Income Tax Appellate Tribunal - Chennai
Adyar Gate Hotel Limited, Chennai vs Assessee on 20 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH, CHENNAI
BEFORE Dr. O.K. NARAYANAN, VICE-PRESIDENT AND
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
ITA No.1502/Mds/2012
(Assessment Year: 2009-10)
M/s. Adyar Gate Hotels Ltd. Vs. Deputy Commissioner of Income
132, TTK Road, Tax, Company Circle-I(1)
Chennai-600 018. Chennai-600 034.
PAN: AAACA9041L
(Appellant) (Respondent)
&
ITA No.1620/Mds/2012
(Assessment Year: 2009-10)
Deputy Commissioner of Income Vs. M/s. Adyar Gate Hotels Ltd.
Tax, Company Circle-I(1) 132, TTK Road,
121, M.G.Road, Chennai-600 018.
Chennai-600 034. PAN: AAACA9041L
(Appellant) (Respondent)
Assessee by : Mr. Suresh Virmani, CA
Revenue by : Mr. Guru Bashyam, JCIT
Date of Hearing : 20th November, 2012
Date of Pronouncement : 14th December, 2012
ORDER
Per Vikas Awasthy, JM:
The present appeals have been filed by the assessee and the Revenue impugning the order of the CIT(A)-III, Chennai dated 17.05.2012 relevant to the assessment year 2009-10.
2 ITA No.1502 & 1620/Mds/2012
2. ITA No.1502/Mds/2012 has been filed by the assessee impugning the order of the CIT(A) on the following grounds:-
a) The CIT(A) has erred in fact and law in holding interest of ` 53,05,229/- as disallowable on proportionate basis under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.
b) The CIT(A) erred in confirming the disallowance of `4,34,392/- under section 14A of the Act read with Rule 8D of the Income Tax Rules.
c) The CIT(A) has erred in holding that income from letting of building and hire charges for plant and machinery and other facilities from Information Technology Park known as "Sai Real Tech Park" under two separate agreements but inseparably let was assessable as Income from Other Sources and not Income from Business.
3. The Revenue in ITA No.1620/Mds/2012 has assailed the order of the CIT(A) primarily on the following two grounds:-
3 ITA No.1502 & 1620/Mds/2012
a) The CIT(A) has erred in directing the Assessing Officer to assess the rental income under the head "income from other sources" under section 56 and allow the permissible deduction under section 57 of the Act, whereas, the income should have been assessed under the head "income from house property".
b) The CIT(A) has erred in excluding interest on bank loan to determine the disallowance under Rule 8D.
4. The brief facts of the case are that the assessee filed its return of income for the assessment year 2009-10 on 28.9.2009 admitting total income of ` 35,85,53,283/-. The case of the assessee was selected for scrutiny and notice under section 143(2) was served to the assessee on 18.8.2010. During the course of assessment, the Assessing Officer disallowed an amount of ` 19,46,733/- under section 14A of the Act. The assessee had admitted an amount of `18,73,537/- as dividend received during the relevant period and claimed the same as exemption under section 10(34) of the Act. The assessee suo moto disallowed 10% of the said 4 ITA No.1502 & 1620/Mds/2012 amount i.e. ` 1,87,354/- under section 14A towards expenditure for earning the exempt income. The Assessing Officer held the assessee had paid interest to the tune of `3,76,42,848/- on the borrowed capital. The assessee has not been able to show that borrowed funds were not utilized for making investment. The Assessing Officer further held that the assessee must have incurred some expenditure to maintain its portfolio to earn dividend. The Assessing Officer relying on the judgement of Godrej & Boyce Vs. DCIT applied the provisions of Rule 8D read with section 14A(2) and worked out disallowance as ` 19,46,733/-.
