I am a builder and I let out the flats I could not sell, which sit in my books as closing stock. Is that rent business income, and can I claim the section 24 deductions including interest on the money that built them?
It is house property income, and yes. The Bombay High Court dismissed the Revenue's appeals and upheld the finding that rent from unsold units of a commercial complex was assessable under the head income from house property with the section 24(a) deduction. It held that the character and nature of the income is decisive, not the treatment the assessee gives it in its books, so a consolidated profit and loss account did not convert the receipt into business income. It also upheld the provision of Rs 45 lakhs for incomplete work under the project completion method, and the deduction under section 24(b) of interest paid on partners' capital, where that capital had gone into constructing the premises that were let.
Decided by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; S.C. Dharmadhikari J and A.K. Menon J) on 2015-04-09, reported as Income Tax Appeal No. 375 of 2013 with Income Tax Appeals Nos. 5313, 5592, 6230, 6232 and 6234 of 2010, 1498 of 2011, 1504 of 2012, and 418 and 675 of 2013, Bombay High Court. It bears on section 22, section 24(b), section 24(a), section 28, section 23 of the Income Tax Act 1961, in House Property and Deductions & Disallowances matters.
Builders letting unsold stock face this argument every year, and the department's case is always the one made here: the firm was formed to construct and sell, so leasing the unsold units exploits a business asset. The Court's answer is that the tests the Supreme Court has evolved for letting of business assets are not general rules but factual parameters, that the fundamental question is whether the premises are a commercial asset or house property, and that the entries in the books do not decide it. It also confirms that where the head is house property, the section 24 deductions follow as a matter of course, including interest under section 24(b). The section 24(b) point is the most contested: the Commissioner had refused interest on partners' capital for want of a borrower and lender relationship, relying on Manse Ram & Sons and Four Fields (P) Ltd, and the Court declined to disturb the contrary view because the interest related wholly to the let premises, whose construction came from the partners' contributions.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee is a partnership firm registered under the Indian Partnership Act, 1932, engaged in real estate and having constructed a commercial complex, May Fair Tower. The facts were taken from Income Tax Appeal No. 5313 of 2010. For assessment year 2000-01 it returned income of Rs 5,51,81,680 on 25 October 2000, including rental income of Rs 45,57,272, and claimed a deduction of Rs 11,39,318 under section 24(a). The Assessing Officer, by order dated 29 March 2006, treated the rent as business income, on the ground that the receipts arose from the exploitation of commercial assets, that the firm had been formed with the specific object of constructing buildings for sale and not for letting, and that leasing the unsold units was an integral part of the business. He noted that the firm maintained a consolidated profit and loss account combining trading and rental receipts and had extracted only the rental receipts and property taxes to show them under a separate head, while also claiming legal, professional and consultancy charges of Rs 6,52,000 relating to the rented property in computing the business loss, which he treated as a double deduction. He had also disallowed Rs 45 lakhs claimed as a provision for incomplete work, the assessee having shown sales of 44,960 square feet with 76,106 square feet as closing stock on which rent was earned. The Commissioner (Appeals), by order dated 19 September 2006, allowed the grounds on the head of income and on the Rs 45 lakhs while confirming a disallowance of Rs 1,80,000 as compensation. The Tribunal dismissed the Revenue's appeal on 11 December 2008 in ITA No. 6449/Mum/2006. In the later years, Income Tax Appeals Nos. 6234 of 2010, 1504 of 2012 and 418 of 2013, a further question arose on the deduction under section 24(b) of interest on borrowed capital, being interest paid to the partners on their capital, first claimed in assessment year 2006-07. There the Commissioner had allowed the claim for 2006-07, upheld by the Tribunal on 20 April 2010 in ITA No. 3216/Mum/2009, but by order dated 30 July 2010 for a later year had refused it for want of a borrower and lender relationship, and the Tribunal reversed that, following its earlier order.
Each of the Revenue's appeals failed and all were dismissed, with no order as to costs. On the head of income, the Court held that no error of law or perversity attached to the Tribunal's reliance on East India Housing and Land Development Trust Ltd, and that a different view from the Tribunal's was not possible on the contentions raised. On the provision for incomplete work, it held that no substantial question of law arose from the Assessing Officer's view having been interfered with, the Commissioner and the Tribunal having found that the assessee followed the project completion method, that the same cost of incomplete work had been taken into closing stock, and that the officer had not doubted the claim but had merely objected to the year in which the provision was made. On section 24(b), the Court held there was no justification for taking a view contrary to that taken for assessment year 2006-07 on identical facts, and that where the entire interest paid on the partners' capital related to the premises let out by the assessee, and the construction of those premises came from the partners' contributions, the interest was due and payable to them not only on the general principle of partnership and under the Indian Partnership Act, 1932, but on the broad consideration under section 24(b). Since the income was income from house property and the deduction was one that could be granted from it, the Revenue could not be permitted to raise the ground, and the finding being consistent with an undisputed factual position, it could not be a substantial question of law either.
On the head of income the Court began with the Revenue's authorities. It set out the propositions summarised from the Supreme Court on letting of business assets: that no precise test can be laid down to decide whether income from leasing or letting assets, by whatever name, falls under profits and gains of business or profession; that it is a mixed question of law and fact to be determined from the point of view of a businessman in that business on the facts of each case, including the true interpretation of the agreement under which the assets are let; that where all the assets of the business are let out, the period of letting is relevant to whether the intention is to go out of business or to restart it; and that if only a few business assets are let temporarily while other business activities continue, that is exploitation of business assets, but if the business never started or has ceased with no intention of resumption, the assets cease to be business assets and the transaction is only exploitation of property by its owner. The Court held that these are not general rules but tests evolved to be applied to the facts of each case, and that the decision relied on, which concerned an assessee who had set up factories, suffered losses and inducted a licensee to continue the business, did not carry the Revenue's case further. From that it drew the proposition that decides this class of case: the character and nature of the income is determinative and decisive, and it is not the treatment the assessee gives it in its books of account that governs, so neither the consolidated profit and loss account nor the assessee's conduct could settle the question. It then considered the Madras decision the Revenue relied on, where a dealer in vehicles let the second floor of its own commercial building and the rent was held to be business income, and noted that even there the fundamental question was whether the premises were a commercial asset or house property, which is a question of fact; and it distinguished Vikram Cotton Mills Ltd, where the letting arose from a court-approved scheme over mortgaged business assets, and Maheshwari Devi Jute Mills Ltd. On section 24(b) the Court set the provision out, noted the proviso limits which were not pressed, and traced the history of the claim. The Commissioner's refusal in the later year had rested on the proposition that there must be a real transaction of borrowing and lending before interest can be deducted, that the partners' capital had been subscribed for the business and not for acquiring or constructing property to let, and that while a legal fiction allows interest on partners' capital to be deducted from business income no such fiction exists under the head income from house property, relying on Manse Ram & Sons v CIT and CIT v Four Fields (P) Ltd. The Tribunal had taken the opposite view, following its own order for assessment year 2006-07, on the footing that the entire interest on partners' capital related to the premises let out. The Court declined to disturb that, holding that where two conflicting views of the Commissioner were before the Tribunal and it concurred with one, and the facts were identical to the earlier year, a contrary view was impossible and no wider controversy needed to be determined.
