In a recent ruling, the division bench of the ITAT, Hyderabad held that, if the main object of leasing out a property is to make profit, the same is chargeable to income tax under the head “Business income” not under the head “income from house property.”The bench also noted that the activities of the assessee will not lose its ‘business nature’ due to mere withdrawal of the benefit of deduction u/s 80IA of the Income Tax Act.
In the instant case, the assessee, M/s Vijay Infotech Ventures, Secundarabad owns a software Park at Kondapur, Hyderabad. The assessee filed income tax returns by showing the income derived from such Software park under the head “Profits & Gains of Business and Profession”. The AO rejected the return by finding that the said income is “Income from House Property.” Consequently, the claim for depreciation and business expenditure were disallowed.
The assessee contended that they are maintaining and operating an industrial park which had been approved by the competent authority for purposes of deduction u/s 80-IA of the Act. The approval to the park had been accorded to the developer, namely, Meenakshi Infrastructure Pvt. Ltd. from whom the assessee had acquired it and the transfer had also been approved by the competent authority.It was also noted that on these facts, the ITAT had, in the earlier years, following the decision of the Apex Court in Chennai Properties and Investments Ltd v. CIT, held that the said income comes under the head “Business income.”
On first appeal, the CIT(A) observed that the assessee was getting benefit u/s 80IA in the earlier years and subsequent to rescindment of approval to claim deduction u/s 80IA, he considered that the assessee looses to be eligible undertaking. The income was treated as profit from business because the undertaking was approved by competent authority for the purpose of deduction u/s 80IA. Subsequent to rescindment of approval, the undertaking does not hold to be carrying on eligible business.
The bench noted that “The assessee was carrying the same activities of leasing the building for software technology and earning maintenance charges before rescindment of approval for deduction u/s 80IA and later years. There is no change in the activities during the year of deduction u/s 80IA and later years. Merely, because the deduction u/s 80IA withdrawn, whether the activities can be regarded as different?”
The bench further noted that, the ratio of the Apex Court decisions in Chennai properties Investment Ltd and Rayala Corporation Pvt. Ltd are applicable to the instant case also though the assessee is a Firm.
Quashing the order, the bench said, “It is evident from the financial statement of the assessee that the main income is from leasing out of the property and related income from maintenance of the property. In case, the main object of the assessee is to lease out the property, then, it can be regarded as the business income. This is inferred from the judgment of the Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd. (supra) and Rayala Corporation Pvt. Ltd. (supra). The above two cases are relating to company, whereas the case in question, relates to partnership firm. The objects of creating the company and partnership firm are similar. Hence, the conclusion can be drawn that both are created to carry on the business of leasing out the properties to make profit. In our considered view, the object of running business to make profit by leasing out the property will be charged to tax only under the head ‘income from business and not income from house property. The assessee has established the business only to earn income from leasing out the property, hence, assessee is eligible to treat the rental income as business income and eligible to claim the related expenditure as business expenditure.”
Read the full text of the order below.
