Income Tax Appellate Tribunal - Bangalore
M/S Velankani Information Systems Pvt. ... vs Department Of Income Tax on 22 March, 2012
Page 1 of 18 1 ITA No.1507 to 1510/Bang/2010
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'B'
BEFORE SHRI GEORGE GEORGE K, J.M AND
SHRI JASON P BOAZ, ACCOUNTANT MEMBER
ITA Nos.1507 to 1510/Bang/2010
(Assessment years 2003-04 to 2006-07)
The Deputy Commissioner M/s Velankani Information
of Income-tax, Circle-12(5), Systems Pvt. Ltd., No.43,
Bangalore. vs Electronic City, Phase-2,
Hosur Road, Bangalore.
PA No.AABCV0552G
(Appellant) (Respondent)
Date of Hearing : 22.03.2012
Date of Pronouncement : 30.03.2012
Appellant by : Shri S K Ambastha,CIT-I (ITAT)
Respondent by : Shri Arvind V Sonde, C.A.
ORDER
PER BENCH :
These are four appeals instituted by the Revenue against the consolidated order of the Ld. CIT (A)-III, Bangalore dated 7.7.2009. The relevant assessment years are 2003-04 to 2006-07.
2. Since these appeals are relating to the same assessee, they were heard, considered together and disposed off in this consolidated order.
Page 2 of 18 2 ITA No.1507 to 1510/Bang/20103. Though the Revenue has raised five identical grounds, the crux of the issue agitated in all these appeals is - Whether the Ld. CIT (A) was justified in directing the assessing officers to assess lease rentals income from leasing out the building as 'business income' instead of 'income from house property'?
4. The assessee company ['the assessee' henceforth] has been in the business of developing of an I.T Park and rendering services. While concluding the assessments for the AYs 2003-04 to 2006-07, the Assessing Officers treated the lease rentals received by the assessee as income from 'house property' as against 'business income' claimed by the assessee for the reasons recorded in their respective impugned orders under challenge. The consequential disallowances were also made in the assessment orders.
5. Aggrieved, the assessee took up the issues, among others, with the Ld CIT (A) for relief. After due consideration of the lengthy submissions coupled with various case laws put forth by the asssessee's learned A.R and also case records, the relevant portions of the CIT (A)'s observations are, for appreciation of facts, are extracted.
5.1. Extensively quoting and analyzing various rulings of judiciary on a similar issue, chiefly, the rulings of Hon'ble Supreme Court reported in 66 ITR 596 (SC) and 83 ITR 700 (SC), the CIT (A) had observed thus:
Page 3 of 18 3 ITA No.1507 to 1510/Bang/2010"11.1. From a perusal of the above decision, as well as other decisions relied on by the appellant, the characteristics on the basis of which we may determine whether an assessee was simply letting out the property or commercially exploiting the property may be summarized as under:
(A) If the income earned is only for bare letting of the property the income has to be assessed as income from house property. In this regard, the Hon'ble High Court of Madras has held in the case of CIT v.
Kongarar Spinners Private Limited (208 ITR 645) that
- 'Thus, it is clear that it is only a letting out of a property simpliciter without anything more that will fall under the category 'income from house property.' (B) The income obtained should be because of the services rendered and facilities provided and not so much for the letting of the property.
(C) It is however to be noted that some service or facilities are provided by all house owners in the normal course of letting out their house on rent. Thus, the services rendered or facilities provided should not be such which is merely incidental to the letting out of the house. The services rendered or facilities provided should not be such which are ordinarily rendered or provided by a landlord who has let out his house.
(D) The service rendered or facility provided should be elaborate and complex in nature.
(E) The rendering of such service and providing of such facilities must be carried out as an organized activity carried out with the primary intent of commercial exploitation of the house property.
Page 4 of 18 4 ITA No.1507 to 1510/Bang/201011.2. On examination of the matter, I find that all the characteristics enumerated above are present in the case of the appellant and the same is evident from the hot of elaborate services rendered and facilities provided by the appellant which are enumerated as under:
(a) The appellant had provided a common reception area for all the lessees and was maintaining the same with necessary staff.
