2010 (7) TMI 488 - AT - Income Tax

Business income or Rental income - ownership of property - property on lease - tenancy right - CIT (A) held that the rental income was assessable under the head business and not under the head income from house property. - Held that - the assessee has exploited the lease rights in the property as an owner. The rent has been received under tenancy rights and, therefore, the assessee is owner of the property for the purposes of section 22 of the Act. Accordingly, the rent received by the assessee will be assessable under the head house property and not under the head income from business. - Decided in favor of revenue.

Summary

Issues Involved:
1. Treatment of rental income as business income vs. income from house property.
2. Determination of ownership under Section 22 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Treatment of rental income as business income vs. income from house property:

The primary issue in this case revolves around whether the rental income of Rs. 7,23,918/- should be treated as business income or as income from house property. The assessee had taken property on lease from a sister concern, M/s. Neelam Cable Manufacturing Company, and developed it at its own cost before letting it out. The assessee contended that the rental income should be assessed as business income, relying on the Supreme Court's decision in S.G. Mercantile Corporation Pvt. Ltd. v. CIT, which held that rental income from a property not owned by the assessee but developed and let out by it should be treated as business income. However, the assessing officer disagreed, arguing that since the assessee was not engaged in the business of leasing land and building, the rental income should be assessed under the head "income from house property."

2. Determination of ownership under Section 22 of the Income Tax Act, 1961:

The crux of the matter lies in the interpretation of Section 22 of the Income Tax Act, 1961, which states that the annual value of property consisting of any building or land appurtenant thereto, of which the assessee is the owner, shall be chargeable to income-tax under the head "income from house property." The term "owner" is further defined under Section 27 of the Act. The CIT (Appeals) sided with the assessee, stating that since the assessee was not the owner of the property, the rental income should be treated as business income. The CIT (Appeals) also noted that the premises were located in an industrial area and could not be used as residential property, further supporting the argument for treating the income as business income.

However, the Revenue argued that the distinction between commercial and residential property is irrelevant for the purpose of Section 22, and any income derived as rent from such properties should be assessed under the head "income from house property." The Revenue relied on the Madras High Court's decision in CIT v. Chennai Properties and Investments Ltd., which held that rental income from property, whether commercial or residential, should be assessed as income from house property.

Tribunal's Decision:

The Tribunal examined the lease agreement and found that the assessee had obtained tenancy rights initially for 11 months, extendable up to 20 years. The Tribunal noted that under Section 22, the term "owner" includes individuals who have acquired rights in the property through transactions specified in Section 269UA(f), which includes long-term leases. The Tribunal cited the Supreme Court's decision in CIT v. Poddar Cement Pvt. Ltd., which held that the term "owner" for the purposes of Section 22 includes persons entitled to receive income from property in their own right, even if they do not have legal title.

The Tribunal concluded that the assessee, having acquired long-term lease rights and developed the property, should be considered the owner for the purposes of Section 22. Consequently, the rental income should be assessed under the head "income from house property" and not "income from business." The Tribunal set aside the CIT (Appeals)'s order and restored the assessing officer's decision.

Conclusion:

In summary, the Tribunal ruled that the rental income received by the assessee should be assessed as income from house property, as the assessee, by virtue of long-term lease rights and property development, qualifies as the owner under Section 22 of the Income Tax Act, 1961. The appeal filed by the Revenue was allowed, and the order of the assessing officer was restored.