the character and nature of the income is determinative and decisive and it is not the treatment that the assessee gives it in its books of account which would enable us to come to any conclusion
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Handle my notice → Ask a CA on WhatsAppIt is house property income, and yes. The Bombay High Court dismissed the Revenue's appeals and upheld the finding that rent from unsold units of a commercial complex was assessable under the head income from house property with the section 24(a) deduction. It held that the character and nature of the income is decisive, not the treatment the assessee gives it in its books, so a consolidated profit and loss account did not convert the receipt into business income. It also upheld the provision of Rs 45 lakhs for incomplete work under the project completion method, and the deduction under section 24(b) of interest paid on partners' capital, where that capital had gone into constructing the premises that were let. This was decided by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; S.C. Dharmadhikari J and A.K. Menon J) and bears on section 22, section 24(b), section 24(a), section 28, section 23 of the Income Tax Act 1961. It is reported as Income Tax Appeal No. 375 of 2013 with Income Tax Appeals Nos. 5313, 5592, 6230, 6232 and 6234 of 2010, 1498 of 2011, 1504 of 2012, and 418 and 675 of 2013, Bombay High Court. Builders letting unsold stock face this argument every year, and the department's case is always the one made here: the firm was formed to construct and sell, so leasing the unsold units exploits a business asset. The Court's answer is that the tests the Supreme Court has evolved for letting of business assets are not general rules but factual parameters, that the fundamental question is whether the premises are a commercial asset or house property, and that the entries in the books do not decide it. It also confirms that where the head is house property, the section 24 deductions follow as a matter of course, including interest under section 24(b). The section 24(b) point is the most contested: the Commissioner had refused interest on partners' capital for want of a borrower and lender relationship, relying on Manse Ram & Sons and Four Fields (P) Ltd, and the Court declined to disturb the contrary view because the interest related wholly to the let premises, whose construction came from the partners' contributions. If it applies to you, the first step is this: Do not let the accounting decide the head: the Court held the character of the income is determinative, so a consolidated profit and loss account is not fatal, but be ready to show how the rental receipts and property taxes were extracted from it.
The assessee is a partnership firm registered under the Indian Partnership Act, 1932, engaged in real estate and having constructed a commercial complex, May Fair Tower. The facts were taken from Income Tax Appeal No. 5313 of 2010. For assessment year 2000-01 it returned income of Rs 5,51,81,680 on 25 October 2000, including rental income of Rs 45,57,272, and claimed a deduction of Rs 11,39,318 under section 24(a). The Assessing Officer, by order dated 29 March 2006, treated the rent as business income, on the ground that the receipts arose from the exploitation of commercial assets, that the firm had been formed with the specific object of constructing buildings for sale and not for letting, and that leasing the unsold units was an integral part of the business. He noted that the firm maintained a consolidated profit and loss account combining trading and rental receipts and had extracted only the rental receipts and property taxes to show them under a separate head, while also claiming legal, professional and consultancy charges of Rs 6,52,000 relating to the rented property in computing the business loss, which he treated as a double deduction. He had also disallowed Rs 45 lakhs claimed as a provision for incomplete work, the assessee having shown sales of 44,960 square feet with 76,106 square feet as closing stock on which rent was earned. The Commissioner (Appeals), by order dated 19 September 2006, allowed the grounds on the head of income and on the Rs 45 lakhs while confirming a disallowance of Rs 1,80,000 as compensation. The Tribunal dismissed the Revenue's appeal on 11 December 2008 in ITA No. 6449/Mum/2006. In the later years, Income Tax Appeals Nos. 6234 of 2010, 1504 of 2012 and 418 of 2013, a further question arose on the deduction under section 24(b) of interest on borrowed capital, being interest paid to the partners on their capital, first claimed in assessment year 2006-07. There the Commissioner had allowed the claim for 2006-07, upheld by the Tribunal on 20 April 2010 in ITA No. 3216/Mum/2009, but by order dated 30 July 2010 for a later year had refused it for want of a borrower and lender relationship, and the Tribunal reversed that, following its earlier order. The matter was decided on 2015-04-09 by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; S.C. Dharmadhikari J and A.K. Menon J). On those facts the High Court held as follows. Each of the Revenue's appeals failed and all were dismissed, with no order as to costs. On the head of income, the Court held that no error of law or perversity attached to the Tribunal's reliance on East India Housing and Land Development Trust Ltd, and that a different view from the Tribunal's was not possible on the contentions raised. On the provision for incomplete work, it held that no substantial question of law arose from the Assessing Officer's view having been interfered with, the Commissioner and the Tribunal having found that the assessee followed the project completion method, that the same cost of incomplete work had been taken into closing stock, and that the officer had not doubted the claim but had merely objected to the year in which the provision was made. On section 24(b), the Court held there was no justification for taking a view contrary to that taken for assessment year 2006-07 on identical facts, and that where the entire interest paid on the partners' capital related to the premises let out by the assessee, and the construction of those premises came from the partners' contributions, the interest was due and payable to them not only on the general principle of partnership and under the Indian Partnership Act, 1932, but on the broad consideration under section 24(b). Since the income was income from house property and the deduction was one that could be granted from it, the Revenue could not be permitted to raise the ground, and the finding being consistent with an undisputed factual position, it could not be a substantial question of law either.
