2017 (1) TMI 106 - AT - Income Tax

Receipts towards lease rentals - income from house property or business income - Held that - The assessee was carrying the same activities of leasing the building for software technology and earning maintenance charges before rescindment of approval for deduction u/s 80IA and later years. There is no change in the activities during the year of deduction u/s 80IA and later years. Merely, because the deduction u/s 80IA withdrawn, whether the activities can be regarded as different The objects of creating the company and partnership firm are similar. Hence, the conclusion can be drawn that both are created to carry on the business of leasing out the properties to make profit. In our considered view, the object of running business to make profit by leasing out the property will be charged to tax only under the head income from business and not income from house property. The assessee has established the business only to earn income from leasing out the property, hence, assessee is eligible to treat the rental income as business income and eligible to claim the related expenditure as business expenditure. Accordingly, the grounds raised by the assessee is allowed

Issues Involved:
1. Classification of income from lease rentals.
2. Eligibility of depreciation and other business expenses.
3. Treatment of receipts from operation and maintenance charges.
4. Applicability of previous ITAT decisions and the principle of consistency.
5. Impact of rescindment of approval for deduction under section 80IA.

Detailed Analysis:

1. Classification of Income from Lease Rentals:
The primary issue was whether the income derived from lease rentals should be classified under 'Income from House Property' or 'Profit and Gains of Business or Profession.' The Assessing Officer (AO) classified the lease rental income as 'Income from House Property,' thereby disallowing depreciation and other business expenses. However, the assessee contended that the income should be treated as business income, citing previous ITAT decisions in its favor and the decision of the Hon’ble Supreme Court in the case of Chennai Properties and Investments Ltd. vs. CIT. The CIT(A) upheld the AO's decision, noting that the initial approval for the industrial park had been rescinded, making the previous ITAT decisions inapplicable.

2. Eligibility of Depreciation and Other Business Expenses:
The AO disallowed depreciation and other business expenses, treating the lease rental income as 'Income from House Property.' The CIT(A) agreed with this treatment, stating that the flat deduction under section 24 for repairs and maintenance of the premises suffices, and no separate deduction for depreciation can be allowed. The assessee argued that operation and maintenance of the infrastructure project should be eligible for depreciation and other expenses.

3. Treatment of Receipts from Operation and Maintenance Charges:
The CIT(A) differentiated between rental income and receipts from operation and maintenance charges. While the rental income was classified under 'Income from House Property,' the receipts from operation and maintenance were treated as business income. The CIT(A) directed the AO to compute the profit and gains of business, allowing expenses incurred wholly and exclusively for rendering specific services to the lessees.

4. Applicability of Previous ITAT Decisions and the Principle of Consistency:
The assessee argued that the principle of consistency should apply, as the income had been assessed as business income in previous years (AY 2006-07 to AY 2010-11). However, the CIT(A) held that the previous ITAT decisions were no longer applicable due to the rescindment of approval for deduction under section 80IA. The assessee maintained that there was no change in its method of operation and that the income should continue to be assessed as business income.

5. Impact of Rescindment of Approval for Deduction under Section 80IA:
The CIT(A) noted that the rescindment of approval for deduction under section 80IA meant that the undertaking was no longer considered an eligible business. Consequently, the income could not be treated as business income. The assessee argued that the nature of its activities had not changed and that the rescindment of approval should not affect the classification of income.

Judgment:
The ITAT concluded that the assessee's main objective was to lease out the property and earn rental income, as stated in its partnership deed. The ITAT referenced the Supreme Court decisions in Rayala Corporation Pvt. Ltd. vs. ACIT and Chennai Properties & Investments Ltd., which supported the classification of such income as business income. The ITAT held that the income should be assessed as business income and allowed the related business expenses, including depreciation. Consequently, the appeals filed by the assessee were allowed, and the appeals filed by the revenue were dismissed.

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