Income earned from property if business income or income from house property primarily depends upon the objects / main business of the assessee – ITAT
In a recent judgment, the Hon’ble ITAT has set aside revisionary order u/s 263 and held that Assessing Officer was not justified in treating rental income assessable as income from house property.
ABCAUS Case Law Citation:
ABCAUS 3901 (2024) (03) ITAT
Important Case Laws relied upon by parties:
Raj Dadarkar & Associates 81 taxmann.com 193 (SC)
Chennai Properties & Investments Ltd. 56 taxmann.com 456 (SC)
Meeraj Estate & Developers 113 taxmann.com 231 (Allahabad)
In the instant case, the assessee had challenged the revisionary order u/s 263 passed by Principal Commissioner of Income Tax (PCIT) on the issue whether the income earned from house property was business income.
The appellant assessee was engaged in providing BPO services, IT enabled services and software consultancy service. . The case was selected for scrutiny and assessment was finalized under Section 143(3) of the Act accepting the income filed by the assessee.
Subsequently, on examination of records, the PCIT observed that the assessee had treated rental income as “income from house property” for the purpose of income tax and claimed standard deduction @ 30% under Section 24 of the Act.
The PCIT was of the view that on one hand, the assessee treated rental income as business income and claimed depreciation on such house property under the Companies Act, but on the other hand the assessee treated the rental income as “income from house property” for income tax purposes, which is irregular. The PCIT was of the view that by availing standard deduction on “other non-operating income” by treating it as house property has resulted in under assessment.
The PCIT issued notice under Section 263 of the Act, in response to which the assessee filed reply. After taking the submissions, of the assessee on record, the PCIT observed that the property on which rental income has been earned by the assessee had been classified as non-current investments in Schedule of the Audited Annual Accounts. The PCIT was of the view that while passing the assessment order Assessing Officer had not made any inquiries as to why such rental income should not be classified as “income from business” and failed to make detailed inquiries on certain aspects like why the property was classified as investment, whether the assessee has claimed depreciation on such property for income tax purposes and once Assessing Officer has already held such income as income from business in earlier years, such treatment ought to have been followed. Accordingly, the PCIT set-aside the assessment order as being erroneous and prejudicial to the interest of the Revenue.
Before the Tribunal the assessee submitted that it had made investment in the house property which was not related to the main business activity of the assessee, which is that of providing IT and IT Enabled Services.
It was submitted that the assessee had disclosed the house property under the head “non-current investment” and not “fixed assets”. It was submitted that the assessee had not treated the immovable property as business asset but as non-current investment and had not claimed any depreciation under the Income Tax Act on such property.
The Tribunal observed that the assessee was not holding the aforesaid property of it’s business asset and had not claimed any depreciation thereon under Section 32 of the Income Tax Act. This, coupled with the fact that the assessee was not engaged in the business of earning rental income, but was engaged in providing IT Services, it cannot be inferred that the rental income earned by the assessee on such house property held as “non-current investment”, would qualify as it’s business income.
The Tribunal further observed that the aforesaid rental income has been reflected as “non-operational income” and not as the “business income” of the assessee. Accordingly, from the instant facts, in our considered view, the assessee has not taken an incorrect position by offering the rental income earned by the assessee on aforesaid property “income from house property”.
Further, it was observed that in various judicial precedents, a distinction has been drawn as to when the rental income earned by an assessee can be classified as it’s business income and under what circumstances, such rental income would qualify as “income from house property”. The Courts have held that whether the income earned from property would qualify as business income or income from house property would primarily depend upon the objects / main business of the assessee company. If the assessee company is primarily engaged in the business of real estate / construction of which letting out properties on rent, alongwith facilities part of its regular business, then the income from letting out would qualify as “business income”, however, in case the assessee was engaged at other business activities and the rental income has been earned by the assessee, not on it’s business assets but on other investments, then such rental income should normally qualify as income from house property.
Accordingly the Tribunal set aside the order passed under Section 263 of the Act
In the result, the appeal of the assessee was allowed
Download Full Judgment Click Here >>
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