2014 (9) TMI 501 - HC - Income Tax

Classification of income - Income from business and profession or income from house property Held that - Section 22 clearly indicates that income from house property would be chargeable to income tax under the head income from other sources - The intention of the legislature in making rent from property chargeable under the heading income from other sources is apparently clear relying upon Universal Plast Ltd. Versus Commissioner of Income-Tax 1999 (3) TMI 15 - SUPREME Court - only the building was leased out along with a lift, tubewell and electrical fittings - This cannot be treated as plant and machinery but would be treated as amenities, which are necessary for the use of any building - the assessee had not placed any material on record to show that the building had peculiar amenities with which the building could be treated as a plant and not a building simplicitor - No material has been brought on record to indicate that the building had peculiar amenities, which could be commercially exploited such as facilities of sterilization of surgical instruments and bandages or an operation theatre - The Tribunal was rightly of the view that the building which was leased out by the appellant was nothing else but a building simplicitor and was not a building, which was equipped with specialized plant and machinery assessee is not running the business of a hospital and has only let out the building - the income derived was from the ownership of the building and not from the personal exertion, which is necessary to treat the income as a business income thus, the income derived by the assessee from the leasing out of its property was an income from house property and not a business income Decided against assessee.

Summary

Issues:
1. Classification of income derived from leasing out property as income from business or income from house property.
2. Interpretation of lease agreement between the appellant and lessee.
3. Application of legal principles to determine the nature of income derived from property lease.

Analysis:
1. The appellant company initially intended to run a hotel business but later leased out the building to a nursing home due to the impracticality of the hotel location. The company claimed the income from the lease as business income, while the tax authorities treated it as income from house property. The dispute arose regarding the classification of the income derived from leasing out the building with amenities. The Tribunal's members had differing opinions on the matter, leading to the appeal before the High Court.

2. The lease agreement between the appellant and the lessee was examined to determine the nature of the income. The appellant argued that the lease was not a simple property lease but a business premises lease where the assets were utilized for running a nursing home. However, the tax department contended that only the building was leased out, and the presence of amenities like lifts and electrical fittings did not change the nature of the income. The terms of the lease agreement were crucial in deciding whether the income should be classified as business income or income from house property.

3. Legal principles were applied to ascertain the nature of the income derived from the property lease. The appellant relied on Supreme Court decisions to support the claim that the income should be treated as business income. However, the court emphasized the distinction between income from property and business income under the Income Tax Act. The court analyzed the specifics of the lease agreement, the intentions of the parties, and the nature of the leased property to determine the appropriate classification of the income.

In conclusion, the High Court held that the income derived from leasing out the property was income from house property and not business income. The court found that the building leased out by the appellant was a simple building without specialized plant and machinery for commercial exploitation. The court emphasized that the income was from the ownership of the building and not from active business operations. Consequently, the appeal was dismissed, affirming that the income should be classified as income from house property based on the legal provisions and factual findings.