2015 (4) TMI 625 - HC - Income Tax

Rental income earned from terrace floor/roof area - assessable under the head Income from other sources OR Income from house property - Held that - In the case at hand, the building the top terrace of which is the subject of focal attention here has been developed for its various portions to be sold or let out with no possibility of the terrace floor being subjected to such utilization. The assessee continues to be the owner of the terrace floor. It has conceivably no other purpose to be served by such property as is held on the terrace floor, except the exploitation of the licensed space for gaining the income that cannot be treated as either income from business or income from other sources. The income was thus rightly returned as income from house property. We do not approve of the logic employed by ITAT in rejecting the claim of it being income from house property. The terrace floor cannot exist in the air. It is part of the building which has been constructed on the land beneath the super-structure. It is, therefore, not correct to hold that the terrace does not have any appurtenant land. We, therefore, reject the conclusion of ITAT that the agreement of renting and hiring terrace is in essence for hiring space and not hiring building or land appurtenant thereto. - Decided in favour of the assessee.

Issues Involved:
1. Classification of income from the terrace floor/roof area.
2. Determination of whether the income is "Income from house property" or "Income from other sources."
3. Examination of the dominant object of letting out the property.
4. Evaluation of the nature of the asset (fixed asset or stock-in-trade).
5. Analysis of the legal precedents applicable to the case.

Issue-wise Detailed Analysis:

1. Classification of Income from the Terrace Floor/Roof Area:
The primary issue revolves around whether the income of Rs. 38,23,281/- earned by the appellant from the terrace floor/roof area should be classified as "Income from house property" or "Income from other sources." The Income Tax Appellate Tribunal (ITAT) had classified this income as "Income from other sources," rejecting the appellant's claim of it being "Income from house property."

2. Determination of Whether the Income is "Income from House Property" or "Income from Other Sources":
The appellant argued that the income derived from the terrace floor, used for mounting a tower/mast and antenna, should be treated as "Income from house property." The Assessing Officer (AO) and ITAT, however, classified it as "Income from other sources." The AO noted that the property was reflected as a commercial asset and thus, the income derived was incidental to the business activities of the assessee, a builder/developer. The ITAT further asserted that the terrace, primarily used for mounting antennas, did not constitute a building and land appurtenant thereto, thus classifying the income under "Income from other sources."

3. Examination of the Dominant Object of Letting Out the Property:
The CIT (Appeals) examined whether the dominant object of letting out the property was to enjoy and utilize the property as an owner or if it involved any complex commercial activity. The CIT (Appeals) concluded that the appellant was exploiting the property as an owner, without rendering additional services, and thus the income should be classified as "Income from house property." This view was supported by the Supreme Court ruling in Karanpura Development Co. Ltd. v. CIT, which emphasized examining the primary object of exploiting the property.

4. Evaluation of the Nature of the Asset (Fixed Asset or Stock-in-Trade):
The ITAT incorrectly classified the licensed space as stock-in-trade, while the CIT (Appeals) and the High Court emphasized that the classification in the books of account should not alter the true character of the transaction. The High Court noted that the terrace floor, used for setting up towers and antennas, remained a part of the building, thus qualifying as a fixed asset.

5. Analysis of the Legal Precedents Applicable to the Case:
The High Court referred to several legal precedents, including CIT v. National Storage Pvt. Ltd. and Mukherjee Estate (P.) Ltd. v. CIT, but found them inapplicable to the present case. In National Storage Pvt. Ltd., the income was derived from providing services related to the storage of films, while in Mukherjee Estate, the income was from letting out hoardings, not space. The High Court emphasized the ruling in Karanpura Development Co. Ltd., which focused on the primary object of the property exploitation.

Conclusion:
The High Court concluded that the income derived from the terrace floor should be classified as "Income from house property." It rejected the ITAT's reasoning that the terrace did not have any appurtenant land and emphasized that the terrace is part of the building constructed on the land. Thus, the High Court set aside the ITAT's order and restored the view taken by the CIT (Appeals), answering the question of law in favor of the assessee. The appeal was disposed of accordingly.

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