2024 (3) TMI 1079 - HC - Income Tax

Rental income from house property qualifies for Section 32AB deduction when part of unified business operations

The Bombay HC ruled that rental income assessed under 'Income from house property' qualifies for deduction under Section 32AB. The court held that rental ... Deduction under Section 32AB - profits of eligible business or profession - treatment of rental income assessed under the head 'income from house property' - mode of computation under Section 32AB(3) using accounts prepared in accordance with Parts II and III of the Sixth Schedule - scope of 'eligible business or profession' excluding specified activitiesDeduction under Section 32AB - profits of eligible business or profession - income from house property - computation in accordance with Parts II and III of the Sixth Schedule - Whether rental income earned by the assessee and assessed under the head 'Income from house property' is includible in the 'profits of eligible business or profession' for computing deduction under Section 32AB of the Income Tax Act, 1961. - HELD THAT: - The Court held that eligibility under Section 32AB requires the assessee to have income chargeable under the head 'profits and gains of business or profession', and that the definition of 'eligible business or profession' is wide, excluding only the activities specifically enumerated in sub clauses (a) and (b) of Section 32AB(2)(i). Where rental receipts form part of the assessee's business accounts prepared in accordance with Parts II and III of the Sixth Schedule, such receipts constitute business income for the purposes of Section 32AB(3). The mode of computation in Section 32AB(3) contemplates starting from profits as computed in those accounts and making the specified adjustments; the expression 'chargeable to profits and gains of business' is not a fetter in subsection (3). Consequently, rental income, although assessed under the head 'income from house property' for assessment purposes, is includible in the profits of the eligible business if it is reflected as business income in the accounts and is not one of the activities excluded by statute. The Court relied on the principle that the characterisation in the books and the manner of accounting under the Sixth Schedule govern the computation under Section 32AB and that the Assessing Officer cannot exclude such income from the eligible business computation merely because it has been assessed under a different head. [Paras 7, 8, 9, 10]Rental income assessed under the head 'Income from house property' qualifies for inclusion in the 'profits of eligible business or profession' and thus for deduction under Section 32AB, where such income is shown as part of the business accounts prepared in accordance with Parts II and III of the Sixth Schedule and is not excluded by Section 32AB(2).Final Conclusion: The substantial question is answered in the negative: the rental income earned by the appellant and assessed under the head 'Income from house property' will qualify for deduction under Section 32AB of the Income Tax Act, 1961, where it forms part of the business income in the accounts prepared as required by Section 32AB(3). Issues Involved:1. Whether the rental income assessed under the head 'Income from house property' qualifies for deduction under Section 32AB of the Income Tax Act, 1961.Summary:Issue 1: Deduction u/s 32AB for Rental Income- The appellant contested the ITAT's judgment denying deduction u/s 32AB for rental income assessed under 'Income from house property.'- The Assessing Officer restricted the deduction to Rs. 2,85,024/- against the appellant's claim of Rs. 76,97,918/-, excluding Rs. 1,27,11,742/- rental income from the computation.- The CIT(A) and ITAT upheld this view, stating rental income does not qualify as 'profits of eligible business or profession' for Section 32AB.Appellant's Arguments:- The term 'eligible business or profession' in Section 32AB (2)(i) includes all activities resulting in profits except those specified.- The rental income's assessment under 'Income from house property' does not alter its inherent character as business income.- Cited precedents: Commissioner of Income Tax V/s. Diners Club India Ltd. and Apollo Tyres Ltd. V/s. Commissioner of Income Tax, supporting the inclusion of such income for Section 32AB deduction.Respondent's Arguments:- Section 32AB pertains specifically to 'profits and gains of business or profession,' excluding income from house property, capital gains, and other sources.- The computation of business income must adhere strictly to Sections 28 to 44D, and deductions under Section 32AB cannot extend to other income heads unless explicitly provided.Court's Analysis:- The court examined Sections 32AB (1), (2), and (3) of the Act, noting the requirement for income to be chargeable under 'profits and gains of business or profession.'- The court emphasized the broad definition of 'eligible business or profession,' which includes various business activities beyond manufacturing or production.- The appellant's accounts, prepared per the Companies Act, included rental income as business income, aligning with the definition of eligible business.- The court rejected the dichotomy between rental and business income for Section 32AB purposes, noting the unified management and accounting treatment.Conclusion:- The court ruled that rental income, as part of business income, qualifies for deduction under Section 32AB.- The question of law was answered in the negative, favoring the appellant's claim for deduction on rental income.Disposition:- The appeal was disposed of accordingly, allowing the rental income assessed under 'Income from house property' to qualify for deduction under Section 32AB.