2011 (3) TMI 445 - AT - Income Tax

Business income Vs. House property - Notional interest - assessee company is engaged in construction of residential units and development activities - there is no dispute that principal object of the assessee company is to develop and sell the premises constructed - According to the assessee leasing is one of the methods of commercial utilisation of immovable property forming part of the business of the assessee company therefore the income derived therefrom should be assessed as income from business - assessee has received simple rent from the flats/units therefore the assessee being the owner of the flat/property the income derived therefrom should be assessed as income from house property - the principle object of the assessee company is to develop and sell the premises constructed and there is no material on record to show that the said principle object of the company includes leasing of the stock - Held that the rental income is assessable under the head income from house property - Decided against the assessee

Summary

Issues Involved:
1. Classification of lease rental income as business income or income from house property.
2. Disallowance of depreciation.

Issue-wise Detailed Analysis:

1. Classification of Lease Rental Income:
The primary issue in this case was whether the lease rental income earned by the assessee should be classified as business income or income from house property. The assessee, engaged in construction and development of residential units, argued that leasing out unsold units was a method of commercial utilization of immovable property, thus forming part of its business activities. The assessee relied on several judicial decisions to support its claim that the lease income should be treated as business income.

However, the Assessing Officer (AO) did not accept this argument. The AO noted that the assessee had not provided evidence to show that the leased premises were commercial assets or that the income derived was from a commercial asset. The AO emphasized that the assessee had capitalized the unsold properties, converting them to fixed assets, thus changing their nature to capital assets. Consequently, the AO assessed the rental income under the head "income from house property."

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, distinguishing the cases cited by the assessee and relying on the Supreme Court's decision in Shambhu Investment (P.) Ltd. v. CIT, which held that if the primary intention is to let out the property to earn rent, the income should be considered as rental income. The CIT(A) observed that the assessee's unsold units were let out without any complex commercial operations, thus the rental income could not be treated as business income.

The assessee appealed to the ITAT, arguing that leasing out the property was part of its business activity and should be treated as business income. The assessee cited the decision in Hiranandani Developers (P.) Ltd. v. Jt. CIT, where the Tribunal held that income derived from property let out temporarily should be assessed as business income if the dominant object was to sell the flats.

The ITAT, however, found no material evidence to show that leasing was a principal object of the assessee company. The ITAT referred to the principles laid down in Shambhu Investment (P.) Ltd. and other cases, concluding that the primary intention was to earn rent from the property, not to exploit it through complex commercial activities. Therefore, the rental income was assessed under the head "income from house property."

2. Disallowance of Depreciation:
The second issue was the disallowance of depreciation claimed by the assessee. During the hearing, the assessee's counsel chose not to press this ground of appeal, and the Departmental Representative (D.R.) did not object. Consequently, in the absence of any supporting material, the ITAT rejected the ground of appeal regarding the disallowance of depreciation.

Conclusion:
The ITAT dismissed the assessee's appeal, upholding the CIT(A)'s decision that the rental income should be classified as "income from house property" and not as "business income." The ground regarding disallowance of depreciation was also rejected as it was not pressed by the assessee.