2024 (9) TMI 961 - HC - Income Tax

Correct head of income - rental income receipts - to be assessed under the head Income From House Property or Income from Business' - HELD THAT -Though there were many objects as revealed from the Memorandum of Association, even the AO finds that the assessee did not have any other business but lease of the properties. The finding is also that no construction project has been carried out by the assessee since its incorporation in 1975 nor has it booked any major sale since Financial Year 2000-2001. Even the AO finds that the assessee has been pursuing its object of earning rental income through letting out and makes a casual statement that this is the object pursued more vigorously than the others referred in the Memorandum of Association. The presumption of the AO that no prudent person would wait for more than 10-20 years even after payment of twice the cost of the building cannot be countenanced. If the building has not been conveyed to the purchaser and remains with the developer then there is nothing wrong in the developer leasing out the premises. There is no sale noticed, in the very many years, by the AO who also states that the Company had furnished the name of 25 persons who had entered into agreements for sale who were all related parties of the assessee. It is also presumed that the transactions appear to be a prima facie business connivance (sic) and that retention of huge advance money without any legal claims from the prospective customers cannot be countenanced. We cannot understand how the absence of legal proceedings by the intending purchasers can impact the tax levy of the assessee. The fact remains that the Assessing Officer has clearly found that but for the lease of properties the assessee is not engaged in any other business. This is the precise facts on which Rayala Corporation and Chennai Properties 2016 (8) TMI 522 - SUPREME COURT have been decided. The First Appellate Authority rightly found the income to be from business and not under the head, income from house property, especially since the assessee has only the business of renting out buildings in the subject years. On the specific finding of facts made by the Assessing Officer in the assessment order, we are convinced that there is no question of the income of the assessee being treated as income from house property. Decided in favour of the assessee

Summary

Issues Involved:
1. Classification of rental income as 'Income from House Property' vs. 'Income from Business'.
2. Consistency in the assessment of rental income by the Income Tax Department.

Detailed Analysis:

1. Classification of Rental Income:
The primary issue in these appeals is whether the rental income of the assessees should be classified as 'Income from House Property' or 'Income from Business'. The Tribunal affirmed the order of the Assessing Authority, which was reversed by the first appellate authority, classifying the rental income as 'Income from House Property'. The appellants argued that their rental income should be classified as 'Income from Business' based on their Memorandum of Understanding (MoU) and past assessments.

The assessees relied on the decisions of the Hon'ble Supreme Court in Rayala Corporation Pvt. Ltd v. ACIT and Chennai Properties & Investments Ltd. v. CIT, which held that rental income can be classified as 'Income from Business' if the main object of the assessee's business is leasing properties. The Department, however, argued that the assessees are real estate developers and builders, and the rental income generated from the buildings constructed by them should be assessed as 'Income from House Property'.

The court examined the objects of the assessees as revealed from their respective MoAs. For H. R. Properties Pvt. Ltd., the MoA indicated that the company was engaged in land development and building construction, and had not undertaken any construction projects since its incorporation. The company was earning rental income from properties held as stock-in-trade. Similarly, for Chero Medico & Developers Pvt. Ltd., the MoA indicated that the company was engaged in real estate development and was earning rental income from properties.

The court noted that the Assessing Officer found that the assessees were not engaged in any other business except leasing properties. The court concluded that the rental income should be classified as 'Income from Business' based on the specific findings of facts made by the Assessing Officer.

2. Consistency in Assessment:
The assessees argued that the Department should maintain consistency in the assessment of rental income, as it had been regularly assessed as 'Income from Business' in the past. The Department contended that each assessment year is a separate cause of action, and if the view taken by the Assessing Officer in earlier years is found to be erroneous, there can be no rule of consistency.

The court referred to the decision in Dr. Narendra Prasad & Others v. CIT & Another, which emphasized the need for consistency in tax assessments. The court found that the first appellate authority rightly classified the income as 'Income from Business' based on the consistent business activity of renting out buildings.

Conclusion:
The court set aside the order of the Tribunal, finding it to be perverse, and ruled in favor of the assessees. The rental income was classified as 'Income from Business' and not 'Income from House Property'. The appeals were allowed, and the question of law was answered in favor of the assessees and against the Revenue. The parties were left to suffer their respective costs.