ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 1(1), , GUNTUR vs. BBM ESTATES PRIVATE LIMITED, GUNTUR

We have considered the rival submission as well as the relevant material available on record. The assessee declared the rental income in the return of income as income from house property which was treated by the Assessing Officer as business income of the assessee by relying upon the judgments of the Hon'ble Supreme Court in the case of Hon'ble Supreme Court in the case of Rayala Corporation (P) Ltd vs. ACIT (Supra) as well as Page 6 of 17 Chennai Properties & Investments Ltd vs. CIT (Supra). The relevant facts on this point are that the assessee has entered into a lease agreement dated 24/11/2016 with M/s. Cognizant Technology Solutions India Private Limited to lease out the property bearing No. 5/639, Old Mahabalipuram Road, Kandanchavadi, Chennai. The said property has been constructed comprising of Ground + 7 floor I.T Park under the name and style of Varalakshmi Tech Park. The total leased out built up area in the said property was 3,20,645 sft and canteen area of 21,000 sft. As per clause 3 of the agreement, the let out property was comprising of IT Park including canteen area with fixtures, assets comprising of elevator, air conditioning equipment, structural glazing, transformers, diesel generator and all fire safety equipment etc., as listed in Annexure-A to the said agreement. The term of the lease was for a period commencing from 19/01/2016 and ending on 30/09/2020 with a locking period up to 30/09/2018. As per clause (3.3) of the lease agreement, the lease may be renewed for a further period as may be mutually agreeable by the parties by execution and registration of fresh lease deed subject to such other terms and conditions as may be mutually agreed between parties. Thus, the letting out of the I.T Park by the assessee to M/s. Cognizant Technology Solutions India Private Limited was not an adhoc or temporary arrangement but it was for more than 4 years being the initial lease period with the option of renewal of the lease. As per the Memorandum of Association placed at page No.68 of the paper book, the main objects for which the assessee company was established are mentioned as under:

This property is also forming part of the property, plant and equipment as reported in Note No.10 to the notes forming part of the financial statement in the category of tangible asset. It is manifest from the books of account that this property has been shown as the business asset of the assessee company and not as a stock-in-trade. Thus, the leasing out of the property is the main object of the assessee and further the lease income is shown as sales of services/business income of the assessee in their books of account. Even the outstanding lease rental is also shown as trade receivables which shows the nature of the income as recognized by the assessee and reported in the audited books of account as business income. The Hon'ble Supreme Court in the case of Chennai Properties & Investments (P) Ltd vs. CIT (Supra) while considering an identical issue has held in para 4.2 to 11 as under: “4. We have heard the learned counsel for the parties on the aforesaid issue. Before we narrate the legal principle that needs to be applied to give the answer to the aforesaid question, we would like to recapitulate some seminal features of the present case. 5. The Memorandum of Association of the appellant-company which is placed on record mentions main objects as well as incidental or ancillary objects in clause III. (A) and (B)

It transpires that the return of a total income of Rs.244030 was filed for the assessment year in question that is assessment year 1983-1984 and the entire income was through letting out of the aforesaid two properties namely, "Chennai House" and "Firhavin Estate". Thus, there is no other income of the assessee except the income from letting out of these two properties. We have to decide the issue keeping in mind the aforesaid aspects.

With this background, we first refer to the judgment of this Court in East India Housing & Land Development Trust Ltd.'s case (supra) which has been relied upon by the High Court. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls. In those facts, the question arose for consideration was whether the rental income that is received was to be treated as income from the house property or the income from the business. This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties.

Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P.) Ltd. (supra), we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in 'Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC). That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the Page 11 of 17 underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub- leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mining leases was shown as business income. Department took the position that it is to be treated as income from the house property. It would be thus, clear that in similar circumstances, identical issue arose before the Court. This Court first discussed the scheme of the Income Tax Act and particularly six heads under which income can be categorised / classified. It was pointed out that before income, profits or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under, another head. Thereafter, the Court pointed out that the deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel, House of Lords in England and US Courts were taken note of. The position in law, ultimately, is summed up in the following words: — "As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned."

After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd.'s case (supra) squarely applies to the facts of the present case.

