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Income Tax Appellate Tribunal, DELHI BENCH “G” NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
The aforesaid appeal has been filed by the assessee against the impugned order dated 16.12.2014, passed by ld. CIT (Appeals)-VIII, Delhi for the quantum of assessment passed u/s. 143(3) for the Assessment Year 2010-11. In the grounds of the appeal, assessee has raised the following grounds:- “1. The learned CIT (A) erred in law and on facts in holding the “receipts from operation of mall” and “recovery of expenses from tenants” as “income from other sources” as against “business income” declared by the assessee ignoring the facts and circumstances of the case and the fact that the business is a systematic activity involving time, money and effort. Thus the income from the said two activities should be assessed as business income. Necessary directions in this regard may be issued.
2. The learned CIT(A) erred in law and on facts in issuing directions about the allowance of interest paid on funds borrowed for purchase of the mall though no such issue was there in appeal before the CIT (A) and without giving any notice of such proposition to the assessee. Thus the direction regarding interest on borrowed funds made by CIT (A) should be reversed.
3. The appellant craves the leave to add, substitute, modify, delete or amend all or any ground of appeal either before or at the time of hearing.”
2. The facts in brief are that the assessee company is engaged in the business of operating a commercial Mall at Pune and also renting the shop in the said commercial Mall besides letting out its factories at Gurgaon. The rent receipt from letting out of shop and factories on rent has been offered for taxation in ‘income from house property’. However, in so far as the activity of operating of the commercial mall which included various activities such as provision of services like electricity, security, generator facility, arranging promotion campaigns of mall, arranging fairs and exhibitions at mall, overall management of the mall including the common areas etc., the assessee has been showing the receipts as business income. The assessee also recovers part of the expenses incurred for the operation of the mall from the shop owners over and above the rent. The assessee has divided its operation in the Mall as ‘income from house property’ and ‘business income’. During the course of the assessment proceedings, the AO required the assessee to furnish the bifurcation of head-wise expenses. In response, the assessee re- casted its profit and loss account wherein the income was bifurcated into rental income, business income and recovery of common expenses from shop owners. Expenses have been bifurcated as expenses exclusively against rental income; common joint expenses incurred on behalf of the shop/Mall tenants; and for assessee’s own business, the direct expenses incurred exclusively for own administrative and corporate expenses. The entire administrative and corporate expenses amounting to Rs.1,20,23,094/- have been charged to the business income as the business income constituted 8.5% of the total receipts of Rs.16,60,86,641/-. The Assessing Officer held that entire administrative expenses against the business income is not justified, because rental income from Mall and other receipts of common expenses recovered from tenants is a full time job and require lot of administrative attention. Thus, it cannot be said that no administrative expenditure attributable the earning of income other than its business income. The Assessing Officer on adhoc basis disallowed 50% of the administrative expenses amounting to Rs.60,61,547/- (1,20,23,094/2).
Ld. CIT (Appeals) on the other hand held that administrative charges received by the assessee should be treated as ‘income from other sources and rental income received from shop and factories should be treated as ‘income from house property’ and all other income is to be treated as income from other sources. He further held that while allocating the interest income on borrowed funds which was taken for the purchase of Mall, the Assessing Officer should consider the area of shops for calculating the proportionate interest relatable to the shops and other activities of the Mall. Accordingly, he directed the Assessing Officer to compute the income accordingly.
