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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA & SHRI LALIT KUMAR
O R D E R Per Shri Lalit Kumar, Judicial Member Assessee filed the appeal before the Tribunal feeling aggrieved by the order passed by the ld. CIT(A) on 16.09.2016 on various grounds.
2. The appellant company is engaged in the business of real estate including development of properties. The appellant acquired land at Kadubeesanahalli village, Bangalore in August 2005. Thereafter the appellant started developing the land into IT and ITES campus under the name ‘Cessna Business Park’. The appellant had secured the permission from the SEZ authorities to develop the Cessna Business Park as SEZ unit. For the year ending 31.03.2010 it is the case of the appellant that the appellant had completed four blocks and M/s. Cisco Systems (India) Pvt. Ltd. had occupied these blocks as tenant. It is also the case of the assessee that the remaining two blocks were under construction for the year ending upto 31.03.2010. The assessee was also involved into business of construction of a hotel for the year ending 31.03.2010.
3. The Assessing Officer in the assessment order, has recorded at pages 2 to 4 of the order that the assessee company has shown the following income.
INCOME FROM HOUSE PROPERTY Let Out Property 1.1 Address:-Cessna Business Park (SEZ) Kadabeesanahalli Sarjapur Marathahalli Bangalore KARNATAKA - 560087 Tenant name: CISCO Systems (India) Pvt Ltd Gross Annual Value : 469748640 Municipal Taxes paid : 41940161 Net Annual Value : 427808479 Ded U/s 24-Standard Deduction U/s. 24(a) : 128342544 Interest on Borrowed Capital u/s. 24(b) : 278952800 Income From let out House Property (1.1): 20513135 Income From House Property : 20513135 2. INCOME FROM BUSINESS / PROFESSION 2.1 Business” Cessna Garden Developers Pvt. Ltd No. 1, The Falcon House, Main Guard Cross Road Bangalore Net Profit before Tax – (P1) -162434658 Additions SEC-37-Any other amount not allowable under section 37 commission paid : 29421834 Depreciation as per Profit and Loss Account : 140067258 TOTAL ADDITIONS U/s. 28 to 44DA 169489092 Expenses considered under other head / Exp related to Exempt income Exp. Considered under other head-Interest : 278952800 Exp. Considered under other head-Property Tax : 133907498 Total Expenses considered under other Head/ 412860298 Exp Related to Exempt Income TOTAL ADDITION-(P2) 582349390 Deductions: Incomes considered under other head Rent Income : 469748640 Interest on IT refund : 2127420 471876060 Depreciation as per Income tax act -Refer Annexure No.- 55292
Page 3 of 12 TOTAL DEDUCTIONS-P3 471931352 Income From Business/Profession-B1=(P1+P2+P3) - 52016620 3. INCOME FROM OTHER SOURCES 3.1 Interest on Others 1. Interest from Income-tax-Interest on IT refund : 2127420 212740 Income from Other Sources 2127420 Unadjusted Current Year loss Carried Forward: 1. Business Depreciation 55292 55292 ---------------------------------------------------------------------------------------------------------- GROSS TOTAL INCOME : 0 DEDUCTION U/s VIA Description Gross Qualifying Deductable 80IA -Deduction to certain Industrial Undertakings engaged in infrastructure development 1. Industrial park and SEZs(RENTAL INCOME FROM HOUSE PROPERTY IN SEZ) 235088799 235088799 235088799 235088799 Total Deductions NIL ---------------------------------------------------------------------------------------------------------------- TOTAL INCOME 0 ---------------------------------------------------------------------------------------------------------------- TAX ON TOTAL INCOME 0 EXPENDITURE Rates & Taxes 28,465 Property Tax (Refer Note B11 of schedule 12) 13,39,07,498 Auditors Remuneration (Refer Note B10 of schedule 12) 1,25,000 Donations 25,00000 Legal & Professional Charges 3,57,870 Repairs & Maintenance 3,550 Commission 2,94,21,834 Insurance 4,53,445 Miscellaneous Expenses 5,19,235 Financial Expenses (net) 32,69,26,563 Depreciation 14,00,67,258 ------------------------------ 63,43,10,718 ---------------------------
