Renting money from a house rental business is taxable as business income
Fact and issue of the case
This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-11, Ahmedabad, in proceeding u/s. 250 vide order dated 17/08/2022 passed for the assessment year 2018-19.
The Department has taken the following grounds of appeal:-
Whether on the facts and in the circumstances of the case and in law, the Id. C1T(A) has erred in holding that the income earned by the assessee under the head “income from House-‘Property” was required to be taxed under the head “Profits and Gains from the Business or Profession” as claimed by the assessee and thereby directed to delete the addition of Rs.95.41.923/- made on account of “income from House Property and disallowance of depreciation of Hs,l,44;62,541/-claimed on let out building”.
The brief facts of the case are that during the year under consideration, the assessee earned income of Rs. 7,14,14,205/- from its mall operating business, and offered the same to tax as its “business income”. The assessee had also claimed business expenditure namely; administration, finance, other miscellaneous expenditure etc. against such business income. However, during the course of assessment, the Assessing Officer held that the aforesaid income earned by the assessee from letting out the space and house property is taxable as “income from house property” and cannot be taxed as “business income”.
The assessee filed appeal before the ld. CIT(A) against the aforesaid classification done by ld. Assessing Officer. The ld. CIT(A) allowed the appeal of the assessee on the ground that the present issue whether such income forms part of “business income” or “income from house property” has been settled in favour of the assessee by Hon’ble ITAT for assessment years 2010-11 to 2013-14 vide ITA No. 3560/Ahd/2015 and ITA No. 135/Ahd/2018. While allowing the appeal of the assessee, the ld. CIT(A) has made the following observations:-
I have carefully considered the facts of the case, assessment order and statement of facts& submission filed by the appellant. The AO had treated the income derived by the appellant on letting out of various units/ shops etc. in the Mall as “Income form house property” instead of “Income from business and profession” as offered by the appellant in the return of income. The AO has consequentially disallowed depreciation claimed by appellant. The addition was made by AO on the ground that similar additions were already made by..the AO in earlier vear.The AO has mentioned that the Hon’ble Ahmedabad IT AT has deleted similar additions made by AO but as thePepartment is in appeal before the Hon’ble High court, he has made present additions.
The present issue as to whether such income forms part of business income or income from house property has been settled in favour of appellant by Hon’ble Ahmedabad ITAT for A.Y.2010-11 to 2013-14 vide ITA No, 3560/Ahd/2015 and ITA No. 135/Ahd/2018, The findings of Hon’bfe ITAT in aforesaid order has been followed in A.Y.2015-16 in JTA No. 1718/Ahd/2Q18. The relevant para of the findings of the Hon’ble ITAT in A.Y. 2015-16 is reproduced as under:-
Heard both the sides and perused the material on record. The assesses is engaged in the business of developing and maintaining properties and mall. During the year under consideration, the Assessing Officer has treated the income from let out of various properties in mall under the head house property as done in earlier year in order to maintain consistency. With the assistance of Ld. Representatives, we have gone through the decision of Co-ordinate Bench of the ITATfor Assessment Year 2010-11 to 2013-14 and noticed that similar issue on identical facts has been decided in favour of assesses vide ITA No, 3359/Ahd/2015, ITA No. 3560/Ahd/2015 and ITA No. 135/Ahd/2018. The discussion made by the Tribunal while allowing the claim of the assesses for assessment year 2013-14 vide ITA No. 135/Ahd/2018 is reproduced as under:
We have considered rival submissions and gone through the record carefully. We have also gone through order of the Tribunal in the assessee’s own case for the assessment year 2010-11 and 2011-12. We find that issues raised in this year are similar to assessment year 2010-11 and 2011-12. Before us, this is not a vexed issue, because the assesses is continuously claiming the same claim right from the Asstt. Year 2009-10, and the Tribunal has also upheld the treatment of income earned by the assesses under the income from business or profession. The discussion made by the Tribunal while allowing the claim of the assessee reads as under
