2019 (5) TMI 1875 - AT - Income Tax

Correct head of income - Rental Income received by the assessee on leasing properties - income from house property OR profits and gains of business/profession - HELD THAT - Lease rental is to be paid to the lessor only after the lessor i.e assessee herein, completes all the interior, fittings and furniture works and has provided the infrastructural facilities and materials to the lessees as per Annexure A to the agreement. Therefore, it is not mere bare structure that is provided by the assessee to the tenant on rent but it is with furniture and fixtures along with power back up and AC facility. On perusal of the returns of income for earlier assessment years, we find that the assessee had let out properties at Hyderabad, Mumbai Delhi, but the income from said properties is not offered during the relevant assessment year. Whether such properties were let out since they were unsold during the relevant period and whether they were sold subsequently to which, there is no rental income during the relevant assessment year is not clear from the details filed before us. Unless the assessee is carrying on a systematic and organized activity to exploit the property commercially, it cannot be taxed as business income. We find that except for creating the infrastructure as per the requirement of the lessee, the assessee is not providing any other service during the year as is evident from the profit and loss account of the assessee for the relevant assessment year. The only expenses claimed by the assessee are interest, salaries administrative expenses. Therefore, it is clear that the assessee s intention is to enjoy the rental income on a long term basis by leasing out the premises and not to exploit the same commercially on short term basis. We are inclined to accept the contentions of the assessee that the rental income is to be assessed as income from house property as offered by the assessee and as accepted by the Revenue in the earlier years up to A.Y 2011-12. Appeal filed by the assessee is allowed.

Issues Involved:
1. Classification of rental income as 'Income from House Property' vs. 'Business Income'.
2. Application of principles of consistency and uniformity in tax treatment.
3. Interpretation of the Memorandum of Association (MoA) regarding the business objectives of the assessee.
4. Relevance of previous case law and judgments to the current case.

Detailed Analysis:

1. Classification of Rental Income:
The primary issue was whether the rental income earned by the assessee should be classified as 'Income from House Property' or 'Business Income'. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] classified the income as 'Business Income', arguing that the assessee's main intention was to commercially exploit its properties. They relied on judgments such as Sultan Brothers (P.) Ltd. vs. CIT, Rayala Corporation (P.) Ltd. vs. ACIT, and Chennai Properties and Investments Ltd. vs. CIT, which supported the view that income from properties let out with additional amenities should be treated as business income.

The assessee contended that the rental income should be classified as 'Income from House Property', arguing that the properties were not let out as part of a systematic business activity but rather to enjoy rental income. The assessee cited several judgments, including Raj Dadarkar & Associates vs. ACIT and Keyaram Hotels (P.) Ltd. vs. DCIT, to support this view.

2. Principles of Consistency and Uniformity:
The assessee argued that the principle of consistency should apply since the rental income had been consistently treated as 'Income from House Property' in previous years. The AO had accepted this classification until the Assessment Year (AY) 2011-12. The assessee cited cases such as CIT vs. Haryana Tourism Corporation and CIT vs. Neo Poly Pack (P.) Ltd. to argue that the tax treatment should not be changed arbitrarily.

3. Interpretation of the Memorandum of Association (MoA):
The assessee's MoA indicated that the primary business objectives included construction and development of properties, but it also mentioned letting out properties on lease. The AO and CIT(A) interpreted this as evidence that the assessee's business included leasing properties, thus supporting the classification of rental income as 'Business Income'.

The assessee countered this by arguing that the primary object was construction and development, not leasing. They distinguished their case from Chennai Properties and Investments Ltd., where the MoA explicitly stated that the business was to earn rental income from properties.

4. Relevance of Previous Case Law:
Both parties relied on various judgments to support their positions. The AO and CIT(A) cited cases where rental income was treated as business income due to the commercial exploitation of properties. The assessee cited cases where rental income was treated as 'Income from House Property' when the properties were not part of a systematic business activity.

The tribunal examined these cases and found that the facts of the current case were more aligned with those where rental income was treated as 'Income from House Property'. They noted that the assessee was not engaged in systematic and organized activities to exploit the property commercially and that the rental agreements were long-term, indicating an intention to enjoy rental income rather than engage in a business activity.

Conclusion:
The tribunal concluded that the rental income should be classified as 'Income from House Property' based on the following reasons:
- The assessee's primary intention was to enjoy rental income on a long-term basis.
- The assessee was not engaged in systematic and organized activities to commercially exploit the properties.
- The principle of consistency should apply, as the rental income had been treated as 'Income from House Property' in previous years.

The appeal filed by the assessee was allowed, and the rental income was classified as 'Income from House Property'. The tribunal's decision was pronounced in the open court on 27th May 2019.

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