2021 (11) TMI 531 - AT - Income Tax

Correct head of income - Lease income as Income from House Property OR 'Business income' - HELD THAT - As property under consideration was obtained by the assessee on long term lease basis and it was sub-leased to various tenants. The income thus earned was offered as business income . The main object of sub-leasing was to exploit the property in a business-like manner and earn the rental income therefrom. It is also evident that the assessee and his associated entities had business interest in real estate development. We find that the major source of income for the assessee is rental income. The assessee obtained long-term lease of the property and sub-leased the same in a regular systematic manner with a view to earn rental income from such activities in a business-like manner. The perusal of financial statements would show that the assessee had obtained loans to procure the properties and business investments were mostly in the nature of various properties. Therefore, considering the facts of the case, the income was rightly offered as Business Income and the claim of the assessee, in this regard, was to be accepted. We order so. The Ld. AO is directed to recompute the income of the assessee in terms of this order. Resultantly, the appeal stand partly allowed.

Summary

Issues: Assessment of lease income as 'Income from House Property' instead of 'Business Income'; Condonation of delay in filing appeals.

Analysis:
1. Condonation of Delay: The appellant sought condonation of a 20-day delay in filing the appeals due to business-related travel. The bench, after reviewing the affidavit, decided to condone the delay and admitted the appeals for adjudication on merits.

2. Assessment of Lease Income: The appellant, a resident individual, leased a property for 27 years and sub-leased it, offering the income as business income. However, the AO assessed it as 'Income from House Property' due to the lease exceeding 12 years. The appellant argued that the income should be treated as business income, citing relevant case law. The Tribunal noted the appellant's long-standing real estate activities and the business nature of sub-leasing. Referring to judicial decisions, the Tribunal emphasized the need to determine whether the income stemmed from property exploitation or a business operation. Considering the appellant's rental income as the primary revenue source and the systematic sub-leasing for business purposes, the Tribunal concluded that the income should be classified as 'Business Income' and directed the AO to recompute accordingly.

3. Appellate Proceedings: The CIT(A) upheld the 'Income from House Property' assessment but deleted interest disallowance and restricted disallowance u/s 14A. The Tribunal, based on the appellant's business activities and income nature, partially allowed the appeal, directing the AO to accept lease income as 'Business income' for all relevant assessment years (2014-15 to 2016-17) in line with the decision for AY 2011-12.

4. Final Decision: The Tribunal partially allowed all appeals, directing the AO to treat the lease income as 'Business Income' for consistency across assessment years. The order was pronounced on 3rd November 2021.