DCIT, RANGE-3, LUCKNOW vs. M/S WELLDONE INFRASTRUCTURE PVT. LTD., LUCKNOW

3. Aggrieved with this order of assessment, the assessee went in appeal before the ld. CIT(A). Before the ld. CIT(A), it was submitted that as per the revenue breakup of the assessee, rental income was not the dominant contributor to it. The majority of the same had come from sale of units. Since, the dominant objective of the assessee was not to earn rental income,the rental income had shown a progressive decline in subsequent years, as the units came to be sold. It was further submitted that section 23(5) of the Income Tax Act, 1961 did not differentiate between residential and commercial properties and income from both types of properties were assessable under the head income from house property. It was submitted that merely because 3 the owner of the property was a company incorporated with the object of developing real estate projects, the incidence of income derived from the property owned by it could not be regarded as altered; the income came more directly and specifically under the head, “income from house property” rather than income from business. It was further submitted, that the properties had been let out as bare apartments without any extra services or facilities, which had been provided by facilities management service provider namely M/s Halwasiya Centre Maintenance LLP. The ld. AO had not provided any cogent reason for holding that the income earned by the assessee company was not rental income but income from business and no cogent evidence had been brought in support of such an addition. It was further submitted that it had been held through a number of judgments that such income, earned by real estate developers, are in fact income from house property and not from business.The assessee quoted from the decision of the Hon’ble Supreme Court in the case of Raj Dadarkar& Associates vs. ACIT (2017) 394 ITR 592 (SC) wherein the Hon’ble Supreme Court had taken a similar view. The assesse also quoted from the judgment of the Hon’ble Supreme Court in the case of Sultan Brothers (P.) Ltd. vs. CIT (1964) 51 ITR 353 and decisions of various Hon’ble High Courts and Tribunals in the cases of Shambhu Investment (P.) Ltd., vs. CIT (2003) 263 ITR 143, Atma Ram Properties P. Ltd. vs. JCIT (2006) 102 TTJ (Delhi)[SB], CIT vs. Gundecha Builders (2019) 102 taxman.com 27 (Bom) and ACIT vs. Ashapura Developers (ITAT Mumbai)wherein all the Courts and Tribunals had held that where the assessee was not having the dominant business of letting out of properties but was essentially acquiring, developing and selling of properties, the rental income received by it by way of ownership and not exploitation of property, was an income from house property. After considering the facts of the case and the judgments cited by the assessee, the ld. CIT(A) held that the additions made by the ld. AO were not based on the facts of the case. Accordingly, she directed that the additions may be deleted and the assessee may be assessed under the head income from house property for its rental income.

4. Aggrieved by this decision of the ld. CIT(A), the Revenue has come in appeal before us. Shri. Amit Singh Chauhan, JCIT (hereinafter referred to as the ld. Sr. DR) pointed out that section 22 of the Income Tax Act laid down that it was only the annual value of such property which was not utilized by the assessee for the purposes of any business or profession that were chargeable to income tax under the head, “income from house property” and in the case of the assessee, the assessee was progressively selling these units, not as capital assets that would fetch capital gains, but as business assets yielding business income. Therefore, the rental income derived from such property could not be regarded as income from house property. The ld. Sr. DR also took us through the Memorandum of Association and Articles of Association of the assessee company to point out that the letting out of properties was also included in the main objects of the assesse company. The ld. Sr. DR also invited our attention to page 32 of the paper book filed by the ld. AR and pointed out that the rental income had been included under, “revenue from operations” by the assessee company. Therefore, when the assessee was incorporated with one of the objects of letting out of properties and had also included rental income under its revenue from operations, it did not stand to reason that the rent should be charged under the head, “income from house property”. Inviting our attention to the block of assets of the assessee’s accounts, the ld. Sr. DR pointed out that no buildings had been included in the block of assets. In the circumstances, it could not be held that the buildings upon which the rents were being charged were fixed assets but were clearly stock in trade. The ld. Sr. DR further pointed out that the assessee was both claiming repair and maintenance of building of Rs.91,95,028/- and also claiming standard deduction of 30% on the rental income. Thus, the assessee was claiming double expenditure with regard to the properties upon which rent was levied. He further pointed out that 5 interest bearing loan of Rs. 2.41 Crores had been taken against rental security and as per Clause (b) of section 24 the amount of interest paid on borrowed capital was deductible as an income from house property, but in the case of the assessee where the loan had been taken after the construction of the property, it could not be allowed as a deduction from house property. Accordingly, the ld. Sr. DR prayed that the ld. AO had fittingly assessed the income under the head income from business and the ld. CIT(A) was not justified in applying case laws that were different from the facts of the assessee’s case to grant the relief to the assessee.

