B. Ramakotaiah, Accountant Member
1. This is an assessee's appeal against the order of the Commissioner of Income Tax(Appeals), Vijayawada dated 26-03-2012.
2.Briefly stated, assessee is a company in which public are not substantially interested. Assessee is in the business of running guest houses and has a property at Hyderabad in which it has seven rooms. Assessee has entered in to various agreements with various companies for accommodating their employees from time to time in these rooms and received rental receipts to the extent of Rs. 87,70,615 during the FY. 2006-07 relevant for AY. 2007-08. Assessee was incorporated in the year 2002 and such incomes have been accepted up to AY. 2006-07 as 'income from business'. However, in the impugned year Assessing Officer (AO) asked assessee to show cause why the income should not be treated as 'income from house property' as against 'profits and gains of business or profession'. Assessee submitted that it is carrying the business of hospitality since inception i.e., 19-04-2002 and its main object as per Clause-I of Memorandum of Association is that of 'carrying on of business of hotels, resorts, boarding and lodging, houses, guest houses, holiday homes, Inns, resorts, caf, bar, resorts, health clubs etc'. It also submitted that it is running a lodging and providing food to guests. It was submitted that in earlier years, assessee's incomes were accepted under head business and there is no change in the line of business activity or method of account. It was submitted that due to recession, number of employees employed by assessee was reduced when the Inspector visited the premises for enquiry. The Ld. AO was, however, of the opinion that assessee has let out the property and does not have any license to run the catering part and on enquiry, it was found out that assessee is not running a kitchen but providing food by outsourcing, on cost to cost basis and accordingly, he was of the opinion that the income received by assessee should be brought to tax as 'income from house property'. In coming to that decision, AO also noted that TDS by various companies was made u/s. 194-I of the Act, consequently, the rentals received should be assessed as 'income from house property'. In addition to treating the income from house property, AO also opined that in case assessee's incomes are to be assessed as 'business income' the expenditure cannot be allowed fully. Therefore, he has substantially disallowed the amounts on a protective basis.
3.Assessee contested before the Ld. CIT(A) without much success.
4.Before us, assessee has raised as many as ten grounds and also additional grounds from 11 to 16 mainly on two issues, whether assessee's incomes are to be assessed as 'income from business' or 'income from house property' and if under the head 'business' i.e., expenditure can be disallowed as was done by the AO on protective basis. The additional grounds are legal in nature mainly pertaining to the disallowance of expenditure. Accordingly, they are allowed.
5.After considering the rival contentions, we are of the opinion that there is dispute with reference to certain facts; (i) Assessee owns the property on which it is running the hospitality business; (ii) Assessee has not let out propertyper sebut has entered into agreement for providing accommodation to the software engineers of various companies in its property; (iii) The agreement indicate that the charges are payable on occupancy basis on per day basis without any food, except providing coffee and tea and light snacks; (iv) The receipts which are received are for occupancy only of the seven rooms assessee is owning. There is no let out of any property as such, but the amounts were paid by the said companies as rent for occupation of the property. It is also not in dispute that in earlier years, assessee's receipts were accepted under the head 'business'. Moreover, assessee's Memorandum of Association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses etc.,
6.The Hon'ble Supreme Court in the case ofChennai Properties & Investments Ltd.v.CIT 56 taxmann.com 456/231 Taxman 336/373 ITR 673 (SC)has held that where in terms of Memorandum of Association, main object of the assessee-company was to acquire properties and earn income by letting out the same, the said income is to be brought to tax as 'income' from business and not as 'income from house property'. It was held that:
"The Memorandum of Association of the assessee- company mentions that main object of the company is to acquire and hold the properties and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. It may further be noted that in the return that was filed, entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order.
In the aforesaid circumstances, it is concluded that letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the head income from business. It cannot be treated as 'income from the house property'. Accordingly, instant appeal is allowed and order of the High Court is set aside."
In the above said case, assessee was acquiring the properties and let out those properties as well as making advance on security of lands and buildings and other properties. In assessee's case, assessee has not let out any property but has allowed the occupancy of the said properties on a rental basis charged on day to day basis. Assessee has entered into agreement with various companies only for providing occupancy, not for lease of property.
As seen from the agreements placed on record, assessee has entered into agreements with various software companies for providing accommodation only and the property as such was not leased. It was submitted that there are more than 40 companies with which assessee had entered into agreement and more than 700 employees stayed in the seven rooms during the year. Since no property was let out and as assessee received only rentals for occupation of the premises on a daily basis, AO's contention that income has to be assessed under 'house property' has no basis at all.
7.Provisions of Section 194-I may be applied for any rental income paid, but as seen from the definition of 'rent' in Section 194-I, it is defined as under:
'Explanation.-For the purposes of this section -
(i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any -
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings, whether or not any or all of the above are owned by the payee;
(ii). . . . .'.
7.1As can be seen from the above, the definition of rent includes any payment by whatever name called, for use of buildings including factory buildings, equipment, furniture or fittings. Even if machinery was leased, the consequent rent comes under the definition. But machinery lease can not be considered under 'income from House property'. That indicates that just because TDS was made u/s. 194-I, it cannot be treated as 'house property income' as the rent definition includes lease of equipment, lease of furniture, fittings which cannot be considered as 'house property'. AO's opinion that since TDS made u/s. 194-I, incomes are to be assessed under head 'income from house property' can not be accepted. Moreover, even if assessee has let out property but, when the Memorandum of Association permits the business of letting out of properties as such, the income cannot be brought to tax as 'income from house property' as held in the above said case ofChennai Properties & Investments Ltd.(supra). Therefore, both on facts of the case and also on law, as established by the Hon'ble Supreme Court in the above said case, receipts of assessee cannot be brought to tax
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under the head 'house property'. The same is to be assessed under the head 'Profits and gains of business or profession' only. 8.Having decided the head of income, it is assessee's contention that AO has arbitrarily, without giving opportunity, restricted the expenditure. Since this issue was not examined by the CIT(A) in his order and since we are of the opinion that AO arbitrarily arrived at disallowance at a certain percentage, we are of the opinion that allowing of expenditure is to be re-examined by the AO. Assessee is directed to furnish necessary evidence in support of its claims. To that extent, orders of AO and CIT(A) are set aside. Issue of head of income to be assessed is decided in favour of assessee and the issue of allowance of expenditure is restored to the file of AO for fresh consideration. Grounds are considered allowed accordingly. 9.In the result, appeal is allowed for statistical purposes.