Income from temporary letting of Property

Citation of the Case:- G.R. Commercial Pvt. Ltd. vs. ITO (Individual) (ITAT Delhi), Income Tax (Appeal) Nos. ITA No.273/Del/2013 and ITA No.1134/Del/2013, AY 2005-06 and 2006-07, Date of Judgment: 30/04/2015

Brief of the Case

ITAT Delhi held In the case of G.R. Commercial Pvt. Ltd. vs. ITO that the Supreme Court in the case of Chennai Properties and Investments Ltd. vs CIT (2015) 373 ITR 673 (SC) after considering all previous judgments of Supreme Court, held that where the main object of the assessee company is to acquire and hold properties and to let out those properties, then the rental income had to be treated as income from business and not as income from house property. In the present case, the assessee company was formed with the main object of property business and earning income from property transactions in the form of commission and profits etc. and letting out the shop was not main objects of the assessee company. The shop was let out in the third year of business operations temporarily when the assessee company could not earn income from its main object in spite of their best efforts. Hence, income will be taxable under income from house property.

Facts of the Case

The assessee filed E-return on 30.11.2006 declaring an income of Rs.2,45,851/- for AY 2006-07. Subsequently a paper return was also filed on 8.12.2006 after setting off of brought forward business loss of Rs.7,67,190. The assessee has shown income from its property located at sector 18, Noida under the head of “profit and gains of business and profession” but the AO treated the same as “income from house

property”. The AO finalized the assessment by treating the receipts of rent as income from house property and after allowing 30% for repair and maintenance along with audit and filing fee, the assessment was framed at net taxable income of Rs. 13,67,361. The AO disallowed all other expenses.

Contention of the Assessee

The ld counsel of the assessee submitted that the AO treated rental receipts of the company as income from house property only on the sole basis of a letter dated 22.8.2008 which was not filed on the instructions of the assessee and the AO did not consider the treatment given by the assessee and accepted by the revenue in earlier assessment yeas and other relevant facts. He further contended that the CIT (A) rejected additional evidence of the assessee and upheld the conclusion of the AO only on the basis of wrong observations of the AO which were not sustainable in law and on the facts of the case.

The ld. counsel of the assessee placed rejoinder to the contentions of the ld. DR and submitted that when objects of the company include activities of letting properties and exploiting income there from, then the AO cannot treat the rental income as income from house property especially when the revenue had already accepted the same as business income during earlier AY from 2001-02 to 2004-05 and subsequent assessment years 2007-08 and 2011-12. Ld. counsel has placed reliance on the following judgments of Hon’ble Supreme Court and Hon’ble Gujarat High Court:- Commissioner of income Tax Vs. Calcutta National Bank [1959], 37 ITR 171 (SC) , Universal Plast Vs Commissioner of Income Tax [1999] 103 Taxman 493 (SC) and Commissioner of Income Tax vs. New India Ind. Ltd.[1993] 201 ITR 208 (Gujarat).

Contention of the Revenue

The ld counsel of the revenue submitted that the AO had no option but to accept the admission letter of the assessee which was filed on 22.8.2008 and the CIT(A) had no alternative except to go with the conclusion of the AO which was supported by the assessee’s letter accepting the stand and action of the AO. However, the ld. DR fairly accepted that the lower authorities did not consider the other relevant facts and circumstances while adjudicating this issue. The ld. DR placed reliance on the judgment of Hon’ble Supreme Court in the case of Rajasthan Warehousing Corp. (2000) 242 ITR 450 (SC), S.G. Mercantle Corpn. Ltd. vs CIT (1972) ITR 700 (SC), East India Housing & Land Dev. Trust vs CIT (1961) 42 ITR 49 (SC) and the order of the Special Bench of ITAT Delhi in Atma Ram Properties Pvt. Ltd. vs JCIT (2006) 102TTJ (SB) (Del) 345.

Held by ITAT

ITAT held that it is clear that the assessee company was formed with the main object of earning commission income from property transactions and it has earned commission income of Rs.66,710 in AY 2001-02, the first year of business. Subsequently, in AY 2002-03, there was neither any business income nor any rental income for the assessee company. Subsequently, in AY 2003-04 and 2004-05, the gross rental income was Rs.90,000 and Rs.9,50,600 respectively and there was no business income from commission. In the AY 2005-06, there was rental income of Rs.17,88,000 and there was no commission income during this period. In the year under consideration i.e. AY 2006-07, the assessee earned gross rental income of Rs.19,75,500 and there was no business income during this period. From above, it is clear that the assessee company earned commission income from property transaction of Rs.66,710 only in AY 2001-02 and in the subsequent AY from 2002-03 to 2006-07, there was no business income either from commission of property transaction or from any other business activity.

Further we are of the view that the principle of consistency cannot be applied to the assessment order which was passed u/s 143(1) of the Act because under this provision, the assessment is framed in a mechanical manner by accepting the return of income filed by the assessee without taking any view on a particular issue or treatment of income under a specific head. Hence, application of principle of consistency cannot be pressed in the present case.

Hon’ble Supreme Court in the case of Chennai Properties and Investments Ltd. vs CIT (2015) 373 ITR 673 (SC) wherein after considering all previous judgments of Hon’ble Supreme Court including dicta of the judgments of Hon’ble Apex Court in the case of East India Housing and Land Development Trust Ltd. vs CIT (1961) 42 ITR 49(SC), decision of Hon’ble constitutional bench to Supreme Court in the case of Sultan Brothers (P) Ltd. vs CIT (1964) 51 ITR 353 (SC) and also ratio of the decision of Hon’ble Supreme Court in the case of Karanpura Development Co. Ltd. vs CIT (1962) 44 ITR 362 (SC) held that letting of property, in fact was the main business of the assessee and, therefore, the assessee rationally disclosed the rental income under the head of income from business and the same cannot be treated as income from house property. In this case, Supreme Court has provided a clear proposition that where the main object of the assessee company is to acquire and hold properties and to let out those properties, then the rental income had to be treated as income from business and not as income from house property.

In the case in hand, the main object of the present assessee company was not to earn rental income from letting of property which was purchased in FY 2001-02 and let out in FY 2002- 03 temporarily till the company gets sufficient profits from its main business activity with cautious decision of Board of Directors of the company with the intention to reduce burden of expenditure and losses suffered by the assessee company right from its incorporation during preceding three years.

Further in the judgment of Sultan Brothers (1964) 51 ITR 353 (SC), the Hon’ble apex court categorically held that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at a conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case.

The present case clearly falls on all four corners within the dicta of the constitutional bench of Hon’ble apex court in the case of Sultan Brothers Ltd. vs CIT, as the assessee company let out the shop situated at Sector 18, Noida not as per main objects of the assessee company and the same was let out in the third year of business operations temporarily when the assessee company could not earn income from its main object in spite of their best efforts. At this juncture, the ratio of the decision of Hon’ble Special Bench, ITAT, Delhi in the case of Atma Ram Properties (P) Ltd. (2006) 102TTJ (SB) (Del) 345 also supports the case of the revenue wherein it was held that rental income derived by assessee company of letting out property simplicitor was chargeable to tax under the head income from house property and not as business income irrespective of the fact that the assessee company was doing business of acquiring, developing and selling properties because the rental income accrued to the assessee company only because of ownership of the property and not by exploitation of rented property by way of complex commercial activity. We uphold the view taken by AO and upheld by CIT (A).