2017 (8) TMI 651 - AT - Income Tax

Rental income from leasing of property owned by the assessee - treatment of income from business OR income from house property - Held that - The business asset of the assessee company were let out to different persons. Since the assessee has received the rentals from letting out of not the building structure only but it is a factory premises including all fittings and fixtures. Therefore in the facts and circumstances of the case, when the business asset of the assessee is let out but after discontinuing the business activity of the textile mill then the rental income cannot be treated as income from house property however the same would be assessed as income from other sources. Since the factory building was neither acquired nor held by the assessee for the purpose of letting out but it was held by the assessee for its textile business which was discontinued then for the claim of business income cannot be accepted. Accordingly, in view of the above discussion, the Assessing Officer is directed to assess the rental income as income from other sources and allow the deductions as per Section 57 of the Act as well as the expenditure on maintenance of the company in existence.

Summary

Issues:
Dispute over rental income categorization - Business income or income from house property.

Analysis:
The appeal concerns the categorization of rental income from leasing property as either business income or income from house property for the Assessment Year 2006-07. The assessee, having discontinued a textile mill business, leased out factory premises and claimed the rental income as business income. However, the Assessing Officer assessed it as income from house property. The CIT (Appeals) upheld this assessment, leading to the appeal.

Before the Tribunal, the assessee's representative argued that leasing the factory premises was a business activity as per the company's Memorandum and Articles of Association. Referring to specific clauses, it was contended that the lease rental constituted business income. Citing a Supreme Court decision, it was emphasized that letting property could be considered a business activity.

On the contrary, the Departmental Representative supported the lower authorities' decisions, stating that since the assessee had ceased its primary business activity, the rental income could not be classified as business income. It was argued that the letting out of property was not the main business objective of the assessee.

After reviewing the submissions and evidence, it was established that the assessee permanently discontinued the textile mill business and leased out the factory premises to various entities. While the leasing of assets was a business object per the company's documents, the factory building was not originally intended for letting but for textile business. Therefore, the rental income was deemed to be from other sources, not house property income. The Assessing Officer was directed to assess the income accordingly and allow deductions as per the Income Tax Act.

Conclusively, the appeal was partly allowed, and the judgment was pronounced on 28th April 2017.