2008 (6) TMI 241 - AT - Income Tax

Tribunal classifies leased property income as 'Income from house property' under IT Act

Margadarsi Housing (P) Limited. Versus Income-Tax Officer, Ward 2(1), Hyderabad.

The Tribunal classified the income earned by the assessee from leasing properties to its sister concerns as 'Income from house property' under Section 22 ... Income From House Property Issues Involved:Classification of income as 'Income from house property' vs. 'Income from business.'Detailed Analysis:Classification of Income:The core issue is the classification of income earned by the assessee from leasing properties to its sister concerns. The assessee argued that the income should be classified as 'business income' because the properties were part of a larger business activity involving the development of infrastructure for film production. The assessee cited several judgments to support this claim, including those from the Andhra Pradesh High Court and the Supreme Court.Assessee's Argument:The assessee, a private limited company and part of a group involved in film production, argued that the income from leasing properties should be treated as business income. It claimed that the properties were developed as part of a comprehensive business strategy to support film production. The assessee cited judgments from the Andhra Pradesh High Court and the Supreme Court, arguing that the properties were commercial assets exploited for business purposes.Department's Argument:The Department contended that the income should be classified as 'Income from house property.' It argued that the assessee merely leased out the properties and did not engage in any incidental services. The Department emphasized that the rental income was received in the capacity of a landlord and not as part of a business operation. The Department cited various judgments, including those from the Madras High Court and the Supreme Court, to support its position.Tribunal's Findings:The Tribunal examined the lease agreements and the nature of the transactions. It noted that the properties were leased out for long terms (10 years) and that the assessee did not provide any incidental services to the tenants. The Tribunal found that the assessee's income was derived from leasing properties as a landlord, not from exploiting commercial assets in a business capacity. The Tribunal distinguished this case from others cited by the assessee, noting that the properties were not used by the assessee for its own business activities but were leased to independent legal entities (sister concerns).Key Judgments Considered:1. Vazir Sultan Tobacco Co. Ltd.: The Tribunal noted that this case involved properties occupied by employees for business purposes, which was not analogous to the present case where properties were leased to sister concerns.2. New India Maritime Agencies (P) Ltd.: The Tribunal distinguished this case by noting that the properties in question were used by directors for business purposes, unlike the present case.3. Universal Plast Ltd.: The Tribunal highlighted that this case involved the lease of an entire factory, whereas the present case involved residential units leased for long terms.4. A.P. Small Scale Industrial Development Corporation and Andhra Pradesh Industrial Infrastructure Corporation: The Tribunal found these cases inapplicable as they involved infrastructure development specifically for business promotion, unlike the present case where properties were leased for rental income.Conclusion:The Tribunal concluded that the income from leasing properties should be classified as 'Income from house property' under Section 22 of the IT Act. It found no merit in the assessee's claim that the income should be treated as business income. The appeal of the assessee was dismissed, and the order of the lower authority was confirmed.Result:The appeal of the assessee stands dismissed, and the income is classified as 'Income from house property.'