1. 1. That the appellant in the present case is Private Limited by status which has been regular in filing its return of income and also in making compliances of the statutory notices issued by the Revenue from time to time. As per its MOA, the main and the core objects of the appellant company has been to develop real estates and allied activities. Copy of MOA is placed at pages 1 to 30 of the paper book.

2. That during the year under consideration, appellant earned income from business and profession, Income from House Property and income from other sources. It filed its original return of income on 03.11.2017 at total income of Rs. 1,40,86,790/-comprising of all these incomes. Net income earned from the House Properties has been at Rs.2,26,72,571/-which was inadvertently returned as Business Income while filing the original return of income on 03.11.20217. Rental income of Rs.2,26,72,571/-has been on account of letting out of unsold stock/shops/offices of its Commercial Project named "One Awadh Mall', Lucknow.

D Before the Hon'ble Bench, ITAT, Lucknow:

1. 1. The present appeal before the Hon'ble Bench has been filed by the Revenue against the appellate order dated 23.09.2020 passed by the office of the Ld. CIT(A).

2. The only issue involved in the present appeal is whether the rental income of Rs.2,26,72,571/-is to be taxed as Business Income or as Income from House Property. The Ld.CIT(A) has given a detailed findings on the issue that the rental income of Rs.2,26,72,571/-is to be taxed as "Income from House Property" and we rely on the appellate order passed by the office of the Ld. CIT(A).

3. Whether a rental income is income from House property or business income depends upon the various factors such as- (i) In the case of a Corporate assessee, the main objective of the company is required to be seen, which in the present case is developing of real estates and this fact is not in dispute. (ii) Whether the rental income is dominant contributor to the total income of an assessee or not, which in the present case is missing. (iii) Each case is required to be looked at from a businessman's point of view to find out whether the letting out was the doing of a business or the exploitation of his property by an owner. In the present case, it is the exploitation of the property by the owner. (iv) whether the letting out of property is the exclusive business of the assessee. In the present case, letting out of property is not the exclusive business of the assessee. (v) In the case of an assessee being engaged in the development of real estates, the unsold stocks of flats/shops/ offices are not meant for exclusively used for earning rental income rather being a prudent businessman; these unsold stocks are exploited to earn rental income to be taxed as Income from House Property. (vi) The Assessing Officer is required to establish the fact with documentary evidence on record that the assessee has been engaged in the business of letting out of property as a systematic business activities.

