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Income Tax Appellate Tribunal, BANGALORE BENCHES “A”, BANGALORE
Before: Shri George George K, JM & Ms.Padmavathy S, AM
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “A”, BANGALORE Before Shri George George K, JM & Ms.Padmavathy S, AM ITA No.982/Bang/2019 : Asst.Year 2014-2015 M/s.Embassy Knowledge The Assistant Commissioner Infrastructure Projects Pvt.Ltd. of Income-tax, Circle 2(1)(2) v. Bangalore. 1st Floor, Embassy Point 150 Infantry Road Bangalure – 560 001. PAN : AABCE7567Q. (Appellant) (Respondent)
Appellant by : Sri.Sandeep Chalapathy, CA Respondent by : Sri.Sanjay Kumar S.R., CIT –DR Date of Pronouncement : 15.06.2022 Date of Hearing : 14.06.2022
O R D E R Per George George K, JM : This appeal at the instance of the assessee is directed against CIT(A)’s order dated 12.02.2019. The relevant assessment year is 2014-2015.
The relief sought are as under: (i) Income may be treated as `income from business’ and not `income from property’; (ii) Interest of Rs.7,03,43,585 may be deducted while computing the income; (iii) Depreciation may be allowed on assets leased out; and (iv) 80G may be allowed on the donation of Rs.5,00,000.
2 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd. 3. The assessee has also raised additional grounds by applications dated 23.05.2022 and 13.09.2021. The additional grounds raised read as follows:-
“That the learned assessing officer erred in law and on facts in not appreciating that the income from letting out of the building with the infrastructure would amount to carrying on business and therefore should be assessed under the head “Income from business”. “Without prejudice to the main grounds of appeal, that the learned lower authorities erred in law and on facts in not allowing to set off the loss assessed under the head “Income from house property” of Rs.4,55,96,946 for A.Y. 2012-13 and Rs.3,69,76,599 for A.Y. 2013-14 against the income assessed under the head “Income from house property” for the current A.Y.2014-15 and carry forward the balance loss to subsequent years.”
The above additional grounds do not require examination of new facts or documents other than those already on record. The additional grounds raised are legal issues. Therefore, in view of the judgments of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) and in the case of Jute Corporation of India Ltd. v. CIT (1991) 187 ITR 688 (SC), the additional grounds are admitted for adjudication.
The brief facts of the case are as follows: The assessee is a company, engaged in the business of development, maintenance and leasing of infrastructure for educational institutions in Bangalore. For the assessment year 2014-2015, the return of income was filed on 30.11.2014 declaring a loss of Rs.17,82,34,060. The assessee’s case was selected for scrutiny and a notice u/s 143(2) of the Income- tax Act, 1961 was issued and served. Further notice u/s
3 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd. 142(1) of the I.T.Act were also issued on various dates. The assessee declared the entire income under the head “Profits and gains of business or profession”. However, the A.O. did not accept the contentions of the assessee and stated that the primary motive behind business should be profit making and the business activities are usually concerned with transfer, exchange of goods and services. It was further stated by the A.O. that the business is an activity which is continuously carried out for economic gain with the associated risk of producing and selling of goods and services and the assessee is neither manufacturing, exchanging nor selling any goods or services. It was held by the A.O. that mere letting out properties with facilities like furniture, air conditioners, dish antenna etc. does not change the nature of services. It was concluded by the A.O. that the rental income has to be assessed under the head “income from house property” instead of business income as disclosed by the assessee. The A.O. further held that depreciation is not allowable since the income has to be assessed under the head “income from house property”. Further, the A.O. added a sum of Rs.8,63,056 incurred towards repairs and maintenance expenses to the rental income for the reason that the assessee has not provided the invoice copies. The A.O. did not consider a sum of Rs.4.63 crore of interest cost u/s 24(b) of the I.T.Act. This aspect was not discussed in the assessment order.
