Where rental income was received by assessee as owner of flat same was to be assessed under head income from house property and not as business income, as flat was not stock-in-trade in assessee-builder’s case.

Assessee was a builder and purchased a flat and gave, it to its director for his residence, after investing all resources like share capital surplus, reserves, surplus and unsecured loans, etc. Rental income’ was shown by assessee under head “business income”. Whereas AO assessed same under head “Income from house property”. Since long time assessee was not carrying any business activity. Held: Assessee was owner of premises which had been let out for earning rent income. It is a well settled law that income derived from property had to be taxed under, head Income from House Property. Further, where the assessee was the owner of building on leasehold land, rental income was income from house property even though letting out was an objective of assessee-company. In view of the above, it was held that the rental income received by assessee was to be assessed under head “Income from house property”. Considering totality of facts and circumstances of case, there was no merit for treating rental income under the head “Business Income”.

Decision: Against the assessee.

Relied: Tinsukia Development Corporation Ltd. v. CIT 120 ITR 466,  CIT v. Mithila Properties Publications & Contract Enterprises (P) Ltd. 228 ITR 713, Bihar State Co.op. Bank Ltd. v. CIT (1960) 39 ITR 114 (SC), CIT v. K. Street Light Electric Corporation (2011) 244 CTR 647 (P&H-HC)and Sakarlal Balabhai v. ITO (1975) 100 ITR & 97 (Guj).

Distinguished: Chennai Properties v. Investments Ltd. CIT [CA No. 449 of 2004, Rayala Corporation (P) Ltd. [Appeal No. 6437 to 64441 of 2016, dt. 11-8-2016].

Applied: Bihar State Co-op. Bank Ltd. v. CIT (1960) 39 ITR 114 (SC).

IN THE ITAT, MUMBAI BENCH

R.C.SHARMA, A.M. & RAM LAL NEGI, J.M.

Suyash Holding & Estate Developers (P) Ltd. v. ITO

ITA Nos. 341/Mum/2018 to 344/Mum/2018

20 June, 2018

Assessee by: K. Shivram & Neelam C. Jadhav

Revenue by: N. Hemalatha

R.C. Sharma, A.M.

These are the appeals filed by the assessee against the order of Commissioner (Appeals)-14, Mumbai dated 27-10-2017 for assessment year 2009-10, 2011-12, 2013- 14 & 2014-15 in the matter of order passed under section 143(3) read with section 147 of the Income Tax Act.

2. Common grievance of assessee in all the years pertains to treatment of income offered under the head “business and profession ” or as ” income from house property”

3. Rival contentions have been heard and record perused.

4. Rental income offered by assessee under the head of “business and profession” was declined by the assessing officer and treated as income from house property after having the following observation :–

2. The assessee had purchased an immovable property (flat) admeasuring about 1342 sq.ft. on the building known as Venus Apartments situated at 87, Cuffe Parade, Mumbai-400 005,in 1997-98 for a total consideration of Rs. 3,53,24,387. During the course of assessment proceedings in the assessee’s own case for assessment year 2012-13, it was observed that assessee-company had let out the said flat to its director Shri. Vipin Kumar Jain at a fixed monthly rent; of Rs. 25,000 p.m. in the year 1998 and had taken security deposit of Rs. 70,00,000 from him. The director of the assessee-company Shri Vipin Kumar Jain continuously resides in the said flat at a fixed monthly rental income of Rs. 25,000 p.rn. The assessee-company had offered this rental income as business income rather than Income from House Property. Other than this rental income of Rs. 3,00,000, the assessee has not received any income from business during the said year. On being asked, the assessee has stated that prevailing market rent of the flat was Rs. 1,00,000 to Rs. 1.,25,000. Therefore, after considering all the submissions filed by the assessee and after discussing the facts of the case in detail, the assessing officer has passed the Assessment order for assessment year 2012-13 treating the said rental income as income from house property. The assessing officer has adopted the prevailing fair market rental value @Rs. 1,50,000 p.m. for the said flat and also given the benefit of deemed interest on the security deposit received by the assessee. The assessing officer had also made additions of Business Expenses of Rs. 80,426 and disallowance under section 14A read with rule 8D in the said order.

3. During the financial year relevant to the Assessment year, the assessee has received the same fixed rent of Rs. 25,000 p.m. as rent without adopting the fair market rental value for the said flat; In view of the above, the assessment for the year under consideration was reopened to assess the escaped income.

4. In response to the notices issued during the scrutiny proceedings, the authorized representative of the assessee-company. Smt. Priya R Mehta, from M/s. D.V. Dalai 65 Co., chartered accountants attended from time to time and filed submissions as called for.

5. The assessee-company had claimed to be in the business of builders and developers. However, as noticed in the earlier years, and succeeding years, the assessee neither carried on any business activity nor offered any other business income except the rental income from the above said property. The Balance sheet of the assessee as on 31-3-2009 is reproduced as under :–

5.1. On perusal of the above Balance Sheet of the assessee, it is seen that the assessee has invested all its funds including the funds brought on interest in a single premises(i.e., flat) and only miniscule amount of funds invested in other investment options. Since, the rental income is an income from house property, vide show cause notice issued dated 25-11-2016, the assessee was asked to explain “why the rental income received by it should not be computed under the head Income from House Property”. In response to the same, the representative of the assessee-company vide his Letter, dt. 28-11-2016 has stated that it is one of the main objectives of the assessee-company to lease the house properties and hence rental income received is treated as business income. It is further stated that “the Hon’ble Supreme Court in the case of M/s. Chennai Properties v. Investments Ltd. v. CIT-Central-III (Civil Appeal No. 4494 of 2004) had recently allowed the appeal of the assessee with regard to letting out of house property as its business activity and allowing the income to be treated as income from business and profession as against the treatment by assessing officer as Income from House Property.” The assessee has also relied on the decisions of the Hon’ble Supreme court in the case of Rayala Corporation (P) Ltd. (Appeal No. 6437 to 6441 of 2016, dt. 11-8-2016) stating that as per the said decision “Even if the assessee has single property, the income has to be treated under the Business income”.

5.2. The above explanation submitted by the representative of the assessee is considered. The explanation could not be accepted in view of the following facts and circumstances of the case.

(i) The assessee has relied on decisions of the Hon’ble supreme court in the case of Chennai Properties 85 Investments Ltd., Chennai v. CIT (Civil Appeal Nos. 4491-4494 of 2004) and Rayala Corporation (P) Ltd. v. ACIT (Civil appeal No. 6437 of 2016). On perusal of the decision in the case of Royals, Corporation it is seen that the assessee is in the business ‘pf renting its properties and is receiving rent as its business income and shown it under the head income from Business. While deciding the appeal the Hon’ble supreme court has relied squarely on the decision in the case of Chennai Properties and Investment Ltd.

(ii) While deciding the appeal by the Hon’ble Supreme court in the case of Chennai Properties & Investments Ltd., it concluded that “merely an object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income form business and such a question would depend upon the circumstances of each case i.e., whether a particular business is letting or not”. Further it is pointed out by the Hon’ble Supreme court 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. A commercial asset is only an asset Used in a business and nothing else, and business may be carried on which practically all things. In the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee.”

From the above conclusion of the Hon’ble Supreme court it is crystal clear that by just having a word in its object clause is itself not sufficient but it should be supported by the circumstances of each case.

