2018 (6) TMI 1178 - AT - Income Tax

Rental income - income offered under the head business and profession or as income from house property - Held that - The assessee has invested almost all its resources like Share capital Reserves and Surplus and Unsecured loans to invest in -a single residential flat amounting to ₹ 3.53 crores(approx.) and no other resources were left with the company to do a business or invest in any other avenues. Only a miniscule amount of ₹ 10 (lacs approx..) was given by company as loans and advances, ₹ 10 lacs(approx.) invested in shares and an amount of ₹ 13 lacs(approx..) was left as bank balances. The company is not doing any sort of business from many years. The investment in flat is shown as Asset of the company and not as stock in trade. The said flat purchased by the assessee after investing all its funds has been given to its director on a fixed rent of ₹ 25,000/- p.m from the year 1998 to till date without citing any reason for not increasing the rent. Even though assessee has offered the income under the head business and profession‟, however, no depreciation has been claimed as per I.T. provisions in respect of alleged business assets in the profit and loss account over these years. As mentioned in the lease agreement that the property was purchased for the purpose of trading and it is being temporarily leased because market conditions are not good, even though market conditions improved, the assessee neither sold the property nor even increased the rent. Thus, the conduct of the assessee over the years shows that the main purpose of acquisition was to provide the same to the Director at a very nominal rent. We do not find any infirmity in the order of lower authorities for not treating rental income as income from business and profession. Computation of ALV - we are in agreement with the AR that AO has not properly computed the ALV. Accordingly, ALV is directed to be computed on the basis of principle laid down in the decision of Jurisdictional High Court in the case of Tip Top Typography 2006 (5) TMI 55 - MADHYA PRADESH HIGH COURT . We direct accordingly. Reopening of assessment - Allowance of minimum business expenditure to run the company is concerned, we are of the view that minimum expenditure to maintain status of company is required to be allowed. These expenditure are to be allowed to be set off against the income from house property as per the provision of Section 71 of the IT Act. So far as reopening is concerned, as per the reasons recorded, we are in agreement with the lower authorities that there was sufficient reason to reopen the assessment.

Summary

Issues Involved:
1. Classification of rental income as "Business and Profession" or "Income from House Property".
2. Computation of Annual Letting Value (ALV) of the property.
3. Allowance of business expenditure to maintain the company’s status.
4. Validity of reopening the assessment.

Issue-Wise Detailed Analysis:

1. Classification of Rental Income:
The primary issue in this case pertains to whether the rental income received by the assessee should be classified under "Business and Profession" or "Income from House Property". The assessee argued that the rental income should be treated as business income based on the company’s main objective of leasing properties, as outlined in its Memorandum of Association. The assessee relied on the Supreme Court decisions in the cases of Chennai Properties & Investments Ltd. and Rayala Corporation Pvt. Ltd., which allowed rental income to be treated as business income if the main object of the company is to let out properties.

However, the Assessing Officer (AO) and CIT(A) did not accept this argument, noting that the assessee had invested all its funds in a single residential flat and had not engaged in any other business activities. The property was let out to a director at a fixed rent significantly below the market rate, and there was no evidence of commercial exploitation of the property. The Tribunal upheld the lower authorities' view, emphasizing that merely having an object clause in the Memorandum is insufficient; the actual conduct and circumstances must support the business activity claim. The Tribunal concluded that the rental income should be assessed under "Income from House Property".

2. Computation of Annual Letting Value (ALV):
The AO computed the ALV of the property by considering the fair market rental value and the notional interest on the security deposit received. The AO determined that the fair market rent was significantly higher than the rent received by the assessee. The Tribunal agreed with the AO's approach but directed that the ALV should be computed based on the principles laid down by the Jurisdictional High Court in the case of Tip Top Typography, ensuring a fair and reasonable assessment.

3. Allowance of Business Expenditure:
The Tribunal acknowledged that the assessee should be allowed minimum business expenditure necessary to maintain the company's status. These expenditures should be set off against the income from house property as per Section 71 of the Income Tax Act. This ensures that the company can deduct essential expenses incurred to keep the company operational.

4. Validity of Reopening the Assessment:
The Tribunal found that the reopening of the assessment was valid. The AO had sufficient reasons to believe that the rental income was not correctly assessed, justifying the issuance of a notice under Section 148 of the Income Tax Act. The Tribunal upheld the lower authorities' decision to reopen the assessment based on the reasons recorded.

Conclusion:
The Tribunal concluded that the rental income should be assessed under "Income from House Property" and not "Business and Profession". The ALV should be computed based on the principles of the Jurisdictional High Court, and the assessee should be allowed minimum business expenditure to maintain the company's status. The reopening of the assessment was deemed valid. The appeal of the assessee was allowed in part, with specific directions for the computation of ALV and allowance of business expenditure.