(vii) This fact is required to be seen as to whether the rental income earned from letting out of the unsold stock is inclusive of the value of other facilities or not. In the present case, assessee has not provided any sort of other facilities / amenities to the tenants. (viii) The Character of rental income is not altered just because it was received by a company formed with the object of developing and setting up markets or because occupants are not permanent. [East India Housing & Land Development Trust Ltd Vs. CIT] [42 ITR 49-SC] (ix) 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 income is to be treated as income from business, such a question would depend upon the circumstances of each case. [Raj Dadarkar& Associates Vs. ACIT-394 ITR 592-SC] 3. That the issue involved in the present case is squarely covered in favour of the assessee company by various appellate courts. With a view to assist the Hon’ble Bench, we would like to rely on certain case authorities, as under:- (i) Raj Dadarkar& Associates Vs. ACIT [ 2017-394 ITR 592-SC] (Placed at page 62 to 68 of the paper book) (ii) CIT Vs. Sane &Doshi Enterprises [377 ITR 165-Bom] (Placed at page 38 to 52 of the paper book) (iii) CIT Vs. Gundecha Builders[2019-102 Taxmann.Com 27-Bom] (Placed at page 53 to 55 of the paper book) (v) PCIT Vs. Banzai Estate Pvt. Ltd. [131 TLC 461-Bom] (Placed at page 56 to 61 of the paper book) (vi) ACIT Vs. Ashapura Developers [2019-67 TLC 020-ITAT MUM] (vii) CIT Vs. Oberon Edifices & Estates Pvt Ltd [2019-311 CTR 815-KER] (viii) Sultan Bros Pvt. Ltd Vs. CIT [1964-51 ITR 353-SC] (ix) Shambhu Investment Pvt. Vs. CIT [2003-263 ITR 143] (x) Atma Ram Properties Pvt. Ltd Vs. Jt. CIT [2006-102 TTJ 345-SB-DELHI] (xi) DCIT Vs. Anjala Exhibitors (P) Ltd.[60 ITR (TRIB)-104-DEL] (xii) East India Housing & Land Development Trust Vs, CIT [42 ITR 49-SC] (xiii) Chennai Properties & Investment Ltd. Vs.CIT [277 CTR 185-SC] In view of the facts of the present case, in law and in light of the case authorities squarely covering the issues involved in the present case in favour of the assessee company, your hounours would find that the Ld. CIT(A) has rightly held that the rental income of Rs.2,26,72,571/-be taxed as income from house property and the order of the Ld.CIT(A) may kindly be upheld."

Thereafter, the ld. AR pointed out that the assessee met all the conditions for the application of the cited judgments; i. It had substantial revenue from real estate business. ii. The rental income was not a dominant contributor to the assessee’s business. iii. A majority of the assessee’s income was from the sale of units. iv. The rents had been reduced in subsequent years as the units had been sold. With regard to the various other points raised by the ld. Sr. DR, the ld. AR pointed out that the repair and maintenance of the building that had been shown in its accounts were for that portion of the building that was being sold by it. The ld. AR invited our attention to pages 123 to 129 of the paper book, which contained the invoices raised by the maintenance agency upon the assessee and the confirmation of accounts that showed that a sum of Rs.91,95,028/- had been invoiced by M/s Halwasiya Centre Maintenance Services LLP on account of maintenance services provided to One Awadh Centre Mall. It was further pointed out that for the leased portions, Halwasiya Centre Maintenance Services LLP had raised invoices directly to the lessees. Attention was invited to invoices of the Halwasiya Centre Maintenance Services LLP addressed to the various lessees of the leased portions to show that these were separate from the Rs. 91,95,028/- that was reflected in the assessee’s account and there was no claim of double deduction as alleged by the ld. Sr. DR. With regard to the loan raised against Rental Securitization Scheme, it was pointed out that the loans had been raised in respect of funds for construction and since they had been raised before the construction, they were allowable as a deduction. Furthermore, the ld. AR pointed out that the issue of interest had not been raised by the Revenue as a ground of appeal and therefore, could not be raised during the course of appeal. For this proposition, he relied upon the case of Jasmine Commercials Limited vs. Commissioner of Income Tax 2011 200 taxman 338 (Calcutta).

