A.B. HOTELS LTD. (RADISSON HOTEL),NEW DELHI vs. ACIT, NEW DELHI

PER R.K. PANDA, A.M: The above three appeals filed by the assessee are directed against the separate orders dated 11th June, 2014 of the CIT(A)-II, New Delhi relating to assessment year 2006-07, 2009-10 and 2011-12 respectively. For the sake of convenience, these appeals were heard together and are being disposed of by this common order. ITA no. 4009/Del/2014 (Assessment year 2006-07) 1. The only ground raised by the assessee reads as under :

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“The learned CIT(Appeals) – II, New Delhi has erred on fact in confirming the action of DCIT, CC-3, New Delhi u/s 143(3) with regard to assessing the rental income from House Property as Business Income amounting to Rs. 3,28,95,846/-.” 2. Facts of the case in brief are that the assessee is a company engaged in the business of running hotel. It filed its return of income on 28.11.2006 declaring total income of Rs. 24,47,96,572/-. During the course of assessment proceedings, the AO observed that assessee has declared rental income from house property at Rs. 3,28,95,846/- and claimed deduction of municipal taxes relating to rental portion amounting to Rs. 14,74,476/- and standard deduction of 30% u/s 24 of IT Act at Rs. 94,26,411/-. He noted that in the earlier assessment years i.e. assessment year 1999-2000 to 2004-05, the income from house property as declared by the assessee has been assessed under the head “ income from other sources”. He, therefore, asked the assessee to explain as to why the income from the house property should not be treated as business income. Rejecting the explain given by the assessee, the AO treated such income as income from business. 3. The Ld. CIT(A) upheld the action of the AO. 4. Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 5. After hearing both the sides, we find identical issue had come up before the tribunal in assessee’s own case in assessment year 2009-10. The Tribunal vide ITA No. 212/Del/2013 and ITA No. 6412/Del/2012 order dated 31st March, 2015 has decided the issue in favour of the assessee by observing as under :

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“ 5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position, 6. The true test for as to whether income from letting of a property is to he taxed under the head income from house property or as a business income is as to what is the primary object of the assesse, rather than whether the assessee is letting out the property as part of its main business, As held by Hon'ble Calcutta High Court in the case of CIT Vs Shambhu Investments Pvt Ltd [249 ITR 47], which has been approved by Hon'ble Supreme Court in the case of Shambhu Investments Pvt Ltd Vs CIT (263 ITR 143], "If It is found applying such test that the main intention is for letting out the property or any portion thereof the same must be considered as rental income or income from property" anti "in case it is found that the main intention is to exploit the immovable property by way of complex commercial activities in that event it must be held as business income". There can be situations in which the assessee's main business may be to let out a property but when, in the course, of such a business, the assessee lets out simplictor, without complex commercial activities, the income from such letting out will still be taxable under the head ‘income from a house property'. On the other hand, there can be situations when assesse may not have letting out of properties as its main object, but when, even In such a situation, the assesse exploits the property by way of a complex commercial activity, income from such a letting out could still be' taxable as a business Income. Clearly, therefore, it is not

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The business as an object but complexity of the business activity, in the course of letting out the property, which is, determinative of the head under which rental Income is to be brought to tax, Hon'ble AP High Court's judgment in the case of AP State Small Scale Development Corp (supra), which has been relied upon by the AO as wall, also has expressed similar views when Their Lordships observed as follows; .............. .............. ..............We are in entire agreement with the observations of the .............. Tribunal: "But the position is different where the income received Is not from the letting of the tenements or from the letting accompanied by incidental services or facilities but the subject 'hired1 is a complex one and the income obtained is not so much because of the bare letting of the tenements but because of the facilities and services rendered, and the operations involved in each letting of the property may be of the nature of business or trading operations, In such a case, the income derived is liable to be assessed under the head 'Business'. The above propositions emerge from the decision of the Supreme Court in C1T vs, National Storage (P) Ltd. (supra), affirming the decision of the Bombay High Court in the same case (1963) 48 ITR 577. “ 11. In CIT vs. National Storage (P) Ltd. (supra), the assessee purchased a plot of land and constructed godowns for storage of films. There were 13 units and each unit was divided into four vaults having a ground floor for rewinding of films. The units were constructed in conformity with the requirements and specifications laid down in the Cinematograph Film Rules, 1948. The vaults were licensed to film distributors. Under the licence, the vault could not be

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used for any purpose other than storing cinema films. The assessee installed a fire alarm and paid an annual amount to the municipality towards fire a services . It maintained a regular staff and also paid for the entire staff of the Indian motion Picture Distributors Association for services rendered to the licensees. It was held that the assessee was carrying an adventure or concern in the nature of trade and the subject which was hired out was was was a complex one. Dealing with the was activities carried on by the assessee in that case and agreeing with the view taken by the Bombay High Court, the Supreme Court held : "The assesses kept the key of the entrance which permitted access to the vaults in its own exclusive possession. The assessee was thus in occupation of all the premises for the purpose of its own concern, the concern being the hiring out of specially build vaults and providing special services to the licensees. As observed by Viscount Finlay in Governors of the Rotunda Hospital, Dublin vs. Coman (1920) 7 TC 217/ (1921) AC 1, 'the subject which is hired out is a complex one' and the returned received by the assessee is not the income, derived from the exercise of property rights only but is derived from carrying on an adventure or concern in the nature of trade." 7. It is, therefore, quite clear that an income from letting out can be brought to tax under the head 'profits-and gains of business and profession' only when income received is not only for "letting accompanied by incidental services or facilities but the subject 'hired1 is a complex one and the income obtained is not so much because of the bare letting of the tenements but because of the facilities and services rendered". The true test for deciding whether income is to be taxed

