2015 (4) TMI 882 - HC - Income Tax

Rental Income Classified as House Property Income: Deductions Allowed

The Commissioner of Income Tax-12 Versus M/s. Sane & Doshi Enterprises

The Commissioner of Income Tax-12 Versus M/s. Sane & Doshi Enterprises - [2015] 377 ITR 165 (Bom) Issues Involved:1. Classification of rental income as business income or income from house property.2. Deduction of expenses for incomplete work.3. Deduction of interest on borrowed capital under section 24(b) of the Income Tax Act, 1961.Detailed Analysis:1. Classification of Rental Income:The primary issue was whether the rental income received by the assessee from unsold flats should be classified as business income or income from house property. The Assessing Officer (AO) treated the rental income as business income, arguing that the income was derived from the exploitation of commercial assets and the firm was engaged in the business of constructing buildings for sale, not leasing. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) found that the income should be treated as income from house property. The Bombay High Court upheld this view, referencing the Supreme Court's judgment in East India Housing and Land Development Trust Ltd. vs. Commissioner of Income Tax, which held that income from letting out property should be classified as income from house property, regardless of the company's business objectives.2. Deduction of Expenses for Incomplete Work:The second issue pertained to the deduction of Rs. 45 lakhs for incomplete work. The AO disallowed this expense, arguing there was no basis for such a claim since the buildings were completed and let out. However, the CIT(A) and ITAT accepted the assessee's explanation that the provision for incomplete work was necessary and had been accounted for in the closing stock. The High Court agreed with the ITAT's conclusion that making a provision for incomplete work is a correct accounting practice, especially when following the project completion method.3. Deduction of Interest on Borrowed Capital under Section 24(b):The third issue involved the deduction of interest on borrowed capital under section 24(b) of the Income Tax Act. The AO and CIT(A) initially disallowed the deduction, arguing that the partners' capital contribution was for business purposes, not for acquiring property to earn rental income. However, the ITAT found that the interest on partners' capital was related to the premises let out by the assessee and thus allowed the deduction. The High Court upheld the ITAT's decision, noting that the interest paid on partners' capital was a permissible deduction under section 24(b) since the funds were used for constructing the property from which rental income was earned.Conclusion:The Bombay High Court dismissed the Revenue's appeals, upholding the ITAT's decision to classify the rental income as income from house property, allow the deduction for incomplete work, and permit the deduction of interest on borrowed capital under section 24(b). The Court emphasized that the character and nature of the income, rather than its treatment in the books of account, are determinative in such cases.