The Hon'ble Supreme Court has specifically observed that letting out of the property is in fact the business of the assessee and therefore, the same was rightly disclosed as income under the head “income from business”. Similarly, in the case of Rayala Corporation (P) Ltd vs. ACIT (Supra), the Hon'ble Supreme Court has held in para 9 to 13 as under: “9. Upon hearing the learned counsel and going through the judgments cited by the learned counsel, we are of the view that the law laid down by this Court in the case of Chennai Properties & Investment Ltd. (supra) shows the correct position of law and looking at the facts of the case in question, the case on hand is squarely covered by the said judgment. 10. Submissions made by the learned counsel appearing for the Revenue is to the effect that the rent should be the main source of income or the purpose for which the company is incorporated should be to earn income from rent, so as to Page 13 of 17 make the rental income to be the income taxable under the head "Profits and Gains of Business or Profession". It is an admitted fact in the instant case that the assessee company has only one business and that is of leasing its property and earning rent therefrom. Thus, even on the factual aspect, we do not find any substance in what has been submitted by the learned counsel appearing for the Revenue.

The judgment relied upon by the learned counsel appearing for the assessee squarely covers the facts of the case involved in the appeals. The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income.

In view of the law laid down by this Court in the case of Chennai Properties & Investment Ltd. (supra) and looking at the facts of these appeals, in our opinion, the High court was not correct while deciding that the income of the assessee should be treated as Income from House Property.

In the said case, the assessee had only one business and that is on leasing its property and earning rental therefrom and accordingly, the Hon'ble Supreme Court has held that the business of the company is to lease its property and to earn the rent and therefore, the income so earned should be treated as its business income. In the case in hand, the leasing out of the property is one of the main objects of the assessee company and this lease/rental income is the only income reported by the assessee as business income in the books of account/audited financials. We found that the claim of the assessee in the return of income declaring the rental income as income from house property is contrary to the facts as recorded in the books of account as well as the terms and conditions of the lease agreement. Therefore, this is not a case of exploiting the property by the owner for rental income but it is one of the main objects of Page 14 of 17 the assessee company and the only business income of the assessee company. The decisions relied upon by the learned AR of the assessee has been considered by the Hon'ble Supreme Court in the judgments in the case of Chennai Properties & Investments (P) Ltd vs. CIT (Supra) as well as Rayala Corporation (P) Ltd vs. ACIT (Supra). Even otherwise, in case of Raj Dadarkar & Associates vs. ACIT (Supra), the primary question involved was whether the assessee was the owner of the shopping centre within the meaning of section 32 r.w.s. 27 of the I.T. Act, 1961 and once this issue was decided against the assessee by treating the assessee as deemed owner of the leasehold premises acquired for more than 12 years, then treating the rental income as income from house property or profit & gain from the business or profession was only a consequential issue. Therefore, the said judgment will not help the case of the assessee.

As regards the rule of consistency, as contended by the learned AR, we are of the considered view that when the claim of the assessee is contrary to the admitted facts, as well as settled law, then a mere non-disturbance of claim by the Assessing Officer for the particular assessment would not give a right to the assessee to perpetuate impermissible claim. Accordingly, we do not find any substance in this contention of the learned AR as well as the reasons given by the learned CIT (A). Hence, in the facts and circumstances, as discussed above and in view of the binding precedents of the Hon'ble Supreme Court cited (supra), the impugned order of the learned CIT (A) qua this issue is not sustainable and the same is set aside and the order of the Assessing Officer is restored.

Ground No.1 of the Cross Objection supports the impugned order of the learned CIT (A) and therefore, in view of our findings in the Revenue Appeal, the same stands dismissed.

Ground No.2 is regarding disallowance of expenses made by the Assessing Officer while assessing the lease income as income from business or profession. We have heard the learned AR as well as the learned DR and carefully perused the orders of the authorities below. The Assessing Officer disallowed certain expenditure against the business income which was challenged by the assessee before the learned CIT (A). The learned CIT (A) while passing the impugned order has allowed the claim of the assessee regarding the rental income as income from house property and therefore, did not adjudicate the issue of disallowance of expenses made by the Assessing Officer. Accordingly, this issue is remanded to the record of the learned CIT (A) for adjudication on merits. Needless to say, the assessee shall be given an appropriate opportunity of hearing before passing the fresh order.

In the result, Revenue appeal is allowed and the C.O of the assessee is partly allowed for statistical purposes.