Characterization of Rental Receipts: ITAT Delhi Rules in Favour of “Income from House Property”
The Delhi Bench of the Income Tax Appellate Tribunal in Sumrit Impex Pvt. Ltd. vs Assessment Unit examined whether substantial rental receipts should be assessed as “Income from House Property” or as “Profits and Gains of Business or Profession” where the assessee is engaged in multiple business activities. The ruling provides useful guidance on how rental income is to be taxed where leasing of property is not the sole or exclusive business activity of the assessee.
Background of the Appeal
The matter arose out of an appeal filed by Sumrit Impex Pvt. Ltd. for Assessment Year 2022–23 against an order passed by the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi under Section 143(3) of the Income Tax Act 1961.
The assessee challenged two broad aspects:
- The nature of scrutiny under which the case was selected and assessed.
- The correct head of income for rental receipts of ₹1,11,24,910.
While the first issue on the scope of scrutiny was decided against the assessee, the Tribunal accepted the assessee’s contention on the substantive issue relating to the head of income for rental receipts.
Issue 1: Limited Scrutiny vs Complete Scrutiny
Assessee’s Contention
The assessee argued that its case had originally been chosen for limited scrutiny but was effectively handled as a complete scrutiny by the Assessing Officer as well as by the CIT(A)/NFAC. It was contended that such an expansion of the scope of scrutiny was not justified and therefore the assessment order was vitiated on this legal ground.
Revenue’s Stand
The Revenue placed on record a report from the field authorities asserting that the case had in fact been covered under complete scrutiny and not merely limited scrutiny. Based on this report, the Revenue contended that the assessee’s legal objection lacked any factual foundation.
Tribunal’s Finding on Scrutiny Issue
After examining the record and the Revenue’s report, the Tribunal concluded that:
- The case of the assessee was indeed under complete scrutiny.
- The contention that the authorities had expanded the scope of a limited scrutiny assessment was therefore factually incorrect.
Key Note:
The Tribunal held the additional legal ground on the nature of scrutiny to be without merit and rejected it outright.
With the legal challenge to the nature of scrutiny rejected, the Tribunal proceeded to evaluate the main dispute on the head of income applicable to the rental receipts.
Issue 2: Head of Income for Rental Receipts
The core controversy related to the treatment of rental income of ₹1,11,24,910 earned by the assessee from letting out immovable property.
Position Taken in the Return of Income
- The assessee had offered the rental receipts under the head “Income from House Property”.
- It had claimed the 30% standard deduction available under
Section 24(a)based on that classification.
Treatment by Assessing Officer and CIT(A)/NFAC
Both the Assessing Officer and the CIT(A)/NFAC took a different view:
- They concluded that the rental receipts constituted “business income”.
- On that basis, the 30% standard deduction allowable under the head “Income from House Property” was denied.
- The rental receipts were accordingly taxed as profits and gains of business.
Arguments Before the Tribunal
Stand of the Assessee
On merits, the assessee strongly urged that: