Income Tax Appellate Tribunal - Mumbai
The Marwar Textiles (Agency) Pvt. Ltd. vs The Ito-5(2)(3) on 24 April, 2008
ORDER
K.C. Singhal, Judicial Member
1. Though various grounds have been raised by the assessee but the effective ground is one i.e., whether charges received by the assessee from different parties on account of user of the property owned by the assessee are assessable under the "income from house property" or under head "profits and gains from business or profession".
2. Briefly stated, the facts are that the assessee is the owner of an immovable property situated at Pedder Road, Mumbai. This property, as per the assessee, was initially used for the purpose of its business of textile. However, on discontinuance of the said business, the company decided to allow the use of the property to other persons along with facilities like telephone etc., as per resolution dated 15.12.1993. Subsequently, the said premises was allowed to be used by various companies of assessee's group w.e.f. 1.4.1994 at a fixed monthly charge provided in the agreement. The copy of agreement with West Coast Paper Mills Ltd., is placed on record. It is stated that all the agreements are similarly worded though monthly charges are different, perhaps, depending upon the area used by the occupants. For the year under consideration, the assessee declared the income of Rs. 52,575/- under the head 'business income'. The relevant details are given below.
Statement showing yearwise recovery of establishment charges made
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Sr. Nature of expenses FY 1994-95 to FY 1998- FY 1999- No. 1997-98 1999 2000
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1. Cambay Investments Ltd. 90000 99000 126000
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2. Oriental Co. Ltd. 90000 99000 126000
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3. Maharaja Shree Umaid Mills Ltd. 180000 198000 252000
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4. The West Coast Paper Mills Ltd. 60000 60000 84000
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5. Shree Laxmi Agents Ltd. 60000 60000 60000
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6. Shri Synthetics Ltd. 12000 15000 24000
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7. Fort Gloster Industries Ltd. 12000 12000 24000
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504000 543000 696000
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The Assessing Officer processed the return Under Section 143(1) of the Income-tax Act, 1961 (the Act). Subsequently, notice Under Section 148 was issued as, according to the Assessing Officer, the income should have been declared under the head 'income from house property'. In re-assessment proceedings, the Assessing Officer noted that this issue is under litigation since assessment year 1995-96 and the matter is pending before the High Court. He, therefore, treated the charges received by the assessee as rent from house property and consequently, determined the income from house property at Rs. 5,23,226/-. The other income was dividend income of Rs. 1168/-only which was exempt Under Section 10(33) of the Act. On appeal, the CIT(A) noted that in assessment years 1997-98 and 1998-99, the Tribunal had decided the issue in favour of the assessee by holding that income was in the nature of business income. However, he held that income was assessable under the head 'income from house property' in view of the latest judgement of hon'ble Supreme Court in the case of Shambhu Investment (P) Ltd. 263 ITR 143 (SC). Aggrieved by the same, the assessee is in appeal before the Tribunal.
3. The learned Counsel for the assessee vehemently assailed the orders of the CIT(A) by submitting - (i) that after the closure of earlier business carried on by the assessee, it was decided that the office premises should be exploited by way of running a business centre. Our attention was invited to the resolution passed by the Board of Directors on 15.12.1993 wherein it was resolved that its premises be made available along with facilities including telephone, etc., for office use on such terms and conditions as may be deemed fit. He also drew our attention to one of the agreements executed on 4th January, 1994 wherein West Coast Paper Mills Ltd., was allowed to use the premises of the assessee along with the facilities i.e., use of office equipments, telephones, vehicles, etc., against fixed charge of Rs. 5,000/- per month; (ii) no specific area was allotted to the occupant and ultimate control over the property remained with the assessee; and (iii) it is not a case of letting out of property since no tenancy is created under the agreement. The agreement was merely leave & licence agreement. In support of his submissions, he relied on the decision of Gujarat High Court in the case of Saptarshi Services Ltd., 265 ITR 379 as well as the decision of the Tribunal in the case of PFH Mall & Retail Management Ltd. 298 ITR (AT) 371 (Kol) for the proposition that income derived from the activity of running of a business centre or exploitation of property for commercial use must be assessed as business income under the head "profits and gains from business or profession". He also relied on the decision of hon'ble Supreme Court in the case of Karnani properties Ltd., 82 ITR 547 wherein it was held that service charges received by the assessee on account of supply of electric current, provisions of hot and cold water, scavenging and lift services etc., were assessable as business receipts.
4. On the other hand, the learned DR has referred to the decision of hon'ble Supreme Court in the case of Shambhu Investment (P) Ltd. 263 ITR 143 (SC) wherein it was held that income derived from letting out the furnished accommodation is assessable under the head 'income from house property' and not as 'business income'. He also relied on the decision of hon'ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. 42 ITR 49 wherein it has been held that even in the case of an assessee engaged in the business of developing the market, the income from letting out has to be assessed as income from house property being the specific head.
5. In reply, the learned Counsel for the assessee also relied on certain observations made by the Calcutta High Court in the case of Shambhu Investments Pvt. Ltd., which has been approved by the hon'ble Supreme Court for the proposition that it is the main intention of the assessee which has to be seen to ascertain whether the property was let out or it was exploited by way of complex commercial activities. According to him, the case of the assessee is that of exploitation of the immovable property in commercial sense and therefore, the income received by the assessee should be assessed as business income.
6. After considering the rival submissions of the parties, we don't find merit in the appeal of the assessee on this issue since, in our opinion, the controversy between the parties is covered by the decision of the apex court in the case of Shambhu Investment (P) Ltd. (supra). The facts of the present case are similar to the facts of the case before the apex court. In that case, the following facts were noted by the apex court.
Shambhu Investment (P) Limited, the assessee abovenamed, is the owner of a building at Raheja Chambers, Nariman Point, Mumbai. The said premises have been furnished by the assessee and have been let out to various persons and/or firms and/or organisations with all furniture, fixtures, light, air-conditioners for being used as 'table space'. The said assessee under the agreement with those occupiers is to provide services like watch and ward staff, electricity, water and other common amenities.
The court further observed at page 52 as under:
In the light of the above, let us now apply such test in the present case. From the copy of the agreement produced before us it appears that the assessee has let out the furnished office at a monthly rent payable month by month by the respective occupants. The services rendered to the various occupants according to the said agreement are not separately charged and the monthly rent payable is inclusive of all charges to the assessee.
On the facts stated above, the court held that income earned by the assessee was by letting out the property and therefore, the same was assessable under the head 'income from house property'. The decision of the High Court has been upheld by the hon'ble Supreme Court 263 ITR 143 (SC).
7. In the present case, the facts are similar inasmuch as the property had been let out to its group companies on fixed monthly rent basis. The fact that the property was let out along with facilities like telephone, electricity and office equipment etc., is not relevant since rent was composite one like the case before the apex court. On going through the resolution passed by the assessee company and the agreements between the assessee and other companies, we find some discrepancy. In the resolution dated 15.12.1993, the assessee decided to make available the said premises for use along with facilities including telephone, etc., but the agreement provides that the premises would be available to the company for use along with facilities including office equipment, telephone, vehicles, etc. However, the perusal of balance sheet does not show that vehicles were owned by it. The parties to the agreements belonged to the same group and, therefore, assessee was in a position to draft the agreement to suit its own interest. It appears that insertion of the word 'vehicle' is made just to give the colour of business centre. Therefore, credibility of the agreement is also doubtful. If aspect of vehicle is excluded from the agreement then it is case of letting out of the furnished accommodation on fixed monthly charges which is nothing but rent of the premises. In the course of hearing, we were informed that the above premises continues to be occupied by the same parties as is also clear from the chart given in para 2. Therefore, facts of the present case are the same as facts in the case of Shambhu Investment (P) Ltd. (supra) and therefore, the said judgement squarely applies to the present case.
8. The learned Counsel for the assessee has submitted before us that it was exploiting the immoveable property for running business centre and therefore, the Supreme Court judgement would not apply. In our view this submission of assessee's Counsel cannot be accepted. A property can be said to be run as a business centre, when it is equipped with various facilities and the space is given to general public for a specified purpose for a short duration. The entire activity is run like a business. For example, running a hotel business where various rooms are offered to general public for a short period along with various facilities. Similarly in case of a hospital, space is offered to patients during the period of illness. Similarly, a property may be converted into banquet hall which is given for marriage parties. Similarly in a business centre, the space is provided against charges for holding of conferences, exhibition, etc., to business people. In our opinion, mere letting out of property to few persons on fixed monthly charges would not convert the rental income into business income. The fact that it is furnished accommodation would also not convert the rental income into business income in view of the hon'ble Supreme Court judgement in the case of Shambhu Investment (P) Ltd. (supra).
9. The contention of the assessee's Counsel that it is not a case of letting out of property as no tenancy is created in favour of the occupants is also without force for two reasons - Firstly, because there is nothing on record to substantiate the same except making self serving statement; and secondly because the expression 'let out' in Section 22/23 of the Act does not make any such distinction. The letting out of property would include not only cases where property is given under lease agreement but also cases where property is given under leave & licence agreement. If the intention of the assessee is to earn rental income from the property owned by it, whether furnished or unfurnished, income derived would be computable under the head 'income from house property'.
10. The contention of the learned Counsel for the assessee that no specific area is allotted to the occupants also appears to be without force for the reason that consideration received varies from party to party as is apparent from the chart given in para 2. For example, Rs. 15,000/- per month was received from Maharaja Shree Umaid Mills Ltd., Rs. 7,500/- per month was received from two companies, Rs. 5,000/- per month from other two companies and Rs. 1,000/-per month from another two companies all belonging to assessee group. The assessee has not been able to explain as to why different charges were received from different parties if no specific area was allotted. The fact that different charges were received from different parties itself shows that different areas were allotted to different companies. Hence, the contention of the assessee in this regard is also rejected.
11. The learned Counsel for the assessee has also relied on the following observations of Calcutta High Court in the case of Shambhu Investment (P) Ltd. (supra):
Merely because income is attached to any immovable property, that cannot be the sole factor for assessment of such income as income from property. If the main intention of the assessee is to let out the property or any portion thereof the income must be considered as rental income or income from property whereas if the primary object is to exploit the immovable property by way of complex commercial activities in that event it must be held as business income.
According to him, the above observations make it clear that where property is exploited by way of complex commercial activities, income would be considered as business income. We have no dispute with such legal position but the assessee has failed to prove that complex commercial activities were carried out by the assessee. Renting of furnished accommodation does not involve complex activity as held by the hon'ble Calcutta High Court in the case of Shambhu Investments (supra) approved by the apex court. Therefore, the earlier decision of the Tribunal in assessee's own case being in conflict with the above Supreme Court judgement cannot be followed.
12. The decision of hon'ble Gujarat High Court in the case of Saptrishi Services Ltd. 265 ITR 379 heavily relied upon by assessee's Counsel is distinguishable on facts. In that case, one 'K' had leasehold rights over a land on which part construction was done. 'K' subleased the property to the assessee under which the assessee could develop the said property into a business centre. After developing the said property, the assessee carried on the business as business centre by providing the following services:
(a) Services of lift;
(b) Services of receptionist to greet the visitors of members and accept the message on behalf of the members;
(c) Telephone services for directing the calls;
(d) Secretarial services/assistance like steno services;
(e) Data processing and word processing facility;
(f) Conference room facility; and
(g) Message service and local transport facility.
The assessee declared the income as business income while the Assessing Officer treated the same as 'income from house property'. The Tribunal found that assessee was not the owner of the property and therefore, question of assessing the income as 'income from house property' did not arise. Further, it was found that charges received by the assessee were not only for space but also for various commercial activities and therefore, income was assessable as business income. On appal, the High Court held that no question of law arose from the order of the Tribunal. The above decision is distinguishable on two grounds. Firstly, assessee was not the owner while in the present case the property is owned by the assessee. Secondly, in that case various facilities were given to customers such as secretarial services, services of receptionist and telephone operator, message services and local transport facilities, data process and word processing facility which are absent in the present case. Statement of Profit & Loss Account in the present case shows salary worth Rs. 64,932/- which is attributable only for watch and ward facility. We have already pointed out that no vehicle is maintained by the assessee. Since no facility is provided by the assessee, case of the assessee cannot be equated with the case before the hon'ble Gujarat High Court.
13. The decision of the Tribunal in the case of PFH Mall & Retail Management Ltd. 298 ITR 371 (AT) (Kol) relates to the income from running a mall which is quite different from letting out a furnished accommodation. It was held that running of mall was akin to running of hotel business. Accordingly, the said decision does not advance the case of the assessee.
14. The judgement of the apex court in the case of Karnami Properties Ltd. 82 ITR 547 (SC) relied on by the assessee's counsel does not help the case of the assessee. In that case, the assessee apart from letting out the property to various tenants, also provided certain facilities and declared the entire receipts under the head "profits and gains from business or profession" . The Assessing Officer split the receipts in two parts - one part was attributed to rental income while the other part was attributed to services. The later part was assessed as 'income from other sources'. On appeal, the rental income assessed by Assessing Officer was not in dispute. The controversy was restricted to other receipts - whether to be assessed as income from other sources or as business income. The AAC held that other part was also assessable as rental income. On further appeal, the Tribunal held that later part of receipts were business receipts. Finally, the apex court held the same to be business receipts. That judgement cannot be applied to the present case as rental income from property was not in dispute. In the present case, the entire receipts were composite receipts on account of letting out of furnished accommodation and therefore, the same was rightly assessed as 'income from house property' in view of the hon'ble Supreme Court judgement in the case of Shambhu Investment.
15. The activity of letting out the immoveable property is always assessable under the head 'Income from house property' even though the object of the assessee is to carry on the business of real estate inasmuch as separate and specific head is provided for computing such income. Reliance is placed on the decision of the apex court in the case of East India Housing & Land Development Trust Ltd. 42 ITR 49 wherein it has been held that rental income must be computed under the specific head. It was held that character of income is not altered because it is received by a company formed with the object of developing and setting up markets. Therefore, even assuming for the sake of argument that object of letting out was exploitation of business asset, the income was still computable under the specific head 'Income from house property'.
16. However, we make it clear that if the intention of the assessee is really to carry on business and the property was merely used to achieve that object then it would be case where the income would be assessable as 'business income'. The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose as held by the hon'ble Supreme Court in the case of Narain Swadeshi Weaving Mills 26 ITR 765 (SC). If this test is satisfied then income earned would be computed as business income. For example, the activity of running a hotel, hospital, banquet hall, business centre, etc., where activity is carried on in a systematic or organised manner. Before applying this test, the distinction must be kept in mind as to whether property per se is let out or the property is used as a means to achieve the object of running a business. In the former case, it would be 'income from house property' while in the latter case, it would be considered as business income. So, if really a business centre is run by an assessee like the case before the hon'ble Gujarat High Court in the case of Saptarshi Services Ltd. (supra) then the income would be computed under the head "profits and gains from business or profession".
17. In the present case, the assessee has failed to prove that any-business activity was carried on by the assessee. Mere statement of the assessee that it was running a business centre is not enough. No facility or services were provided by the assessee. It is mere case of letting out of furnished accommodation on long term basis. In case of business centre, the purpose is to provide space to business people on short term basis for holding conferences, exhibitions, etc., which is missing in the present case. The case of the assessee is akin to the case before the apex court in the case of Shambhu Investment (P.) Ltd. (supra) and, therefore, income from letting out was rightly assessed as 'income from house property'. The order the CIT(A) is, therefore, upheld.
In the result, the appeal is dismissed.
Order pronounced on 24th April, 2008.