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

HC held rental receipts were business income, not income from house property, because the assessee's properties formed stock-in-trade in its construction and sale/letting business. The Tribunal's comparison of rental income with dividend or interest was unjustified and the issue was not previously raised before subordinate forums. Records showed most units were sold and only the ground floor was let, demonstrating the property's character as stock-in-trade from the outset. The reference was answered in favor of the Revenue and disposed of accordingly.

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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.

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