Rental income from godowns classified as house property, not business income. Ownership key.

The Tribunal held that the rental income derived from leasing out the godowns constructed by the assessee is assessable as income from house property and not as business income. The Tribunal emphasized that the ownership of the building determines the classification of income, citing relevant precedents. The order of the Commissioner (Appeals) was upheld, and the appeals were dismissed.

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Issues Involved
1. Classification of income from letting out godowns: Business income or Income from house property.

Detailed Analysis

Issue 1: Classification of Income from Letting Out Godowns: Business Income or Income from House Property

Background:
The assessee-firm constructed four godowns which were leased to the Food Corporation of India (FCI) as per an agreement. The firm claimed that the income from letting out these godowns should be classified as business income. However, the Income Tax Officer (ITO) classified it as income from house property under Section 22 of the Income-tax Act, 1961. The Commissioner (Appeals) upheld the ITO's decision, leading to the present appeals.

Arguments by the Assessee:
The assessee argued that the very object of the firm was to construct godowns per FCI's specifications and lease them out. This activity, they claimed, constituted a business activity. The assessee emphasized that the services provided, such as electricity, water supply, inner approach roads, and fencing, further supported the classification as business income. They relied on precedents like CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596 (SC) and S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC).

Arguments by the Department:
The departmental representative contended that the income derived from the godowns should be classified as income from house property, as the source of income is ownership of the property. The representative argued that the services provided were basic amenities and did not constitute special services that would change the nature of the income. They cited cases like Parekh Traders v. CIT [1984] 150 ITR 310 (Bom.) to support their argument.

Tribunal's Analysis:
The Tribunal considered whether the income from leasing out godowns constructed per FCI's specifications should be classified as income from house property or business income. Under Section 22, the annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to income-tax under the head 'Income from house property'. The Tribunal noted that the godowns constructed by the assessee fall under the description of a 'building' as per Section 22. The Tribunal emphasized that the income derived from ownership of the building should be classified under 'Income from house property'.

The Tribunal referred to several precedents:
- In East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC), the Supreme Court held that income derived from shops and stalls by a company formed to develop markets should be classified as income from property.
- In S.G. Mercantile Corpn. (P.) Ltd., the Supreme Court held that the liability to tax under Section 9 is of the owner of the buildings or land appurtenant thereto.
- In Commercial Properties Ltd. v. CIT AIR 1928 Cal. 456, the Calcutta High Court held that income derived from rent by a company whose sole object was to acquire lands, build houses, and let them to tenants was assessable under Section 9 and not under Section 10.

The Tribunal concluded that the principles from these cases apply to the instant case. The fact that the firm was constituted with the object of constructing godowns per FCI's specifications for leasing does not alter the character of the income, as the assessee is the owner of the godowns. The Tribunal distinguished the case of CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596, noting that the vaults in that case were of special design and the assessee provided special services, which was not the situation in the present case.

Conclusion:
The Tribunal held that the rental income derived by the assessee by leasing out the godowns is assessable as income from house property and not as business income. The order of the Commissioner (Appeals) was upheld, and the appeals were dismissed.

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