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Income is attached to any immovable property cannot be the sole factor for assessment of such income as income from property
How income of the commercial complex is to be taxed. Whether it is a business income or income from house property? Recenlty, in the case of ITO Vs. Shanaya Enterprises, ITAT Mumbai has held that merely because income is attached to any immovable property 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 main intention is for letting out the property, or any part 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.
The same is reproduced hereunder:
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “J”, MUMBAI
ITA No. 3648/MUM/2010
ASSESSMENT YEAR: 2006-2007
Income Tax Officer Vs. Shanaya Enterprises
Per Pramod Kumar:
1. By way of this appeal, the Assessing Officer has called into question correctness of Ld. CIT (A)’s order dated 12th March, 2010, in the matter of assessment u/s 143(3) of the Income Tax Act, 1961 for the Assessment Year 2006-07, on the following ground:
Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in directing to treat income from letting out of studio under the head ‘Profits and Gains of Business or Profession’ instead of income under the head ‘income from house property’ by not relying upon the decision in the case of CIT vs. Sultan Brothers Put. Ltd. reported in 51 ITR 353.
2. The relevant material facts, so far as necessary for adjudication on issue in dispute before us, are like this. The assessee is stated to be carrying out business of letting out of studio for producing television serials, advertisement films, short documentaries etc., in as much as the premises is let out, for the said purposes, on hourly basis for a unit of eight hours each to production houses. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has income from such hire charges received aggregating to Rs.28,89,573, but, in view of claim of several expenses to earn these receipts, net loss is disclosed at Rs. 89,942/-. The Assessing Officer further noted that assessee has claimed credit for taxes deducted at source, aggregating to Rs. 2,46,615, and, on most of the TDS certificates, nature of receipt is shown as ‘rent’. It was in this backdrop that the Assessing Officer required the assessee to show cause as to why all the receipts not be treated as ‘rent’ and, accordingly, be taxed under ‘Income from House Property’.
3. It was submitted by the assessee that the assessee lets out the property on hourly basis for use as shooting location, but it is not a case of renting out the property simplicitor. It was explained that complex commercial activities are involved in this process inasmuch as existing furniture and fixtures in the premises have to be modified to suit the requirements of the clients, from time to time, and to accommodate various props, that a separate meter is provided for recording consumption of electricity on hourly basis, that security arrangements have to be put in place for ensuring safety of cinema photographic equipment, that temporary structures and frameworks have to be set up so as to enable client to erect the necessary props and sheds, that the facilities of plumbers, electricians, carpenters and painters etc., have to be provided as per client requirements, and that considerable marketing activities have to be undertaken to sell the studio time to prospective clients. The assessee also submitted a list of clients so as to demonstrate that the studio facilities have been used by film industry, TV industry and generally media and broadcasting industry. None of these submissions, however, impressed the Assessing Officer. He was of the view that, on the above facts, issue is covered against the assessee by Hon’ble Supreme Court’s judgment in the case of CIT vs. Shambhu Investments Ltd. (263 ITR 143), because ‘if it is found that main intention is for letting out the property or any portion thereof, the same must be considered as rental income or income from property’. The Assessing Officer also noted that “from the facts of the case and details submitted by the assessee, the services rendered by the assessee, if any, to various occupants according to the list of occupants, are not separately charged and the rent payable is inclusive of all charges to the assessee”. The Assessing Officer then proceeded to refer to Hon’ble Supreme Court’s judgment in the case of Sultan Brothers Pvt. Ltd. vs. CIT (51 ITR 353) by observing as follows:-
In the case of M/s Sultan Brothers Pvt. Ltd. vs. CIT 1964 51 ITR 353 (SC), a five judges’ Bench of the apex court herein gave a guideline that to come to a conclusion of nature of any receipts attached to a property. The test comprises of three questions, namely
(a) Was it the intention in making the lease—and it maters not whether there is one lease or two, i.e., separate leases in respect of the furniture and building—that the two should 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?
If the answers to the first two questions are in the affirmative and the last in the negative, then it has to be held that the lettings would be inseparable.
In the instant case, the answers of the first two questions are in affirmative and the last in the negative. The assessee was claimed that there was some infrastructure given to the parties and therefore the same is business. However, it is very clear from the facts of the case that without the said facilities, the premises would not have been let in the first place. The ratio laid down by the Hon’ble Apex Court is totally applicable to the facts of the case.
4. As regards assessee in contention that studio business activities are activities in an organized manner, Assessing Officer simply brushed them aside by stating that the contention ‘is general in nature’. On the contention that assessee is rendering complex services, the Assessing Officer observed that ‘the assessee is covered by the Calcutta High Court in the case of Shambhu Investments Ltd. vs. CIT (supra)’. The Assessing Officer thus proceeded to tax receipts under the head income from house property, and restricted the deductions to 30% of charges received as for ‘repairs’. Aggrieved, assessee carried the matter in appeal before the Ld. CIT (A) who reversed the action of the Assessing Officer by observing as follows:-
I have carefully gone through the rival submissions and I am inclined to agree with the contention of the assessee that the income received from letting out of the bungalow/studio isn’t “income from house property” as held by the AO. In the case of Shabvhu Invt. Pvt. Ltd. vs. CIT, the premises where let out on monthly rent basis for providing table space to the occupants. In that case, assessee has received interest-free deposit to the extent of entire cost of the property, whereas in the case of the assessee it is claimed that no deposit is received by it. In the case of Shambhu Invt. Ltd, their lordships held that property was not commercially exploited as the assessee had already received interest free deposit to the extent of cost of the property. In the case of the assessee, this is not so. The giving on hire the bungalow intermittently for a brief period based on number of hours with full facilities for the purpose of creating panorama concept is a commercial activity. Thus to my mind, the appellant is exploiting the immovable property by was of commercial activity and in that event it must be held as busine3ss income as held in the case of M/s. Shambhu Investments P. Ltd. vs. CIT. Since the assessee has not received any deposit from its clients, the main objective of the assessee is to commercially exploit the said property for earning the income. The facts discussed above coupled with the fact that the assessee has obtained service tax registration for the income earned from hiring out of bungalow/studio, it becomes quite clear that the assessee is engaged in the commercial activities of earning of such income. The AO, is therefore, directed to treat the receipts of the assessee of Rs. 28,89,573/- as business receipts and not to treat the same as income from house property. The ground of appeal is allowed.
5. The Assessing Officer is not satisfied by the stand so taken by the Ld. CIT (A), and is in appeal before us.
6. We have heard the learned Departmental Representative, but none appeared for the assessee. We have also carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
7. We find that in CIT vs. Shambhu Investment Pvt. Ltd’s case (249 ITR 7), which was approved by Hon’ble Supreme Court in judgment reported at 263 ITR at page 143, Their Lordships had an occasion to elaborately deal with judicial precedents on whether rental income could be taxed under the head business profits, and Their Lordships concluded as follows:
Taking a sum total of aforesaid discussions, it clearly appears that merely because income is attached to any immovable property 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 main intention is for letting out the property, or any part 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.
8. It is thus clear that when a property is exploited by way of “complex commercial activities”, income so earned by exploiting the property is to be taxed as business income. Viewed in this perspective, and having regard to the fact that it is not a case of simplicitor renting of premises but significant value addition to premises by providing all incidental and support services to facilitate cine shooting and related activities, the income is earned by complex commercial activities which can only be taxed under the head business income. The fact that it is clearly a commercial adventure, involving marketing and promotions as also appropriate improvisations on a case to cases basis, takes these receipts out of the ambit of income under the head property income. Similarly, as regards classification of the nature of payments in the TDS certificates, nothing on turns on the same because the nature of payment, as the law is well settled, need not be the same in the hands of the recipient as in the case of the payer. That apart, it is only elementary that definition of ‘rent’ in Section 194I is not conclusive of tax ability of the related income under the head ‘income from house property’. The conclusions arrived at by the Ld. CIT (A) thus do no call for any interference.
9. A lot of emphasis has been laid, by the Assessing Officer, on Hon’ble Supreme Court’s judgment in the case of Sultan Brothers (supra), but we are unable to see as how does it advance his cause. The Assessing Officer, as we have noted earlier while setting out the facts, has referred to this judgement and claimed to have applied the ratio of the same. As a matter of facts, the precise grievance raised by the Assessing Officer in this appeal is that contrary to the law laid down by Hon’ble Supreme Court in the case of Sultan Brothers (supra), the CIT(A) has given the impugned relief. The stand of the Assessing Officer, as also grievance raised by the Assessing Officer, is devoid of any legally sustainable merits, for more reasons than one. Firstly, Hon’ble Calcutta High Court’s judgment in the case of Shambhu Investments Ltd. (supra), which has been approved by Hon’ble Supreme Court and which clearly settles the issue in favor of the assessee, has duly taken into account Hon’ble Supreme Court’s judgment in the case of Sultan Brothers (supra) and yet reached the conclusion that where complex commercial activities are involved in exploiting a property, income can only be taxed as business income. There is thus no conflict between these two judgments; quite to the contrary, Shambhu Investments (supra) judgment merely follows law laid down by Hon’ble Supreme Court in the case of Sultan Brothers. Secondly, in the case of Sultan Brothers (supra), Their Lordships were in seisin of a case in which no services were being rendered by the assessee, there was no business at all, and the true question was under which head income from rental was to be taxed when building is let out with furniture and fillings. The assessee’s plea that it should be taxable as business income, which was not anyway decided in favour of the assessee by Hon’ble High Court either, was rejected at the threshold itself, and then Their Lordships dealt with the issue as to whether it should be taxed as income from other sources or as income from house property. As a matter of fact, Hon’ble Supreme Court had, in this case, categorically observed that “These (lease covenants) do not at all show that lesser was rendering any service in the hotel business carried on by the lessee, or in fact doing any business at all. On the facts of this, we are unable to agree that the letting out of the building amounted to the doing of business. The income under the lease cannot, therefore, be assessed under section 10 of the IT Act as the income of a business”. These observations of Hon’ble Supreme Court are in sharp contrast with our findings in the present case in which assessee is actively, and on day to day basis, engaged in organized business activities and is rendering significant services. The observations made by Hon’ble Supreme Court were in the context of whether it should be taxable as business income or as income from other sources. The Assessing Officer was thus clearly in error in applying these observations in the context of an unrelated question. Finally, the dispute in Sultan Brother’s case (supra), which was finally adjudicated by Hon’ble Supreme Court, was not whether an income is to be taxed under the head business income or under the head income from house property, but the issue really was whether the income from giving a hotel, along with furniture and fixtures, was to be taxed under the head income from other sources or under the head income from house property. The observations made by Hon’ble Supreme Court have no relevance in the present context of the question whether income could be taxed under the head business income or under the head income from other sources. Revenue thus does not gain anything from reference to Hon’ble Supreme Court’s judgment in the case of Sultan Brothers’ judgment (supra) either.
10. In view of the above discussions and bearing in mind entirely of the case, we approve conclusion arrived at by the Ld. CIT (A) and decline to interfere in the matter.
11. In the result, appeal is dismissed.
Order pronounced on this 30th day of June, 2011.