4. On the basis of the above the Assessing Officer has mentioned in the assessment order that the assessee has declared the rental income on the property of Cessna Business Park by declaring the annual value as Rs. 46,97,48,640/- to M/s. Cisco Systems India Pvt. Ltd. As is clear from the financial it is mentioned that the assessee has earned mainly the rental income by renting the property to the extent of Rs. 46,97,48,640/- and also claimed deduction to municipal taxes of Rs. 4,19,40,161/- and deduction u/s. 24 (a) & (b) it was concluded that the net income from the house property was Rs. 2,05,13,135/-. It was observed by the Assessing Officer from the financial that on the one hand the assessee was claiming this standard deduction u/s. 24 of the IT Act and on the other hand the assessee is also claiming the rent receipt as business receipt and is also claiming the expenditure to the extent of Rs. 63,43,10,718/- under profit and gains of Business and profession . The Assessing Officer has asked the assessee during the course of assessment proceedings as to how the rental receipt can be treated as business income and why it should not be disallowed. In response to that the assessee, has mentioned as under. “Your goodselves have asked us to give reasons for not offering rental income under business income. In this regard we wish to draw your kind attention to the lease agreements enclosed as Annexure-L Your goodselves will appreciate the fact that the income derived is from mere letting out of commercial space to CISCO. This income is derived out of an asset capitalized as building in the books. We have during the year under review, not claimed depreciation on the said asset as the same is not an allowable deduction u/s 24. Further we also would like to inform you that Assessment u/s 143(3) for A.y.2009-10 was also concluded treating the rental income received under Income from house property and not business income. If your goodself still propose to bring the income offered under house property as business income, depreciation on the said asset should also be allowed. This is explicitly made clear by Explanation 5 to Section 32(1) of the Act.”
5. The Assessing Officer was not convinced with the reasoning given by the assessee and therefore disallowed the business losses to the tune of Rs. 5,20,16,620/- and treated the entire rental receipt as income from the house property. After treating the rental income as income from the house property, the Assessing Officer examined the deduction claimed u/s. 24 of the IT Act. The assessee has claimed these following deductions u/s. 24 of the IT Act.
Page 5 of 12 1) Municipal taxes paid – Rs. 4,19,40,161/- 2) Interest on borrowed capital u/s. 24(b) – Rs. 27,89,52,800/-
6. It was mentioned by the Assessing Officer that the assessee was asked to furnish the detail of interest paid however the assessee has not filed any evidence of payment of interest from the bank and has only produced the ledger for the payment of EMI to the bank. The Assessing Officer has examined the loan agreement and it was found that the assessee has availed loan of Rs. 91,00,00,000/- from the HDFC Bank vide loan agreement dated 29.09.2006. Interestingly the purpose of taking the loan was not mentioned in the loan agreement then the Assessing Officer asked the assessee to furnish the details as to for what purposes the loan was availed. However the same was not furnished by the assessee . Further the assessee has also availed the loan of Rs. 70 Crores and Rs. 49 Crores from HDFC Bank vide loan agreement dated 28.03.2008. The purpose of loan was mentioned as ‘Project financed means building bearing Block Nos. C, D, Club house and service blocks in the project namely Cessna Business Park’. On the basis of the documents submitted by the assessee, the Assessing Officer had concluded that Wing B1 and B2 were completed on 07.04.2007, Wing B3 was completed on 27.12.2007 and Wing B4 was completed on 13.11.2008. On the basis of documents submitted by the assessee, viz., the loan agreement dated 28.03.2008 and the other evidences, the Assessing Officer concluded that though the assessee has availed loan of Rs. 119 Crores on 28.03.2008 but prior thereto Wing B1, B2 and B3 were already completed and there was no occasion to use these loans therefore it was noted that Rs. 119 Crores could have been used by the assessee for completing the Wing B4 , and as such it was not possible to use it in a span of 7 to 8 months from the date of availing the loan. The Assessing Officer, has concluded that the entire loan of Rs. 119 Crores was not utilized for the purpose of construction of 4th block for which rental income was offered to tax of Rs. 27,89,52,800/- and accordingly the Assessing Officer has disallowed the 25% of the interest on the borrowed capital u/s. 24(b) of the IT Act. Feeling aggrieved by the denial of benefit u/s. 24(b) for the amount of Rs. 6,97,38,200/- and the business losses of Rs. 5,20,16,620/- the assessee filed the appeal before the ld. CIT(A) for various