5.3. The facts and circumstances of the present case are completely different from the above mentioned cases on which the decisions were given by the Hon’ble Supreme court. In the present case, the assessee has invested almost all its resources like Share, capital, Reserves and Surplus and Unsecured loans to invest in -a single residential flat amounting to Rs. 3.53 crores(approx..) and ho other resources were left with the company to do a business or invest in any other avenues. Only a miniscule amount of Rs. 10 (lacs approx..) was given by company as loans and advances, Rs. 10 lacs (approx.) invested in shares and an amount of Rs. 13 lacs(approx..) was left as bank balances. The company is not doing any sort of business from many years. The investment in flat, is shown as Asset of the company and not as stock in trade. The said flat purchased by the assessee after investing all its funds has been given to its director on a fixed rent of Rs. 25,000 p.m from the year 1998 to till date without citing any reason for not increasing the rent. In support, the copy of the rent agreement dtd. 31-3-1908 has been submitted by the assessee stating that the said flat is given on rent for a period of one year for a rent of Rs. 25,000 p.m and in case the agreement is to be extended then the rent of Rs. 30,000 p.m is to be paid after one year. The agreement was also not registered and it is made on a stamp paper. Further, supplementary agreement dtd. 5-4-1999 is prepared it is agreed to renew the agreement for further period of five years at the same fixed rate of Rs. 25,000 p.m without citing any reasons. Lease agreement was not submitted for the further period.

5.4. At this juncture, the issue that arises for a consideration is as to whether the income offered by the assessee under the head “Business and Profession” is correct, or as to whether the income’ needs to be assessed under the head “Income from House Property”.

5.5. In order to come to a conclusion about the correct head of income under which head the receipt is taxable, it would be necessary to run through the relevant provisions of the Income Tax Act, more specifically Section 14, which deals with the heads of income and the Chapter IV–

5.6. In this case the assessee has shown a premises valuing at Rs. 3,53,24.387 in the fixed assets schedule annexed to the Balance Sheet. The said property purchased in the year 1997-98. An amount Rs. 3,00,000 being a “Rent on premises” has been credited in the profit & loss account under the head “income from Business”. Thus, it is clear that that the assessee is the owner of the premises which has been let out for earning rent income. It is a well settled law that the income derived from the property has to be taxed under, the head Income from House Property. The Hon’ble Apex Court has held in the case of CIT v. Chugandas & Company (1965) 55 ITR 17 (SC) that income received from the building will be shown under the head income from house property and not under the head profit and gains of the business, even if an assessee carries on business of purchasing and selling building.

5.7. Further, where the assessee is the owner of building on leasehold land, rental income is income from house property even though letting out is an objective of the assessee-company, as held by the Hon’ble Calcutta High Court and the Patna High Court, delivered in the cases of Tinsukia Development Corporation Ltd. v. CIT (120 ITR 466) and in CIT v. Mithila Properties Publications & Contract Enterprises (P) Ltd. (228 ITR 713), respectively. The facts of the case of the assessee, in the instant case, being identical, the ratios laid down by the Hon’ble Calcutta High Court and the Patna High Court are squarely applicable to the facts of the case.

5.8. Further, reliance is also placed on the decision of Hon’ble Supreme Court delivered in the case of Sambhu Investments Ltd. Reliance is also placed on the decision of Apex Court in the case of Bihar State Co.op Bank Ltd. v. CIT (1960) 39 ITR 114 (SC) wherein it was held that it does not matter any way how the assessee has chosen to show a particular income in the return of income submitted by it. The income is to be charged/taxed under the appropriate head of income.’

In view of the above, it is held that the rent income received by the assessee is to be assessed under the head Income from House Property.

6. Income from House property–Annual value :–

6.1. It is a well settled law that where the assessee has taken interest free security deposits from concerns to whom certain assets were leased out by the assessee and the amount of such deposit was abnormally very high vis-a-vis the market practice. The said security deposit is held as a sham device to circumvent the real rent and hence notional interest on such security deposit has to be assessed as income from house property. Reliance in this regard placed on the judgment of Hon’ble Punjab and Haryana High Court delivered in e case of CIT v. K. Street Light Electric Corporation (2011) 244 CTR 647. Further, it has also been held by the judiciary, that rate of interest on cost can also be the basis for determining; fair rent, if there is no better way to estimate rent. The Hon’ble Gujarat Court in the case of M/s. Sakarlal Balabhai v. ITO (1975) 100 ITR & 97 (Guj) has ruled that in absence of any better way of estimating rent, the rate of interest on cost of building and land may prqvi4e;a reasonable basis for determining the annual letting value, house property and more particularly when the property is occupied by the owner. It is pertinent to mention here that in the instant case the let out property has been given to the director. Hence, the ratio of this case law is squarely applicable since the property has not been ler/out at the market rate.

6.2 In view of the above, it is held that the rent of Rs. 3.00 lacs p.a. received from the tenant, (who was also director of company) which was purchased in the year 1997- 98 for a sum of Rs. 3,53,24,387 and against which a security deposit of Rs. 70,00,000 have been received, is not the sum of which the property might reasonably be expected to let out from year to year by virtue of provisions of section 23(l)(a) of the Act.

6.3 It is also pertinent to mention that during the course of assessment proceedings for the assessment year 2012-13, the assessee itself had admitted that flats have been rented out in the same society raising from Rs. 1.00 lac per month to Rs. 1.25 lacs per month with an upfront security deposit of Rs. 5 lacs to Rs. 6 lacs. Keeping in view the cost of indexation generally adopted, the fair market rent is computed on the basis of value determined in the assessment order for the assessment year 2012-13 as well as the fair market rent as quoted by the assessee-company.

6.4 Further, keeping in mind the cost of inflation index given by’ the department for valuing the property; the property which was acquired in the year 1997-98 for a sum of Rs. 3,53,24,387 would be1 costing to Rs. 6,21,11,158 in the financial year 2008-09 relevant to assessment year 2009-10. It is also pertinent that the rate of return on the let out property in the market is generally determined @ 4% per annum on the cost of the let out premises. Hence, the rate of return @ 4% on the let out property in the instant case which, on the indexed ‘ cost, amounts to Rs,24,84,446. In view of this, the notional rent could be determined around Rs. 24.90 lacs per annum in the case of assessee.

6.5 It is also relevant to examine the rate of return on1 the security deposit of Rs. 70.00 lacs received by the assessee for the premises let out. The interest which the assessee has got benefited is worked out @15% per annum on the security deposit of Rs. 70.00 lacs which amounts to Rs. 10,50,000. Moreover the assessee ‘has credited Rs. 3.00 lacs as annual rent from the said property. Thus, the notional rent for the assessee could be worked out at Rs. 13,50,000.

6.6 After taking into consideration the deposit amount received by assessee from the tenant and its expected annual yield of interest it is held that the sum at which the property might reasonably be expected to let out in this instant case is Rs. 14,40,000 p.a. (24,90,000–10,50,000) which is effectively Rs. 1,20,000 p.m. excluding the notional interest calculated on the deposit received’ in view of the provisions of section 23(l)(a) of the Act; The ‘said rent income is assessed under the head Income from House Property after giving standard deduction as prescribed under section 24(a) of the I.T.: Act. However, no deduction on account, of municipal taxes/property taxes is being allowed since no supporting documentary evidence has, been furnished by the assessee.

6.7 Therefore, an amount of Rs. 14,40,000 is treated as income house property and standard deduction under section 24(b) of Rs. 4,32,000 (@ 30% of Rs. 14,40,000) is allowed. Hence, an amount of Rs. 10,08,000 (14,40,000 -4,32,000) is added under the head income from house property. Penalty proceedings under section 271(1)(c) are separately initiated for furnishing inaccurate particulars of income leading to concealment of income.

5. By the impugned order, Commissioner (Appeals) confirmed the order of assessing officer against which assessee is in further appeal before us.

