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The primary issue in this case revolves around whether the rental income earned by the assessee from letting out a property should be classified as 'income from house property' or 'business income'. The assessee, a partnership firm engaged in the business of Promoter and Builder, declared rental income from a commercial property named "City Jewel Building" as 'income from house property'. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] reclassified this income as 'business income'.
The AO observed that the assessee had not effected any sales during the year but had credited office rent and debited property tax in the profit and loss account. The AO held that since the unsold property was shown as stock in trade, any income derived from it should be treated as 'business income'. The AO relied on the decision of the Hon’ble Gujarat High Court in the case of CIT Vs. Neha Builders (296 ITR 661) and CEPT Vs. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451.
Before the CIT(A), the assessee argued that the rental income should be considered as 'income from house property' since the shops leased out were shown under the head 'investment' in the balance sheet. However, the CIT(A) upheld the AO’s decision, noting that the property in question was held as stock in trade and the nature of the business activities indicated that the income should be classified as 'business income'. The CIT(A) relied on the decision of the Hon’ble Supreme Court in the case of Chennai Properties and Investment Ltd. and Karanpura Development Company Ltd. Vs. CIT (44 ITR 362).
On appeal, the assessee reiterated that the rental income should be treated as 'income from house property', citing the consistent classification of the shops under 'investment' in the balance sheets for the relevant years. The assessee also referenced the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Ansal Housing Finance and Leasing Company Ltd. (354 ITR 180), where the court held that the annual letting value of unsold flats should be taxed under 'income from house property'.
The Tribunal found merit in the assessee's argument. It distinguished the facts of the present case from those in Chennai Properties and Investment Ltd., noting that the main object of the assessee was not to acquire and let out properties but to engage in construction and development. The Tribunal also noted that the shops were consistently shown as 'investment' in the balance sheets, supporting the classification of rental income as 'income from house property'. The Tribunal referred to the decision in Ansal Housing Finance and Leasing Company Ltd., where the court held that the annual letting value of unsold flats should be taxed under 'income from house property'.
Based on these considerations, the Tribunal concluded that the rental income should be classified as 'income from house property' and not 'business income'. The order of the CIT(A) was set aside, and the appeal filed by the assessee was allowed.
Order pronounced in the open court on 23-09-2016.
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