H&M Housing Finance and Leasing Private Limited vs. Revenue [ITA/1332/MUM/2024]
Background of the Case
The appellant owned a commercial property at Raheja Woods, Pune, which had been leased since AY 2005–06. For over a decade, the appellant consistently reported the rental income from this property under the head “Income from House Property,” and the Revenue had accepted this classification in all prior and subsequent years, including as recent as AY 2023–24. However, for AY 2017–18, the Assessing Officer departed from this consistent position and reclassified the rental income of Rs.10.62 crore as “Profits and Gains of Business or Profession,” relying on the Supreme Court judgment in Chennai Properties and Investments Pvt. Ltd. The AO further allowed depreciation instead of the statutory deduction under section 24(a). This treatment was upheld by the CIT(A), prompting the appellant to file an appeal before the Tribunal.
Arguments by the Appellant
The appellant counsel argued that the activity was one of pure leasing, as the lease agreement clearly indicated that lessee bear all utility charges and maintenance costs, leaving no scope for ancillary services. They highlighted that since AY 2005–06, rental income from this very property had been accepted by the Revenue under the head “House Property,” supported by an affidavit filed before the Tribunal. The appellant relied heavily on the Supreme Court ruling in East India Housing and Land Development Trust Ltd. (42 ITR 49), which held that income derived from shops and stalls is to be taxed as income from house property. Further reliance was placed on Raj Dadarkar & Associates v. ACIT (394 ITR 592) and the recent Bombay High Court judgment in PCIT v. Banzai Estates Pvt. Ltd, both of which clarified that an entry in the object clause of a company’s Memorandum of Association cannot override the scheme of classification under the Income Tax Act.
The appellant distinguished its case from Chennai Properties, noting that in that case the company was formed solely to hold two properties and its only source of income was lease rent, whereas H&M Housing Finance and Leasing earned diverse income streams—interest on loans, debentures, capital gains on investments, and share of profits from a partnership firm. In addition, the assets reflected in the balance sheet showed significant investments beyond the leased property. On these facts, the appellant contended that the principle of consistency, coupled with statutory provisions under sections 22–24, required the rental income to be taxed under the head “Income from House Property.”
Respondent’s Response
The Revenue, represented by the Departmental Representative, supported the orders of the Assessing Officer and the CIT(A). It was argued that the Memorandum of Association of the appellant specifically listed leasing of properties as its main object. Therefore, the rental income represented business income, consistent with the principle laid down in Chennai Properties. The Revenue maintained that systematic and organized activity of leasing, as reflected in the MOA, constituted a business activity. It was also argued that merely because earlier assessments had accepted the rental income under “House Property” head, the Department was not estopped from applying the correct legal position in the year under consideration. On the issue of depreciation, the CIT(A) had held that depreciation was to be computed from AY 2005–06, being the first year the property was put to use, and not from AY 2014–15 as claimed by the appellant. The DR urged the Tribunal to affirm these findings.
Court Findings and Decision
The Tribunal observed that the core issue was whether the lease rent should be assessed as “Income from House Property” or “Business Income.” It noted that for over 18 years, the Revenue had consistently accepted the appellant treatment of rental income under the head “House Property,” both before and after AY 2017–18. The Tribunal distinguished Chennai Properties on facts, reiterating that in that case the entire business of the appellant revolved solely around two properties, whereas H&M Housing Finance and Leasing was engaged in multiple investment and financing activities, with only a portion of its assets devoted to the leased building.
The Tribunal emphasized that section 22 mandates that annual value of a property owned by the appellant must be taxed under “House Property,” unless it falls within the specific exception of being used for the appellant own business. That exception did not apply here, as the property was fully leased out.
Accordingly, the Tribunal held that the rental income was taxable under the head “Income from House Property,” thereby allowing the appellant claim for deduction under section 24(a). Having decided this principal issue in favour of the appellant, the Tribunal treated the alternative ground regarding depreciation as infructuous. However, it clarified that municipal taxes and insurance paid, amounting to Rs. 17,01,686 and Rs. 1,90,477 respectively, were allowable subject to verification of evidence by the AO.
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ITAT Mumbai Lease Rental Income
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