By TIOL News Service

MUMBAI, JULY 21, 2017: THE ISSUE BEFORE THE COURT IS - Whether operational income derived from leasing out of shops/stalls, are to be treated as 'business income', when the intention was to commercially exploit the property by way of complex commercial activities. YES is the verdict.

Facts of the case:

During the subject year, a company named E-City Entertainment Pvt.Ltd was demerged and its properties were divided in the present Assessing Company i.e., E City Project Construction Pvt Ltd. The Assessee is primarily engaged in the business of leasing and rentals of property and other types of leasing business. The counsel for Assessee submitted that both CIT(A) as well as ITAT on appreciation of facts, arrived at the concurrent conclusion that the income derived by way of rent was a business income. According to the counsel, even the object clause in the Memorandum of Association made it clear that the business of the Assessee was to construct malls/commercial complex and lease it. The entire income of Assessee was rent income except the other paltry sum received by the interest on fixed deposits and sale of scrap.

On appeal, the HC held that,

++ it is to be noted that no straitjacket formula can be laid down to conclude as to an income being a 'income from the house property' or 'business income'. It does not appear to be a matter of debate that prior to the A.Y 2006-07, consistently the AO has accepted that the income derived to the Assessee by way of rent is a business income. The deviation is from the Assessment Year 2007-08. One of the ground raised is that there is demerger of the Company and that is why the AO has right to revisit the facts and arrive at an independent conclusion. The Company which is demerged is E-City Entertainment Pvt.Ltd. The properties of the said demerged Company are divided in the present Assessing Companies. It is not disputed that E-City Entertainment was assessed till the Assessment Year 2005-06 and the income derived by the said Company by way of rent was always assessed as 'business income'. There is no dispute with the proposition that the principle of res judicata would not apply, however principle of consistency has to be considered. Even in a case of Sultan Brothers, the Apex Court has observed that a small entry in the object clause showing a particular object would not be a determinative factor to arrive at a conclusion, whether the income is to be treated as 'income from business' and as such a question would depend upon the circumstances of each case i.e. whether particular business is letting or not. The said Judgment was considered by the Apex Court in the case of Chennai Properties and Investments Limited, Chennai, wherein the Apex Court held the 'rent income' to be a 'business income'. However, in the present case, the facts are otherwise. The substantive income of the Assessee is from leasing out the shop/stalls;

++ the Tribunal in its Judgment, while appreciating the facts, has observed that the various malls are built by Assessee and are operated from the year 2001. The operational income received from the said activity, in the form of rent, and other service charges was consistently offered to tax as its business income in the earlier years and the same was accepted by the Department as a business income. After demerger, both the Assessee Companies took over the assets and liabilities of the demerged Company and continued the same business of operating and running the malls. The Tribunal has considered the nature of the business activities of the Assessee Company, as well as, terms and conditions of the relevant agreements, under which the commercial space in the mall was given on hire by the Assessee Companies to the concerned parties. It also considered the various services provided by the Assessing Companies during the course of operation and running of the Family Entertainment Centrecummalls. On appreciation of facts, the Commissioner (Appeals) and the Tribunal have concurrently arrived at a conclusion that the intention of the Assessing Companies was to commercially exploit the property by way of complex commercial activities and it was not a case of letting out the property simplicitor. The rental income and the service charges thus were received by the Assessee Company as business income during the course of business carried out by them of operating and running a Mall as a commercial activity. The facts of the present case are much similar to the case of Chennai Properties and Investments Limited, Chennai. We find that the appreciation of evidence by the Commissioner (Appeals) and Tribunal is not perverse and the finding arrived at by them is plausible one.

(See 2017-TIOL-1365-HC-MUM-IT)