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2021 (11) TMI 768 - AT - Income TaxCorrect head of income - rental income - On perusal of the assessment order u/s. 263 CIT was of the opinion that rental income shown by the assessee under the head 'income from house property' should have been treated as income from business - assessee preferred a appeal before the CIT(A) who allowed the same partly by following the order of ITAT in assessee's own case for the AY 2014-15 wherein ITAT has directed to treat the income from letting of flats as 'income from house property' and income from furniture fixtures as 'income from business' - as per revenue CIT(A) erred in holding that income earned from exploitation of commercial space has to be assessed under the head 'income from House Property' instead of 'Profits and Gains of Business/Profession and had incorrectly and unjustifiably deleted the action of Ld. AO - HELD THAT - As decided in own case 2019 (5) TMI 1875 - ITAT HYDERABAD the property let out is a commercial complex is not sufficient to treat the rental income therefrom as 'Business Income'. The tests to be applied are; 1) the tenure of the lease, 2) the objects of the company; 3) the intention of the company; and 4) the services provided or activities carried on by the assessee after letting out of the property. Though one of the objects of the company is to let out the properties on lease/rent, it is not clear whether the intention is to earn rental income only from the properties constructed/developed by it. On perusal of the returns of income for earlier assessment years, we find that the assessee had let out properties at Hyderabad, Mumbai Delhi, but the income from said properties is not offered during the relevant assessment year. So, whether such properties were let out since they were unsold during the relevant period and whether they were sold subsequently to which, there is no rental income during the relevant assessment year is not clear from the details filed before us. As held by the Hon'ble Bombay High Court in the case of Gundecha Builders (supra), rental income from unsold flats is to be assessed on 'income from house property'. Further, as held by the Hon'ble Courts in cases cited supra, unless the assessee is carrying on a systematic and organized activity to exploit the property commercially, it cannot be taxed as business income. We find that except for creating the infrastructure as per the requirement of the lessee, the assessee is not providing any other service during the year as is evident from the profit and loss account of the assessee for the relevant assessment year. The only expenses claimed by the assessee are interest, salaries administrative expenses. Therefore, it is clear that the assessee's intention is to enjoy the rental income on a long term basis by leasing out the premises and not to exploit the same commercially on short term basis. We are inclined to accept the contentions of the assessee that the rental income is to be assessed as 'income from house property' as offered by the assessee and as accepted by the Revenue in the earlier years up to A.Y 2011-12. Accordingly, assessee's appeal is allowed.
Issues Involved:
1. Classification of rental income as "income from house property" vs. "income from business". 2. Applicability of the principle of consistency and uniformity in tax treatment. 3. Interpretation of the main object clause in the Memorandum of Association (MoA). 4. Relevance of case laws and judicial precedents. Issue-Wise Detailed Analysis: 1. Classification of Rental Income: The primary issue was whether the rental income of ?14,85,52,805/- should be classified under "income from house property" or "income from business". The Assessing Officer (AO) initially classified it as "income from house property," but upon revision under section 263 of the Income Tax Act, the Principal Commissioner of Income Tax (Pr. CIT) opined that it should be treated as "income from business". The ITAT, in its previous order, directed the AO to reconsider the matter based on relevant case laws. Upon reconsideration, the AO treated the rental income as "income from business," leading to the present appeal by the assessee. 2. Applicability of Principle of Consistency and Uniformity: The assessee argued that the rental income had consistently been treated as "income from house property" in previous assessment years (AYs) 2010-11 to 2011-12. The principle of consistency and uniformity dictates that the tax treatment should not change arbitrarily in subsequent years unless there is a significant change in facts or law. The ITAT noted that the AO had accepted the classification of rental income as "income from house property" in earlier years and had only changed the classification in AY 2012-13 following the Pr. CIT's order under section 263. 3. Interpretation of Main Object Clause in MoA: The assessee's MoA stated that its primary business was infrastructure development and leasing out properties. The AO and CIT(A) relied on this clause to classify the rental income as "business income". However, the ITAT noted that while the MoA allowed for leasing properties, the primary intention was to construct and develop properties. The ITAT distinguished this case from others like Chennai Properties and Investments Ltd. vs. CIT, where the primary object was to earn rental income. 4. Relevance of Case Laws and Judicial Precedents: The ITAT considered several judicial precedents, including: - Sultan Brothers (P.) Ltd. vs. CIT: The Supreme Court held that the intention of the assessee in exploiting the property is crucial. - Chennai Properties and Investments Ltd. vs. CIT: The Supreme Court ruled that rental income is "business income" if the primary object is to earn rental income. - Raj Dadarkar & Associates vs. ACIT: The Supreme Court held that rental income from sub-licensing should be treated as "income from house property" if the assessee is not engaged in systematic or organized activities of providing services to tenants. - Gundecha Builders: The Bombay High Court held that rental income from unsold flats should be treated as "income from house property". The ITAT found that the assessee's activities did not constitute a systematic or organized business activity aimed at commercially exploiting the properties. The rental income was derived from long-term leases, and the assessee provided basic infrastructure without additional services. Conclusion: The ITAT concluded that the rental income should be classified as "income from house property" rather than "income from business". The CIT(A)'s order, which followed the ITAT's previous decision, was upheld. The Revenue's appeal was dismissed, and the assessee's classification of rental income as "income from house property" was accepted. Order: The Revenue's appeal is dismissed. The rental income of the assessee is to be assessed as "income from house property". The order was pronounced in open court on 07/10/2021.
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