Income Tax Appellate Tribunal - Chennai
Adayar Gate Hotel Limited, Chennai vs Assessee on 12 October, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH, CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER]
I.T.A.No.2168/Mds/2010
Assessment year : 2007-08
The Dy. CIT vs M/s Adyar Gate Hotel Ltd
Company Circle I(1) 132, TTK Road
Chennai Chennai 600 018
[PAN - AAACA9041L ]
(Appellant) (Respondent)
I.T.A.No. 2010/Mds/2010
&
C.O.No.16/Mds/2011
[In I.T.A.No. 2168/Mds/2010]
Assessment year : 2007-08
M/s Adyar Gate Hotel Ltd vs The Dy. CIT
132, TTK Road Company Circle I(1)
Chennai 600 018 Chennai
( Appellant/Cross objector) (Respondent)
Department by : Shri K.E.B Rengarajan, Jr. Standing
Counsel
Assessee by : Shri Suresh Virmani
Date of Hearing : 12.10.2011
Date of Pronouncement : 15.12.2011
:- 2 -: ITA 2010 & 2168/10
CO 16/11
ORDER
PER HARI OM MARATHA, JUDICIAL MEMBER:
The above captioned cross appeals are directed against the order dated 24.9.2010 passed by the ld. CIT(A)-III, Chennai, pertaining to assessment year 2007-08. The assessee has, in addition, also filed cross objection against the disallowance of ` 50,000/- under section 14A of the Act.
2. Briefly stated, the facts of the case are that the assessee- company filed its return of income for assessment year 2007-08 on 26.10.2007 declaring a total income of ` 33,30,97,980/-. This return was processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act' for short). Subsequently, the case was taken up for scrutiny and regular assessment was made u/s 143(3) vide order dated 15.12.2009. The assessee-company had received an amount of ` 7,92,84,480/- as rent from the let out of its building known as 'Sai Real Tech Park' during the relevant year. This rental income has been treated and offered by the assessee-company as its 'business income'. The Assessing Officer was of the opinion that this receipt has to be assessed under the head 'income from house property'. The Assessing Officer had invited objection, if any, from the assessee- company against his proposed action to assess this receipt under the :- 3 -: ITA 2010 & 2168/10 CO 16/11 head 'income from house property'. The company had objected to the same on the basis of the following reasoning:
"(a)The building rented out is a specialized building providing infrastructure for Information Technology companies and has been built in accordance with the special guidelines notified by the Government.
(b) The income from the let out of the property includes income from specialized services such as hire charges for specialized facilities including Cafetaria, covered and open car parking, centralized airconditioning, diesel generator set with capacity of 4000 KVA, 12 lifts, fire fighting equipments, fire alarms, smoke detectors, electrical installation and equipment, mass communication system and communication dish.
(c) Hiring of the building and facilities is a complex one since the services and facilities provided are of specialized nature meant only for information technology purposes.
(d) The Memorandum of Association of the company under the main objects permits the company to carry on real estate business.
(e) Reliance was placed on the decision of Supreme Court in the case of CIT Vs. National Storage Private Limited (66 ITR 596)."
3. After considering the above submission in the light of lease agreements between the parties, the Assessing Officer found that the assessee-company had purchased the building from M/s Real Value Promoters Pvt. Ltd., which was earlier leased out to M/s Tata Consultancy Services Ltd (TCS). The seller company had entered into an agreement of lease of this property and had also executed a 'facility provider agreement', both, on 18.2.2005, with M/s TCS. The :- 4 -: ITA 2010 & 2168/10 CO 16/11 assessee-company purchased the leased premises from M/s Real Value Promoters Pvt. Ltd through a sale deed dated 1.7.2005. The assessee had admittedly conveyed the change of ownership and also made its intention known to M/s TCS, mentioning that it would continue the lease in terms of the 'lease agreement' and the 'facility provider agreement' already executed between M/s Real Value Promoters Pvt. Ltd and M/s TCS. Meaning thereby, the assessee- company substituted M/s Real Value Promoters Pvt. Ltd in both the agreements; and except for that all their terms and conditions remained the same. As per the original agreements, the assessee received ` 50,05,200/- per month and in lieu of facility provider agreement, it received ` 16,01,840/- per month, the break-up of which is as under:
Office A & Office B - Hire Charges ` 10,01,040 p.m. Cafetaria ` 4,36,800 p.m. Car Park ` 1,64,000 p.m.
4. From these facts, the Assessing Officer has come to the conclusion that the main object of the assessee-company is to let out the property in question on rent alongwith additional right to use the common facilities including the Cafeteria, which he culled out from the Agreements dated 18.2.2005. The Assessing Officer, with reference to :- 5 -: ITA 2010 & 2168/10 CO 16/11 the decision of the Hon'ble Madras High Court rendered in the case of Chennai Properties Ltd vs CIT, 266 ITR 685 and the decision of Hon'ble Apex Court rendered in the case of Shambu Investments Pvt. Ltd vs CIT, 263 ITR 143, has treated this receipt as assessable under the head 'income from house property'. It has been held in the above cases that the main/primary object of the assessee while explaining of the property has to be considered to answer the question as to whether the receipt has to be assessed as 'income from house property' or 'income from business' and if it is found that the main intention is to let out the property or any portion thereof, it has to be considered as rental income or income from property. In case it is found that the main intention is to exploit the immovable property by way of complex commercial activities, in that event, it must be held as 'business income'. The Assessing Officer has further applied the tests suggested by the Five Judges Bench in the case of Sultan Brothers Pvt. Ltd, 51 ITR 353(SC) to determine whether rental income is assessable under the head 'business' or under the head 'income from house property'. He has extracted the relevant portion of the decision which reads as under:
:- 6 -: ITA 2010 & 2168/10CO 16/11
"Let us approach the problem from another angle by applying the test suggested by the five judges' Bench in the case of Sultan Brothers Pvt. Ltd. [1964] 51 ITR 353 (SC). The three questions framed by the apex court are applied in the instant case as follows:
(A) Was it the intention in making the lease - and it matters not whether there is one lease or two, i.e., separate leases in respect of the furniture and the building-that the two should be enjoyed together?
In the instant case there is no separate agreement for furniture and fixtures or for providing security and other amenities. The only intention, in our view, was to let out the portion of the premises to the respective occupants. Hence, the intention in making such agreement is to allow the occupants to enjoy the table space together with the furniture and fixtures. Hence, this question should be answered in the affirmative. (B) Was it the intention to make the letting of the two practically one letting:
From a plain reading of the agreement it appears that the intention of the parties to the said agreement is clear and unambiguous by which the first party has allowed the second party to enjoy the said table space upon payment of the comprehensive monthly rent. Hence, this question should be answered in the affirmative.
(C) Would one have been let alone, and a lease of it accepted, without the other?
As we have discussed hereinbefore that it is composite table space let out to various occupants, the amenities granted to those occupants including the user of the furniture and fixtures are attached to such letting out and the last question, in view of the same, must be answered in the negative.
Applying the said test we hold that by the said agreement the parties have intended that such letting out would be an inseparable one.
Hence, we hold that the prime object of the assessee under the said agreement was to let out the portion of the said property to various occupants by giving them additional right of :- 7 -: ITA 2010 & 2168/10 CO 16/11 using the furniture and fixtures and other common facilities for which rent was being paid month by month in addition to the security free advance covering the entire cost of the said immovable property."
5. Accordingly, he has applied the tests laid down as above to the facts of this case and has concluded that the primary object of the assessee-company as revealed by Agreements is to let out the building and provide the lessee with certain additional common facilities, which are the subject matter of facility provider agreement, and are summarized as under:
(a) Covered car parking (205 Nos.) in the Stilt Floor
(b) Open Car park (110 Nos.)
(c) Two wheeler parking (565 Nos.)
(d) Cafetaria with permanent fixtures (31,200 sq.ft.)
(e) Lifts - 12 Nos.
(f) Transformers - 2 Nos.
(g) DG set (4000 KVA) - 1 No.
(h) Centralised Air conditioning
(i) Fire Alarms & Smoke Detectors
(j) Communication Dish on the Terrace
6. With reference to above facilities, he has observed that these are normal facilities which are usually provided in any building.
