Income Tax: High Court Upholds Rental Income from Let-Out Factory as House Property, Not PGBP

This current case is regarding a company named Shree Rama Multitech Limited and how it should be taxed for the rent it earned by leasing its factory building on rent.

The company named Shree Rama Multitech Limited had a factory building in Pondicherry, which it was not using for business. Instead of keeping it idle, the company rented it out to someone else and started earning rental income on it. The income displayed this income as “Income from House Property” in its income tax return and claimed deductions allowed under Section 24 of the Income Tax Act. These deductions include municipal taxes paid and a 30% standard deduction, which are normally allowed when you earn rental income from a property.

But the Income Tax Department did not agree with the claim of the company and how it displayed its income in its ITR. The Assessing Officer (AO) said that this was not just any ordinary property; instead, it was a factory building, which was originally used for business. Therefore, the officer argued that the rent received should be taxed under the head “Profits and Gains from Business or Profession” instead of “Income from House Property.” Since business income does not allow the same deductions as property income, the AO disallowed the deduction claim of the company of Rs. 25.18 lakhs for the year 2012-13 and Rs. 22.91 lakhs for the year 2013-14.

The company did not agree with the department and raised an appeal with the Commissioner of Income Tax (Appeals), also known as CIT(A). The CIT(A) analysed the case and found the company was right. Even though the building was a factory, the law does not say that factory buildings cannot be treated as house property when they are rented out. As long as the property is not being used for business anymore and is given on rent, it can be treated as house property for tax purposes. The CIT(A) also noted that in the earlier year (AY 2011–12), the department had made the same kind of addition, and the company had won that case too.

However, the Income Tax Department still did not agree and again filed an appeal to the Income Tax Appellate Tribunal (ITAT) in Ahmedabad. However, the ITAT also announced its decision in favour of the company and agreed to the point of CIT(A). It confirmed that the rental income was correctly offered as “Income from House Property” and that the company was allowed to take the deductions under Section 24. This means both the CIT(A) and ITAT supported the company and gave decisions in its favour.

When the IT department lost at both levels, it went to the Gujarat High Court. There, it filed two separate appeals: one for the assessment year 2012-13 and another for 2013–14. The department argued that the ITAT had made a mistake and wanted the High Court to decide if this was a “substantial question of law.”

The Gujarat High Court heard both appeals together because the issue in both was exactly the same. The court carefully reviewed all the earlier orders and found that the Tribunal (ITAT) and CIT(A) had both made correct and lawful decisions. They found that the company had stopped using the building for business, and since it was rented out, the income could be rightly taxed as house property income. The court also noted that there was no new or unsettled legal issue in this case – the same point had already been decided earlier in the company’s favour.

Because of this, the High Court said there was no substantial question of law involved, and it dismissed both appeals filed by the Income Tax Department. Meaning, the High Court did not see any error in the earlier decisions and saw no need to interfere.

Here, the Gujarat High Court too ruled in favour of the company and allowed the company to treat rental income from its unused factory as property income, giving it the benefit of deductions under Section 24, and rejected the tax department’s challenge.