Kalpesh Classes

Business of letting of property

The appellant company, which was incorporated with​​ the objects of buying and developing landed properties and promoting and developing markets, purchased 10 bighas of land in the town of Calcutta and set up a market therein. The question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income" or as “income from property” [[1961] 042 ITR 0049- ​​ East India Housing and Land Development Trust Ltd. vs. Commissioner of Income-tax (Supreme Court of India)]​​ Where it was Held that the income derived by the​​ company from shops and stalls was income received from property and fell under the specific head of House Property. The character of that income was not altered because it was received by a company formed with the object of developing and setting up markets.​​ Nor because of the fact that the company was required to obtain a licence from the Calcutta Municipality to maintain sanitary and other services and for that purpose had to maintain a staff and to incur expenditure did the income become "profits or gains" from business 10. Nor was the character of the income altered merely because some stalls were occupied by the same occupants and the remaining stalls were occupied by a shifting class of occupants. The primary source of income from the stalls was the occupation of the stalls, and it was a matter of little moment that the occupation which was the source of the income was temporary.

For a person to have income under the head business one need not be a businessman. Salaried employees, including Government​​ servants who may not be expected to carry on business, may well be liable to be assessed under the head business, if the facts warrant it.

Company was formed for developing landed properties and markets. Income from letting of stalls and shops in market was income from house property. The character of that income was not altered because it was received by a company formed with the object of​​ developing and setting up markets. Nor because of the fact that the company was required to obtain a licence from the Calcutta Municipality to maintain sanitary and other services and for that purpose had to maintain a staff and to incur expenditure did the income become "profits or gains" from business. Nor was the character of the income altered merely because some stalls were occupied by the same occupants and the remaining stalls were occupied by a shifting class of occupants. The primary source of income from the stalls was the occupation of the stalls, and it was a matter of little moment that the occupation which was the source of the income was temporary. If the income from a source falls within a specific head set out, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head. [1961] 042 ITR 0049- ​​ East India Housing and Land Development Trust Ltd. vs. CIT (Supreme Court of India)​​ 

There was composite letting of building fitted with furniture and fixtures for the purpose of being run as a hotel. Income was derived from lease of the rooms. Question was whether it is income from business or under the head house property. Letting of building was inseparable from letting of furniture and fixtures. The income is not assessable under the head house property. [1964] 051 ITR 0353- ​​ Sultan Brothers Pvt. Ltd. vs. CIT (Supreme​​ Court of India)

Letting of property held as stock in trade – business income

The question of classification of income as between​​ different heads of income is one of the perennial sources of dispute, since the income under one head may be different from the income computed under a different head. One such dispute came up in CIT v. Neha Builders P. Ltd. [2008] 296 ITR 661 (Guj) in respect of income from letting out property in the case of an assessee, who is engaged in the business of development, construction, sale and lease of immovable property.​​ In other words, the property was his stock-in-trade. The High Court overruling the decision of the Tribunal held that, since the property was stock-in-trade, the income from that part of property which was let out by the assessee, should be income from business.​​ Since the property was stock-in-trade, the High Court ruled that “the Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, the question was not raised before the subordinate Tribunals and, all of a sudden, the Tribunal started applying the analogy”. The Tribunal’s reference to the case of dividend from shares held as stock-in-trade was not based upon analogy but on adoption of the principle decided by the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519.​​ 

Where the assessee gets mere rent from the property, such income is assessable only​​ as income from property, because of the schedular system of taxation and in the larger context of the meaning of business for classification as between heads of income. The High Court decision that it forms part of the assessee’s business income in the wider sense cannot be faulted, but it is not so for computation of taxable income of the year. When interest on securities was a separate head of income, such income was found assessable under this head, even where securities were held as stock-in-trade in United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) and CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC), though it was conceded that for purposes of set off of carried forward loss against such income, it was business income, since this rigid classification was applicable only for assessing the income of the year and not for set off purposes.​​ 

In a number of decisions on computation of income from property, it has been held that irrespective of the fact, whether the property was managed as part of the assessee’s business or otherwise, the rental income is assessable only as income from property as held in Rajasthan State Warehousing Corporation v. CIT [2000] 242 ITR 450 (SC), where the property was merely let out on hire. Even where it is let​​ out along with amenities for a consolidated amount, such amount could be split up as between income from property and other sources as held in Shambhu Investment P. Ltd. v. CIT [2003] 263 ITR 143 (SC), so that the decision of the Tribunal accords with law​​ and should not have been taken up by the Revenue to the High Court in the facts of the case and in the light of its own stand in other cases based upon its interpretation accepted by the courts.​​ 

Letting to group company

Where the assessee was letting​​ out furnished accommodation to be used by its group companies on long term basis without any service, the income therefrom is assessable as income from property as was held by the Tribunal in Marwar Textiles (Agency) P. Ltd. v. ITO [2008] 307 ITR (AT) 19 (Mumbai) following, inter alia, the decision of the Supreme Court in ​​ Shambhu Investment P. Ltd. v. CIT ​​ [2003] 263 ITR 143. The claim that the accommodation was for running a business centre, was found to be factually incorrect and, therefore, it was not treated as business income.

