2015 (10) TMI 2560 - AT - Income Tax

Appellate Tribunal remands case to Assessing Officer for detailed inquiry on rental income classification.

The Appellate Tribunal remanded the case back to the Assessing Officer for further investigation to determine whether the rental income should be ... Disallowance u/s 24(a) - treatment to rental income as ‘Income from house property’ instead of ‘Income from business and profession' - rental income earned from stock in trade - Held that:- More enquiry is required to be conducted by the AO to ascertain the true nature of assessee’s activities with a view to ascertain whether the letting was a business activity or was exploitation of property by the owner. In our view, for that purposes AO is required to make more enquiries like whether there are any other source of income besides giving the properties on rent or what is true intention of the assessee by letting the property or whether the properties were leased out interregnum period waiting actual the sale of the property with a view to mitigate the loss as would have been done by an ordinary property owner. We notice that the various portions of the property, like the ground floor, 1st floor, 6th floor and 7th floor were lying vacant as mentioned in the closing stock as on 31.3.2011. In our opinion, AO should also bear in mind the status of vacant floors in the property while deciding the issue. Thus we restore the matter to the file of AO to decide afresh after affording reasonable opportunity of being heard to the assessee. Issues Involved:1. Whether the rental income should be treated as 'Income from house property' or 'Income from business and profession'.2. Entitlement to deduction under section 24(a) of the IT Act.Detailed Analysis:Issue 1: Classification of Rental IncomeThe primary issue was whether the rental income earned by the assessee from leasing out the property should be classified as 'Income from house property' or 'Income from business and profession'. The assessee, a business entity engaged in construction, had leased out parts of its commercial property and declared the rental income as 'Income from house property', claiming deductions under section 24(a) of the IT Act. The Assessing Officer (AO) contested this classification, arguing that the property was a business asset and the rental income should be treated as 'Income from business and profession'. The AO's reasoning included:- The main object of the assessee company, as per its Memorandum of Association, was to manage and deal in land and buildings, not to let out property.- The property was part of the assessee's stock in trade and was leased out to attract potential buyers.- The leasing was a temporary measure to avoid idle commercial assets and generate income until a suitable buyer was found.- The lease agreements were long-term (9 years), indicating a business activity rather than mere property exploitation.Issue 2: Entitlement to Deduction under Section 24(a)The AO denied the deduction under section 24(a) based on the classification of the rental income as business income. The assessee appealed this decision, and the Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO's decision, treating the rental income as 'Income from house property' and allowing the deduction under section 24(a). The CIT(A) relied on various judicial precedents, including the ITAT Special Bench Delhi's decision, which held that rental income from property, even if part of stock in trade, is taxable under the head 'Income from house property'.Appellate Tribunal's Observations and Decision:The Tribunal reviewed the case, considering the arguments and judicial precedents. Key points included:- The Supreme Court's ruling in East India Housing and Land Development Trust Ltd. vs. CIT, which established that income should be classified based on the specific head it falls under, irrespective of its indirect coverage by another head.- Further Supreme Court judgments (Sultan Brothers Pvt. Ltd. vs. CIT, Karanpura Development Co. vs. CIT) emphasized that each case must be examined from a businessman's perspective to determine if the letting was a business activity or property exploitation.- The jurisdictional High Court's ruling in Commissioner of Income Tax Vs. Hotel Ratanada International P. Ltd., which outlined factors to consider, such as whether the business had ceased or if the leasing was temporary while other business activities continued.The Tribunal concluded that more inquiry was needed to ascertain the true nature of the assessee's activities. The AO was directed to conduct further investigations, including:- Assessing whether there were other sources of income besides rental.- Determining the true intention behind letting the property.- Evaluating if the leasing was a temporary measure pending actual sale.- Considering the status of vacant portions of the property.Conclusion:The Tribunal restored the matter to the AO for a fresh decision, emphasizing the need for a detailed inquiry into the nature of the assessee's activities and the intention behind leasing the property. The appeal was allowed for statistical purposes, and the matter was remanded for further examination.Order Pronounced:The order was pronounced in the open court on 30/10/2015.