2011 (1) TMI 1431 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from owned properties.
2. Classification of income from properties taken on rent.
3. Inclusion of notional interest in computing income from property.

Summary:

Issue 1: Classification of income from owned properties
The primary issue was whether the income from properties owned by the assessee should be classified as "Profits and gains of business" or "Income from house property." The assessee argued that the properties were converted into business centers and thus the income should be treated as business income. However, the Assessing Officer (AO) classified it as "Income from house property." The ITAT upheld the AO's decision, citing precedents such as East India Housing and Land Development Trust Ltd. vs. CIT and Shambhu Investment P. Ltd. vs. CIT, which established that income from letting out properties, even with additional services, should be classified as "Income from house property." The Tribunal concluded that the assessee was not providing sufficient business center services to classify the income as business income.

Issue 2: Classification of income from properties taken on rent
The second issue was whether the income from properties taken on rent and then let out should be classified as "Business income" or "Income from other sources." The AO treated this income as "Income from other sources," but the CIT(A) and the Tribunal upheld the assessee's claim that it should be classified as "Business income." The Tribunal noted that the assessee had been consistently treating such income as business income since the assessment year 1992-93 and that the activity constituted a continuous, organized, and systematic course of business.

Issue 3: Inclusion of notional interest in computing income from property
The third issue involved the inclusion of notional interest on security deposits in the computation of income from property. The AO included 10% of the security deposits as notional rent, but the CIT(A) deleted this addition. The Tribunal affirmed the CIT(A)'s decision, referencing the Mumbai Bench's order in DCIT vs. Reclamation Realty India Pvt. Ltd., which held that notional interest income on security deposits should not be included in the income from property for the purposes of section 23(1)(a) of the Income Tax Act.

Conclusion:
The Tribunal partly allowed the department's appeals, upholding the classification of income from owned properties as "Income from house property" and rejecting the inclusion of notional interest in computing property income. It also upheld the classification of income from properties taken on rent as "Business income."