2013 (12) TMI 1166 - HC - Income Tax

Whether income from letting out of shops held as stock in trade is taxable as business income - Held that - Letting out the premises or receiving the rent is not a business of the assessee. The business of the assessee is to construct and sale the properties - Following CIT vs. M/s. Goel Builders 2010 (5) TMI 487 - Allahabad High Court - The units lying vacant due to shortage of demand were rented to earn income - The rental income was utilized to reduce the burden of repayment of interest - The assessee has rightly claimed rental income under the head income from business specially when the assessee was not engaged in the business of letting out for the construction of the business complex - The rental income was earned for a short period - The same was shown in the books of account - The unsold units in the stock-in-Trade were already treated as business assets - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of income from letting out of shops as "Income from House Property" or "Income from Business."
2. Allowability of deduction of interest under section 36(1)(iii) of the Income Tax Act.
3. Disallowance of interest referable to borrowings made for setting up of business.
4. Allowability of interest on accumulated arrears of interest as deduction.
5. Authority's power to decide tax assessment beyond reference/claims made in income tax filings.

Analysis:
1. The appeals were filed under Section 260-A of the Income Tax Act, 1961, challenging the ITAT's decision regarding the classification of income from letting out of shops. The main issue was whether the income should be assessed as "Income from House Property" or "Income from Business." The court analyzed the nature of the business complex, the purpose of letting out units, and the treatment of unsold units as stock-in-trade. The court held that the rental income was rightly claimed under the head "Income from Business" due to the business activities carried out by the assessee.

2. The deduction of interest under section 36(1)(iii) was contested, with the appellant claiming that the interest on borrowed funds used for constructing the complex should be allowed as a deduction. The court examined the utilization of borrowed funds, the treatment of interest in the books of accounts, and relevant case laws. It concluded that the interest on borrowings for business purposes was allowable as a deduction under section 36(1)(iii).

3. The disallowance of interest to the extent referable to borrowings for setting up the business was also challenged. The appellant argued that the entire interest amount should be allowed as a deduction. The court reviewed the nature of borrowings, construction of the complex, and the treatment of interest payments. It held that the entire claim for deduction of interest was allowable as it was related to business activities.

4. The issue of the allowability of interest on accumulated arrears of interest as a deduction was raised. The court assessed the relevance of interest on arrears and its deductibility under the law. It determined that interest on accumulated arrears of interest was allowable as a deduction, overturning the ITAT's decision.

5. The court also addressed the authority's power to decide tax assessments beyond the reference or claims made in income tax filings. It emphasized the assessee's right to raise legal issues at any stage and cited relevant case laws to support the argument. The court ruled in favor of the assessee, allowing the appeals and directing the AO to treat the rental income from unsold units under the head "Income from Business."

In conclusion, the High Court ruled in favor of the assessee on all substantial questions of law, allowing the appeals and directing the tax authority to treat the rental income from the business complex as "Income from Business."