2025 (9) TMI 1730 - AT - Income Tax

Rental receipts from letting warehouses treated as business income, not house property; s.24(a) deduction denied on appeal

Whether rental receipts from letting out warehouses are taxable as business income or as income from house property. The Tribunal found on facts that the ... Correct head of income - rental receipts from letting out warehouses/godowns - profits from business income as house property -nature of the assessee’s business - Entitlement of standard deduction u/s 24(a) - AO came to the conclusion that assessee was not constructing properties with intention to sell them but only for the purpose of letting them out which is the business of assesses as per Form 3CD HELD THAT:- In the instant case, the main business activity of the assessee comprises of construction and letting out of warehouses on rent as part of it main activity. It is not case of stock in trade remaining vacant for temporary period. Assessee did not provide any satisfactory reply to the Bench in respect of the period of construction and the treatment to such income in the preceding years right from the date of construction. It could not demonstrate that certain parts of the stock was actually sold during h entire period of holding. Evidently, the assessee is engaged in the business activity of construction of galas/godowns for the sole purposes of earning business income therefrom as it is the only activity. Moreover, it is not a case where some of the unsold units lying vacant were leased out for the intervening period. CIT(A) has exhaustively dealt with all relevant judicial decisions in this regard and applied the ratio laid down to the facts of the case as also distinguishing the cases relied upon by the assessee on facts of the case. We notice that in case of Chennai Properties & Investments [2015 (5) TMI 46 - SUPREME COURT] held that in case of bare letting of property by construing the object clause of the company (and not the circumstance of bare letting) as relevant factor to determine the head of taxation. In this case, the main object of the memorandum made specific reference, by name, to two different properties from which rental income was earned. There was also no dispute that the entire income of the taxpayer was from letting of properties. Due to this, it was held the rental income from property was assessable assessment Business Income. The ruling of Chennai Properties and Investments (supra) was followed in the case of Rayala Corporation Pvt. Ltd. [2016 (8) TMI 522 - SUPREME COURT] In this case the business of the assessee was to deal into real estate and also to earn rental income by letting out the properties. It was noted that taxpayer had stopped its other business activity and letting out of the properties was the sole business of the taxpayer. The taxpayer earned only rental income during the year. It was observed that the facts being similar as in the case of Chennai Properties (supra), it was held that the rental was to be taxed as Business income. Thus, both the above decisions support taxation as business income if the taxpayer in involved only in business of bare letting supported by object clause and actual conduct of the taxpayer. The assessee being engaged in the construction of godowns for subsequent letting them out in an organized manner has all the ingredients of business income. All these facts are found in existence in the instant case. It may be stated here that in National Leasing Limited [2024 (10) TMI 1209 - BOMBAY HIGH COURT] allowed the appeal and set aside the orders of the Tribunal on identical issue. The Court ruled that the income derived from leasing/renting properties is to be assessed as “Income from Profits and Gains of Business” and not as “Income from House Property,” overturning the Tribunal’s decision. Decided against assessee. Issues: Whether rental receipts from letting out warehouses/godowns should be assessed as income from business and profession (with denial of standard deduction under section 24(a)) or as income from house property for Assessment Years 2012-13, 2014-15, 2015-16 and 2017-18.Analysis: The assessment and reassessment proceedings examined (including audit report Form 3CD entries and treatment of properties as closing stock) were considered against the statutory heads of income and applicable principles from authoritative decisions. Relevant factors applied include the assessee's main business objective as recorded in statutory/business documents, the nature and conduct of operations (rent being the dominant component of revenue), treatment of the properties in books of account as stock-in-trade, and absence of evidence that properties were constructed with intent to sell. The analysis applied the legal tests distinguishing income chargeable under the head 'house property' and under 'profits and gains of business or profession' (including the significance of dominant intention, object clause, and whether letting forms part of organized trading operations), and applied those tests to the facts before the Tribunal. Coordinate-bench precedents treating unsold/stock-in-trade property and organized letting as business operations were applied to the facts to conclude that the rental receipts arose from the business activity of letting and were not liable as income from house property.Conclusion: The rental receipts are to be treated as income from business and profession and not as income from house property; the appeals challenging that treatment are dismissed, i.e., the decision is against the assessee and in favour of the Revenue.