266 ITR 0685- ​​​​ COMMISSINER OF INCOME-TAX VS. CHENNAI PROPERTIES AND INVESTMENTS LTD. (MAD)

Section 22 of the​​ Income-tax Act, 1961, does not refer to “house property” despite its caption. The language employed in the section shows that the income referred to therein is not necessarily income from houses. It is income from property “consisting of any building or lands appurtenant thereto of which the assessee is the owner”.​​ The word “building” is not confined in its scope only to dwelling houses. The word “house” in association with other words also has many other meanings. But, a commercial building is not regarded​​ as a house. That, however, would not take the income from such buildings out of the ambit of section 22. Though it is not clear from the context why the Act describes income from property as income from house property, the substantive provision of law which creates the charge and obligates the person who receives such income to have it assessed under that head does not confine its application only to house property, but extends to all buildings whether such building is used as a dwelling house or for other​​ purposes.

The assessee-company owned two buildings. The Assessing Officer declined to assess that rental income under the head “Income from business” and assessed the same under the head “Income from property”. Held that, it was clear that the assessee, as owner of the building, was only exploiting the property as owner by leasing out the same and realising income by way of rent. Such rental income was liable to be assessed under the head “Income from house property”.​​ 

Property used by employees – used for business purposes​​ 

271 ITR 0079- ​​​​ Commissioner of Income-tax vs. T.V. Sundaram Iyengar and Sons Ltd. (Madras High Court)

Where a property is used for assessee's business, there is no doubt that the income from such property, whether notional or otherwise, would be assessed only as business income and not as property income. It is on this reasoning, that where the assessee derives income from letting out property for its own employees or directors, such income has been understood as being assessable as business income as was done by the Full Bench of the Delhi High Court in CIT v. Modi Industries Ltd. [1994] 210 ITR 1. Where the assessee’s property was being used by employees of a sister concern, a different inference would follow in that, such income could be assessed only as income from property, as held in CIT v. T. V. Sundaram Iyengar and Sons Ltd. [2004] 271 ITR 79 (Mad) distinguishing Modi Industries' case.

Letting of office premises

283 ITR 0162- ​​ Commissioner of Income-tax vs. Kohinoor Tobacco Products P. Ltd. (Madhya Pradesh High Court)

There is a mistaken view that income from commercial property should be assessable as business income and that income from residential properties alone should be assessable as income from property. Such a view was taken in CIT v. Kohinoor Tobacco Products P. Ltd. ​​ [2006] 283 ITR 162 (MP), where it was held that temporary letting out of property used normally for business, which was not intended to be closed down, will be assessable as business income. An assessee may​​ have let out on hire properties as its business. But that does not mean that such income can be assessed as business income. This decision would need review, since even income from property held as stock-in-trade in real estate business pending sale of such property was held to be assessable as property income in CIT v. Chugandas and Co. [1965] 55 ITR 17 (SC).

Exploitation of property by business arrangement ​​ 

In CIT v. Faith Real Estate (P) Ltd. [2008]​​ 173 Taxman 405​​ (Delhi) the assessee had given on rent its premises to a retail chain store. Under the agreement the assessee was to receive 2 per cent commission on sales for use of such premises. The assessee offered​​ such income under the head ‘business income’ whereas the department assessed it as income from house property instead. On examination of facts it was found as under:

• that the assessee was involved in day-to-day functioning of the store;

• that the assessee​​ was required to perform the upkeep of the building;

• that the assessee was to participate in the management by giving suggestions on the display of items and pricing of goods.

The Delhi High Court on perusal of such facts held that the amount received by the assessee had to be assessed under the head ‘business income’. Very interestingly the Court made the following relevant observations:

“ It appears that the arrangement arrived at between the assessee and M/s. Ebony Retail Holdings Ltd. was only to exploit​​ the property in this manner due to a recession in the market.”

In the current day scenario property owners must insist on a similar arrangement to optimise their taxes. ​​ 

CONCLUSION​​ 

Where there is a Business of letting the property or there is​​ incidental letting of property it shall be taxable as income under the head House Property. Where there is specific head provided for it one can not tax the income under the other head. However if there is composite letting of the property it can not be assessed under the head house property since it contemplates only the property income to be assessed there in. (This view is subject to various judicial debate.)​​