2015 (6) TMI 1229 - AT - Income Tax

Correct head of income - income from business and profession or income from house property - assessee received licence fee from leased out flats - HELD THAT - Assessee is a partnership firm engaged in the business of development activities since its inception. All the units, leased outs, were developed by the assessee itself and only small portion of the total units were leased out on lease and licence basis, which were held as stock in trade. Let out the premises on lease and licence basis is the ancillary business of development and the rent constitute a small percentage of total revenue/income earned by the assessee. These units were subsequently sold out and in between (when remained to be unsold) were commercially exploited/utilized. Subsequent to sale of such units, the assessee offered the income as business income. In the present appeal, the units were leased out for temporary period for commercial utilization of the unsold units. Clause-14 of the lease and licence agreement clearly demonstrate the commercial intention of the assessee because the clause provides that the assessee shall have the right to sale the leased premises without any objection for the lessee except that lease and licence agreement shall continue for the balance period. Holding that mere entry of the object clause showing a particular object would not be the determinative factor to arrive at a conclusion whether the income is to be treated as income from business and such question would depend upon the circumstances of each case i.e. whether a particular business is letting or not. Income derived from property would be termed as income from property but if the property is held as stock in trade, then the said property would become or part take the character of stock and thus any income derived therefrom would be income from business and not income from property. If business of the assessee is to construct the property and sale it or to construct and let out the same then that would be the business income. Disallowances of expenses which were arrived at pro rata basis - AO observed that income from leasing of properties is assessed under the head income from house property and thus part of expenses incurred in creating/building, the stock cannot be allowed as business expenditure - HELD THAT - The assessee duly submitted the details of expenses along with names and addresses of the vendors. The ld. Commissioner of Income Tax (Appeals) found that the assessee transferred some amounts to profit and loss account and balance in WIP account. The assessee also filed statement showing the total area developed was divided into sold area and leased area and stock in hand. It was found by the CIT(Appeals) almost 94% of the income was derived from sale of flats and the remaining through rentals. Even the assessee bifurcated total expenses so incurred by it into revenue expenses and that leased to be capitalized. CIT(Appeals) and the Revenue has not brought any contrary material in their support, we find no infirmity in the conclusion drawn by the ld. CIT(Appeals). Even otherwise, while disposing of the aforesaid ground whether business income or income from house property, since we have affirmed the decision of the ld. CIT (Appeals), following the latest decision from Hon ble Apex Court, we affirm the stand of the ld. CIT (Appeals). Thus, this ground of the Revenues is also dismissed.

Summary

Issues Involved:
1. Classification of income from leased properties as 'income from business and profession' versus 'income from house property'.
2. Disallowance of depreciation on leased assets.
3. Disallowance of proportionate expenses related to leased properties.

Issue-wise Detailed Analysis:

1. Classification of Income:
The primary issue was whether the income of Rs. 1,51,95,578/- from leased properties should be treated as 'income from business and profession' or 'income from house property'. The Revenue argued that the income should be classified as 'income from house property' based on the lease and license agreement, citing the Supreme Court decision in Shambhu Investments (263 ITR 143). The assessee contended that the income should be treated as 'business income' since the leasing was an ancillary activity to their business of property development, relying on the Supreme Court decision in M/s Chennai Properties vs CIT. The Tribunal noted that the assessee was a partnership firm engaged in property development, and the leased units were part of the stock in trade. The Tribunal concluded that the income from temporary leasing of unsold units should be treated as 'business income', citing the Supreme Court's decision in Universal Plast and the latest decision in Chennai Properties, which emphasized examining the business context and commercial utilization of the property.

2. Disallowance of Depreciation:
The second issue involved the disallowance of depreciation amounting to Rs. 11,14,982/- on furniture and fixtures related to leased assets. The Assessing Officer disallowed the depreciation, treating the income from leasing activities as 'income from house property'. However, since the Tribunal upheld the classification of the income as 'business income', it allowed the depreciation on leased movable assets as a deductible expense.

3. Disallowance of Proportionate Expenses:
The third issue concerned the disallowance of proportionate expenses amounting to Rs. 1,41,00,000/- related to the leased properties. The Assessing Officer disallowed these expenses, arguing that they could not be allowed as business expenditure since the income was assessed under 'income from house property'. The assessee provided detailed statements and evidence showing that the expenses were related to completed projects and were necessary for the day-to-day running of the business. The Tribunal found that almost 94% of the income was derived from the sale of flats, and the remaining was from rentals. It concluded that the Assessing Officer had not provided sufficient evidence to disallow these expenses and, therefore, upheld the assessee's claim, allowing the expenses as business deductions.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the decision of the Commissioner of Income Tax (Appeals) to treat the income from leased properties as 'business income', allowing depreciation on leased assets, and permitting the deduction of proportionate expenses related to the leased properties. This judgment was pronounced in the open Court on 02nd June 2015.