Friday, June 15, 2012

Whether income from unsold flats of builder, given on rent, is to be treated as income from HP or Business

I-T- Whether income from unsold flats of builder, given on rent, is to be treated as income from house property or income from business - Income from house property, rules Calcutta HC

KOLKATA, NOV 11, 2011: THE issue before the High Court is - Whether income from unsold flats of a builder, given on rent, is to be treated as income from house property or income from business. Income. And, the HC rules in favour of the assessee.

Facts of the case

Assessee is a property developer and builder. Assessee constructed a building in which there were some unsold flats which were appearing as stock-in-trade under the current assets and were meant for sale. Costs of these unsold flats were Rs.26.09 lacs and the rental income of Rs.49.00 lacs from these flats were shown under the head `operating income'. Assessee had shown the rental income under the head "income from house property" and, thus, claimed statutory reduction of 1/5th on account of repair from annual letting out value. AO stated that in the wealth tax proceedings, the assessee had considered the unsold flats as stock in trade and not assets for the purpose of wealth tax. Since the assessee had been treating the unsold flats as stock-in-trade of its business, the income from such business assets in the nature of stock-in-trade should be treated as business income and not income from house property, as claimed by the assessee and thus the AO rejected the claim of statutory deduction on account of repair to the extent of 1/5th of the gross rental income.

CIT (A) allowed the appeal of the assessee observing that the appropriate head for the income derived by way of letting out the unsold flats should be income from house property and not business income. ITAT set aside the order passed by the CIT (A) and restored the order passed by the AO.

Assessee contended that following the decision of Apex Court in the case of East India Housing and Land Development Trust Ltd. vs. Commissioner of Income-Tax (2002-TIOL-420-SC-IT) that the distinct heads specified in the Act indicating the sources are mutually exclusive and the income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. The assessee had a business of developing house property and the unsold flats, income derived from such unsold flats by way of letting out so long a buyer was not procured amounts to income from house property by letting out and could not be a business income.

After hearing both the parties, the High Court held that,

++ what was to be seen was whether the asset was being exploited commercially by the letting out or whether it was being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend upon certain facts peculiar to each case. The commercial assets like machinery, plants, tools, industrial sheds or godowns having high business potentials stand on a different footing from assets like land and building;

++ the subject matter of exploitation of unsold flats still owned by the assessee, the CIT (Appeals) rightly concluded that the same should be treated as income from house property by way of letting it out. The unsold flats being house property, pure and simple and having fallen under the head, income from house property, as provided in section 22 of the Act, thus the rental income of such property should be assessed u/s 22 of the Act;

++ the income of an assessee is one and various sections of the Act direct the modes in which the income is to be taxed. None of those sections can be treated as general or specific for the purpose of any one particular source of income; they are all specific and deal with various heads in which an item of income, profits and means of an assessee falls. These sections are mutually exclusive and where an item of income falls specifically under one head, it has to be charged under that head and no other.

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