KANAKIA GRUHNIRMAN PVT LTD,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX-10(1)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI

BEFORE SHRI VIKAS AWASTHY, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., v. DCIT – 10(1)(2) Aayakar Bhavan, M.K. Road Kanakia Future City, CTS No. 101 Behind Dr. L. H. Hiranandani Hospital Mumbai - 400020 Near Ayyappa Temple, Tirandaz Powai, Mumbai – 400076 PAN: AAACK1572C (Appellant) (Respondent)

Assessee Represented by : Shri Anuj Kisnadwala Department Represented by : Shri Rajesh Meshram

Date of Conclusion of Hearing : 23.03.2023 Date of Pronouncement : 31.05.2023 O R D E R PER S. RIFAUR RAHMAN (AM)

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 10.11.2022 for the A.Y.2013-14.

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., ₹. 91,66,360/- from M/s RBK Education Solution Pvt Ltd for letting out of school building along with complete infrastructure and amenities which has been constructed by it after acquiring the development rights from M/s. Natvar Parikh & Co, on 11.08.2006. During the construction period, a lease deed was entered into with Babubhai Kanakia Foundation at a monthly lease rent as provided in the lease deed plus taxes, electricity charges and outgoings. The said lease deed was not registered. The school building was constructed with the above referred infrastructure and amenities and the lease rent was ₹.30/- per sq. ft. per month for all the ten (10) academic years without any subsequent upward variation. The cost composition of the school is as under: -

a. Cost paid towards getting Rs.6,23,96,820/- development right. b. Cost of construction material, Rs.30,55,24,923/- labour. c. Furniture and fixture air conditions Rs.1,92,59,461/- plant Computer with printer, generation set, equipments. d. Finance cost capitalized. Rs.3,64,57,807/- e. Total Cost as per balance sheet. Rs.42,36,39,011/

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ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., assessee was asked to show cause as to why the composite rent income received under the head house property should not be brought to tax under the head other sources in view of section 56(2)(ii) of the Act.

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ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., business ₹.10,97,013/-, Demat Charges and Insurance charges of ₹.2,848/-, ₹.60,000/- respectively).

“1. The Commissioner of Income tax (Appeal) erred in law & on facts in treating the rental income of Rs. 4,16,04,080/- received from school building under the head 'Income from other sources. Appellant prays that the same should be treated as 'Income from House Property' since the primary object is to lease school building only. Accordingly, deduction on account of interest paid should be allowed u/s 24(b). 2. The learned Commissioner of Income Tax (Appeal) erred in law & on facts not allowing deduction on account of interest on loan borrowed for the purpose of school building and also depreciation on school building and other infrastructure facilities like plant & machinery, furniture. The same should be allowed as deduction against rental income u/s. 57 of the Income Tax Act, 1961. 3. The learned Commissioner of Income Tax (Appeal) erred in law & on facts in not following orders passed by the appellate authorities on similar issue in earlier years. The same should be followed & relief should be granted. 4. Appellant prays to leave, add, alter or amend any or all the grounds of appeal.” Page No. | 5

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., 10. At the time of hearing, Ld. AR of the assessee submitted that the

lease rental income received from letting out of school building along with infrastructure and other amenities should be treated as “Income

from House property”. Ld. AR brought to our notice in the A.Y. 2011-12

and 2012-13, on similar facts Assessing Officer has rejected the claim of the assessee and Ld.CIT(A) allowed the claim of the assessee by

treating the same under the head “Income from House Property” and department has agreed to the same and further appeal is not filed by

the department. Copy of the orders are placed on record. He also filed

a chart highlighting the status of the present issues in earlier assessment years and subsequent assessment years. The same is

reproduced below: -

“Chart showing status of earlier and subsequent years in respect of treatment given to rental income received by assessee:-

Treatment Treatment Sr. A.Y. given by given by Remarks No. AO CIT(A) 1. 2009-10 Income Income The Hon'ble Tribunal upheld the order passed by from other from house CIT(A) and held that rental income is to treated sources property as income from house property (Pg nos 16-18 of P.B.; par nos. 2 - 2.3). 2. 2010-11 - - Assessee offered rental income as income from house property. Accepted u/ 143(1) of the Act. 3. 2011-12 Income Income The order passed by CIT(A) was accepted by the from other from house department. No further appeal filed before sources property Hon'ble ITAT (Pg nos 28, 33-35 of P.B.; para nos 5 - 5.3). 4. 2012-13 Income Income The order passed by CIT(A) was accepted by the from other from house department. No further appeal filed before sources property Hon'ble ITAT (Pg nos 45, 47 - 53; para nos 5.2 - 5.3). Page No. | 6

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd.,

Treatment Treatment Sr. A.Y. given by given by Remarks No. AO CIT(A) 5. 2013-14 Year under appeal 6. 2014-15 Income -- Assessee offered rental income as income from from house house property. Accepted b Assessing Officer property u/s. 143(3) of the Act (Pg nos 55-56; para nos 4 and 5). 7. 2015-16 - -- Assessee offered rental income as income from house property. Accepted u/ 143(1) of the Act 8. 2016-17 - -- Assessee offered rental income as income from house property. Accepted u/ 143(1) of the Act 9. 2017-18 - -- Assessee offered rental income as income from house property. Accepted u/ 143(1) of the Act

Note: In all the above years, the assessee has offered rental income under the head 'Income from House Property'.

“5.2 During the course of appellate proceedings, the A/R has submitted as under: - "GOA 1 to 4 - Whether income from "House Property" income from Other Sources" or "Business Income" Page No. | 7

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., The grounds read as under- 1) The learned Assessing Officer erred in law & on facts in treating the rental income of Rs. 4,13,03,520/- received from school building as 'Income from other sources'. Appellant prays that the same should be treated as 'Income from house property'.. Without prejudice to above, 2) The same may be treated as 'Business Income'. 3) If the rental income is treated as 'Business Income, interest paid should be allowed u/s 36(1)(ii) of the Income Tax Act, 1961 against such business income as also depreciation on school building should be allowed u/s 32 of the IT Act, 1961. Alternatively, 4) If at all, the income is treated as 'Income from other sources. interest paid should be allowed u/s 57 of the Income Tax Act, 961 against the said 'Income from other sources as also depreciation on school building should be allowed u/s 57 of the IT Act, 1961. BACKGROUND:- 1.1) Kindly refer to the statement of facts wherein at items 1 to 14, the background of the appellant and the property under consideration is given. 1.2) Appellant had taken secured and unsecured loans for construction of the school building. During year under consideration, it paid interest of Rs. 6,91,77,945/- on secured as well as unsecured loans & claimed the same u/s 24 of the IT Act. ASSESSMENT ORDER AND SUBMISSION OF THE APPELLANT 1.3) The assessing officer is not convinced that the rental income should be treated under the head 'Income from House Property. He brought to tax the same under the head 'Income from other sources' by stating that lease deed to let out school building with infrastructure & amenities is composite & in-separable as also mentioning that the similar issue has been involved for earlier assessment years which is sub judice. Hence, a same line is adopted for this year also and the lease rental income shown at Rs.4,13,03,520/- is treated as "Income from other sources" u/s 56(2)(II). 1.4) Reasons given by the LAO and submission of the appellant against the same are as under:- Page No. | 8

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., submission of the S.No. Reasons given by the LAO Appellant A) Lease deed to let out the The issue involved in school building with assessment 2009/10 is that infrastructure and amenities the school building is was entered into for incomplete as on 31.03.2009. composite in-separable rent Correct date of possession of in respect of letting out the property seems to be school building with after 31-03-09. Hence, rent infrastructure. The assessee received for the incomplete was asked to show cause as building cannot be regarded to why the composite rent as rent for the purpose of income received under the section 22 and interest head house property should claimed against 'Income from not be brought to tax under House Property is not the head income from other allowable within the meaning sources in view of section of section 24 as the same 56(ii)(2) of the Act. The being capitalized to assessee furnished reply investment towards property. wherein it has been stated Accordingly. rental income is that if lease rental is taxable taxed under the head Income under the head other sources from Other Sources'. The said & not house property, issue has been adjudicated by depreciation is allowable as the learned Commissioner of deduction. The same was Income Tax. Appeal - 20 in verified from the details filed detail in his order for AY wherein it was found that 2009-10 and held that the depreciation was worked out rental income from school on gross value without taking building should be treated as into consideration that the 'Income from House Property assets were let out and and interest claimed against depreciation needs to be the same is allowable within worked out from the date of the meaning of section 24 of leasing. In the absence of the IT Act, 1961. Copy any such working, the claim enclosed at pages 30 to 44 of is not considered. It is also a PB. Without prejudice to fact worth mentioning here above & without admitting, that similar issue has been we state as under involved for earlier The main contention on the assessment years which is basis of which the rental sub judice. Hence, a same income I was treated as line is adopted for this year Income from other sources' also and the lease rental and interest being disallowed income. in AY 2009-10 is the The issue involved in presumption that school assessment 2009/10 is that Page No. | 9

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., submission of the S.No. Reasons given by the LAO Appellant the school building is building is incomplete. incomplete as on 31.03.2009. It can be appreciated that Correct date of possession of during the year under the property seems to be consideration the fact that after 31-03- 09. Hence, rent completed building has been received for the incomplete let out has not been disputed building cannot be regarded by the learned AO. Thus, on as rent for the purpose of consistency ground also, section 22 and interest treatment of rental income as claimed against 'Income from 'Income from other sources' House Property is not is not correct as there is a allowable within the meaning change in fact from AY 2009- of section 24 as the same 10 wherein partly completed being capitalized to building was given on rental investment towards property. basis whereas during the year Accordingly, rental income is under consideration taxed under the head completed building is 'Income from Other Sources given on rental basis. On the basis of the above, we request your honour to treat the rental income as 'Income from House Property & not 'Income from other Sources' and allow deduction of interest u/s 24 of the IT Act. Moreover, the Hon'ble Tribunal, Bench 'A' in appellant's own case in AY 2009-10 on similar issue, dismissed the departmental appeal and confirmed the order of the learned Commissioner of Income Tax, Appeal 20. Hon'ble Tribunal Held that "The evidences produced before FAA about admission of students and their report cards for 3 academic years clearly prove that school had commenced its activities in the year under consideration. We do not find

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ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., submission of the S.No. Reasons given by the LAO Appellant any legal infirmity with the order of the FAA who had held that income could not be taxed as income from other sources and that interest paid. amounting to Rs. 3,26,25,374/ had to be allowed u/s 24 of the Act. Therefore, confirming his order, we decide Gr. No. 1 and 2 against the AO" Copy of order of Hon'ble Tribunal enclosed at pages 45 to 49 of PB B) The assessee furnished a Without prejudice to reply wherein it has been submission made in para A) stated that if lease rental is above, we state as under- treated as 'Income from It can be appreciated that the Other Sources' then learned AO had never deduction of interest disputed that the loan has amounting to Rs. been utilized for the purpose 6,91,77,945/- utilized for the other than construction of purpose of construction of school building. Hence, on school building and this count interest paid on depreciation on school loan utilized for the purpose building, furniture / fixture & of construction of school plant / Machinery amounting building should be allowed to Rs. 4,15,73,739/- since the u/s 57(iii) of the IT Act. same is also incurred wholly Please refer to page no 27 of & exclusively for the purpose PB wherein appellant had of earning rental needs to be submitted detailed working of allowed u/s 57(iii). The same depreciation allowable on was verified from the details building, furniture / fixture, filed wherein it was found plant & machinery. It can be that depreciation was worked observed that all the assets out on gross value without have been put to use in AY taking into consideration that 2010-11 and depreciation is the asset were let out and allowable for that year and depreciation needs to be thereafter for AY 2011- 12 worked out from the date of onwards. For the year under leasing. In absence of such consideration, the WDV as on working, the claim is not 31/03/2011 has been carried considered. forward assuming the Page No. | 11

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., submission of the S.No. Reasons given by the LAO Appellant allowance of depreciation in AY 2010-11 & 2011-12. The contention of the learned AO that depreciation has been worked out on gross value without taking into consideration that the assets were let out and the depreciation needs to be worked out from the date of leasing and in absence of such working. The claim is not considered is hot correct. In fact the depreciation had been worked out correctly from the date on which the assets are let out. Hence, on the basis of the above, we request your honour to allow interest paid of Rs. 6,91,77,945/- and the depreciation on school building. furniture fixture, plant & machinery amounting to Rs. 4,15,73,739/- u/s 57(ii) of the IT Act. If the income is to be treated as "Business. Income", corresponding interest paid of Rs. 6,91,77,945/- for the purpose of business and depreciation of Rs. 4,15,73,739/- should be allowed against such business income.

On the basis of the above, we request your honour to allow the appeal.” 5.3 I have gone through the assessment order and submissions made in this regard. The only substantive ground of appeal is regarding treatment by the A.O. of rental income of 4,13,03,520/- received from school building as income from other sources instead Page No. | 12

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., of the claim of it being income from house property as made by the assessee and consequential disallowance of interest claim of 4,07,03,999/- of assessee. The A.O. had made these disallowances by noting that the assessee was unable to establish that any construction activity was carried out by the assessee during the year. Accordingly all expenses claimed to have been incurred for the building construction were rejected. The assessee has vehemently opposed the disallowance and submitted that A.O. had not correctly appreciated the facts of the case and made additions which may be deleted. In this regard it is noted that the issue of commencement of construction has already been decided in assessee's own case by this office order dt.07- 11-2012 for A.Y. 2009-10. It has been held in this order by my Ld. predecessor that it is evident that appellant started construction of school building during A.Y. 2007-08 and expenses were debited in the books of accounts from that year and were shown as Work-in-progress. The total expenditure incurred including plot of land increase as on 31.03.2008 showed further expenses and the file number of approvals such as IOD, CC remained the same throughout, that the contention of the AO with regard to invalidity of IOD and CC was not correct, that the certificate of architecture proved that as on 12.4.2008 work up to the 2nd floor of the school was completed in all aspects and RCC work upto 7th Floor was also complete. My Ld. predecessor had perused the number of students of the school in A.Ys 08-09 to 10-11, sample copies of admission forms, academic report of student of each standard and held that these documents were of the address of same place i.e. Chembur, that NOC issued by the Govt. of Maharashtra dt.24.1.2007 proved that permission was given to start school at Chembur, that the assessment order passed u/s.143(3) of the Act in case of BKF for A.Y.08-09 and 09- 10 confirmed that the trust was engaged in educational activities in Chembur and was conducting school at Chembur, that there was no basis to hold that school might have functioned from other building, that the details about the students, results, correspondence, deduction of tax at source etc. proved that the school had started functioning during the year under consideration, that the income received by the assessee was to be taxed under the head income from house property. He also held that proportionate Interest of ₹.3.26 crores u/s. 24 of the Act, claimed by the assessee was to be allowed. The Hon'ble ITAT Mumbai while deciding assessees appeal in ITA No.853/Mum/2013 for A.Y. 2009- 10 vide order dt. 30-10-2015 has noted that in the assessee case the IOD is dt.10-01-2007 and CC dt.24-04-2007 which establish that the construction work had started prior to 31-03-2007 and the total expenditure incurred till 31-03-2007 was of 10,53,44,733/-. The Hon'ble ITAT also noted that further expenses were incurred in subsequent year which were shown in the books of accounts and the assessee had given details of the constructed area. The ITAT Page No. | 13

ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., upheld the stand taken by the CIT(A) that the school had commenced its activities in A.Yr 2008-09 and the Income could not be taxed as income from other sources and the interest expense had to be allowed u/s 24 of the I.T. Act. Since the facts of the present assessment year are identical, respectfully following the order of my Ld. predecessor and Hon'ble ITAT as discussed it is held that in the treatment of rental income as income from other sources by the A..O., is without much basis and cannot be sustained in appeal. Similarly the disallowance of interest expenses claimed against this income cannot be sustained in appeal and is directed to be deleted. Accordingly these grounds of appeal are allowed.”

Order pronounced in the open court on 31st May, 2023

Sd/- Sd/- (VIKAS AWASTHY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 31/05/2023 Giridhar, Sr.PS

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ITA NO.3219/MUM/2022 (A.Y: 2013-14) Kanakia Gruhnirman Pvt. Ltd., Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum

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