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under the head property Income or business income, therefore, lies in examining complexity of the activity which shifts the core and proximate reason of earning from property let out to the earning from business activity carried out. Take the case of hiring out a hotel room which has added value for earning not because of the room simplictor but because of the integrated complex activities such as room maintenance and upkeep, housekeeping support, amenities inside and outside the room, room service and support, lobby and common space, recreational facilities, health club and swimming pool, telephone, fax and message services, butler and endless other services. These services, and complex business activity in respect thereto, are so vital that the importance of these services is as much as the property itself even when such services do not relegate the property let out into relative insignificance. On the other hand, even when property is let out in the course of the business or as a part of the core business, In a situation in which consideration for such letting out is predominantly for the use of property Itself, rather than the Incidental facilities and services, the income will nevertheless be taxable as 'income from house property’. 8. In the situation that we are dealing with, it is not oven the case of the Assessing Officer that the letting is accompanied by incidental services and facilities which have a dominant role to play In the earning from the property let out. We have also perused the lease agreements filed before us and we find that the property is let out, without any dominant incidental services as part of this arrangement, for the purposes of running offices and commercial establishments. We do not find it a case of anything more than simple letting out of property where the emphasis is on the property itself rather than the services. It

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is true that the commercial or office complex is on the same plot on which the hotel is situated but it is undisputedly distinct from, even if somewhat attached to, the hotel itself, and, therefore, the fact of the commercial complex being on the same plot does not help the case of the revenue. The physical proximity of the hotel and the commercial complex does not really matter as long ‘as the character of arrangement has distinct character, and there is no dispute on that aspect. It is a case of renting simplictor and the services incidental to letting out do not constitute such complex character so as to be render it as a business by itself. 9. We have also noted that undisputedly in the earlier assessment years, coordinate benches have held that the income from letting out is in the nature of income from house property. Once there are categorical findings to this effect, and there is no dispute on that fact, it is not open to the lower authorities to still hold that the income can be taxed as business income because that aspect of the matter was not examined. We are unable to see any merits in this approach. As laid down by the apex Court in the case of Ambika Prasad Mishra vs. State of UP AIR 1980 SC 1762 (1980) 3 SCC 719 (p. 1764 of AIR 1980 SC) “Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent.., A decision does not lose Its authority merely because It was badly argued, inadequately considered or fallaciously reasoned,...". Learned CIT(A) was thus, in error in not following a binding Judicial precedent, His adventurism was neither Judicially appropriate nor legally permissible, In this view of the matter, for the reason of consistency In approach and bound by the Judicial precedent by the coordinate bench also, we bold that the

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Income from letting out the property ought to have been taxed under the head 'income from house property'. In view of the above discussions, as also bearing In mind entirety 10. of the case, we uphold the plea of the assesse and direct the Assessing Officer to tax the rental income of Rs 6,59,36,930 under the head 'income from house property' and allow the deduction under the scheme of taxability of income under this head.” 6. Since the facts of the instant case are identical to the facts of the case for assessment year 2009-10 in assessee’s own case, therefore, following the decision of the Tribunal in assesse’s own case and in absence of any contrary material brought to our notice by the ld. DR, we set aside the order of the CIT(A) and direct the AO to tax the rental income of 3,28,95,846/- as income from house property and allow consequential deduction on account of municipal tax and standard deduction u/s 24. The ground raised by the assessed is accordingly allowed. ITA No. 4010/Del/2014 (Assessment year 2009-10) 1. The only effective ground raised by the assessee reads as under : “The learned CIT(Appeals)-II, New Delhi has erred on fact in confirming the action of DCIT, CC-3, New Delhi u/s 143(3) with regard to disallowance of Rs. 6,92,209/- u/s 14A of the Income Tax Act, 1961.” 2. Facts of the case in brief are that the AO during the course of assessment proceedings observed that assessee has claimed in its computation of income dividend income of Rs. 2,21,006/-, which has been claimed as exempt. However, assessee has not made any disallowance u/s 14A r.w.Rule 8D. He, therefore, asked the assessee to

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explain as to why disallowance should not be made u/s 14A r.w.rule 8D. It was explained by the assessee that the provision of section 14A does not attract in its case for this year. Rejecting the explanation given by the assessee, the AO made disallowance of Rs. 6,92,209/- u/s 14A r.w.rule 8D of the IT Act. 3. Before the CIT(A), the Assessee submitted that no direct or indirect expenses were incurred by the assessee. It was stated that section 14A does not envisage any deemed or assumed disallowance and it could be only in relation to expenditure incurred and charged to the profit and loss account. The decision of the Hon’ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers P. Ltd. 326 ITR 1 and the decision of Hon’ble Delhi High Court in the case of Maxopp Investment P. Ltd. Vs. CIT reported 347 ITR 272 (Del.) were brought to the notice of the CIT(A). 3.1 However, the Ld. CIT(A) was also not satisfied with the explanation given by the assessee and upheld the action of the AO by observing as under : “The submissions of the AR are considered and not found to have merit. The arguments advanced by the AR are not maintainable. The decisions cited by the AR do not support the case of the appellant. As held in Maxopp (supra), before applying the formulae contained in the provisions of Rule 8D(2)(iii), the AO is only required to be satisfied about the applicability of section 14A, which he was in the case at hand, as is evident from the query letter issued by him. Moreover, sub section (3) to section 14A makes it clear that provisions of sub section (2) ‘shall’ apply in relation to such cases also where the assessee claims that no expenditure was incurred in relation to exempt income. Clearly, the AO was not satisfied with the

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mere assertion of the appellant that no expenditure was incurred in relation to the income not forming part of the total income. Moreover, the ‘proximate cause’ for disallowance u/s 14A, in the case at hand, is the presence of exempt income coupled with the fact that expenditure, direct or indirect, was subsumed in the total expenditure debited to the accounts. Besides, even if no direct expenditure and interest expenditure was relatable to the exempt income, since the accounts were composite and comprised of both taxable and exempt incomes, disallowance was required to be made in terms of Rule 8D(2)(iii), which even while being an ‘artificial figure’ is the ‘third component’ of the method for determining the expenditure in relation to exempt income, as noted by the jurisdictional High Court in Maxopp (supra). It is also of import that in Walfort (supra), the Apex Court did not ascribe ‘narrow meaning’ to the expression ‘in relation to’ appearing in section 14A. Therefore, the action of the AO in computing the disallowance under rule 8D(2)(iii) is upheld. Consequently, the appeal fails.” 4. Aggrieved with such order of CIT(A) the assessee is in appeal before the Tribunal. 4.1 The Ld. Counsel for the assessee referring to the decision of Hon’ble Delhi High Court in the case of CIT vs. Om Prakash Khetan reported in 376 ITR 390 submitted that the Hon’ble High Court in the said decision has held that where the assessing officer did not record any finding that any expenditure incurred by assessee was attributable to earning exempt income, disallowance u/s 14A was to be deleted. He submitted that in the instant case also the AO has not recorded any finding that

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any expenditure incurred by assessee is attributable to earning such exempt income. Therefore, no disallowance can be made. 5. The Ld. DR on the other hand heavily relied the order of the CIT(A). He submitted that the Ld. CIT(A) has given a finding that the accounts were composite and comprise of both the taxable and exempt income and therefore, disallowance is required to be made in terms of Rule 8D(2)(III). He accordingly submitted that the order of the CIT(A) being in accordance with law should be upheld. 6. We have considered the rival arguments made by both the sides, perused the orders of the AO as well as CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has received dividend income of Rs. 2,21,006/- which was claimed as exempt. Since there was no disallowance u/s 14A by the assessee, the AO, invoking the provision of section 14A r.w.Rule 8D, disallowed an amount of Rs. 6,92,209/- which has been upheld by the CIT(A). It is the submission of the Ld. Counsel for the assessee that since the AO has not recorded any finding that any expenditure incurred by the assessee is attributable to earning such exempt income, therefore, no disallowance u/s 14A can be made. We find merit in the above submission of the ld. Counsel for the assessee. We find the Hon’ble Delhi High Court in the case of Om Prakash Khetan (supra), while deciding an identical issue has observed as under : “ As regards the second issue concerning the disallowance under section 14A of the Act, the ITAT noticed the decision of its co-ordinate Bench in justice Sam P. Bharucha v. Addl. CIT [2012] 25 taxmann.com 381/53 SOT 192 (Mum.) and observed

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that in the present case, the AO had not recorded any finding that any expenditure incurred by the Assessed was attributable for earning the exempt income. In order to disallow the expenditure there must be a nexus between the expenditure incurred and the income not forming part of the total income. Consequently, the disallowance under Section 14A of the Act was rightly deleted by the CIT(A) and affirmed by the ITAT. 10. The Court finds that no substantial question of law arises for determination by the Court from the impugned order of the ITAT.”

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We have already decided the above ground in the preceding paragraphs and the ground raised by the assessee has been allowed. Following similar reasonings, the above ground raised by the assessee is allowed. 3. In the result the above three appeals filed by the assessee are allowed. (Order Pronounced in the Open Court on 16/06/2017)

Sd/- Sd/- [SUCHITRA KAMBLE] [R.K. PANDA] Judicial Member Accountant Member DATED: 16 .6.2017 *Binita* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR

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Date Initial 1. Draft dictated on 14/06/2017 2. Draft placed before author 15/06/2017 3. Draft proposed & placed before the second member 4. Draft discussed/approved by Second Member. 5. Approved Draft comes to the Sr.PS/PS 6. Kept for pronouncement on 7. File sent to the Bench Clerk 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.