We have noted that in assessee’s own case for the assessment year 2009-10, the Assessing Officer himself has accepted the treatment of income in question as ‘profits and gains from business or profession’. No doubt the principles of res judicata do not apply to the income-tax proceedings, but where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. This is so held by the Hon’ble Supreme Court in the case of Radhasoamt Satsang v. CIT  193 ITR 321 (SC), In this perspective, when we approach the facts of the present case, we find that whether the income in question is to be treated as income from house property or income from business or profession is a question which must depend on the appreciation of complex web of facts pertaining to the services offered: by mall to, and for, those occupying the business premises on such mall. Once the Assessing Officer himself comes to the conclusion that given the complexity of these services and all these facts being taken as integrated wholly the income in question is to be taxed as business income, it would not at all appropriate for the Assessing Officer to deviate from such a stand, without any material change in the facts and circumstances in a subsequent year. In any event, the maintenance charge for common area maintenance is only one of the segments of services provided to the unit holders in the mall. The common area maintenance is one aspect where costs are shared but that does not mean that all other services and amenities essential to smooth functioning and conducive to business, can be ignored for the purpose of ascertaining the nature of business model. It, therefore, cannot be said, on the facts and circumstances that all the services which have been provided to the unit holders have been separately taxed, as business income. The fact remains that even though’ common area maintenance services are charged for certain services, there are larger number of services such as round-the-clock security, electrification, cleanliness, parking services and most of other services which are integrated and essential for successful operation of mall, consideration for v/t)icti is included in the charges received from unit holders. The fact that these unit holders treat these charges as rent simpliciter and tax deducted at source under section 194-1 cannot determine the question of taxability in the hands of the recipient. In the business model embedded by the operation of the shopping mall, as we have / pointed out earlier, a complex web of integrated services are to be provided and the consideration received from those occupying the business premises is not simply as such rent for the premises. As we hold so, we find support from Hon’ble Supreme Court’s judgment in the case of CIT vs. E City Real Estate (P.) Ltd.,  100 taxmann.com 94 (SC), wherein Their Lordships has, inter alia, observed as follows:-
in the present case, the facts are otherwise. The substantive income of the Assessee is from leasing out the shop/stalls.
The Tribunal in its Judgment, while appreciating the facts, has observed that the various malls are built by Assessee and are operated from the year 2001, The operational income received from the said activity, in the form of rent, and other service charges was consistently offered to tax as its business income in the earlier years and the same was accepted by the Department as a business income. After demerger, both the Assessee Companies took over the assets and liabilities of the demerged Company and continued the same business of operating and running the malls. The Tribunal has considered the nature of the business activities of the Assessee Company, as well as, terms and conditions of the relevant agreements, under which the commercial space in the mail on hire by the Assessee Companies to the concerned parties, considered the various services provided by the Assessing Companies during the course of operation and running of the Family Entertainment Centre-cum-; malls.. On appreciation of facts, the Commissioner (Appeals) and the Tribunal have concurrently arrived at a conclusion that the intention of the Assessing Companies was to commercially exploit the property by way of complex commercial activities and it was not a case of letting out the property simplicitor. The rental income and the service charges thus were received by the Assessee Company as business income during the course of business carried out by them of operating and running a Mall as a commercial activity. The facts of the present case are much similar to the case of Chennai Properties and Investments Ltd. (referred to supra)
We find that the appreciation of evidence by the Commissioner (Appeals) and Tribunal is not perverse and the finding arrived at by them is plausible one.” 8. Specifically with a materially similar question, the Hon’ble Kerala High Court in the case of CIT vs. Oberon Edifices & Estates (P) Ltd, reported in  103 taxmann.com 413 (Kerala), have, inter alia, Observed as follows:-
In the instant case, it is not a letting out of property it is not a letting out of property simplicitor, 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 out 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 which income by such activity, the income so derived would be business income of the assesses. We, therefore, agree with the view of the Tribunal that the income derived by the assesses by letting out the shops in the mail has to be assessed as income from business and not as income from house property.
On the basis of the discussion above, we find that the amount received by the assessee company on letting out the shop rooms in the mall constructed by it has to be treated as business income and it has to be assessed to tax under the head “profits and gains of business” and not under the head “income from house property”. The substantial question of law is answered in favour of the assessee and against the revenue.”
In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that the authorities below were indeed in error in treating the consideration received by the assessee for commercial space given in the mall to various persons as income from house property. We vacate the action of the authorities below and direct that the said income be treated as profits and gains from business or profession. As this core issue has been decided by us in favour of the assessee, all other issues are rendered academic and infructuous. The appeal of the assessee is thus allowed.” The Id. DR has not pointed out any fundamental changes in the facts of this year with that of earlier years, so as to prompt to us to take a different view. Rather, both the Revenue authorities gone to record a finding that there is no change in the facts and to maintain consistency with the earlier years, income of the assessee is to be treated as income from house property. Since identical issue was dealt with by the Tribunal in earlier years, as cited (supra) in the assessee’s own cases, following the principle of consistency, we direct the AO to treat the impugned income earned by the assessee under “profit and gains from business or profession”. Since identical issue on similar facts has been adjudicated by the ITAT in earlier years as supra in favour of the assessee treating the said income as profit and gain from business or profession, therefore, we direct the Assessing Officer to assess the income earned by the assessee under the head profit and gain from business or profession. Accordingly, this appeal of the assessee is allowed.”
As there is no change in facts during the year under consideration, therefore, following the findings of the Hon’ble ITAT, Ahmedabad referred supra in appellant’s own case wherein similar issue has been consistently allowed in favour of appellant, it is held that income derived by the appellant on letting out of various units/ shops etc. in the Mali has been rightly offered as ‘income from business and profession’. Therefore, the AO is directed to compute rent income under the head “Income from business & profession” as claiming return of income. Further, the AO is also directed to delete the disallowance of depreciation amounting to Rs. 1.44.62,541/-.Thus, grounds of appeal no. 2, 3 & 4 are allowed.”
The Department is in appeal before us against the aforesaid order passed by ld. CIT(A) holding that income from letting of space in mall qualifies as “business income” of the assessee. The ld. Departmental Representative submitted that the Department is in appeal before the Gujarat High Court against the order passed by Hon’ble ITAT, on which reliance has been placed by ld. CIT(A) while allowing the assessee’s appeal. Therefore, since the Department is aggrieved/not agreeable with a view taken by ITAT, the present appeal has been preferred.
In response, the ld. counsel for the assessee submitted that various High Courts have decided this issue in favour of the assessee that income from letting out of property on a commercial basis qualifies as “business income”. Further, the Hon’ble ITAT in assessee’s own case from assessment year 2011-12 to assessment year 2015-16 has decided this issue in favour of the assessee. The relevant extracts of the ruling have been reproduced by ld. CIT(A) as part of the appellate order. Further, the counsel for the assessee also produced before us copies of the orders passed by ITAT in assessee’s own case for A.Y. 2011-12 to A.Y. 2015-16.
Observation of the court
We have heard the rival contentions and perused the material on record. We observe that Hon’ble Ahmedabad ITAT in assessee’s own case has decided this issue in favour of the assessee for various assessment years. In the case of Chennai Properties & Investments Ltd.  56 taxmann.com 456 (SC), the Hon’ble Supreme Court held that where in terms of memorandum of association, main object of assessee-company was to acquire properties and earn income by letting out same, said income was to be brought to tax as “business income” and not as “income from house property”. In the case of Rayala Corporation (P.) Ltd.  72 taxmann.com 149 (SC), the Hon’ble Supreme Court held that where assessee-company was engaged in business of leasing out its house properties to earn rent, income so earned as rent should be treated as ‘business income’, and not as ‘income from house property’.
In view of the aforesaid decisions rendered by the Hon’ble Supreme Court and also the consistent view taken by ITAT Ahmedabad in assessee’s own case on this issue from assessment years 2011-12 to 2015-16, we are of the considered view that ld. CIT(A) has not erred in facts and in law in holding that the aforesaid income qualifies as “business income” of the assessee.
In the result, the appeal of the Department is dismissed.
Order pronounced in the open court on 16-06-2023
In the result, appeal of the assessee is allowed and ruled in favour of the assessee