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Income Tax Appellate Tribunal, DELHI BENCH “G”, NEW DELHI
Before: SHRI G. D. AGRAWAL & SHRI AMIT SHUKLA
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “G”, NEW DELHI BEFORE SHRI G. D. AGRAWAL, PRESIDENT & SHRI AMIT SHUKLA, JUDICIAL MEMBER I.T.A. No.3751/DEL/2013 Assessment Year: 2008-09 Select Infrastructure Pvt. Ltd v. Addl. CIT Suite No.101-103, Range 8 Kanchunjunga Building New Delhi Barakhama Road New Delhi TAN/PAN:AAGCS8781D (Applicant) (Respondent) I.T.A. No.3775/DEL/2013 Assessment Year: 2008-09 DCIT v. Select Infrastructure Pvt. Ltd Range 8 (1) Suite No.101-103, New Delhi Kanchunjunga Building, Barakhama Road, New Delhi TAN/PAN:AAGCS8781D (Applicant) (Respondent) I.T.A. No.3752/DEL/2013 Assessment Year: 2009-10 Select Infrastructure Pvt. Ltd v. Addl. CIT Suite No.101-103, Range 8 Kanchunjunga Building New Delhi Barakhama Road New Delhi TAN/PAN:AAGCS8781D (Applicant) (Respondent) I.T.A. No.5401 & 5402/DEL/2014 Assessment Year: 2010-11 & 2011-12 Select Infrastructure Pvt. Ltd v. Addl. CIT Suite No.101-103, Range 8
I.T.A. No.3751, 3775&3752/D/2013 & ,5401,5402&5241/D/2014 2
Kanchunjunga Building New Delhi Barakhama Road New Delhi TAN/PAN:AAGCS8781D (Applicant) (Respondent)
I.T.A. No.5241/DEL/2014 Assessment Year: 2011-12 DCIT v. Select Infrastructure Pvt. Ltd Range 8 (1) Suite No.101-103, New Delhi Kanchunjunga Building Barakhama Road New Delhi TAN/PAN:AAGCS8781D (Applicant) (Respondent)
Assessee by: Shri Ajay Vohra, Sr. Advocate Department by: Shri S. S. Rana, CIT (DR) Date of hearing: 28 08 2017 Date of pronouncement: 04 10 2017
O R D E R PER AMIT SHUKLA, J.M.:
The cross-appeals for assessment year 2008-09 have been filed by the assessee as well as by the Revenue against the impugned order dated 28/3/2013, passed by the Ld. CIT(Appeals)-XI, New Delhi for the quantum of assessment passed under section 143(3) of the Act; appeal for assessment year 2009-10 has been filed by the assessee against the impugned order dated 28/3/1013; appeal for assessment year 2010-11 has been filed by the assessee against the impugned order dated 31/7/2014; cross-appeals for the assessment year 2011- 12 have been filed by the assessee as well as by the Revenue against the impugned order dated 31/7/2014.
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Since the issues involved in all the appeals are common arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of this consolidated order.
In order to understand the facts and the issues involved in the impugned appeals and the implication thereof on the grounds raised by the respective parties, we are taking up the cross-appeals for the assessment year 2008-09, the finding on major issue would apply mutatis mutandis in all the succeeding appeals, as similar facts are permeating through in all the years. In the assessee appeal following grounds of appeal have raised:-
“1. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in treating rental income of Rs. 27,37,99,940 received by the appellant from letting out of retail space in mall, as "business income", as opposed to “income from house property” declared by the appellant in the return of income. 1.1 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that where house property constitutes commercial asset, rental income earned from letting out thereof, would always partake character of business income. 1.2 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that the intention of the appellant was to exploit the mall commercially to earn profit, and, therefore, rental income earned from letting out retail shops, was taxable under the head “business income” instead of “income from house property” under section 22 of the Income Tax Act, 1961 (‘the Act”). 1.3 That the Commissioner of Income-Tax (Appeals) officer erred on facts and in law in consequentially upholding
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disallowance of deduction aggregating to Rs.20,49,46,6191- , claimed on account of 30% of the annual value, interest on borrowed capital, from the rental income under section 22 read with section 24 of the Act. 2. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in confirming disallowance under section 14A of the Act read with Rule 8D of the Income-tax Rules. 1962 ("the Rules) to the extent of Rs.12,45,053/-. 2.1 The Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that disallowance under section 14A of the Act was mandatorily to be computed as per Rule 8D of the Rules in assessment years 2008-09 and onwards. 2.2 The Commissioner of Income-Tax (Appeals) erred on facts and in law in not appreciating that application of Rule 8D was not automatic in the present case, since the preconditions for applying the said rule as prescribed in sub- sections (2)/ (3) of section 14A of the Act were not satisfied in as much as the assessing officer did not record any satisfaction as to the incorrectness of the amount of suo- moto disallowance made by the appellant in the return of income. 2.3 Without prejudice that the Commissioner of Income- Tax (Appeals) erred on facts and in law in not deleting the amount of Rs.7,63,867/- suo-moto surrendered for disallowed by the appellant in the return of income, while sustaining disallowance made by the assessing officer under section 14A of the Act in the assessment order. 4. The brief facts qua the issues raised in ground No.1 to 1.3 are that the assessee is a Public Limited Company engaged in the business of development/ construction of shopping malls, office complex and multiplex, etc. During the relevant previous year, the
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assessee company has completed construction of complex called as “Select City Walk” at Saket, New Delhi, which became operational from 29th September, 2007. The commercial area of the said complex was divided into following categories by the assessee:- � Shopping mall / Retail space � Service apartments � Office space � Multiplex � Parking � Surplus business space for general/common use. 5. Out of the aforesaid categories of constructed /developed space, the assessee; firstly, had given retail space on lease to various lessees, on which it has charged rent /license fee aggregating to Rs.27,37,99,940/- during the year. This amount of license fee received from lease of retail space has been offered to tax under the head “income from house property” in accordance with the provisions of section 22. Secondly, so far as other spaces such as office space, multiplex and service apartments, etc. which were constructed/ developed for outright sale, were shown as “stock-in-trade” in the books of account. The incomes earned from sale of such stock-in-trade have been offered to tax under the head “business income”. Lastly, the income arising from the balance space, which were retained by the assessee and used for the purpose of business, viz., common maintenance charges, advertising revenue, parking fees, etc., were offered to tax as business income under the head “profits and gains of business or profession”. Thus, the assessee had bifurcated its income from various commercial areas of the said complex into two categories; (i) license fee/rental income from lease of shopping mall/retail space as ‘income from house property’; and (ii) for
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exploiting of other spaces either for the purpose of sale or for the purpose of business, the assessee have been showing the income under the head ‘profits and gains of business or profession’.
However the Assessing Officer, was of the view that the amount of lease rent of Rs.27,37,99,940/- is to be taxed as ‘business income’ on the ground that, firstly, Select City Walk is a very famous shopping mall in Saket, New Delhi, which is purely a commercial property and not a residential property; and secondly, the assessee has developed the entire complex for multi use and sale of the spaces and, therefore, the entire receipts have to be taxed under the head business income. He also noted that during the year the assessee had sold constructed space for Rs.154.74 crores and the same has been reflected in the Income & Expenditure account, which is much higher than the receipts from lease license fee which is Rs. 27.38 crores. AO further observed that sale of land rights as well as constructed space in various forms is only a beginning of business of purchase and sale as well as activity of dealer in land by the assessee company and hence, the income from such activity is to be taxed as business income. He also scrutinized the specimen copy of certain lease license agreement and noted that these were generally for a period of three years which may or may not be extended and also had certain terms and conditions, but these lease license agreement does not prevent the assessee in selling the balance constructed space. After referring to various judgments like; Karanpura Development Co. Ltd. Vs. CIT reported in 44 ITR 362 (SC); CIT vs. Halai Nemon Association reported in 243 ITR 439 (Mad.) and some Tribunal decisions, AO held that the income shown by the assessee under the head ‘income from house property’ should be taxed as ‘business income’ and accordingly, disallowed the statutory deduction claimed by the assessee under
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section 24(a) of Rs. 8,11,43,540/-. He also disallowed 1/5th interest for pre-construction period amounting to Rs.1,32,43,886/- and also deduction of interest on loan of borrowed funds for Rs.8,75,83,776/-. Accordingly, total disallowance worked out by the Assessing Officer on this score aggregated to Rs.18,19,71,202/-.
Before the ld. CIT (A), the assessee, after explaining the entire facts and background of the case, submitted that the assessee was granted perpetual lease in respect of commercial plot in District Centre, Saket, New Delhi, vide lease deed dated 14/10/2004 for the purpose of construction and development of retail space, service apartments, multiplex, etc. It was submitted that in order to retain the ownership in the shopping mall and to ensure better control and continued management interest, the assessee right from the construction of the project had decided to adopt a model whereby the ownership in retail space was to be retained by the assessee with a view and intention to let out the same on lease and sell other spaces, viz., multiplex, service apartments and office space on completion of construction. This intention is also gathered from the Director’s report and Notes to Accounts of the earlier years when the construction of the project was in progress, wherein it was categorically disclosed that the retail space in the proposed project would be provided only on lease and license and other area would be sold out rightly. The assessee also referred to the relevant portion of disclosure in the accounts for the financial year 2005-06 which has a great significance in understanding the intention and purpose for constructing the Mall. The same reads as under:-
“Space at Select CITYWALK is only being licensed and not sold like most other malls In National Capital Region. ...
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... it is also India's first turnover-rental-based up-market shopping destination. The fully licensed and turnover-rental-based model ensures better control, continued management interest, a well- regulated and disciplined environment, and a strategically controlled Tenant Mix with the shopper in focus. Operations We have adopted a business model whereby the Retail Podium is proposed to be retained by the company and licensed/leased in order to preserve the quality of trade and tenant mix, instead of being sold in small fragmented pieces. In view of the possibility of sale of certain components of the project, they have been bifurcated as Inventory being project components intended to be sold and Capital Work in progress being components intended to be retained by the Company. Accordingly, the cost of construction has been appointed and allocated to the constituents of the project on the basis of technical evaluation of area intended to be used for respective purposes. We shall be one of the first few Retail Shopping Centres in India that would be fully license/lease based. We have already, by the end of the year under review, entered into MOU's for License/Lease of about 60% of the Leasable / Licensable area in the Retail Podium..."
Consistent with the said intent/object, the assessee during the construction period itself had entered into Memorandum of Understanding (MoU) with various prospective lessees, to provide the retail space on lease on completion of construction thereof. The sample copies of the MoU entered with various lessees were also filed before the ld. CIT(Appeals) just to point out that the intention of the assessee was always to own the retail space. Thus, from these facts and material, the assessee pointed out that rental income earned by
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the assessee from letting out retail space has rightly been offered under the head income from house property. In support, the assessee had also relied upon catena of decisions, which have been dealt and incorporated by the ld. CIT (A) from pages 8 to 16 of the appellate order.
The ld. CIT (A) after analysing the entire facts and material placed on record held that the income from ‘license fee’ from retail space has rightly been taxed as business income by the Assessing Officer. His relevant conclusion on this issue is as under:-
“The issue to be considered is whether the appellant is intrinsically using the asset owned by it for the purpose of business or exploiting the property for earning rent. The appellant is the owner of a mall, which is the only commercial asset it owns. The appellant is also using portions of the mall for its business. The appellant has given on rent retail shops situated in the mall. The appellant provides services to the tenants for which it charges amounts which are offered to tax under the head profits and gains of business and profession. The mall is being used mainly for the business of the appellant. The main intention of the appellant is not to earn rental income from the mall by letting out the retail shops. The appellant is not renting out shops to maximize its profits. The main business of the appellant is to use the commercial asset - the mall to earn profits. The mall was constructed with a business purpose to earn profits and not for earning rental income. The other activities of the company i.e. marketing and advertising, holding events, arranging weekly bazaars are all linked to the earning of business profits. It is^ evident that the company is not letting out space with a view to earn income by exploitation of ownership of property, but to earn business income by exploitation of the commercial asset.
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If the appellant derived income from a commercial asset which was capable of being used as a commercial asset, then it would partake character of income from his business, whether he uses that commercial asset himself or lets it out to somebody else to be used. The asset would not cease to be a commercial asset simply because temporarily it was let out to another person for their use. So long as the commercial asset is capable of being exploited as such, its income is business income irrespective of the manner in which the asset is exploited by the owner of the business. The owner is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. It is therefore, apparent that the appellant is earning business income from the mall. I therefore, uphold the action of the AO in treating the entire income of the appellant as income from business and profession and not from House Property. The addition made is confirmed. The ground of appeal is ruled against the appellant.”
Before us, the ld. Sr. Counsel for the assessee, Shri Ajay Vohra, submitted that the main distinctive feature in the assessee’s case is that it has divided the entire complex into various categories and only leasing of retail space alone has been treated as income from house property and receipts from sale and exploitation of other commercial space has been treated as business income. So far as the Assessing Officer’s contention that the assessee had made a huge chunk of sale of constructed space for a sum of Rs.154.72 crores, he pointed out that the same was done only in the first year when the complex was ready, i.e., relevant to the previous year of the assessment year 2008-09. Thereafter, there has been no sale and assessee has been constantly showing license fee from retail as income from house property and the balance receipts from other spaces have
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been shown as business income. Mr. Vohra submitted that now this issue stands squarely covered by the judgment of the Hon'ble Supreme Court in the case of Raj Dadarkar & Associates vs. ACIT, reported in [2017] 248 Taxman 1 (SC). In the said judgment, the Hon'ble Apex Court has analysed this issue threadbare and has also discussed and distinguished its earlier judgments in the case of Chennai Properties and Investments Ltd. vs. CIT, reported in [2015] 231 Taxman 336 (SC) and also the judgment in the case of Rayala Corporation (P.) Ltd. vs. ACIT, reported in [2016] 243 Taxman 360 (SC). In this also the substantial question of law for consideration before their Lordships was, whether the Tribunal was right in holding that the income earned by the appellant from shopping centre was required to be taxed under the head income from house property instead of under the head income from profits and gains from business of profession as claimed by the appellant. After referring to the facts of that case as discussed in para 3, he pointed out that the Hon'ble Apex Court held that, wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, if the provisions of section 22 are satisfied. Their Lordships further held that merely there is 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 is to be treated as income from business or otherwise. It would all depend upon the facts and circumstances of each case. Thus, the Hon'ble Apex Court concluded that where assessee having obtained a property on lease, constructed various shops and stalls on it and gave the same to various persons on sub- licensing basis, then the income from sub-licensing was to be taxed as income from house property and not as business income. Thus, Mr.
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Vohra submitted that this judgment clearly clinches the issue in favour of the assessee.
So far as reliance placed by the ld. CIT(A) in the case of S.G. Mercantile Corporation P. Ltd. Vs. CIT reported in [1972] 83 ITR 700 (SC), he submitted that in that case assessee was not the owner of the property and on this background the judgment was rendered and would be inapplicable on the present case.
On the other hand, the ld. CIT-D.R., strongly relying upon the orders of the Assessing Officer as well as the ld. CIT(A), submitted that, what is to be seen here in this case is, whether the assessee was systematically engaged in the exploitation of commercial property for earning income or not. The Assessing Officer has categorically noted that the intention was to carry on the business for sale of commercial space and it was in this background the Assessing Officer has treated the entire receipts to be taxed under the head business income. In any case running and operating of shopping mall is always a business adventure and renting of space is part of such activity. Ld. CIT-DR also tried to distinguish the judgment of the Hon'ble Supreme Court in the case of Raj Dadarkar & Associates vs. ACIT (supra) on the ground that in that case there was no intention by the appellant to sell the said shop as he got the license/lease for managing the market for 12 years which he had constructed and sub-licensed to various shopkeepers. He also strongly relied upon the judgment of the Hon'ble Delhi High Court in the case of Jay Metal Industries Pvt. Ltd. Vs. CIT reported in [2017] TIOL 1338 and also the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Ansal Housing and Construction reported in [2016] 389 ITR 373.
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We have heard the rival submissions, perused the relevant finding given in the impugned order as well as the material referred to before us. The core issue before us for adjudication is, whether the income shown by the assessee as ‘license fee’ from lease of retail space is to be taxed under the head ‘income from house property’ or ‘business income’? Briefly recapitulating the relevant facts which have a very vital bearing on the issue involved are that, during the relevant financial year 2007-08, the assessee completed the construction of complex known as “Select City Walk” in Saket, New Delhi which became operational from 29th September 2007. The commercial area of the aforesaid complex has been bifurcated by the assessee into following categories:- � Shopping mall / Retail space � Service apartments � Office space � Multiplex � Parking � Surplus business space for general/common use During the year, assessee had sold certain constructed space which were developed for outright sale and was shown as stock-in-trade in the books of account had been offered as business income. These spaces included service apartments, office space, multiplex, etc. The income arising from the balance spaces, which were retained by the assessee-company for common maintenance, event and advertising revenue, parking fees, etc., was again offered to tax under the head profits and gains of business of profession. So far as the taxability of receipts from these activities and spaces are concerned, there is absolutely no dispute that they are to be taxed as business income. So far as the ‘license fee’ from letting/ lease of retail space is concerned, it is seen from the records that right from the conception of
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the complex and the initial years when the complex was under construction, assessee had always intended to keep the retail space under its control and possession so as to give it on lease and earn regular income. This is quite evident from the Director’s report and Notes of Accounts in the financial year 2005-06, which has been incorporated in the foregoing paragraphs. The said disclosure at the initial stage assumes great significance to gauge the intention of the assessee and purpose of constructing the complex. Consistent with the said intend/ object, the assessee during the construction period only had entered into a MoU with various prospective lessees to provide retail space on lease and to earn rental income. These facts have not been disputed either by the Assessing Officer or by the ld. CIT (A). Ostensibly when assessee has constructed a property solely with an intention and purpose to give it on lease and to earn rental income/ license fee, then the income has to be assessed under the head ‘income from house property’, because right from the stage of conception of the project and construction, the intention was only to exploit the property for lease rent. Before us, the ld. Sr. Counsel for the assessee has given a comparative chart showing gross income earned during assessment years 2008-09 to 2012-13 to show that how the assessee had been showing income under various heads, which is reproduced as under:- A/Y 2012-13 A/Y 2011 12 A/Y 2010-11 A/Y 2009-10 A/Y 2008-09 Description Amount Rs Amount Rs. Amount Rs. Amount Rs. Amount Rs. Licence Fee 1,064,732,734 944,402,018 815,868,034 753,245,472 273,799,940
Sale of - - - - 1,547,164,866 Constructed space Electricity, Air Conditioning & 112,332,735 98,947,355 104,378,313 121,076,611 33,529,374 Water Ch. Common Area Maintenance 173,905,187 148,353,011 134,022,750 138,413,554 54,794,000 Charges
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Parking Charges 42,012,165 38,845,204 37,654,420 35,805,060 10,781,330 Received Misc. Event and 142,638,087 123,224,960 99,381,380 67,237,517 11,137,973 Signage Income Sale of Trading 156,055,617 11,015,208 - - - Goods* Other Income Dividend Income - - 491,079 6,617,876 763,867 on Investment Security Deposit - - 4,381,701 3,665,691 - forfeited Credit balances 1,699,066 1,401,815 4,634,989 197,220 - written back Liabilities no longer required - 1,907,607 - 836,319 - written back
Gain on sale/ redemption of short term non - - 819,010 - trade investments (net)
Interest from: -Bank 12,937,876 7,423,917 8,023,732 531,494 174,317 -Others 1,680,532 1,582,100 5,523,481 1,787,539 2,928,978 Miscellaneous 833,008 1,749,810 8,430,185 1,361,972 --- Income Total Income ( Rs.) 1,708,827,007 1,378,853,005 1,222,790,064 1,131,595,335 1,935,074,645
From the above it is quite apparent that only license fee has been shown by the assessee as income from house property under section 22. One of the main allegation of the Assessing Officer as well as the ld. CIT (A) is that, since mall is being used for the business of the assessee and was constructed with purpose to earn profit and assessee has also mixed up with other activities like marketing and & advertising, holding events, arranging weekly bazaars, etc., therefore, income earned has to be reckoned as business income. So far as the purpose for construction of retail shops in the mall to earn profit by way of business adventure, is not borne out from the records, albeit as stated above, assessee all throughout right from inception and construction phase had always intended to keep/ retain the retail/
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shopping space for the purpose of leasing it out and that is why these spaces were never entered as stock-in-trade in the books of account. The business motive if any, is evident from sale of other spaces like service apartments, offices, multiplex theater, which assessee did sold in this year and sum amounting to Rs.154.47 crores from sale of such spaces has been already offered it as business income in this year. The receipts from other activities like marketing and & advertising, holding events, arranging weekly bazaars, at the common space etc., have also been consistently shown as business income. It is qua the retail space only the assessee always had intention and motive to earn rental income and thus, the finding of the Assessing Officer and the ld. CIT (A) is completely divorced from the facts and material placed on record before them. On these facts and background, it would be very relevant to refer to the ratio and principle laid down by the Hon'ble Supreme Court in the case of Raj Dadarkar & Associates vs. ACIT (supra). One of the main substantial question of law for consideration before the Apex Court was as under:-
“Whether in the facts and circumstances of the case, and in law, the Tribunal was right in holding that the income earned by the appellant from the shopping centre was required to be taxed under the head “income from House Property” instead of the head “Profits and Gains from the Business or profession” as claimed b the Appellant?”
The relevant facts as noted by the Hon'ble Apex Court can be summarized in the following manner:-
� The Maharashtra Housing and Developing Authority (MHADA) had constructed a building. However, there was a reservation for Municipal retail market on the plot on
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which MGADA had put up the construction. Therefore, MHADA handed over the ground floor [stilt portion] of the aforesaid buildings to Market Department of Municipal Corporation Greater Bombay (MCGB).
� The Market Department of the MCGB auctioned the market portion on a monthly license [stallage charges] basis to run municipal market. The assessee firm participated in the auction to acquire the right to conduct the market. The assessee was the successful bidder and was handed over possession of the market portion.
� The terms and conditions subject to which the market portion to run and maintain municipal market contained in the terms and conditions of the auction. The premises allotted to the assessee was a bare structure, on stilt, that is, pillar/column, sans even four walls: In terms of the auction, it was the assessee who had to make the entire premises fit to be used as a market, including construction of walls and construction of entire common amenities like toilet blocks, etc.
� After taking possession of the premises, the assessee spent substantial amount on additions/alterations of the entire premises, including demolishing the existing platform and, thereafter, reconstructing the same according to the new plan sanctioned by the MCGB. The assessee constructed various shops and stalls of different carpet areas on the premises.
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� The assessee collected the Receipt from the sub-licensees in form of leave & license fees and service charges for providing various services, including security charges, utilities etc.
� The assessee filed the return wherein income from the aforesaid shops and stalls sub-licensed by it was offered to tax under the head 'Profits and gains of business or profession'.
� The Assessing Officer computed the income from the shops and the stalls under head Income from House Property’. The reasons given for so computing the income under the head 'Income from House Property' were by virtue of section 27(iii b), the appellant was 'deemed owner' of the premises as it had acquired leasehold right in the land for more than 12 years; in agreements for sub-licensing the words ‘lease compensation' were used instead of ‘license fees' and deposits were referred as 'sub-lease deposits'; property tax had been levied on the assessee.
� The Tribunal also held that assessee had not established that it was engaged in any systematic or organized activity of providing service to the occupiers of the shops/stalls so as to constitute the receipts from them as business income. The assessee received income by letting out shops/stalls, and therefore, the same had to be held as income from house property.
On these facts, the Hon'ble Apex Court, after analyzing various provisions contained in sections 22 to 27 and also various
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judgments of its own Court including that of Sultan Bros. (P.) Ltd. Vs. CIT reported in [1964] 51 ITR 353 (SC) and the judgment in the case of Chennai Properties and Investments Ltd. Vs. CIT (supra) and Rayala Corporation (P.) Ltd. vs. ACIT, held that the income earned by the assessee is to be treated as income from house property. The relevant finding and observation of the Hon'ble Apex Court are as under:-
“14. There may be instances where a particular income may appear to fall in more than one head. These kind of cases of overlapping have frequently arisen under the two heads with which we are concerned in the instant case as well, namely, income from the house property on the one hand and profits and gains from business on the other hand. On the facts of a particular case, income has to be either treated as income from the house property or as the business income. Tests which are to be applied for determining the real nature of income are laid down in judicial decisions, on the interpretation of the provisions of these two heads. Wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, in case provisions of Section 22 of the Act are satisfied with primary ingredient that the assessee is the owner of the said building or lands appurtenant thereto. Section 22 of the Act makes ‘annual value’ of such a property as income chargeable to tax under this head. How annual value is to be determined is provided in Section 23 of the Act. ‘Owner of the house property’ is defined in Section 27 of the Act which includes certain situations where a person not actually the owner shall be treated as deemed owner of a building or part thereof. In the present case, the appellant is held to be “deemed owner” of the property in question by virtue of Section 27(iiib) of the Act. On the other hand, under certain circumstances, where the income may have been derived from letting out of the premises, it can still be treated as business income if letting out of the premises itself is the business of the assessee.
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What is the test which has to be applied to determine whether the income would be chargeable under the head “income from the house property” or it would be chargeable under the head “Profits and gains from business or profession”, is the question. It may be mentioned, in the first instance, that merely because there is 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 is to be treated as income from business. Such a question would depend upon the circumstances of each case. It is so held by the Constitution Bench of this Court in Sultan Bros. (P) Ltd. v. CIT, (1964) 5 SCR 807 and we reproduce the relevant portion thereof: “7. … 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.” Finally, the Apex Court, after analyzing various judgments, concluded that where assessee has obtained a property on lease, constructed various shops and stalls and gave the same to various persons on sub-license basis, then the income from sub-license was to be taxed as income from house property and not as business income. 17. Here in this case also, qua the retail space, the assessee was not carrying on any systematic or organized activity of providing service to the occupiers of the shops, albeit other service charges
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pertaining to the common maintenance, event and advertising, parking fees, etc., has been offered separately for tax under the head profits and gains of business of profession. So far as retail space is concerned, it is lease rent simplicitor, which is evident from the copy of sample lease deed which has been placed by the assessee in its paper book from pages 157 to 187 and also the copies of MoU, the copy of which are appearing at pages 149 to 156 of the paper book. Thus, on the facts of the present case and also relying upon the principle laid down by the latest Supreme Court judgment in the case of Raj Dadarkar & Associates vs. ACIT (supra), we hold that the receipts from the lease rent/license fee from lease of retail space in the shopping mall is to be taxed under the head “income from house property” under section 22; and consequently, the assessee is liable for deduction under section 24(a) and other deductions of interest of pre-construction period and interest on loan which are to be allowed while computing the income from house property. Accordingly, disallowance made by the Assessing Officer for the sums aggregating to Rs.18,19,71,202/- is directed to be deleted.
So far as the other judgments, which have been referred by the ld. CIT (A) in the impugned order as well as by the ld. D.R., we are not venturing into distinguishing the same, because, on the facts, the assessee’s case strongly indicates that lease rent income from leasing of retail space is purely a rental income and the principle and ratio laid down by the Hon'ble Apex in the case of Raj Dadarkar & Associates vs. ACIT (supra), which has been rendered taking into consideration various judicial precedents and analysis of the statutory provisions is squarely applicable on the facts of present case. Thus, we are refraining from entertaining into the semantics of various judgments referred and relied upon before us.
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Coming to the issue raised in ground No.2, i.e., with regard to the disallowance under section 14A read with rule 8D to the extent of Rs.12,45,053/-, Mr. Ajay Vohra, the ld. Sr. counsel for the assessee at the outset submitted that the dividend income earned by the assessee, which has been claimed as exempt is only Rs.7,63,867/-, whereas the disallowance made by the Assessing Officer is Rs.12,45,053/-. He submitted that the disallowance under section 14A should be restricted to the extent of exempt income earned and no further relief is sought for. In support of this proposition, he strongly referred and relied upon the judgment of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT, reported in (2015) 372 ITR 694 (Delhi).
The Ld. CIT-D.R., on the other hand, relied upon the orders of the Assessing Officer as well as the Ld. CIT (A).
Since the assessee’s only grievance before us is that, the disallowance under section 14A should be restricted to the extent of exempt income of Rs.7,63,867/-, therefore, following the ratio and principle laid down by the Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (supra), we restrict the disallowance at Rs.7,63,867/- as disallowance of expenses cannot exceed the income earned. Thus, ground No.2 of the assessee is partly allowed. 22. In the result, appeal of the assessee is partly allowed.
Now we shall take up the Revenue’s appeal for assessment year 2008-09, vide which following grounds have been raised:-
The ld. CIT(A) has erred in deleting the addition of Rs.2,63,55,191/- made by the Assessing Officer on account of interest on optionally fully convertible debentures after
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applying the provisions of section 2(22)(e) of Income Tax Act, 1961. 2. The ld. CIT( A) has erred in deleting the addition of Rs.8,16,38,515/- made by the Assessing Officer on account of disallowance of depreciation on plant and machinery after noting down discrepancies regarding purchases, installation and utilization of the plant and machinery. 24. The brief facts qua the issue raised in the first ground are that the assessee has taken secured loan of Rs.195,52,51,207/- and unsecured loan of Rs.100,00,00,000/-. The assessee had also shown receipt of Rs.48,53,54,996/- as shop security deposits from its various tenants. These receipts have been claimed as interest free deposits and refundable in nature. As against these loans, the assessee had debited sum of Rs.8,99,95,318/- as interest on fixed loans; sum of Rs. 3,76,50,274/- as Optional Fully Convertible Debenture (OFCD); and Rs.99,19,273/- as bank and finance charges. The Assessing Officer, from the perusal of the balance sheet, noted that the assessee had issued 100 OFCDs totaling to Rs.100 crores with fixed interest liability. Out of the said OFCDs, 70 OFCDs were held by ‘Select Holiday Resorts Pvt. Ltd.’, which was the holding company of the assessee-company. On this background, he assumed that out of 100 OFCDs, 70 OFCDs is actually held by the holding company and therefore, the assessee-company cannot be held to be owner/ beneficiary from the entire OFCD and payment of interest cannot be allowed on entire OFCD. Accordingly, he held that proportionate interest in the ratio of 30:70 becomes disallowable and accordingly, worked out a sum of Rs.2,63,55,191/- as taxable on two counts namely; firstly, the amount equivalent to Rs.2,63,55,191/- is disallowable because the Assessee-company has borrowed another
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interest bearing secured loans amounting Rs.95,52,51,207/- and is paying Rs.3,99,95,318/-, hence it is a case where the assessee- company is borrowing interest bearing loans and paying certain interest to its related company in the form of OFCD’s interest and that too, to its Holding Company, therefore, it is a clear cut case of diversion of interest bearing loan to sister/related company; and secondly, it is taxable u/s 2(22) of the IT Act 1961, whereby the assessee-company is transferring a profit of Rs.2,63,55,191/- to its Holding Company under the name and guise of interest payment.
Before the ld. CIT (A), the assessee submitted that funds have been provided by the holding company to the assessee-company in the form of OFCD which have been utilized by the assessee company in the business activities and development & construction of commercial complex, the income from which has been assessed and brought to tax in the assessment order. Inflow and utilization of borrowed fund by the holding company is not in dispute and the payments on account of interest cannot be held to be bogus or mere diversion of funds simply because OFCDs have been subscribed by the holding company. In any case, the holding company is a separate entity from the assessee in the eyes of law and therefore, presumption of diversion of fund does not arise.
So far as taxing of deemed dividend under section 2(22)(e) is concerned, it was submitted that provision of deemed dividend cannot be held to be applicable at all, because it is payment on account of interest in lieu of funds borrowed from the holding company by way of OFCD which is not in the nature of distribution of any accumulated profit to the shareholder. Lastly, heavy reliance was placed on the
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judgment of the Hon'ble Delhi High Court in the case of CIT vs. Aniket Limited. 27. The ld. CIT (A), held that AO has made the addition u/s 2(22)(e) only and the provisions of deemed dividend cannot be applied in this case, as there is no loan or advance given, it is just payment of interest on loan. Therefore, section 2(22)(e) cannot be attracted.
The ld. CIT D.R., strongly relied upon the order of the Assessing Officer and submitted that such a payment of interest has to be seen from the point of view of payment to a sister concern in the nature of advance for non-business purpose. He placed reliance upon the following decisions:-
(1) Kantilal Manilal v. CIT [1961] 41 ITR 275 (SC). (2) Shashibala Navnitlal vs. CIT, 54 ITR 478 (Guj.)
On the other hand, the ld. Sr. Counsel for the assessee, Shri Ajay Vohra, strongly relied upon the order of the ld. CIT(A) and submitted that payment of interest cannot be reckoned as loan or advance and, therefore, the ld. CIT(A) has rightly deleted the addition by saying that it cannot be taxed as deemed dividend.
After considering the rival submissions and on a perusal of the relevant finding given in the impugned order, we find that it is an undisputed fact that, what has been disallowed by the Assessing Officer is in fact interest payment on OFCD held by Select Holiday Resorts Pvt. Ltd. which is one of the holding company of the assessee- company. The assessee for generating of funds had offered 100 OFCDs totaling to Rs.100 crores, out of which 70 OFCDs have been subscribed/ held by Select Holiday Resorts Pvt. Ltd. On such OFCD,
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assessee-company had paid interest payment of Rs.3,7650,274/- (for the entire 100 OFCD). The Assessing Officer held that 70% of such interest is to be taxed, because, firstly, the assessee company is borrowing interest bearing loans and paying certain amounts to holding company and, therefore, it is a case of diversion of interest bearing loan fund to another company; and secondly, it is taxable under section 2(22)(e). We are unable to appreciate such a hypothesis of the Revenue to approach the payment of interest to holding company/ sister concern; firstly, payment of interest on OFCD can never be reckoned as loan or advance given as stipulated in section 2(22)(e), as OFCD is one of the mode of securing an unsecured loan and there is no payment of loan or advance from accumulated profits; and secondly, there is no diversion of any interest bearing fund, because assessee has offered OFCD to a separate entity which has been subscribed by them, on which assessee is paying interest. Hence, there could be no case of diversion of any interest bearing loan or advance of fund to sister concern for non-business purposes. Thus, the ground raised by the Revenue has no merits and the addition has rightly been deleted by Ld. CIT (A). Accordingly, ground raised by the revenue is dismissed.
So far as second ground is concerned, i.e., addition of Rs.8,16,38,515/- on account of disallowance of depreciation on plant and machinery is concerned, the ld. CIT D.R. submitted that assessee has made a claim of depreciation on second set of plant and machinery, which has been disallowed by the Assessing Officer on the ground that evidence of purchase of assets has not been filed nor original purchase bill with proof of payments by account payee cheque have been produced for verification. Out of the details furnished of various plant and machineries, the assessee could not furnish the
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details with regard to purchase of plant and machinery amounting to Rs.54,42,56,769/-, on which assessee-company has claimed depreciation @15%. Secondly assessee could not prove that these plants and machinery have been put to use during the year for the purpose of business. Accordingly, AO has rightly disallowed the entire claim of Rs.8,19,38,515/- and Ld. CIT(A) has erred in law and on facts to entertain additional evidence on this score. In any case matter can be restored to the file of AO for proper verification.
Before the ld. CIT (A), assessee filed entire details of purchase of plant and machinery along with copy of ledger accounts, etc. The said details were sent to the Assessing Officer to submit his remand report and for examining the same. However, the Assessing Officer objected to the admission of additional evidence instead of examining the same. The ld. CIT (A), duly took note of the additional evidence and allowed depreciation of plant and machinery on the ground that once the AO has assessed the business income and plants and machinery have been put to use for the business purpose depreciation has to be allowed.
On the other hand, the Ld. Sr. Counsel submitted that all the details of plant and machinery installed were given before the AO and what was asked by the AO was filed. AO’s main objection was that in absence of bills it was difficult to ascertain whether machinery was put to use. Before the CIT (A) assessee had submitted the entire evidences not only of installation but actual use of plant and machinery for the purpose of assessee’s business. When Ld. CIT (A) called for AO’s comment and to examine the details, he chose not to verify and instead opposed for its admission which cannot be appreciated.
