2011 SCC OnLine ITAT 11889 J 2

In the Income Tax Appellate Tribunal ‘B’ Bench, Chennai

(BEFORE HARI OM MARATHA, J.M. AND ABRAHAM P. GEORGE, A.M.)

The Dy. CIT Company Circle I(1) Chennai … Appellant;

Versus

M/s Adyar Gate Hotel Ltd. 132, TTK Road Chennai 600018 … Respondent.

PAN: AAACA9041L

M/s Adyar Gate Hotel Ltd. 132, TTK Road Chennai 600018 … Appellant/Cross objector;

Versus

The Dy. CIT Company Circle I(1) Chennai … Respondent.

I.T.A. No. 2168/Mds/2010, Assessment Year: 2007-08 and I.T.A. No. 2010/Mds/2010 & C.O.
No. 16/Mds/2011, [in I.T.A. No. 2168/Mds/2010], Assessment Year: 2007-08

Decided on December 15, 2011, [Hearing on: October 12, 2011]

Department by: Shri K.E.B. Rengarajan, Jr. Standing Counsel

Assessee by: Shri Suresh Virmani

ORDER

 HARI OM MARATHA, J.M.:— The above captioned cross appeals are directed against
the order dated 24.9.2010 passed by the ld. CIT(A)-III, Chennai, pertaining to
assessment year 2007-2008. The assessee has, in addition, also filed cross objection
against the disallowance of Rs. 50,000/- under section 14A of the Act.

 2. Briefly stated, the facts of the case are that the assessee-company filed its return
of income for assessment year 2007-2008 on 26.10.2007 declaring a total income of
Rs. 33,30,97,980/-. This return was processed u/s. 143(1) of the Income-tax Act, 1961
(hereinafter referred to as ‘the Act’ for short). Subsequently, the case was taken up for
scrutiny and regular assessment was made u/s. 143(3) vide order dated 15.12.2009.
The assessee-company had received an amount of Rs. 7,92,84,480/- as rent from the
let out of its building known as ‘Sai Real Tech Park’ during the relevant year. This rental
income has been treated and offered by the assessee-company as its ‘business
income’. The Assessing Officer was of the opinion that this receipt has to be assessed
under the head ‘income from house property’. The Assessing Officer had invited
objection, if any, from the assessee-company against his proposed action to assess this
receipt under the head ‘income from house property’. The company had objected to the
same on the basis of the following reasoning:

“(a)The building rented out is a specialized building providing infrastructure for

Information Technology companies and has been built in accordance with the
special guidelines notified by the Government.

(b) The income from the let out of the property includes income from specialized
services such as hire charges for specialized facilities including Cafetaria,
covered and open car parking, centralized airconditioning, diesel generator set
with capacity of 4000 KVA, 12 lifts, fire fighting equipments, fire alarms, smoke
detectors, electrical installation and equipment, mass communication system and
communication dish.

(c) Hiring of the building and facilities is a complex one since the services and
facilities provided are of specialized nature meant only for information technology
purposes.

(d) The Memorandum of Association of the company under the main objects permits
the company to carry on real estate business.

(e) Reliance was placed on the decision of Supreme Court in the case
of CIT v. National Storage Private Limited (66 ITR 596).”

 3. After considering the above submission in the light of lease agreements between
the parties, the Assessing Officer found that the assessee-company had purchased the
building from Real Value Promoters Pvt. Ltd., which was earlier leased out to Tata
Consultancy Services Ltd. (TCS). The seller company had entered into an agreement of
lease of this property and had also executed a ‘facility provider agreement’, both, on
18.2.2005, with TCS. The assessee-company purchased the leased premises from
Real Value Promoters Pvt. Ltd. through a sale deed dated 1.7.2005. The assessee had
admittedly conveyed the change of ownership and also made its intention known to
TCS, mentioning that it would continue the lease in terms of the ‘lease agreement’ and
the ‘facility provider agreement’ already executed between Real Value Promoters Pvt.
Ltd. and TCS. Meaning thereby, the assessee-company substituted Real Value
Promoters Pvt. Ltd. in both the agreements; and except for that all their terms and
conditions remained the same. As per the original agreements, the assessee received
Rs. 50,05,200/- per month and in lieu of facility provider agreement, it received Rs.
16,01,840/- per month, the break-up of which is as under:
Office A & Office B-Hire Charges Rs. 10,01,040 p.m.

Cafetaria Rs. 4,36,800 p.m.

Car Park Rs. 1,64,000 p.m.

 4. From these facts, the Assessing Officer has come to the conclusion that the main
object of the assessee-company is to let out the property in question on rent alongwith
additional right to use the common facilities including the Cafeteria, which he culled out
from the Agreements dated 18.2.2005. The Assessing Officer, with reference to the
decision of the Hon'ble Madras High Court rendered in the case of Chennai Properties
Ltd. v. CIT, 266 ITR 685 and the decision of Hon'ble Apex Court rendered in the case
of Shambu Investments Pvt. Ltd. v. CIT, 263 ITR 143, has treated this receipt as
assessable under the head ‘income from house property’. It has been held in the above
cases that the main/primary object of the assessee while explaining of the property has
to be considered to answer the question as to whether the receipt has to be assessed
as ‘income from house property’ or ‘income from business’ and if it is found that the
main intention is to let out the property or any portion thereof, it has to be considered as
rental income or income from property. In case it is found that the main intention is to
exploit the immovable property by way of complex commercial activities, in that event, it
must be held as ‘business income’. The Assessing Officer has further applied the tests
suggested by the Five Judges Bench in the case of Sultan Brothers Pvt. Ltd., 51 ITR
353 (SC) to determine whether rental income is assessable under the head ‘business’
or under the head ‘income from house property’. He has extracted the relevant portion
of the decision which reads as under:

“Let us approach the problem from another angle by applying the test suggested by
the five judges' Bench in the case of Sultan Brothers Pvt. Ltd., [1964] 51 ITR 353
(SC). The three questions framed by the apex court are applied in the instant case
as follows:

(A) Was it the intention in making the lease-and it matters not whether there is
one lease or two, i.e., separate leases in respect of the furniture and the
building-that the two should be enjoyed together?

In the instant case there is no separate agreement for furniture and fixtures or
for providing security and other amenities. The only intention, in our view, was
 to let out the portion of the premises to the respective occupants. Hence, the
intention in making such agreement is to allow the occupants to enjoy the
table space together with the furniture and fixtures. Hence, this question
should be answered in the affirmative.

(B) Was it the intention to make the letting of the two practically one letting:

From a plain reading of the agreement it appears that the intention of the
parties to the said agreement is clear and unambiguous by which the first
party has allowed the second party to enjoy the said table space upon
payment of the comprehensive monthly rent. Hence, this question should be
answered in the affirmative.

(C) Would one have been let alone and a lease of it accepted, without the other?

As we have discussed hereinbefore that it is composite table space let out to

various occupants, the amenities granted to those occupants including the
user of the furniture and fixtures are attached to such letting out and the last
question, in view of the same, must be answered in the negative.

Applying the said test we hold that by the said agreement the parties have intended
that such letting out would be an inseparable one.

Hence, we hold that the prime object of the assessee under the said agreement was
to let out the portion of the said property to various occupants by giving them
additional right of using the furniture and fixtures and other common facilities for
which rent was being paid month by month in addition to the security free advance
covering the entire cost of the said immovable property.”

 5. Accordingly, he has applied the tests laid down as above to the facts of this case
and has concluded that the primary object of the assessee-company as revealed by
Agreements is to let out the building and provide the lessee with certain additional
common facilities, which are the subject matter of facility provider agreement and are
summarized as under:

(a) Covered car parking (205 Nos.) in the Stilt Floor

(b) Open Car park (110 Nos.)

(c) Two wheeler parking (565 Nos.)

(d) Cafetaria with permanent fixtures (31,200 sq. ft.)

 (e) Lifts-12 Nos.

(f) Transformers-2 Nos.

(g) DG set (4000 KVA) - 1 No.

(h) Centralised Air conditioning

(i) Fire Alarms & Smoke Detectors

(j) Communication Dish on the Terrace.

 6. With reference to above facilities, he has observed that these are normal facilities
which are usually provided in any building. According to him, parking facility, lifts, fire
alarms and smoke detectors are basic facilities which are mandatory as per the Building
Construction Norms set out by the Government which only means that they cannot be
categorized as specialized services/amenities. To describe Cafeteria, he has observed
that this a part of permanent fixtures of the building. Although he has agreed that
Centralized AC, DG Set and Communication Dish, he has mentioned that these are
additional and extra facilities, yet these can be treated only incidental to the letting of
building. At the end, he has concluded that the claim of the assessee, that it has
provided specialized services to the lessee, is devoid of merits. Ultimately, he has
applied the test laid down in the case of Sultan Brothers Pvt. Ltd. (supra) in the following
way:

(A) Was it the intention in making the lease-and it matters not whether there is one
lease or two, i.e. separate leases in respect of the furniture and the building-that
the two should be enjoyed together?

In the instant case, there are two separate agreements-one for letting out of
building and the other for “other amenities”. The only intention could be to let out
the premises and allow the lessee to enjoy additional facilities in the form of
airconditioning, cafeteria, etc. Hence, this question should be answered in the
affirmative.

(B) Was it the intention to make the letting of the two practically one letting:

It is definitely one letting since the services or amenities provided could be

enjoyed only along with the building. Hence this question should be answered in
the affirmative.

(C) Would one have been let alone and a lease of it accepted, without the other?
 As discussed above, the letting of building and the amenities is a composite one
and the amenities granted are attached to such letting. Therefore, the question
must be answered in the negative.

 7. Finally, he has summed up that the letting of the building and the services
provided are inseparable and the prime object of the assessee is only to let out the
property as such and to provide the lessee only an additional right to use the various
amenities and common facilities provided therein. He has also rejected the contention of
the assessee that the decision of the Hon'ble Jurisdictional High Court in the case
of Chennai Properties (supra) supports its claim. The Assessing Officer has mentioned
as under:

“The assessee's contention that its Memorandum of Association permits it to do real

estate business and therefore, the rental income is business income is not legally
tenable in view of the decision of the jurisdictional High Court of Madras in the case
of Chennai Properties reported in (266 ITR 685) wherein it was held that even in the
cases of companies engaged in the business of property development, if the income
derived is that of rental income, then the same is assessable under the head
“Income from House Property”. In the case of Mangala Homes P. Ltd. v. CIT, (182
Taxman 55) (Bom), the assessee was engaged in the business of purchase and
sale of house properties. Due to recession in the market, it had to let out its
properties for rent. The Honourable Bombay High Court held that such rental income
is assessable under the head “Income from House Property”

 8. He has also distinguished the decision of CIT v. National Storage Pvt. Ltd., 66 ITR
596, on which reliance was placed on behalf of the assessee. By referring to the
decision of Hon'ble Calcutta High Court rendered in the case of Shambu Investment
Pvt. Ltd. (supra), he has finally treated the impugned receipt as rental income derived
from letting out of the building namely, ‘Sai Real Tech Park’ amounting to Rs.
7,92,84,480/- and he has assessed the same under the head ‘income from house
property’. He has, resultantly also disallowed the following expenses claimed in respect
of alleged business income:
Rs.

Municipal Taxes 35,24,879

Insurance 5,81,987

Interest 4,20,62,426
Depreciation 6,01,55,137

Miscellaneous 2,00,000

Total 10,65,24,429

 9. The facts apropos other addition are that the assessee had made investments in
shares of various companies including in its subsidiary companies. A sum of Rs.
1,45,93,889/- has been invested as capital in a partnership firm named ‘Parma Lakshmi
Restaurant’ in which the assessee is also a partner. The investment in shares of
companies and in the capital of the partnership are shown at Rs. 7,18,78,302/- as on
31.3.2007 and Rs. 7,12,59,585/- as on 31.3.2006. Since the profits on investment in
shares in the form of dividend and profits from the partnership firm are exempt from tax
u/s. 10(34) and 10(2A) of the Act and the assessee having received only an amount of
Rs. 5,630/- as dividend during the relevant period, expenditure incurred for the purpose
of earning an exempt income has not been allowed in re the taxable profits in the light of
the provisions of section 14A of the Act. The assessee has claimed the entire dividend
income as exempt but has not attributed any portion of the expenditure by debiting it to
the Profit & Loss Account. The Assessing Officer has found that the assessee has
incurred only routine expenditure that too to maintain its establishment and towards
administration. But with reference to Rule 8D, treating this rule as retrospective in
nature, he has worked out total disallowance under this head as under:
Rs.

(i) Direct expenditure relating to exempt income Nil

(ii) Interest relating to exempt income 25,44,414

(iii) 1/2% of investments yielding exempt income 3,75,345

(1/2% of Rs. 7,50,68,944/-)

Total disallowance u/s. 14A 29,19,759

Rs. Rs.

Interest debited to P&L A/c not directly related to a particular income or receipt 6,36,59,109

Total Assets as per Balance Sheet

As on 31.03.2007 189,42,24,995

As on 31.03.2006 189,42,24,995
 Average 187,81,62,211

Investment yielding exempt income

7,88,78,302

As on 31.03.2007 7,12,59,585

As on 31.03.2006

Average 7,15,68,944

 10. Accordingly, he has assessed the total income of the assessee as under:

Rs. Rs.

Income from Business (as admitted) 33,24,74,443

Less: Rental Income treated as 7,92,84,480

House Property (as discussed)

Income from Business 25,31,89,963

Add: (1) u/s. 14A (as discussed) 29,19,759

(2) Expenses claimed under rental income (as discussed) 10,65,24,429

Business Income 36,26,34,151

Income from House Property 7,92,84,480

Less: Municipal Taxes paid 35,24,879

7,57,59,601

Less: Deduction u/s. 24 @ 30% 2,27,27,880

5,30,31,721

Less: Interest paid 4,20,62,426

1,09,69,295

37,36,03,446

 11. Being aggrieved, the assessee went in first appeal before the ld. CIT(A), who has
treated the impugned receipt as assessable under the head ‘income from other sources’
under section 56 treating it eligible for deduction u/s. 57 of the Act by accepting
alternate plea of the assessee. He has also given part relief out of other addition made
on account of disallowance of expenses u/s. 14A of the Act. Resultantly, both the
parties are now aggrieved. The Revenue has raised the following grounds in its appeal:
“1. The order of the learned Commissioner of Income-Tax (Appeals) is contary to the
law and facts of the case.

2. The learned Commissioner of Income Tax (Appeals) has erred in directing the
assessing officer to assess the rental income under the head “Income from other
sources” u/s. 56 and allow the permissible deduction u/s. 57 of the Act.

2.1 It is submitted that the CIT(A) while considering the amount of Rs. 7,92,84,480
has directed to consider it as income from other sources u/s. 56 of the Act
instead of House property income. He has also recommended for an allowance
of all permissible deduction u/s. 57. The CIT(A) has erred in relying on the
decision of the Constitution bench of the Hon. Supreme Court in the case
of Sultan Brothers (51 ITR 353) since very many decisions have superseded
either by the Hon. Supreme Court or other High Courts.

2.2 It is further submitted that in the instant case, the agreements for the payment of
rent was of two types viz., Lease Agreement and Facility Provider Agreement
and the prime object of the assessee under the above said agreement is to let
out the property on rent and give them additional right of using the facilities
including the Cafetaria. The decision of the Hon. Madras High Court in the case
of Chennai Properties Ltd. (266 ITR 685) and the decision of the Hon. Supreme
Court in the case of Shambu Investments Pvt. Ltd. v. CIT (263 ITR 143) which
affirmed the decision of the Hon. Calcutta High Court (249 ITR 47) which says
that the income derived from the let out of a building is to be assessed under
‘Income from House property’ only and not under the head ‘business’.

2.3 The learned CIT(A) ought to have appreciated that the decision of the Hon.
Supreme Court in the case of Shambu Investments Pvt. Ltd., supersedes the
decision of Sultan Brothers Pvt. Ltd. and in the case of former the decisions were
made only after analysing all the previous judgements of various courts including
the Hon. Supreme Court. The Hon. High Court of Calcutta while discussing the
case of Shambu Investment Pvt. Ltd. has made a test check that was suggested
by the Five judge Bench in the case of Sultan Brothers Pvt. Ltd.

2.4 It is submitted that in the case of Adayar Gate Hotel Ltd., the Ld. CIT has not
considered the decision of the Hon. Supreme Courts in the case of Shambu
Investments at all in which the test check which was discussed in detail by the
AO himself in the assessment order. They are (a) Was it the intention in making
 the lease and it matters not whether there is one lease or two and if two should it
be enjoyed together? (b) Was it the intention to make the letting of the two
practically one letting: (c) Would one have been let alone and a lease of it
accepted, without the other/. For the first question the intention in making such
agreement is to allow the occupants to enjoy the table space together with the
furniture and fixtures and for the second question the first party has allowed the
second party to enjoy the table space upon payment of comprehensive monthly
rent. For the third question the table space to be let out including the furniture
and fixtures only. In the instant case the assessee Company has not provided
any Furniture or fixtures inside the building which was let out. Therefore, the
assessee's claim that it has provided some specialised services to the lessee
was devoid of merits.

2.5 The reliance of the Ld. CIT(A) on the decision of the Supreme Court in the case
of Sultan Brothers Pvt. Ltd. in the instant case and the decision that ‘we must,
therefore, hold that when a building and plant, machinery or furniture are
inseparably let, the Act, contemplates the rent from the building as a residuary
head of income’, is not legally tenable. Rather, on the other hand, he basic
facilities which are mandatory as per the Building Construction Norms set out by
the Govt, which only means that they cannot be categorised as specialised
services/amenities. It can be said that the letting of the building and the services
are inseparable and the prime object of the assessee was only an additional right
to use the various amenities and common facilities provided therein. On the
above basis, it is unacceptable to deviate from the stand taken in the assessment
order made by the AO, that the income should be taken as ‘Income from House
property’.

3. The learned CIT(A) has erred in restricting the disallowance u/s. 14A r.w. Rule 8D
to Rs. 50,000/- as against Rs. 29,19,759/-

3.1 The Ld. CIT(A) has erred in disallowing of addition made by the AO to the extent
of Rs. 29,19,759/- u/s. 14A relied on the decision of the judgement of Special
Bench in the case of Daga Capital from where the lead matter was taken by the
Hon. Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. was
decided, in which, it is said that the provision of Rule 8D of the IT Rules which
have been notified with effect from 24 March 2008 shall apply with effect from
A.Y. 2008-2009. But in the same case of Daga Capital (117 ITD 169 (Mum)) the
 Special Bench stated that where it has been held that Section 14A(2) & (3) and
Rule 8D are procedural in nature and have retrospective effect and the matter
was remanded back to the AO for re-computing the disallowance.

3.2 It is submitted that Section 14A supersedes the principle of law that in the case
of a composite business expenditure incurred towards tax free income could not
be disallowed and in corporate an implicit theory of apportionment of expenditure
between taxable and non-taxable income. Once a proximate cause for
disallowance was established-which is the relationship of the expenditure with
income which does not form part of the total income a disallowance u/s. 14A of
the Act has to be affected. Moreover, where Rule 8D does not apply, the AO will
have to determine the quantum of disallowable expenditure by a reasonable
method having regard to all facts and circumstances.

4. For these and other grounds that may be adduced at the time of hearing, it is
prayed that the Order of the learned Commissioner of Income Tax (appeals) be
set aside and that of the Assessing Officer be restored.”

 12. The assessee has raised the following ground in its appeal:

“1. That on the facts and circumstances of the case the Learned Commissioner of
Income-tax (Appeals) erred in fact and in law in holding that the income from letting
of building and hire charges for plant and machinery and other facilities from
Information Technology Park known as ‘Sai Real Tech Park’ under two separate
agreements but inseparably let, is assessable as income from other sources and not
as income from business as claimed by the assessee-company.”

 13. In its cross objection, the assessee has raised the following ground:

“That on the facts and in the circumstances of the case, the ld. CIT(A) Chennai erred
in fact and in law in upholding disallowance of Rs. 50,000 under section 14A of the
Income-tax Act, 1961. In any case the disallowance is uncalled for and is excessive
and needs to be deleted.”

 14. We have considered the rival submissions and have carefully perused the entire
record. After cogitating the rival stands in the light of the available evidence on record,
we have to adjudicate the common issue involved in Revenue's appeal as well as in
assessee's appeal which pertains to the nature of receipt arising from giving the so
called ‘Sai Real Tech Park-Building + Plant and Machinery and Extra Facilities’. As per
the assessee, this is a business receipt and has to be assessed under the head ‘income
from business or profession’; according to the Assessing Officer, this receipt has to be
assessed under the head ‘income from house property’; according to the ld. CIT(A), this
receipt has to be assessed under the head ‘income from other sources’. Section 22 of
the Act deals with income from house property which reads as under:

“Income from house property.

16
22. 17 The annual value of property consisting of any buildings 18 or lands
appurtenant18 thereto of which the assessee is the owner 18, other than such portions
of such property as he may occupy 18 for the purposes of any business or profession
carried on by him the profits of which are chargeable to income-tax, shall be
chargeable to income-tax under the head “Income from house property”.”

 15. Section 28 deals with profits and gains of business or profession. This section
reads as under:

Profits and gains of business or profession.

39
28. 40 The following income shall be chargeable to income-tax under the head
“Profits and gains of business or profession”,—

(i) the profits and gains 41 of any business or profession 41 which was carried on
by the assessee at any time during the previous year;

(ii) any compensation 41 or other payment due to 41 or received by41,—

(a) any person, by whatever name called, managing the whole or

substantially the whole of the affairs of an Indian company, at or in
connection with the termination of his management or the modification of
the terms and conditions relating thereto;

(b) any person, by whatever name called, managing the whole or

substantially the whole of the affairs in India of any other company, at or in
connection with the termination of his office or the modification of the
terms and conditions relating thereto;

(c) any person, by whatever name called, holding an agency in India for any
part of the activities relating to the business of any other person, at or in
connection with the termination of the agency or the modification of the
terms and conditions relating thereto;
 42
[(d) any person, for or in connection with the vesting in the Government, or in
any corporation owned or controlled by the Government, under any law for
the time being in force, of the management of any property or business;]

(iii) income derived by a trade, professional or similar 43 association from specific

services43 performed for its members;
44
[(iiia) profits on sale of a licence granted under the Imports (Control) Order,
1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);]
45
[(iiib) cash assistance (by whatever name called) received or receivable by any
person against exports under any scheme of the Government of India;]
46
[(iiic) any duty of customs or excise re-paid or re-payable as drawback to any
person against exports under the Customs and Central Excise Duties
Drawback Rules, 1971;]
47
[(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme,
being the Duty Remission Scheme under the export and import policy
formulated and announced under section 5 of the Foreign Trade
(Development and Regulation) Act, 1992 (22 of 1992);]
48
[(iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being
the Duty Remission Scheme under the export and import policy formulated
and announced under section 5 of the Foreign Trade (Development and
Regulation) Act, 1992 (22 of 1992);]
49
[(iv) the value of any benefit or perquisite, whether convertible into money or
not, arising from business or the exercise of a profession;]
50
[(v) any interest, salary, bonus, commission or remuneration, by whatever name
called, due to, or received by, a partner of a firm from such firm:

Provided that where any interest, salary, bonus, commission or

remuneration, by whatever name called, or any part thereof has not been
allowed to be deducted under clause (b) of section 40, the income under
this clause shall be adjusted to the extent of the amount not so allowed to
be deducted;]
51
[(va) any sum, whether received or receivable, in cash or kind, under an
agreement for—
 (a) not carrying out any activity in relation to any business; or

(b) not sharing any know-how, patent, copyright, trade-mark, licence,

franchise or any other business or commercial right of similar nature or
information or technique likely to assist in the manufacture or processing
of goods or provision for services:”

 16. Section 56 deals with income from other sources, which reads as under:

“Income from other sources.

91
56. (1) Income of every kind which is not to be excluded from the total income
under this Act shall be chargeable to income-tax under the head “Income from other
sources”, if it is not chargeable to income-tax under any of the heads specified
in section 14, items A to E.

(2) In particular and without prejudice to the generality of the provisions of sub-
section (1), the following incomes, shall be chargeable to income-tax under the head
“Income from other sources”, namely:—

(i) dividends;
92
[(ia) income referred to in sub-clause (viii) of clause (24) of section 2;]
93
[(ib) income referred to in sub-clause (ix) of clause (24) of section 2;]
94
[(ic) income referred to in sub-clause (x) of clause (24) of section 2, if such
income is not chargeable to income-tax under the head “Profits and gains of
business or profession”;]
95
[(id) income by way of interest on securities, if the income is not chargeable to
income-tax under the head “Profits and gains of business or profession”;]

(ii) income from machinery, plant or furniture belonging to the assessee and let
on hire, if the income is not chargeable to income-tax under the head “Profits
and gains of business or profession”;

(iii) where an assessee lets on hire machinery, plant or furniture belonging to him
and also buildings and the letting of the buildings is inseparable from the
letting of the said machinery, plant or furniture, the income from such letting, if
it is not chargeable to income-tax under the head “Profits and gains of
business or profession”;
 96
[(iv) income referred to in sub-clause (xi) of clause (24) of section 2, if such
income is not chargeable to income-tax under the head “Profits and gains of
business or profession” or under the head “Salaries”;]
97
[(v) where any sum of money exceeding twenty-five thousand rupees is
received without consideration by an individual or a Hindu undivided family
from any person on or after the 1st day of September, 2004 98[but before the
1st day of April, 2006], the whole of such sum:”

 17. Before dealing with the prescription of these sections and applying them to the
facts of the case in hand, with reference to the relevant precedents thereto, we would
like to cull out the correct and full facts which led to the impugned receipt. The
assessee-company is operating hotels at various places. The assessee has received an
amount of Rs. 7,92,84,480/- as rent from the let out of its building known as ‘Sai Real
Tech Park’ during the relevant year. This rental income has been offered by the
assessee-company under the head ‘income from business’. To support its stand, the
contention of the assessee is that the building rented out is a specialized building
providing infrastructure for Information Technology Companies and has been built in
accordance with the special guidelines notified by the Government. The receipt from
this let out of the property includes income from specialized services such as hire
charges for speciliased facilities including cafeteria, covered and open car parking,
centralized air conditioning, diesel generator set with capacity of 4000 KVA, 12 number
of lifts, fire fighting equipments, fire alarms, smoke detectors, electrical installation and
equipment, mass communication system and communication dish. Further contention of
the assessee to substantiate its claim is that the building in question being a complex
one, in which specialized services and facilities are provided and which is only for
Information Technology purposes, it can be hired by specified person/entities only. As
per the assessee, the Memorandum of Association permits the company to carry on
real estate business and therefore, in the light of the ratio of the decision of the Hon'ble
Supreme Court rendered in the case of CIT v. National Storage Pvt. Ltd., 66 ITR 596,
this receipt has to be treated as ‘income from business’ only. In fact, the assessee-
company had purchased this building as is where is basis, from Real Value Promoters
Pvt. Ltd. Prior to its purchase by the assessee-company, Real Value Promoters Pvt.
Ltd. had already leased out this property to TCS. Real Value Promoters Pvt. Ltd. had
already leased out this property under lease agreement and a connecting facility
provider agreement which were executed on 18.2.2005 in favour of TCS, the lessee.
Meaning thereby, the assessee had purchased the leased premises through a sale
deed dated 1.7.2005. As a sequel to this change of ownership, the lessee company was
informed about this change and also expressed its intention to continue the lease with
them with same terms and conditions and thereby entering into the shoes of Real Value
Promoters Pvt. Ltd. in so far as both these agreements are concerned. The lessee had
no objection regarding this and rather accepted this position. We have gone through the
lease agreement and facility provider agreement which were executed by Real Value
Promoters Pvt. Ltd. and now they relate to the assessee-company in their letters and
spirit. As per the lease agreement, the assessee has to receive Rs. 50,05,200 per
mansion as base rent. As per the facility provider agreement, the assessee has to
receive Rs. 16,01,840/- per mansion towards hire charges of office A&B, cafeteria and
car parking, the break-up of which we have already provided while narrating the facts of
the case. The facilities which are provided in the ‘Sai Real Tech Park’ can be explained
by the following chart which is enclosed at page 4 of the paper book:
SAI REAL TECH PARK FACILITIES

A.Y. 2007-2008 (F.Y. 2006-2007)

CALCULATION OF DEPRECIATION AS PER INCOME TAX ACT, 1961

NAME OF ASSETS RATE ADDITION DEPRECIATION WDV as on DEPRECIATION WDV as on

OF 2005-2006 2005-2006 31.03.06 2006-2007 31.03.07
DEP.

CENTRAL AC 15% 48,380,328 7,257,049 41,123,279 6,168,492 34,954,787

REFRIGERATION

DIESEL 15% 30,117,290 4,517,594 25,599,696 3,839,954 21,759,742

GENERATOR

ELECTRICAL 15% 37,804,964 5,670,745 32,134,219 4,820,133 27,314,086

INSTALLATION &

FIRE FIGHTING 15% 2,974,398 446,160 2,528,238 379,236 2,149,002

EQUIPMENT

LIFT 15% 11,576,000 1,736,400 9,839,600 1,475,940 8,363,660

TOTAL (A) 130,853,980 19,627,948 111,225,032 16,683,755 94,541,277

NAME OF ASSETS RATE ADDITION DEPRECIATION WDV as on DEPRECIATION WDV as on

OF
 DEP. 2005-2006 2005-2006 31.03.06 2006-2007 31.03.07

BUILDING 10% 483,015,353 48,301,535 434,713,818 43,471,382 391,242,436

LAND 128,055,470 - 128,055,470 - 128,055,470

TOTAL (B) 611,070,823 48,301,535 562,769,288 43,471,382 529,297,906

GRAND TOTAL 741,9233,803 67,929,483 673,994,320 60,155,137 613,839,183

(A+B)

 18. Schedule I appended to the facility provider agreement is being extracted herein

below so that one can easily understand the exact nature of building and facilities
provided therein:

“SCHEDULE-I

The Land and building known as “SAI REAL TECH PARK”, with a total super built up
area of 2,50,260 Sq. Ft. (Stilt + Four Floors) bearing S. No. 165/1A, 2&4, with an
extent of 1,01,196.5 Sq. Ft. or thereabouts of Velachery Village, situate in
Velachery-Taramani 100 Ft. Road, Velachery, Chennai-42, in the Registration Sub-
District of Velachery and Registration District of South Chennai bounded on the:—
North by : Land gifted to CMDA for O.S.R.S. No. 147, & Private Lands.

South by : Velachery-Taramani (100') Road and Private lands

East by : 24′ Feet Wide Road and S. No. 149.

West by : S. No. 147, 24′ wide Roads & Private lands

ANNEXURE I
Building Name : SAI REAL TECH PARK

Property Address : S. No. 165/1A, 2&4, Velachery-Taramani 100 Ft. Road, Velachery, Chennai-600042.

Plot Area : 1,01,196.5 Sq. Ft.

Frontage of the Plot : 21,164.32 M

Plot Coverage : 54.68%

Proposed time of completion for fit out : Office “A” - 1st April 2005 Office “B” - 1st July 2005

Building Type : Information Technology Park

Height of Building : 49.25 Feet/15 Metres

No. of Access to the Building : Five

No. of Floors : Stilt + four floors

Total Super Built up Area : 2,50,260 Sq. Ft.

Floor plate Size- Office “A” Office “B” Combined Single Floor

Level 1 28,685 Sq. Ft. 33,000 Sq. Ft. 61,685 Sq. Ft.

Level 2 28,685 Sq. Ft. 33,000 Sq. Ft. 61,685 Sq. Ft.

Level 3 29,340 Sq. Ft. 33,725 Sq. Ft. 63,075 Sq. Ft.

Level 4 29,785 Sq. Ft. 34,030 Sq. Ft. 63,815 Sq. Ft.

1,16,495 Sq. Ft. 1,33,765 Sq. Ft. 2,50,260 Sq. Ft.

Car Parking (covered) : 205 Nos. (in the Stilt Floor)

Open Car Park : 110 Nos.

Two Wheeler parking : 565 Nos.

Cafeteria (with permanent Fixtures) : 31,200 Sq. Ft. or as applicable.

External : Glazing & Natural brick tiled walls

External Finish Office “A” Double Glazing

Glazing Office “B” Single Glazing

Load Bearing Capacity : 400 Kg/Sq. M.

Live Load : Self Weight + 200 for Floor finish

Type of construction : Flat Slab

Lifts

No. & Capacity of the Lifts : 20 passengers-8 Nos.

Passenger : 8 Passengers-4 Nos.

Freight : One Tonne Capacity-2 Nos.

Make of the Lift : Otis

Technical

Power : 3200 KVA (Deposits by TCSL)

HT : Bus Bar till each Floor

LT
Total capacity installed : 3000 KVA

No. of Transformers installed for the building : 2 Nos.

Power allotted per floor : 600 watts per 100 Sq. Ft.

(including common)

Total Power available : 4000 KVA (1000 KVA × 4)

Back Power for each floor : 600 watts per 100 Sq. Ft.

(including common)

DG set capacity : 4000 KVA

Make of the DG set : Caterpillar/Cummins

Place where the DG set is kept : Adjacent to the road

Fuel tank capacity : 4 × 990 Litres.

Fuel tank : 10 K. Litres in 1 or 2 tanks in addition

DG set Sound proof : Yes, as per guidelines of TCSL

AC availability

Type of AC : Centralised, Chillers & AHU's

AC capacity : 1000 Tones

Make of the AC Plant : Blue Star

Upgrading Potential : Yes

Place where AC units are installed : Terrace

Fire Standards & Wet Riser (as per the TCSL fire advisors instructions)

No. of Fire Exits : 3+2 main exits

Rood Height : Doglegged, 11 feet

Fire Staircase landing : Outside the building

Fire Hydrants : Yes to be modified as per the advice of TCSL

Place where Fire pump & Emergency diesel pump installed : Ground floor

Fire Alarms : Yes

Smoke Detectors : Yes

Sprinklers : No.

Mass Communication Systems : Yes

Building Management Systems : No

Ceiling Height

Slab to Slab : 11 Feet-floor to Slab bottom

Clear : 11 Feet

Toilets (per Floor) as per standards prescribed by the TCSL's architect

Male : as required by TCSL

Female : as required by TCSL

Toilet floor finish : Vitrified tiles/ceramic tiles

Flooring

In the Lobby : Granite/marble/vitrified tiles

Stair case : Tiles/Granite/marble

Inside the Shell (common areas) : Vitrified tiles

Communication

Location of the communication rooms : Stilt Floor

Communication Dish : On the terrace

Note: Common areas, exterior of the building, landscaping, AC upto AHU, TNEB
Power Co-ordination, Power Back up and the Signage & naming rights-by the
Facility Provider.”

 19. In so far as the lease agreement and facility provider agreements are concerned,
there is no dispute between the facts contained therein. The case of the assessee is
that out of its main objects, object No. 7 is stated to be relevant for the adjudication of
impugned issue. Object No. 7 reads as under:

“7. To subsidise, assist and guarantee the payment of money by or by the

performance of, any contract, engagement or obligation by any persons or
companies and in particular, customers, of the company or any persons or
companies with whom the company may have or intend to have, business relations.”

 20. With reference to the above, it was argued that to take any property on lease, the
company has purchased this property and given the same on lease in furtherance of its
objects. The ld. AR also invited our attention towards Object Nos. 13, 14 & 15 to support
his above contention. Object Nos. 13, 14 & 15 read as under:

“13. To manage lands, buildings and other property situate as aforesaid, whether
belonging to the company or not and to collect rents and income and to supply to
tenants and occupiers and others, refreshments, attendance, messengers, light,
waiting rooms, reading rooms, meeting rooms, lavatories, laundry conveniences,
electric conveniences, stables and other advantages.

14. To acquire and take over any business or undertaking carried on, upon, or in
connection with any land or building which the company may desire to acquire as
aforesaid or become interested in and the whole or any of the assets and liabilities of
such business or undertaking and to carry on the same, or to dispose of remove or
put an end thereto, or otherwise deal with the same as may seem expedient.

15. To establish and carry on and to promote the establishment and carrying on,
upon any property in which the company is interested, of any business which may
be conveniently carried on, upon or in connection with such property and the
establishment of which may seem calculated to enhance the value of the Company's
interest in such property, or to facilities the disposal thereof.”

 21. With the help of these documents, the ld. AR convassed that this receipt is only
assessee's business receipt and has to be taxed under the head ‘income from
business’.

 22. On the other hand, the case of the Revenue is that the assessee-company has
given the property in question on rent as the prime object under the agreements in
question is to let out the property on rent and given them additional right of using the
facilities including the cafeteria etc. The ld. DR heavily relied on the decision of Hon'ble
Hon'ble Supreme Court as well as High Courts which are mentioned in the grounds of
appeal which we have extracted herein above. In the light of this submission, it was
insisted that this impugned receipt has to be assessed under the head ‘income from
house property’ only. The ld. DR has also disputed the finding of the ld. CIT(A) when he
has given a direction to the Assessing Officer to assess the impugned receipt under the
head ‘income from other sources’ u/s. 56 and also holding it eligible for deduction u/s.
57 of the Act.

 23. So, primarily, the prayer of the ld. AR is that the impugned receipt should be
treated as business receipt and in the alternative, he has vehemently submitted that in
any worst case, this receipt has to be assessed under the head ‘income from other
sources’ to which sections 56 & 57 of the Act are applied. For ready reference, we can
extract para 4.2 of the order appealed against which contains the detailed written
submission filed before the ld. CIT(A), herein below:

“4.2 The appellant has subsequently given further details regarding the impugned
property and the facilities and the reasons as to why the income derived therefrom
should be considered as business income. The submission of the appellant is as
under:

“2. The memorandum of association of the company allows the company to

acquire and carry out real estate business. The Company acquired an
information technology park from Real Value Promoters (Private) Lid during the
previous year relating to assessment year 2006-2007 at a total cost of Rs. 74.19
crores comprising of land at Rs. 12.8 crores, Building at Rs. 48.30 crores and
Plant and Machinery at Rs. 13.09 crores …….

The income from the Information Technology Park is not assessable as income
from house property. Information Technology Parks are infrastructure
undertakings which are not covered under section 22 of the Income tax Act.
These Information Technology Parks are in the nature of development
infrastructure facilities encouraged by the Central Government and include
development of infrastructure to promote exports of software. The statute
provides tax incentives as detailed in section 80 IA of the Income tax Act 1961
where the development is in accordance with the industrial Park scheme 2002
notified under notification number SO 354(E) dated 1-4-2002. The objectives of
the Industrial Park scheme includes an industrial park for the development of
infrastructural facilities or built up space with common facilities in an area allotted
or earmarked for the purpose of industrial use specified in Explanation to
paragraph 6 sub-clause (c) of the scheme. Infrastructure development means air
conditioning, roads (including approach roads) water supply and sewerage,
common effluent treatment facility, telecom network, generation and distribution
of power and such other facilities for the common use for industrial activity that
are provided on commercial terms.

4. The Information Technology Park owned and operated by the assessee, is

occupied by TCSL 100% export oriented unit under the Software Technology
Park of India scheme and the premises is recognized by the Custom˜ as a
 bonded manufacturing unit carrying out 100% export unit. The necessary
approvals under the Software Technology Park scheme and the Customs
obtained by TCSL are enclosed herewith for your ready reference.

5. The assessee acquired the Information Technology Park during construction

period between August 5, 2004 to July 1, 2005 and during construction period,
two agreements both dated Feb 18, 2005 were entered into with Tata
Consultancy Services Limited (TCSL), the country's largest software company.
These agreements are (i) Lease agreement and (ii) facility provider agreement.
The rent under these agreements commenced from July 1, 2005 for building
known as “Office A “and from September 5, 2005 for building known as “Office B
“. This is the first letting. The above two agreements are inseparable. Please see
page 5 of the Facility Provider Agreement paragraph 3 which reads as “3. The
parties hereto agree that the period of this agreement shall be concurrent to and
coterminous with the Lease Agreement dated 18th day of February, 2005 in
respect of the “Demised Premises” executed by the Facility Provider in favor of
TCSL. This Facility Provider Agreement cannot be terminated when the said
Lease Agreement is in effect. The terms and conditions of this Agreement are in
addition to the terms contained in the said Lease Agreement. In the event of
termination of this Agreement, TCSL may, at its discretion, adjust appropriate the
security deposit against the hire payable for such balance period of notice of
termination to the Facility Provider, as set out in the Lease Agreement.”

Lease Agreement - Under the lease agreement the monthly rent payable by TCS is
Rs. 20/- per sq. ft. for 250,260 sq. ft. aggregating to Rs. 50,05,200 (Rupees Fifty
lakhs five thousand and two hundred only) per month and Rs. 6,00,62,400 (Rupees
Six crores sixty two thousand four hundred only) per annum. The interest free
refundable security deposit is at Rs. 4,00,41,600 (Rupees Four crores forty one
thousand and six hundred only).

Facility Provider Agreement - Under this agreement hire charges payable by

TCSL is at Rs. 16,01,840/- (Rupees Sixteen lakhs one thousand eight hundred and
forty) per month or Rs. 1,92,22,080 (Rupees One crore ninety two lakhs twenty two
thousand and eighty only) per annum. The interest free security deposit is at Rs.
1,28,14,720/- (Rupees One crore twenty eight lakhs fourteen thousand seven
hundred and twenty only). Annexure I of the agreement provides the details of the
facilities provided.
As stated above the company has let out the entire Industrial Park to TCSL and that
company is engaged in the business of manufacturing software (an industrial
activity) as a hundred percent export unit recognized by the Government of India.
The fact that an industrial Park has been defined to mean a project in which plots of
developed space or built up space or combinations with common facilities and
quality infrastructure facilities are developed and made available to units for
industrial or commercial activities which include development of software would
show that no ordinary services or facilities or activities are being rendered by the
company and the inference drawn by the Assessing Officer that the services
provided are ordinary services, is wrong and misplaced and deserves only to be
rejected. The company provides quality infrastructure services to TCSL and would
have also qualified for recognition under the Industrial Park Scheme and would have
been eligible for deduction under 801A but for the criteria that there must be
minimum number of 30 units and that no industrial unit should occupy more than
25% of the allocable area which the appellant company is unable to meet as the
entire premises are occupied by TCSL. This failure to meet the regulations would
only mean that the company is not eligible for deduction under section 80 IA and
cannot be interpreted to mean that the company does not carryon business or that
the income is assessable under the head House Property.

6. The Assessing Officer wrongly applied the decisions of CIT v. Shambu

Investments Private Ltd., 249 ITR 47 (Affirmed by the Supreme Court in 263 ITR
143), Chennai Properties and Investments Ltd., 266 ITR 685 (Mad) and decision of
the Supreme Court in the case of Sultan Brothers, 51 ITR 353. These cases are
distinguishable on facts and do not apply to Information Technology Parks and are
not applicable for reasons stated hereunder.

a) In the case of CIT v. Shambu Investments P. Ltd. supra the assessee had let

out a portion of the premises to occupants and there was no separate
agreement for use of furniture and fixtures or other amenities. The intention
was to allow occupants table space together with furnitures and fixtures and
other faculties and amenities. The assessee had taken as security the entire
cost of property. On these facts, the High Court held that the income was
assessable as Income from House Property. The Honorable High Court said
(see page 52)
 “Taking a sum total of the aforesaid decisions it clearly appears that merely
because income is attached to any immovable property that cannot be the
sole factor for assessment of such income as income from property. What
has to be seen is what was the primary object of the assessee while
exploiting the property. If it is found applying such test that the main intention
is for letting out the property or any portion thereof the same must be
considered as rental income or income from property. In case it is found
that the main intention is to exploit the immovable property by way of
complex commercial activities in that event it must be held as business
income.

(emphasis supplied)…

To decide this issue we cannot overlook the fact that the cost of the property
was Rs. 5,42,443. A portion of the said property is used by the assessee
himself for his own business purpose. The rest of the said property has been
let out to the various occupiers as stated hereinbefore. It further appears
that the assessee had already recovered a sum of Rs. 4,25,000 as and
by way of security free advance from three occupants. Hence, the entire
cost of the property let out to those occupiers has already been
recovered as and by way of interest-free advance by the assessee.
Hence, it cannot be said that the assessee is exploiting the property for
its commercial business activities and such business activities are
prime motive and letting out the property is a secondary one”

(emphasis supplied)

(b) In the case of Chennai Properties and Investments Ltd., (Mad) 266 ITR 685
the facts were that the assessee company owned two buildings in the city of
Chennai, “Chennai House” and Firhavan Estates”. For the assessment here
1979-1980, 1983-1984 and 1984-1985, the Assessing Officer declined to
assess the rental income under the head business and assessed the income
under the head House property. The income was assessed both by the
Commissioner and the ITAT as income from business. The Honorable High
Court reversed the decision of the ITAT and held the income was assessable
as income from house property. The court found on facts that the
assessee was exploiting the property as owner by leasing out the-same
and a realizing income by way of rent. The Honorable Hjgh Court held
 “Although it was held by the Constitution Bench in the case of Sultan
Brothers, [1964] 51 ITR 353 (SC) that whether a particular letting is business
has to be decided in the circumstances of each case and that each case has
to be looked at from a businessman's point of view to find out whether the
letting was the doing of a business or the exploitation of his property by an
owner, in all the cases which have come before the courts involving
commercial or residential buildings owned by assessees it has been held that
the income realized by such owners by way of rental income from a building,
whether a commercial building or residential house, is assessable under the
head “Income from house property”.

The only exceptions are cases where the letting of the building is
inseparable from the letting of the machinery, plant and furniture. In
such cases, it has been held that the rental would not have been
realized but for the letting out of the machinery, plant or furniture along
with such building and therefore the rental received for the building is to
be assessed under the head “Income from other sources”:

(emphasis supplied)

Again the above case is not the case of an Information Technology Park and
is a case of bare letting and therefore distinguishable on facts. It will be
pertinent to note that in subsequent years for AY 2000-2001 and 2001-
2002 the Honorable High Court of Madras has assessed the amenity
charges as Income for Other Sources and not as House Property.
Please see 303 ITR 33

(c) In the case of Sultan Brothers Pvt. Ltd., a private company constructed and
let out on lease a fully equipped hotel with furniture, fixtures and fittings. The
lease provided for a monthly rent of Rs. 5,950/- and hire of Rs. 5,000/- for
furniture and fixtures. Up to the period commencing from Dec. 1, 1946 to
assessment year 1952-53 the income derived from letting of the building and
the furniture and fixtures was being computed under section 12
(corresponding to section 56 of the present Act) of the Income tax Act 1922.
The income tax officer for assessment year 1953-54 computed the income
from property leased under section 9 (corresponding to section 22 of the
present Act) and the income derived from hiring of furniture and fixtures under
section 12 (corresponding to section 56 of the present Act) Income tax Act
 1922. At no time the assessee had to contended before the Income Tax
Officer that the assessee company was carrying on business. (Please see the
Statement of the Case 38 ITR 85 at page 87 and only an alternate plea was
taken that if the income cannot be computed wholly under section 12 then it
should be wholly computed under section 10 as much as “letting out totality of
the assets” is the assessee's business and the building that is leased is used
for the purpose of that business).

The Honorable Supreme Court on facts found that the two leases were
inseparable and that the assessee never carried out hotel business and had
no intention to carry on such business. On such facts, the Supreme Court
held that the Income from hire of Furniture & Fixtures and Building was
assessable as Income from Other Sources and not income from House
property or income from business. This case does not advance the case of
the Assessing Officer that income from letting of an Information Technology
Park is assessable as income from House property.”

 24. Before moving further, let us further discuss the decision of Hon'ble Jurisdictional
High Court rendered in the case of Chennai Properties and Investments Ltd., 266 ITR
685. In that case, the assessee-company owned two buildings in the city of Chennai,
‘Chennai House’ and ‘Firhavan Estates’. For assessment years 1979-1980, 1983-1984
and 1984-1985, the Assessing Officer declined to assess the rental income under the
head ‘business’ and assessed the income under the head ‘income from house property’.
As against which the ld. CIT(A) as well as the Tribunal held that receipt as ‘income from
business’. This finding of the Tribunal was reversed by the High Court when it found that
the assessee was exploiting the property as owner by leasing out the same and
realizing income by way of rent. In doing so, the Hon'ble High Court has observed the
decision of Constitution Bench of Hon'ble Supreme Court rendered in the case of Sultan
Brothers, 51 ITR 353 that whether a particular letting is business has to be decided in
the circumstances of each case and that each case has to be looked at from a
businessman's point of view to find out whether the letting was the doing of a business
or the exploitation of his property by an owner, in all the cases which have come before
the courts involving commercial or residential buildings owned by assessees it has been
held that the income realized by such owners by way of rental income from a building,
whether a commercial building or residential house, is assessable under the head
‘income from house property’. The Hon'ble Supreme Court as well as the Hon'ble
Madras High Court have certified that the only exception are cases where the letting of
the building is inseparable from the letting of the machinery, plant and furniture. In such
cases, it has been held that the rental would not have been realized but for the letting
out of the machinery, plant or furniture along with such building and therefore, the rental
received for the building is to be assessed under the head ‘income from other sources’.
As is clear, in the case of Chennai Properties and Investments Ltd. (supra), the asset
given on lease was not an Information Technology Park and was a simple case of
letting. So, in our considered opinion, the facts are distinguishable. The Hon'ble Madras
High Court, while dealing with such rental cases, has ordered to assess the amenity
charges as income from other sources and not as ‘income from house property’ while
deciding the case of CIT v. Chennai Properties & Investments Ltd., 303 ITR 33,
pertaining to assessment year 2001-2002.

 25. In the case of Sultan Brothers Pvt. Ltd. (supra), a private company constructed
and let out on lease a fully equipped hotel with furniture fixtures and fittings. The lease
deed provided for a monthly rent of Rs. 5950/- and hire of Rs. 5000/- for furniture and
fixtures. Upto the period commencing from 1.12.1946 to assessment year 1952-1953,
the income derived from letting of the building and the furniture and fixtures was being
computed u/s. 12 (corresponding to section 56 of the present Act). The Assessing
Officer, in that case, assessed the income from property leased under section 9
(corresponding to section 22 of the present Act). In that case at no point of time, the
assessee-company had contended before the ITO that the assessee-company was
carrying on business. On the obtaining facts of that case, the Hon'ble Supreme Court
found that the two leases were inseparable and the assessee never carried out hotel
business and had no intention to carry on such business. On such facts, the Hon'ble
Supreme Court held that the income from hire of furniture and fixtures and building was
assessable as ‘income from other sources’ and not ‘income from house property’ or
‘income from business’.

 26. In short, the case of the ld. AR is that the income from building and plant and
machinery which is inseparable let out is assessable as income from business. In
support of his contention he has relied on the decision of Hon'ble Supreme Courts
rendered in the case of SG Mercantile Comp. P. Ltd. v. CIT, 83 ITR 700 and that
of Karnani Properties Ltd. v. CIT, 82 ITR 547. Further reliance was placed on the
following cases:
CIT v. National Storage Pvt. Ltd. 66 ITR 596 (S.C)
CIT v. Associated Building Co. Ltd. 137 ITR 339 (Bom.)

CIT v. K.L. Puri (HUF) 233 ITR 43 (Delhi)

CIT v. Halai Nemon Association 243 ITR 439 (Mad)

CIT v. Admiralty Flats Motel 133 ITR 895 (Mad)

Sultan Brothers Pvt. Ltd. v. CIT 51 ITR 353 (S.C)

 27. Further reliance was placed on the decision of Hon'ble Supreme Court rendered
in the case of Universal Plast Ltd. v. CIT, 237 ITR 454 and that of Hon'ble Allahabad
High Court rendered in the case of CIT v. Goel Brothers, 331 ITR 344. These decisions
clearly say that section 22 does not apply to commercial assets. Further reliance was
placed on the decision of Hon'ble Orissa High Court rendered in the case of CIT v. M.P.
Bazaz, 200 ITR 131. The ratio of the above decision is that intention of the parties is to
be seen. To support the ld. CIT(A)'s finding, the ld. AR has relied on the decision of
Hon'ble Madras High Court rendered in the case of Orient Hospital Ltd. v. Dy. CIT, 315
ITR 422 in which it has been held as under:

“Held, dismissing the appeal, that income derived out of the lease of property and
furniture as in this case could not be treated as income from profits and gains of
business or profession. The finding given by the Tribunal that the income was
income from other sources was correct.”

 28. Further reliance has been made on the decision of Chennai Properties &
Investments Ltd., which has followed another decision in the case of Tarapore and
Co. v. CIT, 259 ITR 389, the ratio of these decisions is that when the letting of building
is inseparable from the letting of plant and machinery and furniture, the receipt of such
leasing has to be assessed under the head ‘income from other sources’.

 29. Section 22 which we have extracted in the former part of this order simply talks
about annual value of letting of the property consisting of any building or land
appurtenant thereto of which the assessee is the owner which excludes portions of such
property as he may occupy for the purposes of any business or profession carried on by
him the profits of which shall be chargeable to income tax under the head ‘income from
house property’. In our considered opinion, this section does not directly apply to the
facts of the given case.

 30. Again section 28 prescribes about the profits and gains from business or
profession. So, if it is found that the receipt in question is in furtherance of the objects of
the assessee which form part of its business then only the income can be assessed
under this section. In our opinion, the findings of the ld. CIT(A) and the reasoning given
by him that receipt cannot be treated as assessee's business income are correct and
we uphold the same. In this regard, we would like to incorporate para 4.4 of the ld.
CIT(A)'s order herein below:

“4.4 I have carefully considered the facts of the case and the submissions of the Id.
AR. I have also gone through the decisions relied on by the AO and AR. I have also
perused the lease agreements and other documents submitted by the appellant. The
AO has treated the rental income as income from house property by mainly relying
on the decision of the Madras High Court in the case of Chennai Properties (supra)
and the decision of the Supreme Court in the case of Shambu Investments (supra).
The appellant, on the other hand, has relied on the specific nature of the building
(ITP) and the decision of the Supreme Court in the case of SG Mercantile Company
Pvt. Ltd., Karnani Properties, National Storage Pvt. Ltd., Associated Building
Company Ltd., K.L. Puri, Halai Nemon Association and Admiralty Flats
Motel (supra). After considering the facts of the case and the precedents relied on by
the AO and AR, I am of the opinion that the income from the building and the-
facilities cannot be considered as “profits and gains of business or profession”. As
per s. 14 of the Act, all income, for the purposes of charge of Income-tax and
computation of total income, are classified under the following heads of income: (i)
Salaries, (ii) Income from house property, (iii) Profits and gains of business or
profession, (iv) Capital gains and (v) Income from other sources. The various heads
and the provisions of Act applicable to these various heads are mutually exclusive.
Where an item fall specifically under one head it has to be charged under that head
and no other. The method of book keeping followed by the assessee will not decide
under which head a particular income will fall. The heads of income must be decided
from the nature of the income by applying practical notions and not by reference to
an assessee's treatment of the income. It is to be decided according to the common
notions of a practical man. The following conditions should be satisfied in order for
an income to be charged under 28(i) i.e. the profits and gains of any business (i)
there should be profit and gains; (ii) the profits and gains should be of any business
or profession; (iii) the business or profession should be carried on; (iv) the business
or profession should be carried on by the assessee and (v) the business or
profession should be carried on during the previous year. As per clause (13) of
section 2, business includes any trade, commerce or manufacture or any adventure
 or concern in the nature of trade, commerce or manufacture. Essential features of a
business include regularity of transactions and continuity of activities. The objective
should be to earn profit. The activity should be real, substantial, systematic and
organized [CIT v. Distributors (Baroda) Pvt. Ltd., 83 ITR 377 (SC)]. The Gujarat High
Court in the case of CIT v. Smt. Meenal Rameshchandra, 167 ITR 507 (Guj) held
that business activity or transaction necessarily implies the activity with an object to
earn profit. Larger the risk, greater the margin of the profit. Uncertainty about the
return to be received from the investment made in the business, also the facing of
many imponderables and even the risk of losing the capital invested, are inherent in
activity called ‘business’. Risk, uncertainty, foresightedness to visualize the
imponderables and capacity to overcome the unforeseen hurdles are the essential
requisites for business activity.”

 31. But we are in agreement with the ld. AR that the letting out of plant and
machinery, furniture and fixtures as provided in facility provider agreement is in fact
inseparable from letting out of building under the lease agreement, income of such
letting, both building and plant and machinery, furniture, fixtures etc. is required to be
assessed as ‘income from other sources’ and the assessee is entitled to deductions on
account of depreciation u/s. 57 and also other expenses such as interest, property tax
paid insurance etc. In this regard, decision of Hon'ble Supreme Court rendered in the
case of Sultan Brothers Pvt. Ltd. (supra) is very much relevant and supports our above
conclusion.

 32. Thus, the alternate submissions of the ld. AR is correct and has to be allowed.
The Industrial Park buildings are specialized buildings to provide infrastructure to
Information Technology Companies. This company has let out the entire building to a
single tenant and there is no dispute regarding this fact. Two agreements are
complementary to each other and are made with the same lessee so in effect, both
these agreements although executed separately, have to be read conjointly because
same parties have entered into the agreements relating to the same property. The
letting out through two separate agreements in this case, is definitely inseparable and
both the agreements have to be carried simultaneously without availing one agreement
the other agreement would become useless. Given the facts that the cost of building
being 48.30 crores and that of the plant and machinery being 30.09 cores and for them
substantial rent per mansion being received would go to suggest necessarily that no
prudent man would keep any of these two idle and these cannot be given on lease/hire
to different entities, therefore, the subject of both the agreements are inseparable. Both
the agreements are complimentary to each other and cannot be separated. No same
person or entity would take the entire building on rent without the facilities in question.
Rather it would not be possible to carry on the business of Information Technology from
a place without such facilities.

 33. In regard to the primacy of the letting out of the machinery and plant vis-à-vis the
building, the Hon'ble Supreme Court in the case of Sultan Brothers Pvt. Ltd. (supra) has
observed as under:

“If we are right in our view, as we think we are, that the letting of a building can never
be incidental to the letting of furniture contained in it, then it must be held that no-
consideration of primary or second lettings arises in construing the section for what
must apply when furniture is let and also building must equally apply when plant and
machinery are let and also buildings. We think all that sub-section (4) of section 12
contemplates is that the letting of machinery, plant or furniture should be inseparable
from the letting of the buildings.”

 34. The Hon'ble Supreme Court, thus held that the section contemplates inseparable
letting and not primary or secondary lettings. In such situations, has laid down a
justifiable law that the rent received from such building has to be assessed under the
head ‘income from other sources’. The Court went on observing as under:

“What, then, is inseparable letting? It was suggested on behalf of the respondent

Commissioner that the sub-section contemplates a case where the machinery, plant
or furniture are by their nature inseparable from a building so that if the machinery,
plant or furniture are let, the building has also necessarily to be let along with it.
There are two objections to this argument. In the first place, if this was the intention,
the section might well have provided that where machinery, plant or furniture are
inseparable from a building and both are let, etc. The language however is not that
the two must be inseparably connected when let but that the letting of one is to be
inseparable from the letting of the other. The next objection is that there can be no
case in which one cannot be separated from the other. In every case that we can
conceive of, it may be possible to dismantle the machinery or plant or fixtures from
where it was implanted or fixed and set it up in a new building. As regards furniture,
of course, they simply rest on the floor of the building in which it lies and the two
indeed are always separable. We are unable, therefore, to accept the contention that
 inseparable in the sub-section means that the plant, machinery or furniture are
affixed to a building.

It seems to us that the inseparability referred to in sub-section (4) is an inseparability

arising from the intention of the parties. That intention may be ascertained by
framing the following questions: Was it the intention in making the lease—and it
matters not whether there is one lease or two, that is, separate leases in respect of
the furniture and the building—that the two should be enjoyed together? Was it the
intention to make the letting of the two practically one letting? Would one have been
let alone and a lease of it accepted without the other? If the answers to the first two
questions are in the affirmative and the last in the negative then, in our view, it has to
be held that it was intended that the lettings would be inseparable. This view also
provides a justification for taking the case of the income from the lease of a building
out of section 9 and putting it under section 12 as a residuary head of income. It then
becomes a new kind of income, not covered by section 9, that is, income not from
the ownership of the building alone but an income which though arising from a
building would not have arisen if the plant, machinery and furniture had not also
been let along with it.”

 35. Thus, the assessee-company has given on rent (by stepping into the footing of
the earlier company Real Value Promoters Pvt. Ltd.) the building namely ‘Sai Real Tech
Park’ to TCS, Both the agreements are with the same entity. The only inference which
can be drawn from the facts of this case are that the parties' intention to execute these
two agreements on the same date were that both the agreement had to be enjoyed
together. Further more, TCS is engaged in software/information technology business for
which a building simplicitor without facilities in question would be useless. Moreover,
both these items i.e. building and the facilities cannot be separately used for any
purpose and they have to be jointly used. In case the building alone is given on lease, it
will become useless without the facilities in question. Moreover, if the facilities are given
on rent alone these cannot be utilized without the building. The argument of the ld. DR
that most of the facilities are such facilities which are usually go with a building to give
the same on rent would not apply in the given case where the property itself is meant for
a specified utility i.e. software and information technology. So, the intention of both the
parties was to use both building and facilities although separate agreements were
drawn, may be for quantifying the amount of lease/hire charges. Therefore, it is a case
where the building and facilities cannot be separately let out, the total built-up area is
2,50,260 sq. ft. consisting of four levels. The entire space has been let out to TCS.
When the assessee-company has incurred such huge costs it cannot afford to either
keep the building or the facilities idle. TCS being the largest software company of India,
it cannot afford to allow any other competitor in the same building or to enjoy the
facilities for that matter. Thus, for TCS it would not be possible to conduct its business in
the building without all the facilities required in case of a software company. Thus, the
fact that both the building as well as the facilities were let out together and not
separately is established from the facts of the case. Therefore, we can safely hold that
letting out of the building is inseparable from letting out of the facilities. The decision of
Hon'ble Supreme Court rendered in the case of Sultan Brothers Pvt. Ltd. (supra) applies
on all fours to the facts of the given case. Therefore, the alternate plea of the assessee
has to be allowed and confirmed as the ld. CIT(A) has already taken similar view. With
our above observations, the grounds raised by the Revenue and the assessee in this
regard in their respective appeals, stand dismissed.

 36. The other issue raised by the Revenue is against restricting the disallowance u/s.
14A r.w. Rule 8D to Rs. 50,000/- as against Rs. 29,19,759. The assessee has filed
cross objection against the disallowance of Rs. 50,000/-.

 37. The facts apropos this issue are that the assessee has received an amount of
Rs. 5,630/- as dividend during the relevant period. The assessee itself submitted
through its ld. AR that no expenditure was incurred in earning this exempt income. But
the Assessing Officer did not accept this contention and applied Rule 8D by relying on
the decision of the ITAT Special Bench, Mumbai in the case of CIT v. Daga Capital
Management Pvt. Ltd., 117 ITD 169 (AT) (Mum). There is no finding by the Assessing
Officer that any expenditure has been incurred for the purpose of making such
investments which is tax free. In the absence of such a finding no amount of interest
can be disallowed. From the records, it is clear that share capital, reserves and the
profit were available for making investments and such amounts were substantial and in
no case it can be said that there was any diversion of borrowed funds. At the same
time, the Assessing Officer has accepted that interest of Rs. 4,20,62,426/- was payable
in reference to amount borrowed for the purchase of Information Technology Park.
Thus, this amount of interest could not have been included in the computation of
disallowance. The investments made in equity shares of wholly owned subsidiaries
were made in the financial year 1995-1996 and 1998-1999 and therefore, there is no
question of any borrowed money having been invested in the impugned investments.
The investments in equity shares is very small i.e. Rs. 42,234/- and that too was made
in earlier years as compared to which the profits of the company are very high and
running in crores. So, it shows that the company had sufficient sources for its own to
make such investments. The only new investment during the year is in Balaji
Entertainment Pvt. Ltd. i.e. of Rs. 60,45,458/- and in the capital of the partnership firm of
Rs. 1,45,93,889/- which have been made out of borrowed funds as contrast to which
profits for the year ended 31.3.2007 are 35.02 crores, are sufficient enough to make
such investments. Likewise, investment in the capital gain bonds of Rural Electrification
Corporation Ltd. amounting to Rs. 70,00,000/- has been made from sale proceeds of
equity shares which is taxable as capital gains. Thus, in the given facts, no disallowance
can be made of interest u/s. 14A. The application of Rule 8D is not permissible in the
absence of such a finding. Moreover, the decision of Bombay High Court rendered in
the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT in I.T.A. No. 626 of 2010, order
dated 12.8.2010, has also decided the Special Bench decision of the Tribunal rendered
in ITO v. Daga Capital (supra) by holding that provisions of Rule 8D which have been
notified with effect from 24.3.2008 shall apply with effect from assessment year 2008-
2009. Prior to that the Assessing Officer has to reach a finding with certitude to
ascertain the expenditure which has been incurred to earn as income which does not
form part of the total income of the year. The assessment year under appeal is 2007-
2008, obviously, the provisions of Rule 8D would not apply in view of the above
uncontroverted decisions. The assessee-company has earned dividend income or Rs.
5630/- only. The ld. CIT(A) has, however, sustained the lump sum addition of Rs.
50,000/- and has deleted the remaining amount added in this account by Assessing
Officer, after considering the fact that the monitoring of the investments and tracking of
the mutual funds, etc. for which some amount has to be spent towards the involvement
of some manpower in which treasury Department is also involved. On that premise, he
has sustained an addition of a sum of Rs. 50,000/- by disallowing the same and has
deleted the remaining disallowance for which the Revenue is aggrieved.

 38. In our considered opinion, action of the ld. CIT(A) is verily justifiable and cannot
be faltered with. The facts apropos to this issue are that the assessee made
investments in the shares of various companies. It has invested a sum of Rs.
1,45,93,889/- as capital, in a partnership firm named Parma Lakshmi Restaurant, in
which the assessee is a partner. As on 31.03.07 the investment in shares of various
companies stand at Rs. 7,18,78,301/-; And as on 31.03.06 in the firm towards capital
investment stands at Rs. 7,12,59,585/-. These investments are subjected to exempt
provision contained in sections 10(34), (for investment in shares in the form of
dividends) and in section 10(2A) - for profits from Partnership firm. The assessee has
received a sum of Rs. 5,630/- as dividend during this year. As per section 14A, no
expenditure incurred for the purpose of earning an exempt income can be allowed
against taxable profits. The assessee has claimed the amount of Rs. 5,630/- as exempt
being dividend income and has not attributed any portion of the expenditure debited to
the Profit and Loss Account towards the same. In the opinion of the Assessing Officer-
the assessee incurs routine expenditure to maintain its establishment and also towards
administration, so a portion of this expenditure can be attributed towards investments in
shares and towards capital in firm. On the same reasoning, some portion of the
remuneration paid to Directors and Managers has been attributed towards the above
investments. Thereafter, by invoking Rule 8D brought to life with effect from 01.04.2007
vide the Finance Act, 2006, which allows such apportionment of expenses, the
Assessing Officer has worked out the impugned disallowance as under:
Rs.

(i) Direct expenditure relating to exempt income Nil

(ii) Interest relating to exempt income 25,44,414

(iii) 1/2% of investments yielding exempt income 3,75,345

(1/2% of Rs. 7,50,68,944/-)

Total disallowance u/s. 14A 29,19,759

Rs. Rs.

Interest debited to P&L A/c not directly related to a particular income or receipt 6,36,59,109

Total Assets as per Balance Sheet

As on 31.03.2007 189,42,24,995

As on 31.03.2006 189,42,24,995

Average 187,81,62,211

Investment yielding exempt income

7,88,78,302

As on 31.03.2007 7,12,59,585
 As on 31.03.2006

Average 7,15,68,944

Thereafter, invoking Rule 8D of the Rules in conjunction with Sec. 14A(1), 14A(2) & (3)
and relying on the decision of ITAT Chennai Bench rendered in the case of MGM
Diamond Beach Resorts P. Ltd. v. DCIT order dated 13.06.2008 in ITA No.
2173/Mad/2005 A.Y. 2002-2003, in which it has been held that even if no income was
earned, expenditure is still allowable, the Assessing Officer has held that disallowance
u/s. 14A can exceed the exempt income actually received during the year. Accordingly,
he has added Rs. 29,19,759/- u/s. 14A of the Act.

 39. The Ld. Commissioner of Income Tax(A) has held that Daga Capital's case has
since been reversed by Hon'ble Bombay High Court who has held the provisions of
Rule 8D to be applicable only with effect from A.Y. 2008-2009. The Assessment Year
under consideration being 2007-2008, this provision would not apply. He has found that
the investment in assets giving rise to exempt in case is only Rs. 7,15,31,444/-, which
are covered by cash profit and the reserves and surplus funds. Therefore, according to
him not interest u/s. 14A can be disallowed. But on account of monitoring of investment,
etc., he has sustained a sum of Rs. 50,000/- in lump-sum. Now both parties are
aggrieved. The Revenue has raised a ground in its appeal against deletion of major
addition and the assessee is before us through cross-objection.

 40. The case of the Revenue as put forth before us is that apportionment of

expenses for composite business incurred towards tax-free income has to be done as
per Rule 8D, particularly when a proximate clause for disallowance i.e. the relationship
of the expenditure with income which does not form part of the total income, does not
exist in the given case. It was further argued that leave alone the applicability of Rule
8D, Section 14A supersedes the general rule that business expenditure not incurred
towards tax-free income cannot be disallowed and the Assessing Officer shall
determine the quantum of such disallowable expenditure by following a reasonable
method. Per cantra, ld. A.R. has argued that Rule-8D is not applicable in this
Assessment Year and that the Assessing Officer has not applied a reasonable method
to determine the quantum of disallowable expenditure. After considering rival stands, we
have found that Rule-8D is not applicable during this year. This is such a issue for which
only guess-work, based on individual prudence, is the answer. When the assessee has
declared that no expenditure was incurred to earn this income, it has to be accepted as
the assessee is the best master of its affair. But fiscal law in such circumstances lay
down some provisions which have to be adhered to even if they are against the rule of
two plus two is equal to four. To cut long story short, our consistent stand is that under
section 14A only 2% of the gross dividend earned can be treated as expenditure
relatable to earning of this exempt income. This view was taken in the case
of Sundaram Finance Ltd. v. DCIT in ITA Nos. 8425, 8426 & 8427/Mds/vide order dated
02.12.2002, by Chennai Bench of the ITAT. Therefore, respectfully following this
decision, we direct the Assessing Officer to re-compute the impugned relatable
expenditure to earning of the income of Rs. 5630/- as dividend income by invoking 20%
of gross dividend earned. Accordingly, this ground of the Cross-Objection is partly
allowed for statistical purposes.

 41. In the result, both the appeals of the Revenue and the assessee stand dismissed
where as Cross Objection of the assessee stands allowed for statistical purposes.

———

© EBC Publishing Pvt.Ltd., Lucknow.