IN INCOME TAX APPELLATE TRIBUNAL SMC BENCH, PUNE BEFORE SHRI R.K. PANDA, AM ITA No.1063/PN/2016 Assessment Year : 2010-11 Kalpataru Developers, 710, Laxmi Road, Appellant Narayan Peth, Pune 411 030 PAN : AAEFK7426L v/s ITO, Ward-11(4), Pune Respondent Appellant by : Shri Nikhil Pathak Respondent by : Smt. Sumitra Banerji Date of Hearing :22.09.2016 Date of Pronouncement:23.09.2016 ORDER PER R.K.PANDA, AM : This appeal filed by Assessee is directed against order dated15-03-2016 of CIT(A)-V, Pune relating to Assessment Year 2010-11. 2. assessee in only ground of appeal has challenged order of CIT(A) in treating income from house property as income from business. 3. Facts of case, in brief, are that assessee is partnership firm engaged in business of Promoter and Builder. It filed its return of income on 21-03-2011 declaring total income of Rs.11,06,420/-. During course of assessment proceedings AO observed that assessee has not effected any sales during year. However, it has credited office rent at Rs.27,03,280/- and property 2 ITA No.1063/PN/2016 tax has been debited in profit and loss account at Rs.1,64,664/-. On being questioned by AO regarding rental income derived by assessee it was submitted that rental income has been derived by assessee by letting out property simplicitor is chargeable to tax under head income from house property only and not as business income irrespective of fact that assessee is doing business of acquiring, developing and selling of properties as rental income received by assessee is because of ownership of property and not by exploitation of property by way of complex commercial activity. Various decisions were also cited before AO to this proposition. 4. However, AO was not satisfied with explanation given by assessee. He noted that assessee vide letter dated 10-12-2012 has admitted that it has debited expenses to profit and loss account for maintenance of unsold stock and property and unsold property is shown as stock in trade. He, therefore, held that property would partake character of stock and any income there from cannot be taken as income from property. Distinguishing various decisions cited by assessee and relying on decision of Hon ble Gujarat High Court in case of CIT Vs. Neha Builders reported in 296 ITR 661 where it has been held that rental income derived from property held in stock was treated as business income AO determined income from letting out of property as business income . He also relied on decision in case of CEPT Vs. Shri Lakshmi Silk Mills Ltd. reported in (1951) 20 ITR 451. 3 ITA No.1063/PN/2016 5. Before CIT(A) assessee submitted that firm had developed commercial property by name City Jewel Building which consisted of ground floor and 3 upper floors and 2 parking floors on 4th floor and terrace as per PMC requirement. assessee had leased out part of said premises and earned rental income therefrom by virtue of lease agreement with Vishal Retail Ltd. Accordingly, it had offered rental income from house property amounting to Rs.27,03,380/-. It was submitted that expenses claimed in profit and loss account are towards maintenance of property which is unsold and office rent as assessee had shifted its office to Ranganath Bungalow. It was further submitted that it has paid office rent for Rs.8000/- per month which was claimed as expenses. 6. It was further submitted that office on upper floor which was unsold appearing as stock in trade whereas shops leased out to Vishal Retail Ltd. are appearing under head investment in balance sheet every year. Relying on various decisions assessee submitted that rental income should be considered as income from house property. 7. However, CIT(A) also was not satisfied with explanation given by assessee and upheld action of AO. While doing so, she noted that assessee is engaged in construction business as Builder and Developer. property in question is office premises which was held by assessee as stock in trade in stock portfolio of business . assessee had never treated said property in portfolio of investment and never let out this property or any other property owned by assessee for earning or claiming rental income. She also analysed leave and license 4 ITA No.1063/PN/2016 agreement dated 06-02-2009 between assessee and Vishal Retail Ltd and noted that clause 4.2 clearly states nature of property as commercial building constructed as one by licensor and was let out to licensee under leave and license agreement as commercial building. There is no iota of any investment in house property for purpose of earning rental income within provisions of section 22 to 24 of I.T. Act. On other hand very nature of business activities carried out by assessee holding of commercial property and let it out for commercial purpose explicitly establishes that such income is required to be offered by assessee as well as taxed by department under head income from business and in no case same could be treated as income from house property . For above proposition she relied on decision of Hon ble Supreme Court in case of Chennai Properties and Investment Ltd. reported in TS-238-SC-2015 and decision in case of Karanpura Development Company Ltd. Vs. CIT reported in 44 ITR 362. 8. As regards submission of assessee that shops leased out to Vishal Retail Ltd. are shown in accounts under head investment is concerned she noted that very object of assessee is not construction of property for holding same as investment and thereafter earning rental income by letting it out. Relying on various decisions she held that such rental income has to be assessed as income from business and not as income from house property . 9. Aggrieved with such order of CIT(A) assessee is in appeal before us. 5 ITA No.1063/PN/2016 10. Ld. Counsel for assessee referring to balance sheet for year ending 31-03-2008, copy of which is placed at page 21 of paper book submitted that assessee under head investments has shown shops at Rs.43,07,975/- and closing stock under head current assets at Rs.77,17,200/-. Referring to balance sheet for year ending 31-03-2009 copy of which is placed at page 16 of paper book he submitted that shops at Rs.43,07,975/- has been declared under head investment whereas closing stock under head current assets has been shown at Rs.92,22,084/-. Referring to copy of balance sheet for year ending 31-03-2010, copy of which is placed at page 10 of paper book he submitted that under head investments shops have been shown at Rs.43,07,975/- and closing stock has been shown under head current assets at Rs.92,22,084/-. He submitted that assessee is consistently showing shops under head investment on which it has received rental income. 11. Referring to submission given to CIT(A) dated 27-02-2016, copy of which is placed at pages 1 to 4 of paper book Ld. Counsel for assessee drew attention of Bench to para 2.3 at page 2 of said letter and drew attention of Bench to following submission before CIT(A): 2.3 Assessing Officer has failed to realize that shops leased out to Vishal Retail Ltd. are appearing under head investment in balance sheet every year and some of offices above shops leased to Vishal Retail Ltd. are appearing as stock in trade. We are enclosing herewith copy of our trading, profit & loss account and balance sheet, wherein we have duly highlighted shops appearing under head investment 12. Referring to copy of leave and license agreement with Vishal Retail Ltd., copy of which is placed at pages 22 to 37 of 6 ITA No.1063/PN/2016 paper book he drew attention of Bench to clause 4.2 which Ld.CIT(A) has relied upon and submitted that this is standard clause in all agreements and therefore this cannot be held against assessee. He submitted that even after completing assessment for this year u/s.143(3) treating rental income as income from business as against income form house property shown by assessee, AO has completed assessment for subsequent year u/s.143(3) and no action u/s.147/148 has been initiated. 13. Referring to decision of Hon ble Delhi High Court in case of CIT Vs. Ansal Housing Finance and Leasing Company Ltd. and others reported in 354 ITR 180 he submitted that assessee in that case was engaged in business of Development of Mini Townships, Construction of house property, commercial and shop complex etc. In assessment proceedings AO assessed annual letting value of properties of flats which assessee had constructed but were lying unsold now as income from house property. AO did not accept contention of assessee that flats were its stock in trade and therefore annual letting value of flats could not be brought to tax under head income from house property . CIT(A) set aside addition made by AO which was confirmed by Tribunal. On appeal filed by revenue Hon ble High Court held that intention of assessee was to hold properties till they were sold. capacity of being owner was not diminished because assessee carried on business of developing, building and selling flats in housing estates. Hon ble Court held that assessee was liable to pay tax on annual letting value on unsold flats owned by it under head income from house property . 7 ITA No.1063/PN/2016 14. So far as decision of Hon ble Supreme Court in case of Chennai Properties Ltd. (Supra) is concerned, he submitted that main objects of assessee company as stated in memorandum of association was to acquire properties in City of Madras and to let out those properties. assessee had rented out such properties and rental income received therefrom was shown as income from business in return filed by assessee. AO refused to tax same as business income on ground that since income was received from let out of properties, it was nature of rental income. He accordingly treated same as income from house property . CIT(A) allowed appeal filed by assessee holding same to be business income . Tribunal dismissed appeal filed by Revenue. Hon ble High Court allowed appeal filed by revenue vide order dated 05-09-2002 holding that income derived by letting out of properties would not be income from business but could be assessed only as income from house property . On further appeal by assessee, Hon ble Supreme Court set aside order of High Court and restored order of Tribunal concluding that income had to be treated as income from business and not as income from house property. He accordingly submitted that since main objection as per memorandum of association of company was to acquire properties and to let out those properties, therefore, it constituted business income. However, facts of present case are distinguishable and not application to facts of M/s. Chennai Properties (Supra). Various other decisions relied on by CIT(A) are also not applicable to facts of present case and are distinguishable. He accordingly submitted that order of CIT(A) be set aside and ground raised by assessee should be allowed. 8 ITA No.1063/PN/2016 15. Ld. Departmental Representative on other hand heavily relied on order of CIT(A). She submitted that Ld.CIT(A) has given finding as to why and how rental income received by assessee from letting out of shops should be treated as income from business and not as income from house property . She accordingly submitted that order of CIT(A) be upheld and grounds raised by assessee should be dismissed. 16. I have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. I have also considered various decisions cited before me. only dispute in instant appeal is regarding treatment of rental income. It is contention of assessee that such income has to be treated as income from house property whereas it is case of revenue that it should be treated as income from business . 17. From details furnished by assessee I find assessee in instant case is engaged in business of real estate and had constructed commercial complex in name of City Jewel Building at Narayanpeth, Pune. It had sold most of offices and shops. ground floor of premises had been leased out to Vishal Retail Ltd. on which assessee has earned rental income for year under consideration. Such shops which were let out to Vishal Retail Ltd. has been shown under head investment in balance sheet for year ending 31-03-2008, 31-03-2009 and 31- 03-2010. unsold portion of commercial building has been shown under head closing stock year after year. Under this scenario, one has to see as to treatment of such rental income as 9 ITA No.1063/PN/2016 income from house property or business income . I find Ld.CIT(A) while deciding issue against assessee and upholding decision of AO in treating such income as business income has relied on decision of Hon ble Supreme Court in case of M/s. Chennai properties (Supra). However, according to Ld. Counsel for assessee, said decision is not applicable to facts of present case and is distinguishable. 18. I find some force in argument of assessee. I find in that case main object of that company as stated in memorandum of association is to acquire properties in City of Madras and to let out those properties for which assessee treated such rental income as business income . AO refused to accept same as business income and treated nature of receipt from let out of properties as in nature of income from house property . CIT(A) accepted plea of assessee to treat same as business income which was upheld by Tribunal. On further appeal by Revenue Hon ble Madras High Court reversed decision of Tribunal and upheld action of AO in treating same as income from house property . On further appeal by assessee Hon ble Apex Court held that objects of assessee company are to acquire and hold properties known as Chennai House and Firavin Estate both in Chennai and to let out these properties as well as make advances upon security of lands and buildings or other properties or any interest therein. Accordingly, it was held that such income has to be treated as income from business . 10 ITA No.1063/PN/2016 19. However, in instant case, main object of assessee company is not to acquire property and to let out those properties. assessee is Builder and Developer. It had considered part of its unsold stock as investment and rental income derived from such investment has been declared under head income from house property . 20. I find identical issue had come up before Hon ble Delhi High Court in case of Ansal Housing Finance and Leasing Company Ltd. In that case, assessee company was engaged in business of Development of Mini Townships, Construction of house property, commercial and shop complexes etc. AO assessed annual letting value of flats which assessee had constructed but were lying unsold under head income from house property . assessee however contended that said flats were its stock in trade and therefore annual letting value of flats could not be brought to tax under head income from house property . However, AO did not accept stand of assessee and added annual letting value of unsold flats to total income of assessee. CIT(A) set aside order of AO. Appeal filed by Revenue was also dismissed by Tribunal. On further appeal filed by revenue Hon ble High Court relying on various decisions including decision in case of Karanpura Development Company Ltd. (Supra), Sultan Brothers Pvt. Ltd. (Supra) held that such income has to be treated as income from house property . Hon ble High Court in said decision has held that assessee was liable to pay tax on annual letting value of unsold flats owned by it under head income from house property . 11 ITA No.1063/PN/2016 21. Since in instant case assessee has shown shops under head investment and has received rental income from such shops which were let out, therefore, such income in my opinion should be held as income from house property and not as business income . various decisions relied on by CIT(A) are distinguishable and not applicable to facts of present case. Accordingly, order of CIT(A) is set aside and ground raised by assessee is allowed. 22. In result, appeal filed by assessee is allowed. Order pronounced in open court on 23-09-2016. Sd/- (R.K. PANDA) ACCOUNTANT MEMBER Pune; Dated : 23rd September, 2016. Copy of Order forwarded to : 1. Appellant 2. Respondent 3. CIT(A)-I, Kolhapur 4. CIT- I, Kolhapur 5. SMC Bench DR, ITAT, SMC Bench Pune; 6. 2 Guard file. BY ORDER, True Copy // // True Copy // Sr. Private Secretary ITAT, Pune Kalpataru Developers v. ITO, Ward-11(4), Pune