2006 (7) TMI 354 - AT - Income Tax

Summary

Issues Involved:
1. Whether the rental income received by the assessee from a property should be treated as business income or income from house property.
2. Applicability of the principle of consistency in assessing rental income.
3. Relevance of the nature of property (stock-in-trade vs. capital asset) in determining the head of income.
4. Consideration of judicial precedents and decisions by higher courts in determining the head of income.

Issue-wise Detailed Analysis:

1. Whether the rental income received by the assessee from a property should be treated as business income or income from house property:
The core issue in this case was whether the rental income received by the assessee from a property should be assessed under the head "Income from house property" or "Profits and gains of business or profession." The Assessing Officer (AO) held that the rental income should be assessed under the head "Income from house property," citing various judicial precedents, including the Supreme Court's decision in CIT v. National Storage (P.) Ltd. The AO emphasized that house owning, however profitable, cannot be considered a business or trade under the Income-tax Act. The CIT (Appeals), however, directed the AO to treat the rental income as business income, following the principle of consistency. The Tribunal, after considering the Special Bench decision in Atma Ram Properties (P.) Ltd. v. Jt. CIT, upheld the AO's view that rental income should be assessed under the head "Income from house property."

2. Applicability of the principle of consistency in assessing rental income:
The assessee argued that the rental income had been consistently assessed as business income in earlier years and that the AO's change in the head of income was arbitrary and against the principle of natural justice. The CIT (Appeals) accepted this argument and allowed relief to the assessee based on the principle of consistency, referring to the Supreme Court's decision in Radhasoami Satsang v. CIT. However, the Tribunal held that the principle of consistency should not perpetuate an error and that each assessment year is independent. The Tribunal emphasized that the principle of res judicata or estoppel does not apply to income-tax proceedings and that the AO was justified in rectifying the error.

3. Relevance of the nature of property (stock-in-trade vs. capital asset) in determining the head of income:
The assessee contended that the property was held as stock-in-trade and not as a capital asset, and therefore, the rental income should be treated as business income. The Tribunal, however, held that even if the property was held as stock-in-trade, the rental income was earned by the assessee in its capacity as an owner and not as a trader. The Tribunal cited the Supreme Court's decision in CIT v. Chugandas & Co., which held that income received from buildings owned by the assessee should be shown under the head "Income from house property."

4. Consideration of judicial precedents and decisions by higher courts in determining the head of income:
The Tribunal extensively reviewed various judicial precedents, including decisions of the Supreme Court and High Courts, to determine the correct head of income. The Tribunal referred to the Supreme Court's decisions in East India Housing & Land Development Trust Ltd. v. CIT, Sultan Brothers v. CIT, and Karnani Properties Ltd. v. CIT, which held that rental income from buildings owned by the assessee should be assessed under the head "Income from house property." The Tribunal also considered the Special Bench decision in Atma Ram Properties (P.) Ltd., which analyzed the relevant law and circumstances under which rental income should be assessed under the head "House property income" or "Business income."

Conclusion:
The Tribunal concluded that the rental income received by the assessee should be assessed under the head "Income from house property" and not as business income. The principle of consistency should not perpetuate an error, and each assessment year is independent. The nature of the property (stock-in-trade vs. capital asset) is not relevant in determining the head of income. The Tribunal set aside the CIT (Appeals) order and restored the AO's order, assessing the rental income under the head "House property income." The appeals by the revenue were allowed.