2022 (5) TMI 1217 - AT - Income Tax

Correct head of income - Characterization of income - rental income as 'business income' or 'income from house property' - HELD THAT - Assessee is a company engaged in the business of real estate development. According to Memorandum of Association, main object of the assessee company is to acquire properties such as land and building lease hold or free hold and also to earn rental income from these properties and to develop them. This is contained in main objects of the company clause A (1). Further, in B (5) also the assessee is having incidental and ancillary object of renting out of the properties. Therefore, there is no doubt that assessee has object of renting out of the properties as per its object in Memorandum of Association. Honourable Bombay High court in principal commissioner of income tax v. City centre mall nashik pvt. Ltd. 2020 (1) TMI 872 - BOMBAY HIGH COURT has also held that when main objects of assessee, over and above real estate development as main clause has renting of property there in and assessee is also providing certain other services as mentioned in Annexure B of leave and License agreement, income derived is to be taxed as Business Income and not income from house property. Also see M/S CHENNAI PROPERTIES INVESTMENTS LTD VERSUS THE COMMISSIONER OF INCOME TAX 2015 (5) TMI 46 - SUPREME COURT Therefore looking at the facts of the case and the decision of honorable Supreme Court and Honorable Bombay High court, we hold that income from property earned by the assessee is chargeable to tax as business income and not as income from house property. Accordingly, we direct the learned Assessing Officer to tax the above income under the head of business income and not as income from house property - Appeal of assessee allowed.

Summary

Issues:
1. Characterization of income as business income or income from house property.
2. Treatment of business expenses in relation to the income earned.

Issue 1: Characterization of income as business income or income from house property:

The case involved an appeal by a company engaged in real estate development against the treatment of its income from a license agreement as income from house property instead of business income. The Assessing Officer considered the income chargeable under the head 'income from house property' due to TDS deductions by the licensee under section 194(I) of the Act. The company argued that its memorandum of association allowed for renting out properties, citing relevant legal precedents. The Tribunal analyzed the company's main objects as per the memorandum of association, which included renting out properties as an incidental object. The Tribunal held that the TDS provisions did not determine the characterization of income and referred to Supreme Court and High Court decisions supporting the treatment of such income as business income when the main objects of the company included real estate development and renting out properties. Consequently, the Tribunal allowed the appeal, directing the income to be taxed as business income.

Issue 2: Treatment of business expenses in relation to the income earned:

The company had incurred significant business expenses related to the income earned from the license agreement. The Assessing Officer disallowed these expenses when treating the income as income from house property. The Tribunal, upon deciding that the income should be taxed as business income, implicitly acknowledged the legitimacy of these business expenses. However, the judgment did not explicitly address the treatment or allowance of these specific business expenses. It focused primarily on the characterization of income, resulting in the allowance of the appeal and the direction to tax the income as business income. Therefore, the issue of the treatment of business expenses was indirectly resolved in favor of the company by the Tribunal's decision to tax the income as business income.

In conclusion, the Tribunal's judgment addressed the primary issue of characterizing the income from the license agreement as business income rather than income from house property. The decision was based on a thorough analysis of the company's memorandum of association, legal precedents, and the nature of the income earned. The Tribunal allowed the appeal, directing the Assessing Officer to tax the income as business income. While the judgment did not explicitly discuss the treatment of specific business expenses, the implicit acceptance of the legitimacy of these expenses was evident in the decision to tax the income as business income.