2016 (10) TMI 1076 - AT - Income Tax

Rental income derived by way of letting out of corporate office - business income or income from house property - Held that - In the case at hand, undisputedly, when the property in question consisting of buildings and land appurtenant thereto i.e. in the shape of corporate office and quarters is owned by the assessee company and is on rent pursuant to the lease agreement dated 07.06.2007, the same has to be treated as income from house property. It does not matter if the property in question is rented out to the third party or its sister concern because sister concern is otherwise treated as a separate entity for all intents and purposes. CIT (A) has proceeded on the basis of whims and fancies by holding that the portion of the property in question has been rented out by the assessee company to its sister concern is on temporary basis and could be taken back at any point of time by the assessee company for its business purposes. When the property in question has been rented out on the basis of lease agreement dated 07.06.2007, the sister concern becomes statutory tenant of the assessee company and the word temporary basis cannot be imported to interpret the lease agreement (supra). So far as observations returned by ld. CIT (A) that depreciation has been claimed by the assessee company on business assets as far as rental income of ₹ 21,49,943/- is concerned, the same need to be strictly interpreted under the provisions contained u/s 22 of the Act. We are of the considered view that the rental income derived by the assessee company by way of letting out the quarters to the employees of its company, who undisputedly works for conducting the business of the company, has to be treated as business income and cannot be treated as income from house property by any stretch of imagination u/s 22 of the Act. Rental income derived by the assessee company by way of letting out of MD Office (soap unit merged with MD Office) - income from other sources OR income from house property or business income ? - Held that - Perusal of the lease agreement dated 07.06.2007, minutely perused by the ld. CIT (A), is enough to describe the property in question as total land area of 1584 sq. mtr. Having industrial shed of covered area of 733 sq. mtr. It is also subject matter of the lease agreement that the lessee has requested the lessor to renovate and reconstruct the existing constructed building as the said structure is quite old and is not suitable for lease for use of manufacture warehouse, storage of goods and offices etc. When the lease agreement is categoric enough to lease out the land and structure thereon, the same cannot be disbelieved without getting the same verified by the ld. CIT (A) and no such verification/remand report is there on the file. So, we are of the considered view that the rental income of ₹ 4,20,000/- was derived by the assessee company by letting out the land and structure thereon. When it is not in dispute that the regular rental income of ₹ 4,20,000/- is being derived by the assessee company from the land and structure thereon from M/s. Weld Excel India Limited on the basis of lease agreement dated 07.06.2007 @ ₹ 35,000/- per month on permanent basis, it has become regular business income of the assessee company. So, we are of the considered view that AO as well as ld. CIT (A) have erred in treating the rental income of ₹ 4,20,000/- as income from other sources. So, the same is ordered to be treated as business income of the assessee company.

Summary

Issues Involved:
1. Determination of rental income classification as "business income" or "income from house property."
2. Treatment of rental income derived from letting out MD Office as "income from other sources," "income from house property," or "business income."

Issue 1: Determination of Rental Income Classification

The appeal involved the classification of rental income of ?20,83,413 derived from letting out corporate office and quarters as "business income" or "income from house property." The Appellant argued for consistent treatment under "Income from house property" based on historical declarations. The Tribunal analyzed Section 22 of the Income-tax Act, which states that rental income from unused portions of business premises owned by the assessee should be treated as income from house property. The lease agreement dated 07.06.2007 confirmed the rental of the property to a third party or sister concern, qualifying it as income from house property. The Tribunal rejected the argument that the property could be taken back for business purposes and upheld the classification as income from house property. However, rental income from letting quarters to company employees for business purposes was deemed as business income.

Issue 2: Treatment of Rental Income from MD Office

The second issue involved determining the classification of rental income of ?4,20,000 derived from letting out MD Office. The CIT (A) treated this income as "income from other sources" due to the property being a vacant plot of the soap unit. The Tribunal, after reviewing the lease agreement, found that the property included land and structures, qualifying it as business income. The regular rental income from the property established it as a business income rather than income from other sources. Consequently, the Tribunal dismissed the revenue's appeal and partially allowed the assessee's appeal.

In conclusion, the Tribunal's judgment clarified the classification of rental income from different properties, emphasizing the distinction between income from house property and business income based on the nature of the property and its usage.