G CORP PRIVATE LIMITED ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME-TAX 3(1)(2), BANGALORE

The assessee is having a share of 50% in “1 MG” Mall in M.G. Road, Bengaluru. From January 2014, the assessee entered into an agreement with M/s. Lido Malls Management Pvt. Ltd. for collecting the rental income and paying the same to the assessee after taking a commission of 2% as their fees. Insofar as the promotional income and parking fees etc., the same was collected by M/s. Lido Malls Management Pvt. Ltd. and it was agreed that the 75% of the said revenue would be taken by M/s. Lido Malls Management Pvt. Ltd. and the balance 25% would be given to the owners of “1MG” Mall. The mall manager also collected the common area maintenance charges received from the various tenants and retained the same for providing services such as for operations, maintenance and management of the mall. The mall manager has to incur the maintenance expenses out of the common area maintenance chares collected by them and the assessee had no role in the said collection of charges as well as the maintenance of the mall. The agreement executed with the mall manager would exhibits the above facts. The assessee is in the business of leasing of shopping malls and therefore the entire lease rent and other receipts from shopping malls are to be treated as business income but to avoid litigation with the department, the assessee had shown the income as income from house property. The AO had included the 1% of the license fees which was retained by the mall manager as fees to the annual value of the property of the assessee and taxed in the hands of the assessee. The AO also included the common area maintenance charges exclusively collected by the mall

The assessee challenged the said order of the AO before the Ld.CIT(A). The assessee also filed an application u/s. 154 of the Act before the AO and pointed out some mistakes in the assessment order. The AO had also considered the said rectification application and rectified the mistakes while the appeal was pending before the Ld.CIT(A). The AO in the rectification order, had revised the addition made on account of common area maintenance charges to 50% and the municipal taxes paid by the assessee has also been accepted. The interest on the borrowed capital was refixed at Rs. 4,87,755/-. The addition made on account of mismatch of the rental receipts accounted by the appellant vis-à-vis form 26AS has been accepted. The Ld.CIT(A) had partly allowed the appeal filed by the assessee.

As against the said order, the assessee is in appeal before this Tribunal.

At the time of hearing, the Ld.AR submitted that the addition of 1% which was treated as the fees for the mall manager is not correct since the agreement with the mall manager specified the activities which are to be done by the mall manager and the agreement also speaks about the remuneration given to the mall manager for collecting the license fees from the licensees and therefore the 2% of the license fee collected by the mall manager could not be added for the purpose of calculating the annual rental

The Ld.AR further submitted that the common area maintenance charges charged and collected by the mall manager from the lessees for rendering various services to the licensees of the malls would not be taken for the purpose of calculating the annual rental value of the property. The Ld.AR further submitted that the mall management agreement clause would exhibit that the mall manager would charge the maintenance charges from the lessees and out of the said funds collected, various maintenance works are to be carried out by them and therefore the same would not be added to the assessee for calculating the annual rental value. The Ld.AR further submitted that the common area maintenance charges are collected by the mall manager based on the agreement and therefore they are entitled to receive 100% of the charges. The Ld.AR also brought to our notice that the said mall manager has shown the said maintenance charges received from the licensees as his income in their return of income and therefore the same could not be added for the purpose of arriving the annual rental value of the assessee. The Ld.AR further submitted that the maintenance charges are directly collected by the mall manager and retained by him for the purpose of maintaining the mall and therefore the assessee had rightly not included the said sum while calculating the annual rental value of the property. The Ld.AR also distinguished the judgment of the Hon’ble Punjab & Haryana High Court reported in 73 taxmann.com 374 which was relied on by the AO and relied on the Hon’ble Delhi High Court judgment reported in 25

Insofar as the interest portion is concerned, the Ld.AR submitted that the disallowance of the 1/5th of the preconstruction period interest is related to the loan availed for the construction of “1MG” Mall and relied on the sanction letters issued by the bankers and the statement of accounts. The Ld.AR therefore submitted that on mere suspicion, the disallowance could not be made in respect of the disallowance disallowing the deduction of interest u/s. 24 of the Act to an extent of Rs. 4,87,755/-. The Ld.AR also submitted that the levy of interest u/s. 234C is not required and prayed to delete the same.

The Ld.AR also filed a paper book compilation and enclosed the written submissions filed before the Ld.CIT(A) and the audited accounts and other details for the interest restriction. The Ld.AR also furnished the copy of the mall management agreement and the memorandum and articles of association of the assessee in support of their submissions. The Ld.AR also filed a compilation of case laws and prayed that the appeal may be allowed by following the above judgments of the Hon’ble High Courts as well as the orders of the other Tribunals.

The Ld.DR submitted that the AO had rightly added the 1% retained by the mall manager out of the rent received from the various licensees which is nothing but a rental income in the hands of the assessee. Similarly, the Ld.DR submitted that the common area maintenance charges collected by the mall manager from the licensees would also partake the character of rent and therefore it should be added for the purpose of Page 7 of calculating the annual rental value of the property. Insofar as the disallowance of preconstruction period interest, the Ld.DR submitted that the documents furnished by the assessee would not exhibit that the loan has been obtained only for the purpose of constructing the “1MG”Mall and therefore the AO had rightly restricted the interest claimed u/s. 24 of the Act.

We have heard the arguments of both sides and perused the materials available on record.

