Property Rental Income of assessee engaged in building construction taxable as income from property

Brief of the case:

Hon’ble HC have decided following questions of law in these bunch of appeals:

• Whether ITAT was justified in directing the AO to tax the rental income of Rs.45,57 lakhs as ‘income from house property’ and to allow deduction u/s 24 ignoring the fact that the income was received from the business asset of unsold flats shown as closing stock?
• Whether ITAT was justified in directing the AO to allow the claim of expenses of Rs.45 lakhs on account of provision for incomplete work ignoring the fact that there was no incomplete work in the project as is evident from the fact that assessee has received rental income out of closing stock shown by him?
• Whether ITAT was justified in treating the rental income as income from house property when the assessee had not maintained any separate account in respect of the income from the house property?

The Hon’ble Court have dismissed all the appeals and confirmed the order of ITAT.

Facts of the case: Hon’ble Court have mentioned facts of ITA No. 5313 of 2010 only which are produced hereunder:

• The respondent-assessee before us is common to all appeals and it is engaged in the real estate business and constructed a commercial complex.
• It filed its return of income for the assessment year 2000-01 declaring total income at Rs.5,51,81,680/- including rental income of Rs.45,57,272/- and claimed deduction under section 24(a) of Rs.11,39,318/-.
• This claim of the assessee was not accepted and he treated the rental income as business income.

Contention of the revenue:

• The receipts from this property were on account of exploitation of commercial assets and as such, it is the business profit of the assessee.
• The assessee is engaged in the business of construction of building with a view to sell the same and not for leasing it. Thus, leasing of unsold units is an integral part of its business. Hence, the income earned on leasing was business income.
• In each of these appeals, the Tribunal lost sight of the fact that if the firm carries on business of development in real estate and has constructed buildings comprising of units or flats for sale, then, the unsold flats or units being given on lease by the firm would not enable it to claim the income derived therefrom as income from House property.
• Since the business of the firm is of development and construction of property, then, this income and which is derived from the stock of unsold units or flats is business income and ought to be treated as such.
• By some jugglery or manipulation of the accounts, the assessee firm claimed the income derived from the lease transactions as income generated from house property which was not permissible.
• The rental income from these unsold units has been shown as income from house property and huge deduction has been claimed under section 24(a) of the IT Act.
• The assessee may have succeeded before the Commissioner and the Tribunal, but both missed the point that for the assessment years 2002-03, 2003-04 and 2004-05, the disallowance by the Assessing Officer was in the sum of Rs.97,48,551/-, Rs,99,23,274/- and Rs.1,08,34,876/-. This huge deduction under section 24(a) has been claimed and the revenue implications are, therefore enormous. The Revenue, therefore, rightly asserted and by relying on case law that the exploitation of business assets would yield business income.
• No separate accounts are maintained in respect of the properties which have been let out yielding rental income.
• The problem arose when the assessee abruptly deviated from the accounting practice by taking out only two items – rental receipts and property taxes from house property and claimed huge deduction under section 24(a).
• On the issue of interest paid as capital brought in by partners and claimed u/s 24 (b)   it was submitted that though rental income was generated in the earlier assessment years, such deduction was not claimed for the assessment years 2000-01, 2002-03, 2003-04, 2004-05 and 2005-06.

Contention of the assessee:

Regarding the claim u/s 24 (b) it was explained that this claim was not made in the initial years because in those years the stock-in-trade is completely unsatisfactory. If these were stock-in-trade, then, the income derived therefrom was definitely business income.

Held by CIT (A):

• The Commissioner concluded that the claim of the assessee of expenses of Rs.45,00,000/- should have been allowed.
• The Commissioner also accepted the ground of the assessee and pertaining to the charge of rental income and held that this should be treated as income from house property.
• The assessee has constructed a building of which it is owner and received income from letting out some portion of this house property.
• The real and main issue is whether this income is earned in the capacity as a trader or in the capacity of the owner of the premises. If the property belongs to the assessee and part of it which was unsold has been let out, then, the income generated therefrom has been treated as income from house property.
• The claim for interest falls under section 24(b) and which pertains to interest paid to the partners from their capital. The Commissioner held that relationship of borrower and lender must come into existence before it can be said that any money is borrowed by one person from another.
• Where there is no relationship of borrower and lender, no deduction is permissible towards interest.
• He only confirmed the disallowance of compensation of Rs. 1,80,000/-.

Held by the Tribunal:

• There is no dispute that the assessee was engaged in construction business and has constructed a commercial property known as May Fair Tower. The unsold portion of the property was let out and assessee earned rental income therefrom.
• If rental income earned by the assessee could be treated as business income as claimed by the Revenue, or income from house property, is an issue which has been repeatedly raised and considered.
• An identical issue, according to the Tribunal, was raised before the Hon’ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. vs. Commissioner of Income Tax (1961) 42 ITR 49 where it was held that the assessee company was incorporated with the object of also developing landed properties. The construction of shops and stalls on purchased lands was made and these were let out to different tenants. The question arose as to whether rental income received by the assessee is an income from house property or a business income. The Hon’ble Supreme Court concluded that income received from tenants or shops and stalls by the assessee company is liable to be taxed as property income and not as a business income.
• The assessee had earned substantial rental income and, therefore, the interest on borrowed funds has to be allowed.

Held by the Court:

• The three grounds which have been projected and emphasised pertain to treatment of total income as income from house property and allowing deduction under section 24 ignoring the fact that the income was received from the business asset (unsold flats) shown as closing stock.
• If the Tribunal also had before it the Profit & Loss account and it referred to the treatment given by the assessee therein, then, we do not find how the Revenue can complain otherwise.
• If two conflicting views of the Commissioner were placed before the Tribunal and the Tribunal found that it had concurred with one of those views and that the view with which it concurred prevails, then, we do not think how the Revenue can raise this issue.
• If the entire interest paid on the partners’ capital was related to the premises which were let out by the assessee but the construction thereof came from the contributions of the partners, then, the interest was due and payable to them.
• If the income is income from house property and that is a deduction which could be granted from the same we do not think that the Revenue should be permitted to raise this ground.
• Each of these appeals by the Revenue have failed and dismissed.