2017 (5) TMI 1102 - AT - Income Tax

Rental Income Classified as Business Income, Depreciation Allowed on Building

M.M. Creations Versus ACIT Circle-24 (1), New Delhi

The Tribunal upheld the classification of rental income as 'Business Income' for the assessment years 2008-09 and 2009-10, directing the Assessing Officer ... Rental income received from property - business income or income from house property - Held that:- By a catena of decisions, courts, time and again, have held that where subject matter that is let out or given on licence is not a bare tenement but is a complex one like the one in present facts and circumstances, income derived therefrom which is not separable as income from letting out building and “income letting out from furniture, plant and machinery”, etc., such composite income shall not be covered by income from house property. In the present case rental income received from lease of building is not derived either wholly or even substantially from the ownership of the property. The income is not derived from mere letting of a tenement but income is derived from a complex of letting substantial part of which is other than bare tenement. It is further observed from bare reading of agreements that arrangement in the present case, is in the course of and as a part of business of company and enterprise which it has entered upon is of providing special facilities. Respectfully following decision of Hon’ble Supreme Court in the case of Shambhu Investment Pvt. Ltd vs CIT (2003 (1) TMI 99 - SUPREME Court) and discussions herein above, we are of considered opinion that rental income earned by assessee from lease of building would be taxable under the head “income from business and profession”. Ld. AO is directed to grant depreciation on building while computing income from business as per law. - Decided against assessee. Issues Involved:1. Classification of rental income from property as 'Income from House Property' vs. 'Business Income.'2. Consideration of tax deduction at source by the lessee.3. Assessment of income under the head 'Business Income' without allowing depreciation.4. Assessment of income under the head 'Income from Other Sources.'5. Consistency with prior assessment orders.Detailed Analysis:1. Classification of Rental Income:The primary issue was whether the rental income from the property let out to M/s Agilent Technologies should be classified as 'Income from House Property' or 'Business Income.' The Tribunal noted that the assessee had leased out both the building and fit-outs to the lessee. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had different views, with the AO classifying the income as 'Business Income' and the CIT(A) as 'Income from Other Sources.' The Tribunal concluded that the rental income should be classified as 'Business Income' because the property was let out as a fully equipped office, which involved complex commercial activities. This conclusion was supported by the Supreme Court's decision in the case of Sultan Bros Pvt Ltd. and Shambhu Investments Pvt. Ltd., where it was held that income from letting out a property with substantial value addition should be considered as business income.2. Consideration of Tax Deduction at Source:The assessee argued that the lessee was deducting tax at source on the rental income, which should influence the classification of the income. However, the Tribunal did not find this argument persuasive in determining the nature of the income. The primary focus remained on the nature of the lease agreements and the intention behind the leasing activity.3. Assessment of Income Without Allowing Depreciation:The AO had assessed the income as 'Business Income' but did not allow depreciation on the building. The Tribunal directed the AO to grant depreciation on the building while computing the income from business, as per the law. This direction aligns with the principle that depreciation should be allowed on business assets.4. Assessment under 'Income from Other Sources':The CIT(A) had assessed the income under the head 'Income from Other Sources.' The Tribunal disagreed with this assessment, stating that when a specific head of charge is provided for income, it should be assessed under that head. Since the rental income was determined to be 'Business Income,' it should not be classified under 'Income from Other Sources.'5. Consistency with Prior Assessment Orders:The assessee argued that the treatment of rental income in the previous assessment years (2004-05 to 2007-08) should be considered. The Tribunal acknowledged the principle of consistency but emphasized that each case must be decided based on its specific facts and circumstances. The Tribunal found that the nature of the lease agreements and the intention behind the leasing activity justified the classification of the income as 'Business Income.'Conclusion:For the assessment year 2008-09, the Tribunal dismissed the appeal, upholding the classification of rental income as 'Business Income' and directing the AO to allow depreciation. For the assessment year 2009-10, the Tribunal partly allowed the appeal, maintaining the classification of rental income as 'Business Income' and rejecting the classification under 'Income from Other Sources.' The Tribunal's decision was pronounced in the open court on 5th May 2017.