2019 (4) TMI 1312 - HC - Income Tax

Taxability of rental income on properties held as stock-in-trade - assessee is engaged in the business of development of real estate - Only small portion of the number of units constructed by the assessee were given on lease and license basis - income from the property vs business income - allowability of expenditure - HELD THAT - The Tribunal, having noted the relevant facts, by placed reliance on the decisions of the Gujarat High Court in the case of Neha Builders 2006 (8) TMI 105 - GUJARAT HIGH COURT and of the Supreme Court in the case of Chennai Properties 2015 (5) TMI 46 - SUPREME COURT . It is true that income derived from the property would always be termed as 'income' from the property, but if the property is used as 'stock-in-trade', then the said property would become or partake the character of the stock, and any income derived from the stock, would be 'income' from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the 'business' and the business stocks, which may include movable and immovable, would be taken to be 'stock-in-trade', and any income derived from such stocks cannot be termed as 'income from property'. Allowability of expenditure - The Assessing Officer had objected to certain expenditure being claimed by the assessee for earning the business income arising out of running of its units. Once, we hold that the first question regarding taxability of rental income is not to be entertained, automatically the second question would fall - Income Tax Appeal of revenue is dismissed.

Summary

Issues involved:
1. Characterization of income derived from letting out properties as income from house property or business income.
2. Allowability of expenses pertaining to stock-on-lease while computing income from house property.

Issue 1: Characterization of income derived from letting out properties

The High Court considered whether the income derived by the assessee from letting out properties held as stock-in-trade represents income from house property or business income. The Revenue contended that the Tribunal erred in not upholding the Assessing Officer's findings that the income should be treated as income from house property. The Tribunal, however, upheld the view that the assessee, a partnership firm engaged in real estate development, derived income from an ancillary business of letting out premises on leave and license basis. The Tribunal referenced the decision of the Gujarat High Court in Neha Builders and the Supreme Court in Chennai Properties case to support its conclusion that income from such activity should be considered business income rather than income from house property. The High Court agreed with the Tribunal's interpretation, emphasizing that the nature of the assessee's business activities was crucial in determining the character of the income derived from letting out properties.

Issue 2: Allowability of expenses pertaining to stock-on-lease

The second question raised in the appeal was regarding the pro-rata disallowance of expenses amounting to &8377;1,41,00,000 related to stock-on-lease. The Assessing Officer had disallowed these expenses, contending that they were not allowable while computing income from house property. The High Court noted that the decision on the first issue regarding the characterization of income would impact the treatment of these expenses. Since the Court upheld the view that the income derived from letting out properties should be considered business income, it followed that the expenses related to the business activity were allowable. Consequently, the High Court dismissed the Income Tax Appeal, indicating that the second question was consequential to the first issue and did not require separate consideration.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing that the nature of the assessee's business activities was pivotal in determining the character of the income derived from letting out properties. The Court clarified that income from such activities should be treated as business income rather than income from house property, aligning with the principles established in relevant case law.