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We have heard the parties at length on this issue and also perused the relevant material placed before the ld. CIT (A) as well as before the AO. The Assessing Officer has disallowed the claim of depreciation on the ground that the assessee had not produced relevant purchase bills and evidences and assessee did not put to use the aforesaid assets during the relevant previous year, for which he has relied upon general voucher whereby accounting entry for capitalization of aforesaid plant and machinery from work-in-progress was passed at the time of finalization of account for the relevant year as at the last date, i.e., 31/3/2008 after presumed that it has been installed on the last date of the accounting year and therefore, was not put to use. Assessee’s contention has been that the details of addition to plant and machinery and the date on which they are being put to use were verified and reported by the Auditors in Annexure -4 to the Tax Audit Report in Form no. 3CD which provided all the items of plant and machinery which were installed and put to use on 29/9/2007 itself, which was the date of commencement of operation of the complex. Before the ld. CIT (A), assessee had filed various evidences to substantiate and corroborate the claim of depreciation on plants and machinery installed as on 29th September, 2007. The assessee made another attempt before the Ld. CIT (A) to show that the entire complex along with plant and machinery was put to use on 29/9/2007 itself along with details of purchase of plant and machinery. All these details were sent to the Assessing Officer to verify and submit a remand report, but instead of examining the same, he objected for such an admission of evidence. Whence, assessee has duly shown that the plant and machinery for sums aggregating to Rs.54,42,56,799/- were not only installed but also put to use on 29/9/2007, when the complex started its operation and huge business income has been shown and assessed by the AO, then
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depreciation on such plant and machinery has to be allowed. Journal entry for capitalization of plant and machinery from capital work-in- progress passed on 31/3/2008 does not in any manner can lead to an inference that assets were installed and put to use on that date only and were not installed or put to use on 29/9/2007, because the assessee had shown the revenue in the form of rent and maintenance charges in relation to the said complex and also filled various contemporaneous evidences which have been highlighted at page 31 of the impugned appellate order. Based on these facts and evidences, the ld. CIT (A) has given a finding of fact that, since the assessee has shown income from business during the year and there is no way income would have been earned without utilizing the assets like lift, parking equipments, etc. and such income has been accepted by the Assessing Officer, then depreciation on such assets cannot be disallowed. Such a finding of the ld. CIT (A) is based on correct appreciation of facts and law and we do not find any reason to deviate from such a finding or set aside the issue to the file of the AO as contended by the Ld. CIT-DR, because all the relevant material to corroborate the claim are already on record and confronted to the AO. Accordingly, ground No.2 is dismissed.
Accordingly, appeal of the Revenue is dismissed.
So far as the other appeals of the assessee in I.T.A. No 3752/DEL/2013 for assessment year 2009-10 and I.T.A. No 5401 & 5402/DEL/2014 for assessment years 2010-11 and 2011-12 are concerned, as admitted by both the parties, assessee has raised identical grounds relating to taxability of rental income/ license fee from lease of retail shops, whether to be assessed as ‘business income’ or ‘income from house property’ or not as raised in I.T.A. No 3751 /
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DEL/2013 for assessment year 2008-09, except for the variation in the amount. No other ground and issues have been raised in these years, which is evident from the bare perusal of grounds of appeal raised by the assessee in these years. Since similar facts and findings of the AO and ld. CIT (A) are permeating in these years also, therefore, our findings given above in I.T.A. No 3751/DEL/2013 for the assessment year 2008-09 qua this issue will apply mutatis-mutandis in these years also. Accordingly, we hold that income from license fees from lease of retail shops/ spaces will be assessed under the head ‘income from house property’ and consequently, the assessee would be eligible/ entitled for the deductions permissible under section 24 and in accordance with law. Thus, the appeals of the assessee in I.T.A. No 3752/DEL/2013 for assessment year 2009-10 and I.T.A. No 5401 & 5402/DEL/2014 for assessment years 2010-11 and 2011-12 are allowed.
So far as appeal of the Revenue in I.T.A. No 5241/DEL/2014 for assessment year 2011-12 is concerned, Ld. CIT DR fairly pointed out that the tax effect on the disputed issue as has been raised by the Revenue in the grounds of appeal is much less than Rs.10 lakhs and therefore at the threshold the revenue’s appeal is not maintainable. Admittedly the issue of disallowance is Rs. 20,79,477, on which tax effect is less than the prescribed monetary limit of Rs. 10 Lakhs for filing of appeal before the Tribunal. Whence the tax effect on the addition is much less than Rs.10 lakhs, then, in wake of C.B.D.T. Circular No.21/2015 dated 10/12/2015, the appeal filed by the Revenue is not maintainable. It has been further clarified in the said Circular that the monetary limit for filing of appeal will apply on all the pending appeals also. Accordingly the appeal of the Revenue is dismissed in-limine without going to the merits of the case.
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In the result, appeal of the assessee for the assessment year 2008-09 is partly allowed; and the appeals for the assessment years 2009-10; 2010-11; and 2011-12 are allowed; whereas the appeals of the Revenue for the assessment years 2008-09 and 2011-12 are dismissed. Order pronounced in the open Court on …04... October, 2017.
Sd/- Sd/- [G.D. AGRAWAL] [AMIT SHUKLA] PRESIDENT JUDICIAL MEMBER
DATED: 04th October, 2017 JJ:2609 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR Assistant Registrar Date 1. Draft dictated on 2. Draft placed before author 3. Draft proposed & placed before the second member 4. Draft discussed/approved by Second Member. 5. Approved Draft comes to the 4.10.2017 Sr.PS/PS 6. Kept for pronouncement on 7. File comes back to PS/Sr. PS 8. Uploaded on 9. File sent to the Bench Clerk 4.10.2017 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order.
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