ITAT, KOLKATA BENCH ‘A’

Dropadi Properties (P.) Ltd.

v.

Income-tax Officer

D. K. Tyagi, Judicial Member

And

R. K. Panda, Accountant Member

IT Appeal Nos. 302 and 303 (Kol.) of 2006

March 23, 2007

Section 28(i), read with section 22, of the Income-tax Act, 1961 - Business income - Chargeable as - Assessment years 2001-02 and 2002-03 - Assessee-company was carrying on business of taking property on lease and giving out same along with providing other amenities - In year 2000, assessee took over a partnership firm as a going concern with all assets and liabilities thereof - Assets of said firm included a leasehold property taken in year 1963 for 51 years which upon expiry of lease was to revert to lessor - During relevant years, assessee leased out said property along with various other facilities and amenities and declared rental income so received as its business income - However, Assessing Officer assessed said rental income as income from house property as in his view, assessee was owner of said property - Whether since property was to revert back to lessor by 2014, assessee could not be said to be owner thereof, but was only a lessee for unexpired period of lease - Held, yes - Whether, therefore, rental income received from such short-term leasehold property could not be treated as income from house property - Held, yes - Whether since assessee provided various facilities to its tenants in an organised manner with a set purpose and with a view to earn profits, such activities could be construed as business activities and income arising therefrom was assessable as business income - Held, yes - Whether, however, since there was no segregation of rent and service charges in bills raised by assessee against all its tenants, 60 per cent of amount was to be treated on account of rent and rest 40 per cent on account of service charges - Held, yes

FACTS

In its return of income for the assessment years 2001-02 and 2002-03, the assessee-company declared the rental income derived from a house property as its business income and claimed various expenditures against the said income. However, the Assessing Officer was of the view that the assessee was owner of the house property and, hence, he sought to assess the rental income as income from house property. As against that, the assessee submitted that the said property was constructed by a partnership firm on the leasehold land acquired for a period of 51 years commencing from 1963, that the said firm was taken over by the assessee as a going concern on 1-4-2000, that as a result of said acquisition, the lease right that subsisted in the firm now vested in the assessee, that as the transferee, it had only a temporary right both in the building and in the leasehold land. It was further submitted that after 51 years, the structure erected by the firm was to revert to the lessor by 2014, that since unexpired period of lease in the relevant assessment year was merely of 13 years, such short-term holding could not be taken as the house property owned by the assessee, and hence it was not the owner of the house property in question. The Assessing Officer did not accept the explanation of the assessee and treated the rental income as income from house property.

On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer.

On second appeal:

HELD

The assessee was not the owner of the land but was only a lessee for the unexpired period of 13 years. The structure erected by the erstwhile partnership firm was to revert back to the lessor of the land by 2014 in terms of the lease deed.

The copy of a bill issued by the assessee to a tenant on 9-7-2000 showed that the bill included the following entries: Rent, service charges, and municipal tax.

Further, various bills raised by one S on the assessee for the period from April, 2000 to March, 2001 showed that the assessee was paying an amount of Rs. 55,000 per annum to S towards cost of maintenance.

The assessee was providing facilities like scavenging, watch and ward facility, lift facility, etc., through S. The services rendered by the assessee to its tenants were the result of its activities carried on continuously in an organized manner with a set purpose and with a view to earn profit. Therefore, these activities could be construed as business activities and the income arising therefrom was assessable as business income.

However, in view of the fact that there was no segregation of rent and service charges in the bills raised against all the tenants by the assessee, 60 per cent of the amount was to be treated on account of rent and the rest 40 per cent on account of service charges. The assessee was eligible for deduction of corporation tax and deduction under section 24 as per law on the rent portion. The assessee was also eligible for deduction of various expenses under section 37(1) from the portion of service charges.

In the result, the appeal was to be partly allowed.