2024 (10) TMI 1209 - HC - Income Tax

Correct head of income - rent income derived from properties - Income from house property or Income from Profits and Gains of Profession or Business - HELD THAT - In the present case, it appears to be not in dispute that the only source of income for the assessee was the income derived from rent or amounts as received by the assessee from letting out its properties. The record indicates that the AO in the present case has not disputed the nature of the business of the assessee and more importantly, the income offered to tax in respect of all the relevant assessment years, (subject matter of different appeals) is derived from letting out various properties, and which is the business activity of the assessee, to earn such income, through its business, as seen from the main objectives, outlined in the memorandum of association. It is hence, not the case that the business of the assessee is of a nature that the income from house property is required to be treated as an incidental income not derived from its main business, when it is derived from its main business of letting out its properties. In our opinion, there is certainly a difference between the two situations, firstly where the main object of the assessee is to earn income from letting out properties, and secondly, where the assessee incidentally earns income apart from its main business i.e. from letting out its house properties, both these situations are totally distinct. Adverting to the law as laid down in Chennai Properties Investments Ltd. 2015 (5) TMI 46 - SUPREME COURT it is clear that what must be borne in mind for the Court is to consider the main objective of the assessee as contained in the Memorandum of Association, and that the deciding factor, is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It is the main objective of the company which needs to be the focal point, to consider the business of the assessees in considering whether any income derived from such properties is the income from profits and gains of business or profession or the same would be required to be regarded as income from house property . In the present case, the income of the assessee is derived from letting out of the properties, which in fact, is the principal business of the assessee as seen from its main objectives of the assessee as contained in its memorandum of association, therefore, the assessee was correct in accounting such income under the head income from profits and gains of business , and not as income from house property . For such reasons, there was an apparent error of law in the Tribunal holding that the assessee s income is required to be treated as income from house property and not the income from profits and gains of business . The appeals need to succeed. Rent income derived by the assessee from lease of its properties was assessable as income from profits and gains of business. The questions of law as framed by this Court are answered in favour of the assessee and against the revenue.

Summary

Issues Involved:

1. Classification of rental income: Whether the rental income received by the assessee from leased properties should be assessed as "Income from House Property" or "Income from Profits and Gains of Business or Profession".
2. Consistency in assessment: Whether the principle of consistency should apply given the varied treatment of the assessee's income in different assessment years.

Issue-wise Detailed Analysis:

1. Classification of Rental Income:

The primary issue in these appeals was the classification of rental income derived by the assessee from its properties. The assessee contended that the income should be classified under "Income from Profits and Gains of Business or Profession" as its main business activity was leasing properties. The Tribunal, however, classified the income under "Income from House Property," relying on the Supreme Court's decision in East India Housing and Land Development Trust Ltd. v. CIT, where rental income was deemed to fall under "Income from House Property" if derived from immovable property owned by the assessee, despite the business being in real estate.

The court examined the nature of the assessee's business, as outlined in its memorandum of association, which specified the primary business objective as leasing properties. The court emphasized that the nature of the business activity and the operations related to it should determine the income classification. The Supreme Court's decision in Chennai Properties & Investments Ltd. was cited, where income from letting properties was considered business income due to the company's main objective being property leasing.

The court concluded that the Tribunal's reliance on East India Housing was misplaced, as the facts of the assessee's case aligned more closely with Chennai Properties, where leasing was the primary business activity. Therefore, the rental income should be classified as "Income from Profits and Gains of Business or Profession."

2. Consistency in Assessment:

The court also addressed the issue of consistency in the treatment of the assessee's income over different assessment years. It was noted that for several years, the income was assessed as "Income from Profits and Gains of Business," while for other years, it was classified as "Income from House Property."

The court highlighted the principle of consistency, as established in Radhasoami Satsang v. CIT and reiterated in subsequent cases, which dictates that a consistent approach should be maintained unless there is a material change in circumstances. The court observed that the revenue's inconsistent treatment of the assessee's income over the years was unjustified, as there were no changes in the nature of the assessee's business activities.

Thus, the court ruled that the principle of consistency should apply, and the income should be assessed under "Income from Profits and Gains of Business or Profession," aligning with the treatment in several previous assessment years.

Conclusion:

The appeals were allowed, and the court set aside the Tribunal's orders, holding that the rental income derived by the assessee from leasing its properties should be assessed as "Income from Profits and Gains of Business or Profession." The court's decision was based on the nature of the assessee's business activities and the principle of consistency in tax assessments.