grounds. However the ld. CIT(A), was not convinced with the reason given before her and with respect to and hence recorded the finding in paras 5.4, 5.5, 6.1, 7.1 and 7.2 to the following effect. These paras are held as under. “5.4 Under such facts, and in absence of any other business, the claim of business expenses and interest expenses (other than that allowed under para 3) is against the construction/development of business park only, which have been let out and declared as "income from house property". Therefore, expenses claimed as interest and other expenses cannot be allowed as business income, and these have to be capitalised towards the cost of the building (to the extent allowable)and are to be allowed against the said building once it is ready to yield income (as either 30% of standard deduction against house property income) or against business income (in case it is a case of income from profits of business or capital gains (as cost of acquisition) as the case may be.
5.5 In this case, the appellant has consistently been claiming income as 'income from House property' and standard deduction u/s 24(a) has accordingly been allowed to it year after year. In addition, the claim of expenses under interest and other expenses which cannot be attributable to any other business being run by the appellant cannot be allowed.
Whether expenses of interest Rs. 4,57,23,763 claimed under business expenses and held as not allowable at para 5 above is allowable against income from House Property as interest expenditure u/s 24(b)?
6.1 The appellant is unable to show that these have been laid out in respect of the house property which has been let out and for which income is declared as income from house property. Under such facts, I am unable to give any finding in favour of the appellant for this additional claim made during the course of appeal. 7. Whether the alternate claim of the appellant that income should be allowed as income from 'profits of gains of business' can be considered?
7.1 Considering that the appellant has been claiming income under the head 'income from house property' year after year (as shown at para 3 above) and has been allowed standard deduction u/s 24(a) of 30% in this regard, going back and making a claim that this should now be treated/allowed as 'business income' is not in order. The same cannot be accepted. Also the claim of the appellant in submissions filed on 22.7.2015 that – “6. White filing the return of income, since the rental income was offered under the head 'Income from house property', the appellant did not claim depreciation allowance under section 32 in respect of the buildings Let out on rent. The said depreciation was also not claimed in computing the income/Loss under the head 'Profits and gains of business'. Assuming without admitting that the entire rental income is assessable under the head 'Profits and gains of business, the appellant would be eligible or depreciation allowance on buildings under section 32 of the Act and deduction under section 80 IAB in respect of rental income derived from development of a SEZ (provided there are profits) Even though 30% of net annual value under section 24(b) amounting to Rs. 12,83,42,544 would not be allowable if the rental income is assessed to tax under the head 'Profits and gains of business", depreciation under section 32 would be allowable in respect of the written down value of the buildings. Gross block of buildings as on 31st March 2010 as per financials amounted to Rs. 298,28,64,788. Even if one were to roughly calculate 10% depreciation on 70% of 298,28,64,788 (being 3rd year of operation) the same amounts to Rs. 20,88,00,535. The depreciation so computed would be more than 30% deduction allowable under section 24(b0. Consequently, Loss/unabsorbed depreciation assessable under the head 'Profits and gains of business' if rental income were to be treated as business income, would be higher than the Loss carried forward in the return of income." cannot be considered. It is not open to the appellant to change its stand now after availing of the benefit under Income from House Property year after year and also in subsequent years merely as the wrong or double claim has been noticed and pointed out by the AO.