Aggrieved by the assessment order, the assessee filed appeal before the first appellate authority. The issues raised before the first appellate authority are as follows:-
4 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd.
(i) Interest cost of Rs.4.34 crore was not allowed u/s 24(b) of the I.T.Act. (ii) A sum of Rs.8,63,056 was added back to income from house property even though it cannot be added as per the provisions of the Act.
The assessee also raised following additional grounds:-
(i) The interest cost is Rs.7.03 crore and not Rs.4.34 crore as raised in original grounds of appeal. (ii) Depreciation on the asset leased has to be allowed. (iii) Deduction on section 80G of Rs.5 lakh has to be allowed.
As regards the additional grounds raised, it was stated before the first appellate authority that the financial charges / interest expenditure of Rs.7.03 crore should be allowed instead of Rs.4.34 crore, as mentioned in the original grounds of appeal. The CIT(A) directed the A.O. to furnish a remand report. The A.O. observed in the remand report that the assessee has not produced ledger extracts, bank statements, substantiating and quantifying the claim that the interest expenses is Rs.7.03 crore and did not prove that it was spent towards the construction of the building for allowability of claim of interest u/s 24(b) of the I.T.Act. In view of the remand report, the CIT(A) did not allow deduction u/s 24(b) of the I.T.Act. The addition of Rs.8,63,056 which was disallowance of maintenance expenses was also confirmed for non-production of invoices. The grounds in relation to
5 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd. allowance of depreciation and deduction u/s 80G of the I.T.Act were also not allowed.
Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal. The learned AR had furnished a paper book comprising of 121 pages enclosing therein the certification of incorporation, memorandum of association, the statement of total income, financial statement for the year ending 31.03.2014, sanction letter of loan issued by the bank, cash flow statement, the case laws relied on, etc. The learned AR submitted that the issue raised in the additional ground, namely, whether the lease rentals received whether it is to be assessed as “income from business” or “income from house property” was not raised before the first appellate authority though the assessee had filed the return of income claiming the said receipt as income from business and profession. The learned AR submitted that in the interest of justice and equity, the matter may be examined by the CIT(A). It was further submitted by the learned AR that most of the other issues raised in this appeal are primarily consequential to the decision that is to be rendered whether the lease rentals is to be assessed as “income from business” or “income from other sources”. Accordingly, the learned AR submitted that the issues raised may be restored to the files of the CIT(A).
Per contra, the learned Departmental Representative, supported the orders of the Income Tax Authorities.
6 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd. 11. We have heard rival submissions and perused the material on record. The assessee has filed an elaborate written submission that lease rental income received by the assessee is to be assessed as “income from business” instead of “income from house property”. The relevant portion of the same reads as follows:-
“2.1.1 The objects of the applicant as per the Memorandum of Association states as under:- [A] THE MAIN OBJECTS TO BE PURSUED BY THE COMPANY ON ITS INCORPORATION 1) To provide infrastructure including buildings, know-how and support services for education, training and knowledge support services of all kinds and description to any person or institution on its own or through joint ventures and to promote educational institutions, schools, colleges, training .centre without any limitation to any functional field or area of education. And to promote general education, advanced education in the field of engineering, medical, management and research of all kind and description and all type of research, and electronic governance. 2) To acquire land, building and other immovable properties or any interest therein by purchase or otherwise and to carry on all or any other business of designing, planning, managing, developing and / or construction of schools, colleges, educational institutions, apartments, houses, factory buildings, godowns, warehouses, hotels, farm houses, health clubs, holiday resorts, club house, industrial sheds, housing colonies, public buildings, multistoried buildings, schools, colleges, community halls, shopping complex, dams, bridges, canals, power projects and playgrounds, tennis court, and / or to carry on business as civil, mechanical, electrical, water supply and sanitary contractors, builders, real estate agents, real estate developers, suppliers of various services required for residential, commercial, industrial and other units. It is clear from the above objects that the intention of the appellant is to conduct business by renting out the premises along with other amenities and movable assets which are required for running a school. Hence, letting out of immovable and movable properties is business income. 2. 1.2. It is further submitted that the lease agreements dated
