Whether sub-leasing of properties will be taxable in PGBP or income from house property

M/s. Rayala Corporation Private Limited Vs.
Assistant Commissioner of Income-tax, Chennai and Another (High Court of Judicature at Madras)
Tax Case No. 91, 99 & 212 Of 2012 & 230 & 231 Of 2007 | 04-10-2013.

SUB

Whether Income from Sub-leasing of properties will be considered as Income from Profits and Gain from Business or Profession (Section 28) or Income form House Property (Section 22).

Tax Case (Appeal) No.91 of 2012, at the instance of the assessee has been admitted on the following substantial questions of law:

(i) Whether the Income Tax Appellate Tribunal is justified in upholding the assessment of the income received by the appellant, by

a) Sub-leasing of already leased out property;

b) maintenance charges and air conditioning hire charges, as Income from House Property and not income from business having regard to the fact that the Appellant with the view of commercial exploitation, pursuing the main objects of the Company had taken on lease the premises and thereafter sub leased the premises and also provided integrated services such as maintenance and air conditioning services?

(ii) Whether the income earned by the Appellant by commercial exploitation of sub leasing leased premises in terms of the Memorandum and Articles of Association of the Appellant Company and providing integrated services such as maintenance and air conditioning services and further investing the returns in real estate development is assessable as Income from Business under Section 28 or income from house property under Section 22?

FACTS OF CASE

The assessee herein a company mainly derived income from sub lease of rental properties, maintenance charges, interest income being interest on deposits, A.C. service charges and miscellaneous income. The assessee had shown the receipts from leasing out of property etc, as income from business by claiming expenses towards salaries, wages, bonus, administrative expenses etc., for the relevant assessment years.

The assessment for the assessment years 2003-04, 2006-07 and 2008-09 were taken up for scrutiny, the Assessing Officer held that the rental income by way of sub-lease of properties located at No.781-785, Anna Salai, Chennai, hereinafter referred to as "Annasalai property" and No.144/7, Old Mahabalipuram Road, Kottivakkam, Chennai - 41, hereinafter referred to as "Kottivakkam property" were assessable as "income from house property".

APPEAL BEFORE CIT (APPEAL)

Consequently, the Assessing Officer disallowed the expenses claimed and allowed deductions under Section 24 of the Income Tax Act (I.T. Act) as per permissible under law. Aggrieved by such order, the assessee preferred appeals before the Commissioner of Income Tax (Appeals) [CIT (A)].

The CIT (A) held that the income from sub-lease of the space allotted in the Anna Salai property and the lease rent in respect of factory premises rented out along with machinery and equipment at Kottivakkam are assessable as "income from house property". As regards the rental income from Anna Salai property, the CIT(A) held that it had been taken on lease at a concessional rent from the developer of the building in the capacity of the owner of the land and the lease was for 33 years, renewable once in five years, the assessee was deemed to be the owner of the superstructure taken on lease from the developer and hence the income from property subleased to various tenants for office premises was assessable as "income from house property".

Apart from the above reasons, the CIT (A) relied on the decision of the Division Bench of this Court in the case of Chennai Properties and Investments Ltd., (supra), assessed the income for the relevant assessment year under the head of "income from house property". The additions claimed for the properties during the relevant assessment year were rejected. The CIT (A) followed the above decisions for the assessment year 2008-09 and dismissed the appeal by order dated 27.07.2011.

DECISION OF TRIBUNAL

Challenging these orders, the assessee preferred appeal before the Tribunal. The Tribunal dismissed the appeals filed for the assessment year 2003-04, by order dated 22.09.2006 following the decision of the Division Bench of this Court in the case of Chennai Properties and Investments Ltd., (supra). Following the said order, the appeals in respect of the assessment years 2004-05, 2006-07 and 2008-09 were dismissed by the Tribunal, by orders dated 26.04.2007, 02.11.2011 and 06.02.2012.

Appeals before this Court by the assessee.

THE HON’BLE HIGH COURT OF CHENNAI

• The substantial questions of law framed in these appeals are as to whether the income received by the assessee by way of sub-lease of the Anna Salai property, collection of maintenance charges, A.C., hire charges etc., would be income from "business" or income from house property", similar is the question in respect of Kottivakkam property.
• Before we examine the issue on the facts placed before us, it has to be pointed out that the Assessing Authority in the order of assessment for the assessment year 2003-04 has made a reference that insofar as Kottivakkam property was concerned, the assessee company had leased out the factory premises, machinery and equipment to Mr.Ranjith Prathap and his associates and receiving lease rental from them and concluded that the income has to be treated as "income from house property".

This finding was confirmed by CIT (A) and in doing so, the Commissioner (Appeals) referred to an earlier order in I.T.A.No.60 of 2005, dated 29.11.2004. In the said order in paragraph 7.17, it has been observed that the assessee had stopped its business during 1993 and there is no intention of continuing the same and the assessee leased out the factory building along with furniture and fittings, plant and machinery to Mr.Ranjith Prathap and was receiving rent, since September 1993 and the rent was revised during 1996 and subsequently in 1997.

Further, it has been observed that as there was no intention to resume business and the written down value (WDV) of the plant and machinery as on 01.04.2000, was only Rs.6,777/-, which is insignificant and therefore, he concluded that what was leased essentially was only the factory building, furniture and fixtures and hence the income from such lease was to be assessed as "income from house property".

• It is seen that though such finding had been recorded to effect that the lease was in respect of the factory shed, machinery and equipment, we find that no documents were placed before the Assessing Authority to establish this fact. The copy of the lease agreement dated 16.03.2003, alone has been produced before us and from the said document, we find that the property which had been leased, was factory shed and RCC building constructed on the land. Therefore, the finding given by the Assessing Officer for the assessment year 2003-04, that the lease was along with plant and machinery is not supported by any document and there is nothing on record to show that the lease in respect of Kottivakkam property was along with plant and machinery. Therefore, it is the submission of the learned counsel for the assessee that in the absence of any such material, the matter requires to be remitted back to the Assessing Officer to examine this aspect.
• In the case of CIT vs. Chennai Properties and Investments Ltd., reported in [2008] 303 ITR 33 (Mad), the question of law formulated was whether the Tribunal was right in holding that the amenity charges received in respect of let out property should be treated as "income from other sources". The Division Bench of this Court while dismissing the appeal took note of the decision in the case of Tarapore and Co. v. CIT reported in [2003] 259 ITR 389 (Mad) wherein it was held that the actual rent received by the assessee would constitute the basis for determining the annual value and it was that value which would have to form the basis for determining income from "house property" and for allowing the deduction from income from "house property" to the extent permitted under the other provisions of the Income-tax Act. In making such computation, there was no provision to add other amounts received by the owner of the building and held that the Tribunal was right in holding that the receipts from service charges were liable to be assessed as income from other sources and not "income from house property".
• In the case on hand, the Assessing Authority, Commissioner (Appeals) as well as the Tribunal have recorded a factual finding that the assessee closed down the manufacturing business with no evidence of revival and the income from the land and building has to be treated as "income from house property".
• Section 27 (iiib) of I.T. Act defines Owner of house property, for the purposes of Sections 22 to 26 of the I.T.Act, as a person, who acquires any rights excluding rights by way of lease from month to month or for a period not exceeding one year in respect of any building or part thereof, by virtue of any transaction as referred in clause (f) of Section 269UA of the I.T. Act [which defines transfer in the relation to any immovable property to mean transfer of such property by way of lease for a term of not less than 12 years], shall be deemed to be the owner of that building or part thereof. The rental lease agreement dated 06.05.2002, has been produced which is a sublease agreement between the assessee and M/s. J&B Software India Pvt., Ltd., from which it is seen that the lease deed dated 09.10.1981, entered into between the assessee and M/s.Vira Properties in respect of the Anna Salai property is for a period of 33 years with option of five times consecutive renewals of the same for the similar period.
• The Finance Act 1987, which came into effect from 01.04.1988, enlarged the definition of owner so as to include persons, who acquire rights in or with respect of any building or part thereof by virtue of transaction, falling under Section 269UA (f) of the I.T. Act, by doing anything, which has effect of transferring to or enabling their enjoyment of such property by him. The exclusion being month to month lease or lease for less than one year. In the assessees case the lease is for 33 years with renewals for five consecutive times for the same period and the assessee would squarely fall within the definition of deemed to be the owner of house property as defined under Section 27(iiib) of the I.T. Act.
• The Honble Supreme Court in the case of CIT v. P. V. S. Beedies Pvt. Ltd. reported in [1999] 237 ITR 13 (SC) among other things held that where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back or to restart the same and if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.
• The Tribunal pointed out that based on the materials (which may include the accounts itself, the Assessing Officer evidently has not scrutinised earlier), rightly the Assessing Officer invoked the jurisdiction under Section 147 of the I.T. Act. Thus, read in the context of the decision of the Apex Court in the case of CIT vs. Kelvinator of India Ltd., reported in [2010] 320 ITR 561 (SC), which has been referred to in the Delhi High Court decision, we hold that the proceedings under Section 147 are rightly initiated.
• As regards the question on the assessment under proper head of income useful reference could be made to the recent decision of the Division Bench of this Court in Commissioner of Income-Tax vs. Ideal Garden Complex P. Ltd., (supra). The assessee in the said case, a company incorporated with an object of carrying on business in real estate, developing landed properties etc.

The assessee claimed the income derived from letting out the properties was "business income" and not to be taxed as "income from house property". While passing the assessment order under Section 143(1)(a) of the I.T. Act, originally the Assessing Officer accepted the claim of the assessee, however proceedings under Section 147 of the I.T. Act was invoked on the basis of decision of this Court in the case of Commissioner of Income-tax v. Indian Metal and Metallurgical Corporation reported in [1995] 215 ITR 424. The assessees raised their objections, which were rejected by the Assessing Authority holding that the transaction being one of exploitation of the property as an owner and not by way of exploitation of business asset, the rental receipts have to be assessed under the head "income from house property".

The appeal was allowed by CIT(A), and the Revenue preferred appeal before the ITAT. The Tribunal rejected the Revenues appeal and the Revenue filed the Tax Case before this Court.

The Division Bench after referring to the decisions on the point rejected the contentions raised by the assessee and held that whether a particular letting was business had to be decided in the circumstances of each case and each case has to be looked at from a businessmans point of view and before invoking Section 22 of the I.T. Act, for the purpose of assessing the rental income as an "income from house property", the Revenue authorities must go into the question whether there was any exploitation of the property by its owner by giving it away for rent.

It was further held that the transactions being in the nature of exploitation of the property by the assessee and not by way of exploitation of business asset, the contention of the assessee could not be accepted. Further, mere fact of the assessee having business in letting out the property as stated in the memorandum by itself will not conclusively point out that the income is nothing, but business income.

DECISION OF COURT

Thus, by applying the decision of this Court in the case of CIT vs. Ideal Garden Complex (supra), to the facts as found by the Assessing Officer that the assessee company has stopped its business activities long back and is not carrying out any other business activity and the assessee has parted with the commercial assets and confined solely to receive some income by virtue of ownership thereof by lease or otherwise and the act of leasing was the outcome of the assessees decision to get out of the business, we accept the case of the Revenue that the income receipt from letting out of the property was rightly assessed by the Assessing Officer as "income from house property". We make it clear that in so far as the Kottivakkam Property, it was submitted that the written down value of the machinery was only Rs.6,777/-, however, we have remitted the same to the Assessing Authority to verify the aspect whether the lease was together with machinery and equipments.

For all the above reasons, we hold that the proceedings initiated under Section 147 of the I.T. Act is valid. Accordingly, the appeal on this ground fails and the question is answered in favour of the Revenue and T.C.(A).No.230 of 2007, stands rejected.

In the result,

1. the assessment of the income in respect of the Anna Salai property as income from house property" is affirmed.
2. Insofar as the Income from Kottivakkam property for the assessment year 2003-04, the matter is remanded to the Assessing Authority to consider the entire materials for the purpose of ascertaining as to whether the lease of the Kottivakkam property, was together with plant, machinery and equipment.
3. Accordingly, the appeals in T.C.(A).No.231 of 2007 and T.C.(A).Nos.91, 99 & 212 of 2012 are partly allowed except that what has been rejected.
4. The substantial questions of law framed in T.C.(A).N.230 of 2007 is answered in favour of the Revenue and the appeal is dismissed. No costs.

CONCLUSION

From the above decision of Hon’ble High Court , it is clear that whether a particular letting was business had to be decided in the circumstances of each case and each case has to be looked at from a business man’s point of view and before invoking Section 22 of the I.T. Act, for the purpose of assessing the rental income as an "income from house property", the Revenue authorities must go into the question whether there was any exploitation of the property by its owner by giving it away for rent. It was further held that the transactions being in the nature of exploitation of the property by the assessee and not by way of exploitation of business asset. Further, mere fact of the assessee having business in letting out the property as stated in the memorandum by itself will not conclusively point out that the income is nothing, but business income.

DISCLAIMER: The above case law is only for information and knowledge of readers. In case of necessity, it is advisable to consult with Tax Professionals.