2015 (4) TMI 869 - HC - Income Tax

Bifurcation of income - Rental income - Tribunal treating 60% of his income as 'income from business' and 40% of the rental income as 'income from house property' - claim of the assessee is that the entire income is to be treated as income from business - Held that - What is to be seen is; firstly, what is the intention behind the lease and secondly, what are the facilities given along with the buildings and documents executed in respect of each of them is to be seen and thirdly, it is to be found out, whether it is inseparable or not. If they are inseparable and the intention is to carry on the business of letting out the commercial property and carrying on complex commercial activity and getting rental income therefrom, then such a rental income falls under the heading of profits and gains of business or profession. In the facts of this case, it is clear that the entire construction and the interiors are all done with the sole intention of carrying on the business and therefore, the claimant is entitled to treat the entire income as income from business. Merely because the document is styled as lease deed and building is involved. Therefore, the authorities were not justified in bifurcating the rental income and the business income. The rental income shall be treated as income from the business, ie., profits and gains from the business under Section 28 of the Income Tax Act. - Decided in favour of assessee.

Summary

Issues:
1. Classification of income as 'income from business' or 'income from house property.'

Analysis:
The judgment revolves around the issue of determining the classification of income derived from providing facilities to users. The appellant, a private limited company, offered infrastructure services to various industries. The Assessing Authority initially categorized 80% of the rental income as 'income from house property' and 20% as 'income from other sources.' The First Appellate Authority adjusted this to 60% 'income from business property' and 40% 'income from house property.' The Tribunal upheld the First Appellate Authority's decision, prompting the appellant to challenge the order.

The primary contention was whether the entire income should be treated as 'income from business' or if a portion should be classified differently. The Court referred to a previous judgment and emphasized that the intention behind the lease, the facilities provided, and the nature of the activity conducted are crucial factors. If the facilities are inseparable from the business activity of letting out commercial property, the income qualifies as 'profits and gains of business or profession.'

In this case, the Court determined that the appellant's construction and operations were geared towards conducting business activities. Despite the lease document's style and involvement of buildings, the entire income was deemed attributable to the business. The authorities' decision to segregate rental income was deemed unjustified. Consequently, the Court allowed the appeal, setting aside the previous orders and directing that the rental income be treated as 'profits and gains from the business' under the Income Tax Act.

In conclusion, the judgment clarifies the criteria for categorizing income derived from commercial activities and underscores the importance of intent and operational aspects in determining the appropriate classification. The decision provides clarity on distinguishing between income from business and income from other sources, offering valuable guidance for similar cases involving the taxation of revenue generated from commercial ventures.