AFL PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), MUMBAI, MUMBAI

INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI BENCH: A BEFORE HON’BLEJUSTICE (RETD.) C V BHADANG, PRESIDENT AND HON’BLE SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA 5581/MUM/2025 निर्धारणवर्ा/Assmt. Year:2017-18) Permanent Account Number: AABCA2213P DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), AFL PRIVATE LIMITED MUMBAI AFL HOUSE, 05TH FLOOR, LOK ROOM NO. 803, 8TH BHARTI COMPLEX, MAROL FLOOR, PRASTISHTHA MAROSHI ROAD, ANDHERI Vs. BHAVAN, OLD CGO EAST, MUMBAI, ANNEX, MAHARISHI MAHARASHTRA 400059 KARVE ROAD, MUMBAI, MAHARASHTRA 400020 (अपीलार्थीAppellant) (प्रत्यर्थीRespondent)

निर्धाऩितीद्वधिध/Assessee represented by: Shri Nitesh Joshi, Advocate िधजस्वiद्वधिध/Revenue represented by: Shri Surendra Mohan, Sr. DR

सुिवधईकीतधिीख/Date of conclusion of hearing: 17.03.2026 घोषणधकीतधिीख/Date of pronouncement: 05.06.2026 आदेश / ORDER PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the assesseeis against the order of Ld. Commissioner of Income Tax (Appeal) 48, Mumbai vide DIN: ITBA/APL/S/250/2025-26/1078824846(1) dated 23.07.2025 passed against the assessment order by Assistant Commissioner of Income 1 Tax Central Circle 2(3), Mumbai u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 10.12.2019for the Assessment Year 2017-18.

i. The learned Commissioner of Income Tax (Appeals) erred in upholding the treatment of operating income received by way of rent as taxable under the head 'Income from House Property' as against income from 'Profit and Gains from Business' as claimed by the Appellant. ii. The learned Commissioner of Income Tax (Appeals) erred in upholding that dominant intention and activity of the Appellant is the exploitation of its property as an owner to earn rental income. iii. The learned Commissioner of Income Tax (Appeals) erred in upholding that the services provided by the Appellant to the tenants are not complex commercial services that constitute an independent business in themselves. iv. The learned Commissioner of Income Tax (Appeals) erred in holding that because a consolidated license fee is charged by the Appellant to its occupants, the dominant object of the arrangement is exploitation of property as an owner and the services are merely incidental to make the property more marketable. v. The learned Commissioner of Income Tax (Appeals) ought to have referred to and distinguished the various decisions of Hon'ble High Courts and Appellate Tribunals including Jurisdictional High Court and Appellate Tribunal before dismissing the Grounds of Appeal. vi. The learned Commissioner of Income Tax (Appeals) erred in not following principles of consistency. vii. The learned Commissioner of Income Tax (Appeals) erred in disregarding the fact that the building cannot be segregated from the block of assets and therefore, depreciation on that ought to have been allowed. viii. The learned Commissioner of Income Tax (Appeals) erred in upholding the non- granting of depreciation on plant, equipment, generator and others assets.

ix. The learned Commissioner of Income Tax (Appeals) erred in upholding the disallowance of expenses under the head profit and gains of Business. x. The learned Commissioner of Income Tax (Appeals) erred in upholding the non-allowance of any expenses against interest income. xi. The learned Commissioner of Income Tax (Appeals) erred in holding that since opportunity is granted to argue all the grounds in appellate proceedings, the grievance of the Appellant of the Assessing Officer not issuing show cause notice is redressed and therefore, it cannot be held that assessment is void for failure of natural justice. xii. The learned Commissioner of Income Tаx (Appeals) ought to have considered that capital gains arising out of the depreciable asset u/s. 50 of the Act even though deemed to be capital gainarising from transfer of a short term capital asset, that fiction has to be confined only to section 50 of the Act and it cannot convert 'long term capital asset' into a 'short term capital asset' for the other purpose of the Act including for set off against a long term capital loss. xiii. Without prejudice to the above, the Appellant submits that even though section 50 of the Act treats that excess to be taxed as capital gain arising from transfer of a short-term capital asset but the rate of tax to be applicable in terms of section 112 of the Act which is 20% for gain arising for transfer of long term capital asset. 2.1. Ground nos. 1 to 6 raised by the assessee relate to treatment of rent income under the head „income from house property‟ as against income from „profits and gains from business‟. Ground nos. 7, 8 and 9 have consequential effect of the outcome of ground nos. 1 to 6, since these relate to claim of depreciation and disallowance of certain expenses from the head of income computed under „profit and gains of business‟. Ground no. 10 is in respect of claim of expenses against interest income earned by the assessee. Ground no. 11 is general in nature and needs no separate adjudication. Ground no. 12 and 13 are towards treatment of capital gain in respect of depreciable asset under section 50 and rate of tax in terms of section 112.

3.1. Ld. AO observed that assessee owns a building named as „AFL House‟, situated at Marol Morari Road, Lok Bharti Compound, Andheri (East), Mumbai. Part of this building is occupied by the assessee itself and unusedbalance is given on rent to unrelated tenants under their respective leave and license agreements. Assessee received rental income of Rs. 7,53,08,195/- during the year which was duly reported in its audited financial statements. This rental income was offered to tax in the return of income under the head „income from profit and gains of business‟.

3.1. In the course of assessment, ld. AO issued notice under section 142(1) dated 19.09.2019 wherein among other things, specific details were called for in respect of expenses claimed in the profit and loss account along with their supporting documents. These expenses have been listed in the annexure to notice under section 142(1) which are as under:

i. Salary, ii. Rent &tax, iii. Advertisement/business promotion, iv. Travelling expenses, v. Brokerage, vi. Legal and professional charges, vii. Repairs, Foreign travelling expenses. viii. 3.2. Ld. AO also called for reasons for loss from discontinuing certain business operations along with relevant documents. It is noted that

during the year under consideration, assessee discontinued its business of cartridge refilling with effect from 31.07.2016. Assessee had prepared a profit and loss statement for this discontinued business operation forming part of the audited financial statement as Note no. 33, wherein the loss of Rs. 40,49,711/- was reported.

3.3. A note on claim of income from rent offered to tax under the head „income from business and profession‟ was furnished in the course of assessment proceedings whereby it was submitted that assessee not only provides premises on rent but also is engaged in providing several other facilities along with the premises which includes the following:

i. There is a centrally air-conditioned plant for whole of the building; ii. The latest fire-fighting equipment are installed in whole of the premises; iii. The maintenance and upkeep of the premises are undertaken by the assessee; iv. Security and guards are provided on the entrance, which control the visitors and issue visitors pass for all the occupants (as may be desired by them); v. There is a common parking area along with a small place for recreation provided for all the occupants; vi. Electricity/Generator facility is provided to all the occupants, etc. 3.4. According to the assessee, premises are subjected to alteration depending upon the requirements of new occupants as and when it happens. Assessee provides bundle of services to the occupants; this business activity is systematically carried out by it. According to it, substantial amount of repairs and maintenance expenses are incurred which includes annual maintenance charges for various equipment and plants installed like chiller, lift, cooling plant, fire alarm system, generator set, fire-fighting system, elevators, CCTV, etc.

3.5. Assessee furnished copies of rent agreement entered with tenants for the year under consideration which are perused, as forms part of the paper book.From one such agreement entered into by the assessee with Mahindra EPC Services Private Limited, Schedule-2: List of various amenities provided by the assessee as the licensor is taken note of, details of which are extracted below for ready reference:

3.6. Also, in Schedule-3 of the same agreement, there is a list of inventoriesof various assets provided by the licensor.This includes work station, white board, soft board, wall cabinet, etc. The entire list as containedin the schedule is also extracted for ready reference:

3.7. Similar is the case for the agreement between the assessee and Dachser India Private Limited wherein also the inventory of assets provided by the assessee includes similar item for work station/cubical with storage space, cabin with manager‟s table/storage etc. According to the assessee, the rent charged by it includes charges not only for the premises but also for all the services provided by it.

5.2. The decision of Krome Planet Interior (Supra) was relied by the Hon‟ble Court in its another decision of PCIT v. City Center Mall Nashik (P) Limited (2020) 424 ITR 85 (Bom).

these are mandatory in nature as required by certain laws and some are required to make the place habitable. Thus, there is no exclusivity for the services rendered as claimed by the assessee. According to him, decision in the case of Karnani Properties Ltd. v. CIT (1971) 82 ITR 547 (SC) relied upon by the assessee deals with provisions of the 1922 Act. During those times, certain amenities provided were exclusive in nature which in the present times, on account of technological advancement and improvement in standard of living have become incidental and therefore, it cannot be considered that assessee is engaged in the business of earning rental income. According to him, treatment of rental income under the head „income from house property‟ is rightfully done by applying the relevant provisions of the Act. Also, the consequential effect on disallowing depreciation and other expenses is justified.

8.1. Before we delve on the issue, it is important to take note on the amendment brought in by the Finance Act, 2017 with effect from 01.04.2018,i.e. A.Y. 2018-19, under section 23(5). According to this, where the property consists of any building held as stock in trade and the said property or part thereof is not let out during the year,the annual value of such property or part thereof shall be taken to be nil up to one year from the end of the financial year in which the

certificate of completion of construction of the property is obtained from the Competent Authority. This amendment brings the rental income on the property held as stock in trade under the head „income from house property‟ though the stock in trade forms part of the business activity. Thus, rental income even on business assets of the assessee gets charged under the head „income from house property‟. Similar analogy can be drawn in respect of earning of dividend income on shares held as stock in trade whereby the dividend income earned on such stock in trade is chargeable to tax under the head of „income from other sources' and is not taken as business income. The year under consideration before us A.Y. 2017-18 which is prior to the aforesaid amendment.Effective from A.Y. 2018-19, the position for the treatment of same rental income would be different from the years prior to the amendment and for the years when the amendment to section 23(5) became effective from A.Y. 2018-19,when the legislature in its wisdom brought the same income to be taxed under the head „income from house property‟.

8.2. Admittedly, it is a fact on record that the department has accepted the position taken by the assessee for its rental income reported under the head „profits and gains of business‟ for past assessment years as already noted in the above paragraphs. On the contention of the exclusivity of services rendered by the assessee as claimed by the ld. CIT DR, we note that similar contentions were made by the revenue in the case of Krome Planet Interior (Supra) by placing reliance on the decision in the case of Raj Dadarkar and Associates (Supra) which was distinguished by the Hon‟ble Court while arriving at the decision in favor of the assessee.

8.3. We also took note of the inventory of assets provided by the assessee forming part of the leave and license agreement entered into

with each of the tenants. The said inventory is extracted in the above paragraph on a sample basis, which evidently demonstrates that it is not just the premises which has been offered on rental basis but there is whole gamut of various other services along with these leasedassets which are made available to the tenant, depending upon their specific requirements. Contents of these leave and license agreements remain uncontroverted as nothing cogent has been brought on record to disprove the same by the revenue.

8.4. Following the principle of consistency, in view of the assessments completed for the preceding several assessment years by the revenue wherein the rental income was accepted as reported by the assessee under the head „profits and gains of business‟, as well as by drawing our force from the afore-stated judicial precedents as well as position of law on the statute prior to the amendment brought in by Finance Act, 2017 in section 23(5),we accept the income reported by the assessee towards rental income under the head „profits and gains of business‟ and set aside the re-characterization done by the ld. AO of the same under head of „income from house property‟. Accordingly ground no. 1 to 6 raised by the assessee are allowed.

assessee. Since ld. AO had re-characterized the rental income of the assessee under the head „income from house property‟ as against profit and gains of business, he did not allow any expense reported by the assessee, neither under the head „profits and gains of business‟ nor under the head of „income from other source‟. This resulted into taxing the interest income at gross level.

10.1. Assessee raised this ground before the ld. CIT(A) claiming for allowance of expenditure against the interest income earned by it. In this regard, we note that there is nothing furnished on record to demonstrate the direct nexus between the claim of expenditure towards earning of interest income.In this regard, section 57(iii) provides for deduction of expenditure laid out wholly or exclusively for the purpose of earning such income which should not be in the nature of capital expenditure. Assessee is required to demonstrate incurrence on such expenditure having a direct nexus with the earning of the income for claiming its deduction.

10.2. Ld. CIT(A) in this regard has noted in para 9.6 that assessee has failed to provide any specific details or supporting documents to establish this nexus. The general claim for expenses without linking them to the specific income earning activity is not admissible for which the primary onus lies with the assessee. We have perused the paper book placed on record and gone through the submissions made and could not find any specific details with supporting documents to justify the claim made by the assessee. Accordingly, we do not find any reason to interfere with the finding arrived at by the ld. CIT(A). Ground no. 10 raised by the assessee is dismissed.

of the Act.On account of sale, Short Term Capital Gain arose under section 50 which was computed at Rs. 1,07,89,942/-. Assessee claimed setoff of current year business loss against this Short Term Capital Gain. Assessee also had brought forward Long Term Capital Loss of Rs. 74,36,23,267/- which was not applied for setoff of Short Term Capital Gain as the same was setoff against the current year business loss. However, in the assessment completed by the ld. AO, business income towards rental income was re-characterized under the head „income from house property‟, resulting in income under the head „profit and gains of business‟ at nil.

11.1. Assessee furnished details of brought forward loss and contended that it is eligible to setoff of Short Term Capital Gain against unabsorbed brought forward Long Term Capital Loss. On the above factual matrix, we find that capital gains arising out of the depreciable asset u/s. 50 of the Act, even though deemed to be capital gain arising from transfer of a short term capital asset,such a fiction has to be confined only to section 50 of the Act and it cannot convert 'short term capital asset' into a 'long term capital asset' and vice-versa, for the other purposes of the Act, either for set off against a long term capital loss or exemption provision where benefit is given from a long term capital gain on transfer of a long term capital asset or the rate of tax provided u/s 112 of the Act which clearly provides that income arising from transfer of a long term capital asset chargeable under the head capital gains, the amount of income tax calculated on such a long term capital gain shall be the rate of 20%. Thus, even section 50 of the Act treats that excess is to be taxed as capital gain arising from transfer of a short term capital asset but the rate of tax has to be applicable in terms of section 112 of the Act, because the treatment of a short term capital asset is the only purpose of section 50 and not otherwise can convert a 'long term capital asset' into a 'short term capital asset' for

the purpose of rate of tax or any other provision of the Act.This view is supported by the decision of theHon'ble Special Bench of Mumbai Tribunal in the case of SKF India Ltd. v. DCIT (ITA No 7544/Mum/2011), reported in 210 ITD 01.

11.2. We also referred to the decision of Hon‟ble jurisdictional High Court of Bombay in the case of CIT v. Manali Investment (2013) 39 taxmann.com 4 (Bom) wherein it held that Short Term Capital Gain computed on Long Term depreciable asset can be setoff against long term capital loss. In the given set of facts, and the aforesaid judicial precedents both by Hon‟ble Special Bench and Hon‟ble Jurisdictional High Court, we find that assessee is entitled to claim setoff of Short Term Capital Gain arising by complying the computation mechanism under section 50, against the Long Term Capital Loss brought forward from the earlier years. Accordingly ground nos. 12 and 13 are allowed.

Order pronounced in the open court on 05.06.2026

Sd/- Sd/- (Justice (Retd.)C V Bhadang) (Girish Agrawal) President Accountant Member Ankit, PS Mumbai Dated: 05.06.2026 Copy to: AFL PRIVATE LIMITED AFL HOUSE, 05TH FLOOR, LOK 1 BHARTI COMPLEX, MAROL MAROSHI ROAD, ANDHERI EAST, MUMBAI, MAHARASHTRA 400059 2 DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), MUMBAI ROOM NO. 803, 8TH FLOOR, PRASTISHTHA BHAVAN, OLD CGO ANNEX, MAHARISHI KARVE ROAD, MUMBAI, MAHARASHTRA 400020 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAIBENCH 5 GUARD FILE