$ 15 * IN HIGH COURT OF DELHI AT NEW DELHI Decided on: March 25,2015 + ITA 43/2014 NIAGARA HOTELS & BUILDERS (P) LTD .Appellant Through Mr. Ajay Vohra, Sr. Adv. with Ms. Kavita Jha and Ms. Shraddha, Advs. versus COMMISSIONER OF INCOME TAX .Respondent Through Mr. Kamal Sawhney, Sr. Standing Counsel, Mr. B. Chakraborty and Mr. Mukul Mathur, Advs. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K.GAUBA MR. JUSTICE R.K.GAUBA % 1. This appeal under Section 260-A of Income Tax Act, 1961 (hereafter referred to as Act ) has been preferred by assessee questioning correctness of view taken by Income Tax Appellate Tribunal (hereinafter referred to as ITAT ) in its order dated 30.04.2012 deciding ITA No. 901/Del/2012 and rejecting contention of appellant that income claimed as rent from space antenna in respect of top terrace of property described as Vikram Tower, 16, Rajendra Place, New Delhi (hereinafter referred to as property ), in sum of `38,23,281/- for assessment year 2008-09 was income from house property and instead treating it as income from other sources . 2. following question of law arises for consideration:- ITA 43/2014 Page 1 of 12 Whether on facts and in circumstances of case and in law, Tribunal erred in holding that rental income of 38,23,281/- earned by appellant from terrace floor/roof area was assessable under head "Income from other sources", as opposed to "Income from house property" returned by appellant? 3. assessee is company incorporated under Companies Act, 1956 having its registered office at G-6 and 7, Vikram Tower, 16, Rajendra Place, New Delhi. It is absolute owner of terrace floor of property. On 31.10.2007, it entered into formal arrangement styled as Leave and Licence Agreement with M/s Arvind Mills Ltd. (Telecommunication), company incorporated under Companies Act having corporate office at 3rd Floor, Lingfield Plaza , S. No. 66/67, Salunke Vihar road, Wanowrie, Pune 411 040. By virtue of said agreement, assessee company gave on licence terrace floor as space for mounting tower/mast and antenna and gen set in addition to covered space admeasuring 132 Sq. Ft. for installation of radio trunking related equipment , described in document as licensed space , on monthly licence fee on terms specified in agreement, inclusive of payment of interest-free security deposit of `3,03,000/-, refundable at time of discontinuation of use of space by licensee, inclusive of maintenance charges but exclusive of electricity and water charges (worked out on basis of present rate of house tax, etc. and subject to increase in case rates of taxes are increased ) for ten years at `74,000/- for period 01.11.2007 to 31.10.2010, at `85,000/- for period 01.11.2010 to 31.10.2013, and `98,000/- for period November, 2013 to 31.10.2017. ITA 43/2014 Page 2 of 12 4. In terms of above-mentioned agreement, licence fee is payable in advance on or before 10th day of each English calendar month; licensee is to pay charges for electricity as per actual consumption; licence is to terminate in case of default in payment of licence fee for period of four months or more; and licensee is to comply with bye- laws, rules and regulations of Municipal Corporation/local authorities and use licensed space for radio-based communication and service subject to rules and regulations prescribed by appropriate/statutory authorities. licensee was permitted by agreement to make minor masonry work in licensed space to install tower/mast and antenna equipments but not so as to cover portion of open space nor allow its use to any third party, with exception of sister concerns or subsidiaries . terms stipulate that licensee shall permit licensor or its authorized agents to enter into licensed space during working hours upon reasonable notice for purpose of viewing its condition, reserving right of licensor to carry out, without any objection or hinderance as part of licensee, necessary repairs, alterations or improvements of licensed space including for laying water pipes, drains, etc. 5. agreement further stipulated that tenure of licence and its renewal would inure and stand transferred in case title to property changes hands without in any way imparing rights and privileges of licensee . It contained express understanding that licence only allows bare use and occupation of licensed space but so as never to confer status of lessee unto licensee, right for passage for ingress into and egress from licensed space to be subject to ITA 43/2014 Page 3 of 12 prescription of licensor. licensee, however, is permitted to deploy on 24-hours basis its own security guard with stipulation that legal possession of licensed space shall always remain with licensee . 6. case of appellant-assessee was taken up for assessment under Section 143(3) of Act. Assessing Officer (AO) by his order dated 27.12.2010 rejected claim of appellant regarding income of `38,23,281/- on account of rent from space and antenna being income from house property. He noted that property of Vikram Tower had been reflected in fixed assets of assessee company and space for antenna shown in financial statements as stock-in-trade . By order sheet entry dated 30.11.2010, assessee was called upon to show cause as to why this income be not treated as business income, since it had been derived from property held as stock-in-trade. 7. AO eventually held against assessee and, inter alia, observed that assessee is builder/developer, primary objective of its business being to purchase, develop and sell various properties, renting parts of property (stock-in-trade) held by it being only incidental activity , and indulged in only till such time such properties were actually sold, and thus, it was engaged primarily in complex commercial activities . AO ruled that merely because person is owner of property, it does not necessarily follow that income generated therefrom must be assessed as income from house property. In his view, for such purposes, it has to be found out as to what is character of property and what is purpose for which it is used. He held that since property was reflected as commercial asset , income derived therefrom will have to be assessed as business income. Referring to ruling of Supreme Court in CIT v. ITA 43/2014 Page 4 of 12 National Storage Pvt. Ltd. (1967) 66 ITR 596, AO observed that question of exploitation of property for purposes of commerce or business is material and that it requires to be seen whether assessee is carrying on any business in nature of trade, commerce or manufacture. 8. appellant-assessee was aggrieved and, thus, took out appeal before Commissioner of Income Tax (Appeals) [hereinafter referred to as CIT (Appeals) ]. It submitted that crucial test is as to what is primary object in exploiting property as against primary object of activities in which assessee company was engaged. assessee pointed out that it had entered upon arrangement in above nature respecting licensed space as owner of property and would sell only such portions of property as it was legally permitted to do. It also submitted that only such portions of property had been let out (to government departments or other public utility organizations) which it was not legally or contractually permitted to sell and, thus, there was no question of turning let out property to account . It was also submitted that assessee (i.e. licensor vis- -vis agency to which licensed space has been given) was not required to render any services. 9. appeal was allowed by CIT(Appeals) taking note of, amongst others, law laid down by Supreme Court in case of Karanpura Development Co. Ltd. v. CIT (1962) 44 ITR 362. CIT (Appeals) noted that for scrutiny of such claim as at hand, it required to be examined as to whether assessee could exploit property as its owner; as to what was dominant object of letting out property; as to whether income was earned as owner of property or some further activities/services were ITA 43/2014 Page 5 of 12 involved; and, as to whether any complex commercial activity is involved in letting out property. 10. On basis of material examined, CIT (Appeals) concluded as under:- ...the appellant had let out structures on terraces of buildings to various companies and government departments for housing their communication equipments and antennas and did not render any other services to them. It is also fact that appellant was not entitled to sell any space on terraces of buildings. Therefore, it had to exploit property as owner only and it was not interim arrangement to let out property pending final sale. dominant object of letting out was to enjoy and utilize property as owner. No complex commercial activity was involved in process of earning rental income ... 11. CIT (Appeals) also rejected contention of Revenue founded on fact that property in question is shown as stock-in-trade holding that such classification by itself would not change true character of receipts for purposes of taxation and took note of fact that income on this account had been claimed as income from house property and consistently so accepted by AO while completing assessment under Section 143(3) for preceding six years. Observing that nothing had been brought on record to suggest that facts for period in question in any manner differed from those prevailing in previous years, she upheld contentions of assessee and allowed deduction in terms of Section 24 (a) of Act. 12. Revenue questioned correctness of order of CIT (Appeals) by ITA No. 901 (Del)/2012 before ITAT which reversed findings recorded by first appellate authority, treating income in ITA 43/2014 Page 6 of 12 question as neither income from house property nor income from business and instead classifying it as income from other sources through reasoning set out in Para 2.6 of its order as under:- 2.6 In order to answer aforesaid question, it is necessary to find out true nature of asset as to whether it is fixed asset or stock-in-trade. admitted facts in this connection are that assessee has been renting space and small rooms constructed on terraces for last 9 years. Thus, intention is not to sell space on terrace as stock-in-trade but hold on to it as fixed asset. Therefore, it is held that asset has been wrongly classified in accounts and for purpose of law it should be taken as fixed asset. Now, we have to decide as to whether space and small rooms on terraces constitute house property, i.e., building and land appurtenant thereto. space on terrace is taken on rent for mounting antennae and other instruments for reception of electro-magnetic signals or transmission thereof. For this purpose open pieces of land can also be taken on hire. However, that would require construction of high towers on which instruments and antennae may be mounted for reception or transmission of electromagnetic signals so as to avoid obstruction by buildings in vicinity. terraces are found most suitable as they obviate necessity of constructing towers to avoid shadow region occurring on account of obstruction from tall buildings in vicinity. Thus, in essence main purpose of hiring terraces is to have open space for mounting antennae and other instruments. terrace does not have any appurtenant land. Therefore, agreement of renting and hiring terraces is in essence agreement of hiring space and not building and land appurtenant thereto. existence of small rooms on terrace is incidental to hiring space as some spare parts may have to be kept there and personnel attending to antennas may use them for routine servicing and repairs. ...the income is rightly assessable either as business income or income from other sources and not as property income. From facts brought on record, it transpires that letting out is ITA 43/2014 Page 7 of 12 for three years but extendable up to 9 years on option of parties. Therefore, it is not case where systematic activity of lending space is being carried out so as to render it as business activity. Thus, income is rightly assessable under head "income from other sources". It may be mentioned here that Tribunal will be within its right to correct head of income although it may not be in position to enhance income. Treating income to be taxable under residuary head as against business income as taxed by AO does not lead to enhancement of income. Therefore, we are entitled to correct head of income. [emphasis supplied] 13. As observed in majority view in Nalinikant Ambalal Mody v. CIT (1966) 61 ITR 428 (SC), issue as to whether income falls under one head or another has to be decided according to common notions of practical men, for Act does not provide complete guidance in such regard. 14. In rejecting claim of assessee in case at hand treating receipts in question as either income from business or income from other sources, reference has been made to rulings in cases reported as CIT v. National Storage Pvt. Ltd. (supra) and Mukherjee Estate (P.) Ltd. v. Commissioner of Income-tax (2000) 244 ITR 1 (Cal.), but improperly so. 15. In National Storage Pvt. Ltd. (supra), assessee had purchased plot of land and constructed thereon building in nature of godown. In super-structure, thus built, certain vaults were developed with objective of making them available on licence basis to film distributors for storing cinema films, ground floor being reserved for purposes of examination, cleaning, waxing and rewinding of films. licensees were permitted access to vaults, entry being regulated and exclusive ITA 43/2014 Page 8 of 12 possession of premises retained by licensor. assessee/licensor was responsible for maintaining regular staff, inter alia, providing services in nature of fire-proofing, railway booking counter, canteen, etc. Against this factual backdrop, it was held that income derived was not income generated from exercise of property rights but on account of carrying on trade. Holding that letting out of space from which assessee derives income has to have definite and identifiable nexus with business of assessee, it was ruled that such income was bound to be treated as income from business and not as income from house property. court held that assessee was in occupation of entire premises and providing special services to licensee. Thus, fee received was held to be income derived not from exercise of property rights but in nature of income gained from carrying on adventure or concern in nature of trade. 16. In Mukherjee Estate (P.) Ltd. (supra), issue concerned income generated by assessee by letting out space for putting up hoardings for display of advertisements. Noticeably, there was irrefutable finding of fact recorded by ITAT that it was hoardings which had been let out instead of space on roof for putting up all such hoardings. In these facts and circumstances, Calcutta High Court took view that income from hoardings could not be taken as income from house property since hoardings were not part of building. 17. In Karanpura Development Co. Ltd. (supra), Supreme Court had ruled as under:- Ownership of property and leasing it out may be done as part of business, or it may be done as landowner. Whether it is ITA 43/2014 Page 9 of 12 one or other must necessarily depend upon object with which act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving use of it to another on rent. Where this happens, appropriate head to apply is "Income from property' ...even though company may be doing extensive business otherwise. But company formed with specific object of acquiring properties not with view to leasing them as property but to selling them or turning them to account even by way of leasing them out as integral part of its business, cannot be said to treat them as landowner but as trader... In deciding whether company dealt with its properties as owner, one must see not to form which it gave to transaction but to substance of matter [emphasis supplied] 18. above view was reiterated in S.G. Mercantile Corporation P. Ltd. v. CIT (1972) 83 ITR 700 (SC). 19. crucial test is as to whether letting out has definite nexus with business of assessee. In our opinion, approach of both AO and ITAT in case at hand has been totally misdirected. Wrong classification of licensed space in books of account as stock-in-trade cannot change character of transaction concerning its eventual exploitation. use of expression leave and licence in agreement entered with M/s Arvind Mills Ltd. (Telecommunication) may be debatable. fact remains that use of terrace floor has been handed over to licensee not only for setting up tower/mast on which antenna is to be mounted but also for construction of room where watch/ ward staff can be stationed and space used for storage purposes. 20. Unlike case of Mukherjee Estate (P.) Ltd. (supra) where no space on terrace floor was let out (the income generated being restricted to ITA 43/2014 Page 10 of 12 display of advertisement on hoardings provided), in case of assessee here, licensee is virtually given exclusivity in utilizing terrace floor for achieving objectives set out in agreement. There is no parallel with case of National Storage Pvt. Ltd. (supra), where giving of vault spaces in building developed was dominant purpose of business activity undertaken by assessee. 21. In case at hand, building top terrace of which is subject of focal attention here has been developed for its various portions to be sold or let out with no possibility of terrace floor being subjected to such utilization. assessee continues to be owner of terrace floor. It has conceivably no other purpose to be served by such property as is held on terrace floor, except exploitation of licensed space for gaining income that cannot be treated as either income from business or income from other sources. income was thus rightly returned as income from house property. 22. We do not approve of logic employed by ITAT in rejecting claim of it being income from house property. terrace floor cannot exist in air. It is part of building which has been constructed on land beneath super-structure. It is, therefore, not correct to hold that terrace does not have any appurtenant land. We, therefore, reject conclusion of ITAT that agreement of renting and hiring terrace is in essence for hiring space and not hiring building or land appurtenant thereto. 23. For above reasons, we answer question of law in affirmative in favour of assessee. In result, we set aside impugned order passed by ITAT and restore view taken by CIT (Appeals). ITA 43/2014 Page 11 of 12 24. appeal stands disposed of accordingly. R.K.GAUBA (JUDGE) S. RAVINDRA BHAT (JUDGE) MARCH 25, 2015 ik ITA 43/2014 Page 12 of 12 Niagara Hotels & Builders (P) Ltd v. Commissioner of Income-tax