PCIT Vs Classique Associates Ltd. (Bombay High Court)
The Bombay High Court dismissed the Revenue’s Income Tax Appeal concerning the treatment of rental income earned by a real estate development partnership firm from properties held as stock-in-trade. The respondent-assessee, a partnership firm engaged in real estate development, had filed its return for Assessment Year 2006-07. During scrutiny, the Assessing Officer noted that the assessee had earned approximately Rs.1.51 crores by leasing certain flats. The assessee had treated the receipts as business income and claimed various expenses as business expenditure, whereas the Assessing Officer treated the receipts as income from house property. The Revenue challenged the Tribunal’s decision before the High Court.
The first question before the High Court was whether the Tribunal was justified in not upholding the Assessing Officer’s finding that income from letting out properties held as stock-in-trade represented income from house property. The Revenue relied on the distinction between the assessee’s real estate development business and the facts in Chennai Properties and Investments Ltd. V/s. Commissioner of Income-Tax. The Tribunal had noted that the assessee was principally engaged in real estate development, had declared total income of approximately Rs.10.45 crores, and had leased only a small portion of the units constructed. It therefore considered the letting activity to be ancillary to the assessee’s main real estate development business.
The Tribunal had relied upon the Gujarat High Court’s decision in Commissioner of Income-tax V. Neha Builders (P.) Ltd., reported in 2008 (296) ITR 661, and the Supreme Court’s decision in Chennai Properties and Investments Ltd. V/s. Commissioner of Income-Tax, reported in [2015] 377 ITR 673. In Neha Builders, the Court considered the treatment of income from property used as stock-in-trade and observed that where the property forms part of stock-in-trade, income derived from such stock could constitute business income. The decision also considered circumstances where the business involved constructing property and selling or letting it.
In Chennai Properties, the assessee was engaged in acquiring and holding properties and had earned income by letting out properties acquired during that business. The Supreme Court confirmed the treatment of such income as business income rather than income from house property.
The Bombay High Court found that the Tribunal had considered the relevant facts and had placed reliance on the decisions in Neha Builders and Chennai Properties. The Court therefore declined to entertain the Revenue’s first question. The second question concerned the Revenue’s challenge to the pro-rata disallowance of Rs.1,41,00,000 relating to expenses pertaining to stock-on-lease. The High Court treated this issue as consequential to the first question. Since the first question was not entertained, the second question also fell. Accordingly, the Income Tax Appeal filed by the Revenue was dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. The Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal (“the tribunal” for short) raising following questions for our consideration :
“1. Whether on the facts and circumstances of the case and in law, the Hon file Tribunal was justified, in not upholding the AO’s findings that the income derived by the assessee from letting out of its properties, held as stock-in-trade, represents income from house property, by relying on the decision of the Honble Supreme Court in the case of Chennai Properties Pvt. Ltd. Without appreciating the facts of the case of M/s. Chennai Properties Pvt. Ltd. Are distinguishable in so far as the main object of Chennai Properties Pvt. Ltd. Was to acquire and give properties on rent, whereas, the assessee firm is engaged in development and construction of properties
2. Whether on the facts and circumstances of the case and in law the Honble Tribunal was justified in not upholding the pro-rata disallowance of Rs.1,41,00,000/- being expenses pertaining to stock-on-lease, which was rightly made by the AO since such deduction is not allowable while computing income from house property ?”
3. The respondent-assessee is a partnership firm and is engaged in the business of development of real estate. The questions arise out of the assessee’s return of income for the Assessment Year 2006-07. While scrutinising such return, the Assessing Officer noticed that the assessee had earned an amount of Rs.1.51 crores (rounded off) by leasing out certain flats and treated such income as the business income, intern claiming various expenses by way of business expenditure. The Assessing Officer held that, the income was from house property being rental. income. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment while confirming the view of the Commissioner of Income Tax (Appeals) and dismissing the Revenue’s Appeal, noted that the assessee was engaged in the business of real estate development. During the year under consideration, the assessee had declared total income of Rs.10.45 crores (rounded off). Only small portion of the number of units constructed by the assessee were given on lease and license basis. The Tribunal therefore held that the activity of letting out the premises on leave and license was only ancillary business of the assessee to the main business of development of real estate. The Tribunal referred to and relied upon the decision of the Division Bench of the Gujarat High Court in the case of Commissioner of Income-tax V. Neha Builders (P.) Ltd. reported in 2008 (296) ITR 661 and of the Supreme Court in the case of Chennai Properties and Investments Ltd. V/s. Commissioner of Income-Tax, reported in [2015] 377 ITR 673 to come to the conclusion that the Assessing Officer incorrectly held that the income was from house property and not business income.
4. The Tribunal, having noted the relevant facts, by placed reliance on the above decisions of the Gujarat High Court in the case of Neha Builders (supra) and of the Supreme Court in the case of Chennai Properties (supra). In Neha Builders (supra), the Division Bench of the Gujarat High Court was considering a very similar issue. While accepting the assessee’s contention in this respect, the Court held and observed as under :
“8. True it is, that income derived from the property would always be termed as ‘income’ from the property, but if the property is used as ‘stock-in-trade, then the said property would become or partake the character of the stock, and any income derived from the stock, would be income’ from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the ‘business’ and the business stocks, which may include movable and immovable, would be taken to be ‘stock-in-trade, and any income derived from such stocks cannot be termed as income from property. Even otherwise, it is to be seen that there was distinction between the ‘income from business’ and income from property’ on one side, and ‘any income from other sources. The Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy”
5. In the case of Chennai Properties (supra), the facts were that the assessee was engaged in the business of acquiring and holding properties. During the course of such business, the assessee had let out certain properties so acquired and earned income out of such activity. The Supreme Court confirmed the view of the High Court that income generated from such source was assessee’s business income and not the assessee’s house property.
6. The second question is consequential to the first one. The Assessing Officer had objected to certain expenditure being claimed by the assessee for earning the business income arising out of running of its units. Once, we hold that the first question is not to be entertained, automatically the second question would fall. In the result, the Income Tax Appeal is dismissed.
