Calcutta High Court: Revenue From Sub-Letting Is 'Business Income' If Purpose Is Renting Or Licensing Space
Calcutta High Court: Revenue From Sub-Letting Is 'Business Income' If Purpose Is Renting Or Licensing Space
Notes that the assessee was in the business since 1972 and the IT department never took a contrary stand
The division bench of the Calcutta High Court has held that the assessee's income from sub-licensing/sub-letting was chargeable to tax as ‘business income’ and not as ‘income from house property’.
The bench comprising Justice Surya Prakash Kesarwani and Justice Rajarshi Bharadwaj observed that the assessee's income from sub-letting/sub-licensing the space was always accepted by the respondent-Income Tax department as income from the business.
The Judges stated, “Since the object of the assessee company and its activity is the business of renting/licensing/sub-licensing shops, and it derived income mainly from the aforesaid business activity, the income from contribution/sub-licensing is business income and not income from house property.”
The assessee-company Oberoi Building & Investment (P) Ltd, a subsidiary of EIH Limited, entered a leave and license agreement with EIH to obtain an office space for 50 years in Oberoi Sheraton Hotel, Mumbai.
Thereafter, it sub-let/sub-licenses the space to different persons along with certain services for which it received a monthly consideration. The assessee made the disclosure as the total contribution received from letting out the shops. It claimed expenses towards contribution for the license fee and other charges under ‘business income’.
However, the assessing officer (AO) treated the total receipts towards license fees as ‘rental income’ after allowing deduction under Section 24(a) of the Income Tax Act, 1961, and computed ‘income from house property’.
The matter reached the Income Tax Appellate Tribunal (ITAT), which referred to Section 27(iiib) defining the term 'deemed owner' and Section 269UA(f) defining the word 'transfer'. The tribunal held that the income derived by the assessee was 'income from house property'.
However, the assessee challenged it and approached the High Court.
The Court observed that while holding the impugned receipts chargeable to tax under ‘income from house property’, the tribunal committed a manifest error of law. It ignored the object and business activity of the assessee and misunderstood the nature of the sub-license transaction.
The bench added that both the memorandum of association and the assessment order mentioned that the assessee was engaged in the business of licensing the space.
The Judges stated, “When the respondent-Income Tax department has always accepted the income of the appellant assessee from sub-licensing/sub-letting of the space to be income from business, it cannot take a contrary stand in the present appeal.”
The Court held that the assessee's objective ancillary to the main object (as mentioned in the memorandum of association) was to acquire licensed premises suitable for housing. It accommodated shops, boutiques, stores, offices, and showrooms for lease, license, and sub-license.
The bench noted that the assessee had been engaged in the same business since 1972. It allowed the appeal and directed that any amount deposited by the assessee towards the demand made by the IT department must be refunded to the assessee.
