DCIT 1(3)(2), MUMBAI vs. TILERRA LANDPRO LLP, MUMBAI

2. First, we shall take up appeal of the assessee (AY. 2006-07), wherein, first ground pertains to confirming the assessment order in treating the licence fee as ‘income from other sources’ instead of ‘business income’, without appreciating the fact. At the outset, the ld. counsel for the assessee, Shri Rakesh Joshi, claimed that the impugned issue is covered in favour of the assessee by the order of the Tribunal for AY 2003-04 and 2005-06, order dated 10/06/2015. The ld. counsel produced the photocopy of the order of the Tribunal. However, Ms. Radha K.Narang, ld. DR, defended the conclusion arrived at in the impugned order. 2.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal, dated 10/06/2015, for ready reference:- “4. The issue arising in the present appeal is in relation to assessability of leave and licence income received by assessee and whether the same has to be assessed as profit and gains of business or as income from other sources. The Tribunal, in the first round of appeal, vide order dated 31st October, 2008 had appreciated the facts of the case wherein the assessee under an agreement dated 16.11.2000 styled as leave and licence agreement granted licence to M/s. American Express Bank Ltd. to use the premises of which it was the lessee. The licence fee was fixed at Rs.13,66,875/- as quarterly licence fee. The said premises along with fixtures and fittings were licensed to the party for a period of three years commencing from 01.01.2001 and expiring on 31.12.2003. The Assessee had declared the said licence fee as income from business and claimed certain expenses against it. On the other hand, the AO has show caused the assessee as to why the same should not be assessed as income from other sources. The explanation of the assessee in this regard was that under clause 53, 109, 129 and 131 of the object clause of Memorandum of Association of assessee, assessee was permitted to pursue business of taking on lease and earn income from the same. Another plea raised by the assessee was that it had taken on lease commercial assets which in turn were leased out to derive income and the said income was to be assessed as business income. Both the AO and the CIT(A) treated the said income as income from other sources as the assessee was merely subletting the property and there was no business activity involved in such subletting. The Tribunal, vide order dated 31st October, 2008, upheld the orders of the authorities below holding that assessee had not been able to demonstrate as to how the activity of subletting was done in a systematic and organized manner, so as to constitute carrying on of business. Another point noted by the Tribunal in assessee’s case was that the Director’s report dated 26.08.2003 quoted that the licence agreement with American Express Bank came to an end on 31.03.2003 after which a new licence agreement had been entered into by the assessee with the British Deputy High Commission, Mumbai. As per the Tribunal this was an act of subletting by the assessee and even the list of fixtures and fittings provided to the licensee in the premises do not find place in the leave and licence agreement and even otherwise provisions of such items would not make the income in question as business income.

We have heard the rival contentions and perused the record. In the facts of the present case assessee, as per its object clause in the Memorandum of Association, was permitted to perform business of taking on lease and earning income from the same. It had taken premises on lease which in turn was sublet to M/s. American Express Bank. The issue arising before us is in relation to assessability of such lease income earned by the assessee. The claim of the assessee before the authorities below and even before us is that such income being in continuation of its object as per the Memorandum of Association, is to be assessed as business income in its hands. Whereas the case of the Revenue is that assessee was engaged in subletting of the property, which in turn it had obtained on lease and hence the income arising there from is assessable in the hands of the assessee as income from other sources, since the assessee was not the owner of the property. The assessee had entered into lease agreement with American Express Bank in the earlier year and admittedly the rental income declared by the assessee was assessed as business income in the hands of the assessee after allowing the related business expenditure claimed. The said decision was accepted by the authorities below from assessment year 1993-94 onwards for which the assessment was completed under section 143(3) of the Act and copy of the assessment order is filed at pages 32-42 of the paper book. Similarly, for assessment year 2001-02 the assessment was completed under the head income from business in the assessment order passed under section 143(3) of the Act, which in turn is placed at pages 43 to 49 of the paper book. The assessee continues to earn income from same lease agreement as in the past and the income declared during the year under consideration was received from American Express Bank, which will also be sub-lessee in the earlier years. The Hon'ble High Court, while adjudicating the appeal of the assessee, had noted all the above said facts and also noted that there were no distinguishing features before the Tribunal to justify in giving a different treatment for the assessment year in question, whereas similar income was assessed as income from business in the hands of the assessee in the prior years. On verification of the records available we find that in assessment years 1993-94 and 2001-02 the income had been assessed under the head income from business. Though the Hon'ble High Court had restored the issue back to the file of the Tribunal but with the direction that the said issue be decided with regard to the circumstances of the case.

