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Income Tax Appellate Tribunal, “E”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJEET SINGH, JM &
Assessee by : Shri H.N.Singh Revenue by : Shri Vijay Mehta Date of Hearing : 06/09/2016 Date of Pronouncement : 19/10 /2016 आदेश / O R D E R PER R.C.SHARMA (A.M):
These are the cross appeals filed by the assessee and the Revenue against the order of Ld. CIT(A) for the AY 2008-2009, in the matter of order passed under section 143(3) of the Income Tax Act.
2 & 1258-2012 E-City Projects Construction Pvt.Ltd., 2. The assessee has taken the following grounds in its appeal:
1. The Ld. CIT(A) erred in law and facts in upholding disallowance of interest expenses of Rs. 82,571,088/- paid to IL & FS crystallized during the year. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law.
2. The Ld. AO ought to have held interest expenses crystallized during the year, incurred for the purposes of the business, as allowable expenses u/s 36(1 )(iii) /37 or 43B of the Act.
3. In the appeal filed by the Revenue, Revenue is aggrieved by action of CIT(A) for treating operational income from mall as income from business.
4. At the outset Ld. AR placed on record order of Tribunal in assessee’s own case dt. 30/07/2014, wherein issue raised by revenue in its appeal No.1437/M/2012 has been decided in favour of the assessee for the AY 2007-08, 2008-09, & 2009-10, after having the following observations: "
12. We have considered the rival submissions and also perused the relevant material available on record. It is observed that both the assessee companies in the present case have come into existence as a result of demerger of E-City Entertainment (India) Pvt. Ltd. which took place on 1-4-2006. Prior to the demerger, the said demerged company was also engaged in the business of acquisition of immovable properties and constructing, developing and building family entertainment centre cum malls across India and leasing, licensing, renting and managing, operating and running the same for commercial use after setting up necessary infrastructure. Accordingly, various malls were built by the said company and the same were operated right from the year 2001. The operational income received from the said activity in the form of rent and other service charges was consistently offered by the demerged company to tax as its business income in the earlier years upto 2006-07 and as submitted by the Id. Counsel for the assessee at the time of hearing before us and also noted by the Id. CIT(A) in his impugned orders, the same was accepted by the department. After demerger, both the assessee companies took over the assets and liabilities of the demerged company and continued the same business of operating and running 3 & 1258-2012 E-City Projects Construction Pvt.Ltd., the Malls. In these facts and circumstances of the case, we find ourselves in agreement with the Id. Counsel for the assessee that the A.O was not justified in taking a different view by treating the operating income received by the assessee companies from Malls in the form of rent and other service charges as income from house property and the Id. CIT(A) was correct in treating the same as business income of the assessee companies by following the rule of consistency after having found that there was no change in the relevant facts and circumstances of the case.
It is also observed that while accepting the claim of the assessee companies that operational income in the form of rent and service charges constituted their business income on merit, the Id. CIT(A) has considered all the judicial pronouncements cited by the assessee as well as relied upon by the A.O. and decided the issue in favour of the assessee by applying the legal position emanating from the said judicial pronouncements. While doing so, he has duly taken into consideration the nature of business activity of the assessee company as well as the terms and conditions of the relevant agreements under which the commercial space in the Malls was given on hire by the assessee companies to the concerned parties. He has also taken into account the various services provided by the assessee companies during the course of operation and running of the family entertainment centre cum Malls owned by it in para 2.3.14 of his impugned order to come to the conclusion that the intention of the assessee companies was to commercially exploit the property and letting out was only incidental to carrying on such business.
As held by the Hon'ble Calcutta High Court in the case of Shambhu Investment Pvt. Ltd. (2001) 249 ITR 47 (Ca I.) , which has been subsequently affirmed by the Hon'ble Supreme Court, what has to be seen in this context is what is the primary object of the assessee while exploiting the property. If it is found applying such test that the main intention is to let out the property or any portion thereof, the same must be considered as income from house property. In case it is found that the very intention is to exploit the property by way of complex commercial activity, in that event it must be held as business income. In our opinion, the facts of the present case as borne out from the record clearly shows that the cases of the assessee’s fall under the latter category as the intention of the assessee’s clearly was to exploit the commercial property by way of complex commercial activities and it was not a case of letting out the property owned by the assessee companies simpliciter.
The rental income was not received by the assessee companies merely because of the ownership of the property but the same was received because of the complex commercial activity carried on by them of operating and running Malls which brought that rental income. The rental income and service charges thus were received by the assessee company as business income during the course of its business carried on by them of operating and running the Malls as a commercial activity and as rightly held by the Id. ClT(A) , the said income primarily arising from the exploitation of commercial assets by way of complex commercial activity constituted the business income of the assessee company.
It is observed that the decision of the co-ordinate bench of this Tribunal in the case of Mls Khandelwal Estate P. Ltd. (supra) cited by the Id. Counsel for the assessee also supports the case of the assessees. In the said case, the income received by the assessee from the operation of shopping malls in the form of rent and service charges was held to be business income of the assessee by the Tribunal holding that giving space with services and facilities of varied and wide nature would definitely constitute a business and the relationship between the parties in such case is distinguished from that merely of a landlord and tenant relationship. We therefore find no infirmity in the impugned orders of the Id. CIT(A) treating the operational income received by the assessee companies from running of Malls in the form of rent and service charges as their business income and upholding the same on this issue, we dismiss these appeals filed by the Revenue.
In the result, appeals of the Revenue are dismissed.”
We have carefully gone through the orders of authorities below as well as order of Tribunal and found that issue under consideration is squarely covered by the order of the Tribunal in assessee's own case, wherein Tribunal have held that operational income received by the assessee company from running of Malls in the form of rent and service charges are assessable as business income in place of income from house property. Respectfully following the order of the Tribunal 5 & 1258-2012 E-City Projects Construction Pvt.Ltd., we do not find any infirmity in this part of order of the Ld. CIT(A) accepting assessee’s claim of income from business.
In the result, appeal of Revenue is dismissed.
With regard to the ground taken by the assessee for disallowing interest expenditure we found that during the course of assessment proceedings the Ld. AO observed that the assessee has claimed interest of Rs. 8,25,71,088/- paid to IL&FS during the year on account of share application money received during the FY 2005-06 pertaining to AY 2006-07 of Rs. 40.00 crores to E-City Entertainment (I) P. Ltd. pursuant to the scheme of demerger of E.C.E.L. into E-City Project Construction Ltd. and E-City Real Estate P. Ltd, the said amount was transferred to the assessee company. No shares were allotted to IL&FS during the year under consideration. The Ld. AO held that the assessee's income is assessed as 'income from house property' and not as business income. Hence, section 43B is not applicable. The Ld. AO further held that the said funds were not obtained as a loan but as a share application money for allotment of shares and over which no interest was payable and it was no suo motto decision taken by the assessee to pay interest from the date of funds received and not to allot the shares and hence, claim of interest is not allowable. The Ld. AO further held that the previous years claim is not allowable as the assessee follows mercantile system of accounting and u/s 36(1 )(ii) the charge was created suo moto. Accordingly Ld. AO disallowed the claim of interest. By the impugned order Ld. CIT(A) confirmed the disallowance.
6 & 1258-2012 E-City Projects Construction Pvt.Ltd., 8. It was argued by the Ld. AR that in terms of agreement dated 01/12/2007 assessee was under obligation to pay interest on the funds provided by way of share application money. Reliance was also placed on the decision of Pune Bench of the Hon'ble Tribunal in the case of S.R. Thorat Milk Products(P) Ltd. Vs. ACIT (159 ITD 255) in support of the proposition that the share application money cannot be equated with the share capital as obligation to return money is always implicit in event of non allotment of shares hence payment of interest on share application money pending allotment of shares would be allowable as revenue expenditure. Reliance was placed on the decision of Pune bench in case of ACIT Vs. Rohit Exhaust Systems P. Ltd. in ITA No. 686/PN/2011 order dt. 05/10/2012, wherein it was held that share application money pending allotment during the year under consideration, and the assessee paid interest for the said amount, was eligible for deduction of interest as expenditure.
Further in support of proposition of deductibility of interest in the year of crystallisation reliance was placed on the decision of Delhi Bench in case of Urban Improvement Co. (P.) Ltd. Vs. ITA [177 Taxman(Mag) 104], wherein it was held that assessee was entitled to deduction on account of interest relating to earlier year, on the plea that same was crystallized only during the year under consideration. Reliance was also placed on the decision of Delhi High Court in case of Krishak Bharati Cooperative Ltd. Vs. CIT (45 taxmann.com 437), in support of the proposition that interest expenditure is deductible in the year of crystallization of liability.
7 & 1258-2012 E-City Projects Construction Pvt.Ltd., 10. We have considered the rival contention and deliberated on the judicial pronouncement referred by lower authorities in their respective orders and cited by the Ld. AR & OR during the hearing before us in the context of factual matrix of the instant case. From the record we found that interest was paid on the share application money kept deposited with the assessee in terms of agreement dated 01/12/2007. As per the agreement assessee was required to pay interest on the funds provided by way of share application money. We found that money received as a share application was utilized by the assessee for the purpose of its business, therefore as a matter of commercial expediency, interest on share application money so utilized for the purpose of business is required to be allowed as business expenditure. Hon'ble Bombay High Court in the case of Sales Magnesite 214 ITR 1 held that even expenditure incurred voluntarily on the ground of commercial expediency to facilitate carrying on the business would be deductible under section 37. So far as deductibility of interest even pertaining to earlier years is concerned we found that interest was crystallized only during the year under consideration, therefore same is allowable during the year when it is paid and claimed as expenditure.
In the instant case though the interest payable relates to share application money taken in earlier year the liability to pay interest was crystallized during the year as the assessee as well as IL&FS has decided not to proceed with the allotment of shares in pursuance of agreement dt. 01/12/2007. It was not a suo motto decision of the assessee. No prudent businessman will suo motto make 8 & 1258-2012 E-City Projects Construction Pvt.Ltd., payment of expense unless and until it is due and payable nor will leave what is due to him. In the instant case there is agreement dt. 01/12/2007 between the assessee and IL&FS for payment of interest on the funds provided by way of share application money. We found that payment has been crystallized during the year as the decision of not making allotment against share application money received and payment of interest thereon was taken during the year itself. Hence, the expense are crystallized during the year and allowable u/s 36(1 )(iii)/37 of the Act. We have carefully gone through the terms of agreement dt. 01/12/2007 between the assessee and IL&FS for payment of interest on share application money and found that it is not a suo motto decision of the Assessee as alleged by the Ld. AO. The decision of payment of interest is consideration for use of funds for the purpose of business of the company hence allowable. It is neither payment to related party which attracts section 40A(2)(b) nor personal expense or capital expense. It is expense for the business of the assessee hence' fully allowable under the provisions of the Act.
In the result, appeal of revenue is dismissed whereas appeal of assessee is allowed.
Order pronounced in the open court on this 19/10 /2016.