2023 (9) TMI 1350 - AT - Income Tax

Correct head of income - gain on sale of property - business income or capital gain/income from house property - whether the property constructed is a commercial or a residential premises? - HELD THAT - From the stand-point of the company, it is immaterial whether, therefore, a part of the property is sold at a profit, as it does a flat at Kakkanad for Rs. 65 lakh on 20.10.2014, purchased on 06.09.2011 for Rs. 45 lakh, after effecting improvement thereto costing Rs. 16.33 lakh, yielding it thus a gain of Rs. 3.67 lakh, or sell it s building, a godown, let since FY 1997-98, on 13.07.2011, i.e., during the previous year relevant to AY 2012-2013, for the reason that it had become old, necessitating repairs and improvement which may presumably not yield it commensurate return. In each case, the sum realized, as indeed the rent received over the years, is, after meeting expenses, ploughed back in the business, purchasing and constructing landed property for being, similarly, either sold at a profit or leasing it. Where it found the land purchased (purchased for Rs. 78.80 lakhs on 02.05.2012), which was out of the sale proceeds of the godown sold during FY 2011-2012, could not be subject to commercial construction, i.e., its intended user, the same was immediately disposed of on 19.05.2014, i.e., for a business reason, even if at a meager profit of Rs. 1.20 lacs. The same could be held as a capital asset inasmuch as its location would only be appropriate, awaiting again in value over time, but was sold at near par once it was found that it did not serve a business purpose. The assessee is thus undertaking the business of real estate development, of which leasing, as is sale, an integral and a regular part. Thus setting aside the impugned order, uphold the assessment as framed, assessing the capital gains and income from house property as business income. Revenue s appeals are allowed.

Summary

Issues Involved:
1. Classification of Income: Whether the rental income and income from the sale of property should be assessed as "Income from House Property" or "Business Income."
2. Consistency in Past Assessments: Whether the past acceptance of income as "Income from House Property" affects the current assessment.
3. Judicial Precedents: Applicability of judicial precedents to the case.

Summary:

1. Classification of Income:
The primary issue in this case is whether the income earned by the assessee from letting out properties and selling them should be classified as "Income from House Property" or "Business Income." The assessee, a company incorporated for real estate development, argued that the properties were held as fixed (capital) assets, yielding rental income, and not as stock-in-trade. The Revenue, however, assessed the income as business income, citing the company's real estate business activities as per its Memorandum of Association (MoA).

The Tribunal noted that the law requires income to be assessed under specific heads, with Section 22 covering "Income from House Property" and Section 28 covering "Profits and Gains of Business or Profession." The Tribunal referred to various Supreme Court judgments, emphasizing that the head of income is determined by the source of income. Ownership of property is recognized as a source of income under the Act, and letting out property does not inherently constitute a business activity.

However, the Tribunal found that the assessee's activities, including the systematic pursuit of real estate development and the realization of property value through sales and leases, satisfied the test for being classified as business income. The assessee's rental income and property sales were part of its business model, making the income assessable as business income.

2. Consistency in Past Assessments:
The assessee claimed that its rental income had been consistently accepted as "Income from House Property" in past assessments. However, the Tribunal found no evidence of affirmative action by the Revenue in past assessments, which were processed under Section 143(1) without detailed examination. Therefore, the past acceptance did not impact the current assessment.

3. Judicial Precedents:
The assessee relied on various judicial precedents to support its case. The Tribunal, however, found that the cited cases did not contradict the law as explained by the Supreme Court. The Tribunal emphasized that the classification of income depends on the specific facts of each case. In this case, the assessee's activities were consistent with its object clause, supporting the classification of income as business income.

Determination:
The Tribunal concluded that the assessee's activities constituted a business in real estate development, with rental income and property sales being integral parts of its business model. The Tribunal upheld the Revenue's assessment of the income as business income, setting aside the appellate order that had partly allowed the assessee's appeals.

Order:
The Tribunal allowed the Revenue's appeals, pronouncing the order on September 25, 2023.