7 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd. 31.07.2009 and 10.12.2015 show that the lease rent is charged for both movable properties and immovable properties. Movable properties consist of Furnitures and Fixtures, Plant and Machinery, Office Equipment, Books and sports equipment, computers etc. (Page No. 54 to 72 of paper book) 2.1.3. The learned assessing officer states in para 3.3 of the assessment order that the appellant has entered into two agreements. One is for the lease rentals and a separate agreement for services and amenities provided. In this connection, it is submitted that the appellant has entered into only one agreement with the lessee on 31.07.2009 and the same is revised on 10.12.2015. The above agreement for lease of both buildings and other facilities. Therefore, the finding of the learned assessing officer that the appellant has entered into two separate agreements is factually incorrect. 2.1.4. It can be seen from the preamble of the lease agreement dated 31st July 2009 wherein the lessee is looking out for the infrastructure like a school building with necessary open space for recreational facilities and playground, theatre, library, laboratory, hostel building for student, teachers, and other similar facilities necessary for the purpose of setting up and running an international school. The appellant being Lessor is in possession of such land, building and necessary infrastructure stated above for setting up and running an international school. Therefore, the property being let out is not just plain structure with minimum facilities but a special natured building with lot of other infrastructure, amenities which is suitable for schools. 2.1.5. We rely on the decision of the Hon'ble Supreme Court in Chennai Properties and Investments Ltd Vs CIT 373 ITR 673. In this case there was a finding of the fact that the main object of the company was to acquire and hold the properties known as "Chennai House" and "Firhavin Estate" and to let out those properties as well as advance on the security of the lands and buildings or other properties or any interest therein. The Supreme Court relying on the above main objects came to a conclusion that the assessee therein is carrying on a business and since the letting out is a part of trading operation, the rent has to be assessed under the head "Profits and Gains from Business or Profession". The Hon'ble Supreme Court also noted that the observations of the Constitution Bench in Sultan Brothers that the entry in the object clause showing a particular object would not be the determinative factor to arrive at to a conclusion whether the income is to be treated as income from business and such a question would depend on the circumstances of each case,
8 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd. viz: whether a particular letting is business or not. According to us, the ratio of the decision of the Supreme Court in Chennai Properties is that if the letting out of a building can properly said to be carrying on a business, the rental income should be assessed under the head "Profits and gains of business or profession". (Page No. 92 and 94 of paper book) 2.1.6. The decision of the Supreme Court in Chennai Property's case was followed by the Supreme Court in Rayala Corporation Pvt Ltd Vs JCIT 386 ITR 500 as the facts were similar. (Page No. 96 and 97 of paper book) 2.1.7. The Supreme Court had an occasion to consider Chennai Properties and Rayala Corporation once again in Raj Dadarkar and Associates Vs ACIT 394 ITR 592. The Hon'ble Supreme Court observed as under: (Page No. 106 of paper book) Wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, in case provisions of section 22 of the Act are satisfied with primary ingredient that the assessee is the owner of the said building or lands appurtenant thereto. Section 22 of the Act makes "annual value" of such a property as income chargeable to tax under this head. How annual value is to be determined is provided in section 23 of the Act. "Owner of the house property" is defined in section 27 of the Act which includes certain situations where a person not actually the owner shall be treated as deemed owner of a building or part thereof. In the present case, the appellant is held to be "deemed owner" of the property in question by virtue of section 27(iiib) of the Act. On the other hand, under certain circumstances, where the income may have been derived from letting out of the premises, it can still be treated as business income if letting out of the premises itself is the business of the assessee. What is the test which has to be applied to determine whether the income would be chargeable under the head "Income from the house property" or it would be chargeable under the head "Profits and gains from business or profession", is the question. It may be mentioned, in the first instance, that merely because there is an entry in the object clause of the business showing a particular object, would not be the determinative factor to arrive at a conclusion that the income is to be treated as income from business. Such a question would depend upon the circumstances of each case. It is so held by the Constitution Bench of this court in Sultan Brothers (P.) Ltd. v. CIT [1964] 5 SCR 807* and we reproduce the relevant portion thereof:
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"We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature." The Hon'ble Supreme Court held that the rent received from the commercial complex is to be assessed under the head "Income from house property" and not as business income. 2.1.8. An analysis of the above decisions at first blush seems to lay down ostensibly contradictory views. But a careful analysis of all the above decisions would show that the following principles emerge: - a The question whether rental income is to be assessed as income from house property or as business income depends on the facts and circumstances of each case. The main test to be satisfied to be assessed as business income is that the assessee's business should be that of letting out properties. b. If the assessee has let out the property simply by exercising his right as an owner and not in the course of business, the rental income should be assessed under the head "Income from House Property". c.The objects in the Memorandum of Association of a company or in the partnership deed in the case of a firm are not determinative in deciding whether the assessee is carrying on a business or not. As stated earlier, such a determination should be based on facts. 2.1.9. Applying the above test to the facts of the present case, it can be said that the rent received by the appellant should be assessed under the head "Profits and gains of business or profession" for the following reasons: a As stated, above, the main test to be satisfied for assessing the income as business income is that the assessee's business should be that of letting out properties and in the present case, based on the MOA and lease agreement, it can be clearly said that the assessee's business is letting out of properties.
10 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd. b.The assessee is not acting as a mere owner of the assets and letting out the properties. The letting out of the properties along with other amenities is business operations of the assessee. The appellant company was formed for the above purpose. Hence, rental income has to be considered as business income. c.The objects clause on the MOA may not be a conclusive factor but they can be taken into consideration in arriving at the conclusion. Hence, the objects and lease agreements show that the appellant is in the business of letting out of properties to schools. The appellant relies on the decision of Hon'ble Calcutta High Court in Shyam Burlap Co Ltd Vs CIT 380ITR 151 (Pg Nos. 153 of PB) d.It can be seen from the preamble of the lease agreement dated 31st July 2009 wherein the lessee is looking out for the infrastructure like a school building with necessary open space for recreational facilities and playground, theatre, library, laboratory, hostel building for student, teachers and other similar facilities necessary for the purpose of setting up and running an international school. (Pg No. 55 and 56 ofPB). The appellant being Lessor is in possession of such land, building and necessary infrastructure stated above for setting up and running an international school. Therefore, the property being let out is not just plain structure with minimum facilities but a special natured building with lot of other infrastructure, amenities which is suitable for schools. 2.1.10. It is further submitted that the objects clause in the MOA is very clear that the main activity of the appellant is to provide infrastructure including buildings, know-how and support services for educational institutions. The objects as per the MOA referred in para 2.1.1 also shows that the buildings are constructed specifically for schools. Therefore, these activities are more than mere letting out of building for tenancy and the income has to be treated as business income. We rely on the decision of Hon'ble Madras High Court in CIT v. NDR Warehousing P. Ltd 372 ITR 690 for the above proposition. (Please see observations at Pave No. 110 and III ofPB). The facts of this case are that the assessee was letting out the god owns and warehouses to the manufacturers and traders and other companies carrying on warehousing business. The Hon'ble High Court held that the income from letting out the godowns is in the nature of warehousing business. 2.1.11. We further rely on the following decisions for the proposition that the income from letting out of properties are carried out as business and not enjoying as a mere land owner to earn rental income therefore, the rental income has to be assessed as "Business income". a Karanpura Development Co. Ltd v. CIT 44 ITR 362 (SC) [Pg No. 121ofPB)
11 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd.
