2014 (4) TMI 1218 - AT - Income Tax

Rental income - nature of income - to be treated as Business income or income from house property - whether depreciation should be allowed - Held that - Assessee is engaged in the business of Services, leasing and business Centre facilities, Maintenance & Running of Guest House - thus income of the assessee should be assessed under the head income from business and it should be allowed expenses incurred by it in carrying out its business - Depreciation claimed by the assessee has also been allowed by the Tribunal - FAA has granted relief to the assessee,in pursuance of the orders of the Tribunal - hence respectfully following the orders of the Tribunal for earlier years and confirming the order of the FAA,we decide effective ground of appeal against the AO - Decided in favor of assessee.

Summary

Issues:
1. Classification of rental income as business income.
2. Allowance of rental expenses and depreciation on building under business income.

Issue 1:
The primary issue in this case was whether the rental income of the assessee should be treated as business income. The Assessing Officer (AO) contended that the rental income should be assessed under the head "Income from House Property" based on a decision of the Hon'ble Supreme Court. However, the assessee argued that the leasing of property was part of its business activities, supported by the Memorandum of Association, and should be categorized as income from business. The First Appeal Authority (FAA) and the Mumbai ITAT had previously ruled in favor of the assessee in similar cases, holding that rental receipts from leasing activities should be taxed under the head of business income. The FAA directed the AO to assess the rental income as business income and allow the related expenses and depreciation based on past history and consistent tribunal decisions.

Issue 2:
The second issue revolved around the allowance of rental expenses and depreciation on the building under business income. The AO had disallowed these expenses as he considered the rental receipts from the building to be taxable under the head "Income from House Property." However, the FAA, following the precedent set by the tribunal and considering the similarity of facts to earlier years, directed the AO to allow these expenses and depreciation, emphasizing that the rental income should be taxed under the head of business income. During the hearing, both sides acknowledged that the tribunal had consistently ruled in favor of the assessee, allowing expenses and depreciation incurred in carrying out the business activities. Consequently, the tribunal dismissed the AO's appeal, upholding the FAA's decision and confirming the treatment of rental income as business income.

In conclusion, the judgment by the ITAT Mumbai affirmed the classification of rental income as business income for the assessee, in line with past tribunal decisions and the Memorandum of Association. The allowance of rental expenses and depreciation on the building was also upheld under the head of business income, following consistent rulings and the similarity of facts to previous years. The decision provided clarity on the tax treatment of rental income derived from leasing activities and reiterated the importance of considering business activities when determining the appropriate tax categorization.