1992 (4) TMI 85 - AT - Income Tax

Co-op society's rental income deemed house property, not business income.

The Tribunal concluded that the rental income from the ground floor of the building owned by the assessee co-operative society is not assessable as ... Business Income, Carrying On Business, Co-operative Society, Let Out, Rental Income Issues Involved:1. Whether the rental income from the ground floor of the building owned by the assessee co-operative society is assessable as part of its business income.2. Whether the rental income is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Assessability of Rental Income as Business IncomeThe primary issue in this case is whether the rental income derived from letting out the ground floor of the building owned by the assessee co-operative society can be considered part of its business income. The assessee, a registered Co-operative Credit Society, constructed a building on a plot of land leased from the Indian Railways for 99 years. The first floor of the building is used for the society's office, and the ground floor is rented out to the State Bank of Hyderabad for Rs. 3,000 per month. The Income-tax Officer (ITO) assessed this rental income as income from house property under section 22, not as business income.The Appellate Assistant Commissioner (AAC) reversed this decision, treating the rental income as part of the business income and exempt under section 80P(2)(a)(i). The AAC relied on a prior Tribunal decision in Vizag Co-operative Bank Ltd. v. ITO [1986] 26 TTJ (Hyd.) 387, where rental income was considered business income because it was incidental to the banking business.However, the Tribunal found this prior decision distinguishable. The Vizag Co-operative Bank case involved a banking company governed by the Banking Regulation Act, 1949, which explicitly allows banks to acquire, construct, and maintain buildings as part of their business activities under section 6(1)(k). In contrast, the assessee in this case is not engaged in banking but in providing credit facilities to its members. Therefore, the Tribunal concluded that owning and renting out a building is not a business activity of the assessee co-operative society under the Co-operative Societies Act or its bye-laws.Issue 2: Exemption under Section 80P(2)(a)(i)Section 80P(2)(a)(i) of the Income-tax Act, 1961, allows for the deduction of the whole amount of profits and gains of business attributable to activities such as banking or providing credit facilities to its members. The Tribunal emphasized that for the rental income to be exempt under this section, it must be part of the profits and gains of the business attributable to the activities carried on by the assessee society.The Tribunal noted that the rental income was not derived from the business of providing credit facilities to members. Instead, it was income from letting out surplus space, which is an incident of ownership and not a business activity. The Tribunal referred to the Kerala High Court decision in Kottayam Co-operative Land Mortgage Bank Ltd. v. CIT [1988] 172 ITR 443 (Ker.), which held that rental income from surplus space in a building owned by a co-operative society does not partake the character of profits and gains attributable to the society's business activities.Moreover, the Tribunal cited the Andhra Pradesh High Court decision in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. v. CIT [1975] 100 ITR 472, which ruled that for income to be exempt under section 80P(2)(a)(i), it must be earned in carrying on the business of banking or providing credit facilities to members. The Tribunal found that the assessee's rental income did not meet this criterion.ConclusionThe Tribunal concluded that the rental income from the ground floor of the building owned by the assessee co-operative society is not assessable as business income and is not exempt under section 80P(2)(a)(i). The Tribunal set aside the AAC's order and restored the ITO's assessment, treating the rental income as income from house property. The department's appeal was allowed.