Income Tax Appellate Tribunal - Bangalore
Deputy Commissioner Of Income Tax vs Manmit Arcade (P) Ltd. on 17 September, 2004
Equivalent citations: (2005)93TTJ(BANG)463
ORDER
P. Mohanarajan, J.M.
1. The appeals for the asst. yrs. 1993-94 to 1995-96 are by the Revenue directed against the orders of the learned CIT(A)-V, Bangalore, dt. 23rd Oct., 1998. The appeal for the asst. yr. 1996-97 is by the assessee directed against the order of the learned CIT(AH)-II, Bangalore, dt. 31st July, 2000.
2. We have heard both sides and perused the records. The issues raised in all the appeals are identical and, therefore, heard together and a consolidated order being passed for the sake of convenience and brevity. The assessee is a private limited company. The assessee is carrying on the business in real estate and developing property, promoting commercial complex and leasing and selling the same. For the asst. yr. 1993-94, the assessee had shown a net chargeable income of Rs. 1,67,979 from business. For the asst. yr. 1994-95, the assessee had disclosed a loss of Rs. 2,69,400. For the asst. yr. 1995-96, the assessee had disclosed a net loss of Rs. 1,48,211. In the asst. yr. 1996-97, the assessee had shown a loss of Rs. 5,05,040.
3. The assessee had taken over a vacant land on lease for a term of 30 years commencing from 1st May, 1985. According to assessee, as a business venture, the land was developed by putting up a complex from assessee's own funds. The assessee should surrender the lease with the improvements to the landlord at the end of 30 years, as per the lease deed. The assessee on completion of the building, leased out the complex to various persons and the income so received by the assessee was claimed as income from business. For all the assessment years, the assessing authority declined to accept the claim of the assessee. However, for the asst. yrs. 1993-94 to 1995-96, the learned CIT(A) accepted the claim of the assessee and hence the Revenue is in appeal. For the asst. yr. 1996-97, the learned CIT(A) confirmed the order of assessment and hence the assessee is in appeal.
4. The learned Departmental Representative appearing for the Revenue vehemently contended that the income by way of rent cannot be assessed under the head 'Business' and the expenses claimed by the assessee under various heads are not allowable, as the income will have to be computed under the head 'Income from house property. The learned Departmental Representative further submitted, to claim the income as income from business, the assessee's activities should be of such complex in nature, while providing various facilities. It is not so in the case of assessee that it does not involve or engage in providing for any extraordinary service as narrated in various decisions of the High Courts and apex Court. The assessee had simply split up the total rent agreed to between the company and the tenants in two parts, one part shows the actual amount received and another part, payments towards the amenities and facilities. Submitting as above, the learned Departmental Representative vehemently contended that the charges are not relatable to the facilities provided, because the assessee had charged for the facilities depending upon the area of occupation and not on the basis of the need of such services and facilities. Therefore, the learned Departmental Representative contended that for the asst. yrs. 1994-95 and 1995-96, the learned CIT(A)'s order should be reversed and that of the AO has to be restored and for the asst. yr. 1996-97, the orders of the authorities below have to be confirmed.
5. On the other hand, the learned counsel for the assessee contended as under :
(i) The respondent is a private limited company carrying on the business in real estate and developing property and promoting commercial complex and leasing and/or selling the same.
(ii) The assessee-company has taken over a vacant land on lease.
(iii) As a business venture, the land was developed by putting up a complex by the respondent from its own business funds.
(iv) The lease has to be surrendered with improvements to the landlord at the end of 30 years as per the lease deed.
(v) Hence, the funds invested in business had to be recovered with reasonable return on investment within 30 years of lease period.
(vi) The company had also carried on textile and readymade exhibition business earlier in the premises besides leasing.
(vii) The lease consideration receivable is on two counts, namely : (a) lease rent for the premises, and (b) towards facilities for the additional services provided.
(viii) The facilities provided by the company are providing watch and ward, maintenance of common area, corridors, toilet, staircase, maintenance of the lights in the common area, maintenance of the building, supply of water, providing lift, installing electrical transformer for providing LT power to the lessees, providing standby generator, overhead tank, pumps, maintenance of drainage, sanitary and fitting, etc. For these, an agreed amount is collected under the head 'other facilities' as commercial proposition. In all the earlier years, the lease and income from facilities were assessed as business income. The learned counsel further submitted that in the memorandum of association of the company, the main business of the assessee as per its object clause are :
1. To carry on the business of estate property.
2. To acquire, construct or lease hotel, commercial and residential complexes.
3. To acquire, construct, run or lease lodging and boarding houses, hotels, canteens and restaurants.
4. To acquire, improve, manage, develop, turn to account or deal with, any property and rights of the company.
6. The learned counsel further submitted that the objects make it very clear that the respondent is doing business in all aspects of real estate which includes acquiring property on lease, developing it as a commercial asset and leasing, etc., and providing additional services and collecting charges for the same. All these are part of business activities only and, therefore, such income received therefrom should be considered only under the head 'business income'. He also relied on the decision of the Bombay Bench of the Tribunal in the case of Vora Warehousing (P) Ltd. v. Asstt. CIT (2001) 71 TTJ (Mumbai) 361 and also a decision of CIT v. VST Motors (P) Ltd., (1997) 226 ITR 155 (Mad).
