ITAT held that the income was not from house property

1. Assessee company was in the business of running guest houses and had a property at Hyderabad in which had seven rooms. Assessee has entered in to various agreements with various companies for accommodating their employees from time to time in these rooms and received rental receipts to the extent of Rs. 87,70,615/- during the FY. 2006-07 relevant for AY. 2007-08. Assessee was incorporated in the year 2002 and such incomes have been accepted up to AY. 2006-07 as 'income from business'. However, in the impugned year Assessing Officer (AO) asked assessee to show cause why the income should not be treated as 'income from house property' as against 'profits and gains of business or profession'. Assessee submitted that it is carrying the business of hospitality since inception i.e., 19-04-2002 and its main object as per Clause-I of Memorandum of Association is that of 'carrying on of business of hotels, resorts etc'. It also submitted that it is running a lodging and providing food to guests. AO was, however, of the opinion that assessee has let out the property and does not have any license to run the catering part and on enquiry, it was found out that assessee was not running a kitchen but providing food by outsourcing, on cost to cost basis and accordingly, he was of the opinion that the income received by assessee should be brought to tax as 'income from house property'. AO also noted that TDS by various companies was made u/s. 194 (of Income Tax Act, 1961)-I of the Act, consequently, the rentals received should be assessed as 'income from house property'. In addition to treating the income from house property, AO also opined that in case assessee's incomes are to be assessed as 'business income' the expenditure cannot be allowed fully. Therefore, he has substantially disallowed the amounts on a protective basis.

2. CIT(A) dismissed assessee's appeal.

3. On appeal, the ITAT held as under:

"As seen from the agreements placed on record, assessee has entered into agreements with various software companies for providing accommodation only and the property as such was not leased. It was submitted that there are more than 40 companies with which assessee had entered into agreement and more than 700 employees stayed in the seven rooms during the year. Since no property was let out and as assessee received only rentals for occupation of the premises on a daily basis, AO's contention that income has to be assessed under 'house property' has no basis at all.

AO's opinion that since TDS made u/s. 194 (of Income Tax Act, 1961)-I, incomes are to be assessed under head 'income from house property' can not be accepted. Moreover, even if assessee has let out property but, when the Memorandum of Association permits the business of letting out of properties as such, the income cannot be brought to tax as 'income from house property' as held in the above said case of Chennai Properties & Investments Ltd., Vs. CIT [56 Taxmann.com 456] (SC). Therefore, both on facts of the case and also on law, as established by the Hon'ble Supreme Court in the above said case, receipts of assessee cannot be brought to tax under the head 'house property'. The same is to be assessed under the head 'Profits and gains of business or profession' only.

we are of the opinion that allowing of expenditure is to be re-examined by the AO. Assessee is directed to furnish necessary evidence in support of its claims. To that extent, orders of AO and CIT(A) are set aside. Issue of head of income to be assessed is decided in favour of assessee and the issue of allowance of expenditure is restored to the file of AO for fresh consideration.”

Case Reference - Heritage Hospitality Ltd vs Deputy Commissioner of Income Tax,

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES "B", HYDERABAD

BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND

SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER

I.T.A. No. 874/HYD/2012

(Assessment Year: 2007-08)