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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: SH. N. K. BILLAIYA & SH. ANUBHAV SHARMA
This appeal by the assessee is preferred against the order of the CIT(A)-9, New Delhi dated 10.09.2018 pertaining to A.Y.2014- 15. 2. The grievance of the assessee read as under :- “That on the facts & in the circumstances of the case 1. and in law, the order passed by the Ld. Commissioner of Income Tax (Appeals) [CIT(A)] is wrong and bad in law.
That the Ld. CIT (A) erred on facts and in law in holding that income of the appellant is chargeable under the head “Income from Profits and Gains of Business and Profession” as against the income offered to tax under the heacj “Income from House Property” by the appellant.
3. That the Ld. CIT(A) erred on facts and in law in confirming the disallowances of Rs. 1,66,96,674/- made by the Ld. AO u/s 4o(a)(ia) of the Income Tax Act, 1961.”
Briefly stated the facts of the case are that the assessee is a private limited company incorporated on 01.04.2008 with main objects to build, construct and develop and to act as builders colonisers and civil and constructional contractors.
The return for the year under consideration was filed on 22.12.2014 declaring income under the head income from house property on account of rent received Rs.3.64 crores on which the assessee claimed deduction of Rs.1,66,96,574/- u/s. 24(b) of the Act on account of interest paid on loan to acquire the property. However, income of the assessee is only from other sources and while computing the business profit the assessee has business expenses of Rs.2897007/- and did not claim any depreciation on the property building.
During the year under consideration the assessee has taken a loan of Rs.17.50 crores from Aditya Birla Finance Limited for the purpose of purchasing the property on which interest arose during the year at Rs.1,66,96,574/-. The AO sought clarification from the assessee why TDS was not made on the impugned interest of Rs.16696574/- to which the assessee furnished the prescribed from 26A as required as per the first proviso to section 201 (1) of the Act. The AO was not convinced with the reply and added back Rs.16696574/- u/s. 40(a)(ia) of the Act and completed the assessment.
Assessee carried the matter before the CIT(A) challenging the disallowance of interest u/s. 40(a0(ia) of the Act. The CIT(A) referring to the decision of the Hon’ble Supreme court in the case of Chennai Properties & Investments Limited proposed to treat the rental income as profit and gains of business or profession and asked the assessee to show cause why the income should not be taxed under the head profit and gains of business or profession. The assessee filed the following reply :- “5.1 The AR of the appellant submits as under: Vide letter dated 10.07.2018, the appellant submitted as under: Your Honor has relied on the ruling of Hon’ble Supreme Court in the case of Chennai Properties & Investments Limited (supra) and has proposed to treat the rental income as “Profits and Gains of Business or Profession". In the aforesaid ruling, the Hon’ble Apex Court has held that when the main objects of the company was to acquire properties and earn rental income by letting out the same, the said income was to be brought to tax as business income and not as house property.
The facts in the case of Chennai Properties (supra) were as follows: • The taxpayer was incorporated with main objective, as stated in the memorandum of association (“MOA”), to acquire the properties in the city and to let out those properties. The taxpayer had rented out such properties and the rental income received therefrom was shown as income from business. • The assessing officer took a view that the rental income received by taxpayer was to be taxed as income from house property. • The Commissioner of Income-tax (Appeals) as well as the Tribunal accepted taxpayer’s claim holding that amount in question was to be taxed as business income. • The High Court, however, restored order passed by the Learned Assessing Officer ("Ld. Ao”).
Hon’ble Supreme Court in the case of Chennai Properties (supra) held as follows:
The MOA of the taxpayer mentions that main object of the company is to acquire and hold the properties and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. It may further be noted that in the return that was filed, entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order. [Para 5] • In aforesaid circumstances, it is concluded that letting of the properties is in fact is the business of the taxpayer. The taxpayer therefore, rightly disclosed the income under the head income from business. It cannot be treated as 'income from the house property'.
It is humbly submitted that the MOA of the taxpayer in the Chennai Properties (supra) N ruling included object of letting out of properties as a main object. However, in the instant case, it is submitted that the Appellant company's main objects in the memorandum of association do not include the object of letting out the properties and earn rental income thereon. Hence, the facts of the aforesaid ruling are distinguishing and not applicable in the Appellant’s case. The memorandum of association of the company has been enclosed as Annexure 1 to this submission.
To reiterate, the appellant humbly submits that the company is the owner of the building which has been given on lease to Aditya Birla Retail Limited. The copy of lease agreement and the agreement for purchase of property has been enclosed as Annexure 2 to the submission.
In order to substantiate the taxability of rental income under the head income from house property, the appellant submits that the following three conditions are required to assess the income from house property under the head "income fromhouse property: i) That the property should consist of any building, land appurtenant hereto. ii) The assessee is the owner of such building, and iii) Such building is not occupied by the assessee for the purpose of any business or occupation.
Based on the above, the appellant humbly submits that:
The property in question is the building purchased by TGPL from Jacksons Developers Private Limited(purchase agreement attached with the submission); 2. The appellant is the owner of the building; and 3. The building is not occupied by TGPL for the purpose of any business or occupation. Instead the building is given on lease to Aditya Birla Retail Limited (lease agreement attached with the submission).”
After considering the facts and the submission the CIT(A) dismissed the contention of the assessee and drawing full support from the decision of the Hon’ble Supreme Court concluded by holding that the rent received is to be taxed under the head profit and gains of business or profession and directed the AO to compute the income in accordance with the code prescribed u/s. 28 to sec. 43D, taking into consideration the disallowance of interest expenditure under the provision of section 40(a)(ia) and compute the income accordingly and accordingly enhanced the income treating the rental income as income from business or profession. However, also directed that the interest of Rs.1,66,96,574/- has to be disallowed u/s. 40(a)(ia) of the Act.
Before us the Counsel reiterated what has been stated before the CIT(A). 9. Per contra the DR strongly supported the findings of the CIT(A) and read operative part of the order. 10. We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that the ratio laid down by the Hon’ble Supreme Court in the case of Chennai Properties and Investments 373 ITR 673 squarely apply on the facts of the case, therefore, there is no error or infirmity in the decision of the CIT(A) wherein rental income has been taxed under the head profits and gains of business or profession. Once the income has been held to be taxed under the head profits and gains of business or profession the same has to be computed as per the provision of section 28 to section 43D of the Act and to this extent also there is no infirmity in the directions of the CIT(A). However, once the assessee has filed form 26A in respect of the interest payment of Rs.1,66,96,574/- the same has to be considered in the light of the provisions of section 201 of the Act vis a vis the applicability of the provision of section 40 (a)(ia) of the Act. Accordingly the directions of the CIT(A) are modified and the AO is directed to consider the claim of expenditure in the light of the relevant provisions of the Act after making due verification from the recipients of the interest. With the above modifications the appeal of the assessee is partly allowed. 11. Decision announced in the open court on 18.01.2023.