Mere fact that property let out is commercial complex, is not sufficient to treat ‘rental income’ therefrom as ‘business income


Mere fact that property let out is commercial complex, is not sufficient to treat ‘rental income’ therefrom as ‘business income.

DCIT Vs Cache Properties Pvt Ltd
ITA Nos. 64 & 65/H/2020


Short Overview of the case:
The assessee company, engaged in the business of infrastructure development and rental services, e-filed its return declaring total income at normal provisions of Rs. 4,92,10,595/- and income under book profits of Rs. 7,62,08,202/- u/s 115JB, which was processed u/s 143(1).
Subsequently, the AO noticed that the income received by assessee on leasing properties was shown as operation income in P&L Account, and as income from house property in its return and also claimed deduction u/s 24(a) and, therefore, issued notice u/s 148. After issuing statutory notices, the AO completed the assessment u/s 143(3) rws 147 assessing the total income at Rs. 8,39,01,215/- by treating the income shown by the assessee as income from business as against the income shown by the assessee under the head ‘income from house property.
On appeal, the CIT(A) confirmed the action of the AO with regard to reopening of assessment.
As regards the treating the income as business income by the AO, the CIT(A) directed the AO to treat the income from letting out of flats as income from house property.
On appeal, the issue before ITAT & it’s observations were as under:
Whether mere fact that property let out is commercial complex, is not sufficient to treat ‘rental income’ therefrom as ‘business income’.
ITAT held it as yes & in favour of assessee.
the issue in dispute is squarely covered by the decision of the coordinate bench of this Tribunal in assessee’s own case, wherein, the coordinate bench has held that: “….the fact that the property let out is a commercial complex is not sufficient to treat the rental income therefrom as ‘Business Income’.
The tests to be applied are;
1) the tenure of the lease,
2) the objects of the company;
3) the intention of the company; and.
4) the services provided or activities carried on by the assessee after letting out of the property.
Though one of the objects of the company is to let out the properties on lease / rent, it is not clear whether the intention is to earn rental income only from the properties constructed / developed by it.
On perusal of the returns of income for earlier assessment years, we find that the assessee had let out properties at Hyderabad, Mumbai & Delhi, but the income from said properties is not offered during the relevant assessment year.
So, whether such properties were let out since they were unsold during the relevant period and whether they were sold subsequently to which, there is no rental income during the relevant assessment year is not clear from the details.
As held by the Bombay High Court in the case of Gundecha Builders, rental income from unsold flats is to be assessed on ‘income from house property’.
Except for creating the infrastructure as per the requirement of the lessee, the assessee is not providing any other service during the year as is evident from the profit and loss account of the assessee for the relevant assessment year.
The only expenses claimed by the assessee are interest, salaries & administrative expenses.
Therefore, it is clear that the assessee’s intention is to enjoy the rental income on a long term basis by leasing out the premises and not to exploit the same commercially on short term basis….”
As the issue under consideration is materially identical to that of the decision of the ITAT in assessee’s own case, respectfully following the same, the order of CIT(A) in directing the AO to treat rental income of the assessee as income from house property, is upheld.