Rental Income is Taxable as House Property Unless Property Dealing is the Main Business Object.

The Dispute: Standard Deduction vs. Business Income

The Conflict: The assessee leased out properties and claimed the income under the head “Income from House Property.” This allowed them to take the 30% Standard Deduction under Section 24(a) (now Section 21 of the 2025 Act) without having to prove actual maintenance expenses.

The Revenue’s Stance: The Assessing Officer (AO) argued that since the assessee was a corporate entity/business, the leasing was a commercial activity and should be taxed as “Business Income.”
The Assessee’s Stance: Their primary business was textiles and garments, not real estate. Leasing was merely an incidental use of an asset, not a systematic business of “property dealing.”

The Judicial Verdict

The Tribunal/Court ruled in favour of the Assessee, relying on the following legal tests:

1. The “Object Clause” Test

The Court examined the assessee’s Memorandum of Association (MoA). The objects were focused on furnishing fabrics, fibers, and readymade garments. Buying and selling properties or “real estate business” was not the main object. If property holding is not the “business” of the company, the rent must be taxed as House Property.

2. The Rule of Consistency

A major factor was that the Revenue had accepted the “House Property” classification in earlier assessment years. The Court held that unless there is a significant change in facts or law, the Department cannot suddenly change its stance just to deny the 30% standard deduction.

Transition to the Income-tax Act, 2025

As of April 2026, the new Act maintains this distinction but introduces stricter reporting:

Section 20 (New Act): Continues to govern “Income from House Property.” The 30% Standard Deduction remains a “statutory allowance,” meaning it is granted even if the taxpayer spent nothing on repairs.
Section 26 (New Act): Replaces Section 28(i). It clarifies that for rental to be “Business Income,” the assessee must prove that they are providing significant extra services (like a business center, security, housekeeping, etc.) beyond just a simple lease.
Consistency Doctrine: The 2025 Act emphasizes “Certainty in Taxation.” If a classification is settled through a “Search” or “Scrutiny” in a previous year, it carries high weight for future assessments under the new Section 276 (Scrutiny).

Key Takeaways for Taxpayers

Check Your MoA: If your company leases out property, ensure your “Main Objects” do not characterize you as a real estate developer unless that is your primary trade.
Passive vs. Active Income: Simple leasing of a shell building is almost always House Property. If you add services like WiFi, cafeteria, and furniture, the Revenue will likely push for Business Income.
30% Deduction is a Right: Do not let the AO re-classify your income just because it results in a higher tax for them. The 30% deduction is a “lump sum” meant to replace the headache of maintaining repair vouchers.
Consistency Matters: If your 2024 or 2025 returns were accepted as House Property, keep those records handy for any 2026 scrutiny.

IN THE ITAT DELHI BENCH ‘E’

Sumrit Impex (P.) Ltd.

Assessment Unit, Income-tax Department^*

SATBEER SINGH GODARA, Judicial Member
and AMITABH SHUKLA, Accountant Member

IT APPEAL No. 3245 (Delhi) of 2025
[Assessment year 2022-23]

JANUARY 13, 2026

Piyush Kaushik, Adv. for the Appellant. Ms. Ankush Kalra, Sr. DR for the Respondent.

ORDER

Satbeer Singh Godara, Judicial Member.- This assessee’s appeal for assessment year 2022-23, arises against the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [in short, the “CIT(A)/NFAC”], Delhi’s DIN and order no. ITBA/NFAC/S/250/2024-25/1074704436(1), dated 19.03.2025 involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).

Heard both the parties. Case file perused.

2. Learned counsel representing assessee first of all seeks to canvass his additional/legal ground that the impugned “limited” scrutiny has wrongly been treated as an instance of a “complete” one in both the lower authorities’ respective orders.

3. The Revenue on the other hand has filed a necessary report coming from the learned field authorities that the assessee’s case is indeed covered under the latter’s scrutiny i.e. a complete one only. We thus hold the assessee’s instant former argument/legal ground as devoid of merits which stands rejected in very terms.

4. Next comes the sole substantive issue between the parties on merits. There is hardly any dispute that the assessee had declared rental receipts of Rs.1,11,24,910/- as income from house property thereby claiming 30% standard deduction thereupon which has been held as assessable as in the nature of business income in both the learned lower authorities’ respective assessment and lower appellate findings.

5. Both the parties vehemently reiterated their respective stands against and in support of the impugned assessment of the assessee’s rental income as that derived from a house property and business; as the case may be.

6. It is in this factual backdrop that we first of all sought to ascertain the past assessment of the very nature of income in the assessee’s case. Learned counsel takes us to page 27 in the paperbook wherein it has placed on record the Assessing Officer’s section 143(3) assessment order in AY 2012-13 nowhere making any such business income addition.

7. Learned departmental representative at this stage quotes Chennai Properties & Investments Ltd. v. CIT (SC) that both the lower authorities have rightly treated the assessee’s impugned rental income as business income. And also that it has not performed anyther business activity apart from leasing out of the property as well.

8. We find no merit in the Revenue’s foregoing vehement submissions. We first of all notice that the case law Rayala Corporation Pvt. Ltd. v. ACIT (SC) has settled the issue after Chennai Properties & Investments Ltd. (supra) regarding assessment of such an income derived from leasing out property thereby concluding that the same ought to be assessed under the head ‘business income’. We are further mindful of the fact that as per para 6 in their lordship’s detailed discussion, the said assessee had stopped all other business activity whereas this is not the case herein since learned counsel has taken us to its object clauses of buying, selling, export, distributorship etc. in furnishing fabrics, fiber as well as readymade garments. We conclude in light of these peculiar facts that the assessee’s impugned rental income derived from leasing out properties could not be held as assessable as business income. We thus directed the learned Assessing Officer to finalize his consequential computation as per law in very terms.

9. No other ground or argument has been pressed.

10. This assessee’s appeal is partly allowed.