Rental income from property leasing constitutes business income when leasing is company's main business object

ITAT Visakhapatnam held that rental income from property leasing constituted business income rather than income from house property where leasing was the main object of the assessee company and sole source of business income. The tribunal rejected the consistency rule argument, noting that incorrect claims cannot be perpetuated merely because previously undisturbed by authorities. The CIT(A)'s order treating rental income as house property income was set aside and AO's assessment restored. The matter regarding expense disallowances was remanded to CIT(A) for adjudication on merits.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal and cross-objection are:

- Whether the rental income earned by the assessee from letting out a commercial property should be classified as business income or income from house property for tax purposes.

- Whether the Assessing Officer was justified in treating the rental income as business income relying on the assessee's business objects and judicial precedents.

- Whether the learned CIT(A) erred in deleting the addition made by the Assessing Officer and treating the rental income as income from house property.

- Whether the principle of consistency in tax treatment across assessment years applies to the nature of income declared by the assessee.

- Whether the disallowance of certain expenses by the Assessing Officer while treating the income as business income was justified and whether this issue requires adjudication.

- Whether the delay of 11 days in filing the Revenue's appeal should be condoned.

2. ISSUE-WISE DETAILED ANALYSIS

Delay in Filing Appeal

The Revenue filed the appeal with an 11-day delay. The Assessing Officer submitted an affidavit explaining that the delay was due to unavoidable circumstances arising from his election duty as a Nodal Officer during the General Elections of 2024. The assessee did not oppose the condonation of delay. The Tribunal considered the affidavit and the circumstances and held that the delay was unintentional and beyond control, thus condoning the delay.

Classification of Rental Income: Business Income vs. Income from House Property

Relevant Legal Framework and Precedents:

The Income Tax Act classifies income under distinct heads, including "Income from House Property" and "Profits and Gains of Business or Profession". The classification depends on the nature of the activity and the business of the assessee. The Supreme Court judgments in Chennai Properties & Investments Ltd. vs. CIT and Rayala Corporation Pvt. Ltd. vs. ACIT are authoritative on this issue. These rulings clarify that where the business of the company is leasing or letting property to earn rent, the rental income is to be treated as business income, not income from house property.

Court's Interpretation and Reasoning:

The Tribunal analyzed the facts that the assessee had leased out an IT Park property to M/s. Cognizant Technology Solutions India Private Limited under a long-term lease agreement (initial term over 4 years with renewal options), indicating a commercial and business-like arrangement rather than a mere exploitation of property ownership. The Memorandum of Association (MOA) explicitly included leasing, letting, and hiring of properties as one of the main objects of the company.

The audited financial statements showed the rental income recorded as "sale of services" or business income, and the outstanding rent was classified as trade receivables. The property was classified under tangible fixed assets, not as stock-in-trade, further supporting the business nature of the activity.

Applying the principles from the Supreme Court's decisions, the Tribunal noted that the letting of property was not incidental but the core business activity of the assessee. Hence, the income should be taxed under the head "Profits and Gains of Business or Profession".

Key Evidence and Findings:

• Lease agreement terms indicating a long-term commercial lease with renewal options.
• MOA specifying leasing and letting as main business objects.
• Accounting treatment showing rental income as business income and property as business asset.
• Prior judicial precedents establishing that income from letting property as a business is business income.

Application of Law to Facts:

The Tribunal applied the legal principle that the character of income depends on the nature of the activity and the objects of the company. Since the assessee's main business was leasing property, the rental income must be treated as business income. The Tribunal rejected the assessee's claim that the income should be treated as income from house property based on prior acceptance in earlier years, holding that consistency cannot perpetuate an impermissible claim contrary to facts and settled law.

Treatment of Competing Arguments:

The assessee argued that it held only one property and had no other business activity, and that the rental income had been accepted as income from house property in earlier years. The assessee relied on decisions including Raj Dadarkar & Associates vs. ACIT and Cache Properties Pvt. Ltd. The Tribunal distinguished these precedents, noting that the Supreme Court had considered and rejected similar arguments in the cited landmark cases. The Tribunal also clarified that the prior acceptance of the income as house property income in earlier years does not bind the tax authorities if the claim is contrary to facts and law.

Conclusions:

The Tribunal set aside the CIT(A)'s order and restored the Assessing Officer's order treating the rental income as business income under the head "Profits and Gains of Business or Profession".

Disallowance of Expenses

The assessee challenged the disallowance of expenses amounting to Rs. 1,88,69,349/- made by the Assessing Officer while computing the lease income as business income. The CIT(A) did not adjudicate this issue because he treated the income as income from house property. The Tribunal remanded this issue back to the CIT(A) for adjudication on merits, directing that the assessee be given an opportunity of hearing before passing a fresh order.

Cross Objection Grounds

The assessee's cross objection supported the CIT(A)'s order that the income should be treated as income from house property and challenged the disallowance of expenses. The Tribunal dismissed the first ground in light of its findings in the Revenue appeal and partly allowed the second ground by remanding the issue of expenses for fresh adjudication.

3. SIGNIFICANT HOLDINGS

"The letting out of the property is in fact the business of the assessee and therefore, the same was rightly disclosed as income under the head 'income from business'. It cannot be treated as 'income from the house property'."

"The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income."

"The character of income depends on the nature of the activity and the objects of the company, not merely on ownership of property or prior tax treatment."

"When the claim of the assessee is contrary to the admitted facts as well as settled law, then a mere non-disturbance of claim by the Assessing Officer for a particular assessment year would not give a right to perpetuate an impermissible claim."

"The delay of 11 days in filing the Revenue's appeal is condoned on account of unavoidable circumstances of election duty."

"The issue of disallowance of expenses against the business income is remanded to the CIT(A) for adjudication on merits with opportunity of hearing."

---