On the head of income the Court began with the Revenue's authorities. It set out the propositions summarised from the Supreme Court on letting of business assets: that no precise test can be laid down to decide whether income from leasing or letting assets, by whatever name, falls under profits and gains of business or profession; that it is a mixed question of law and fact to be determined from the point of view of a businessman in that business on the facts of each case, including the true interpretation of the agreement under which the assets are let; that where all the assets of the business are let out, the period of letting is relevant to whether the intention is to go out of business or to restart it; and that if only a few business assets are let temporarily while other business activities continue, that is exploitation of business assets, but if the business never started or has ceased with no intention of resumption, the assets cease to be business assets and the transaction is only exploitation of property by its owner. The Court held that these are not general rules but tests evolved to be applied to the facts of each case, and that the decision relied on, which concerned an assessee who had set up factories, suffered losses and inducted a licensee to continue the business, did not carry the Revenue's case further. From that it drew the proposition that decides this class of case: the character and nature of the income is determinative and decisive, and it is not the treatment the assessee gives it in its books of account that governs, so neither the consolidated profit and loss account nor the assessee's conduct could settle the question. It then considered the Madras decision the Revenue relied on, where a dealer in vehicles let the second floor of its own commercial building and the rent was held to be business income, and noted that even there the fundamental question was whether the premises were a commercial asset or house property, which is a question of fact; and it distinguished Vikram Cotton Mills Ltd, where the letting arose from a court-approved scheme over mortgaged business assets, and Maheshwari Devi Jute Mills Ltd. On section 24(b) the Court set the provision out, noted the proviso limits which were not pressed, and traced the history of the claim. The Commissioner's refusal in the later year had rested on the proposition that there must be a real transaction of borrowing and lending before interest can be deducted, that the partners' capital had been subscribed for the business and not for acquiring or constructing property to let, and that while a legal fiction allows interest on partners' capital to be deducted from business income no such fiction exists under the head income from house property, relying on Manse Ram & Sons v CIT and CIT v Four Fields (P) Ltd. The Tribunal had taken the opposite view, following its own order for assessment year 2006-07, on the footing that the entire interest on partners' capital related to the premises let out. The Court declined to disturb that, holding that where two conflicting views of the Commissioner were before the Tribunal and it concurred with one, and the facts were identical to the earlier year, a contrary view was impossible and no wider controversy needed to be determined. In the words reproduced by the source cited on this page: "the character and nature of the income is determinative and decisive and it is not the treatment that the assessee gives it in its books of account which would enable us to come to any conclusion"
It was decided by the High Court on 2015-04-09 and is reported as Income Tax Appeal No. 375 of 2013 with Income Tax Appeals Nos. 5313, 5592, 6230, 6232 and 6234 of 2010, 1498 of 2011, 1504 of 2012, and 418 and 675 of 2013, Bombay High Court. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 22, section 24(b), section 24(a), section 28, section 23, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Each of the Revenue's appeals failed and all were dismissed, with no order as to costs. On the head of income, the Court held that no error of law or perversity attached to the Tribunal's reliance on East India Housing and Land Development Trust Ltd, and that a different view from the Tribunal's was not possible on the contentions raised. On the provision for incomplete work, it held that no substantial question of law arose from the Assessing Officer's view having been interfered with, the Commissioner and the Tribunal having found that the assessee followed the project completion method, that the same cost of incomplete work had been taken into closing stock, and that the officer had not doubted the claim but had merely objected to the year in which the provision was made. On section 24(b), the Court held there was no justification for taking a view contrary to that taken for assessment year 2006-07 on identical facts, and that where the entire interest paid on the partners' capital related to the premises let out by the assessee, and the construction of those premises came from the partners' contributions, the interest was due and payable to them not only on the general principle of partnership