The learned counsel for the assessee relied on the following decisions :
1. Sri Balaji Enterprises v. CIT (1997) 225 ITR 471 (Kar)
2. S.G. Mercantile Corporation (P) Ltd. v. CIT (1972) 83 ITR 700 (SC)
3. CIT v. Shree Shew Shakthi Mills (P) Ltd. (1999) 239 ITR 729 (Cal)
4. CIT v. Russel Properties (P) Ltd. (1982) 137 ITR 473 (Cal)
5. CIT v. Northern India Iron Steel Co. Ltd. (1997) 226 ITR 342 (Del)
6. CIT v. M.A. Sathar (P) Ltd. (1997) 226 ITR 910 (Mad)
7. Asstt. CIT v. Saptharshi Services Ltd. (2004) 265 ITR 379 (Guj)
8. CIT v. Golden Engg. Works (2002) 256 ITR 774 (P&H)
9. Karnani Properties (P) Ltd. v. CIT (1971) 82 ITR 547 (SC).
7. The learned counsel distinguished the facts appearing in the decision of the Hon'ble Karnataka High Court in the case of CIT v. Bhoopalan Commercial Complex & Industries (P) Ltd. (2003) 262 ITR 517 (Kar). Finally, he contended that in the Revenue's appeal, the order of the learned CIT(A) has to be upheld and the assessee's appeal has to be allowed.
8. We have heard the rival submissions and perused the records. In the instant case, the assessee had constructed a commercial complex, which was taken on lease for 30 years and had exploited this commercial asset, by letting out the same to various parties. Apart from that, the assessee itself is running a textile business in the same complex. These facts are not in dispute.
9. The case law relied on by the learned Departmental Representative reported in (2003) 262 ITR 517 (Kar) (supra), is distinguishable on facts. In the aforesaid case, the land taken on lease was held as investment and on expiry of the lease period the title to the superstructure continued to vest with the assessee-company. In the case of Bhoopalan Commercial Complex & Industries (P) Ltd. (supra), there was only a lease rent collected as per the lease deed and no additional facilities and services provided nor charged. In this case, in the earlier years, the income was treated as property income. But, in the case of the present assessee, M/s Manmit Arcade (P) Ltd,, the land was taken on lease as business venture in accordance with the objects of the company. The assessee is not the owner of the land. The assessee has to necessarily surrender the lease with the improvements made over the land to the landlord at the end of 30 years as per the lease deed. When the constructed commercial building is leased out to various people the assessee collects : (a) lease rent, and (b) charges for the facilities and services. Further, in all the earlier years, this income was assessed as business income. From the aforesaid factors, it is obvious that the facts in the case law relied on by the learned Departmental Representative are distinguishable. Therefore, the decision of the jurisdictional High Court in the case of Sri Balaji Enterprises v. CIT (supra) is applicable to the case in hand. As already stated, the assessee is not the owner of the land and the land was taken on lease for the purpose of errecting a commercial complex as per the objects of the assessee-company, by investing its funds. This was subsequently leased to various tenants and rental income was earned. The Hon'ble jurisdictional High Court in Sri Balaji Enterprises' case (supra) referring the decision of the Hon'ble apex Court in (1972) 83 ITR 700 (SC) (supra) held as under:
'From the aforesaid decision of the Supreme Court it is clear that if a person receives a rental income by leasing out the property as its owner, then the income may come under Section 22 of the IT Act, 1961. But, if the leasing of the property was done as part of the business concern, the income received therefrom, cannot be said to be received as a land owner but as a trader. In other words, if the property is taken on lease, thereafter developed and leased out to various tenants as part of the business activity of the assessee and not in its activity as the owner, then the income has to be treated as business income. In other words, the dictum of the Court is clear to that effect that such an income is received as business income, and not as the owner of the property. In this case, the assessee has taken the property on lease, developed the same and has leased out the same as part of its business.' Thus, from the above, it is clear that the assessee's case falls within the ambit of the ratio of the Hon'ble jurisdictional High Court in the case of Sri Balaji Enterprises, cited supra.