b.CIT v. Velankani Information Systems Ltd 35 Taxmann.com 1 (Kar) [Para 26 - Pg No. 136 and 137 of PB) 2.1.12. We further rely on the following decisions of the Hon'ble Karnataka High Court wherein it was held that the activity of developing, operating and maintaining industrial park and providing infrastructural facilities to different software companies is business activity and the rental income has to be assessed under the head "Profits and gains of business or profession". These decisions have been rendered by following the judgement in CIT Vs Velankani Information Systems Ltd 35 Taxmann.com 1) a CIT v. Information Technology Park Pvt Ltd 46 Taxmann.com 239 (Kar) [Para 6] b.CIT v. Prestige Estate Projects P. Ltd 116 Taxmann.com 554 (Kar) [Para 13] c.Rao Computer Consultants P. Ltd v. DCIT 128 Taxmann.com 292(Kar) [Para 4] d.CIT v. Mis. Toyota Techno Park. India P. Ltd (ITA No. 30 of 2009) dated 18.03.2014 [Para 6] 2.l.13. It is further submitted that the department has assessed the income for the assessment years 2012-13 and 2013-14 under the head "Income from house property. (Pg. n079 to 90 of PB). The assessment orders are not challenged for various reasons. However, that does not infer that the appellant cannot contest in the current year on identical issue. There is no estoppel against the assessee. An assessee can al ways take a stand contrary to the one he has taken while filing its return and the assessee has a right to question the assessment framed on the basis of such returns in an appeal. It has been held in the following decisions that the principle of estoppel do not apply to tax proceedings. Narsapalli Oil Mills Vs The State of My sore 32 STC 599 (Kar) Bhandari Metals and Alloys (Private) Ltd Vs State of Karnataka 56 KLJ 438 DCIT 11(3) Vs GEBE (P) Ltd 64 SOT 129 (URO) (Bang) 2.l.14. In view of the binding decisions of the Hon'ble Karnataka High Court 56 KLJ 438 and Hon'ble Bangalore Tribunal in 64 SOT 129 (URO) and other decisions cited above, it is always permissible for an assessee to challenge in the appeal an assessment made accepting the return filed by him Hence, the appellant is entitled to take a different stand from the one based on which the return was filed. 2.l.15. The ratio of the above decisions is equally applicable to the facts of the present case where the assessments for the earlier years are not questioned but the appeal is filed against
12 ITA No.982/Bang/2019. M/s.Embassy Knowledge Infrastructure Projects Pvt.Ltd. the assessment order on identical issue for the current year. It is a settled proposition that res judicata is not applicable to Income-tax. On identical facts, Hon'ble Calcutta High Court in Shyam Burlap Co. Ltd v. CIT 380 ITR 151 held that the principles of consistency are not applicable. The facts of the above case are that the assessee has declared the rental income under the head "Profits and gains of business or profession" for the current year. In the earlier years, the Tribunal decided that the income is assessable under the head "Income from house property". The Department stated that the principles of consistency are applicable, and it has to be decided as income from house property for the current year also. The Hon'ble High Court held that the Tribunal has not decided the appeal in light of the Memorandum of Association of the assessee company and therefore, the principles of consistency are not applicable. It was further held that there was no question of estoppel and res-judicata The relevant portions of the judgment are in Paragraphs 15 to 17 of the judgment (PgNo.153 of PB). In view of the above submissions, it is submitted that the principles of consistency are not applicable.” 11.1 The above issue was not raised before the CIT(A). In the interest of justice and equity, we are of the view that the matter needs to be examined by the CIT(A). The CIT(A) shall afford a reasonable opportunity of hearing to the assessee before a decision taken in the matter.
The assessee had not pressed the issue of 80G, hence, ground 7 is rejected. All other issues are consequential to the main issue that is already restored to the files of the CIT(A), hence, all the issues, except the issue of deduction u/s 80Gof the I.T.Act is to be restored to the files of the CIT(A). It is ordered accordingly.
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In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced on this 15th day of June, 2022.
Sd/- Sd/- (Padmavathy S) (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 15th June, 2022. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-2, Bengaluru. 4. The Pr.CIT-2, Bengaluru. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore