Rental income from property leasing classified as business income not house property income

Patna HC ruled in favor of the assessee regarding classification of rental income. Despite the assessee company having multiple objects in its Memorandum of Association, the AO found it engaged only in property leasing with no other business activities since incorporation in 1975. The court held that rental receipts should be assessed as business income rather than house property income, following precedents from Rayala Corporation and Chennai Properties SC cases. The HC upheld the First Appellate Authority's decision, finding the income constituted business income given the company's sole activity of renting out buildings during the assessment years.

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Issues Involved:
1. Classification of rental income as 'Income from House Property' vs. 'Income from Business'.
2. Consistency in the assessment of rental income by the Income Tax Department.

Detailed Analysis:

1. Classification of Rental Income:
The primary issue in these appeals is whether the rental income of the assessees should be classified as 'Income from House Property' or 'Income from Business'. The Tribunal affirmed the order of the Assessing Authority, which was reversed by the first appellate authority, classifying the rental income as 'Income from House Property'. The appellants argued that their rental income should be classified as 'Income from Business' based on their Memorandum of Understanding (MoU) and past assessments.

The assessees relied on the decisions of the Hon'ble Supreme Court in Rayala Corporation Pvt. Ltd v. ACIT and Chennai Properties & Investments Ltd. v. CIT, which held that rental income can be classified as 'Income from Business' if the main object of the assessee's business is leasing properties. The Department, however, argued that the assessees are real estate developers and builders, and the rental income generated from the buildings constructed by them should be assessed as 'Income from House Property'.

The court examined the objects of the assessees as revealed from their respective MoAs. For H. R. Properties Pvt. Ltd., the MoA indicated that the company was engaged in land development and building construction, and had not undertaken any construction projects since its incorporation. The company was earning rental income from properties held as stock-in-trade. Similarly, for Chero Medico & Developers Pvt. Ltd., the MoA indicated that the company was engaged in real estate development and was earning rental income from properties.

The court noted that the Assessing Officer found that the assessees were not engaged in any other business except leasing properties. The court concluded that the rental income should be classified as 'Income from Business' based on the specific findings of facts made by the Assessing Officer.

2. Consistency in Assessment:
The assessees argued that the Department should maintain consistency in the assessment of rental income, as it had been regularly assessed as 'Income from Business' in the past. The Department contended that each assessment year is a separate cause of action, and if the view taken by the Assessing Officer in earlier years is found to be erroneous, there can be no rule of consistency.

The court referred to the decision in Dr. Narendra Prasad & Others v. CIT & Another, which emphasized the need for consistency in tax assessments. The court found that the first appellate authority rightly classified the income as 'Income from Business' based on the consistent business activity of renting out buildings.

Conclusion:
The court set aside the order of the Tribunal, finding it to be perverse, and ruled in favor of the assessees. The rental income was classified as 'Income from Business' and not 'Income from House Property'. The appeals were allowed, and the question of law was answered in favor of the assessees and against the Revenue. The parties were left to suffer their respective costs.

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