2008 (8) TMI 802 - AT - Income Tax

Summary

Issues Involved:
1. Classification of rental income from letting out a warehouse.
2. Allowance of interest on accrual basis u/s 36(1)(iii) of the Income-tax Act.

Summary:

Issue 1: Classification of Rental Income

The first two grounds address the direction of the ld. CIT(A) for treating the rental income from letting out of the warehouse as 'income from business' as opposed to 'income from house property' as held by the Assessing Officer. The assessee-company, owner of a warehouse in Navi Mumbai, leased the premises to various parties, treating the receipts as business income. The Assessing Officer, noting that the premises were leased for a fixed monthly rent with additional services like security and electricity reimbursed separately, opined that the income should be taxed under 'Income from house property'. The ld. CIT(A), however, considered the duties cast upon the assessee, such as providing security, maintaining stock records, and other services, and opined that the income should be considered as business income.

The Tribunal noted that the Hon'ble Supreme Court in Shambhu Investment (P.) Ltd. v. CIT [2003] 263 ITR 143 did not establish a universal principle that income from immovable property must be taxed under 'Income from house property'. Instead, it emphasized the primary object of the assessee while exploiting the property. If the property is exploited commercially, the income should be taxed under 'Business income'. The Tribunal also reviewed other cases, such as Nutan Warehousing Co. (P.) Ltd. v. ITO [2007] 13 SOT 19 (Pune) and ITO v. Tejmalbhai & Co. [2006] 282 ITR (AT) 224, highlighting that the nature of the activity is crucial in determining the head under which the income should be taxed.

In this case, the assessee provided complex commercial services, including security, stock management, and other activities, indicating that the income was from business activities. The Tribunal also noted that in previous years, the income from the warehouse was consistently taxed as business income, and there was no change in the factual or legal position. Therefore, the Tribunal upheld the ld. CIT(A)'s view that the income should be taxed under 'Profits and gains from business or profession'.

Issue 2: Allowance of Interest u/s 36(1)(iii)

The third ground concerns the allowance of interest to the assessee on an accrual basis u/s 36(1)(iii) of the Income-tax Act. The Assessing Officer disallowed the deduction, stating it was not permissible under 'Income from house property'. However, the ld. CIT(A) allowed the deduction. The Tribunal, considering its decision on the first issue that the income is chargeable under 'Profits and gains from business or profession', upheld the ld. CIT(A)'s order, allowing the interest deduction u/s 36(1)(iii).

In conclusion, the appeal was dismissed.