2006 (4) TMI 196 - AT - Income Tax

Correct head of income - Income from letting of the property - ''Income From House Property'' Or Business - HELD THAT - In the present case, the subject property let out by the assessee-company was undisputedly owned by it and it was a case of bare letting of tenement and the subject hired out was not a complex one. It was thus a case of letting out of a property owned by the assessee simplicitor and not a case of exploitation of the property by way of complex commercial activity. The rental income earned from the said property thus was chargeable to tax under the head Income from house property and not under the head Profits and gains of business or profession as claimed by the assessee. Thus, we hold that the rental income received by the assessee in the year under consideration was assessable to tax under the head Income from house property and not under the head Profits and gains of business . Accordingly, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. As regards the alternative contention of the learned counsel for the assessee that the expenses incurred in connection with the repairs and maintenance of the subject property held as stock-in-trade by the assessee be allowed under the head Profits and gains of business and that the resultant loss under the head be allowed to be adjusted against the income assessable under the head Income from house property , we are of the view that this issue is beyond the scope and ambit of the question specifically referred to this Special Bench u/s 255(3). Even the assessee-company has raised this issue separately in the other grounds taken in its appeals filed before the Tribunal. It will therefore, be open to the assessee to raise this issue before the Division Bench which shall deal with the same in accordance with law. The matter will now go before the regular Bench for disposing of the appeals keeping in view our decision rendered hereinabove.

Issues Involved:

1. Whether the rental income from Scindia House should be assessed under the head "Income from property" or "Business income."
2. Whether the expenses incurred for the maintenance of the property should be allowed under "Profits and gains of business" and if the resultant loss can be adjusted against the "Income from house property."

Issue-wise Detailed Analysis:

1. Rental Income Assessment:

The main issue was whether the rental income from Scindia House should be assessed under "Income from property" or "Business income." The assessee, a company incorporated in 1978, argued that the property was acquired as stock-in-trade for commercial exploitation and not merely for earning rental income. The company had shown the rental income as "Income from business" in its returns, which was initially accepted by the Tribunal for assessment years 1980-81 to 1991-92. However, for the assessment year 1992-93, the Tribunal noted a material change as the company had become the owner of the property and held that the rental income should be assessed under "Income from house property."

The Tribunal's earlier decisions were based on the premise that the property was acquired for commercial exploitation. However, in the assessment year 1992-93, the Tribunal reconsidered the issue and concluded that the property was not stock-in-trade and even if it was, the rental income should be assessed under "Income from house property." The Tribunal relied on the Supreme Court decisions in CIT vs. Chugandas & Co. and S.G. Mercantile Corporation (P) Ltd. vs. CIT, which held that rental income from property owned by the assessee should be assessed under "Income from house property."

The learned counsel for the assessee contended that the intention behind acquiring Scindia House was commercial exploitation, not earning rental income. The property was shown as stock-in-trade, and the rental income was incidental to the business. The counsel cited several cases, including Universal Plast Ltd vs. CIT and CIT vs. New India Industries Ltd., to support the argument that the nature of the income should be determined from the perspective of a businessman.

The learned Departmental Representative argued that the assessee became the owner of the property in May 1980, and the rental income should be assessed under "Income from house property." The representative cited several judicial pronouncements, including East India Housing & Land Development Trust Ltd. vs. CIT and Shambhu Investment (P) Ltd. vs. CIT, to support the argument that rental income from property owned by the assessee should be assessed under "Income from house property."

The Tribunal concluded that the rental income from Scindia House should be assessed under "Income from house property." The property was owned by the assessee, and the rental income was received because of ownership, not because of any business or commercial activity. The Tribunal held that the rental income was chargeable to tax under the head "Income from house property" and not under "Profits and gains of business."

2. Expenses for Property Maintenance:

The alternative contention raised by the assessee was that the expenses incurred for the maintenance of the property should be allowed under "Profits and gains of business" and the resultant loss should be adjusted against the "Income from house property." The Tribunal held that this issue was beyond the scope of the question referred to the Special Bench and should be raised before the Division Bench, which would deal with it in accordance with the law.

Conclusion:

The Tribunal held that the rental income from Scindia House should be assessed under "Income from house property" and not under "Profits and gains of business." The issue of allowing expenses for property maintenance under "Profits and gains of business" was left to be decided by the Division Bench. The Tribunal answered the question in favor of the Revenue and against the assessee.

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