RAMESH BUILDERS,MUMBAI vs. DELHI, NFAC DELHI

1. On the facts and circumstances of the case and in law, the Ld. CIT(A), NFAC, Delhi ought to have held that in assessing the income for the year: (a) the Ld. AO erred in assessing the rental income of Rs.2,38,88,889/- earned from letting out of commercial building known as "Hermes Palazzo" as "Business Income" as against offered by the appellant in the Return of Income furnished for the year under the head "Income from House Property", and (b) The Ld. AO, accordingly, ought to have granted deduction claimed u/s. 24 of the Income Tax Act, 1961 (the Act) of Rs.68,70,331/- being 30% of the said rental income.

The assessee is a partnership firm carrying on the business of Builders and Real Estate Developers. The assessee filed the return of income for AY 2014-15 on 31.07.2014 declaring income of Nil. The case was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. During the course of assessment, the AO noticed that the assessee has declared income from letting out of Hermes Plazzo Mall under the head “Income from House Property”. The AO called on the assessee to furnish the relevant details to which the assessee responded submitting the documentary evidences. The AO after perusing the agreement entered into between the assessee and the tenant, issued a show-cause notice to the assessee to explain as to why the said income cannot be treated as Business Income of the assessee. The assessee submitted that the amount reflected as rent is received from Pantaloon Retails (India) Ltd.,(Pantaloon) towards letting out of the property in the Building Hermes Plazzo and therefore, the same is to be taxed under the head “Income from House Property”. The assessee further submitted that interest free refundable deposit of Rs. 1.20 crores is taken from Pantaloon which goes to prove that the amount received by the assessee is towards rent. The assessee also submitted that the income earned has been offered under the head “Income from House Property” from the previous year relevant to AY 2003-04 and that the revenue has accepted the same. The AO however, did not accept the submissions of the assessee. The AO based on the various clauses in the agreement entered into by the assessee with Pantaloon held that the money received by the assessee is out of Business Agreement and not a leave and licence agreement and therefore, income arising there from should be assessed to tax under the head ‘Profits and Gains from Business & Profession’. Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) upheld the decision of the AO by holding that “6.1. On Ground of Appeal No. 1:- This ground of appeal relates to classification of Rent/Leave and License fees received from M/s Pantaloon Retails (India) Limited of Rs. 2,38,88,889/- as business income instead of House property income.

2 The submission made by the appellant and the facts mentioned in the assessment order have been considered. It is noted that there are a number of clauses mentioned in the Agreement which prove that the income derived from the property in question was business income and not Rental income. A few of them are discussed as under;-

The ld. AR submitted that the assessee is the owner of a Mall in Pune, and that the assessee has rented out the property to Pantaloon under an agreement the income from which is offered under the head “Income from House Property”. The ld. AR further submitted that in the financial statements of the assessee, the impugned property is shown under the head “Investments” and no depreciation has been claimed on the same (page no. 51 to 64 of PB). The ld. AR also submitted that that the sole basis for the AO to treat the income as Business Income is the fact that rental income paid by the tenant is based on a percentage of turnover and that the assessee. The ld. AR further argued that the revenue has been consistently accepting the income under the head “Income from House Property” in all the previous years and only in the year under consideration has taken a different stand which is against the principle of consistency.

The ld. DR on the other hand submitted that the terms of the agreement is examined by the CIT(A) elaborately, it is clear that the agreement entered into by the assessee is not a leave and licence agreement but is an business conducting agreement. The ld. DR further submitted that the assessee is not paid a fixed rent and the payment is depending on the turnover of Pantaloon which goes to prove that the income derived from the assessee is not in the nature of rent. The ld. DR also drew our attention to the relevant clause in the agreement where it is mentioned that Pantaloon does not have any tenancy or leasing rights. Accordingly, the ld. DR supported the order of the CIT(A) and the AO.

We have heard the parties and perused the material on record. The assessee has entered into an agreement with Pantaloon whereby the business of Pantaloon was to be carried out from the premises owned by the assessee. We further notice that as per the terms of the agreement entered into by the assessee an interest free refundable deposit of Rs. 1.2 crores was paid and a minimum guarantee fee was agreed (refer clause-6 in pad 18 of PB) towards occupation of the property. We further notice that as per clause-4, the conductor i.e. Pantaloon shall alone be entitled to profits and loss arising from carrying on of the business. The reason for the revenue to treat the impugned income as Business Income of the assessee is that the consideration is in the form of percentage of turnover. We are of the view that the said fact alone cannot be reason in treating a receipt as Business Income without which is reflected as investment in the financial statements of the assessee. It is also relevant to notice that the assessee has not claimed any depreciation on the said assets which goes to prove that the said asset is not treated as an asset used for the business purposes of the assessee. In our considered opinion, the test to be applied to for assessing the income under the right head would be that whether letting out the property is the business activity of the assessee or letting out is the exploitation of the property as an owner. In the given case it is already established that the assessee is not in the business of letting out the property since no depreciation on the asset is claimed by the assessee. Therefore, the income derived by letting out the property as an owner in our view should be taxed under the head Income from House Property. We also notice that the revenue has been consistently accepting the impugned income under the head Income from House Property and there is no change to the facts as compared to the earlier years for the revenue to take a different stand. Considering these facts and the evidences submitted before us, we are of the considered view that the impugned income derived by the assessee from letting out a property owned is to be taxed under the head “Income from House Property” and not as Business Income. Accordingly, we direct the AO to treat the income as Income from House Property and allow the deductions against the same in accordance with law. It is ordered accordingly.

In result, appeal of the assessee is allowed.