In the facts of the present case assessee had leased out the premises to American Express Bank Ltd. w.e.f. October 1992. The said lease agreement continued upto 31.03.2003 and was 4 -36/M/16;6005/M/16 M/s. Tierra Landpro LLP in application during the financial year 2002- 03, i.e. in the year which is in appeal before us. The said leasing of the premises by the assessee was as per the objects provided in Memorandum of Association. A perusal of the earlier order passed by the Tribunal in assessee’s own case reflects that the Tribunal, vide para 4 of its order had acknowledged that under clause 53, 109, 129 and 131 of the object clause (other objects) of Memorandum of Association of the assessee, assessee was permitted to pursue the business of taking on lease and earning income from the same. Where it is the intention of the assessee to lease out various premises and then sublet the same on leave and licence basis to different parties, then such activity carried on by the assessee in line with its objects is business activity undertaken by the assessee. The income arising from such exploitation of the assets which had been taken by the assessee on lease and had been further sublet by it is a systematic and organized activity of carrying on its business. Undoubtedly, assessee was not the owner of the premises but was only a lessee of the premises, which in turn had been sublet by the assessee with the intention of exploiting the same and the receipts arising there from are assessable in the hands of the assessee as income from business and the necessary related expenditure has to be allowed as deduction in the hands of the assessee.

The Hon'ble Supreme Court in the case of Chennai Properties and Investment Ltd. (supra) has appreciated the facts before it, wherein the assessee had acquired properties in the city of Madras and in turn let out those properties and the rental income received by it was shown as income from business, it was held that where main object of the assessee company as per its Memorandum of Association was to acquire properties and to let out those properties as well as make advances upon the security of land and building, then it was held that “what we emphasis is that holding the aforesaid properties and earning income by letting out these properties is the main objective of the company”. The Hon'ble Supreme Court, however, noted that in the return of income the entire income which had accrued and assessed in the hands of the assessee was from letting out of the said property and there was no other income arising to the assessee. The Hon'ble Supreme Court made reference to the ratio laid down by the Constitution Bench of the Apex Court in the case of Sultan Brothers (P) Ltd. vs. CIT [(1964) (5) SCR 807] and the ratio laid down in the case of Karanpura Development Co. Ltd. vs. CIT reported in 44 ITR 362 (SC) and observed as under: - “8.Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P) Ltd., we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in 'Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal' [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 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 C.A. No. 4494/2004 etc. 5 Page 6 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: - -36/M/16;6005/M/16 M/s. Tierra Landpro LLP

The Apex court also noted the fact that in Sultan Brothers (P) Ltd. (supra) the Constitution Bench had clarified that merely an entry in the object clause showing a particular object would not be determinative factor to arrive at a conclusion whether the income has to be treated as income from business and such question would depend upon the circumstances of each case, i.e. whether a particular business is letting out or not. After noting down the above said decisions the Hon'ble Apex Court held that the circumstances of the case have to be considered and in view of the facts before it and its circumstances the Hon'ble Supreme Court held that letting of the properties was the business of the assessee and assessee, therefore, rightly disclosed the income under the head ‘income from business’.

The facts before us are similar to the facts before the Hon'ble Supreme Court in Chennai Properties & Investment Ltd. As pointed out by us herein above assessee, in furtherance of its object of Memorandum of Association, had leased out the premises, which in turn was subleased on leave and licence basis, thus the intention of the assessee was to exploit the asset leased by it, by way of letting out the same, then such letting out activity is in furtherance of assessee’s intention to carry out the business in a systematic and organized manner. Consequently we hold that the rental income declared by the assessee is to be assessed as income from house property. Another aspect to be kept in mind is that similar income offered by the assessee on account of similar rent received from same tenant in earlier years were assessed as income from business in the hands of the assessee. Another aspect to be kept in mind is that during the year under consideration, i.e. at the close of the year on 31.03.2003 the agreement with American Express Bank had come to an end and the assessee entered into a fresh agreement with British High Commission again establishes the case of the assessee, that it is involved in a systematic and organized activity of leasing out its premises, which in turn are not owned by the assessee. In the totality of the above facts and circumstances we hold that the lease rent received by the assessee is assessable as income from business in the hands of the assessee and the related expenditure has to be allowed in the hands of the assessee. The AO shall accordingly compute the income in the hands of the assessee in line with our directions after affording reasonable opportunity of hearing to the assessee. This ground of appeal