According to him, parking facility, lifts, fire alarms and smoke detectors are basic facilities which are mandatory as per the Building Construction Norms set out by the Government which only means that they cannot be categorized as specialized services/amenities. To :- 8 -: ITA 2010 & 2168/10 CO 16/11 describe Cafeteria, he has observed that this a part of permanent fixtures of the building. Although he has agreed that Centralized AC, DG Set and Communication Dish, he has mentioned that these are additional and extra facilities, yet these can be treated only incidental to the letting of building. At the end, he has concluded that the claim of the assessee, that it has provided specialized services to the lessee, is devoid of merits. Ultimately, he has applied the test laid down in the case of Sultan Brothers Pvt. Ltd (supra) in the following way:
(A) Was it the intention in making the lease - and it matters not whether there is one lease or two, i.e. separate leases in respect of the furniture and the building - that the two should be enjoyed together?
In the instant case, there are two separate agreements - one for letting out of building and the other for "other amenities". The only intention could be to let out the premises and allow the lessee to enjoy additional facilities in the form of airconditioning, cafeteria, etc. Hence, this question should be answered in the affirmative. (B) Was it the intention to make the letting of the two practically one letting :
It is definitely one letting since the services or amenities provided could be enjoyed only along with the building. Hence this question should be answered in the affirmative.
(C) Would one have been let alone, and a lease of it accepted, without the other?
As discussed above, the letting of building and the amenities is a composite one and the amenities granted are attached to such letting. Therefore, the question must be answered in the negative.
:- 9 -: ITA 2010 & 2168/10CO 16/11
7. Finally, he has summed up that the letting of the building and the services provided are inseparable and the prime object of the assessee is only to let out the property as such and to provide the lessee only an additional right to use the various amenities and common facilities provided therein. He has also rejected the contention of the assessee that the decision of the Hon'ble Jurisdictional High Court in the case of Chennai Properties (supra) supports its claim. The Assessing Officer has mentioned as under:
"The assessee's contention that its Memorandum of Association permits it to do real estate business and therefore, the rental income is business income is not legally tenable in view of the decision of the jurisdictional High Court of Madras in the case of Chennai Properties reported in (266 ITR 685) wherein it was held that even in the cases of companies engaged in the business of property development, if the income derived is that of rental income, then the same is assessable under the head "Income from House Property". In the case of Mangala Homes P Ltd. Vs. CIT (182 Taxman 55) (Bom), the assessee was engaged in the business of purchase and sale of house properties. Due to recession in the market, it had to let out its properties for rent. The Honourable Bombay High Court held that such rental income is assessable under the head "Income from House Property"
8. He has also distinguished the decision of CIT vs National Storage Pvt. Ltd, 66 ITR 596, on which reliance was placed on behalf of the assessee. By referring to the decision of Hon'ble Calcutta High Court rendered in the case of Shambu Investment Pvt. Ltd (supra), he has finally treated the impugned receipt as rental income derived from :- 10 -: ITA 2010 & 2168/10 CO 16/11 letting out of the building namely, 'Sai Real Tech Park' amounting to ` 7,92,84,480/- and he has assessed the same under the head 'income from house property'. He has, resultantly also disallowed the following expenses claimed in respect of alleged business income:
` Municipal Taxes 35,24,879 Insurance 5,81,987 Interest 4,20,62,426 Depreciation 6,01,55,137 Miscellaneous ___2,00,000 Total 10,65,24,429
9. The facts apropos other addition are that the assessee had made investments in shares of various companies including in its subsidiary companies. A sum of ` 1,45,93,889/- has been invested as capital in a partnership firm named 'Parma Lakshmi Restaurant' in which the assessee is also a partner. The investment in shares of companies and in the capital of the partnership are shown at ` 7,18,78,302/- as on 31.3.2007 and ` 7,12,59,585/- as on 31.3.2006. Since the profits on investment in shares in the form of dividend ,and profits from the partnership firm are exempt from tax u/s 10(34) and 10(2A) of the Act and the assessee having received only an amount of ` 5,630/- as dividend during the relevant period, expenditure incurred for the purpose of earning an exempt income has not been allowed in re the taxable profits in the light of the provisions of section 14A of the Act. The assessee has claimed the entire dividend income as :- 11 -: ITA 2010 & 2168/10 CO 16/11 exempt but has not attributed any portion of the expenditure by debiting it to the Profit & Loss Account. The Assessing Officer has found that the assessee has incurred only routine expenditure that too to maintain its establishment and towards administration. But with reference to Rule 8D, treating this rule as retrospective in nature, he has worked out total disallowance under this head as under:
`
(i) Direct expenditure relating to exempt Nil income
(ii) Interest relating to exempt income 25,44,414 6,36,59,109 X 7,50,68,944 187,81,62,211
(iii) 1/2% of investments yielding exempt 3,75,345 income ________ (1/2% of Rs.7,50,68,944/-) Total disallowance u/s 14A 29,19,759 ` ` Interest debited to P&L A/c not 6,36,59,109 directly related to a particular income or receipt Total Assets as per Balance Sheet As on 31.03.2007 189,42,24,995 As on 31.03.2006 189,42,24,995 Average 187,81,62,211 Investment yielding exempt income 7,88,78,302 As on 31.03.2007 7,12,59,585 As on 31.03.2006 Average 7,15,68,944 :- 12 -: ITA 2010 & 2168/10 CO 16/11
10. Accordingly, he has assessed the total income of the assessee as under:
` `
Income from Business (as 33,24,74,443
admitted)
Less: Rental Income treated as 7,92,84,480
House Property (as
discussed)
Income from Business 25,31,89,963
Add: (1) U/s 14A (as 29,19,759
discussed) 10,65,24,429
(2) Expenses claimed __________
under
rental income (as
discussed)
Business Income 36,26,34,151
Income from House Property 7,92,84,480
Less: Municipal Taxes paid __35,24,879
7,57,59,601
Less: Deduction u/s 24 @ 30% _2,27,27,880
5,30,31,721
Less: Interest paid _4,20,62,426
_1,09,69,295
37,36,03,446
11. Being aggrieved, the assessee went in first appeal before the ld. CIT(A), who has treated the impugned receipt as assessable under the head 'income from other sources' under section 56 treating it eligible for deduction u/s 57 of the Act by accepting alternate plea of the assessee. He has also given part relief out of other addition made on account of disallowance of expenses u/s 14A of the Act. Resultantly, both the parties are now aggrieved. The Revenue has raised the following grounds in its appeal:
:- 13 -: ITA 2010 & 2168/10CO 16/11
"1. The order of the learned Commissioner of Income-Tax (Appeals) is contary to the law and facts of the case.
2. The learned Commissioner of Income Tax(Appeals) has erred in directing the assessing officer to assess the rental income under the head "Income from other sources" u/s.56 and allow the permissible deduction u/s.57 of the Act.
2.1 It is submitted that the CIT(A) while considering the amount of Rs.7,92,84,480 has directed to consider it as income from other sources u/s.56 of the Act instead of House property income. He has also recommended for an allowance of all permissible deduction u/s.57. The CIT(A) has erred in relying on the decision of the Constitution bench of the Hon. Supreme Court in the case of Sultan Brothers(51 ITR 353) since very many decisions have superseded either by the Hon. Supreme Court or other High Courts.
2.2 It is further submitted that in the instant case, the agreements for the payment of rent was of two types viz., Lease Agreement and Facility Provider Agreement and the prime object of the assessee under the above said agreement is to let out the property on rent and give them additional right of using the facilities including the Cafetaria. The decision of the Hon. Madras High Court in the case of Chennai Properties Ltd.(266 ITR 685) and the decision of the Hon.Supreme Court in the case of Shambu Investments Pvt. Ltd. Vs. CIT(263 ITR
143) which affirmed the decision of the Hon. Calcutta High Court (249 ITR 47) which says that the income derived from the let out of a building is to be assessed under 'Income from House property' only and not under the head 'business'.
2.3 The learned CIT(A) ought to have appreciated that the decision of the Hon. Supreme Court in the case of M/s.Shambu Investments Pvt. Ltd., supersedes the decision of M/s. Su Itan Brothers Pvt. Ltd., and in the case of former the decisions were made only after analysing all the previous judgements of various courts including the Hon. Supreme Court. The Hon. High Court of Calcutta while discussing the case of Shambu Investment Pvt. Ltd. has made a test check that was suggested by the Five judge Bench in the case of Sultan Brothers Pvt Ltd.
:- 14 -: ITA 2010 & 2168/10CO 16/11 2.4 It is submitted that in the case of M/s.Adayar Gate Hotel Ltd,., the Ld. CIT has not considered the decision of the Hon. Supreme Courts in the case of Shambu Investments at all in which the test check which was discussed in detail by the AO himself in the assessment order. They are (a) Was it the intention in making the lease and it matters not whether there is one lease or two and if two should it be enjoyed together?