(b) The appellant had not only provided lifts but undertook the responsibility of their maintenance and also provided staff for their operation.
(c) The appellant had not only provided necessary furniture and fixtures along with each unit but had provided such furniture and fixtures, wherever necessary, complete with outlets for electricity, telecom and internet connection, through which the appellant made available electricity, telecom and internet facilities to the tenants.
(d) In addition to the responsibility of the repairs and maintenance of the exterior structure of the building, such as the repairs of roof space, exterior walls, bearing walls, support beams and foundation columns, the appellant was also responsible for the repairs and maintenance of the interiors of the leased premises.
(e) The appellant had provided adequate parking facilities to the lessees and for such purpose had engaged the services of parking attendants.
(f) The appellant undertook the responsibility of the maintenance of sanitary works and for such purpose provided plumbing and janitorial services.
(g) The appellant had also established a centralized sewage treatment system whereby the waste water was treated and made suitable for use in flushing and gardening.Page 5 of 18 5 ITA No.1507 to 1510/Bang/2010
(h) The appellant had provided for landscaping in and around the Industrial Park and also maintained a garden for the benefit of the lessee.
(i) The appellant had also taken on a comprehensive insurance with regrd to the premises.
(j) The appellant undertook the responsibility of providing security and looked after not only the external security of the building but also provided internal security of the leased premises.
(k) The appellant undertook the responsibility of house-
keeping which included duties such as cleaning the floor, furniture and computers etc., of the leased premises.
(l) The appellant provided central air conditioning to the lessees and was responsible for the operation, maintenance and up keep of air conditioning plant established for such purpose.
(m) The appellant had guaranteed 24 hours supply of electricity to the lessees and for such purpose the appellant had set up substations at a centralized location inside the Industrial/software park and from thereon distributed and transmitted electricity to the lessees through the underground cable network established by it. In addition, the appellant provided 100% power back up to lessees through captive generators. The appellant had not only established electrical cable network throughout the campus but had also provided the various electrical fittings required for the supply of such power to the lessees.
(n) The appellant provided telecom and internet services to the lessees and for such purpose it had obtained distributorship from the Nodal Telecom Service Providers and Internet Service Providers and for the said reason had enabled all the 4 national Nodal Telecom Service Provider and Internet Service Provider to locate their Digital Loop Carrier in the Industrial Park campus. The appellant thereupon provided the required telecom and internet service to the lessees Page 6 of 18 6 ITA No.1507 to 1510/Bang/2010 through optical fibre network established by the appellant through out the campus and maintained dedicated staff for such purpose.
(o) The appellant was responsible for the supply of water to the lessees and for such purpose it had made arrangement to obtain water through the Electronic City Industry Association and the Bengaluru Water Supply & Sewerage Board. The appellant distributed the water so obtained to individual blocks by way of hydro pneumatic pumping systems from a centralized pump.
(p) The appellant provided and maintained a canteen inside the Industrial/Software Technology Park and had also made arrangements for a common food court for the benefit of the people working in the Industrial/Software Technology Park.
(q) The appellant had provided and maintained an amphitheatre in the premises for the use of the lessees.
12. It is evident from the above detailed services and facilities that the income earned by the appellant is NOT merely for the bare letting of the property. In fact, in the case of the appellant, I find that there is much more than mere letting out of property simpliciter inasmuch as a host of services and facilities are being provided to the tenants by the appellant. These services and facilities are elaborate and complex in nature and are such which are not ordinarily rendered or provided by a landlord who has let out his house. More importantly, it is seen that the rendering of such services and providing of such facilities has been carried out by the appellant in an organized manner with the PRIMARY INTENT OF COMMERCIAL EXPLOITATION of the property. In fact, it is evident from the list of services and facilities detailed above that there was no intention on the part of the appellant to simply let out the property and in fact all the activities as detailed above exhibits the clear intention of the appellant to commercially exploit the Page 7 of 18 7 ITA No.1507 to 1510/Bang/2010 property. For instance it may be noted that in order to provide ready made telecom and internet services to the units in the industrial park, the appellant, as already detailed at sub-paragraph (n) of paragraph 11.2 above had obtained distributorship from the Nodal Telecom Service Providers and Internet Service Providers and had enabled all the 4 national Nodal Telecom Service Provider and Internet Service Provider to locate their Digital Loop Carrier in the Industrial Park campus. The appellant thereafter provided the required telecom and internet service to the units through the optical fibre network established by the appellant through out the campus. The appellant had also set up electrical sub-stations and captive generator inside the park and ensured supply of 24 hours electricity to the lessees through underground cable network established by it. The said telecom and internet service and electricity were made available to the units let out to the tenants and in many instances were supplied, wherever required, right up-to the desk of the tenants through electrical outlets and internet and telecom plug points attached to the furniture and fixtures provided by the appellant in each unit. Thus, the units in the industrial/software technology park developed by the appellant were DESIGNED TO BE PLUG AND PLAY OFFICES wherein any company, firm or person can come in and set up its software technology business overnight. Further, the appellant by providing furniture and fixtures, common reception area, parking space, sewage treatment plant, landscaped garden, centralized air- conditioning, electricity, water supply, canteen and amphitheatre ensured that the entire infrastructure required to run a business were made available to the occupants of the units. Similarly, by providing necessary staff to operate and maintain the said facilities as well as providing staff for housekeeping, security and janitorial services the appellant ensured that the units in the park did not have to employ a single employee to maintain and operate the infrastructure support. IF THE APPELLANT HAD WANTED TO JUST SIMPLY LET OUT THE BUIDING, THE APPELLANT NEED Page 8 of 18 8 ITA No.1507 to 1510/Bang/2010 NOT HAVE CARRIED OUT THE ACTION DETAILED ABOVE. The very fact that the appellant had undertaken such elaborate and complex activities which are ordinarily not undertaken by landlord indicates that the appellant had not intended to let out the building as an ordinary landlord but had let out the building along with service and amenities as a business venture. I find that the appellant had directed all its activities in an organized manner for the purpose of developing the property as in Industrial/Software Technology Park and thereafter engaged itself in the business of management of the industrial/software technology park. Therefore, the activities of the appellant, including the letting out of the building, really partake of the character of a BUSINESS ACTIVITY."
5.2. Placing reliance on the judgement of the Hon'ble Apex Court in the case of Karnani Properties Ltd v. CIT [82 ITR 547 (SC)], the CIT (A) further observed that -
"13........On application of the above principle to the case of the appellant, I find that the activity of the appellant of providing services and amenities has been carried on in an organized manner with the set purpose of developing and operating an Industrial/Software Technology Park and thereby earning income. Hence, I am of the opinion that the principle laid down in the case of Karnani Properties Limited v. CIT (supra) is squarely applicable to the case of the appellant and, therefore, it has to be held that the activity of the appellant of providing services and amenities to its tenants in the process of operating an Industrial/Software Technology Park constitute BUSINESS ACTIVITY and the income arising from such business activity is therefore assessable under the head 'Profits and gains of business or profession.' In fact the AO has also admitted as Page 9 of 18 9 ITA No.1507 to 1510/Bang/2010 much when he states that -'The consideration received for the furniture/fittings is to be assessed under 'income from business since this forms part of the normal business of the assessee of running a ITP'. Thus, according to the AO also, the consideration received by the appellant from providing services and amenities [according to the AO, the appellant is providing only furniture and fittings] to the tenants constitutes income from 'profits and gains of business or profession.' 14.0. The AO has, however, failed to note that the said services and facilities that the appellant had to provide in its business of running an industrial/software Technology Park could not have been provided in an open field and had to be necessarily provided inside a building. In fact, in order to provide the services and facilities required to operate an Industrial/Software Technology Park it was indispensible for the appellant to let out the building also and it is only for this reason that the appellant had to let out the building. Thus, the building that was let out by the appellant was merely a place required by the appellant to render the said services and facilities and, therefore, the letting out of the said building was merely incidental to the carrying on of the business of running an Industrial/Software Technology Park. It is, thus, obvious that the appellant had let out the building only as a part and parcel of its business activity of running an Industrial/Software Technology Park and not in its capacity as the owner of the building. Thus, though the action of the appellant consisted of one part which was attributable to the letting out of building and another part which was attributable to providing of services and facilities, both the actions were carried out as a part and parcel of the business Page 10 of 18 10 ITA No.1507 to 1510/Bang/2010 activity of the appellant of running an Industrial/Software Technology Park and, therefore, the entire activity of the appellant including the letting out of the building has to be classified as a business activity. In fact, one one hand it was not possible for the appellant to provide services and amenities without a building and on the other hand, a bare building without the services and facilities would have been useless to the tenants. Therefore, it was the intention of the appellant and the tenants that both the services and facilities and the building should be enjoyed TOGETHER and not separately from one another. Therefore, the consideration received for the letting of the building and the consideration received for providing services and facilities formed INSEPARABLE parts of a COMPOSITE CONSIDERATION. Thus, even though a part of the receipts were attributable to the letting out of the building, since the building was let out only as a part and parcel of the business of running an Industrial/Software Technology Park, the rent receipt formed an indivisible part of a composite consideration [which was assessable as income under the head 'profits and gains of business or profession'] and, therefore, the rent receipts were also assessable as income under the head 'Profits and gains of business or profession' and not under the head 'Income from house property.' In view of the above, the action of the AO in segregating and assessing the receipts attributable to the letting out of the building as 'Income from house property' is found to be NOT SUSTAINABLE."
5.3. After due examination of the reasons recorded by the AOs and also analyzing the history in the case of Bhoopalam Page 11 of 18 11 ITA No.1507 to 1510/Bang/2010 Commercial Complex & Industries Private Ltd which travelled from the CIT (A) to the Tribunal and further went before the Hon'ble jurisdictional High Court which, after duly analyzing the issue threadbare and came to a conclusion that the assessee had to be viewed as an owner and, therefore the resultant income has to be assessed under the head 'income from house property'.
5.4. However, the CIT (A) distinguished the Bhooplam case (supra) from that of the one (the present assessee) under consideration and duly recorded in doing so as under:
"15.4 In view of the above, I am of the opinion that the case of the appellant is distinguishable from the case relied on by the AOs. This conclusion is also supported by the decision in the case of DCIT v. Manmit Arcade Private Limited (supra). In this case, the Hon'ble ITAT, Bangalore B Bench distinguished the case of CIT v.
Bhoopalam Commercial Complex & Industries Private Ltd [supra] and had stated that - "in the case of CIT v. Bhoopalam Commercial Complex & Industries Pvt Ltd (supra), there was only a lease rent collected as per the lease deed and no additional facilities and services provided nor charged." The case of the appellant is also similarly distinguishable, as in the case of CIT v. Bhoopalam Commercial Complex & Industries Private Limited (supra) only lease rent but also included charges for a host of additional facilities and services. Therefore, the ratio of the decision in the case of CIT v. Bhoopalam Commercial Complex & Industries Private Limited (supra)cannot be applied to the case of the appellant.
Page 12 of 18 12 ITA No.1507 to 1510/Bang/201015.5. In my opinion, the AO arrived at a wrong conclusion that the decision of the case of CIT v. Bhoopalam Commercial Complex & Industries Private Limited (supra) is applicable to the case of the appellant because he made two erroneous assumptions. Firstly, the AO has assumed that the income received by the assessee consisted of -
"......letting out of superstructure..." It is true that any income received from the letting out of a superstructure is to be treated as income from house property. However, the assumption of the AO that the case of the appellant consisted of mere letting out of a superstructure is erroneous. As already noted above, in the case of the appellant, there was no mere letting out of a superstructure and in fact the receipts of the appellant consisted of not only a superstructure but also included charges for a host of additional facilities and services which have already been detailed above. Secondly, from the remark of the AO that - "The consideration received for the furniture/fittings is to be assessed under income from business...." It appears that the AO has assumed that the appellant has simply provided some furniture and fittings. This assumption of the AO is wrong as the appellant had provided not only furniture and fittings but also had provided a host of additional facilities and services. Thus, both the assumption of the AO were erroneous and, therefore, the conclusion of the AO that - "The facts of the assessee's case fall squarely within the scope of the judgment" being based on such erroneous assumption is incorrect. Therefore, the ratio of the decision of the case of CIT v. Bhoopalam Commercial Complex & Industries Private Limited (supra) cannot be applied to the case of the appellant.Page 13 of 18 13 ITA No.1507 to 1510/Bang/2010
16.0. In view of the above, I agree with the contention of the appellant that the composite charges which includes the charges received for letting out of the building, is to be taxed under the head 'Profits and gains of business and profession'. In this regard, I find that the appellant has correctly placed reliance on the decision in the case of Global Tech Park Private Limited v. ACIT (supra). In this case the assessee was allotted land measuring 6.25 acres or 2,72,000 square feet in the Electronics City Phase
- II, Industrial Area, Bangalore by the Karnataka Industrial Areas Development Board. The main object of the assessee as per its memorandum of association was to establish and maintain information technology park with factories, commercial offices, residential complexes and other allied facilities and amenities such as gardens, swimming pools, internal roads, satellite communication facilities, shops etc, on land to be allotted by any Government or to be purchased from any person. Accordingly, the assessee developed the said land and constructed an information technology park thereon. The Information Technology Park consists of two large blocks of buildings with four floors in each block, service block, cafeteria, library, gymnasium, utilities for staff, rest rooms, security, ATM and geodesic dome. Besides, landscaping and construction of steel reinforced cement roads and high security compound wall fitted with motorized gage, huge water tank fitted with high pressure pumps, reservoir and sump, bore well, sewage treatment plant, lifts, rain water harvesting system, high standard electrical installation including transformer and generators, air- conditioning, fire fighting and smoke detector equipments etc., have been provided/installed in Page 14 of 18 14 ITA No.1507 to 1510/Bang/2010 the said information technology park by the assessee. The assessee is providing ward and watch, maintenance of common area maintenance of light in the common area, supply of water, providing lift, installation of electric transformer, power to the lessees, providing generator, overhead water tanks, maintenance of drainage etc., in the said technology park. The Hon'ble Income-tax Appellate Tribunal, Bangalore 'A' Bench, held that as the entire activity of lease of the property "..........was done by the assessee as a business venture and was in accordance with the main object of the company" the rental income is assessable as business income.
16.1. On examination, I find that the facts and circumstances of the case of the appellant are identical to the facts and circumstances of the case of Global Tech Park Private Limited v. ACIT (supra) and, hence, I agree with the appellant that the decision in the case that the rental income is assessable as business income is squarely applicable to the case of the appellant.
17.0. In view of the above discussed reasons, the action of the AO in bifurcation and assessment of the composite compensation received by the appellant under the head 'Income from house property' and under the head 'profits and gains of business or profession' is found to be not SUSTAINABLE and, therefore, the consequent disallowances made by the AO on the basis of such bifurcation is hereby DELETED. The AO is directed to treat the entire income of the appellant as income under the head 'profits and gains of business or profession.' Page 15 of 18 15 ITA No.1507 to 1510/Bang/2010
6. Being aggrieved with the findings of the CIT (A), the Revenue has come up with the present appeals before us.
6.1. The learned DR heavily placed reliance on the findings of the AOs and argued that the CIT (A) ought to have appreciated the very fact that the assessee had collected rent for the building premises let out and the same was not in the nature of composite rent paid for letting out the premises and other incidental facilities provided. It was, further, submitted that as per the lease deed, the tenant was required to pay separately for certain facilities like use of catering services and amphitheatre availed, if any, by the tenants.
He had placed more emphasis on the lease deeds which, according to him, clearly mention that the tenant was required to pay rent for the building and hire charges for furniture and fittings taken on hire separately. In conclusion, it was argued that the CIT (A) ought to have held that the hire charges were assessable as 'business income' and the rent received for the building let out was assessable as 'income from house property'.
6.2. On the other hand, the learned A R submitted that the issue under consideration is directly covered by the findings of the earlier Benches in the cases of (i) Global Tech Park (P) Ltd v. ACIT [119 TTJ 421 (Bng); (ii) DCIT v. Golf-link Software Park P Ltd - ITA Nos. 40, 41, 52 & 53/Bang/2010; and (iii) ITO v. M/s. Information Technology Park Ltd, ITPL, Bangalore - ITA Nos.1147 to 1152/Bang/ Page 16 of 18 16 ITA No.1507 to 1510/Bang/2010 2010). It was, therefore, pleaded that the issue be decided in favour of the assessee.
7. We have carefully considered the submissions of either party and diligently perused and evaluated the relevant case records.
7.1. It was indeed an undisputed fact that the assessee had developed a technology park wherein a sizeable privileged I.T. companies have their focal points housed. It was also a fact that the assessee had not only let out its building, but also carried on a complex commercial activity of setting up of a software technology park in which a mixture of amenities as detailed/discussed in the impugned order of the CIT(A) was provided to the tenants.
7.2. At this juncture, with due regards, we would like to highlight the landmark verdict of the Hon'ble Supreme Court in the case of CIT v. National Storage Pvt. Ltd reported in 66 ITR 596 (SC) wherein the Hon'ble Court in its wisdom had clearly distinguished the difference between merely letting out a bare building from that of building which has been adorned with various amenities.
7.2.1. Yet another finding, the earlier Bench of this Tribunal in its findings in Global Tech Park (P) Ltd v. ACIT reported in (2008) 119 TTJ (Bang) 421 had endorsed the principle that the lease rental income arising from a complex commercial activity will be categorized as 'income from business' as against 'income from house property'.
The relevant portion of its findings, are extracted as under:
Page 17 of 18 17 ITA No.1507 to 1510/Bang/2010"7.........On our careful consideration of the facts and circumstances, we are of the considered view that the assessee was incorporated with the sole intention of developing technology park for which it obtained leasehold land from the Karnataka Industrial Development Corporation and also obtained loan from Union of India for constructing superstructure thereon which could not be considered as investment in a property for earning rental income only. The lease of the property was shown as part of the business activity, the income received there-from cannot be said as income received as a land owner but as a trader. In other words, if the property is taken on lease thereafter developed on lease is part of the business activity of the assessee as an owner, then the income has to be treated as business income the activity was done by the assessee as a business venture and was in accordance with the min object of the company. The intention of any prudent businessman is to earn profit at a maximum level and investment made in the business never lost its main intention for which it was incorporated. The entire cost of construction was by way of obtaining loan which was a risk as adventure in the nature of trade. Therefore, the conversion from leasehold to ownership led to a pure commercial proposition resulting in a business venture carried out by the assessee company. The assessee is providing ward and watch, maintenance of common area, maintenance of light in the common area, supply of water, providing lift, installation of electric transformer, power to the lessees, providing generator, overhead water tanks, maintenance of drainage etc., clearly establish that the entire activity is in organized manner to earn profit out of investment made by the assessee as a commercial venture...."Page 18 of 18 18 ITA No.1507 to 1510/Bang/2010
7.3. Taking into account all relevant facts and the circumstances of the issue as deliberated upon in the foregoing paragraphs and also in conformity with the judicial pronouncements cited supra, we are of the considered view that the learned CIT (A) was justified in his reasoning which requires no intervention of this Bench. It is ordered accordingly.
8. In the result, the appeals filed by the Revenue are dismissed.
Order pronounced in the open court on 30th day of March, 2012 Sd/- Sd/-
(JASON P BOAZ) (GEORGE GEORGE K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Copy to :
1. The Revenue
2. The Assessee
3. The CIT concerned.
4. The CIT(A) concerned.
5. DR
6. GF
MSP/ By order
Asst. Registrar, ITAT, Bangalore.