Basics IT Solutions Pvt Ltd vs. ACIT Circle-4(1): Rental Income Appeal Allowed

Basics IT Solutions Pvt Ltd vs. ACIT Circle-4(1): Rental Income Appeal Allowed

Case Number: ITA 5764/DEL/2019

Appellant: Basics IT Solutions Pvt Ltd, New Delhi

Respondent: ACIT Circle-4(1), New Delhi

Assessment Year: 2015-16

Case Filed On: 2019-07-02

Order Type: Final Tribunal Order

Date of Order: 2019-09-13

Pronounced On: 2019-09-13

Conclusion: The appeal filed by Basics IT Solutions Pvt Ltd was allowed by ITAT Delhi, challenging the treatment of rental income as income from house property instead of business income.

Background

The Income Tax Appellate Tribunal (ITAT) Delhi Bench ‘A’, comprising Accountant Member Sh. N. K. Billaiya and Judicial Member Ms. Suchitra Kamble, heard the case on 9th September 2019 and pronounced the order on 13th September 2019.

The appellant, Basics IT Solutions Pvt Ltd, located at G-2, Nizamuddin West, New Delhi-110013, filed an appeal against the Assistant Commissioner of Income Tax (ACIT), Circle-4(1), New Delhi, for the assessment year 2015-16. The appellant’s PAN is AACCB5118K.

Contentions

The sole issue in the present case was whether the income from renting out property should be assessed under the head ‘Income from Business’ or ‘Income from House Property’.

Briefly, the facts of the case are that the assessee company was formed and registered with ROC, NCT of Delhi and Haryana on 25th November 2004 with one of the main objects to carry on all kinds of business, buy, sell, let out, hire, and repair in relation to any immovable property and its maintenance services. The appellant leased out several premises during the year, and the income from these leases was shown in its profit and loss account.

The Assessing Officer was of the opinion that the income of the assessee from rent should be treated as income from house property. After discussing certain judicial decisions, the Assessing Officer completed the assessment by treating the rent of Rs.9,102,000/- as income from house property and, after allowing standard deduction, made an addition of Rs.63,71,400/-.

The assessee carried the matter before the CIT(A), who dismissed the appeal by observing that the inclusion of renting in the memorandum and articles of association was ambiguous and that the appellant had not done any business in systems or information technology.

Arguments

Before the ITAT, the Ld. Counsel for the assessee drew attention to the memorandum of association of the company and pointed out that the main object read with other objects clearly showed that the business of the assessee was to let out and lease the property. Strong reliance was placed on the decision of the Hon’ble Supreme Court in the case of Chennai Properties and Investments Ltd. 373 ITR 673.

The Departmental Representative strongly supported the findings of the CIT(A).

Decision

The Tribunal considered the orders of the authorities below and found merit in the appellant’s arguments. The Tribunal observed that the main objects and other objects of the company indicated that the business of the assessee included letting out and leasing the property. The Tribunal found no merit in the CIT(A)’s observations and noted that the Assessing Officer had examined the memorandum of association of the assessee company.

The Tribunal relied on the decision of the Hon’ble Supreme Court in the case of Chennai Properties and Investments Ltd., where it was held that the letting of properties constituted the business of the assessee and, therefore, the income should be treated as income from business and not as income from house property.

The relevant findings of the Hon’ble Supreme Court read as follows:

“Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P.) Ltd., we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in ‘Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC). That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mining leases was shown as business income. Department took the position that it is to be treated as income from the house property. It would be thus, clear that in similar circumstances, identical issue arose before the Court. This Court first discussed the scheme of the Income Tax Act and particularly six heads under which income can be categorised / classified. It was pointed out that before income, profits or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under, another head. Thereafter, the Court pointed out that the deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel, House of Lords in England and US Courts were taken note of. The position in law, ultimately, is summed up in the following words: “As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.” After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd’s case (supra) squarely applies to the facts of the present case. No doubt in Sultan Brothers (P.) Ltd.’s case (supra), Constitution Bench judgment of this Court has clarified that merely an entry in the 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 from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: “We think 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. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature.” We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is for this reason, we have, at the beginning of this judgment, stated 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. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as ‘income from the house property. We, accordingly, allow this appeal and set aside the judgment of the High Court and restore that of the Income Tax Appellate Tribunal. No orders as to costs.”

Finding parity in the facts of the case in hand with the facts of the case decided by the Hon’ble Supreme Court and respectfully following the same, we direct the Assessing Officer to treat the rental income as income from business. However, income from interest on income tax refund is excluded from the business income. With these observations, the appeal filed by the assessee is allowed.

In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 13.09.2019.

Sd/- Sd/-
(SUCHITRA KAMBLE) (N. K. BILLAIYA)
JUDICIAL MEMBER ACCOUNTANT MEMBER

Date:-13.09.2019

Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI

Basics IT Solutions Pvt Ltd vs. ACIT Circle-4(1): Rental Income Appeal Allowed