(b) Was it the intention to make the letting of the two practically one letting: (c) Would one have been let alone, and a lease of it accepted, without the other/. For the first question the intention in making such agreement is to allow the occupants to enjoy the table space together with the furniture and fixtures and for the second question the first party has allowed the second party to enjoy the table space upon payment of comprehensive monthly rent. For the third question the table space to be let out including the furniture and fixtures only. In the instant case the assessee Company has not provided any Furniture or fixtures inside the building which was let out. Therefore, the assessee's claim that it has provided some specialised services to the lessee was devoid of merits.
2.5 The reliance of the Ld. CIT(A) on the decision of the Supreme Court in the case of Sultan Brothers Pvt. Ltd. in the instant case and the decision that 'we must, therefore, hold that when a building and plant, machinery or furniture are inseparably let, the Act, contemplates the rent from the building as a residuary head of income', is not legally tenable. Rather, on the other hand, he basic facilities which are mandatory as per the Building Construction Norms set out by the Govt, which only means that they cannot be categorised as specialised services/amenities. It can be said that the letting of the building and the services are inseparable and the prime object of the assessee was only an additional right to use the various amenities and common facilities provided therein. On the above basis, it is unacceptable to deviate from the stand taken in the assessment order made by the AO, that the income should be taken as 'Income from House property".
3.The learned CIT(A) has erred in restricting the disallowance u/s.14A r.w.Rule 8D to Rs.50,000/- as against Rs.29,19,759/- 3.1 The Ld.CIT(A) has erred in disallowing of addition made by the AO to the extent of Rs.29,19,759/- u/s.14A relied on the decision of the judgement of Special Bench in the case of Daga :- 15 -: ITA 2010 & 2168/10 CO 16/11 Capital from where the lead matter was taken by the Hon. Bombay High Court in the case of M/s.Godrej & Boyce Mfg. Co. Ltd was decided, in which, it is said that the provision of Rule 8D of the IT Rules which have been notified with effect from 24 March 2008 shall apply with effect from A.Y.2008-09. But in the same case of Daga CapitaI (117 ITD 169( Mum) } the Special Bench stated that where it has been held that Section 14A(2) & (3) and Rule 8D are procedural in nature and have retrospective effect and the matter was remanded back to the AO for re- computing the disallowance.
3.2 It is submitted that Section 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards tax free income could not be disallowed and in corporate an implicit theory of apportionment of expenditure between taxable and non-taxable income. Once a proximate cause for disallowance was established - which is the relationship of the expenditure with income which does not form part of the total income- a disallowance u/s.14A of the Act has to be affected. Moreover, where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all facts and circumstances.
4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (appeals) be set aside and that of the Assessing Officer be restored."
12. The assessee has raised the following ground in its appeal:
"1. That on the facts and circumstances of the case the Learned Commissioner of Income-tax(Appeals) erred in fact and in law in holding that the 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, is assessable as income from other sources and not as income from business as claimed by the assessee-company.":- 16 -: ITA 2010 & 2168/10 CO 16/11
13. In its cross objection, the assessee has raised the following ground:
"That on the facts and in the circumstances of the case, the ld. CIT(A) Chennai erred in fact and in law in upholding disallowance of ` 50,000 under section 14A of the Income- tax Act, 1961. In any case the disallowance is uncalled for and is excessive and needs to be deleted."
14. We have considered the rival submissions and have carefully perused the entire record. After cogitating the rival stands in the light of the available evidence on record, we have to adjudicate the common issue involved in Revenue's appeal as well as in assessee's appeal which pertains to the nature of receipt arising from giving the so called 'Sai Real Tech Park - Building + Plant and Machinery and Extra Facilities'. As per the assessee, this is a business receipt and has to be assessed under the head 'income from business or profession'; according to the Assessing Officer, this receipt has to be assessed under the head 'income from house property'; according to the ld. CIT(A), this receipt has to be assessed under the head 'income from other sources'. Section 22 of the Act deals with income from house property which reads as under:
"Income from house property.
1 6 17
22. The annual value of property consisting of any buildings18 or lands appurtenant18 thereto of which the assessee is the owner18, other than such portions of such :- 17 -: ITA 2010 & 2168/10 CO 16/11 property as he may occupy18 for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property"."
15. Section 28 deals with profits and gains of business or profession. This section reads as under:
Profits and gains of business or profession.39 40
28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",--
(i) the profits and gains41 of any business or profession41 which was carried on by the assessee at any time during the previous year ;
(ii) any compensation41 or other payment due to41 or received by41,--
(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto ;
(c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto ;42
[(d) any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business ;]
(iii) income derived by a trade, professional or similar43 association from specific services43 performed for its members ; 44 [(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) ;] 45 [(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India ;] 46 [(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;] :- 18 -: ITA 2010 & 2168/10 CO 16/11 47 [(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);] 48 [(iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) ;] 49 [(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;] 50 [(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm :
Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ;] 51 [(va) any sum, whether received or receivable, in cash or kind, under an agreement for--
(a) not carrying out any activity in relation to any business; or
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:"
16. Section 56 deals with income from other sources, which reads as under:
"Income from other sources.91
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be :- 19 -: ITA 2010 & 2168/10 CO 16/11 chargeable to income-tax under the head "Income from other sources", namely :--
(i) dividends ;92
[(ia) income referred to in sub-clause (viii) of clause (24) of section 2 ;] 93 [(ib) income referred to in sub-clause (ix) of clause (24) of section 2 ;] 94 [(ic) income referred to in sub-clause (x) of clause (24) of section 2, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession" ;] 95 [(id) income by way of interest on securities, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession" ;]
(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession";
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or profession";
96[(iv) income referred to in sub-clause (xi) of clause (24) of section 2, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession" or under the head "Salaries";] 97 [(v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004 98[but before the 1st day of April, 2006], the whole of such sum :"
17. Before dealing with the prescription of these sections and applying them to the facts of the case in hand, with reference to the relevant precedents thereto, we would like to cull out the correct and full facts which led to the impugned receipt. The assessee-company is :- 20 -: ITA 2010 & 2168/10 CO 16/11 operating hotels at various places. The assessee has received an amount of ` 7,92,84,480/- as rent from the let out of its building known as 'Sai Real Tech Park' during the relevant year. This rental income has been offered by the assessee-company under the head 'income from business'. To support its stand, the contention of the assessee is that the building rented out is a specialized building providing infrastructure for Information Technology Companies and has been built in accordance with the special guidelines notified by the Government. The receipt from this let out of the property includes income from specialized services such as hire charges for speciliased facilities including cafeteria, covered and open car parking, centralized air conditioning, diesel generator set with capacity of 4000 KVA, 12 number of lifts, fire fighting equipments, fire alarms, smoke detectors, electrical installation and equipment, mass communication system and communication dish. Further contention of the assessee to substantiate its claim is that the building in question being a complex one, in which specialized services and facilities are provided and which is only for Information Technology purposes, it can be hired by specified person/entities only. As per the assessee, the Memorandum of Association permits the company to carry on real estate business and therefore, in the light of the ratio of the decision of the Hon'ble :- 21 -: ITA 2010 & 2168/10 CO 16/11 Supreme Court rendered in the case of CIT vs National Storage Pvt.
Ltd, 66 ITR 596, this receipt has to be treated as 'income from business' only. In fact, the assessee-company had purchased this building as is where is basis, from M/s Real Value Promoters Pvt. Ltd.
Prior to its purchase by the assessee-company, M/s Real Value Promoters Pvt. Ltd had already leased out this property to M/s TCS.
M/s Real Value Promoters Pvt. Ltd. had already leased out this property under lease agreement and a connecting facility provider agreement which were executed on 18.2.2005 in favour of M/s TCS, the lessee. Meaning thereby, the assessee had purchased the leased premises through a sale deed dated 1.7.2005. As a sequel to this change of ownership, the lessee company was informed about this change and also expressed its intention to continue the lease with them with same terms and conditions and thereby entering into the shoes of M/s Real Value Promoters Pvt. Ltd in so far as both these agreements are concerned. The lessee had no objection regarding this and rather accepted this position. We have gone through the lease agreement and facility provider agreement which were executed by M/s Real Value Promoters Pvt. Ltd and now they relate to the assessee-company in their letters and spirit. As per the lease agreement, the assessee has to receive ` 50,05,200 per mansion as :- 22 -: ITA 2010 & 2168/10 CO 16/11 base rent. As per the facility provider agreement, the assessee has to receive ` 16,01,840/- per mansion towards hire charges of office A&B, cafeteria and car parking, the break-up of which we have already provided while narrating the facts of the case. The facilities which are provided in the 'Sai Real Tech Park' can be explained by the following chart which is enclosed at page 4 of the paper book:
SAI REAL TECH PARK FACILITIES A.Y. 2007-08 (F.Y. 2006-07) CALCULATION OF DEPRECIATION AS PER INCOME TAX ACT, 1961 NAME OF ASSETS RATE ADDITION DEPRE- WDV as on DEPRE- WDV as on OF 2005-06 CIATION 31.03.06 CIATION 31.03.07 DEP. 2005-06 2006-07 CENTRAL AC 15% 48,380,328 7,257,049 41,123,279 6,168,492 34,954,787 REFRIGERATION DIESEL GENERATOR 15% 30,117,290 4,517,594 25,599,696 3,839,954 21,759,742 ELECTRICAL INSTALLATION 15% 37,804,964 5,670,745 32,134,219 4,820,133 27,314,086 & FIRE FIGHTING EQUIPMENT 15% 2,974,398 446,160 2,528,238 379,236 2,149,002 LIFT 15% 11,576,000 1,736,400 9,839,600 1,475,940 8,363,660 TOTAL (A) 130,853,980 19,627,948 111,225,032 16,683,755 94,541,277 NAME OF ASSETS RATE ADDITION DEPRE- WDV as on DEPRE- WDV as on OF 2005-06 CIATION 31.03.06 CIATION 31.03.07 DEP. 2005-06 2006-07 BUILDING 10% 483,015,353 48,301,535 434,713,818 43,471,382 391,242,436 LAND 128,055,470 - 128,055,470 - 128,055,470 TOTAL (B) 611,070,823 48,301,535 562,769,288 43,471,382 529,297,906 GRAND TOTAL (A+B) 741,9233,803 67,929,483 673,994,320 60,155,137 613,839,183 :- 23 -: ITA 2010 & 2168/10 CO 16/11
18. Schedule I appended to the facility provider agreement is being extracted herein below so that one can easily understand the exact nature of building and facilities provided therein:
"SCHEDULE - I The Land and building known as "SAI REAL TECH PARK", with a total super built up area of 2,50,260 Sq. Ft. (Stilt + Four Floors) bearing S.No. 165/1A, 2&4, with an extent of 1,01,196.5 Sq.Ft or thereabouts of Velachery Village, situate in Velachery - Taramani 100 Ft. Road, Velachery, Chennai - 42, in the Registration Sub-District of Velachery and Registration District of South Chennai bounded on the:-
North by : Land gifted to CMDA for O.S.R. S.No.147, & Private Lands.
South by : Velachery-Taramani (100') Road and Private lands
East by : 24' Feet Wide Road and S.No.149.
West by : S.No.147, 24' wide Roads & Private lands
ANNEXURE I
Building Name : SAI REAL TECH PARK
Property Address : S.No.165/1A, 2&4, Velachery-Taramani
100 Ft. Road, Velachery,
Chennai - 600 042.
Plot Area : 1,01,196.5 Sq. Ft.
Frontage of the Plot : 21,164.32 M
Plot Coverage : 54.68%
Proposed time of completion
for fit out : Office "A" - 1st April 2005
Office "B" - 1st July 2005
Building Type : Information Technology Park
Height of Building : 49.25 Feet / 15 Metres
No. of Access to the Building : Five
No. of Floors : Stilt + four floors
Total Super Built up Area : 2,50,260 Sq. Ft.
Floor plate Size - Office "A" Office "B" Combined Single
Floor
Level 1 28,685 Sq. Ft. 33,000 Sq. Ft. 61,685 Sq. Ft.
Level 2 28,685 Sq. Ft. 33,000 Sq. Ft. 61,685 Sq. Ft.
Level 3 29,340 Sq. Ft. 33,725 Sq. Ft. 63,075 Sq. Ft.
Level 4 29,785 Sq. Ft. 34,030 Sq. Ft. 63,815 Sq. Ft.
1,16,495 Sq. Ft. 1,33,765 Sq. Ft. 2,50,260 Sq. Ft.
:- 24 -: ITA 2010 & 2168/10
CO 16/11
Car Parking (covered) : 205 Nos. (in the Stilt Floor)
Open Car Park : 110 Nos.
Two Wheeler parking : 565 Nos.
Cafeteria (with permanent Fixtures) : 31,200 Sq. Ft. or as applicable.
External : Glazing & Natural brick tiled walls
External Finish Office "A" Double Glazing
Glazing Office "B" Single Glazing
Load Bearing Capacity : 400 Kg / Sq. M.
Live Load : Self Weight + 200 for Floor finish
Type of construction : Flat Slab
Lifts
No. & Capacity of the Lifts : 20 passengers - 8 Nos.
Passenger : 8 Passengers - 4 Nos.
Freight : One Tonne Capacity - 2 Nos.
Make of the Lift : Otis
Technical
Power : 3200 KVA (Deposits by TCSL)
HT : Bus Bar till each Floor
LT
Total capacity installed : 3000 KVA
No. of Transformers installed for
the building : 2 Nos.
Power allotted per floor
(including common) : 600 watts per 100 Sq. Ft.
Total Power available : 4000 KVA (1000 KVA x 4)
Back Power for each floor
(including common) : 600 watts per 100 Sq. Ft.
DG set capacity : 4000 KVA
Make of the DG set : Caterpillar / Cummins
Place where the DG set is kept : Adjacent to the road
Fuel tank capacity : 4 x 990 Litres.
Fuel tank : 10 K. Litres in 1 or 2 tanks in addition
DG set Sound proof : Yes, as per guidelines of TCSL
AC availability
Type of AC : Centralised, Chillers & AHU's
AC capacity : 1000 Tones
Make of the AC Plant : Blue Star
Upgrading Potential : Yes
Place where AC units are installed : Terrace
Fire Standards & Wet Riser (as per
the TCSL fire advisors instructions)
No. of Fire Exits : 3+2 main exits
Rood Height : Doglegged, 11 feet
Fire Staircase landing : Outside the building
Fire Hydrants : Yes to be modified as per the advice
:- 25 -: ITA 2010 & 2168/10
CO 16/11
of TCSL
Place where Fire pump &
Emergency diesel pump installed : Ground floor
Fire Alarms : Yes
Smoke Detectors : Yes
Sprinklers : No.
Mass Communication Systems : Yes
Building Management Systems : No
Ceiling Height
Slab to Slab : 11 Feet - floor to Slab bottom
Clear : 11 Feet
Toilets (per Floor) as per standards
prescribed by the TCSL's architect
Male : as required by TCSL
Female : as required by TCSL
Toilet floor finish : Vitrified tiles / ceramic tiles
Flooring
In the Lobby : Granite / marble / vitrified tiles
Stair case : Tiles / Granite / marble
Inside the Shell (common areas) : Vitrified tiles
Communication
Location of the communication : Stilt Floor
rooms
Communication Dish : On the terrace
Note: Common areas, exterior of the building, landscaping, AC upto AHU, TNEB Power Co-ordination, Power Back up and the Signage & naming rights
- by the Facility Provider."
19. In so far as the lease agreement and facility provider agreements are concerned, there is no dispute between the facts contained therein. The case of the assessee is that out of its main objects, object No.7 is stated to be relevant for the adjudication of impugned issue. Object No.7 reads as under:
:- 26 -: ITA 2010 & 2168/10CO 16/11
"7. To subsidise, assist and guarantee the payment of money by or by the performance of, any contract, engagement or obligation by any persons or companies, and in particular, customers, of the company or any persons or companies with whom the company may have or intend to have, business relations."
20. With reference to the above, it was argued that to take any property on lease, the company has purchased this property and given the same on lease in furtherance of its objects. The ld.AR also invited our attention towards Object Nos.13,14 & 15 to support his above contention. Object Nos.13,14 & 15 read as under:
"13., To manage lands, buildings, and other property situate as aforesaid, whether belonging to the company or not and to collect rents and income and to supply to tenants and occupiers and others, refreshments, attendance, messengers, light, waiting rooms, reading rooms, meeting rooms, lavatories, laundry conveniences, electric conveniences, stables and other advantages.
14. To acquire and take over any business or undertaking carried on, upon, or in connection with any land or building which the company may desire to acquire as aforesaid or become interested in, and the whole or any of the assets and liabilities of such business or undertaking, and to carry on the same, or to dispose of remove or put an end thereto, or otherwise deal with the same as may seem expedient.
15. To establish and carry on, and to promote the establishment and carrying on, upon any property in which the company is interested, of any business· which may be conveniently carried on, upon or in connection with such property and the establishment of which may seem calculated to enhance the value of the Company's interest in such property, or to facilities the disposal thereof. ":- 27 -: ITA 2010 & 2168/10 CO 16/11
21. With the help of these documents, the ld.AR convassed that this receipt is only assessee's business receipt and has to be taxed under the head 'income from business'.
22. On the other hand, the case of the Revenue is that the assessee-company has given the property in question on rent as the prime object under the agreements in question is to let out the property on rent and given them additional right of using the facilities including the cafeteria etc. The ld.DR heavily relied on the decision of Hon'ble Hon'ble Supreme Court as well as High Courts which are mentioned in the grounds of appeal which we have extracted herein above. In the light of this submission, it was insisted that this impugned receipt has to be assessed under the head 'income from house property' only. The ld.DR has also disputed the finding of the ld. CIT(A) when he has given a direction to the Assessing Officer to assess the impugned receipt under the head 'income from other sources' u/s 56 and also holding it eligible for deduction u/s 57 of the Act.
23. So, primarily, the prayer of the ld.AR is that the impugned receipt should be treated as business receipt and in the alternative, he has vehemently submitted that in any worst case, this receipt has to :- 28 -: ITA 2010 & 2168/10 CO 16/11 be assessed under the head 'income from other sources' to which sections 56 & 57 of the Act are applied. For ready reference, we can extract para 4.2 of the order appealed against which contains the detailed written submission filed before the ld. CIT(A), herein below:
"4.2 The appellant has subsequently given further details regarding the impugned property and the facilities and the reasons as to why the income derived therefrom should be considered as business income. The submission of the appellant is as under:
"2. The memorandum of association of the company allows the company to acquire and carry out real estate business. The Company acquired an information technology park from Real Value Promoters (Private) Lid during the previous year relating to assessment year 2006-07 at a total cost of Rs 74.19 crores comprising of land at Rs. 12.8 crores, Building at Rs 48.30 crores and Plant and Machinery at Rs 13.09 crores ...... .
The income from the Information Technology Park is not assessable as income from house property. Information Technology Parks are infrastructure undertakings which are not covered under section 22 of the Income tax Act. These Information Technology Parks are in the nature of development infrastructure facilities encouraged by the Central Government and include development of infrastructure to promote exports of software. The statute provides tax incentives as detailed in section 80 IA of the Income tax Act 1961 where the development is in accordance with the industrial Park scheme 2002 notified under notification number SO 354 (E) dated 1-4-2002. The objectives of the Industrial Park scheme includes an industrial park for the development of infrastructural facilities or built up space with common facilities in an area allotted or earmarked for the purpose of industrial use specified in Explanation to paragraph 6 sub clause (c) of the scheme. Infrastructure development means air conditioning, roads (including approach roads) water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power and such other facilities for the common use for industrial activity that are provided on commercial terms.:- 29 -: ITA 2010 & 2168/10 CO 16/11
4. The Information Technology Park owned and operated by the assessee, is occupied by TCSL 100% export oriented unit under the Software Technology Park of India scheme and the premises is recognized by the Custom~ as a bonded manufacturing unit carrying out 100% export unit. The necessary approvals under the Software Technology Park scheme and the Customs obtained by TCSL are enclosed herewith for your ready reference.
5. The assessee acquired the Information Technology Park during construction period between August 5, 2004 to July 1, 2005 and during construction period, two agreements both dated Feb 18, 2005 were entered into with Tata Consultancy Services Limited (TCSL), the country's largest software company. These agreements are (i) Lease agreement and
(ii) facility provider agreement. The rent under these agreements commenced from July 1, 2005 for building known as "Office A " and from September 5, 2005 for building known as "Office B ". This is the first letting. The above two agreements are inseparable. Please see page 5 of the Facility Provider Agreement paragraph 3 which reads as "3. The parties hereto agree that the period of this agreement shall be concurrent to and coterminous with the Lease Agreement dated 18th day of February, 2005 in respect of the "Demised Premises" executed by the Facility Provider in favor of TCSL. This Facility Provider Agreement cannot be terminated when the said Lease Agreement is in effect. The terms and conditions of this Agreement are in addition to the terms contained in the said Lease Agreement.
In the event of termination of this Agreement, TCSL may, at its discretion, adjust! appropriate the security deposit against the hire payable for such balance period of notice of termination to the Facility Provider, as set out in the Lease Agreement."
Lease Agreement -Under the lease agreement the monthly rent payable by TCS is Rs. 20/- per sq. ft. for 250,260 sq. ft. aggregating to Rs. 50,05,200 (Rupees Fifty lakhs five thousand and two hundred only) per month and Rs.
6,00,62,400 (Rupees Six crores sixty two thousand four hundred only) per annum. The interest free refundable security deposit is at Rs. 4,00,41,600 (Rupees Four crores forty one thousand and six hundred only).
:- 30 -: ITA 2010 & 2168/10CO 16/11 Facility Provider Agreement -Under this agreement hire charges payable by TCSL is at Rs. 16,01,840/- (Rupees Sixteen lakhs one thousand eight hundred and forty) per month or Rs. 1,92,22,080 (Rupees One crore ninety two lakhs twenty two thousand and eighty only) per annum. The interest free security deposit is at Rs. 1,28,14,720/· ( Rupees One crore twenty eight lakhs fourteen thousand seven hundred and twenty only). Annexure I of the agreement provides the details of the facilities provided. As stated above the company has let out the entire Industrial Park to TCSL and that company is engaged in the business of manufacturing software (an industrial activity) as a hundred percent export unit recognized by the Government of India. The fact that an industrial Park has been defined to mean a project in which plots of developed space or built up space or combinations with common facilities and quality infrastructure facilities are developed and made available to units for industrial or commercial activities which include development of software would show that no ordinary services or facilities or activities are being rendered by the company and the inference drawn by the Assessing Officer that the services provided are ordinary services, is wrong and misplaced and deserves only to be rejected. The company provides quality infrastructure services to TCSL and would have also qualified for recognition under the Industrial Park Scheme and would have been eligible for deduction under 80lA but for the criteria that there must be minimum number of 30 units and that no industrial unit should occupy more than 25% of the allocable area which the appellant company is unable to meet as the. entire premises are occupied by TCSL. This failure to meet the regulations would only mean that the company is not eligible for deduction under section 80 IA and cannot be interpreted to mean that the company does not carryon business or that the income is assessable under the head House Property.
6. The Assessing Officer wrongly applied the decisions of CIT versus Shambu Investments Private Ltd 249 ITR 47 ( Affirmed by the Supreme Court in 263 ITR 143), Chennai Properties and Investments Ltd 266 ITR 685 (Mad) and decision of the Supreme Court in the case of Sultan Brothers 51 ITR 353. These cases are distinguishable on facts and do not apply to Information Technology Parks and are not applicable for reasons stated hereunder.
:- 31 -: ITA 2010 & 2168/10CO 16/11
a) In the case of CIT vs. Shambu Investments P. Ltd. supra the assessee had let out a portion of the premises to occupants and there was no separate agreement for use of furniture and fixtures or other amenities. The intention was to allow occupants table space together with furnitures and fixtures and other faculties and amenities. The assessee had taken as security the entire cost of property. On these facts, the High Court held that the income was assessable as Income from House Property. The Honorable High Court said (see page 52) "Taking a sum total of the aforesaid decisions it clearly appears that merely because income is attached to any immovable property that cannot be the sole factor for assessment of such income as income from property. What has to be seen is what was the primary object of the assessee while exploiting the property. If it is found applying such test that the main intention is for letting out the property or any portion thereof the same must be considered as rental income or income from property. In case it is found that the main intention is to exploit the immovable property by way of complex commercial activities in that event it must be held as business income.(emphasis supplied)...
To decide this issue we cannot overlook the fact that the cost of the property was Rs.5,42,443. A portion of the said property is used by the assessee himself for his own business purpose. The rest of the said property has been let out to the various occupiers as stated hereinbefore. It further appears that the assessee had already recovered a sum of Rs.4,25,000 as and by way of security free advance from three occupants. Hence, the entire cost of the property let out to those occupiers has already been recovered as and by way of interest-free advance by the assessee. Hence, it cannot be said that the assessee is exploiting the property for its commercial business activities and such business activIties are prime motive and letting out the property is a secondary one"(emphasis supplied)
(b) In the case of Chennai Properties and Investments Ltd (Mad) 266 ITR 685 the facts were that the assessee company owned two buildings in the city of Chennai, "Chennai House" and Firhavan Estates". For the assessment here 1979·80, 1983 ·84 and 1984-85, the Assessing Officer declined to assess the rental income :- 32 -: ITA 2010 & 2168/10 CO 16/11 under the head business and assessed the income under the head House property. The income was assessed both by the Commissioner and the ITA T as income from business. The Honorable High Court reversed the decision of the ITAT and held the income was assessable as income from house property. The court found on facts that the assessee was exploiting the property as owner by leasing out the - same and a realizing income by way of rent. The Honorable Hjgh Court held " Although it was held by the Constitution Bench in the case of Sultan Brothers [1964] 51 ITR 353 CSC) that whether a particular letting is business has to be decided in the circumstances of each case and that each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner, in all the cases which have come before the courts involving commercial or residential buildings owned by assessees it has been held that the income realized by such owners by way of rental income from a building, whether a commercial building or residential house, is assessable under the head "Income from house property".
The only exceptions are cases where the letting of the building is inseparable from the letting of the machinery, plant and furniture. In such cases, it has been held that the rental would not have been realized but for the letting out of the machinery, plant or furniture along with such building and therefore the rental received for the building is to be assessed under the head "Income from other sources':(emphasis supplied) Again the above case is not the case of an Information Technology Park and is a case of bare letting and therefore distinguishable on facts. It will be pertinent to note that in subsequent years for AY 2000-01 and 2001-02 the Honorable High Court of Madras has assessed the amenity charges as Income for Other Sources and not as House Property. Please see 303 ITR 33
(c) In the case of Sultan Brothers Pvt. Ltd., a private company constructed and let out on lease a fully equipped hotel with furniture, fixtures and fittings. The lease provided for a monthly rent of Rs. 5,950/- and hire of Rs. 5,000/- for furniture and fixtures. Up to the period commencing from Dec 1,1946 to assessment year 195253 the income derived from letting of the building and the furniture and fixtures was being computed under section 12 (corresponding to section 56 of the present Act) of the Income tax Act 1922. The :- 33 -: ITA 2010 & 2168/10 CO 16/11 income tax officer for assessment year 1953 -- 54 computed the income from property leased under section 9 (corresponding to section 22 of the present Act) and the income derived from hiring of furniture and fixtures under section 12 (corresponding to section 56 of the present Act) Income tax Act 1922. At no time the assessee had to contended before the Income Tax Officer that the assessee company was carrying on business. (Please see the Statement of the Case 38 ITR 85 at page 87 and only an alternate plea was taken that if the income cannot be computed wholly under section 12 then it should be wholly computed under section 10 as much as "letting out totality of the assets" is the assessee's business and the building that is leased is used for the purpose of that business. The Honorable Supreme Court on facts found that the two leases were inseparable and that the assessee never carried out hotel business and had no intention to carry on such business. On such facts, the Supreme Court held that the Income from hire of Furniture & Fixtures and Building was assessable as Income from Other Sources and not income from House property or income from business. This case does not advance the case of the Assessing Officer that income from letting of an Information Technology Park is assessable as income from House property. "
24. Before moving further, let us further discuss the decision of Hon'ble Jurisdictional High Court rendered in the case of Chennai Properties and Investments Ltd, 266 ITR 685. In that case, the assessee-company owned two buildings in the city of Chennai, 'Chennai House' and 'Firhavan Estates'. For assessment years 1979- 80, 1983-84 and 1984-85, the Assessing Officer declined to assess the rental income under the head 'business' and assessed the income under the head 'income from house property'. As against which the ld.
CIT(A) as well as the Tribunal held that receipt as 'income from :- 34 -: ITA 2010 & 2168/10 CO 16/11 business'. This finding of the Tribunal was reversed by the High Court when it found that the assessee was exploiting the property as owner by leasing out the same and realizing income by way of rent. In doing so, the Hon'ble High Court has observed the decision of Constitution Bench of Hon'ble Supreme Court rendered in the case of Sultan Brothers, 51 ITR 353 that whether a particular letting is business has to be decided in the circumstances of each case and that each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner, in all the cases which have come before the courts involving commercial or residential buildings owned by assessees it has been held that the income realized by such owners by way of rental income from a building, whether a commercial building or residential house, is assessable under the head 'income from house property'. The Hon'ble Supreme Court as well as the Hon'ble Madras High Court have certified that the only exception are cases where the letting of the building is inseparable from the letting of the machinery, plant and furniture. In such cases, it has been held that the rental would not have been realized but for the letting out of the machinery, plant or furniture along with such building and therefore, the rental received for the building is to be assessed under the head 'income :- 35 -: ITA 2010 & 2168/10 CO 16/11 from other sources'. As is clear, in the case of Chennai Properties and Investments Ltd (supra), the asset given on lease was not an Information Technology Park and was a simple case of letting. So, in our considered opinion, the facts are distinguishable. The Hon'ble Madras High Court, while dealing with such rental cases, has ordered to assess the amenity charges as income from other sources and not as 'income from house property' while deciding the case of CIT vs Chennai Properties & Investments Ltd, 303 ITR 33, pertaining to assessment year 2001-02.
25. In the case of Sultan Brothers Pvt. Ltd (supra), a private company constructed and let out on lease a fully equipped hotel with furniture fixtures and fittings. The lease deed provided for a monthly rent of ` 5950/-and hire of ` 5000/- for furniture and fixtures. Upto the period commencing from 1.12.1946 to assessment year 1952-53, the income derived from letting of the building and the furniture and fixtures was being computed u/s 12 (corresponding to section 56 of the present Act). The Assessing Officer, in that case, assessed the income from property leased under section 9 (corresponding to section 22 of the present Act). In that case at no point of time, the assessee-
company had contended before the ITO that the assessee-company was carrying on business. On the obtaining facts of that case, the :- 36 -: ITA 2010 & 2168/10 CO 16/11 Hon'ble Supreme Court found that the two leases were inseparable and the assessee never carried out hotel business and had no intention to carry on such business. On such facts, the Hon'ble Supreme Court held that the income from hire of furniture and fixtures and building was assessable as 'income from other sources' and not 'income from house property' or 'income from business'.
26. In short, the case of the ld.AR is that the income from building and plant and machinery which is inseparable let out is assessable as income from business. In support of his contention he has relied on the decision of Hon'ble Supreme Courts rendered in the case of SG Mercantile Comp. P. Ltd vs CIT, 83 ITR 700, and that of Karnani Properties Ltd vs CIT, 82 ITR 547. Further reliance was placed on the following cases:
CIT vs National Storage Pvt. Ltd 66 ITR 596(S.C) CIT vs Associated Building Co. Ltd 137 ITR 339 (Bom.) CIT vs K.L.Puri (HUF) 233 ITR 43 (Delhi) CIT vs Halai Nemon Association 243 ITR 439 (Mad) CIT vs Admiralty Flats Motel 133 ITR 895(Mad) Sultan Brothers Pvt. Ltd vs CIT 51 ITR 353(S.C)
27. Further reliance was placed on the decision of Hon'ble Supreme Court rendered in the case of Universal Plast Ltd vs CIT, 237 ITR 454 and that of Hon'ble Allahabad High Court rendered in the case of CIT vs Goel Brothers, 331 ITR 344. These decisions clearly say that :- 37 -: ITA 2010 & 2168/10 CO 16/11 section 22 does not apply to commercial assets. Further reliance was placed on the decision of Hon'ble Orissa High Court rendered in the case of CIT vs M.P.Bazaz & Others, 200 ITR 131. The ratio of the above decision is that intention of the parties is to be seen. To support the ld. CIT(A)'s finding, the ld.AR has relied on the decision of Hon'ble Madras High Court rendered in the case of Orient Hospital Ltd vs Dy. CIT, 315 ITR 422 in which it has been held as under:
"Held, dismissing the appeal, that income derived out of the lease of property and furniture as in this case could not be treated as income from profits and gains of business or profession. The finding given by the Tribunal that the income was income from other sources was correct."
28. Further reliance has been made on the decision of Chennai Properties & Investments Ltd, which has followed another decision in the case of Tarapore and Co. vs CIT, 259 ITR 389, the ratio of these decisions is that when the letting of building is inseparable from the letting of plant and machinery and furniture, the receipt of such leasing has to be assessed under the head 'income from other sources'.
29. Section 22 which we have extracted in the former part of this order simply talks about annual value of letting of the property :- 38 -: ITA 2010 & 2168/10 CO 16/11 consisting of any building or land appurtenant thereto of which the assessee is the owner which excludes portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which shall be chargeable to income tax under the head 'income from house property'. In our considered opinion, this section does not directly apply to the facts of the given case.
30. Again section 28 prescribes about the profits and gains from business or profession. So, if it is found that the receipt in question is in furtherance of the objects of the assessee which form part of its business then only the income can be assessed under this section. In our opinion, the findings of the ld. CIT(A) and the reasoning given by him that receipt cannot be treated as assessee's business income are correct and we uphold the same. In this regard, we would like to incorporate para 4.4 of the ld. CIT(A)'s order herein below:
"4.4 I have carefully considered the facts of the case and the submissions of the Id. AR. I have also gone through the decisions relied on by the AO and AR. I have also perused the lease agreements and other documents submitted by the appellant. The AO has treated the rental income as income from house property by mainly relying on the decision of the Madras High Court in the case of Chennai Properties (supra) and the decision of the Supreme Court in the case of Shambu Investments (supra). The appellant, on the other hand, has relied on the specific nature of the building (ITP)and the decision of the Supreme Court in the case of SG Mercantile Company Pvt. Ltd, Karnani Properties, National Storage Pvt. Ltd, Associated Building Company Ltd, K.L. Puri, Halai Nemon Association and Admiralty Flats Motel (supra). After considering the facts of the case and the precedents relied on :- 39 -: ITA 2010 & 2168/10 CO 16/11 by the AO and AR, I am of the opinion that the income from the building and the- facilities cannot be considered as "profits and gains of business or profession". As per s. 14 of the Act, all income, for the purposes of charge of Income-tax and computation of total income, are classified under the following heads of income: (i) Salaries, (ii) Income from house property,
(iii) Profits and gains of business or profession, (iv) Capital gains and (v) Income from other sources. The various heads and the provisions of Act applicable to these various heads are mutually exclusive. Where an item fall specifically under one head it has to be charged under that head and no other.
The method of book keeping followed by the assessee will not decide under which head a particular income will fall. The heads of income must be decided from the nature of the income by applying practical notions and not by reference to an assessee's treatment of the income. It is to be decided according to the common notions of a practical man. The following conditions should be satisfied in order for an income to be charged under 28(i) i.e. the profits and gains of any business (i) there should be profit and gains; (ii) the profits and gains should be of any business or profession; (iii) the business or profession should be carried on; (iv) the business or profession should be carried on by the assessee and (v) the business or profession should be carried on during the previous year. As per clause (13) of section 2, business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Essential features of a business include regularity of transactions and continuity of activities. The objective should be to earn profit. The activity should be real, substantial, systematic and organized [CIT v. Distributors (Baroda) Pvt. Ltd, 83 ITR 377 (SC)]. The Gujarat High Court in the case of CIT v. Smt. Meenal Rameshchandra, 167 ITR 507 (Guj) held that business activity or transaction necessarily implies the activity with an object to earn profit. Larger the risk, greater the margin of the profit. Uncertainty about the return to be received from the investment made in the business, also the facing of many imponderables and even the risk of losing the capital invested, are inherent in activity called 'business'. Risk, uncertainty, foresightedness to visualize the imponderables and capacity to overcome the unforeseen hurdles are the essential requisites for business activity. "
31. But we are in agreement with the ld.AR that the letting out of plant and machinery, furniture and fixtures as provided in facility :- 40 -: ITA 2010 & 2168/10 CO 16/11 provider agreement is in fact inseparable from letting out of building under the lease agreement, income of such letting, both building and plant and machinery, furniture, fixtures etc, is required to be assessed as 'income from other sources' and the assessee is entitled to deductions on account of depreciation u/s 57 and also other expenses such as interest, property tax paid insurance etc. In this regard, decision of Hon'ble Supreme Court rendered in the case of Sultan Brothers Pvt. Ltd (supra) is very much relevant and supports our above conclusion.
32. Thus, the alternate submissions of the ld.AR is correct and has to be allowed. The Industrial Park buildings are specialized buildings to provide infrastructure to Information Technology Companies. This company has let out the entire building to a single tenant and there is no dispute regarding this fact. Two agreements are complementary to each other and are made with the same lessee so in effect, both these agreements although executed separately, have to be read conjointly because same parties have entered into the agreements relating to the same property. The letting out through two separate agreements in this case, is definitely inseparable and both the agreements have to be carried simultaneously without availing one agreement the other agreement would become useless. Given the facts that the cost of :- 41 -: ITA 2010 & 2168/10 CO 16/11 building being 48.30 crores and that of the plant and machinery being 30.09 cores and for them substantial rent per mansion being received would go to suggest necessarily that no prudent man would keep any of these two idle and these cannot be given on lease/hire to different entities, therefore, the subject of both the agreements are inseparable. Both the agreements are complimentary to each other and cannot be separated. No same person or entity would take the entire building on rent without the facilities in question. Rather it would not be possible to carry on the business of Information Technology from a place without such facilities.
33. In regard to the primacy of the letting out of the machinery and plant vis-à-vis the building, the Hon'ble Supreme Court in the case of Sultan Brothers Pvt. Ltd (supra) has observed as under:
"If we are right in our view, as we think we are, that the letting of a building can never be incidental to the letting of furniture contained in it, then it must be held that no -consideration of primary or second lettings arises in construing the section for what must apply when furniture is let and also building must equally apply when plant and machinery are let and also buildings.. We think all that sub·section (4) of section 12 contemplates is that the letting of machinery, plant or furniture should be inseparable from the letting of the buildings."
34. The Hon'ble Supreme Court, thus held that the section contemplates inseparable letting and not primary or secondary lettings. In such situations, has laid down a justifiable law that the rent :- 42 -: ITA 2010 & 2168/10 CO 16/11 received from such building has to be assessed under the head 'income from other sources'. The Court went on observing as under:
"What, then, is inseparable letting? It was suggested on behalf of the respondent Commissioner that the sub-section contemplates a case where the machinery, plant or furniture are by their nature inseparable from a building so that if the machinery, plant or furniture are let, the building has also necessarily to be let along with it. There are two objections to this argument. In the first place, if this was the intention, the section might well have provided that where machinery, plant or furniture are inseparable from a building and both are let, etc. The language however is not that the two must be inseparably connected when let but that the letting of one is to be inseparable from the letting of the other. The next objection is that there can be no case in which one cannot be separated from the other. In every case that we can conceive of, it may be possible to dismantle the machinery or plant or fixtures from where it was implanted or fixed and set it up in a new building. As regards furniture, of course, they simply rest on the floor of the building in which it lies and the two indeed are always separable. We are unable, therefore, to accept the contention that inseparable in the sub-section means that the plant, machinery or furniture are affixed to a building.
It seems to us that the inseparability referred to in sub-section (4) is an inseparability arising from the intention of the parties.
That intention may be ascertained by framing the following questions: Was it the intention in making the lease--and it matters not whether there is one lease or two, that is, separate leases in respect of the furniture and the building--that the two should be enjoyed together? Was it the intention to make the letting of the two practically one letting? Would one have been let alone and a lease of it accepted without the other? If the answers to the first two questions are in the affirmative, and the last in the negative then, in our view, it has to be held that it was intended that the lettings would be inseparable. This view also provides a justification for taking the case of the income from the lease of a building out of section 9 and putting it under section 12 as a residuary head of income. It then becomes a new kind of income, not covered by section 9, that is, income not from the ownership of the building alone but an income which though arising from a building would not have arisen if the plant, machinery and furniture had not also been let along with it." :- 43 -: ITA 2010 & 2168/10 CO 16/11
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 boththe agreement had to be enjoyed together. Further more, 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 :- 44 -: ITA 2010 & 2168/10 CO 16/11 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, 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.
36. The other issue raised by the Revenue is against restricting the disallowance u/s 14A r.w. Rule 8D to ` 50,000/- as against ` :- 45 -: ITA 2010 & 2168/10 CO 16/11 29,19,759. The assessee has filed cross objection against the disallowance of ` 50,000/-.
37. The facts apropos this issue are that the assessee has received an amount of ` 5,630/- as dividend during the relevant period. The assessee itself submitted through its ld.AR that no expenditure was incurred in earning this exempt income. But the Assessing Officer did not accept this contention and applied Rule 8D by relying on the decision of the ITAT Special Bench, Mumbai in the case of CIT vs Daga Capital Management Pvt. Ltd, 117 ITD 169(AT) (Mum). There is no finding by the Assessing Officer that any expenditure has been incurred for the purpose of making such investments which is tax free. In the absence of such a finding no amount of interest can be disallowed. From the records, it is clear that share capital, reserves and the profit were available for making investments and such amounts were substantial and in no case it can be said that there was any diversion of borrowed funds. At the same time, the Assessing Officer has accepted that interest of ` 4,20,62,426/- was payable in reference to amount borrowed for the purchase of Information Technology Park. Thus, this amount of interest could not have been included in the computation of disallowance. The investments made in equity shares of wholly owned subsidiaries were made in the financial :- 46 -: ITA 2010 & 2168/10 CO 16/11 year 1995-96 and 1998-99 and therefore, there is no question of any borrowed money having been invested in the impugned investments. The investments in equity shares is very small i.e ` 42,234/- and that too was made in earlier years as compared to which the profits of the company are very high and running in crores. So, it shows that the company had sufficient sources for its own to make such investments. The only new investment during the year is in Balaji Entertainment Pvt. Ltd i.e of ` 60,45,458/- and in the capital of the partnership firm of ` 1,45,93,889/- which have been made out of borrowed funds as contrast to which profits for the year ended 31.3.2007 are 35.02 crores, are sufficient enough to make such investments. Likewise, investment in the capital gain bonds of Rural Electrification Corporation Ltd amounting to ` 70,00,000/- has been made from sale proceeds of equity shares which is taxable as capital gains. Thus, in the given facts, no disallowance can be made of interest u/s 14A. The application of Rule 8D is not permissible in the absence of such a finding. Moreover, the decision of Bombay High Court rendered in the case of Godrej & Boyce Mfg. Co. Ltd vs Dy. CIT in I.T.A.No. 626 of 2010, order dated 12.8.2010, has also decided the Special Bench decision of the Tribunal rendered in ITO vs Daga Capital (supra) by holding that provisions of Rule 8D which have been notified with effect :- 47 -: ITA 2010 & 2168/10 CO 16/11 from 24.3.2008 shall apply with effect from assessment year 2008-09. Prior to that the Assessing Officer has to reach a finding with certitude to ascertain the expenditure which has been incurred to earn as income which does not form part of the total income of the year. The assessment year under appeal is 2007-08, obviously, the provisions of Rule 8D would not apply in view of the above uncontroverted decisions. The assessee-company has earned dividend income or ` 5630/- only. The ld. CIT(A) has, however, sustained the lump sum addition of `.50,000/- and has deleted the remaining amount added in this account by Assessing Officer, after considering the fact that the monitoring of the investments and tracking of the mutual funds, etc. for which some amount has to be spent towards the involvement of some manpower in which treasury Department is also involved. On that premise, he has sustained an addition of a sum of ` 50,000/- by disallowing the same and has deleted the remaining disallowance for which the Revenue is aggrieved.
38. In our considered opinion, action of the ld. CIT(A) is verily justifiable and cannot be faltered with. The facts apropos to this issue are that the assessee made investments in the shares of various companies. It has invested a sum of `.1,45,93,889/- as capital, in a partnership firm named M/s.Parma Lakshmi Restaurant, in which the :- 48 -: ITA 2010 & 2168/10 CO 16/11 assessee is a partner. As on 31.03.07 the investment in shares of various companies stand at `.7,18,78,301/-; And as on 31.03.06 in the firm towards capital investment stands at `.7,12,59,585/-. These investments are subjected to exempt provision contained in sections 10(34), (for investment in shares in the form of dividends) and in section 10(2A) - for profits from Partnership firm. The assessee has received a sum of `.5,630/- as dividend during this year. As per section 14A, no expenditure incurred for the purpose of earning an exempt income can be allowed against taxable profits. The assessee has claimed the amount of `.5,630/- as exempt being dividend income and has not attributed any portion of the expenditure debited to the Profit and Loss Account towards the same. In the opinion of the Assessing Officer - the assessee incurs routine expenditure to maintain its establishment and also towards administration, so a portion of this expenditure can be attributed towards investments in shares, and towards capital in firm. On the same reasoning, some portion of the remuneration paid to Directors and Managers has been attributed towards the above investments. Thereafter, by invoking Rule 8D brought to life with effect from 01.04.2007 vide the Finance Act, 2006, which allows such apportionment of expenses, the Assessing Officer has worked out the impugned disallowance as under: :- 49 -: ITA 2010 & 2168/10 CO 16/11
`
(i) Direct expenditure relating to exempt Nil income
(ii) Interest relating to exempt income 25,44,414 6,36,59,109 X 7,50,68,944 187,81,62,211
(iii) 1/2% of investments yielding exempt 3,75,345 income ________ (1/2% of Rs.7,50,68,944/-) Total disallowance u/s 14A 29,19,759 ` ` Interest debited to P&L A/c not 6,36,59,109 directly related to a particular income or receipt Total Assets as per Balance Sheet As on 31.03.2007 189,42,24,995 As on 31.03.2006 189,42,24,995 Average 187,81,62,211 Investment yielding exempt income 7,88,78,302 As on 31.03.2007 7,12,59,585 As on 31.03.2006 Average 7,15,68,944 Thereafter, invoking Rule 8D of the Rules in conjunction with Sec.14A(1), 14A(2) & (3), and relying on the decision of ITAT Chennai Bench rendered in the case of M/s.MGM Diamond Beach Resorts P. Ltd. Vs. DCIT order dated 13.06.2008 in ITA No.2173/Mad/2005 A.Y. 2002-03, in which it has been held that even if no income was earned, :- 50 -: ITA 2010 & 2168/10 CO 16/11 expenditure is still allowable, the Assessing Officer has held that disallowance u/s.14A can exceed the exempt income actually received during the year. Accordingly, he has added `.29,19,759/- u/s.14A of the Act.
39. The Ld. Commissioner of Income Tax(A) has held that Daga Capital's case has since been reversed by Hon'ble Bombay High Court who has held the provisions of Rule 8D to be applicable only with effect from A.Y. 2008-09. The Assessment Year under consideration being 2007-08, this provision would not apply. He has found that the investment in assets giving rise to exempt in case is only `.7,15,31,444/-, which are covered by cash profit and the reserves and surplus funds. Therefore, according to him not interest u/s.14A can be disallowed. But on account of monitoring of investment, etc., he has sustained a sum of `.50,000/- in lump-sum. Now both parties are aggrieved. The Revenue has raised a ground in its appeal against deletion of major addition and the assessee is before us through cross- objection.
40. The case of the Revenue as put forth before us is that apportionment of expenses for composite business incurred towards tax-free income has to be done as per Rule 8D, particularly when a :- 51 -: ITA 2010 & 2168/10 CO 16/11 proximate clause for disallowance i.e. the relationship of the expenditure with income which does not form part of the total income, does not exist in the given case. It was further argued that leave alone the applicability of Rule 8D, Section 14A supersedes the general rule that business expenditure not incurred towards tax-free income cannot be disallowed, and the Assessing Officer shall determine the quantum of such disallowable expenditure by following a reasonable method. Per cantra, ld. A.R. has argued that Rule-8D is not applicable in this Assessment Year and that the Assessing Officer has not applied a reasonable method to determine the quantum of disallowable expenditure. After considering rival stands, we have found that Rule- 8D is not applicable during this year. This is such a issue for which only guess-work, based on individual prudence, is the answer. When the assessee has declared that no expenditure was incurred to earn this income, it has to be accepted as the assessee is the best master of its affair. But fiscal law in such circumstances lay down some provisions which have to be adhered to even if they are against the rule of two plus two is equal to four. To cut long story short, our consistent stand is that under section 14A only 2% of the gross dividend earned can be treated as expenditure relatable to earning of this exempt income. This view was taken in the case of Sundaram :- 52 -: ITA 2010 & 2168/10 CO 16/11 Finance Ltd. Vs. DCIT in ITA Nos.8425, 8426 & 8427/Mds/ vide order dated 02.12.2002, by Chennai Bench of the ITAT. Therefore, respectfully following this decision, we direct the Assessing Officer to re-compute the impugned relatable expenditure to earning of the income of Rs.5630/- as dividend income by invoking 20% of gross dividend earned. Accordingly, this ground of the Cross-Objection is partly allowed for statistical purposes.
41. In the result, both the appeals of the Revenue and the assessee stand dismissed where as Cross Objection of the assessee stands allowed for statistical purposes.
The order pronounced in the open court on 15th December,2011.
Sd/- Sd/-
(ABRAHAM P GEORGE) ( HARI OM MARATHA )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 15th December, 2011
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR