MSRTC Commercial Complex Lease Rentals Taxable as Business Income, Not House Property Income: ITAT Mumbai

Background and Overview

The Mumbai Bench of the Income Tax Appellate Tribunal delivered a significant ruling in ACIT Vs Akrutismc Joint Venture, dismissing the Revenue's appeal and affirming that lease rentals collected from a commercial complex developed on land belonging to the Maharashtra State Road Transport Corporation (MSRTC) must be assessed as business income under the Income Tax Act, 1961 — and not as income from house property.

This decision reinforces a crucial principle: where an assessee lacks ownership or deemed ownership of property, rental receipts flowing from its commercial exploitation cannot be subjected to tax under Section 22 of the Act. The ruling carries significant implications for joint venture entities and developers operating under development-cum-lease arrangements with government bodies or public undertakings.

The Assessee and the Arrangement

Akruti SMC Joint Venture is an Association of Persons (AOP)/Body of Individuals (BOI) constituted specifically for the development and commercial exploitation of a bus station and commercial complex situated on MSRTC-owned land in Thane, Maharashtra.

The structural arrangement involved two key agreements:

  1. Development Agreement between MSRTC and M/s SMC Infrastructure Pvt. Ltd. — under which SMC Infrastructure was granted development rights to construct a bus station and commercial complex at its own cost on land belonging to MSRTC. In return, the developer received the right to commercially exploit the commercial portion by leasing it out for 30 years, after which peaceful vacant possession was to be restored to MSRTC.

  2. Joint Venture Agreement between M/s SMC Infrastructure Pvt. Ltd. and M/s Arnav Properties Pvt. Ltd. — pursuant to which the project was to be executed under the name and style of Akruti SMC, i.e., the assessee before the Tribunal.

Critical Feature: Under the terms of the development agreement, ownership of both the land and the building at all times remained vested exclusively with MSRTC. The assessee held only a contractual right to lease the commercial premises for the 30-year duration.

Assessment Proceedings and the AO's Stand

For Assessment Year 2018-19, the assessee filed its return of income declaring total loss at Rs. NIL. The case was selected for limited scrutiny under the e-Assessment Scheme 2019, with income from house property being one of the flagged issues.

Upon examination, the Assessing Officer noted that the assessee had received rental income of Rs. 9,87,57,515/- from the commercial complex built on MSRTC land, and that TDS had been deducted by the lessees under Section 194IA and Section 194IB as reflected in Form 26AS. The AO also pointed out that in the preceding Assessment Years 2016-17 and 2017-18, such rental receipts had been treated as income from house property during assessment proceedings.

Rejecting the assessee's contention that the receipts constituted business income, the AO passed an assessment order dated 06/03/2021 under Section 143(3) read with Section 143(3A) and Section 143(3B) of the Act, determining total income at Rs. 9,94,49,213/- — adding back the entire lease rental receipts of Rs. 9,87,57,515/- as income from house property. Municipal tax deduction was denied on the ground that the assessee had not claimed the same in its return.

Grounds of Appeal Raised by the Revenue

The Revenue raised the following principal grounds before the Tribunal:

  • Ground 1: Whether the CIT(A) erred in deleting the addition of Rs. 9,94,49,213/- by treating lease rentals and related receipts as Profits and Gains of Business or Profession instead of income from house property, contrary to sections 22, 23, 24 and 27(iiib) of the Income Tax Act, 1961.