Before us, ld. counsel for the assessee, Mr. Vinod Kumar Bindal after narrating the facts of the case, submitted that the assessee company is mainly carrying out two activities, i.e., letting out of properties and Mall; and operation of Mall. The expenses like electricity expenses, housekeeping, generator running, common repairs are incurred at the Mall by the assessee itself and the same is recovered from the shop keepers. Apart from that, it also carries promotion campaigns at Mall in common areas in the main atrium. Since assessee is the owner of Mall then it is the duty of the mall owner to maintain the mall and provide facilities to the shop owners and the entire ambience of the mall for which it has to incur various expenses in order to attract the customers. The assessee has re-casted the P&L account wherein it has shown rental income of Rs.12,40,46,554/- and itself has attributed expenses of Rs.14,44,31,264/- towards the said income, which included the insurance, property tax, interest paid on loans for the properties and mall repairs and maintenance. The expenses incurred for the operation of mall has been recovered from shop owners on pro rata basis which has been separately shown in the re- casted P&L account. The assessee has claimed amount of Rs.1,20,23,094/- being the amount of administrative and corporate expenses against the business income of Rs.1,40,43,948/-. The Assessing Officer has arbitrarily disallowed 50% of the said expenses by holding that rental income and other receipts on account of recovery of common expenses from the tenants is a full time jobs and requires lot of administrative attention. This premise of the Assessing Officer is wholly incorrect, because once the shop has been let out and lease agreement is signed then only the cheques of amount of rent are received and deposited and no other activities done for collection of rent. Hence, it cannot be held that it is a continuous activity, especially in the case of Malls when the lease agreement is entered for the period of 5 to 10 years then there is no major effort is required for such a long period lease as no time or effort has been put up by director or any other staff for letting out activity of the company. He further submitted that recovery of expenses again cannot be said to be income of the assessee, because the said recovery will only reduce from the expenditure itself. The assessee has allocated the common expenses properly and therefore, no part of administrative expenses can be further attributed towards earning the same and no disallowance can be made for this purpose. In any case, recovery of an income could neither be business income nor income from other sources. He further submitted that if the business income is 8% of the total expenses, then the expenses attributable to business only 7.5% of the total expenses is far more logical and reasonable. From the re-casted P&L account, he drew our attention that expenses claimed against business expenses including administrative expenses comes to Rs.(22,12,678/- (+) Rs.1,20,23,094/-) which comes to 7.5% of the total expenses of Rs.18,97,61,350/-. If the averment of the Assessing Officer with regard to ratio of business income to total receipt is considered then no further addition is called for as the business expenditure to the total expenditure as it bears the same ratio as business income to total income. Lastly, he submitted that certain expenses are necessary for the existence of the company, like, electricity and water expenses, office maintenance, general repair and maintenance of the office, fees paid to the Registrar of Companies, auditor’s remuneration, etc. He further pointed out that depreciation of Rs.25,78,749/- as per the books has already been disallowed in the computation of income once the said amount has been added to the business income then 50% of the same cannot be further disallowed by the Assessing Officer. The assessee has claimed depreciation of Rs.29,38,157/- only on the fixed assets used for the business purpose and there is no finding by the Assessing Officer regarding the disallowance on depreciation as per Rules. Similarly, he pointed out various nature of expenses like, travelling, boarding and lodging, staff welfare, medical expenses, uniform expenses, bank charges, bad debts, freight and cartage, insurance, loan processing fees, advertising and publicity expenses, etc., which purely for the business and nothing to do with the rental income. Thus, he submitted that such an allocation made by the Assessing Officer is wholly erroneous in law and on facts. In so far as the observation of the ld. CIT (A) that administrative expenditure should be charged from income from other sources, the same cannot be sustained, because assessee itself has shown business income and the judgment of Hon'ble Madras High Court in the case of CIT vs. Chennai Properties and Investments Ltd., reported in (2008) 303 ITR 33 (Mad.) as relied upon by the Ld. CIT(A) has been now reversed by the Hon'ble Supreme Court, since reported in (2015) 373 ITR 673 (SC).
5. On the other hand, learned DR has relied upon the order of the ld. CIT (A) and also upon the following judgments:-
Jay Metal Industries Pvt. Ltd. Vs. CIT [2017-TIOL-1338-HC- DEL-IT . Where the Hon’ble Delhi High Court held that when the owner had let out his building together with equipments & furniture, then the rental income is composite one and has to be treated as income from other sources.
Raj Dadarkar and Associates Vs ACIT [2017-TIOL-222-SC-IT] Where the Hon’ble Supreme Court held that merely because there was 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 from house property is to be treated as income from business. 3. CIT Vs. Ansal Housing & Construction [2016] 72 taxmann.com 254 (Delhi)/[2016] 241 Taxman 418 (Delhi)/[2016] 389 ITR 373 (Delhi) Where the Hon’ble Delhi High Court held that assessee, engaged in business of construction of house property, would be liable to pay tax on ALV of flats lying unsold during year 4. Abhishek Govil & Somya Salwan Vs. CIT (2016-TIOL-102-High Court-DEL-IT) Where the Hon’ble Delhi High Court held that contractual receipts received by an assessee being the owner of a house property after deducting TDS pursuant to a maintenance agreement, cannot be treated as rental income in the hands of assessee.
Shambhu Investment Vs CIT [2003] 129 Taxman 70 (SC)/[2003] 263 ITR 143 (SC)/[2003] 184 CTR 91 (SC) Where the Hon’ble Supreme Court held that since a specific head is provided for income from the ownership of House Property, it cannot be taxed under any other head.
6. Universal Plast Ltd. Vs. CIT [I999] 103 Taxman 493 (SC)/[1999] 237 ITR 454 (SC)/[1999] 153 CTR 95 (SC) Where Hon’ble Supreme Court laid down test as to when income from property is assessable as “business profits” and as “income from house property.”
We have heard the rival submissions and also perused the relevant finding given in the impugned orders. As stated above, the assessee has bifurcated its operations into, firstly, letting out of properties, that is, letting out of the shops in the Mall and its factories and the entire income from letting out of such properties has been shown as ‘income from house property’; and secondly, the other activity includes operation of Mall and hosting of events etc. has been shown as business income. There were certain other expenses like electricity expenses, housekeeping, general repairs and maintenance which have been incurred by the assessee but the same has been recovered from the shop keepers. In the re- casted P&L account filed before the Assessing Officer, in response to his show cause notice, assessee had shown an amount of Rs.1,20,23,094/- on account of administrative and corporate expenses against the business income of Rs.1,40,43,948/-. The assessee has further disallowed amount of depreciation of Rs.25,78,749/-(out of expenses of Rs.1,20,23,094/-) in the computation of income, the copy of which has been filed before us. Such a disallowance of depreciation has further enhanced the net profit/loss under the head ‘business income’. The reasoning given by the Assessing Officer for allocating 50% of administrative expenses for renting of the shop is not only ad hoc but also without any basis having regard to the different activities carried out by the assessee and expenses shown in the re-casted P&L account. The assessee has shown huge rental income of Rs.12,40,46,554/- against which assessee has already attributed huge expenses in the form of insurance, property tax, interest paid on loan and repair & maintenance which aggregated to Rs.14,44,31,264/-.
In so far as running and maintenance of the mall, the assessee has incurred common expenses which have been recovered from various tenants. Even, if it is presumed that the said receipts has not to be treated as business income but under the head ‘income from other sources’ as held by Ld. CIT(A), then also these expenses have to be allowed u/s.57(iii). Recovery of expenses cannot be treated as an income at all and therefore, no expenses could have been attributed on such recovery of expenses and in any case if it is treated as income then expenses attributable to it again has to be allowed either u/s.28 or u/s. 57(iii). From the perusal of the various expenditures which has been debited for the administrative and the corporate expenses, we find that out of Rs.1,20,23,094/-, the amount of depreciation of Rs.25,78,749/- has already been added back by the assessee. All other expenditure debited like security services, electricity and water charges, travelling, telephone, staff welfare, printing and stationery, insurance, advertising and publicity, bad debts written off, loan processing fee, interest on car loans, etc. are purely administrative and corporate expenses which have to be allowed against the business income shown by the assessee and not against the rental income. Thus, we do not find any sound justification in such kind adhoc allocation of expenses as done by the Assessing Officer. However, it is seen that the entire Director’s salary/ remuneration has been debited entirely under the business income. When the composite activities of rental and business is carried out then some portion has to be allocated for Director’s salary, etc. Thus, under the facts and circumstances of the case it would be reasonable to allocate 20% Director’s salary for the rental income. Accordingly, we direct the AO to allocate only 20% of Director’s salary alone and balance expense is not to be allocated.
Now coming to the decisions relied upon by the learned DR, we find that in most of the judgments, the issue was, whether income from letting out the property is to be taxed under the head ‘income from house property’ or ‘business income’. Here in this case, entire letting out activity has been shown as income from house property. Hence, there could not be dispute in this regard. In so far as the judgment of Hon'ble Delhi High Court in the case of Taparia Tools Ltd. vs. JCIT (2003) 260 ITR 102 (Del) here there was a composite rental income, i.e., lease of building and amenities which was inseparable. In such a case, rental income shown by the assessee was treated as income from other sources. However, here lease of building has been shown as income from house property and other amenities provided by the assessee has already been recovered from the tenants. Even if those amenities is to be treated as income from other sources an expenditure incurred has to be allowed to the assessee u/s.57(3). However, this judgment will not affect the otherwise allowbility of the expenditure or disallowing the same on some proportionate basis.
8. Lastly, the direction of the ld. CIT (A) about the loan of interest paid on funds borrowed for the purchase of Mall, it has been contended by the learned counsel, firstly; this issue was never confronted by the ld. CIT (A), therefore, such a direction cannot be upheld; and secondly, in any case, the interest as per the re-casted P&L account is on car loans and other interest has been shown towards the purchase of property under the head ‘income from house property’. Thus, such a direction of the ld. CIT (A) to consider the area of shop for including the proportionate interest related to the shop and other amenities of the Mall is completely unjustified. We agree with the contention of the learned counsel for the reason that; firstly, the entire expenditure of interest on the letting of the property has already been debited under the head ‘income from house property’; and secondly, in the re-casted profit & loss account only interest paid is with regard to the car loan and other interest payment is Rs.76/- only. Thus, we are unable to appreciate as to how the interest is to be allocated based on the area of shops and the proportionate interest related to the shops and other amenities of the Mall, as there is no bifurcation in the re-casted trading account. Thus, such a direction of the ld. CIT (A) is set aside.
In the result, the appeal of the assessee is partly allowed.