2020 (2) TMI 928 - AT - Income Tax

Correct head of income - treatment to lease income - income from house property or business income - HELD THAT - Carrying out all the activities which are relevant for earning the income for these properties by extending various facilities. Thus found that holding of said properties and earning income by letting out those properties is the main objective of the assessee. The income arising therefrom is necessarily assessable under the head Income from Business and profession and assessee is eligible to get deduction in respect of expenditure incurred for earning the aforesaid income and also depreciation on the business assets so held. Assessee has only one business and that is of leasing its property and earning rent therefrom. The assessee has carried out various activities for earning such income by rendering various services as required - the main intention of assessee was to exploit the immovable property by way of complex commercial activities, therefore income so earned by exploiting the property has to be taxed on as business income. No merit in the action of AO for treating the income as income from house property. - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of lease income as income from house property versus income from business and profession.

Issue-wise Detailed Analysis:

1. Treatment of Lease Income:
- The primary issue in all the appeals is the classification of lease income. The assessee declared rental income under the head "income from business/profession" in the return filed, but the Assessing Officer (A.O.) reclassified it as "income from house property" under Section 22 of the Income Tax Act, 1961.

- Facts and Contentions:
- The assessee firm owns a commercial property and leased it out, declaring the rental income as business income. The A.O. questioned this classification, suggesting it should be treated as house property income and issued a show-cause notice to the assessee.
- The assessee argued that it was engaged in the business of renting commercial property, as specified in its Partnership Deed, and thus the rental income should be treated as business income.

- Judicial Precedents and Analysis:
- The Tribunal referred to several judicial pronouncements to determine the nature of the income:
- In Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax, the Supreme Court emphasized that whether an activity amounts to business must be decided based on the continuous exercise of an activity with a set purpose.
- In Universal Plast Ltd. v. CIT, the Supreme Court laid down principles for determining whether income from leasing assets falls under business income or house property. Key considerations include the nature of the business, the intention behind leasing, and whether the business is ongoing or ceased.
- In Chennai Properties & Investments Ltd. v. CIT, the Supreme Court held that if the main objective of a company is to acquire and let out properties, the income from such letting should be treated as business income.
- In Rayala Corporation (P) Ltd. v. ACIT, the Supreme Court reiterated that if a company's primary business is leasing property, the rental income should be classified as business income.

- Tribunal's Conclusion:
- The Tribunal found that the assessee's main business was leasing properties, as evidenced by its Partnership Deed and the activities carried out to earn rental income.
- The Tribunal concluded that the assessee's intention was to exploit the property through commercial activities, making the rental income taxable under the head "income from business and profession."
- Consequently, the Tribunal directed the A.O. to assess the income under the head "income from business and profession" and allowed the assessee to claim deductions for expenses and depreciation related to the business assets.

Judgment:
- The appeals filed by the assessee were allowed, and the Tribunal directed the A.O. to treat the lease income as business income. The order was pronounced in the open court on 28th January 2020.