6. It was argued by learned Authorised Representative that the assessee is engaged in the business of Real Estate, and the main object of the assessee-company is to carry on business of builders and developers, ownership of flats, structures of residential, offices, invest in and hold such properties and also rent, hire, lease such properties etc., The copy of Memorandum of assessee-company shows this as the main object of the company. During the year 1997-1998 the assessee-company purchased the premises which was leased out on Rent to Mr. Vipin Kumar Jain Director of the assessee-company having monthly rent of Rs. 25,000 and security deposits of Rs. 70,00,000. From the year 1997-1998, the assessee-company treated the same as Business Income in its return of income and the same has been accepted by the department in every year.

7. As per learned Authorised Representative, the assessee-company is consistently treating the rental income as income from business since financial year 1997-98 which was not denied or objected by the department. The issue under consideration is squarely covered by the decision of the Hon’ble Supreme Court in Rayala Corporation (P) Ltd. v. ACIT (2016) 386 ITR 0500 (SC) and Chennai Properties & Investments Ltd. v. CIT (2O15) 373 ITR 0673 (SC), Supreme Court held that even if the assessee has only one property, the income from the property can be treated as Business Income and other business expenses can be allowed if the main object of the assessee in to give property on rent/hire.

8. As per learned Authorised Representative in assessee-company’s own case for assessment year 2008-09, assessment year 2010-11 and assessment year 2012-13, the Commissioner (Appeals) held that rental income earned by the assessee treated as income from business and not as income from house property. From the year 1997 1998, the assessee Company treated the same as Business Income in its return of income and the same has been accepted by the department in every year.

9. Learned Authorised Representative argued that keeping in view the main object clause of the assessee-company and applying judicial pronouncements as laid down by the Hon’ble Supreme Court as discussed above, there is no merit in the action of the lower authorities for treating the rental income as income from “House Property”. Furthermore, the judicial consistency also requires that there should not be deviation from the conclusions already arrived unless there is a change in the facts and circumstances. However, there is no change in the facts and circumstances during the years under consideration. Accordingly, assessing officer should be directed to assessee rental income so received under the head of income from business and profession.

10. As per learned Authorised Representative during the years under consideration, assessing officer has changed his opinion and issued notice under section 148 treating the rental income as income from “house property”. During assessment proceedings the assessing officer vide its notice under section 148(1) dated 8-11-2016 had asked the assessee, why an income received from renting of house property should be taxed under the head “Income from House Property”.

11. It was submitted before the assessing officer that assessee-company has always treated the rental income as business income since 1997. However, the assessing officer has completed the assessment by treating business income as income from house property.

12. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned Authorised Representative during the course of hearing before us. From the record we found that assessee has purchased only one flat which was also let out to one of its Directors of the company on rent which was found to be much lower than the market rate of the property. There is no other transaction of assessee of letting out the house property nor assessee has any other house property for doing the business of letting out. The decision relied on by learned Authorised Representative in case of Chennai Properties v. Investments Ltd. and Rayala Corporation (P) Ltd. (supra) are not applicable to the peculiar facts of instant case. So far as in those cases, assessees were actually engaged in commercial exploitation of property, whereas in the instant case only one flat was taken by the assessee and which was also let out to its Directors and not in the open market to carry reasonable rent. Even in the objects of the company only passing reference was made to the activity of renting the property. However, from the act of the assessee over the period of time, we do not find any such activity having been undertaken by the assessee to assess business profit by letting out the property. Property let to the Director at a fixed monthly rent cannot be treated as business of the assessee. Even as per initial agreement dated 31-3-1998 the rent of the property was fixed at Rs. 25,000 per month and deposit of Rs. 70 lakhs was taken. The initial period of lease was one year. It was also mentioned in the agreement that if it extends further one year, lease rent could be Rs. 30,000 per month. However, contrary to this agreement, the assessee made a supplementary agreement on 5-4-1999, through which lease was extended for a further period of five years, a monthly rent was reduced to Rs. 25,000 per month and other conditions remain unchanged. We also found that same rent was continuing till date without any change after entering into supplementary agreement with the Director on 5-4-1999, even the rental agreement is not made and lease of the property was extended through oral agreement only. While deciding the appeal by the Hon’ble Supreme court in the case of Chennai Properties & Investments Ltd., it concluded that “merely an object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income form business and such a question would depend upon the circumstances of each case i.e., whether a particular business is letting or not”. Further it is pointed out by the Hon’ble Supreme court 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. A commercial asset is only an asset Used in a business and nothing else, and business may be carried on which practically all things. In the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee.”

13. From the above conclusion of the Hon’ble Supreme court it is crystal clear that by just having a word in its object clause in itself not sufficient but it should be supported by the circumstances of each case. The facts and circumstances of the present case are completely different from the above mentioned cases on which the decisions were given by the Hon’ble Supreme court. In the present case, the assessee has invested almost all its resources like Share capital Reserves and Surplus and Unsecured loans to invest in -a single residential flat amounting to Rs. 3.53 crores(approx.) and no other resources were left with the company to do a business or invest in any other avenues. Only a miniscule amount of Rs. 10 (lacs approx..) was given by company as loans and advances, Rs. 10 lacs (approx.) invested in shares and an amount of Rs. 13 lacs (approx..) was left as bank balances. The company is not doing any sort of business from many years. The investment in flat is shown as Asset of the company and not as stock in trade. The said flat purchased by the assessee after investing all its funds has’ been given to its director on a fixed rent of Rs. 25,000 p.m from the year 1998 to till date without citing any reason for not increasing the rent. We also found that even though assessee has offered the income under the head “business and profession”, however, no depreciation has been claimed as per Income Tax provisions in respect of alleged business assets in the profit and loss account over these years. It was also mentioned in the lease agreement that the property was purchased for the purpose of trading and it is being temporarily leased because market conditions are not good, even though market conditions improved, the assessee neither sold the property nor even increased the rent. Thus, the conduct of the assessee over the years shows that the main purpose of acquisition was to provide the same to the Director at a very nominal rent. Considering totality of the facts and circumstances of the case, we do not find any merit for treating the rental income under the head “business”.

14. So far as assessee’s contention regarding consistency in treatment of income is concerned, we found that return filed by the assessee in earlier year was just processed under section 143(3) only in one year when the claim was declined, the assessee filed appeal before the Commissioner (Appeals) and the Commissioner (Appeals) has accepted the same. Learned Departmental Representative filed a letter to the effect that appeal was not filed by the Department because of the tax effect. Merely not filing appeal by the Department on the ground of low tax effect, cannot be treated at par to the fact that Department has accepted assessee’s claim of nature of income having been earned by it. In the case of Rayala Corporation (P) Ltd. the Hon’ble Suprement Court has just followed the decision in the case of and Chennai Properties & Investments Ltd., the facts of which we have already discussed hereinabove in detail and the same is not applicable to the facts of the present case as discussed above. We also found that assessing officer has dealt with the issue threadbare and has dealt with each and every argument of the learned Authorised Representative for not treating rental income as income from business.

15. In view of the above discussion and keeping in view the peculiar facts and circumstances of the instant case, we do not find any infirmity in the order of lower authorities for not treating rental income as income from business and profession.

16. So far as contention of learned Authorised Representative with regard to the computation of ALV is concerned, we are in agreement with the Authorised Representative that assessing officer has not properly computed the ALV. Accordingly, ALV is directed to be computed on the basis of principle laid down in the decision of Jurisdictional High Court in the case of Tip Top Typography 368 ITR 300. We direct accordingly.

17. So far as allowance of minimum business expenditure to run the company is concerned, we are of the view that minimum expenditure to maintain status of company is required to be allowed. These expenditure are to be allowed to be set off against the income from house property as per the provision of section 71 of the Income Tax Act. So far as reopening is concerned, as per the reasons recorded, we are in agreement with the lower authorities that there was sufficient reason to reopen the assessment.

18. In the result, appeal of assessee is allowed in part in terms indicated hereinabove.

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