By TIOL News Service

ERNAKULAM, MAR 29, 2019: THE ISSUE AT HAND BEFORE THE BENCH OF THE HIGH COURT IS - Whether income derived from letting out shops in a mall along with provision of basic amenities and services, classifies as business income, considering that such activity constitutes the assessee's main business and which reveals the assessee's intentions to commercially exploit the property. YES IS THE VERDICT.

In this regard, the court also clarified that the manner of exploitation of an asset is key to determining whether any income arising from such activity is business income or rental income.

Facts of the case

The assessee-company is engaged in construction & promotion of residential and commercial complexes. During the relevant AY, the assessee constructed a shopping mall in the property owned by its sister concern and let out the shop rooms. In the revised return filed for the relevant AY, the assessee declared an amount of about Rs 80.09 lakhs received from letting out of rooms. Such amount was declared as income from business. On assessment, the AO treated such amount as income from house property & after deducting municipal taxes and statutory benefit of 30%, computed tax on the balance amount of about Rs 54.41 lakhs. On appeal, the CIT(A) sustained the findings of the AO. Later, the Tribunal held such amount to be business income. Hence the Revenue's appeal against such findings. The Revenue stated that the assessee was also managing the mall and was engaged in day-to-day operations. It was claimed that the assessee was not merely a passive owner who simply let out shops & collected rent, considering that it had employed over 100 persons for operation & management of the mall.

On appeal, the High Court held that,

++ a collective reading of several case laws on the subject makes it clear that each case has to be considered on its own facts to determine whether the income obtained by letting out property constitutes income from house property or business income. An owner of a commercial asset is entitled to exploit it to the best advantage. He may do so either by using it by himself or by letting it out. Whether a particular income received by the assessee as a result of the activities carried on by him is business income or rental income depends upon the manner of exploitation of the assets. In each case, the intention has to be gathered as to whether the asset was intended to be commercially exploited by the assessee or whether it was intended to be used by mere letting out. If it is found that the main intention is to simply let out the property or any part of it, resultant income must be assessed as income from house property. But if the main intention is found to be exploitation of property by way of commercial activities, then resultant income must be held as business income;

++ the present case is not a letting out of property simpliciter, without anything more. A host of services are being provided by the assessee at the shopping mall. The assessee is engaged in a complex set of activities at the shopping mall. Management of the shopping mall is done by the assessee. The basic purpose is commercial exploitation of the property. The assessee has earned the income not merely by letting out the shop rooms but also by providing amenities and facilities at the shopping mall. Such amenities and facilities are not the basic facilities required for occupation of a shop room by a tenant. They are the special facilities for running the shopping mall and are meant to attract the customers and provide them the comfort and convenience of shopping. In cases where the income received is not from the bare letting out the property but on account of the facilities and services rendered, the operations involved in such letting out is in the nature of business and the income derived therefrom has to be treated as business income and not income from property. The income derived by the assessee cannot be regarded as simply from the exercise of property right. Where the assessee company has developed the shopping mall and let out the same by providing a variety of services, facilities and amenities in the mall, it can be found that the primary intention of the assessee was commercial exploitation of the property and where it has derived substantial part of its income by such activity, which constitutes its main business, the income so derived would be business income of the assessee. Hence the Tribunal correctly opined that the income derived by the assessee by letting out the shops in the mall has to be assessed as income from business and not as income from house property.

(See 2019-TIOL-691-HC-KERALA-IT)