By TIOL News Service

NEW DELHI, APR 23, 2015: THE bone of contention before the Bench is - Whether income from use of terrace licensed for mounting radio tower is to be treated as income from house property. YES is the answer.

Facts of the case

The assesse, a company is the absolute owner of the terrace floor of property where its registered office is located. It entered into a formal arrangement styled as "Leave and Licence Agreement" with M/s A, a company, by virtue of which assessee company gave on "licence" the terrace floor as the "space for mounting a tower/mast and antenna and gen set in addition to covered space admeasuring 132 Sq. Ft. for installation of radio trunking related equipment", described in the document as "the licensed space", on a monthly licence fee on terms specified in the agreement, inclusive of payment of interest-free security deposit refundable at the time of discontinuation of the use of the space by licensee, inclusive of maintenance charges but exclusive of electricity and water charges for ten years.

The case of the assessee was taken up for assessment under Section 143(3). AO rejected the claim of the assessee regarding the income on account of "rent from space and antenna" being income from house property. He noted that the property of Vikram Tower had been reflected in the fixed assets of the assessee company and the space for antenna shown in the financial statements as "stock-in-trade". AO observed that the assessee is a builder/developer, the primary objective of its business being to purchase, develop and sell various properties, renting parts of the property (stock-in-trade) held by it being "only an incidental activity", and indulged in only till such time such properties were actually sold, and thus, it was engaged primarily in "complex commercial activities". The AO ruled that merely because the person is the owner of the property, it does not necessarily follow that income generated therefrom must be assessed as income from house property. He held that since the property was reflected as a "commercial asset", income derived therefrom will have to be assessed as business income.

In appeal, CIT(A) allowed assessee’s appeal by holding that assessee had let out the structures on the terraces of the buildings to various companies and government departments for housing their communication equipments and antennas and did not render any other services to them. CIT(A) took note of the fact that assesse was not entitled to sell any space on the terraces of the buildings. Therefore, it had to exploit the property as owner only and it was not an interim arrangement to let out the property pending final sale. The dominant object of the letting out was to enjoy and utilize the property as owner.

Tribunal reversed the findings recorded by the first appellate authority, treating the income in question as neither income from house property nor "income from business" and instead classified it as "income from other sources". It was held that it was not a case where systematic activity of lending space was being carried out so as to render it as a business activity. Thus, the income was rightly assessable under the head "income from other sources". It may be mentioned here that Tribunal will be within its right to correct the head of income although it may not be in a position to enhance the income. Treating the income to be taxable under the residuary head as against the business income as taxed by the AO does not lead to enhancement of income. Therefore, we are entitled to correct the head of income."

Having heard the parties, the Court held that,

++ in Karanpura Development Co. Ltd., the Supreme Court had ruled that ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter;

++ the crucial test is as to whether the letting out has a definite nexus with the business of the assessee. The approach of both the AO and the ITAT in the case at hand has been totally misdirected. Wrong classification of the licensed space in the books of account as stock-in-trade cannot change the character of the transaction concerning its eventual exploitation. The use of the expression "leave and licence" in the agreement entered with M/s A may be debatable. The fact remains that the use of the terrace floor has been handed over to the licensee not only for setting up the tower/mast on which antenna is to be mounted but also for construction of a room where the watch/ ward staff can be stationed and space used for storage purposes;

++ licensee is virtually given exclusivity in utilizing the terrace floor for achieving the objectives set out in the agreement;

++ the building the top terrace of which is the subject of focal attention here has been developed for its various portions to be sold or let out with no possibility of the terrace floor being subjected to such utilization. The assessee continues to be the owner of the terrace floor. It has conceivably no other purpose to be served by such property as is held on the terrace floor, except the exploitation of the licensed space for gaining the income that cannot be treated as either income from business or income from other sources. The income was thus rightly returned as income from house property;

++ the terrace floor cannot exist in the air. It is part of the building which has been constructed on the land beneath the super-structure. It is, therefore, not correct to hold that the terrace does not have any appurtenant land. Therefore, the conclusion of ITAT that the agreement of renting and hiring terrace is in essence for hiring space and not hiring building or land appurtenant, is rejected;

++ question of law answered in the affirmative in favour of the assessee. In the result, the impugned order passed by ITAT is set aside and the view taken by the CIT (Appeals) restored.

(See 2015-TIOL-1007-HC-DEL-IT)