Case Law Details
CIT Vs Neha Builders (P) Ltd (Gujarat High Court)
The Gujarat High Court, in the case of CIT v. Neha Builders (P) Ltd., addressed a question regarding the classification of rental income derived from a property held as closing stock by a construction business. The core issue was whether such income should be assessed under the head “Income from house property” or “Business income” for income tax purposes.
The assessee, Neha Builders (P) Ltd., a construction company, had included one of its building properties in its closing stock. Subsequently, a portion of this property was rented out, and the assessee filed a revised return, claiming the rental income under “Income from house property.” The Assessing Officer (AO) disagreed, noting that expenses related to the property’s maintenance were debited to the profit and loss account, and the building was treated as stock-in-trade. Consequently, the AO classified the rental income as business income.
The assessee’s appeal to the Commissioner of Income-tax (Appeals) proved unsuccessful. However, the Income Tax Appellate Tribunal (Tribunal) allowed the assessee’s appeal. The Tribunal reasoned that just as dividend income from shares or interest from bank deposits are considered “income from other sources,” rental income should be treated as “income from property.” This decision led the Revenue to seek a reference to the Gujarat High Court.
Mr. B.B. Naik, counsel for the Revenue, argued that if a property is used as stock, any income derived from it should be considered business income, not income from property. The High Court concurred with the Revenue’s submission.
The Court observed that the assessee company’s main objectives included constructing, acquiring, and letting out buildings, as well as land development. While income from property is generally termed “income from property,” the Court emphasized that if the property is used as “stock-in-trade,” it assumes the character of stock, and any income generated from such stock becomes “income from business.”
The High Court specifically criticized the Tribunal’s analogy between rental income and dividend or interest income. It stated that the Tribunal was “absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits.” The Court noted that the assessee’s own statements and records indicated that the property was treated as “stock-in-trade,” and except for the rented ground floor, other portions had been sold. This further supported the classification of the property as stock-in-trade from the outset.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Mr. B.B. Naik, learned Counsel for the Revenue.
2. Present reference, under Section 256(1) of the Indian IT Act, has been made by the Tribunal, Ahmedabad Bench ‘A’, at the instance of the Revenue which is dissatisfied with the order of the Tribunal who is aggrieved by the order passed by the Tribunal in ITA No. 266/Ahd/1990 (Annex. ‘C’) in the reference book. (We must record that, in most of the cases, we find that date of the appellate order is not exhibited on the final order nor the same is mentioned in the reference order).
3. The following question has been referred to this Court for its opinion:
Whether, on the facts and in the circumstances of the case, the rental income received from any property in the construction business can be claimed under the head of ‘Income from property’ even though the said property was included in the closing stock and expenses on maintenance were debited to the P&L a/c?
4. The short facts, leading to the reference, are that the non-applicant assessee-company is engaged in the business of construction of property; one of the building properties was included in the closing stock in the balance sheet drawn for the business. The assessee filed revised return submitting that a part of its property was given on rent and the income derived on that basis should be computed under the head ‘Income from house property’ and not as business income. The AO, during the course of the assessment proceedings, observed that the expenses on maintenance of the property were debited to the P&L a/c and so also the building was shown as stock-in-trade, therefore the property would partake the character of the stock and any income derived from the stock cannot be taken to be income from property. It accordingly framed the assessment order. As the appeal against the order proved futile, the assessee filed the above referred income-tax appeal before the Tribunal. The Tribunal allowed the appeal observing, inter aha, that any dividend received on the shares or any interest received from the bank would be taken to be income from other sources, therefore, any income derived under the head of ‘Rent’ would also become income from the property, it accordingly allowed the appeal and directed reconsideration of the matter.
5. Naik, learned Counsel appearing for the Revenue, submits that if the property is used as a property, then any income derived from the property would be an income from property, but if the property is used as a stock, then any income from the stock would not be an income from the property. He submits that the analogy applied by the Tribunal is patently illegal.
6. We have heard Mr. Naik at length. None appears for the respondent despite service of notice.
7. From the order passed by the learned CIT(A), it would clearly appear that the case of the assessee was that the company was incorporated with the main object of purchase, take on lease, or acquire by sale, or let out the buildings constructed by the assessee. Development of land or property would also be one of the businesses for which the company was incorporated.
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.
9. From the statement of the assessee, it would clearly appear that it was treating the property as ‘stock-in-trade’. Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a ‘stock-in-trade’.
10. Agreeing with the submissions made by Mr. Naik, learned Counsel for the Revenue, we hold that the Tribunal was not correct in granting the appeal of the assessee.
11. For the reasons aforesaid, the reference deserves to be answered in favour of the Revenue. It is accordingly answered and stands disposed of. No costs.
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