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

HC held rental receipts were business income, not income from house property, because the assessee's properties formed stock-in-trade in its construction ... Characterisation of property as stock-in-trade - income from property - business income - income from other sources - tax treatment of rental incomeCharacterisation of property as stock-in-trade - income from property - business income - tax treatment of rental income - Whether rental income from a building included in closing stock and maintained through profit and loss account is to be taxed under the head 'Income from property' or as business income. - HELD THAT: - The Court held that where a property is used as or treated by the assessee as stock-in-trade, the property partakes the character of stock and any income derived therefrom is income of the business and not income from property. The Tribunal's analogy equating rental income with dividend or interest income (income from other sources) was rejected as unjustified, particularly because that line of argument was not raised below. The factual findings recorded by the authorities show that the assessee treated the building as stock-in-trade and, except for the ground floor which was let out, the remaining portions were sold; accordingly the property was a business stock from the outset. Applying this principle, the rental received from the building could not be taxed as income from property but must be treated as business income. [Paras 8, 9, 10]The Tribunal's order allowing the assessee and treating the rental as income from property was incorrect; the rental is business income because the building was stock-in-trade.Final Conclusion: Reference answered in favour of the Revenue; the Tribunal's decision was set aside and the rental income is to be treated as business income since the property was stock-in-trade. 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.