2014 (1) TMI 1413 - AT - Income Tax

Whether income from lease rent be assessed as income from house property or income from business - Held that - The assessee has let out the property by the leave and license agreement dated 31.07.2006 for a further period of 33 months upto 31.01.2009 - The assessee has let out the property for the longer period w.e.f. 21-07-2002 by way of leave and license agreement - The assessee was not involved in day to day management or maintenance of the premises and except giving the property on leave and license basis, there are no complex commercial activities involved in this agreement - The agreement was also registered by virtue of Maharashtra Rent Control Act and there are no other plant and machinery so as to consider that the assessee is exploiting it on commercial basis. Immediately after acquiring the property, the property was not occupied by the assessee for its own use for its business and was let out from the time it was acquired on leave and license basis for a longer period of 33 months each time - Decision in CIT vs. Chennai Properties 2003 (3) TMI 28 - MADRAS High Court followed - The rental income has to be treated as income from house property - The depreciation shall be allowed only when the assessee starts using the property for its business purposes - Decided against assessee.

Summary

Issues involved:
1. Whether the income earned by the assessee through rents on leasing the property should be assessed as income from house property or income from business.

Detailed Analysis:

Issue 1: Assessment of Rental Income

The primary issue in these appeals is the classification of the income earned by the assessee from renting out its property-whether it should be treated as "income from house property" or "income from business." The assessee received rental income of Rs. 3.2 crores and claimed depreciation of Rs. 2.15 crores and Rs. 1.93 crores in the P&L account. The Assessing Officer (AO) considered the rental receipts as income from house property, given the long-term lease to Sahara India Commercial Corporation Ltd. The assessee contended that the property was acquired for its own office use but was temporarily leased out due to employee resistance to relocate.

CIT (A) Findings:

The CIT (A), relying on various case laws including the Hon'ble Supreme Court's decision in Shambhu Investments (P) Ltd (263 ITR 143) and CIT vs. Chennai Properties (266 ITR 685 Madras), held that the rental income should be assessed as income from house property. The CIT (A) noted that rental income could only be treated as business income if the property was exploited through complex commercial activities, which was not the case here. The property was not used for such activities and was instead let out to earn rental income from idle space.

Assessee's Arguments:

The assessee argued that the property was let out temporarily due to a dispute with the landlord and employee resistance to shift to the new premises. The assessee cited several judgments to support the claim that the rental income should be treated as business income. Key points included:

1. Shambhu Investment (P) Ltd (249 ITR 47): The primary object of the assessee in exploiting the property is crucial. If the intention is to let out the property, it should be considered rental income; otherwise, it could be business income.

2. Universal Plast Limited (237 ITR 455): Several propositions were laid out, including the relevance of the period for which assets are let out and whether the business intends to resume operations.

3. Vikram Cotton Mills Ltd (169 ITR 597): Lease rent derived from temporarily letting out assets should be assessable as business income if the intention is to resume business.

4. Kohinoor Tobacco Products Ltd (283 ITR 162 (MP)): Income from temporary letting of business premises to generate income should be considered business income.

5. Skipper Properties (P) Ltd (113 ITD 56 (Del)): Income from temporary letting during a business lull should be treated as business income.

6. CIT vs. K. Vijayakumar (243 ITR 685): Letting activities intertwined with the business should be considered business income.

The assessee also emphasized that the department had accepted the rental income as business income in earlier years and should not change its position.

Tribunal's Decision:

The Tribunal upheld the CIT (A)'s decision, noting that the property was let out on a leave and license basis for a long period (seven years or more), indicating it was not a temporary arrangement. The Tribunal found no evidence of complex commercial activities or day-to-day management by the assessee. The property was not occupied by the assessee for its own business use and was leased out from the time of acquisition. Therefore, the rental income was correctly treated as income from house property. The claim for depreciation was also rejected, but the w.d.v of the property could be determined for future use in the business.

Conclusion:

The appeals were dismissed, and the rental income was classified as income from house property, not business income. The decision was pronounced in the open court on 30th November 2011.