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Income Tax Appellate Tribunal, BANGALORE BENCHES “A”, BANGALORE
Before: Shri George George K, JM & Shri B.R.Baskaran, AM
O R D E R Per Bench : These appeals at the instance of the assessee are directed against three orders of CIT(A). The relevant assessment years are 2005-2006 to 2007-2008, 2012-2013 and 2013-2014. (As regards case concerning assessment year 2010-2011, which was part of these batch of cases, the AR had sought for adjournment and the learned DR did not object. Accordingly, the case relating to assessment year 2010-2011 was adjourned).
Common issue is raised in the above appeals, hence, they were heard together and are being disposed of by this consolidate order. Identical grounds have been raised for these
1. That on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in confirming order passed by Ld. Assessing Officer, in treating the rental income earned from building amounting to Rs.84,01,884 as `income from other sources’ instead of “income from house property as claimed by the Appellant / Assessee and deciding the issue raised by Appellant in favour of revenue, without appreciating the true facts and circumstances of the case.
2. Without prejudice to Ground of Appeal 1, that on the facts and circumstances of the case and in law, if at all, rental income earned from building amounting to Rs.84,01,884 be treated as `income from other sources’, deduction of expenses incurred by Appellant for earning the rental income ought to have been allowed as deduction under section 57 of the Act.”
The brief facts of the case are as follow:
The assessee had given part of its factory building on lease during the relevant assessment year’s. The land on which the factory building constructed was taken on lease from Government of India for a period of 99 years. In the revised return of income, the assessee had offered to tax income from letting out of factory building under the head `income from house property’. The rental income from letting out of plant and machinery was offered to tax under the head `income from other sources’.
The assessments were completed u/s 144 r.w.s. 147 of the I.T.Act for A.Ys. 2005-2006 to 2007-2008, 2012-2013 and 2013-2014, wherein the Assessing Officer reclassified the rental income from property as “income from other sources”
(i) The assessee is not the owner of the property but a tenant and it sublets the property, and (ii) The assessee had let out certain plant and machinery / equipment along with the property.
Aggrieved by the assessment orders completed for assessment years 2005-2006 to 2007-2008, 2012-2013 and 2013-2014, the assessee preferred appeals to the first appellate authority. The assessee submitted that it had taken on lease land for a period of 99 years from the Government of India and constructed factory building on it. Therefore, it was contended that the assessee was the owner of factory premises. It was further contended that the rental income from sublease of such land and building was offered to tax by the assessee as “income from house property” being the specific head for taxation of such rental income in terms of section 22 to 27 of the I.T.Act and also based on the principles laid down in various judicial precedents. It was further contended that the rental income from partial letting out of factory building and rent from letting out of equipment are separate transactions being paid under separate invoices, hence, cannot be construed as a composite rent to be charged under the head “income from other sources”.
The CIT(A) accepted the contention of the assessee that it was the owner of the factory premises. The CIT(A), however, after examining the sublease agreement entered between the 4 & Ors. M/s.Vectra Advanced Engineering Pvt.Ltd. . assessee and various sublessees, came to a conclusion that rental income from letting out of factory building and rental income received from letting out of equipment is composite transaction and inseparable. Therefore, there is nothing wrong in the action of the A.O. to consider the rental income from let out portion of the factory building of the assessee along with the rental for equipment as `income from other sources’. Accordingly, the CIT(A) upheld the order of the Assessing Officer.
Aggrieved by the orders of the CIT(A), the assessee has filed these appeals before the Tribunal. The assessee has filed paper book comprising of 151 pages enclosing therein copies of the assessment orders, lease agreements entered between the assessee and sublessee’s, submissions made before the CIT(A), copy of the CIT(A)’s order, etc. The learned AR reiterated the submissions made before the Income Tax Authorities.
The learned Departmental Representative, on the other hand, strongly supported the assessment orders and the orders passed by the CIT(A).
We have heard rival submissions and perused the material on record. The Hon’ble Madras High Court in the case of CIT v. Chennai Properties and Investments Ltd. [(2004) 266 ITR 685 (Mad.)] after referring to the Hon’ble Apex Court judgment in the case of Sultan Brothers Private Limited v. CIT [(1964) 51 ITR 353 (SC)] has observed as under:-
5 & Ors. M/s.Vectra Advanced Engineering Pvt.Ltd. . “Although it was held by the Constitution Bench in the case of Sultan Brothers (1964) 51 ITR 353 (SC) that whether a particular letting is business has to be decided in the circumstances of each case and that 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, in all the cases which have come before the courts involving commercial or residential buildings owned by assessees it has been held that the income realized by such owners by way of rental income from a building, whether a commercial building or residential house, is assessable under the head “Income from house property”. The only exceptions are cases where the letting of the building is inseparable from the letting of the machinery, plant and furniture. In such cases, it has been held that the rental would not have been realized but for the letting out of the machinery, plant or furniture along with such building and therefore the rental received for the building is to be assessed under the head “Income from other sources”.
9.1 In the light of the above dictum, let us examine the facts of the instant case. For the assessment years 2005-2006 to 2006-2007, the assessee had considered the entire rental income as business income. However, from assessment year 2007-2008, the rental income from property was offered to tax by the assessee as “income from house property”. Whereas, the rental income from equipment was considered as “income from other sources” by the assessee. The A.O., however, reclassified the rental income from property as “income from other sources” and disallowed standard deduction claimed u/s 24(a) of the I.T.Act for the following two reasons, namely, (i) the assessee is not the owner of the property but only a tenant and it had sublet the property, (ii) the assessee had let out the equipment along with the property. The CIT(A) accepted the contention of the assessee and it was the owner of the factory building. The CIT(A), however, after examining the lease deed, came to the conclusion that the rental income from letting out of factory 9.2 The details of tenants, the rental income earned from property and rental income earned from leasing of equipment for assessment years 2005-2006 to 2007-2008, 2012-2013 and 2013-2014 are as follows:-
AY Tenants Property Equipment Total (Rs.) rental rental 2005-06 Terex Vectra 84,01,884 15,00,000 99,01,884 Equipment (Private) Limited 2006-07 Terex Vectra 1,27,58,076 24,99,600 1,52,57,676 Equipment (Private) Limited 2007-08 Terex Vectra 1,40,33,884 24,99,600 1,65,33,484 Equipment (Private) Limited Indo Copters 20,93,307 2,61,000 23,54,307 Pvt. Ltd. (Formerly known as Vectra Aviation) Total 1,61,27,191 27,60,600 1,88,87,791 2012-13 Indo Copters 90,89,592 10,44,000 1,01,33,592 Pvt. Ltd. (Formerly known as Vectra Aviation) Integrated 23,24,160 2,40,000 25,64,160 Helicopters Service Private Limited Terex Vectra 2,47,22,931 24,99,600 2,72,22,531 Equipment (Private) Limited Vectra IT 7,73,916 -- 7,73,916 Solutions Private Limited Total 3,69,10,599 37,83,600 4,06,94,211
7 & Ors. M/s.Vectra Advanced Engineering Pvt.Ltd. . 2013-14 Indo Copters 90,89,592 10,44,000 1,01,33,592 Pvt. Ltd. (Formerly known as Vectra Aviation) Integrated 2,32,41,600 2,40,000 25,64,160 Helicopters Service Private Limited Terex Vectra 2,71,95,219 24,99,600 2,96,94,819 Equipment (Private) Limited Vectra 34,57,188 -- 34,57,188 Engineering Materials Pvt. Ltd. Vectra IT 7,73,928 -- 7,73,928 Solutions Private Limited Total 4,28,40,087 37,83,600 4,66,23,687 9.3 The lease agreements entered between the assessee and various sub-lessees are placed on record at pages 54 to 102 of the paper book. On a perusal of the lease agreements, it is seen that the description of entire property is given in the first schedule. The description of portion of factory premises which was let out for sub-lease is mentioned in the second schedule of the lease agreement. The description of the equipment leased out is given in the third schedule. The fourth schedule of the lease agreement gives the break up of lease rentals. For the entire period concerning assessment year 2005-2006, there is only one sub-lessee, namely, M/s.Terex Vectra Equipment (Private) Limited. All the lease agreements entered by the assessee with other lessee’s for other A.Y.’s are identical. It is clearly seen from the perusal of the lease agreements that the rental income, both from property as well as equipment let out by the assessee, are separately identifiable in the lease agreements. It is also clear that the letting out of building as 8 & Ors. M/s.Vectra Advanced Engineering Pvt.Ltd. . well as letting out of equipment are separable. The leasing of factory premises have given rise to major receipt of rental income and leasing of equipment is only incidental and both are clearly separable. Almost 85% of the total rent receipts is on account of leasing factory premises and leasing of equipment is only of minor items such as Cranes, Air- compressor, power generator etc. It is relevant to quote provisions of section 56(2)(iii) of the I.T.Act, which reads as follow:-
“where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the building is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head “Profits and gains of business or profession.”
9.4 The provisions of section 56 of the I.T.Act states that in case the property and equipment are let out and if the rent receivable are inseparable, then only the rent shall be taxable as “income from other sources”. In other words, if letting out of property is separable from letting out of other assets, as in the instant case, then the rent for house property is taxable u/s 22 of the I.T.Act, whereas, rent for other assets is taxable either u/s 28 of the I.T.Act as profits and gains of business or profession or u/s 56 of the I.T.Act as income from other sources, as the case may be.
9.5 The Hon’ble jurisdictional High Court in the case of D.R.Puttanna Sons Private Limited v. CIT [(1986) 162 ITR 468 (Kar.)] was considering a case of an assessee who had taken a land for lease for 30 years. The assessee thereafter put up a 9 & Ors. M/s.Vectra Advanced Engineering Pvt.Ltd. . building thereon and the same was let out on rent. The Revenue contended that the assessee being the owner of the property for 30 years, rental income was assessable under the head `income from property’ and not as business income, as claimed by the assessee. The Hon’ble jurisdictional High Court decided the issue in favour of the Revenue and held that it is clear and as long as the assessee is the owner of the structure built by it, the income derived from the property will have to be assessed under the head income from house property and not business.
9.6 The Hon’ble Apex Court in the case of Shambhu Investment Private Limited. v. CIT [(2003) 263 ITR 143 (SC)] had held that where from an agreement between two parties, it is clear that the primary object was to let out the portion of the property with additional rights of use of furniture and fixture and other common facilities, income derived from said property was income to be assessed u/s 22 of the I.T.Act.
9.7 In view of the aforesaid reasoning and the judicial pronouncements, cited supra, we hold that the rental income earned by the assessee from letting out of property is taxable under the head income from house property and not income from other sources, for the following reasons :-
(i) the assessee is the owner of the property in terms of section 22 of the I.T.Act.
(ii) the rental income on lease of factory premises is taxable under the head house property in view of the (iii) the rental income earned by the assessee from property and from equipment are separable in the facts of the given cases. Accordingly, the provisions of section 56 is not applicable in respect of income received from leasing of property, namely, factory building.
In the result, the appeals filed by the assessee are allowed.