DY COMMISSIONER OF INCOME TAX CIRCLE-6(1)(2), MUMBAI vs. JAY PROPERTIES PRIVATE LIMITED, MUMBAI

Per Kavitha Rajagopal, J M:

This is an appeal filed by the Revenue, challenging the order of the learned

Commissioner of Income Tax (Appeals) (‘ld.CIT(A) for short), National Faceless Appeal

Centre (‘NFAC’ for short) passed u/s.250 of the Income Tax Act, 1961 (‘the Act'),

pertaining to the Assessment Year (‘A.Y.’ for short) 2013-14.

2 ITA No. 2572/Mum/2022 (A.Y. 2013-14) Dy. CIT vs. Jay Properties Private Limited 3. "Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred in Allowing expenses of Rs. 15,74,53,030/- by holding that all the expenses are incurred for the business activities carried on by the assessee. 4. "The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the AO be restored."

in real estate properties, development, construction, etc and was investing funds in

properties directly or indirectly by acquisition of shares or by joint ventures. The assessee

company also had earnings from taking on compensation, commercial properties and

giving such property for compensation with no profit or loss. The assessee filed its return

of income dated 25.09.2012, declaring loss of Rs.22,89,74,129/- and the same was

processed u/s. 143(1) of the Act. The assessee’s case was selected for scrutiny and the

assessment order dated 31.03.2016 was passed u/s. 143(3) where the A.O. determined the

total income at Rs.13,53,79,120/- as income from business services under the head

‘income from other sources’ on the ground that the assessee company was not the owner

of the properties in which the assessee had alleged to have received the rental income,

thereby disallowing the deduction claimed by the assessee u/s. 23(1A) and u/s. 24A of the

Act.

order.

Assessing Officer (A.O. for short) has accepted the contention of the assessee that the

rental income was to be assessed as ‘income from business’ thereby holding that the same

is to be treated as ‘income from business’ for the impugned year. The ld. CIT(A) allowed

3 ITA No. 2572/Mum/2022 (A.Y. 2013-14) Dy. CIT vs. Jay Properties Private Limited the expenses claimed by the assessee as expenses incurred for earning such income and

that the same pertain to business activities and had allowed it u/s. 37(1) of the Act. The

Revenue is in appeal before us, challenging the order of the ld. CIT(A) in treating the

rental income and interest income as ‘business income’ and consequentially allowing the

expenses on the ground that it was expended for the purpose of business.

impugned income received by the assessee was in the nature of rental income and the

same cannot be assessed as ‘business income’. The ld. DR further stated that for A.Y.

2009-10, the matter was set aside to the A.O. for verification and the ld. CIT(A) has erred

in relying on the order of the Tribunal in A.Y. 2009-10 in deciding the impugned order.

The ld. DR relied on the order of the A.O.

other hand, controverted the same and stated that in earlier years in assessee’s case, the

same was treated as ‘income from business’ and not ‘income from other sources’. The ld.

AR further stated that the expenses incurred was exclusively for the purpose of business

and relied on the decision of the Tribunal in the case of Nisarg Realtors Pvt. Ltd. vs.

ACIT [2022] 139 taxmann.com 163 (Mum)(Trib).

observed that the A.O. in the assessment order had determined the rental income,

amounting to Rs.13,44,00,000/- and the interest income of Rs.9,78,082/- under the head

‘income from other sources’ and disallowed the expenses amounting to Rs.15,74,53,030/-

4 ITA No. 2572/Mum/2022 (A.Y. 2013-14) Dy. CIT vs. Jay Properties Private Limited u/s. 37(1) of the Act. The assessee submits that the impugned income was received by the

assessee as ‘income from business and services’ and that the assessee had offered the

same to tax under the head ‘income from house property’, whereas the A.O. had assessed

the same under the head ‘income from other sources’ on the ground that the assessee does

not own the properties from which the said income was derived, thereby holding that the

same is not a business activity. The A.O. disallowed the deductions claimed by the

assessee u/s. 23(1)(a) of the Act towards municipal taxes, amounting to Rs.8,76,118/- and

u/s.24(a) amounting to Rs.4,00,57,045/- being 30% of the net annual value. The assessee

further contended that the A.O. has failed to consider the main object of the assessee

company as per the Memorandum of Association (MOA for short) which was to make

profits through commercial exploitations of the property and relied on the decision of the

Hon'ble Supreme Court in the case of Chennai Properties & Investments Limited 373

ITR 673 and Rayala Corporation Private Limited vs. ACIT 72 taxmann.com 149. The

assessee relied on its own case for A.Y. 2009-10 where the co-ordinate bench had

remanded the matter back to the file of the A.O. with a direction to decide the claim of

the assessee in view of the decision in Chennai Properties & Investments Limited (supra)

by considering the objectives of the MOU. The A.O. in A.Ys. 2009-10 and 2014-15 had

assessed the impugned income as ‘business income’ of the assessee.

Rs.9,78,082/- and had incurred interest expenses amounting to Rs.12,43,78,968/- which

was also treated by the A.O. as ‘income from other sources’ and not ‘business income’.

The assessee had submitted that it had made an investment of 11.90% on non convertible

5 ITA No. 2572/Mum/2022 (A.Y. 2013-14) Dy. CIT vs. Jay Properties Private Limited debenture of ECRPL and had sold the same and received income amounting to

Rs.9,78,082/-. The assessee further stated that clause 15 of the MOA states that it was an

ancillary object of the assessee in making investments in securities for a short period and

the same does not form part of the business of the assessee and contended that the interest

income is ‘business income’ to be taxed under the head ‘business income’. The A.O., on

the other hand, has stated that the assessee company had not carried out any business

activity during the impugned year as per the objectives of the MOA and receiving loans

was not the objective of the assessee company. The A.O. further stated that as per the

objective of the MOA, the assessee’s business activity is not concerned with taking the

premises of the compensation and subletting the same with no profit or loss and the A.O.

relied on the decision of the co-ordinate bench in the case of BMK Laboratories Pvt. Ltd.

vs. DCIT (ITA No. 4443/Mum/2011) which held that on similar facts, the interest income

received from such activities is to be assessed under the head ‘income from other

sources’ and not as ‘business income’. The A.O. held that since the assessee company

was not the owner of the premises, the income derived from the rental receipts cannot be

taxed under the head ‘income from house property’ and has to be taxed under the head

‘income from other sources’ as per section 56 of the Act and the related expenses u/s.

57(iii) of the Act which was not expended for the purpose of such business activity and

disallowed the same on the said ground. The A.O. disallowed the business expenses

amounting to Rs.34,33,34,018/- as not incurred for earning the business income. The ld.

CIT(A), on the other hand, held that for A.Ys. 2009-10 and 2014-15, the A.O. has held

the impugned income received out of renting the properties was assessed as ‘income from

business’ and the Tribunal for A.Y. 2009-10 has held the same to be business income.

6 ITA No. 2572/Mum/2022 (A.Y. 2013-14) Dy. CIT vs. Jay Properties Private Limited The ld. CIT(A) further held that the same view has been taken by the A.O. in A.Y. 2014-

15 vide order dated 28.12.2016 and thereby allowed the assessee’s appeal on this ground.

engaged in the business of real estate and has been giving commercial properties for

compensation as per the objectives of the MOA of the assessee company. It is also

observed that the assessee is having incidental and ancillary object of renting out of the

properties, which are not owned by the assessee company. The decision of the Hon'ble

Supreme Court in the case of Chennai Properties & Investments Limited (supra) and

Rayala Corporation Private Limited vs. ACIT (supra) has allowed the proposition that the

impugned income is to be treated as ‘business income’ and not as ‘income from house

property’. The assessee has also relied on the decision of the co-ordinate bench of the

tribunal in the case of Nisarg Realtors Pvt. Ltd. (supra) which has reiterated the said

proposition. It is also seen that similar view has been taken in assessee’s case for AYs.

2009-10 and 2014-15 by the Tribunal and the A.O. for that year. We do not find any

adverse reason for deciding the issue otherwise and, therefore, hold that there is no

infirmity in the order of the ld. CIT(A) in deciding that the impugned income is to be

treated as ‘business income’. Hence, ground nos. 1 & 2 raised by the Revenue are

dismissed.

Rs.15,74,53,070/- by treating the same as expenses incurred for the purpose of business

activity of the assessee. It is observed that the A.O. has disallowed the impugned

expenses on the ground that there was no business income activity carried out by the

7 ITA No. 2572/Mum/2022 (A.Y. 2013-14) Dy. CIT vs. Jay Properties Private Limited assessee company, thereby holding that the impugned expenses are not for carrying out

the business. The assessee has contended the same to be as ‘business expenses’ and had

claimed u/s. 37(1) of the Act. The ld. CIT(A) has allowed the said expenses on the

ground that the income from rental activities are already held to be business income and

the impugned expenses are held to be incurred for earning of such income. The ld.

CIT(A) has allowed the same u/s. 37(1) of the Act. It is observed that the ld. CIT(A) has

rightly allowed the expenses to be related to the earning of business income and in this

note, we find no infirmity in the order of the ld. CIT(A) in allowing the expenses claimed

u/s. 37(1) of the Act. Accordingly, ground no.3 raised by the Revenue is also dismissed.

Order pronounced in the open court on 09.02.2023

Sd/- Sd/-

(Prashant Maharishi) (Kavitha Rajagopal) Accountant Member Judicial Member Mumbai; Dated : 09.02.2023 Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai