H & M HOUSING FINANCE AND LEASING PRIVATE LIMITED ,MUMBAI vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2), MUMBAI

During the course of hearing, the Ld. AR submitted that the assessee-company was incorporated under the Companies Act, 1956 on 08-03-2004 to inter-alia carry on the business of leasing and finance as per the object clause in the Memorandum of Association. It was submitted that the assessee acquired a property known as Raheja Woods in Pune comprising of the ground floor and six upper office levels with aggregate

It was further submitted that for the AYs. 2005-06 and 2006-07, the assessee received lease rent and an amount from the Lessee towards use of amenities which was offered under the head “income from house property”. The AO accepted the lease rent as income from house property, however, the amount received for amenities was reclassified as income from other sources and not income from house property which position had not been accepted by the Ld.CIT(A), ruling that the amenities were integral to the property let out and could not have been provided without letting out the space. It was also submitted that on appeal by the Revenue, the Tribunal thereafter upheld the decision of the ld CIT(A), confirming the amount received towards amenities also as income from house property. The said appellate order of the Tribunal has since become final in the absence of any challenge by the Income tax department before the High Court.

It was further submitted that from AYs.2007-08 up to AY. 2023-24, the Revenue has accepted the characterization of the rental income and its assessment under the head income from house property. Therefore, except for the year under consideration, i.e., AY.2017-18, in all the earlier as well

The assessee thereafter carried the matter in appeal before the Ld.CIT(A), which came to be disposed-off by his appellate order dated 07-02-2024, wherein, in so far as characterization of the rental income and the head of income under which it is to be assessed is concerned, following the judgment of the Hon‟ble Apex Court in the case of Chennai Properties and Investment Limited, the ld CIT(A) has upheld the assessment as profits and gains of business. With respect to the alternative ground of written down value on which depreciation is to be allowed for the year under consideration, the Ld.CIT(A) has held that “the building has been put to use since the year 2005-06 and the written down value has to be computed after allowing depreciation commencing from the said year.” Aggrieved by the aforesaid findings of the Ld.CIT(A), the assessee has filed the present appeal before the Tribunal.

In light of aforesaid factual matrix, it was submitted by the ld AR that in so far as the head of income for assessment of lease rent, it was submitted that a bare perusal of section 14 of the Act shows that all incomes for the purpose of charge and computation has to be classified under one of the specified head viz., salaries, income from house property, profits and gains of business or profession, capital gains or income from other sources. Each of the heads, are mutually exclusive and provides for the principles to be applied for computation of income. It was submitted that, income has to be assessed as per the principles applicable to the respective head of income. In the present case, the assessee had earned

The Ld.AR relied on judgment of the Hon'ble Supreme Court in the case of East India Housing and Land Development Trust Limited vs. CIT 42 ITR 49, where the Hon‟ble Supreme Court addressed the issue of rental income. In that case, the assessee, a private company incorporated with the object to buy and develop lands and property and to promote and develop markets, generated income by leasing shops and stalls. In that case, the company argued that the rental income should be assessed as profits and gains of business while the Revenue contended it should fall under the head income from house property. The Hon‟ble Supreme Court emphasized that income must be classified under the specific head it falls under, as per Section 6 of the Income Tax Act. The Hon‟ble Supreme Court concluded that “the income from shops and stalls is income received from property and falls under the specific head described in section 9 and taxed accordingly”. This judgment, supported by earlier cases like United

It was further submitted that both the AO and the Ld.CIT(A) have relied upon the judgment of the Hon‟ble Supreme Court in the case of Chennai Properties and Investment Limited vs. CIT (supra) for the proposition that the rental income in the present case, should be assessed as profits and gains of business. However, this case differs fundamentally from the present one. In this regard, it was submitted that, they have overlooked the fundamental point of distinction between that case and the present one, being that the company in that was formed with the object to acquire and hold the properties known as 'Chennai House' and 'Firhavin Estate' and it had earned income only from those two properties and nothing else, vide paragraphs 5 and 6 of the said judgment. The Hon‟ble Supreme Court emphasized that the nature of income does not change simply because it is earned by a company with a specific objective, as clarified in paragraph 7 of East India Housing and Land Development Trust (page 72) and in paragraph 10 of Sultan Brothers (page 72). In paragraph 11 (page 73), the reference to "the circumstances of the present case" referred to at the beginning of the judgment would be the fact that the only income earned by that company was from letting out of properties. As stated hereinabove, the assessee has earned rental income, interest on loans and advances, interest on debentures, profits from investment in shares and units of mutual funds and share of profit from firm. Further, out of the total assets reflected in the Balance sheet of Rs.67,23,35,590/- the investment in building giving rise to rental income

With a view to emphasize on the point of distinction between the case of Chennai Properties and Investment Pvt. Ltd. (supra) and the present case, the Ld.AR also relied on the judgment of the Hon'ble Apex and 79. However, the Hon‟ble Supreme Court clarified that an entry in the object clause is not determinative of the head under which an income is to be assessed. Lastly, in paragraph 19 at pages 81 and 82 thereof it has been clarified that the earlier judgment in the case of Chennai Properties and Investment Limited was distinguishable as, in that case, the Hon‟ble Court had found "that the entire income of the appellant was through letting out of the two properties it owned and there was no other income of the assessee except the income from letting out of the said properties, which was the business of the assessee. Based thereon and considering the facts as referred to in greater detailed hereinabove, it was submitted that, in the present case the Revenue is not justified in assessing the rental income as profits and gains of business.

Per contra, the Ld. DR is heard, who has relied on the order passed by the AO as well as that of the Ld.CIT(A). In this connection, Ld.DR drawn our reference to the findings of the Ld.CIT(A), which are contained in paragraph Nos. 7.3 to 7.13 of the impugned order which read as under:

4 In the written submissions made by the appellant, it has been stated that the appellant was the owner of property known as 'Raheja Woods,, situated at kalyani Nagar, Pune. The appellant owns property and the same continues to be let out, to M/s HSBC Sofware Development India Pvt Ltd. The appellant had offered the rental income thereof under the head 'Income from House property. It is further submitted by the appellant that as long as the ownership of the building vests with the appellant, the rental income received as per the leave & license agreement ought to be assessed as income from house property. The appellant submits that it satisfied all the conditions namely, (1) Property comprises of building (2) The appellant was the owner of the property; (3) The office premises in the building was not used by the appellant for its own business purpose; and (4) The appellant was receiving lease rentals. Therefore, the appellant submits that it had correctly officer the rental income under the head Income from house property'.

5 In addition to the above, the appellant relied upon the decision of the Hon'ble Supreme Court in the case of Raj Dadarkar & Associates Vs. ACIT, CC-46 [(2017) 394 ITR 592 (SC)]. However, the case law on which the appellant relied upon is distinguishable to the facts of the instant case for the reason that in the case law on which the appellant relied upon, Mr. Raj Dadarkar is not the owner of the property. But has taken the property on lease and subleased it. However, in the instant case, the appellant was the owner of the property and business of leasing house property was the main object of the appellant. In the Memorandum of Association of the appellant also it has been mentioned that the main object of the appellant was to carry on the business of leasing & Finance of all types of housing properties, Buildings Premises, Shop, Shopping Mall, Officer, Godowns Factories, land Flats, Apartments, bungalow. The relevant part of the Memorandum of Association' is affixed here as under:

6 As seen from Points IIIA(1) and IIIA(2) of Memorandum of Association, it is clearly mentioned that the main object of the company was to carry on the business of leasing& Finance of all types of housing properties, Buildings, Premises, Shop, Shopping Mall, Offices, Godowns, Factories, Land Flats, Apartments, Bungalow required for residential or commercial

7 In addition to the above, let us examine the decision of the Hon'ble Supreme Court of India in the case of Chennai Properties & Investments itd V. Commissioner of Income Tax, Central-III, Tamil Nadu in [2015] 56 taxmann.com 456(SC) dated April 9, 2015. The head note of the same is reproduced here as under:

8 Para-5 & Para-11 of the aforementioned order are reproduced here as under 5. The Memorandum of Association of the appellant-company which is placed on record mentions main objects as well as reidental or ancilary objects in clause III. (A) and (B) respectively. The main object of the appellant company is to acquire and hold the property known as "Chennai House and Firhavin Estate" both in Chennai 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, What we emphasize is that holding the aforesaid properties and earning income by letting out those properties is the main objective of the company. It may further be recorded 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 him self in his order.

We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment, stated the circumstances of the present case from which we arrive at Irresistible conclusion that in this case, letting of the properties is in fact is the business of the assesse. The assessee, therefore rightly disclosed the income under the head income from business. It cannot be treated as 'Income from the house property. We, accordingly, allow this appeal and set aside the judgment of the High Court and restore that of the Income Tax Appeallte Tribunal. No order as to costs."

10 In respect of grounds of appeal Nos. 3ba & 3c, it is contended by the appellant, that the appellant had been consistently admitting the income from the said property under the head Income from House Property', but not as 'profit & gains from business or profession' and the same was accepted by the assessing officer since the assessment year 2004-05. Therefore, it requests to admit the same policy of admission of income under the head 'Income from House Property for the assessment year 2017-18 also. The contention of the appellant in this regard is not acceptable for the reason that when it is dealt with facts of the case, the principle of taking identical stand for the year under consideration as the stand taken for preceding years is not applicable because on applying ratio of Hon'ble Supreme Court's decision in the case of Chennai Properties & Investments Ltd V. Commissioner of Income Tax, Centre-III, it is held that the income from lease rentals is to be treated as 'Income from Business or Profession'. Therefore, the contentions of the appellant raised in these grounds of appeal Nos. 3b & 3c are also accordingly not acceptable.

11 In respect of grounds of appeal No.4, it is contended by the appellant that the depreciation granted depreciation for the assessment year 2014-15 as against assessment year 2005-06 being the first year from which the depreciation ought to be granted. In this regard, the contention of the appellant is not acceptable for the reason that though the income of the appellant was categorized as "Profit & Gains of Business or Profession' for the first time, it cannot be denied that the asset was put to use since the assessment year 2005-06 and the written down value of the asset should be allowed after allowing depreciation commencing from the assessment year 2005-06. Therefore, the contention of the appellant to allow compute the allowable depreciation treating the asset put to use for the first time during the year under consideration is not acceptable.

12 Further, as seen from the assessment order, it is noticed that the assessing officer allowed depreciation relevant to the assessment year 2014-15 instead of allowable depreciation for the assessment year 2017- 18 as computed in the table furnished in the assessment order. Therefore, the assessing officer is directed to allow correct allowable depreciation for AY 2017-18 (the impugned assessment year) while giving consequential effect to this order.

We have heard the rival contentions and perused the material available on record. The relevant facts under consideration are that the assessee is the owner of a property known as 'Raheja Woods, situated at Kalyani Nagar, Pune comprising of the ground floor and six upper office levels with aggregate area of 1,58,104 sq.ft. which has been let out to HSBC Software Development India Pvt Ltd. The said property had been let out to HSBC Software Development India Pvt Ltd since assessment year 2005-06 and rental income has consistently been offered to tax by the assessee in its return of income under the head 'Income from House property. The said treatment of rental income has been accepted by the AO all through the earlier assessment years right from AY.2005-06 and in the subsequent assessment years as recent as AY.2023-24 except for the assessment year under consideration. To buttress the said factual position, the assessee has also filed an affidavit stating that except for the year under consideration, i.e., AY.2017-18, in all the earlier as well as the later years, the rental income has been assessed to tax as income from house property and the contents of the affidavit so filed are not disputed before us by the Revenue. For the year under consideration, the assessee continued with its past practice and offered the rental income under the head “Income from house property”. The Assessing officer has however not accepted the said treatment and brought the rental income under the head “Income from business/profession” by placing reliance on the decision of the Hon‟ble Supreme Court in case of Chennai Properties (supra) which 14 has been confirmed by the Ld.CIT(A). Evidently, both the AO as well as Ld. CIT(A) except for placing reliance on the decision of the Hon‟ble Supreme Court has not disputed the consistent position so taken by the assessee in offering rental income all through these years under the head “Income from House property” and which has been accepted as such by the Revenue. At this stage, we refer to the decision of the Hon‟ble Bombay High Court in the case of Banzai Estates (P.) Ltd. (Supra) wherein the Hon‟ble Bombay High Court has referred to the decision of the Hon‟ble Supreme Court in case of Radhasoami Satsang and Bharat Sanchar Nigam Ltd. and following its earlier decision in case of Quest Investment Advisors (P.) Ltd. has upheld the principle of consistency and held that such principles are appropriately applied by the Tribunal and the relevant findings read as under:

In the present case, the assessee has availed of deduction under Section 24, which appears to be one of the reasons that the Assessing Officer thought it appropriate to disallow, what was accepted in the earlier three Assessment Years 2005-06, 2006-07 and 2007-08. On a bare reading of Section 22, we find that in the present case, the basic requirements for the assessee to consider the income as received from MBC Tower property as "income from house property" stands clearly satisfied, as the assessee derives income from house property "owned by it" Even if the assessee is to be in the business of letting or subletting of properties and deriving income therefrom, there is no embargo on the assessee from accounting the income received by it, from the property "owned by assessee" (MBC Tower) as "income from house property" and at the same time. categorizing the rental income from other properties not of assessee's ownership under the head income from business. The Revenue's reading of Section 22 differently to those who are in the business of letting out properties as in the present case namely in 15 combination of a property of assessee's ownership and also to have income from properties which are not of assessee's ownership from which rental income is derived, would amount to reading something into Section 22, than what the provision actually ordains. The legislature does not carve out any such categorization/exception. Thus, we do not find that the Revenue is correct in its contention that, in the circumstances in hand, a straight jacket formula is required to be applied, namely, that Section 22 is unavailable to an assessee, who is in the business of letting out properties.

In the prior Assessment Years, the Assessing Officer had accepted the assessee's treatment of such income as an income from house property, which is one of the factors which has weighed with the Tribunal to allow the Appeals filed by the assessee, on the principle of consistency. We are of the opinion that such principles are appropriately applied by the Tribunal. The Supreme Court has held it to be a settled principle of law that although strictly speaking res judicata does not apply to income tax proceedings, and as such, what is decided in one year may not apply in the following year. Thus, when a fundamental aspect permeating through different assessment years has been treated in one way or the other and that has been allowed to continue such position ought not be changed without any new fact requiring such a direction. (See: Radhasoami Satsang v. Commissioner of Income-tax [1991160 Тахтап 248/193 ITR 321/(1992) 1 SCC 659 (SC). The decision of the Supreme Court in Radhasoami Satsang (supra) has been referred in a decision of a recent origin in Godrej & Boyce Manufacturing Company Ltd. v. Deputy Commissioner of Income-tax (2017) 81 taxmann.com 111/247 Taxman 361/394 ITR 449/201717 SCC 421. 14. We may also usefully refer to a decision of this Court in the case of Principal Commissioner of Income-tax v. Quest Investment Advisors (P.) Ltd. [2018) 96 taxmann.com 157/257 Taxman 211/409 ITR 545 (Bombay). in which this Court referring to the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India [2006] 282 ITR 273 (SC) which followed the decision in Radhasoami Satsang (supra) accepted the rule of consistency. The following observations of the Supreme Court are required to be noted:-

Insofar as Revenue's reliance on the decision in Chennai Properties & Investments Ltd (supra) is concerned, the same is not well founded for the reason that in such case, the assessee itself had chosen to account such income derived by the assessee, as an income under the head "income from business". This was a case where the Revenue was of the contrary view, namely that such income ought not to be allowed as an income from business and must be treated as income from house property. The Supreme Court thus held that the income was rightly disclosed by the assessee under the head gains from business, and it was not correct for the High Court to hold that it needs to be treated as income from house property. The situation being quite different in the said case, the same would not be applicable in the present facts. This is not a case where the assessee itself had taken a position that such income be treated as income from business.

In the light of the above discussion, we are of considered opinion that the Appeals do not give rise to any substantial question of law.”

Applying the legal proposition so laid down in the instant case, we find that nothing has been brought on record by the Revenue as to any material change in the transaction entered into by the assessee with the tenant, HSBC Software Development India Pvt. Ltd. except for the contract renewal or for that matter, any material change in the business objects of the assessee company of leasing, financing and investing which warrants reclassifying the lease rental income from one head of income to another head of income for the impugned assessment year as compared to earlier years. The decision of the Hon‟ble Supreme Court in case of Chennai Properties was pronounced on 09-04-2015 and even thereafter, we find that the assessment proceedings were completed for other assessment years and the Assessing officer continued to accept the earlier settled position and didn‟t take a different position. Even looking at the facts of 17 the said case in case of Chennai Properties, we find that the said decision doesn‟t support the case of the Revenue as it was rendered in the context of its peculiar facts where the entire income of the appellant was through letting out of two properties and there were no other income except the income from letting out. The Hon‟ble Supreme Court in its subsequent decision in case of Raj Dadarkar and Associates (supra) has taken note of these distinguishing facts. In the instant case as well, we find that the assessee has not just earned lease rental income besides that, it has earned interest on loans and advances, interest on debentures, profits from investment in shares and units of mutual funds and share of profit in a firm as evident from its audited financial statements placed on record. Therefore, as held by the Courts, where the fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by accepting the said position, it would not be at all appropriate to allow the position to be changed in a subsequent year, unless there was any material change justifying the Revenue to take a different view of the matter. In the instant case, as we have noted above, there is no material change in the facts and circumstances of the case and therefore, we are not inclined to allow the Revenue to deviate from a position which has been accepted consistently in the earlier and subsequent years. Therefore, respectfully following the decision of the Hon‟ble Bombay High Court in case of Banzai Estates (P.) Ltd. (supra), we set aside the order of the Ld.CIT(A) and direct the AO to treat and accept lease rental income under the head „Income from house property” as done by the assessee in its return of income.

In the result, appeal of the assessee is allowed.