10. From the objects of the company extracted elsewhere in this order, it is apparent that the land was taken on lease by the assessee as business venture and this is certainly in accordance with the objects of the company. While this being so, the assessee had to speed up the recovery of the investments and to maximise the returns. The intention of any prudent businessman is to earn profit at the maximum level on the investments made in the business. The entire cost of construction plus the returns have to be recovered within the lease period of 30 years. Otherwise, the assessee has to necessarily surrender the lease without any change to the lessor at the end of 30 years' period of lease. Therefore, there is no doubt that this is purely a commercial proposition resulting in a business venture carried on by the assessee-company.
11. Further, from the facts it is gathered that the assessee is providing watch and ward, maintenance of common area, corridors, toilets, staircase, maintenance of lights in the common area, maintenance of building, supply of water, providing lift, installing electrical transformers for providing LT power to the lessees, providing standby generator, overhead tank, pumps, maintenance of drainage, sanitary fittings, etc. Thus, from the above facts, it is clear that the entire activity of the assessee is on an organised manner to earn profit out of investments made by the assessee as a commercial venture. In the case law relied on by the learned counsel for the assessee reported in (2003) 226 ITR 517 (Kar) (supra), it has been held as under :
'Inasmuch as the building in question on Mount Road was a commercial asset, the assessee could exploit it either by itself or by letting it to others. Therefore, in a matter like this the fundamental position that had to be ascertained was whether a particular building or premises was a commercial asset or a house property. If the premises were a commercial asset, then the income derived therefrom would amount to business income, otherwise, it would be income derived from property assessable under the head 'Property income'. In the facts, the Tribunal had found in the present case that the property in question was a commercial asset, which was used by the assessee as such in the beginning and later on after shifting its branches to outside stations, the second floor had become surplus and was exploited by the assessee by letting it out to others. Therefore, the rental income derived therefrom was rightly assessable under the head 'Business income'. Thus, the proposition canvassed by the learned counsel is supported by the decisions of the Hon'ble apex Court, jurisdictional High Court and various other High Courts.'
12. The Hon'ble apex Court in the case of S.G. Mercantile Corporation (P) Ltd. v. CIT (supra), after considering the facts with the relevant provisions of law held as under:
'The assessee-company was incorporated in January, 1955. One of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation, the company took on lease a market place for an initial term of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site. It was also given the right to sublet the different portions. The assessee's activity during the period covered by the asst. yrs. 1956-57 to 1958-59 consisted of developing the property and letting out portions thereof as shops, stalls and ground spaces to shopkeepers, stallholders and daily casual market vendors. The question was whether the assessee's income from subletting the stalls was assessable as business income under Section 10 of the IT Act, 1922, or as income from other sources under Section 12;
Held : (i) that since the assessee-company was not the owner of the property or any part thereof, no question of making the assessment under Section 9 arose;
(ii) that the definition of 'business' in Section 2(4), was of wide amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market;
(iii) that, on the facts, the taking of the property on lease and subletting portions thereof was part of the business and trading activity of the assessee and the income of the assessee fell under Section 10 of the IT Act; and
(iv) that where, as in this case, the income could appropriately fall under Section 10 as being business income, no resort could be made to Section 12.'
13. The aforesaid decision was delivered by a Full Bench of the apex Court which was delivered on 4th Jan., 1972. In the Supreme Court decision, relied on by the learned Departmental Representative in the case of East India Housing & Land Development Trust Ltd. v. CIT (1961) 42 ITR 49 (SC) was by a Division Bench dt. 2nd Nov., 1960, therefore, the larger Bench of the apex Court will have a binding force. The AO also relied on another decision of the Hon'ble Karnataka High Court in the case of D.R. Puttanna & Sons (P) Ltd. v. CIT (1986) 162 ITR 468 (Kar) which was delivered on 1st July, 1986. However, the decision relied on by the counsel for the assessee in the case of Sri Balaji Enterprises (supra), the - Hon'ble Karnataka High Court delivered the decision on 14th Feb., 1997, wherein the earlier decision of the Hon'ble Karnataka High Court was considered. Under these circumstances, the latest ruling of the Hon'ble Karnataka High Court will certainly have the binding force on the Tribunal. Therefore, we do not find much force in the stand taken by the assessee (sic). The income earned by the assessee from lease rentals and maintenance charges received by the assessee are nothing but business income under the facts and circumstances of the case. Accordingly, the application of the other provisions of IT Act would follow. It is ordered accordingly.
14. In the result, the appeals filed by the Revenue are dismissed and the appeal filed by the assessee is allowed.