2025 (1) TMI 1056 - AT - Income Tax

Correct head of income - income derived from leasing of the property - income from house property or business income - revenue Not granting of deduction u/s 24(a) as claimed by the assessee by computing the income from house property - applicability of section 161 - intimation u/s. 143(1)(a) -assessee s income was assessed at Rs. 6, 69, 38, 890/- as against Nil income by treating the income from house property as business income - HELD THAT - Since assessee being the owner of the property which was given on rent without any service or any other amenities therefore the rent received was declared under the head income from house property and such income from house property has been shown in all the earlier years and there was never any dispute by the department. It is well settled principle in view of the judgment of Raj Dadarkar Associates 2017 (5) TMI 586 - SUPREME COURT that rental income derived from leasing of the property is to be assessed under the head income from house property as not a business income . Thus income was liable to be assessed under the head income from house property only and not as business income. Applicability of section 161 - It is now well settled that if income being taxed in individual hands of beneficiaries the same cannot be assessed u/s 161 as Representative Assessee s in the hands of the trust. This view is squarely covered by the judgment of Alfred Herbert (I)(P) Ltd. 1986 (2) TMI 47 - CALCUTTA HIGH COURT and Smt. Ushaben Trust 1990 (6) TMI 21 - BOMBAY HIGH COURT . Accordingly we hold that firstly income from rental income received from letting out property is to be assessed under the head income from house property ; and secondly once the beneficiaries have included the trust income in their individual return of income and paid the tax at higher rate of tax the assessee trust cannot be assessed at rate of assessee u/s 161. Accordingly on this issue all the grounds raised by the assessee are allowed. Non granting of credit for TDS deducted from house property to the beneficiaries - Once the TDS has been deducted on the rental income and all the 5 beneficiaries have declared this income in their individual return as income from house property then income received by the trust is also entitled for proportionate TDS credit in the hands of all the beneficiaries. Appeal filed by the assessee is allowed.

1. ISSUES PRESENTED and CONSIDERED

The judgment primarily revolves around two core legal questions:

Whether the rental income received by the assessee trust should be classified as "income from house property" or "business income" for tax purposes.
Whether the assessee trust is entitled to the credit for Tax Deducted at Source (TDS) on the rental income, which has been declared by the beneficiaries in their individual returns.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Rental Income

Relevant Legal Framework and Precedents:
The classification of income derived from property leasing is governed by the Income Tax Act, which distinguishes between "income from house property" and "business income." The judgment refers to the precedent set by the Hon'ble Supreme Court in the case of Raj Dadarkar & Associates, which established that rental income from property leasing should be assessed under "income from house property" unless accompanied by additional services or business activities.
Court's Interpretation and Reasoning:
The court noted that the assessee trust had consistently declared its rental income under "income from house property" in previous assessment years, without any objection from the tax department. The court emphasized the absence of any business activity or service provision associated with the property leasing, aligning with the Supreme Court's ruling in Raj Dadarkar & Associates.
Key Evidence and Findings:
The court examined the trust's history of income declarations and tax assessments, confirming that the rental income had always been treated as "income from house property." Additionally, the trust's beneficiaries had declared this income in their individual tax returns.
Application of Law to Facts:
Applying the legal principles from the Supreme Court precedent, the court concluded that the rental income should be classified as "income from house property" rather than "business income."
Treatment of Competing Arguments:
The court dismissed the revenue's argument that the income should be treated as business income due to the lack of response to a notice, emphasizing the consistent historical treatment and legal precedent supporting the assessee's position.
Conclusions:
The court determined that the rental income should be assessed under the head "income from house property," allowing the related grounds raised by the assessee.

Issue 2: Entitlement to TDS Credit

Relevant Legal Framework and Precedents:
The entitlement to TDS credit is governed by provisions that allow for the credit of tax deducted at source to the entity or individual in whose hands the income is ultimately assessed.
Court's Interpretation and Reasoning:
The court reasoned that since the beneficiaries had declared the rental income in their individual returns and paid taxes accordingly, they were entitled to the proportionate TDS credit.
Key Evidence and Findings:
Evidence showed that the TDS was deducted on the rental income, and the beneficiaries had included this income in their returns, supporting the claim for TDS credit.
Application of Law to Facts:
The court applied the relevant provisions to conclude that the beneficiaries were entitled to the TDS credit, as they had borne the tax liability on the income.
Treatment of Competing Arguments:
The court rejected any arguments against granting TDS credit, focusing on the principle that tax credit should follow the income's declaration and assessment.
Conclusions:
The court ruled in favor of the assessee, granting the TDS credit to the beneficiaries as claimed.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:
"It is well settled principle, in view of the judgment of Hon'ble Supreme Court in the case of Raj Dadarkar & Associates, that rental income derived from leasing of the property is to be assessed under the head 'income from house property' as not a 'business income'."
Core Principles Established:
The judgment reinforces the principle that rental income from property leasing, absent additional business activities, should be classified as "income from house property." It also establishes that TDS credit should align with the income's assessment in the beneficiaries' hands.
Final Determinations on Each Issue:
The court concluded that the rental income is to be assessed as "income from house property," and the beneficiaries are entitled to the TDS credit on this income. The appeal filed by the assessee was allowed in its entirety.