2004 (6) TMI 269 - AT - Income Tax

Summary

Issues Involved:
1. Whether rental income should be classified as business income or income from house property.
2. Whether other income should be classified as business income or income from other sources.
3. Eligibility for set off of brought forward business losses against rental income and other income.

Issue-wise Detailed Analysis:

1. Classification of Rental Income:
The primary issue is whether the rental income of Rs. 5,58,035 should be treated as business income or income from house property. The assessee argued that since the company is engaged in the business of leasing, selling, and renting real estate properties, rental income should be considered business income. However, the Assessing Officer (AO) and CIT(A) disagreed, stating that the properties in question, HS-28 and HS-32, Kailash Colony, New Delhi, were not used for business purposes but merely let out, thus classifying the income under the head 'Income from House Property.' The Supreme Court's decision in East India Housing and Land Development Trust v. CIT and the Calcutta High Court's decision in CIT v. Bengal Jute Mills supported this view, emphasizing that rental income derived from property ownership should be taxed as income from house property, not business income.

2. Classification of Other Income:
The second issue concerns whether the amount of Rs. 6,92,220 should be classified as business income or income from other sources. The AO noted that the assessee's primary business was dealing in real estate, not hiring out cars or computers. The income from car hire, computer hire, and commission was therefore assessed under the head 'Income from Other Sources.' The CIT(A), however, treated these receipts as business income, allowing the set off of brought forward business losses. The tribunal found that the assessee had shown these incomes under 'other sources' and could not retrospectively claim them as business income for the purpose of set off under section 72.

3. Eligibility for Set Off of Brought Forward Business Losses:
The core of the dispute is whether brought forward business losses can be set off against rental income and other income. Section 72 of the Income-tax Act allows set off only against business income. Since the rental income was classified under 'Income from House Property' and other income under 'Income from Other Sources,' the tribunal held that these could not be set off against brought forward business losses. The tribunal cited the Supreme Court's decision in East India Housing and Land Development Trust Ltd. v. CIT and the Calcutta High Court's decision in Bengal Jute Mills Co. Ltd., which reinforced that income from house property cannot be treated as business income for the purpose of set off under section 72.

Conclusion:
The tribunal concluded that the CIT(A)'s order allowing the set off of brought forward business losses against rental income and other income was contrary to the provisions of section 72 of the Income-tax Act. The appeal of the revenue was allowed, and the set off was disallowed. The tribunal's decision was based on the clear distinction between business income and income from house property/other sources as outlined in the Income-tax Act and supported by judicial precedents.