Income derived from property is taxable as ‘Income from House Property’

M/s. Suyash Holding & Estate Developers Pvt. Ltd. Vs ITO (ITAT Mumbai)

From the record we found that assessee has purchased only one flat which was also let out to one of its Directors of the company on rent which was found to be much lower than the market rate of the property. There is no other transaction of assessee of letting out the house property nor assessee has any other house property for doing the business of letting out. The decision relied on by learned AR in case of Chennai Properties Vs Investments Ltd and Rayala Corporation Pvt. Ltd (supra) are not applicable to the peculiar facts of instant case. So far as in those cases, assessees were actually engaged in commercial exploitation of property, whereas in the instant case only one flat was taken by the assessee and which was also let out to its Directors and not in the open market to carry reasonable rent. Even in the objects of the company only passing reference was made to the activity of renting the property. However, from the act of the assessee over the period of time, we do not find any such activity having been undertaken by the assessee to assess business profit by letting out the property. Property let to the Director at a fixed monthly rent cannot be treated as business of the assessee. Even as per initial agreement dated 31/03/1998 the rent of the property was fixed at Rs.25,000/- per month and deposit of Rs.70 lakhs was taken. The initial period of lease was one year. It was also mentioned in the agreement that if it extends further one year, lease rent could be Rs.30,000/- per month. However, contrary to this agreement, the assessee made a supplementary agreement on 05/04/1999, through which lease was extended for a further period of five years, a monthly rent was reduced to Rs.25,000/- per month and other conditions remain unchanged. We also found that same rent was continuing till date without any change after entering into supplementary agreement with the Director on 05/04/1999, even the rental agreement is not made and lease of the property was extended through oral agreement only. While deciding the appeal by the Hon’ble Supreme court in the case of Chennai properties & Investments ltd., it concluded that “merely an object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income form business and such a question would depend upon the circumstances of each case i.e., whether a particular business is letting or not”. Further it is pointed out by the hon’ble Supreme court that “each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. A commercial asset is only an asset Used in a business and nothing else, and business may be carried on which practically all things. In the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee.”

From the above conclusion of the Hon’ble Supreme court it is crystal clear that by just having a word in its object clause in itself not sufficient but it should be supported by the circumstances of each case. The facts and circumstances of the present case are completely different from the above mentioned cases on which the decisions were given by the Hon’ble Supreme court. In the present case, the assessee has invested almost all its resources like Share capital Reserves and Surplus and Unsecured loans to invest in -a single residential flat amounting to Rs. 3.53 crores(approx.) and no other resources were left with the company to do a business or invest in any other avenues. Only a miniscule amount of Rs. 10 (lacs approx..) was given by company as loans and advances, Rs. 10 lacs(approx.) invested in shares and an amount of Rs. 13 lacs(approx..) was left as bank balances. The company is not doing any sort of business from many years. The investment in flat is shown as Asset of the company and not as stock in trade. The said flat purchased by the assessee after investing all its funds has’ been given to its director on a fixed rent of Rs. 25,000/- p.m from the year 1998 to till date without citing any reason for not increasing the rent. We also found that even though assessee has offered the income under the head ^„business and profession^‟, however, no depreciation has been claimed as per I.T. provisions in respect of alleged business assets in the profit and loss account over these years. It was also mentioned in the lease agreement that the property was purchased for the purpose of trading and it is being temporarily leased because market conditions are not good, even though market conditions improved, the assessee neither sold the property nor even increased the rent. Thus, the conduct of the assessee over the years shows that the main purpose of acquisition was to provide the same to the Director at a very nominal rent. Considering totality of the facts and circumstances of the case, we do not find any merit for treating the rental income under the head business.

So far as assessee^‟s contention regarding consistency in treatment of income is concerned, we found that return filed by the assessee in earlier year was just processed u/s.143(3) only in one year when the claim was declined, the assessee filed appeal before the CIT(A) and the CIT(A) has accepted the same. Learned DR filed a letter to the effect that appeal was not filed by the Department because of the tax effect. Merely not filing appeal by the Department on the ground of low tax effect, cannot be treated at par to the fact that Department has accepted assessee^‟s claim of nature of income having been earned by it. In the case of Rayala Corporation Pvt. Ltd. the Hon^‟ble Suprement Court has just followed the decision in the case of and Chennai Properties & Investments Ltd., the facts of which we have already discussed hereinabove in detail and the same is not applicable to the facts of the present case as discussed above. We also found that AO has dealt with the issue threadbare and has dealt with each and every argument of the learned AR for not treating rental income as income from business.

In view of the above discussion and keeping in view the peculiar facts and circumstances of the instant case, we do not find any infirmity in the order of lower authorities for not treating rental income as income from business and profession.

Please become a Premium member. If you are already a Premium member, login here to access the full content.