In the present appeal, there are three disputes raised by the assessee.

The first dispute is with regard to inclusion of 1% charges retained by the mall manager as their fees for collecting the rents from the licensees. We have perused the records and also perused the mall management agreement executed with the said M/s. Lido Malls Management Pvt. Ltd. and from which we found that the agreement is clear that the mall manager has to collect the rents from the licensees and transfer the 98% of the rental income to the assessees and retain the 2% of the rent as their fees for doing the said service. It is not the case of the department that the assessee had collected the 100% of rent and thereafter parted with 2% of the said amount to the mall manager for doing the services. From the records produced before us, we found that the owners of the “1MG” Mall i.e. the assessee and the others received as rent only 98% of the rental income from the mall manager. We have also perused the memorandum and articles of association furnished by the assessee and from the said document, we came to know that the assessee is having its main objects to create, construct, acquire, establish, lease, sell and to operate and maintain shopping malls, airport duty free shops, shopping orchards and retail outlets. Therefore the assessee is doing the business of leasing the shopping malls and receive the rental income from the licensees and therefore the 1% license fees retained by the mall manager would be an allowable deduction to the assessee. We have also considered the submission that the assessee in order to avoid

Insofar as the second issue of the common area maintenance charges collected and retained by the mall manager is concerned, the mall management agreement stipulated that the mall manager would collect the maintenance charges from the licensees as its service charges for managing, operating and maintain the mall. The agreement stipulates that the mall manager should ensure the maintenance of common areas, plants and machinery such as D.G.sets, chillers, pumps, escalators, elevators, etc. common amenities such as water supply, drainage, general lighting, landscaping etc out of the amounts collected by it by way of maintenance charges. The agreement further provides that the mall manager would be compensated for the said services by retaining the 100% of the common area maintenance charges collected from the licensees. The AO had relied on the judgment of the Hon’ble Punjab & Haryana High Court reported in 73 taxmann.com 374 and concluded that the common area maintenance charges would form part of the annual rental value of the property. On the other hand, the assessee relied on the Hon’ble Delhi High Court judgment reported in (2012) 25 taxmann.com 258 in the case of CIT vs. DLF Office Developers and also the Hon’ble Bombay High Court judgment reported in (2011) 15 taxmann.com 196 in the case of CIT vs. Runwal Developers (P.) Ltd. We have also considered the said judgments and in the Hon’ble Bombay High Court judgment, it was held that the maintenance charges recovered by the assessee towards the promotion and upkeep of the mall from the persons to whom the premises are let out, and also from the persons to whom the premises were sold are attributable to conducting the business activity of running the mall and therefore the amount of Page 9 of maintenance charges received were business receipts assessable under the head business income. Similarly, in the Hon’ble Delhi High Court judgment, it was held that maintenance charges paid to a separate company could not be treated as a part of the rent taxable in the hands of the assessee.

We have also perused the judgment of the Hon’ble Jurisdictional High Court reported in (1993) 201 ITR 138 in the case of CIT vs. Shankaranarayana Hotels (P.) Ltd. wherein it was held that the composite rent received by the assessee could be split up into the amount attributable to property under the head income from house property and the amount attributable to amenities under the head income from other sources. We have also perused the order of the Hon’ble Mumbai Tribunal reported in (2006) 150 Taxman 4 (Mumbai) in the case of Sharmila Tagore vs. JCIT wherein it was held that the maintenance charges had to be deducted while determining the annual value of the property u/s. 23 of the Act. We have also perused another judgment of the Hon’ble Delhi High Court relied on by the assessee reported in 334 ITR 358 in the case of CIT vs. R.J. Wood Pvt. Ltd. wherein it was held that the maintenance charges payable by the occupier to the agency which maintains the building would not be taken for the purpose of arriving the annual rental value of the property. Considering the above judgments and the principles laid down by the various Hon’ble High Courts, in the present case also, the mall manager had to maintain the mall for which they received the charges from the licensees and retained the same and did the maintenance expenses out of the said receipts and therefore it could not be treated as rent for the purpose of calculating the annual rental value of the property. The licensees are paying the maintenance charges directly to the 3rd party i.e. the mall manager who in turn provided the various services to the licensees and therefore at no stretch of imagination, the same could be added for the purpose of computing the annual rental value of the property of the assessee. We, therefore inclined to accept the plea of the assessee and deleted the common area maintenance charges received by the mall manager for the purpose of Page 10 of computing the annual rental value of the property of the assessee. Further, we have also considered the fact that the mall manager had directly received the maintenance charges from the licensees and utilised the said receipts towards the maintenance of the building and utilised the said funds for doing various expenses in maintaining the said mall. Therefore, the said charges would not be taken for the purpose of computing the annual rental value of the property of the assessee.

The 3rd dispute is with regard to the disallowance of the 1/5th of the preconstruction period interest. Even though the assessee had submitted that the loan has been obtained for the construction of “1MG” Mall, the documents furnished before us does not indicate any connection with the construction of “1MG” Mall. It is a fact that the assessee had received loan from the HDFC Bank but we could not correlate the said loan for the purpose of constructing the “1MG” Mall and therefore we do not agree with the submissions made by the assessee and therefore we are confirming the order of the lower authorities insofar as the disallowance of the preconstruction period interest is concerned.

In the result, the appeal filed by the assessee is partly allowed.