Case Note & Summary
The case involves an appeal by the Commissioner of Income Tax against the order of the Income Tax Appellate Tribunal (ITAT) which held that the rent and compensation of Rs. 60,27,027/- received by the respondent-assessee, M/s. Pelican Investments Pvt. Ltd., for the assessment year 2004-05 should be assessed under the head 'business income' and not 'income from house property'. The assessee, an investment company, owned a property which it treated as stock-in-trade. It leased out the property and received rent and compensation. The Assessing Officer, applying Section 27(iiib) read with Section 269UA(f) of the Income Tax Act, 1961, treated the income as 'income from house property' on the ground that the lease was for more than 12 years, thereby deeming the lessee as the owner. The Commissioner of Income Tax (Appeals) upheld this view. However, the ITAT reversed the decision, following its own earlier order for assessment year 2003-04, and held that the income was business income. The Revenue appealed to the High Court on two substantial questions of law: (A) whether the Tribunal was right in holding that the rent and compensation is chargeable under the head 'business income' and not 'income from house property', and (B) whether the Tribunal was justified in following its earlier order ignoring Section 27(iiib) read with Section 269UA(f). The High Court dismissed the appeal, affirming the Tribunal's decision. The court held that the property was held by the assessee as stock-in-trade, and therefore, the income from its exploitation, including leasing, is business income. The deeming provision under Section 27(iiib) does not apply to convert such income into house property income. The court noted that the Tribunal had consistently held this view for earlier years and no interference was warranted. The appeal was dismissed with no order as to costs.
Headnote
A) Income Tax - Classification of Income - Business Income vs. Income from House Property - Sections 22, 28, 27(iiib), 269UA(f) of the Income Tax Act, 1961 - The assessee, an investment company, leased out its property which was held as stock-in-trade. The Assessing Officer assessed the rental income under 'Income from house property', but the Tribunal held it as 'business income'. The High Court upheld the Tribunal's decision, holding that when property is held as stock-in-trade, the income from its exploitation (including leasing) is business income, and the deeming provision under Section 27(iiib) does not apply to convert it into house property income. (Paras 1-8) B) Income Tax - Deeming Provision - Section 27(iiib) - Applicability to Stock-in-Trade - Section 27(iiib) of the Income Tax Act, 1961 deems a lessee as owner if the lease is for more than 12 years, but this provision does not apply when the property is held as stock-in-trade by the lessor. The court held that the deeming fiction cannot override the fundamental principle that income from stock-in-trade is business income. (Paras 5-8)
Issue of Consideration
Whether rent and compensation received by the assessee from leasing out its property is chargeable under the head 'business income' or 'income from house property' under the Income Tax Act, 1961.
Final Decision
The appeal is dismissed. The order of the Income Tax Appellate Tribunal is upheld. No order as to costs.
Law Points
- Rental income from property held as stock-in-trade is business income
- Section 27(iiib) deeming provision does not apply when property is stock-in-trade
- Classification of income depends on nature of holding and intention of assessee