6. We have duly considered the facts and circumstances of the case. The arguments of the ld. Sr. DR revolve around the fact that since those portions of the One Awadh Mall that had not yet been sold, were the business assets i.e. stock in trade rather than the fixed assets of the assessee company, rent earned from such properties should be regarded as business income because letting out of properties was also among the objects of the assessee company and the assessee has shown this income as income from operations, in its audited accounts.However, as pointed out by the ld. AR in the case of Raj Dadarkar & Associates vs. ACIT (supra), the Hon’ble Supreme Court has held that merely because there is a particular entry in the object clause, that would not be 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. We observed that in his paper book, the ld. AR has furnished a copy of the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Sane & Doshi Enterprises 2015 377 ITR 165 (Bom) in which the Hon’ble Court has considered a similar issue and held that the treatment given in the books of accounts as stock in trade would not alter the character or the nature of the income. It pointed out that the Hon’ble High Courts and Hon’ble Supreme Court in various judgments 12 had held that if the assessee company is engaged in the business of construction and real estate development and it earned income in the form of rent from the tenants / lessees to whom the property was let out, then whether the property was held as stock in trade or otherwise, is not what is material. The real and main issue is whether this income is earned in the capacity of a trader or in the capacity of the owner of the premises. If the property belongs to the assessee and part of it, which was unsold has been let out, then, the income generated therefrom has to be treated as income from house property. The Hon’ble High Court quoted from the judgment of the Hon’ble Supreme Court in the case of East India Housing and Land Development Trust vs. CIT (1961) 42 ITR 49 (SC) to point out that the Hon’ble Supreme Court had held that even though the concerned company was formed with the object of promoting and developing markets, since the income derived from letting out property fell within a specific head as set out in section 6 of the Income Tax Act, 1922, and the income derived by the company from shops and stalls by way of rent was income derived from property and falls under the specific head described in section 9 of the Income Tax Act, 1922, the character of that income would not be altered because it was received by a company formed with the object of developing and setting up markets. The Hon’ble Supreme Court held that the income received by that appellant from shops in the form of rent, was undisputedly income from property and was to be assessed under income from house property. It, therefore, dismissed the appeal of the assessee. Relying upon this judgment, the Hon’ble Bombay High Court dismissed the appeal of the Revenue and in doing so it re- affirmed the principle that income from letting out of shops and stalls by a company task with developing and marketing real estate, should be assessed as, “income from house property”. In the case of PCIT vs. Banzai Estate Pvt. Ltd. (2024) (131) TLC 461 (Bom) where the assessee which was engaged in the business of hiring and leasing of properties, declared an income of a self-owned property as income from house property besides declaring rental income received from sub-letting of four other properties not owned by it, as income from business, the Hon’ble High Court held that section 22 of the Act made a provision that the annual value of a property owned by the assessee shall be chargeable to income tax under the head, “income from house property”.It also pointed out, that the basic condition of ownership of the house property, was clearly satisfied in the case of that assessee. Even if the assessee was to be in the business of letting or sub-letting of properties and deriving income therefrom, there was no embargo on the assessee from accounting the income received by it from property owned by it as, “income from house property” and at the same time categorizing the rental income from other properties that it did not own, under the head of, “income from business”. The Hon’ble High Court went on to hold that the Revenue’s reading of section 22 differently for those who were in the business of letting out properties would amount to reading something into section 22, which was not there in the actual provision and therefore, the Revenue was not justified in holding that section 22 was not available to an assessee, which was in the business of letting out properties. It also distinguished the judgment in the case of Chennai Properties and Investment Ltd. vs. CIT, Central-III, Tamilnadu (2015) 56 taxman.com 456 (SC) pointing out that in that case, the assessee had chosen to account for such income derived by the assessee as an income under the head, “income from business” and it was the Revenue which was of a contrary view i.e. that such income should not be allowed as an income from business and must be treated as an income from house property-on the grounds that the situation being different in the case of Banzai Estate Pvt. Ltd., the said case law could not apply to the question at hand. We have also observed that the Special Bench of the ITAT in the case of Atma Ram Properties P. Ltd. vs. JCIT (2006) 102 TTJ (Delhi) 345, have pointed out, while citing the case laws that the rental income received by the assessee company in that case was chargeable to tax under, “income from house property”. It noted that the ld.

DR had heavily relied on the decision of the Hon’ble Madras High Court in the case of CIT vs. Chennai Property and Investment Limited 266 ITR 685, in which the Hon’ble High Court had discussed and analyzed various decisions of different High Courts and the Hon’ble Supreme Court and the Special Bench held that the legal position which emerged from this analysis was that, if in a given case, the assessee is found to be the owner of the property and rental income is earned by him by letting out predominantly the said property, such rental income will be assessable under the head, “income from house property”. What is let out should predominantly be the said property inasmuch as the rental income should be from the bare letting of tenements or from letting accompanied by incidental services or facilities. The subject hired out should not be a complex one and the income obtained should not be so much because of the facilities and services rendered, than because of their letting the tenements. The Bench observed that it had been held that if such a situation was found to be obtained, the other aspects such as the nature of the property being commercial/business asset etc., in the hands of the assessee as well as the nature of the business of the assessee do not change the nature of income and the rental income does not become income from trade from business.