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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
N. Kumar and B. Manohar, JJ.
Commissioner of Income-tax-III —Appellant
Vs.
Velankani Information Systems (P.) Ltd. —Respondent
Income Tax Appeal Nos. 374 and 375 of 2011 and 273 to 276 of 2012
Decided on : 02-04-2013
Rental Income - Business or House Property - Section 14, 22, 28, 56, 80-IA - The court held that the rental income arising from letting out the buildings and lands appurtenant thereto falls under 'income from house property' or it falls under 'Profits and gains from Business or Profession'. The court also discussed the doctrine of inseparability and the intention of the parties in entering into the lease transaction. The court also discussed the tax on capital gain and the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer.
Fact of the Case:
The assessee, a Real Estate Developer, provided comprehensive facilities to IT Industry, including letting out specialized buildings and office premises. The Assessing Authority held that the rental income from the buildings should be assessed under the head 'Income from House Property' and the income from furniture, fittings, and other accessories and services rendered, under the heading 'Income from Other Sources'. The Appellate Authority and the Tribunal held that the rental income should be treated under the head 'Business' and allowed the claim of expenditures made thereon by the assessee. In respect of the Capital gains on the sale of land, the Assessing Authority adopted the market value of the property and levied Capital Tax on the said amount. The Appellate Authority and the Tribunal set aside the order.
Finding of the Court:
The court found that the rental income arising from letting out the buildings and lands appurtenant thereto falls under 'income from house property' or it falls under 'Profits and gains from Business or Profession'. The court also found that the Assessing Authority was not justified in bringing to tax STCG without any documentary evidence. The substantial questions of law were answered in favour of the assessee and against the revenue.
Issues: The issues involved the classification of rental income as 'income from house property' or 'Profits and gains from Business or Profession', and the computation of short term capital gains based on the value of land sold.
Ratio Decidendi: The court held that the intention of the parties in entering into the lease transaction and the doctrine of inseparability are crucial in determining the nature of rental income. The court also emphasized the legal character of the transfer and the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer in determining the tax on capital gain.
Final Decision: The court dismissed the appeals filed by the revenue, and the substantial questions of law were answered in favour of the assessee and against the revenue.
N. Kumar, J.—All these appeals are taken up for consideration together as the common question of law is involved and therefore, they are disposed of by this common order. However, for proper appreciation of the question of law involved, the facts in ITA No. 374/2011 are set out. The assessee M/s. Golf Link Software Park Pvt. Ltd., is a Real Estate Developer. It is in the business of providing comprehensive facilities to I.T. Industry. Such facilities include provision for specially furnished buildings, special electrical connections and special arrangement for antennae and dish, good net connectivity for transmission of data and special furniture. Provision for such facilities also includes letting out specialized buildings and office premises that are built to cater to the special requirements of the I.T. industry.
2. The assessee-company filed its return of income for assessment year 2005-06 on 31.10.2005 declaring a total income of Rs. NIL and paid taxes under Section 115JB of the Income-tax Act, 1961 (for short, hereinafter referred to as 'the Act'). The same was processed under Section 143(1) of the Act on 28.08.2006. The case was selected for scrutiny by issue of notice under Section 143(2) dated 25.07.2006, which was duly served on the assessee Company. The assessee in response to the notice issued appeared on 13.12.2007 and 14.12.2007 and filed written submissions. The assessee claimed that they are in the business of providing comprehensive facilities to IT Industry. Such facilities include provision for specially furnished buildings, special electrical connections, and special arrangement for antennae and dish, good net connectivity for transmission of data and special furniture. All these facilities include letting out specialized buildings and office premises that are built to cater to the special requirements of the I.T. Industry.
3. The submissions of the assessee were not accepted by the Assessing Authority. According to the assessing authority, the lease agreements clearly reveal that the main activity of the company is renting out property. Majority of the investments has gone into construction of buildings. The assessee is neither manufacturing, exchanging nor selling any goods or services. Mere letting out the properties with facilities like furniture, air conditioners, dish antennae, etc. does not change the nature of the receipt. The business activities arc usually concerned with transfer and exchange of goods and services. The primary motive behind such activity is profit making. Business may be defined as an activity which is continuously carried on for economic gain with the associated risk of producing and selling of goods and services. The factual position regarding the lease rentals as seen from copies of the agreements shows lease rentals were charged for let out of the buildings and a separate agreement was entered into in respect of the services and amenities provided. The Act provides the heads of income under the provisions of Section 14, which are mutually exclusive and determine the heads under which the income is to be assessed. The objects in the memorandum of the company cannot determine the heads of income under which the income is to be taxed. The lease rental income from any property of which an assessee is a beneficial owner shall be liable to be taxed as 'Income from House property' irrespective of the nature of the asset being held as fixed asset or investment or closing stock. In case of a property let out along with furniture, fixtures, plant and machinery etc., then the question as to whether it is let out inseparably shall determine the heads of income. The inseparable letting-out does not depend on rent fixed on each asset but, where one lease shall be acceptable without the other. In case one is acceptable without the other, then the income from letting-out of building shall amount to 'Income from house property' and the income from letting out of the amenities shall const
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