Intention of Assessee while Leasing Out of Property relevant to decide Tax Liability: ITAT [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the intention of the assessee during letting out of the property is significant to determine whether such income is taxable as rental income or business income under the provisions of the Income Tax Act, 1961.

The assessee, a Limited Liability Partnership Firm, filed its income tax return for the relevant assessment year by declaring a sum of amount as rental income. However, the Assessing Officer held that the provisions of the partnership deed clearly mention that the business objective of the firm is to rent or lease outbuildings, and therefore, such income is taxable as business income.

The assessee approached the ITAT for relief as the first appellate authority sustained the assessment order.

While deleting the orders of the lower authorities, the Tribunal noted that there is no other basis of the action of the AO that the rental income is assessable as business income apart from some clauses of the partnership Deed.

“In partnership deed of a firm and Memorandum of Association of a company, objects are generally very wide so that in course of business, the said firm or company can choose from those objects to conduct its activities and such object clause alone cannot be a basis to determine the head of income under which the income is to be assessed. In the facts of the present case, the judgment of Hon’ble Apex Court rendered in the case of Raj Dadarkar& Associates vs. ACIT (Supra) is required to be followed because the facts are similar and in this case, Hon’ble Apex Court has duly considered its earlier judgment rendered in the case of Chennai Properties and Investment Limited vs. CIT (Supra) followed by the AO in the present case and also because in this case, Hon’ble Apex Court referred to the judgment of the Constitution Bench of Hon’ble Apex Court rendered in the case of Sultan Bros. Pvt. Ltd. (Supra) in which, it was held that 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 exploitation of his property by an owner,” the Tribunal said.