ACIT CIR 12(3), MUMBAI vs. LAKE VIEW DEVELOPERS, MUMBAI

आयकर अपील�य अ�धकरण “ए” �यायपीठ मुंबई म�। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE SHRI SANJAY ARORA, AM AND SHRI RAM LAL NEGI, JM आयकर अपील सं./I.T.A. No.3409/Mum/2013 (�नधा�रण वष� / Assessment Year: 2009-10) Lake View Developers Addl. CIT, Range 12(3), बनाम/ 514, Dalamal Towers, Mumbai 211 F.P.J. Marg, Nariman Point, Vs. Mumbai-400 021 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. AAAFL 0589 R (Assessee) : (Revenue) & आयकर अपील सं./I.T.A. No. 4495/Mum/2013 (�नधा�रण वष� / Assessment Year: 2009-10) बनाम/ Addl. CIT, Range 12(3), Lake View Developers Mumbai Mumbai-400 021 Vs. �थायी लेखा सं./जीआइआर सं./PAN/GIR No. AAAFL 0589 R (Revenue) (Assessee) : & आयकर अपील सं./I.T.A. No. 4496/Mum/2013 (�नधा�रण वष� / Assessment Year: 2009-10) Addl. CIT, Range 12(3), Omega Associates, बनाम/ Mumbai 514, Dalamal Tower, 211-F.P.J. Marg, Nariman Point, Vs. Mumbai-400 021 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. AAAFL 0589 R (Revenue) : (Assessee) : Shri Chetan Karia Revenue by Assessee by : Shri R. P. Rastogi सुनवाई क� तार�ख / : 03.5.2016 Date of Hearing घोषणा क� तार�ख / : 28.7.2016 Date of Pronouncement

2 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates आदेश / O R D E R Per Sanjay Arora, A. M.: These are cross Appeals, i.e., by the Assessee and the Revenue, arising out of the Order by the Commissioner of Income Tax (Appeals)-23, Mumbai (‘CIT(A)’ for short) dated 07.3.2013, partly allowing the Assessee’s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated 29.12.2011. The third appeal, for the same year, is by the Revenue in respect of a different assessee, raising though the same issue, i.e., which forms the subject matter of its’ appeal afore-said agitating a similar order dated 07.3.2013 by the same first appellate authority. The appeals were, accordingly, clubbed and heard together.

Lake View Developers 2. The sole issue arising in the assessee’s appeal is the allowability of depreciation on ‘Furniture and Fixture’, forming part of the leased assets, income from which is assessable u/s. 22 of the Act as ‘Income from house property’. The subject matter of the Revenue’s appeal is the deletion of the disallowance by the Assessing Officer (AO) of expenditure on ‘brokerage’ and ‘professional fees’. The same was effected by the AO as it pertained to the assessee’s property income, assessable u/s. 22 r/w s. 23, which does not admit of any such claim.

3 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates by the Revenue in-as-much as there is no scope for allowance of depreciation against rental income. Aggrieved, the assessee is in second appeal.

Assessee’s Appeal (in ITA No. 3409/Mum/2013)

4 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates arising from a particular source, and it cannot be said that any one of these sections is more specific than another. Therefore, a particular variety of income must be assignable to one or the other of these sections. If the income under consideration is taxable under section 9 or section 10, then it cannot be taxed under section 12.’ [emphasis ours] The assessee’s claim, therefore, cannot be accepted. The assessee has per its Ground 1(c), however, raised an alternate claim, as under: ‘1. (c) Alternatively, appellant prays that proportionate rent be assessed under the head income from other sources and depreciation on furniture and fixtures on leased assets should be allowed u/s. 57.’

Though no arguments in its respect were advanced during hearing, the ld. AR did not specifically state the same as being ‘not pressed’. Further, we find the assessee to have raised the said plea before the first appellate authority as well vide it’s ‘Statement of Facts’ (SOF) before the first appellate authority, reading as under, which though remains unaddressed by him: ‘6. b. Assessing Officer failed to appreciate that on many occasions along with lease of immovable property, certain movable assets are also leased. The appellant submits that primary letting out is of immovable property and letting out of movable asset is incidental to letting out of immovable property. In such circumstance a reasonable amount of lease rental is towards such movable assets and the amount of such proportionate lease rent would be equivalent to or less than depreciation on such movable assets. The appellant submits that depreciation on leased movable asset is allowable u/s. 57 and it is only a matter of presentation that a part lease rent would be assessed under the head income from other sources and depreciation would be allowable against such income either over period of lease term (i.e., 3 years) or at commercial rates or @ minimum 10% on the Amenities provided and the impact on total income would be negligible, if any.

c. Alternatively, even if this amount of Rs.21,45,127/- is disallowed then only 1/4th of expenditure towards Somerset building i.e., Rs.5,36,282/- can be added to income. Balance 1/4th of expenditure relating to Citi Park Building will be reduced from Lease stock and stock on hand and 2/4th (i.e., 1/2th) expenditure relating to Crisil and Ventura buildings will be reduced from their respective WIP's.’

5 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates The same would therefore require being addressed and decided on merits. The assessee’s plea raises two issues. Whether the furniture and fixture under reference is a part of the building/s, or independent of it? Example of the former would include ‘doors and windows’, ‘inbuilt cupboards’, ‘kitchen cabinets’, etc., i.e., which form an integral part of the building, provided for its user proper. Examples of the latter, on the other hand, would be: tables and chairs, separate cupboards, furniture in general, etc., used independently, for a given purpose. It is only in the latter case that rent in respect of furniture and fixture, assuming it as ascertainable, would stand to be segregated (from the composite rent) and assessed u/s.56 as ‘income from other sources’. Surely, in that case, depreciation, as exigible in law, would be deductible in computing the said income u/s. 57(iii) of the Act. Further, we may clarify that it is only the furniture and fixture qua a completed building, or the completed portion of an incomplete building, where let/leased, for which the assessee’s argument is maintainable. That is, the furniture and fixture has to be building, nay, flat (identifiable section thereof) specific. We may here also refer to Sultan Brothers (P.) Ltd. (supra). It stands explained therein that where letting of machinery or furniture and fixture accompanies the letting of a building in a manner that the two are inseparable, the income arising would stand to be assessed as ‘business income’ or ‘income from other sources’. The apex court devised tests for determining the inseparability of the two lettings. That is, the entire (rent) income would, in case of inseparability, stand to be assessed under either head, depending on whether it constitutes or forms a part of the assessee’s business, or not so. The Apex Court also discountenanced the plea with regard to the commercial exploitation of a house property by its’ owner. A thing is not, it held, by its’ nature a commercial asset, and which is only an asset used in a business and nothing else, and that business may be carried on by practically all things, so that nothing turns on the fact that the letting is of a ‘commercial asset’ or toward commercial exploitation of a house property. And its rental income, in case of separable lettings, would stand to be assessed as income from house property.

6 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates Ownership of house property, howsoever profitable, it was clarified in CIT vs. National Storage (P.) Ltd. [1963] 48 ITR 577, 594 (Bom) (since affirmed in [1967] 66 ITR 596 (SC)), cannot be business or trade under the Act. The legal aspect of the matter is thus clear. As regards the factual aspect, the same would normally require verification and determination at the end of the assessing authority and, accordingly, a restoration back to his file for the purpose, with the onus to prove its’ claims being on the assessee. This though would not be necessary or required in the present case. This is as the SOF, reproduced here-in-above, makes it abundantly clear that the letting of the furniture and fixture is incidental (to letting the building) (para 6(b) of SOF). Further, per para 6(c) thereof, as an alternative, a prayer is made for a proportionate allowance, i.e., qua building that is complete and not leased, while that leased or, as the case may be, under construction, being liable to be adjusted against the value of the leased stock and work-in-progress (WIP) respectively. The furniture and fixture in the present case is without doubt only an adjunct to the letting of the building, being in fact appropriated on an equal basis over the house properties under reference. We, therefore, have no hesitation in confirming the impugned disallowance; there being no scope for assessment of the proportionate rent, as contended, as income from other sources. Our decision rests, we may clarify, not on the inseparability of the two lettings, but on the finding of the furniture and fixture under reference forming an integral part of the building, so that it’s letting is, as admitted, incidental. That is, it is a case of a single letting and, therefore, the rent relatable to furniture and fixture is not ascertainable. We decide accordingly, and the assessee’s Gd. 1(c) is also not acceptable.

Revenue’s Appeal (in ITA No. 4495/Mum/2013) 7. The basis of the deletion (of the impugned disallowance - refer para 2 of this order) by the ld.CIT(A) is on the ground of it being incurred by the assessee in the

7 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates course of its business, following the decision in Mukti Properties (P) Ltd. vs. CIT [2012] 344 ITR 177 (Cal), relied upon by the assessee. The Revenue relies on the decision in East India Housing & Land Development Trust Ltd. (supra) and Karanpura Development Co. Ltd. (supra), while the assessee does on the decisions in Karanpura Development Co. Ltd. (supra); Cocanada Radhaswami Bank Ltd. (supra); Rajasthan State Warehousing Corporation (supra); and Chugandas & Co. (supra), besides on Mukti Properties (P) Ltd. (supra).

8 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates exclusive heads of income, and that where the income falls under a particular head, the fact that it may indirectly be covered by another head of income will not make it as income taxable under the latter head. Further, income falling under a specified head has to be computed for the purposes of tax in the manner provided by the appropriate sections. The reliance on Rajasthan State Warehousing Corporation (supra) is met by adverting to section 14A, since brought on the statute w.r.e.f. 01.4.1962. The decision is, in any case, rendered in the context of or on the premise of income being not taxable, which is not so in the instant case. Similarly, the reliance on Mukti Properties (P) Ltd. (supra) was also sought to be distinguished on facts.

8.2 We may, before proceeding to adjudicate the issue before us, take note of the enumeration of law by the Apex Court per the cited case law. In East India Housing & Land Development Trust Ltd. (supra), it was held as under: (pg. 51) ‘Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in s. 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in s. 6, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head.’ [emphasis, ours] Repelling the argument that the activity being pursued comprised one of the objects with which the company was formed, it was held that the income derived by the company from shops and stalls was income received from property and fell under the specific head described in section 9. The character of that income, it clarified, is not altered because it was received by a company formed with the object of developing and setting up markets. In Karanpura Development Co. Ltd. (supra), the assessee-company was formed with an object of acquiring and disposing of underground coal mining

9 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates rights. Toward this, it acquired diverse coal mining leases from time to time, and developed them as coal fields by providing means of communication, etc., and subleased them to collieries and other companies. It never worked the coal fields with a view to raising coal, nor did it acquire or sell coal raised by the sub-lessees. As a condition of the acquisition of the leases, the assessee-company had paid salami at the rate of Rs.40 per standard bigha, as well as royalty at certain rates. From the sub-lessees, the assessee-company charged salami at the rate of Rs. 400 per standard bigha and royalties at higher rates. It claimed that the amount realised by way of increased salami was on capital account and, thus, could not be included in its income assessable under the Act. The same was found by the Hon’ble Court to be realized by way of a trader and, hence, income liable to tax. In this regard, it noted the precedents with regard to the distinguishing feature between ‘income’ and ‘capital’, as well as the nature of the income being realised. In its words:

‘“Income” does not include fixed capital or the realising of fixed capital by turning it into some other form of capital or money. Fixed capital is what the owner keeps in his possession but turns to profit; circulating capital, however, is turned over in the process of profit- making. It may sometimes happen that in the process of production, fixed capital may be consumed or wasted, but that is a reduction of capital and not an expenditure in the business claimable as an allowance in the reduction of assessable income in the shape of profits of the business.’ [at pg. 368]

‘Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" (s. 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee-company must be

10 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter.’ [emphasis, ours] [pgs. 377-378]

The issue arising in that case was not the head of income where-under the income was properly assessable, but whether the receipt under reference was income at all, i.e., whether it was of revenue nature or on capital account. The Apex Court answered by adverting to the fundamental principles as to what constituted ‘revenue’ and ‘capital’, applying the same to the facts of the case. The said principles represent trite law, reiterated by it time and again, i.e., as and when the issue has come before the Hon’ble Court, as for example in Empire Jute Co. Ltd. vs. CIT [1980] 124 ITR 1 (SC). Its reference to the character of the income arising, i.e., business or otherwise – which was not in issue, also forms part of the well settled law (by it). The Apex Court, it needs to be borne in mind, referred to the ownership of the property therein in the context of the question before it. Further, the property under reference was not ‘house property’, which is regarded as a separate and distinct source of income under the Act. In Cocanada Radhaswami Bank Ltd. (supra), the assessee-company carried the banking business, holding securities as a part of the trading assets of the said business. The assessee was assessed for business loss for A.Y. 1949-50. The same was disallowed for being set off against the interest on securities for the succeeding years. The Apex Court held that the income from securities, which formed part of the assessee’s trading assets, was part of its income from business and, therefore, the loss incurred in the business in the earlier years can be set off against the income from securities also in the succeeding years. In Chugandas & Co. (supra), the assessee firm, a dealer in securities, holding securities as stock-in-trade, discontinued its business on June 30, 1947. The income from securities for the year 1946-47 had been charged to tax under the Indian Income Tax Act, 1918 under the head of income ‘Income from securities’.

11 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates The question was whether the interest on securities formed part of the assessee’s business income for the purpose of exemption from tax u/s. 25(3) of the Indian Income Tax Act, 1922. The Hon’ble Court held that there was no reason to restrict the condition of the applicability of the exemption u/s.25(3) only to income on which tax was payable under the head ‘profits and gains of business, profession or vocation’. The exemption u/s. 25(3) is general. The income tax is a single tax. By breaking up the income under different heads of income, the same does not cease to be the income of the business; the different heads of income being only the classification prescribed by the Act for computation of total income. That is, the heads do not exhaustively delimit the sources from which income arises. In Rajasthan State Warehousing Corporation (supra), the Apex Court again reiterated the general principles relating to the deduction under the various heads of income, wherein, culling out the relevant part, it was held as under: ‘The following principles may be laid down : (i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computation under each head results in taxable income; (ii) if income of an assessee arises under any of the heads of income but from different items e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii) in computing ‘profits and gains of business or profession’ when an assessee is carrying on business in various ventures and some among them yield taxable income and the other do not, the question of allowability of the expenditure under s. 37 will depend on : (a) fulfilment of requirements of that provision; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do the entire expenditure will be a permissible deduction but if they do not the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee.’ [emphasis, ours]

12 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates [catch notes, culled from the discussion at pgs. 453,455 of the Reports] The Hon’ble Court highlighted the primacy of the computation of income under the prescribed head of income, following the relevant computation provisions. The apportionment of the expenditure and allowing deduction of only that proportion which was referable to the taxable income was held as unsustainable in view of the fact that the income from different ventures was shown as earned in the course of one indivisible business.

8.3 In our considered view, the answer to the question at hand would lie in determining as to whether the property leased forms part of the assessee-company’s trading assets, or not so. That is, as explained in Karanpura Development Co. Ltd. (supra), whether they are a part of the fixed capital, that the owner keeps possession of and turns to profit, or as a part of the circulating capital which is turned over in the process of profit-making. Using its’ words, whether the profit derived is by way of an owner or as a trader. It is only in the case of the latter, i.e., where the property forms part of the trading assets, that income by way of leasing, even if assessable as income from house property, could be said to bear the character of business income and, equally importantly, of the same, indivisible business of construction and sale or leasing. The line of distinction, it must be borne in mind, is clear, and is to be arrived at considering the entirety of the facts and circumstances the case. This is as income stands to be classified under the Act source-wise, i.e., on the basis of its’ defining origin and character. It is thus only where the source does not fully capture the intrinsic nature of the receipt that there is scope for income falling under one head of income as liable to be characterised as income covered also by another (head of income) and, which, therefore, could be said to be indirectly covered by the latter head of income, though would not make it assessable under that, latter head. The heads of income under reference in the instant case present one such example. This is as section 22 makes no distinction between a property held either as a capital asset or as a trading asset. Why, a house property may form part of the

13 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates stock-in-trade and, yet, where complete, i.e., its annual value is liable to be brought to tax under section 22 r/w s. 23 of the Act. The assessee claiming it to represent business income, i.e., by nature, the onus, to prove its case would be on it. This is as the fact of letting itself suggests that the same stands considered as a capital asset, a source of income. This inference gets reinforced by the fact that the assessee had considered it worthwhile to spend lakhs toward securing a tenant, i.e., toward a regular source of income. There is nothing to show that the leasing income is for the interim period only, i.e., where and to the extent the house property, though under sale, is not being let for the time being. No material has been brought on record by the assessee to further its’ case in the matter, i.e., qua this vital aspect. The ld. AR, on being queried by the Bench during hearing in the matter, would state that the assessee has in its books of account categorised the relevant house property separately under the head ‘leased stock’ under the grouping ‘current assets’. The treatment accorded in books, though un-evidenced, would not, in our view, be determinative of the matter, as is trite law (Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 (SC); Sutlej Cotton Mills Ltd. vs. CIT [1979] 116 ITR 1 (SC), etc). On the contrary, the said treatment is contradicted by the assessee claiming depreciation on a part of the leased assets, i.e., furniture and fixture, which is leased out along with the house property. Forming part of the assets under lease, claimed as trading assets, how could, one may ask, depreciation be claimed thereon, implying their being capital assets, even if accounted for separately under the account head ‘furniture and fixture’ (in the balance-sheet) or clubbed along-with, i.e., as part of the ‘leased stock’. The same clearly indicts the assessee’s case, toward which, as afore-noted, no material in support is on record. Add to this, the fact that the property under reference is actually leased out, i.e., constitutes a source of income and, thus, a capital asset by definition, and the assessee’s case becomes untenable on facts – the leased house property constituting the assessee’s capital asset, yielding a regular source of income, and toward which the assessee has, in fact, expended no insubstantial

14 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates sums. Juxtapose this with the settled position in law that the income assessable under a particular head of income is to be necessarily computed under that head only and in the manner provided under the relevant sections (Sultan Brothers (P.) Ltd. (supra); East India Housing & Land Development Trust Ltd. (supra)), and there can be no manner of any doubt that the assessee’s claim is not sustainable in law. We may next clarify that the facts in Mukti Properties (P) Ltd. (supra) are distinctively different. The expenditure under reference in that case was on administrative expenditure. Letting and providing maintenance services formed one segment of the assessee’s - also carrying real estate business, activity. It was under such circumstances that 50% of the administrative expenditure was considered as relatable to the said business and, accordingly, allowable in computing business income. The impugned expenditure in the present case has no nexus whatsoever with the assessee’s construction business, and stands incurred wholly and exclusively for the purpose of letting the constructed house property. The said decision stands, thus, wrongly applied in the present case by the ld. CIT(A). We decide accordingly, and the Revenue succeeds.

Omega Associates 10. The facts and circumstances of the case in this appeal, as well as the respective cases of the parties, are the same as in the case of Lake View Developers (supra), i.e., is the subject matter of this order. The assessee-company is in the business of construction, also leasing property house property. Toward the same, it paid brokerage (at Rs.5.11 lacs) and professional fees (Rs.14.62 lacs) for providing assistance for securing a tenant. Depreciation on furniture and fixture on leased assets, being furniture and fixture, was also claimed. All these claims were denied in assessment in-as-much as the leasing income was assessed, and rightly so, as income from house property. We, therefore, for the same reasons as in the case of

15 ITA Nos. 3409, 4495 &4496/Mum/2013 (A.Y. 2009-10) Lake View Developers & Omega Associates Lake View Developers (supra), uphold the disallowance of brokerage and professional fees, which forms the subject matter of the Revenue’s appeal; the denial of depreciation being upheld by the first appellate authority. We decide accordingly, and the Revenue succeeds.

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai