF THE LEGAL PAPER BOOK. AFTER CONSIDERING THE EAST INDIA HOUSING (SC) (SUPRA), ITAT MUMBAI HELD THAT RENTAL INCOME AND SERVICE CHARGES IN THIS CAS E IS TO BE ASSESSED UNDER BUSINESS HEAD AS ASSESSEE WAS ENGAGED IN COMMERCIAL EXPLOITATION OF PROPERTY. 9. FROM T HE ABOVE CITED JUDGMENTS, IT IS A CLEARLY SETTLED POSITION THAT WHERE THE ASSESSEE IS ENGAGED IN THE BUSINESS OF COMMERCIAL COMPLEX AND COMMER CIAL EXPLOITATION OF THE PROPERTY, THE INCOME EARNED FROM SUCH ACTIVITIES CONSTITUTES BUSINESS INCOME OF THE ASSESSEE. THE SEPARATE AGREEMENT MADE PROVIDING SERVICES AND AMENITIES CLEARLY SHOWS THE INDICATION TO RENDER COMMERCIAL SERVICES TO THE TENANTS . THE AGREEMENT FOR HIRING AND AGREEMENT FOR THE SERVICES AND THE FACILITIES WERE INEXTRICABLY LINKED WITH SIMILAR TENURES. GIVING SPACE WITH SERVICES AND FACILITIES WHICH WERE VARIED AND WIDE AND SUCH ACTIVITIES TOGETHER WOULD DEFINITELY CONSTITUTE AN OR GANIZED STRUCTURE FOR MAKING PROFITS, AND WOULD NECESSARILY CONSTITUTE A BUSINESS AND THE RELATIONSHIP BETWEEN THE PARTIES AS DISTINGUISHED FROM THAT MERELY OF A LANDLORD AND HIS TENANT. OCCUPATION OF SPACE WAS INSEPARABLE FROM THE PROVISION OF SERVICES AN D AMENITIES AS HELD BY THE ITAT IN THE CASE OF GESCO CORP (P) LTD (SUPRA). FURTHER, PROVIDING AMENITIES LIKE ELECTRICITY, TELEPHONE, WATCH AND WARD ETC ARE THE SERVICES RENDERED BY THE ASSESSEE RESULT OF ITS ACTIVITIES CARRIED ON CONTINUOUSLY IN AN ORGANI ZED MANNER WITH A SET PURPOS E AND WITH A VIEW TO EARN PROF IT. HENCE, ALL THE ACTIVITIES WHICH ARE SUBJECT MATTERS OF BOTH THE AGREEMENTS ENTERED INTO BY THE ASSSESSEE FOR RENDERING OF SERVICES AND LETTING OF THE OFFICE SPACE ARE IN THE NATURE OF COMMERCIA L ACTIVITIES AND INCOME DERIVED BY ASSESSEE FROM SHOPPING MALLS / BUSINESS CENTRE WAS ASSESSABLE AS BUSINESS INCOME AND NOT AS INCOME FROM HOUSE PROPERTY AS HELD BY THE ITAT , CALCUTTA IN THE CASE OF PFH 10 MALL & RETAIL MANAGEMENT LTD (SUPRA) AND THE SAME VIEW WAS TAKEN BY THE ITAT CUTTACK ALSO IN THE CASE OF NARAYAH MARKET COMPLEX (SUPRA). REGARDING THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF EAST INDIA HOUSING TRUST LTD (SUPRA), THE ISSUE OF WHETHE R SHOPPING COMPLEX WAS COMMERCIALLY EXPLOITED OR NOT WAS NOT AN ISSUE, WHICH IS THE MAIN ISSUE IN THE INSTANT APPEAL. FURTHER, THERE IS NO ELEMENT OF SERVICE CHARGES AND ONLY RENT WAS CHARGED IN THAT CASE WHICH IS DIFFERENT FROM THAT OF THE PRESENT CASE, WHERE THE MAGNITUDE OF THE SERVICES IS VERY HIGH AND THEY ARE CONNECTED WITH LEASING OF SHOPS. THEREFORE, THE SAID CASE RELIED UPON BY THE REVENUE IS DISTINGUISHABLE TO THE FACTS OF THE APPEAL UNDER CONSIDERATION. CONSIDERING THE ABOVE SETTLED POSITION, WE ARE OF THE OPINION THAT THE BOTH THE RENTAL AND SERVICE CHARGES ARE INSEPARABLE AND THEY SHOULD BE TREATED AS BUSINESS INCOME AND NOT AS INCOME FROM THE HOUSE PROPERTY AS HELD BY THE AO. THEREFORE, THE DECISION OF THE CIT (A) IN ALLOWING THE ASSESS EES CLAIM OF DEPRECIATION ON BUILDING BY HOLDING THAT THE RENTAL INCOME WAS INCOME FROM BUSINESS IS FAIR AND REASONABLE AND IT DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, GROUND NO.1 IS DISMISSED. GROUND NO.2 AND 3 , BEING CONSEQUENTIAL IN NATURE, THE SAME ARE DISMISSED AS CONSEQUENTIAL. ACCORDINGLY, GROUNDS RAISED BY THE REVENUE ARE DISMISSED . 10. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED . ORDER PRON OUNCED IN THE OPEN COURT ON 0 7 T H FEBRUARY, 2014. S D / - S D / - (VIVEK VARMA ) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 7 . 2 .2014 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 11 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI