2006 (8) TMI 105 - HC - Income Tax

Rental receipts treated as business income, not house property, because properties were stock-in-trade in construction and sale business

COMMISSIONEROF INCOME-TAX Versus NEHA BUILDERS PVT LTD

HC held rental receipts were business income, not income from house property, because the assessee's properties formed stock-in-trade in its construction ... Classification of rental income received from property in a construction business - Business income or Income from House property - engaged in development, construction sale and lease of immovable property and properties treated as stock–in-trade - Held that:- True it is, that income derived from the property would always be termed as 'income' from the property, but if the property is used as 'stock-in-trade', then the said property would become or partake the character of the stock, and any income, derived from the stock, would be 'income' from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let-out the same, then that would be the 'business' and the business stocks, which may include movable and immovable, would be taken to be 'stock-in-trade', and any income derived from such stocks cannot be termed as 'income from property'. Even otherwise, it is to be seen that there was distinction between the 'income from business' and 'income from property' one side, and 'any income from other sources'. The Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy. From the statement of the assessee, it would clearly appear that it was treating the property as 'stock-in-trade'. Not only this, it will also be clear from the records that, except for the ground-floor, which has been let-out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a 'stock-in-trade'. Thus, the Reference deserves to be answered in favour of the Revenue. It is accordingly answered and stands disposed of. Issues:Interpretation of rental income from property in construction business under Income Tax Act.Analysis:The High Court of Gujarat delivered a judgment on a reference made under Section 256(1) of the Indian Income Tax Act regarding the classification of rental income received from property in a construction business. The issue revolved around whether such income can be claimed under the head of 'Income from property' when the property was included in the closing stock and maintenance expenses were debited to the profit and loss account. The assessee contended that the rental income should be treated as 'Income from house property' rather than business income. The Assessing Officer considered the property as stock-in-trade due to maintenance expenses being debited to the profit and loss account and framed the assessment accordingly. The Income Tax Appellate Tribunal allowed the appeal, equating rental income to income from property based on analogies with dividend income and interest income. However, the High Court disagreed with this reasoning.The court emphasized that if a property is used as stock-in-trade for business purposes, any income derived from it would be considered as business income and not income from property. It noted that the company in question was incorporated with the main object of constructing and dealing with buildings, indicating a business nature rather than a mere property holding. The distinction between income from business, income from property, and income from other sources was crucial in determining the classification of income. The court found that the property in question was treated as stock-in-trade by the assessee, as most portions were sold except for the ground floor rented out. Therefore, the property was deemed to have the character of stock-in-trade from the beginning.In conclusion, the High Court agreed with the Revenue's argument that the Tribunal erred in granting the appeal of the assessee. It held that the rental income derived from property used as stock-in-trade should be considered as business income rather than income from property. As a result, the reference was answered in favor of the Revenue, and the judgment was disposed of without costs.