and under the Indian Partnership Act, 1932, but on the broad consideration under section 24(b). Since the income was income from house property and the deduction was one that could be granted from it, the Revenue could not be permitted to raise the ground, and the finding being consistent with an undisputed factual position, it could not be a substantial question of law either. It arises in House Property and Deductions & Disallowances matters, on section 22, section 24(b), section 24(a), section 28, section 23 of the Income Tax Act 1961, and was decided by High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; S.C. Dharmadhikari J and A.K. Menon J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Watch for double deduction, which was what drew the officer's criticism here: once income is computed under section 24, do not also claim individual items of expenditure relating to the let property in the business computation. Where interest on partners' capital funded the construction, trace the contributions to the property that is let, because that nexus is what carried the section 24(b) claim past the borrower-and-lender objection. Under the project completion method, keep the provision for incomplete work and the closing stock consistent; the claim survived because the same cost was carried into closing stock and the officer never doubted the underlying figures.
Still good law. A Division Bench judgment of 9 April 2015 disposing of ten connected appeals, applying East India Housing and Land Development Trust Ltd v CIT and distinguishing the Supreme Court's decisions on letting of business assets. The source page records no case citing it. Whether the Revenue has taken it to the Supreme Court was not checked in this session. It construes section 24 as it stood for the years in question; the treatment of rent from unsold stock-in-trade has since been affected by the deemed-rent provisions for property held as stock in trade, which this judgment does not consider. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested page is clipped in two places, about 19,000 characters missing from the middle and a further break in the Court's discussion, so the whole of the Revenue's oral submissions on the additional questions, the Court's treatment of whether those questions could be raised for the first time, and its own analysis on the head of income between paragraphs 12 and 26 are not in the text read. What is set out above is drawn from the parts that survive, which include the framing of the questions, the summary of the Supreme Court's tests, the Court's application of them, the reasoning on the Rs 45 lakh provision and on section 24(b), and the operative order dismissing all the appeals. The judgment does not name the Supreme Court decision from which it extracts the four propositions, nor the Madras and Allahabad decisions in full. Figures are inconsistent: the section 24(b) interest for assessment year 2006-07 is given as Rs 59,77,030 in one sentence and Rs 69,77,030 in the next, and the second proviso to section 24 is extracted as Rs 1,50,000 but paraphrased by the Court as Rs 1,40,000. The Court does not resolve the borrower-and-lender objection as a matter of principle; it holds only that on identical facts the Tribunal could not take a view different from the one it had taken for the earlier year, so the section 24(b) point is decided narrowly. The batch line gave the sections as 22, 23, 24 and 24(b), which matches. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Each of the Revenue's appeals failed and all were dismissed, with no order as to costs. On the head of income, the Court held that no error of law or perversity attached to the Tribunal's reliance on East India Housing and Land Development Trust Ltd, and that a different view from the Tribunal's was not possible on the contentions raised. On the provision for incomplete work, it held that no substantial question of law arose from the Assessing Officer's view having been interfered with, the Commissioner and the Tribunal having found that the assessee followed the project completion method, that the same cost of incomplete work had been taken into closing stock, and that the officer had not doubted the claim but had merely objected to the year in which the provision was made. On section 24(b), the Court held there was no justification for taking a view contrary to that taken for assessment year 2006-07 on identical facts, and that where the entire interest paid on the partners' capital related to the premises let out by the assessee, and the construction of those premises came from the partners' contributions, the interest was due and payable to them not only on the general principle of partnership and under the Indian Partnership Act, 1932, but on the broad consideration under section 24(b). Since the income was income from house property and the deduction was one that could be granted from it, the Revenue could not be permitted to raise the ground, and the finding being consistent with an undisputed factual position, it could not be a substantial question of law either.
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