2017 (2) TMI 556 - HC - Income Tax

Rental income - house property or business - Held that - The main objective of the assessee firm as manifest from the partnership deed was to carry on business in construction of different types of buildings such as godowns, residential or commercial buildings, flats, shops etc., and lease them out as a part of its business activity but not as exploitation of the property as an owner. In simple, construction of different types of buildings and leasing them out was the main business activity of the firm and doing other activity was only an optional one. In that view, the assessee firm was right in showing its both incomes under the head income from business. Therefore, we find no merit in the argument of learned Standing Counsel that the rental income should be shown under a different head. We also do not find any merit in the other argument that since the Tribunal has held in the previous instances that the income received by the same assessee was the income from house property and not a business income, in the instant case also it should have held similarly for the reason that in the earlier instances, the Tribunal had no occasion to peruse the judgment in M/s.Chennai Properties & Investments Ltd., Chennais case (2015 (5) TMI 46 - SUPREME COURT).

Summary

Issues:
1. Determination of rental income as income from house property or business income.

Analysis:
The case involves an appeal filed by the Revenue against the order of the Income Tax Appellate Tribunal (I.T.A.T) regarding the treatment of rental income received by a partnership firm. The firm, engaged in rental income and tobacco trade, declared its total income for the Assessment Year 2008-09. The Assessing Officer (A.O) concluded that the rental income should be treated as Income from house property, leading to a dispute. The Commissioner of Income Tax (Appeals) allowed the appeal in favor of the assessee, considering the rental income as part of the business. The Tribunal, relying on a Supreme Court judgment, upheld the assessee's position that the income was from business, not house property.

The substantial questions of law raised by the appellant focused on whether the Tribunal erred in not treating the rent receipt as income from house property and changing its decision based on a different Supreme Court judgment. The Senior Standing Counsel for the Income Tax Department argued that the Tribunal should have followed its previous decisions regarding the nature of income received by the assessee. However, the Court examined the partnership deed of the firm, which clearly outlined the primary business objective of constructing and leasing out properties. The Court noted that the main business activity of the firm was leasing out properties, with any other business being optional and ancillary.

Drawing parallels with a similar Supreme Court case, the Court concluded that the rental income should be considered as income from business, aligning with the firm's core business activity of constructing and leasing properties. The Court dismissed the appeal at the admission stage, finding no substantial questions of law involved. The judgment emphasized the importance of analyzing the nature of the firm's activities and business objectives in determining the classification of income for tax purposes.

This comprehensive analysis highlights the key legal arguments, interpretations of relevant statutes, and the application of judicial precedents in resolving the dispute over the classification of rental income for the partnership firm.