7.2 Under such facts of the case, for the year in question, in absence of any other business carried out by the appellant, the action of the Assessing officer in disallowing interest expenses of Rs. 6,97,38,200 claimed in excess u/s 24(b)and in not allowing loss under profits from business and profession of Rs. 5,20,16,620 is upheld with the above findings and observations.”
Now the assessee had filled appeal before us on the grounds mentioned in the memo of appeals. Before us ld AR had vehemently argued the case and reiterated the submissions made before lower authority and further he relied upon board circular to support that the income from letting out should be treated as business income. The Ld DR has submitted that the CIT (A) has applied the correct law on facts and therefore relied on the order passed by lower authorities.
We have heard the rival submissions of the parties and perused the record and carefully considered the submission made before us. For the purpose of deciding the appeals, it is necessary for us to determine whether the income earned by the assessee by letting out the property was required to be treated as income from the house property or it is required to be treated as income profit and gain of business or profession u/s. 28 of IT Act. We are saying so if we decide that Page 8 of 12 the income to be treated as income from house property then the assessee is entitled to deduction under chapter (income from house property) then the deduction forming part of chapter IV computation of total income from house property u/s. 24(2), 25, 25A, 25Aa, 27 etc. are available and if we hold that the income from the house property is required to be treated as business income u/s. 28, then the consequences as mentioned in chapter D for profit and gains of the business profit under chapter 4 computation of business income shall be available including the provisions of section 36(1)(3), section 32, section 37, section 38 etc. At the outset the ld. AR has brought to our notice the circular issued by the Ministry of Finance, Department of Revenue being Circular No. 16/2017 dated 25.04.2017 whereby it was held that in the case of an undertaking which develops, develops and operates or maintains and operates an industrial park / SEZ, then in that case the income from letting out of premises / developed space along with other facilities in an industrial park / SEZ is to be charged to tax under the head ‘Profits and Gains of Business’. For the convenience we are reproducing the circular cited by the ld. AR to the following effect.
“The issue whether income arising from letting out of premises /developed space along with other amenities in an Industrial Park/SEZ is to be charged under head 'Profits and Gains of Business' or under the head 'Income from House Property' has been subject matter of litigation in recent years. Assessees claim the letting out as business activity, the income arising from which to be charged to tax under the head 'Profits and Gains of Business', whereas the Assessing Officers hold it to be chargeable under the head 'Income from House Property'.
The matter has been considered by the Board. Income from the Industrial Parks/ SEZ established under various schemes framed and notified under section 80IA(4)(iii) of the Income-tax Act, 1961 (`Act') is liable to be treated as income from business provided the conditions prescribed under the schemes are met. In the case of Velankani Information Systems Pvt Ltd , the Hon'ble Karnataka High Court observed that any other interpretation would defeat the object of section 80IA of the Act and government schemes for development of Industrial Parks in the country. SLPs filed in this case by the Department have been dismissed by the Hon'ble Supreme Court. In a subsequent judgment dated 30.04.2014 in & 78/2012 in the case of CIT vs. Information Technology Park Ltd.2, the Karnataka High Court has reaffirmed its. earlier views. It has held that, since the assessee-company was engaged in the business of developing, operating and maintaining an Industrial Park and Page 9 of 12 providing infrastructure facilities to different companies as its business, the lease rent received by the assessee from letting out buildings along with other amenities in a software technology park would be chargeable to tax under the head "Income from Business" and not under the head "Income from House Property". The judgement has been accepted by the Board.
In view of the above, it is now a settled position that in the case of an undertaking which develops, develops and operates or maintains and operates an industrial park/SEZ notified in accordance with the scheme framed and notified by the Government, the income from letting out of premises/ developed space along with other facilities in an industrial park/SEZ is to be charged to tax under the head 'Profits and Gains of Business'.
Accordingly, henceforth, appeals may not be filed by the Department on the above settled issue and those already filed may be withdrawn/ not pressed upon.
The above may be brought to the notice of all concerned.”
