Bombay HC Holds 'Income From Leasing Of Property' As 'Income From Business', Says Deciding Factor Is Not Ownership But Nature Of Activity

The High Held so after finding that income of assessee is derived from letting out of the properties, which in fact, is the principal business of the assessee as seen from its main objectives contained in its memorandum of association.

The Division Bench of Justice G. S. Kulkarni and Justice Firdosh P. Pooniwalla observed that “what must be borne in mind for the Court is to consider the main objective of the assessee as contained in the Memorandum of Association, and 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”. (Para 24)

Facts of the case

The assessee/ appellant, since inception is engaged in the business of purchasing and renting properties, as also its entire income is based on the income received from leasing its properties. Since 1989 till date, the assessee has leased about 85 properties, and its business model is stated to be such, that it obtains loan from financial institutions for the purchase of properties, purchases properties and then provides the same on lease.

For the first time in A.Y 1989-90, the assessee filed its return under the head “income from house property”. Thus, the AO show caused as to why the annual letting value of the leased premises should not be the higher figure. Later, the AO calculated the annual value of property based on gross rent instead of actual rent issued by assessee as shown in its returns.

When the appeal challenging the action of AO was pending consideration before the CIT(A), the assessee filed its revised returns computing the lease / rental income under the head “income from profits and gains of business”. The CIT(A) however passed an order u/s 250, holding that additional grounds cannot be raised by the assessee at the appeal stage to raise a contention that the income of the assessee was required to be taxed under the head “profits or gains from business or profession”.

Observation of the High Court

The Bench observed that the AO, in assessing the income of assessee, is required to be conscious about the nature of the assessee's business and apply his mind to the source of income, for the income being taxed as the law mandates.

In the present case, the Bench found that the only source of income of assessee was the income derived from rent or amounts as received by the assessee from letting out its properties.

The record indicates that the AO has not disputed the nature of the business of assessee and more importantly, the income offered to tax in respect of all the relevant assessment years, being derived from letting out various properties, and which is the business activity of assessee to earn such income, as seen from the main objectives, added the Bench.

The Bench therefore concluded that there was an apparent error of law in the findings of the Tribunal that the assessee's income is required to be treated as “income from house property” and not the “income from profits and gains of business”.

“The AO for almost 11 A.Ys has consistently held that such income of assessee is required to be treated as “income from business” and not the “income from house property”, added the Bench.

Hence, pointing upon the consistent approach of the department and the principles of consistency, the High Court concluded that rent income derived by assessee from lease of its properties was assessable as income from profits and gains of business.

Thus, the High Court allowed Assessee's appeal.

Counsel for Petitioner/ Assessee: Rohaan Cama, Pheroze Mehta, Abinash Pradhan, Garima Agrawal and Yash Dedhia

Counsel for Respondent/ Revenue: Suresh Kumar

Case Title: National Leasing Limited versus The Assistant Commissioner of Income

Case Number: Income Tax Appeal No. 685 OF 2007

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