Fatehsinh Mohansinh Chauhan Vs ACIT (ITAT Surat)
Rent From Buildings Held as Stock-in-Trade Taxable as House Property Income: ITAT Surat
Stock-in-Trade Classification Does Not Automatically Make Rent Business Income
The Income Tax Appellate Tribunal, Surat Bench, held that rental income from industrial buildings held as stock-in-trade was assessable under “Income from House Property”, where the assessee’s business involved dealing in land and constructing buildings rather than letting out properties.
The Tribunal explained that the classification of a property as a business asset does not, by itself, determine the head under which rent is taxable. The nature of the activity generating the income must be examined.
It directed the Assessing Officer to recompute the rental income under the house property head, allow admissible deductions and grant consequential relief.
Background of the Dispute
The assessee, an individual, filed his return for Assessment Year 2016-17, declaring total income of ₹24,07,090.
His income comprised amounts under the heads house property, business or profession, and other sources.
Following scrutiny, the Assessing Officer completed the assessment under Section 143(3) at ₹1,07,49,980.
The principal dispute arose from the reclassification of rent received from industrial buildings. The assessee had offered the rental income under the house property head, while the Assessing Officer treated it as business income.
The Commissioner (Appeals) sustained that treatment, prompting the appeal before the Tribunal.
Dispute Included Municipal Taxes and Standard Deduction
The assessee challenged the treatment of ₹2,73,40,032 as business income instead of rental income.
He also contested the disallowance of ₹1,63,750 for taxes paid to the local authority and ₹81,52,885 as the standard deduction under Section 24.
The parties accepted that these grounds depended on the central classification issue. The Tribunal therefore considered them together rather than deciding each independently.
A separate ground concerning the absence of video conferencing was not pressed and was dismissed accordingly.
Assessee Distinguished Construction From Letting Business
It was undisputed that the assessee was engaged in dealing in land and constructing buildings, and that the industrial buildings formed part of his stock-in-trade or business assets.
The assessee nevertheless argued that he was not carrying on the business of letting out buildings.
He relied on Section 22, which brings the annual value of buildings owned by an assessee within the house property head.
He also referred to Section 23(5), concerning properties held as stock-in-trade, to support the proposition that such classification does not exclude property income from that head.
Revenue Relied on Business Assets and Expenses
The Revenue supported the lower authorities’ orders, stressing that the buildings were held as stock-in-trade in the assessee’s property business.
It also pointed out that interest and other expenses associated with those properties had been claimed while computing business income.
According to the Revenue, these circumstances supported assessment of the rent as business income.
The Tribunal rejected the proposition that either circumstance independently determined the correct head of income.
Nature of Income Is the Decisive Consideration
The Tribunal contrasted Section 22, dealing with income from owned buildings, with Section 28, concerning profits and gains of business.
It held that merely carrying on a land-dealing and construction business, while letting out properties held for sale, does not automatically make the rent business income.
The lower authorities had recorded no finding that letting out properties was itself the assessee’s business. Nothing brought before the Tribunal demonstrated otherwise.
The fact that the buildings appeared as stock-in-trade was relevant, but insufficient to convert the rental receipts into business income.
Decisions on Property-Letting Businesses Distinguished
The Tribunal distinguished Chennai Properties and Investments Ltd. v. CIT, where the Supreme Court treated rent as business income because letting out properties constituted the assessee’s business.
It similarly distinguished Rayala Corporation (P) Ltd. v. ACIT and PCIT v. Noor Resorts (P) Ltd.
Conversely, it noted that CIT v. New India Industries Ltd., relied upon by the Assessing Officer, supported assessment under the house property head.
The Bench also referred to Section 23(5) as supporting the compatibility of stock-in-trade ownership and house property taxation. Its relief concerned the actual rental income in dispute.
Expense Claims Cannot Determine the Income Head
The Tribunal held that the head under which expenses were claimed could not decide the classification of the receipts.
It observed that expenses incurred for the land-dealing and construction business were allowable in computing that business income.
However, it specifically permitted the Assessing Officer to ensure that the same deduction was not allowed twice, once under business income and again under house property income.
Recomputation Directed; Appeal Partly Allowed
The Tribunal accepted the assessee’s claim and directed computation of the rent under “Income from House Property”, with deductions admissible under the Act.
The appeal was partly allowed, with the video-conferencing ground dismissed as not pressed.
The ruling turns on the absence of a property-letting business; it does not classify every rental receipt from stock-in-trade identically regardless of the underlying activity.
Cases Discussed
1. Chennai Properties and Investments Ltd. Vs CIT (Supreme Court); (2015) 56 taxmann.com 456; (2015) 373 ITR 673; 09/04/2015. The Supreme Court held that rental receipts constituted business income where letting out properties was the assessee-company’s business. The Surat Tribunal distinguished that factual situation from the present assessee’s land-dealing and construction business.
2. Rayala Corporation (P) Ltd. Vs ACIT (Supreme Court); (2016) 72 taxmann.com 149; (2016) 386 ITR 500; 11/08/2016. The Supreme Court held rental income assessable as business income where leasing properties was the business of the assessee. The Tribunal distinguished this decision because the present assessee’s business was dealing in land and constructing buildings.
3. PCIT Vs Noor Resorts (P) Ltd. (Himachal Pradesh High Court); (2022) 145 taxmann.com 353. Relied upon by the CIT(A) and distinguished by the Tribunal as concerning the business of letting out properties. No exact TaxGuru judgment URL was established for this decision.
4. CIT Vs New India Industries Ltd. (Gujarat High Court); (1993) 201 ITR 208. The Assessing Officer referred to this decision, but the Tribunal observed that it supported taxation of rental income under the house property head. The related distinction between property ownership and carrying on a letting business is discussed in TaxGuru’s rental-income classification analysis.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT SURAT
Feeling aggrieved by the order of first appeal dated 27.03.2025 passed by learned Commissioner of Income-Tax (Appeals)-Addl/JCIT(A)-7, Mumbai [“Ld. CIT(A)”], which in turn arises out of the assessment-order dated 29.11.2018 passed by learned Assistant Commissioner of Income-tax, Vapi Circle, Vapi [“Ld. AO”] u/s 143(3) of the Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2016-17, the assessee has filed this appeal.
2. The background facts leading to the present appeal are such that the assessee-individual filed his return of income for AY 2016-17 declaring a total income of Rs. 24,07,090/-, comprising income under the heads “Income from House Property”, “Income from Business or Profession” and “Income from Other Sources”. The case was selected for scrutiny assessment and the Ld. AO issued notices u/s 143(2)/142(1), which were complied with by the assessee. Ultimately, the Ld. AO completed the assessment u/s 143(3) at a total income of Rs. 1,07,49,980/-. The main reason for the variation in income was the re-characterisation of rental income. While the assessee declared the rental income under the head “Income from House Property” (taxable amount Rs. 1,90,23,397/-), the Ld. AO treated the same as part of “Income from Business or Profession”. Aggrieved, the assessee carried the matter in first-appeal before Ld. CIT(A) but did not succeed. Still aggrieved, the assessee has come in the present appeal before us.
3. The assessee has raised the following grounds:
“1. On the facts and circumstances of the case as well as law on the subject, the learned AddI/JCIT (A) has erred in confirming the income of Rs. 2,73,40,032/- as business income instead of rental income.
2. On the facts and circumstances of the case as well as law on the subject, the learned AddI/JCIT (A) has erred in confirming the disallowance of Rs. 1,63,750/- which was claimed as deduction on account of taxes paid to local authority for rental property.
3. On the facts and circumstances of the case as well as law on the subject, the learned AddI/JCIT (A) has erred in confirming the disallowance of standard deduction u/s 24 of the Act of Rs. 81,52,885/-.
4. On the facts and circumstances of the case as well as law on the subject, the learned AddI/JCIT (A) has erred in confirming order, which was passed without providing video conferencing.”
4. At the start of hearing, Ld. AR for assessee submitted that the assessee is not pressing Ground No. 4. The Ld. DR for revenue does not have any objection against this submission. Accordingly, Ground No. 4 is dismissed as non-pressed.
5. As regards the remaining Ground Nos. 1 to 3, Ld. AR submitted that all these grounds are connected to the basic issue whether the rental income earned by the assessee is taxable under the head “Income from House Property” or “Income from Business or Profession”, and once that issue is resolved, there is no necessity to adjudicate each ground independently. The Ld. DR for revenue did not object to this submission. We proceed accordingly in subsequent discussions.
6. Thus, the limited controversy before us is the correct head under which the rental income earned by the assessee is taxable.
7. The undisputed facts, as accepted by the Ld. AO on Page 10 of the assessment-order, are as under:
(i) The assessee is engaged in the business of dealing in lands and construction of buildings; and
(ii) The assessee has earned rental income from industrial buildings which were part of stock-in-trade/business assets.
8. Taking into account above facts, the Ld. AO has assessed the rental income under the head “Income from Business or Profession”. However, the claim of assessee is that he is engaged in the “business of dealing in lands and construction of buildings” but not engaged in the “business of letting out buildings”. Ld. AR submitted that the assessee has made this submission consistently before both of the lower authorities but the lower authorities have not correctly understood the case of assessee.
9. Ld. AR drew our attention to the provision of section 22, which is the charging section of “Income from House Property”, according to which “the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner”, shall be chargeable to income-tax under the head “Income from House Property”. Further attention is drawn to section 23(5) which clearly provides that where the property is held as stock-in-trade and it is not let during the year, the annual value of such property, for a period of first two years, shall be taken to be Nil. According to Ld. AR, the charging section 22 as well as computing section 23(5) makes it very clear that the income from property held as stock-in-trade would be taxable under the head “Income from House Property”. Ld. AR further submitted that the Ld. CIT(A) has relied upon the decisions of Chennai Properties and Investments Ltd. Vs. Commissioner of Income-tax (2015) 56 taxmann.com 456 (SC); Rayala Corporation (P) Ltd. Vs. Assistant Commissioner of Income-tax (2016) 72 taxmann.com 149 (SC); and Principal Commissioner of Income-tax Vs. Noor Resorts (P) Ltd. (2022) 145 taxmann.com 353 (Himachal Pradesh) but those decisions are applicable where the assessee is engaged in the business of letting out properties, which is not the case of present assessee. Further, the Ld. AO has relied upon Commissioner of Income-tax Vs. New India Industries Ltd. (1993) 201 ITR 208 (Guj) but in that case, the Hon’ble Court decided that the rental income would be taxable under the head “Income from House Property”, hence that decision is supporting the assessee’s claim and not the revenue’s stand.
10. With above submissions, Ld. AR contended that the rental income was rightly offered by assessee under the head “Income from House Property”, hence the grounds raised by assessee deserve to be allowed.
11. Per contra, Ld. DR for revenue supported the orders of the lower authorities. Ld. DR submitted that the industrial buildings were admittedly held as stock-in-trade in the course of the assessee’s business of dealing in lands and construction of buildings. Further, the Ld. AO has noted that the assessee incurred interest expenditure and other expenses associated with the properties, which have been claimed as deduction in computing “Income from Business Profession”. Therefore, the rental income arising from properties were rightly assessed under the head “Income from Business or Profession”. Ld. DR accordingly pleaded that the action of Ld. AO, as sustained by Ld. CIT(A), deserves to be upheld.
12. We have considered rival contentions of both sides and perused the orders of the lower authorities as well as the material on record to which our attention has been drawn.
13. Section 22 brings to tax under the head “Income from House Property” the annual value of buildings owned by the assessee, while section 28 brings to tax the profits and gains of a business carried on by the assessee. The mere fact that an assessee carries on a business of dealing in lands and construction of building and has let out the properties held as stock-in-trade for sale, does not, by itself, decide the head under which the rental income is chargeable; the nature of the activity giving rise to the income has to be seen. In Chennai Properties and Investments Ltd. (supra), the Hon’ble Supreme Court treated the rent as business income because letting out of properties was itself the business of the assessee. Other decisions relied by Ld. CIT(A), namely Rayala Corporation (P) Ltd. (supra) and Noor Resorts (P) Ltd. (supra), also apply where the assessee is engaged in the business of letting out properties. On the other hand, in New India Industries Ltd. (supra), relied upon by the Ld. AO, the Hon’ble jurisdictional High Court has held that the rental income was taxable under the head “Income from House Property”.
14. In present case, the assessee is admittedly engaged in the business of dealing in lands and construction of buildings, as noted in para 7 above. The lower authorities have not recorded a finding that the assessee is engaged in the business of letting out the properties and nothing has been brought to our notice to demonstrate so. The fact that the buildings form part of stock-in-trade is relevant, but it cannot, by itself, convert the rental receipts into business income. Similarly, the contention of Ld. DR that the interest and other expenses associated with the properties were claimed in computing business income does not decide the head of income, which depends on the nature of the income and not on the head under which the assessee has claimed the expenses. Since the assessee is engaged in the business of dealing in lands and construction of buildings, those expenses have been incurred for carrying on such business and therefore allowable as deduction. However, the Ld. AO may ensure that no deduction is allowed twice once in computing “Income from Business or Profession” head and again in computing “Income from House Property” head.
15. We also find force in the submission made by Ld. AR that the section 23(5) of the Act itself deals with the properties held as “stock-in-trade” and gives a window of two years for taxing at “Nil” annual value (provided the property is not let out) and after expiry of two years, the annual value as computed u/s 23 becomes taxable. Thus, it is manifest from section 23(5) that a property held as stock-in-trade is taxable under the head “Income from House Property”.
16. In view of the above, we hold that the rental income earned by the assessee from the industrial buildings held as stock-in-trade is assessable under the head “Income from House Property”, as declared by the assessee, and not under the head “Income from Business or Profession”. Accordingly, the claim of assessee is allowed. We direct the Ld. AO to recompute the income under the head “Income from House Property”, allowing the deductions admissible under the Act and to grant the consequential relief in accordance with law. Thus, the grounds raised by assessee are allowed.
17. In result, this appeal is partly allowed.
Order pronounced in open court on 04/11/2026
