Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Amarjit Singh (JM)
The appeal filed by the assessee is directed against the order dated 27.1.2015 passed by learned CIT(A)-12, Mumbai and it relates to A.Y. 2010-11.
2. The assessee is aggrieved by the decision taken by learned CIT(A) on the following issues :- a) Assessment of income from mall operation under the head “income from house property” as against business income. b) Disallowance made u/s. 14A of the Act. c) Disallowance made u/s. 43B of the Act.
3. The assessee has constructed a shopping mall at Nasik and operations have commenced during the year under consideration. The assessee declared income derived from mall operations under head “income from business”. The 2 City Centre Mall Nashik Pvt. Limited Assessing Officer assessed the same under head income from house property and learned CIT(A) also confirmed the same.
We have heard the parties and perused the record. Learned AR submitted that mall consists of five floors, a multiplex theatre with five screens and parking lot with capacity of 600 cars and 700 two wheelers. Besides the above mall is also having an auditorium for public entertainment. Learned AR further submitted that the assessee company was incorporated the main objective of constructing and operating commercial complexes. He submitted that the assessee has employed more than 200 employees for running and maintaining the mall. Learned AR accordingly submitted that the assessee is carrying on complex commercial activities and hence income should be assessed under the head ‘income from business’. The assessee has furnished written submissions in this regard and the same are extracted below:-
“Complex Commercial Activity-The Company has to provide the following services to the licensees/occupants in order to enable them to earn more revenue from the Mall operation, which would in turn result into more revenue for the Company from Mall operations: a) 24 hrs Mall Security Services, Housekeeping services, gardening, pest control for the common area of the mall. b) Maintenance & regular cleaning of the common areas of the mall & elevation of the building, exterior and interior cleaning of the mall, landscaping, providing and maintaining wash rooms & toilets, garbage removal & disposal from the common area etc. c) Lightening of the common areas & Power Supply through 100% power back up. d) Air conditioning of common area. e) Regular repair & maintenance of lifts, escalators, air conditioning plants, generators pumps & other plant & machinery. f) Marketing & Promotional activities of the mall in general. g) Providing space for Advertising in the mall premises at various places in the mall. h) Organizing various events & programmers at regular intervals & at the 3 City Centre Mall Nashik Pvt. Limited time of festivals to promote the foot fall in the mall. i) Providing & maintaining common parking facilities. j) Providing assistance in market survey, customer complaints etc to the occupants. k) Providing piped music in the mall. l) Fire detection & protection system in the common Areas. m) Providing facilities for loading & unloading and easy access to service Lift. n) Providing canteen space for the employees of the occupants. o) Providing facilities for play area for Kids & entertainment zone & food court zone.
The Company has not merely given the premises in the Mall on rent but has offered the same along with various services that are required along with the space in the Mall. For operation and maintenance of the mall in addition to office staff and managers, about 200 skilled and unskilled personnel were deployed for the performance of the above mentioned activities. All these activities were performed and managed through various managers and ultimately board of directors of the Company. The Company had submitted a statement giving details of party wise revenue received during the year under different heads, vide letter dated 11 December 2012. Accordingly, income derived by the Company from provision of space within Mall along with various services would be taxable under the head 'Business income'.
Marketing, Advertisement and promotional activities carried out by the Company - If the Company was in the business of mere renting of property, there was no need for it to incur any expenditure under the various heads of expenses viz. marketing & advertisement expenses, Organizing various events & programmers at regular intervals & at the time of festivals to promote the foot fall in the mall, providing assistance in market survey, customer complaints to the occupants, providing piped music in the mall etc.
The Company during the year under consideration has incurred Marketing and Advertisement expenses of INR 1.07 crores on the operation of the Mall. The Company has carried out various promotional activities in the Mall to attract customers to the Mall. The Company has incurred expenses on various promotional activities carried out within the Mall. Advertisement of Mall would include regular advertisements in print and electronic media, hoardings in the city and surrounding areas, distribution of leaflets etc. Sales promotion activities would include seasonal discount schemes, incentive schemes, lottery/draws, customer loyalty program, Diwali Dhamaka Festive for 12 days etc. The Company spends on the advertisement and sales promotional activities to increase the foot fall and (number of persons entering the Mall) and the "Conversion Factor" (number of customers entering the Mall ending up in spending money).
4 City Centre Mall Nashik Pvt. Limited The Company submits that it is not merely providing facilities such as electricity bill, water charges, AC charges etc. The Company also carries out regular review of the service standard in the Mall. The copy of the said report is submitted which emphasizes the fact that the Company is required to meet very high service standards in order to attract Licensees as well as customers to the Mall.
The said service standard findings would go to show that the Company is required to provide highest level of services within the Mall. It cannot merely let out shops within the Mall and earn rental income. Only with the services provided, it can generate higher income from revenue sharing.
It is submitted that in the Mall operation, services rendered by the Mall owner i.e. the Company plays dominant role. Accordingly, it would be taxable under the head 'Business income'.
Revenue Sharing arrangements - The Company has entered into Agreement with various parties laying down terms for occupying a space in the Mall. It has agreed on different billing arrangement with each licencee. These arrangements are different from mere renting of property wherein rent is fixed per month, independent of business generated by the Licensees.
In most of the cases, it is in the form of revenue sharing which is dependent on income generated by the Licensee. None of the licensee has an option to pay only for use of the building and have his own resources for the other services. Extracts of agreements, entered with various Licensees, on sample basis, were submitted to the AO.
Duration of the License Agreement entered by the Appellant Company generally ranges from 5 to 6 years. The Company does not give shop to every licensee coming to Mall. The selection of Licensees to whom the shop is given is based on future viability of the Licensee's business and many other subjective criteria.
He submitted that various case laws relied upon by the tax authorities are not applicable to the facts prevailing in the instant case. He submitted that the Tribunal, in the following cases, has held that the income derived from running shopping malls is required to be assessed under the head “Income from business” (a) PFH Mall & Retail management Vs. ITO (298 ITR (AT) 371)(Kol) (b) ACIT Vs. Stellar Developers P Ltd (ITA No.4891/Mum/2008)(Mum)
6. On the contrary, learned Departmental Representative strongly supported the orders passed by the learned CIT(A).
5 City Centre Mall Nashik Pvt. Limited
We have heard the parties and perused the record. We notice that the Hon'ble Supreme Court has considered the issue of assessing rental income under the head “Income from business” in the case of M/s. Rayala Corporation Pvt. Ltd. (Civil Appeal No. 6437 of 2016 dated 11.8.2016). For the sake of convenience, we extract below the order passed by learned CIT(A) in the above said case :-
“1. Being aggrieved by the judgment delivered by the High Court of Madras on 4th October, 2013 in Tax Case (Appeal) Nos.91, 99 and 212 of 2012; and 230 and 231 of 2007, these appeals have been filed.
The issue involved in all these appeals is common but it pertains to different Assessment Years and therefore, all these appeals had been heard together. The facts in all these appeals, in a nutshell are as under:
The appellant-assessee, a private limited company, is having house property, which has been rented and the assessee is receiving income from the said property by way of rent. The main issue in all these appeals is whether the income so received should be taxed under the head “Income from House Property” or “Profit and gains of business or profession”. The reason for which the aforestated issue has arisen is that though the assessee is having the house property and is receiving income by way of rent, the case of the assessee is that the assessee company is in business of renting its properties and is receiving rent as its business income, the said income should be taxed under the Head “Profits and gains of business or profession” whereas the case of the Revenue is that as the income is arising from House Property, the said income must be taxed under the head “Income from House Property”.
The learned counsel appearing for the assessee submitted that the issue involved in these appeals is no more res integra as this Court has decided in the case of Chennai Properties and Investments Ltd. v. Commissioner of Income Tax [2015] 373 ITR 673 (SC) that if an assessee is having his house property and by way of business he is giving the property on rent and if he is receiving rent from the said property as his business income, the said income, even if in the nature of rent, should be treated as “Business Income” because the assessee is having a business of renting his property and the rent which he receives is in the nature of his business income.
4. According to the learned counsel appearing for the assessee, the afore-stated judgment in the case of Chennai Properties (supra) has referred to all the judgments on the subject and more particularly, the judgment in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC) which has summed up as under:-
6 City Centre Mall Nashik Pvt. Limited
As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.
5. The learned counsel also submitted that the assessee is a private limited company and even as per its Memorandum of Association its business is to deal into real estate and also to earn income by way of rent by leasing or renting the properties belonging to the assessee company.
The learned counsel also drew our attention to the fact that the High Court and the authorities below had come to a specific finding to the effect that the assessee company had stopped its other business activities and was having only an activity with regard to the leasing its properties and earning rent therefrom. Thus, except leasing the properties belonging to the assessee company, the company is not having any other business and the said fact is not in dispute at all.
7. For the afore-stated reasons, the learned counsel submitted that the impugned judgment delivered by the High Court is not proper for the reason that the High Court has directed that the income earned by the appellant assessee should be treated as “Income from House Property”.
8. On the other hand, the learned counsel appearing for the respondent- Revenue made an effort to justify the reasons given by the High Court in the impugned judgment. The learned counsel also relied upon the judgment delivered by this Court in the case of M/s. S.G. Mercantile Corpn. (P) Ltd. v. CIT, Calcutta (1972) 1 SCC 465. According to him, the important question which would arise in all such cases is whether the acquisition of property for leasing and letting out all the shops and stalls would be essentially a part of business and trading operations of the assessee. According to the learned counsel appearing for the Revenue, leasing and letting out of shops and properties is not the main business of the assessee as per Memorandum of Association and therefore, the income earned by the assessee should be treated as income earned from House Property. He, therefore, submitted that the impugned judgment is just legal and proper and therefore, these appeals should be dismissed.
Upon hearing the learned counsel and going through the judgments cited by the learned counsel, we are of the view that the law laid down by this Court in the case of Chennai Properties (supra) shows the correct position of law and looking at the facts of the case in question, the case on hand is squarely covered by the said judgment.
10. Submissions made by the learned counsel appearing for the Revenue is to the effect that the rent should be the main source of income or the purpose for which the company is incorporated should be to earn income from rent, so as to make the rental income to be the income taxable under the head “Profits and Gains of 7 City Centre Mall Nashik Pvt. Limited Business or Profession”. It is an admitted fact in the instant case that the assessee company has only one business and that is of leasing its property and earning rent therefrom. Thus, even on the factual aspect, we do not find any substance in what has been submitted by the learned counsel appearing for the Revenue.
The judgment relied upon by the learned counsel appearing for the assessee squarely covers the facts of the case involved in the appeals. The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income.
In view of the law laid down by this Court in the case of Chennai Properties (supra) and looking at the facts of these appeals, in our opinion, the High court was not correct while deciding that the income of the assessee should be treated as Income from House Property.
We, therefore, set aside the impugned judgments and allow these appeals with no order as to costs. We direct that the income of the assessee shall be subject to tax under the head “Profits and gains of business or profession”.
In the case of Chennai Properties & Investments Ltd (supra), the assessee therein was incorporated to acquire properties in the city of Madras (now Chennai) and to let out properties. The Hon’ble Supreme court, after considering the decisions rendered by it in the case of East India Housing and Land Development Trust Ltd Vs. CIT (42 ITR 49); Sultan Brothers (P) Ltd Vs. CIT (1964)(51 ITR 353) and Karanpura Development Co Ltd (44 ITR 362) held that the rental income derived by the assessee is to be assessed as its business income. The Hon’ble Apex Court took note of the fact that the main object of the assessee was to acquire and hold the properties known as “Chennai House” and “Firhavin Estate” and to let those properties as well as to make advances upon the security of lands and buildings or other properties. The Hon’ble Apex Court further observed as under:- “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, the entire income which accrued and was assessed in the said return was from letting out of these properties.”
The Hon’ble Supreme Court held that the assessee cited above was carrying on its activities as its business activities and for this purpose, it took support of its decision rendered in the case of Karanpura Development Co Ltd, wherein it was observed as under:-
8 City Centre Mall Nashik Pvt. Limited
As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or subletting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.
9. In the instant case, we have noticed that the assessee was incorporated with the object, inter alia, to construct and maintain shopping malls. The relevant objects of the Company, as given in the written submissions, read as under:- (A) Main Object of the Company as per Memorandum of Association:- Object No.1 :- To acquire by purchase, lease, exchange or otherwise deal in land, estates, building, halls, dwelling houses….. and to do various types of construction of buildings, commercial complexes, houses, halls, officer premises, shops, shopping malls, cinema halls clubs………. And maintaining for shopping arcade, mall, shops, dwelling houses, office premises and other commercial and educational purposes….
(B) Other objects of the Company as per Memorandum of Association: Object No.34:- To carry on business of running a Super shop, shopping mall, Multi shop, Departmental Stores, chain Stores, Speciality stores….
Object No.35:- To build, construct, establish, own, take on lease, purchase, or exchange or otherwise acquire, hold, maintain and manage industrial, commercial or residential buildings, factory premises, ………… clubs, theaters, Cinemas or other show houses, meeting and lecture halls, libraries, health resorts and sanitariums, gardens, bazzar, car parks and markets and to let, sublet, give on lease…..”
Thus, we notice that the assessee has constructed a shopping mall as per its objects for which it was incorporated and has derived income from running and maintaining the shopping mall. The activities carried on by the assessee, which are extracted above, would show that the assessee is carrying on the activities as its trading/commercial activity.
In the case of PFH Mall & Retail management Vs. ITO (298 ITR (AT) 371)(Kol), the Kolkatta bench of Tribunal held that income from Mall operation is assessable as business income, since various services & facilities as well as 9 City Centre Mall Nashik Pvt. Limited other amenities similar to company’s operations are provided by the assessee. Further the activities are carried on continuously in an organized manner with a set purpose and with a view to earn profit. Identical view was also expressed in the case of ACIT Vs. Stellar Developers P Ltd (ITA No.4891/Mum/2008)(Mum).
11. In view of the foregoing, we are of the view that there is merit in the contentions of the assessee that the impugned income should be assessed as business income. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess the income from Shopping Mall as business income.
12. The next issue contested by the assessee relates to the disallowance made u/s 14A of the Act. The AO applied the provisions of Rule 8D to compute the disallowance. The case of the assessee is that the Share application money, which was not immediately required for mall construction purposes, was invested in mutual funds in order to earn dividend income. Accordingly it was submitted that there is no requirement to make disallowance out of interest expenditure as held in the case of HDFC Bank Ltd (366 ITR 505). With regard to the disallowance to be made out of administrative expenses, the assessee has submitted that the assessee has made investment only in SBI mutual fund and hence the expenses may be estimated @ Rs.50/- per transaction. We are of the view that the claim of the assessee that the investment was made only of Share application money needs factual verification. Accordingly we restore this matter to the file of the AO with the direction to examine the factual aspects and decide this issue by following the decision rendered by the jurisdictional High Court in the case of HDFC Bank Ltd (supra). With regard to the disallowance to be made out of administrative expenses, we direct the AO to make disallowance on a reasonable basis, after considering the explanations of the assessee. The order passed by Ld CIT(A) on this issue is set aside accordingly.
10 City Centre Mall Nashik Pvt. Limited
13. The next issue relates to the disallowance of Service tax liability u/s 43B of the Act. According to the assessee, the service tax liability has not accrued on the last date of the year, i.e., the service tax liability shall accrue only when the payment is received from the customer. Accordingly it was submitted that the provisions of sec. 43B shall not apply to the outstanding service tax liability. In this regard, the assessee placed reliance on the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. Ovira Logistics P Ltd (ITA No.1023 of 2013 dated 17-04-2015). Since the claim of the assessee that the outstanding service tax liability has not accrued as on the last day of year, requires verification, we restore this issue to the file of the AO with the direction to examine the factual aspects and decide the issue by following the decision rendered by jurisdictional High Court in the case of Ovira Logistics P Ltd (supra).
In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.
Order has been pronounced in the Court on 23.9.2016