The Assessing Officer also disallowed a sum of ` 8,34,26,214/- which the assessee had earned from letting out of building known as "Sai Real Tech Park" at Information Technology Park. The assessee had offered the said income for tax under the head "Income from Business". The Assessing Officer treated the same as "Income from House Property" and assessed the same after allowing permissible deduction under the head "Income from House Property". 5 ITA No.1502 & 1620/Mds/2012
5. Aggrieved against the assessment order, the assessee preferred an appeal before the CIT(A). The CIT(A), partly allowed the issue of disallowance under section 14A. The CIT(A) held that the interest amounting to ` 3,23,37,619/- was paid on account of loan sanctioned for specific project and has been utilized towards the same i.e. "Sai Real Tech Park". Therefore, the said interest paid to the bank cannot be taken into account for computing disallowance under Rule 8D(2)(ii). The CIT(A) directed the Assessing Officer to take into consideration the remaining interest of ` 53,05,229/- on other loans for computing the proportionate disallowance under Rule 8D (2)(ii). The CIT(A) further held that the investment involves certain administrative and establishment cost. Since the decision to make investments, track investments, sale of such investments etc. have been undertaken by the assessee, the expenditure incurred for the same amounting to `4,34,392/- was confirmed by the CIT(A).
6. As regards the treatment of income from the renting of building "Sai Real Tech Park"at Information Technology Park 6 ITA No.1502 & 1620/Mds/2012 is concerned, the CIT(A) held the same to be assessable under the head "Income from other Sources".
7. Now, both the assessee as well as Revenue has come in appeal assailing the order of the CIT(A). Shri Suresh Virmani appearing on behalf of the assessee submitted that the assessee had suo-motu estimated the disallowance to the tune of 10% of the income earned through divided and thus claimed the benefit on the remaining amount only. No amount from the borrowed funds have been diverted for making investments. The findings of the CIT(A) is against the facts of the case. The learned AR further contended that the CIT(A) has erred in confirming the addition of ` 4,34,392/- i.e. ½ % of average value of investments under Rule 8D. The A.R. submitted that the Assessing Officer did not reject the computation of the assessee while applying the provisions of Rule 8D which is a pre-condition. Since the assessee's computation was not rejected by the Assessing Officer, the provisions of Rule 8D will not apply. The A.R., has relied on the judgement of the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co.Ltd., Vs. DCIT., 328 ITR 7 ITA No.1502 & 1620/Mds/2012 81 and Maxopp Investment Ltd. vs. CIT reported as 347 ITR 272(Del) on this issue.
8. As regards the issue of treatment of income from building i.e. "Sai Real Tech Park" at Information Technology Park is concerned, the A.R. contended that the entire built up area has been given to TATA Consultancy Services for a period of four years and as per the terms and conditions of the agreement, the agreement is renewable. The assessee is responsible for the maintenance of the building and the infrastructure therein. Two separate agreements have been executed by the assessee with the lessee. One agreement pertains to letting of the building and the other agreement is for providing various facilities viz., parking area, generators, maintenance of lifts etc. Therefore, the assessee is considering the income from the letting out of the building as "Income from Business". In order to support his contentions, the A.R for the assessee relied on the order of the Bangalore Bench of the Tribunal in the case ITO Vs. Information Technology Park Ltd., reported as 70 taxmann.com 208 (Bang) and GlobalTech Park Pvt. Ltd. vs. ACIT 28 SOT 8 ITA No.1502 & 1620/Mds/2012 45(Bang) (URO). The A.R. further submitted that the assessee is taking alternative plea to assess the income from building under the head "Income from Other Sources". The learned AR contended that similar issue had come up before the Tribunal in the assessment year 2007-08 in ITA No.2618/Mds/2010. The Tribunal vide order dated 15.12.2011 held that the income from letting out of the building is assessable under the head "Income from other Sources".
9. On the other hand, Shri Guru Bashyam appearing on behalf of the Revenue submitted that the provisions of section 14A supersedes the principle of law that in the case of composite business expenditure incurred towards tax free income, the same could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income. The D.R further submitted that the CIT(A) should have appreciated the fact that Rule 8D undertakes disallowance on proportionate basis in the ratio of average value of total assets. With regard to income from letting of building is concerned, the DR strongly supported the 9 ITA No.1502 & 1620/Mds/2012 order of the Assessing Officer. The DR submitted that there are two types of agreement. The first agreement is for providing facilities including cafeteria, car parking etc. The second agreement is for letting out of property on rent. The prime object of the assessee is to let out the property on rent and give additional right of using facilities. The letting of the building and the services is inseparable , therefore, the income from the building should be assessed as "Income from House Property".
10. We have heard the submissions made by both the parties. We have also perused the judgements/orders referred to by the respective parties. The present appeals involve two issues. The first issue relates to head under which rental income from the building at Information Technology Park is taxable. The assessee has let out a building known as "Sai Real Tech Park" to M/s.Tata Consultancy Services. The assessee is claiming that the income from the said building is assessable under the head "Income from Business" whereas, the stand of the Revenue is that income from the aforesaid building is to be treated as "Income from 10 ITA No.1502 & 1620/Mds/2012 House Property". The AR has taken an alternative plea, supporting the order of the CIT(A). The CIT(A) following the earlier decision of the Tribunal in the assessee's own case relevant to the assessment year 2007-08 in ITA No.2168/Mds/2010 has held that rental income from the building is to be treated as "Income from other Sources.
The second issue relates to disallowance made by the Assessing Officer under section 14A of the Act read with Rule 8D of the Income Tax Rules. The Assessing Officer has made disallowance to the tune of `19,46,733/-. The CIT(A) has reduced the aforesaid amount by giving benefit of interest paid to HDFC bank on a term loan of ` 3,23,36,619/- for Sai Real Tech Park. The assessee is claiming that entire addition made by the Assessing Officer is liable to be deleted, whereas the Revenue is impugning reduction of the amount made by the CIT(A).
11. A perusal of the earlier orders of the Tribunal on record (page 112 to 178 of the paper book) shows that identical issue relating to taxability of the income from the building "Sai Real Tech Park" has been adjudicated by the Tribunal for the 11 ITA No.1502 & 1620/Mds/2012 assessment year 2007-08 in ITA No.2168/Mds/2010 on 15th December, 2011 and for the assessment years 2006-07 and 2008-09 in ITA No.1572 & 1573/Mds/2011 respectively decided on 31.07.2012. The Tribunal vide order dated 15th December, 2011 has held as under:-
"35. Thus, the assessee-company has given on rent (by stepping into the footing of the earlier company Real Value Promoters Pvt. Ltd) the building namely' Sai Real Tech Park' to M/s TCS, Both the agreements are with the same entity. The only inference which can be drawn from the facts of this case are that the parties' intention to execute these two agreements on the same date were that both the agreement had to be enjoyed together. Furthermore, M/s TCS is engaged in software/information technology business for which a building simplicitor without facilities in question would be useless. Moreover, both these items i.e building and the facilities cannot be separately used for any purpose and they have to be jointly used. In case the building alone is given on lease, it will become useless without the facilities in question. Moreover, if the facilities are given on rent alone these cannot be utilized without the building. The argument of the ld.DR that most of the facilities are such facilities which are usually go with a building to give the same on rent would not apply in the given case where the property itself is meant for a specified utility i.e software and information technology. So, the intention of both the parties was to use both building and facilities although separate agreements were drawn, may be for quantifying the amount of lease/hire charges. Therefore, it is a case where the building and facilities cannot be separately let out, the total built-up area is 2,50,260 sq ft consisting of four levels. The entire space has been let out to M/s TCS. When the assessee-company has incurred such huge costs it cannot afford to either keep the building or the facilities idle. M/s TCS being the largest software company of India, it cannot afford to allow any other competitor in the same building or to enjoy the facilities for that matter. Thus, for M/s TCS it would not be possible to conduct its business in the building without all the facilities required in case of a software company. Thus, 12 ITA No.1502 & 1620/Mds/2012 the fact that both the building as well as the facilities were let out together and not separately is established from the facts of the case. Therefore, we can safely hold that letting out of the building is inseparable from letting out of the facilities. The decision of Hon'ble Supreme Court rendered in the case of Sultan Brothers Pvt. Ltd (supra) applies on all fours to the facts of the given case. Therefore, the alternate plea of the assessee has to be allowed and confirmed as the ld. CIT(A) has already taken similar view. With our above observations, the grounds raised by the Revenue and the assessee in this regard in their respective appeals, stand dismissed."
12. In view of the above, we are of the considered opinion that the present controversy with regard to taxability of the income from letting out of building has already been laid to rest by the Tribunal. We respectfully follow the earlier order of the Tribunal on the issue. We, therefore, accept the alternative plea of the assessee and direct the Assessing Officer to assess the income from building under the head "Income from Other Sources". The main plea of the assessee that the income from building is to be treated as "income from business" is rejected and similarly the grounds raised by the Revenue in its appeal for treating the income from building in question as "income from house property" is also rejected.
13. The second issue relates to disallowance made by the Assessing Officer under section 14A read with Rule 8D of the 13 ITA No.1502 & 1620/Mds/2012 Income Tax Rules. The Assessing Officer has presumed that the borrowed capital has been utilized for making investments and thus disallowed the entire amount under section 14A. The Assessing Officer has made separate working and had disallowed a sum of `19,46,733/-. The A.R. for the assessee put forth an argument that the Assessing Officer has not rejected the claim of the assessee. In order to support his contentions, the A.R. has relied on the judgement of the Hon'ble Delhi High Court in the case of Maxopp Investments (supra) and the judgement of the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co.Ltd., (supra). On an appeal, the CIT(A) has come to the conclusion that out of the total amount of interest, `3,76,42,848/- the assessee has paid interest to the tune of `3,23,37,619/- to the HDFC bank for term loan taken on account of "Sai Real Tech Park". As far as the remaining amount of interest `53,05,229/-, the assessee was not able to establish direct nexus with the income which is taxable. Therefore, the CIT(A) upheld the disallowance of interest to the tune of `53,05,229/- only under Rule 8D(2)(ii) as also 14 ITA No.1502 & 1620/Mds/2012 expenditure on account of administrative cost of investment to the tune of `4,34,392/-. We have carefully gone through the judgement relied by the A.R. in the case of Maxopp Investments (supra). The ratio of the said judgement does not apply in the present facts and circumstance of the case. The Assessing Officer may not in straight words have expressed dissatisfaction over the correctness of the claim of the assessee in respect of such expenditure, however in para 2 of his order, the Assessing Officer has given reasons for not accepting the contentions of the assessee and thereafter has worked out disallowance under section 14A read with Rule 8D. From the reasons given by the Assessing Officer , it can be safely construed that the Assessing Officer has rejected the claim of the assessee giving cogent reasons. The CIT(A) has also gone into the same and has thereafter restricted the addition to ` 57,39,621 ( `53,05,229 + `4,34,392). We are in consonance with the findings of the CIT(A) on this issue and uphold the same. Therefore, the ground of appeal of the assessee as well as the Revenue with regard to 15 ITA No.1502 & 1620/Mds/2012 disallowance under Rule 8D read with Section 14A of the Act are dismissed.
15. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed. Order pronounced in the open court on Friday, the 14th day of December, 2012 at Chennai.
Sd/- Sd/-
( Dr. O.K.Narayanan ) (Vikas Awasthy)
Vice-President Judicial Member
Chennai,
Dated the 14th December, 2012.
somu
Copy to: (1) Appellant (4) CIT(A)
(2) Respondent (5) D.R.
(3) CIT (6) G.F.