Now we are examining the undisputed fact before us. It is undisputed by the parties before us that the assessee had acquired the land for the purposes of setting up of the complex, it is also not disputed that the assessee started developing the land under the name of Cessna Business Park during the Financial Year 2004-05. It is also not disputed that the appellant secured the permission from the SEZ authorities to develop the Cessna Business Park as SEZ unit. It is also not disputed that the appellant is earning rental income by letting out the developed property from M/s. Cisco Systems (India) Pvt. Ltd.. Thus in our view all the ingredients has contemplated under the circular No. 16/2017 relied by the ld. AR, are in place . Therefore prima facie we are of the opinion that the income earned by the assessee from the letting out of the premises for developed space is required to be charged under the tax under the head profits and gains from the business. Further as per the brief note of the business activities placed at page no. 92 of the paper book it is mentioned as under. “The Company since March'04 started acquiring converted land at Kadabeesanahalli Village, Bangalore and the process of acquisition was completed in August'05. The land is under development as an IT & ITES Campus and the commencement of the same was in the year 2004-05. We have also got the SEZ approval for the said development. The whole of the development is an approved SEZ and will be retained
Page 10 of 12 and let out to IT & ITES companies. The development is happening in a phased manner and at present we have completed 6 blocks. Cisco have already taken up the space on lease. They have also agreed to take up the future developments which are in progress comprising of 2 more blocks.”
Now we examine the applicability of the judgement of Hon’ble Supreme Court rendered in the case of Chennai Properties & Investments Ltd. Vs. CIT as reported in 373 ITR 673. For the sake of ready reference, we reproduce para nos. 5, 10 and 11 of this judgement. The same are as under. “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) respectively. The main object of the appellant company is to acquire and hold the properties known as "Chennai House" and "Firhavin Estate" both in Chennai and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. What we emphasise is that holding the aforesaid properties and earning income by letting out those properties is the main objective of the company. It may further be recorded that in the return that was filed, entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order. 10. No doubt in Sultan Brothers (P.) Ltd.'s case (supra), Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: — "We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature."
We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is for this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting
Page 11 of 12 of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as 'income from the house property'. We, accordingly, allow this appeal and set aside the judgment of the High Court and restore that of the Income Tax Appellate Tribunal. No orders as to costs.”
11. In para no. 9 above, we have noted down certain facts which are undisputed but still we find that the copy of Memorandum of Association of the assessee company is not made available before us and as per the judgement of Hon’ble Apex Court reproduced above, the main object of the assessee company has to be examined from Memorandum of Association of the assessee company and therefore, we feel it proper that this matter may be restored back to the file of CIT(A) for fresh decision after examining the facts of the present case particularly the Memorandum of Association of the assessee company and decide the issue afresh in the light of this judgement of Hon’ble Apex Court rendered in the case of Chennai Properties & Investments Ltd. Vs. CIT (supra) with regard to this aspect as to whether the income is assessible under the head income from house property or as income from business.
Next issue to be decided is regarding set off of the losses but for deciding this issue, this aspect has to be decided first as to whether the income is to be assessed as income from house property or income from business because this aspect is not being decided by us and is being restored back to the file of CIT(A) for fresh decision as per para no. 11 above, we restore back this issue also to CIT(A) for fresh decision after examining the first aspect as to whether the income is assessible as income from house property or income from business. The CIT(A) should decide both these issues afresh after providing adequate opportunity of being heard to both sides.
Regarding the adhoc disallowance of 25% of interest expenditure claimed by the assessee, we find that on pages 10 and 11 of the assessment order, this disallowance was made by the AO on adhoc basis without giving any cogent reasoning and without indicating any basis for coming to the conclusion that 25% of the interest expenditure is to be disallowed. The CIT(A) has also not given any reasoning for confirming this disallowance. Hence, this issue is also restored
Page 12 of 12 back to the file of CIT(A) for fresh decision by way of a speaking and reasoned order after providing adequate opportunity of being heard to both sides.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Pronounced in the open court on this 14th day of February, 2018.