Kalpesh Classes

Section 22 of Income Tax act provide that the annual value of property consisting of any buildings or lands​​ appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property". ​​ 

 ​​​​ 

 Business of sub-letting of property

The appellant-company was incorporated ​​ with the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold,​​ improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the company took on lease a market place for an initial term of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site. It was also given the right to sublet the different portions. The question was whether the appellant's income from subletting the stalls was assessable as business income, or as income from other sources or under the head house property.​​ [1972] 083 ITR 0700 ​​ S.G. Mercantile Corporation P. Ltd. vs. Commissioner of Income-tax (SC) Held (i) that since the appellant-company was not the owner of the property or any part thereof, no question of making the assessment under the head house property arose; (ii) that the definition of "business" is of wide amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market (iii) that, on the facts, the taking of the property on lease and subletting portions thereof was part of the business and trading activity of the appellant and the income of​​ the appellant fell under the head business and profession and (iv) that where, ​​ the income could appropriately fall under the head business income, no resort could be made to other sources.

Income from sub-letting

Income from sub-lease is also income​​ from investment, where the assessee is content to derive rental income. But then, the further question is, where it could not be assessed as business income, whether it would be income from property or income from other sources. Income from the property put up on leased land would be assessable as property income. Definition of owner under section 27 of the Income-tax Act extends the meaning of ownership to lease, but excludes monthly tenancy and lease for a period less than 12 years vide section 27(iiib) read with section 269UA(f). Though the computation provision under section 24 for property does not recognise deduction for lease rent, the annual value of the property in the hands of such lessee cannot ignore the over-riding claim of lessor, since the lease rent payable gets diverted at source. At any rate, the lessee is not the full owner, so that the lessor and the lessee can only be assessed on their respective income.​​ 

An issue that came up for consideration was whether income from​​ sub-lease could be treated as income​​ from property. It was held in CIT v. A.V.K. Constructions P. Ltd. ​​ [2007] 292 ITR 512 (Mad), that the​​ assessee cannot be treated as the owner,​​ since sub-lease was on monthly payment of rent for period, which could be extended only for two​​ more years. The issue, however, related to the assessment of sub-lease income in the hands of the assessee-company as lessor. On the finding that the lease itself was not for period of twelve years, the​​ High Court had little difficulty in coming to the conclusion that the income cannot be assessed as property income.​​ But the finding of the Assessing Officer that was approved by the Tribunal was that its income should be assessed as business income, while the correct inference would have been that it should​​ be assessable as income from other sources, but that was not the point which was urged by the Revenue.​​ 

Where bare property is let out, such rent would be income from property. Where​​ certain amenities are also provided against a composite receipt, it may be possible to dissect the composite receipt as between amounts relatable to property and amenities. The amount relating to the latter part may well be taxable under business or other​​ sources, while the part relating to property is taxable only as property income as was held in Shambhu Investment P. Ltd. v. CIT [2003] 263 ITR 143 (SC).​​ But where the provision of various amenities and services is predominant, the entire receipt may well​​ be assessable as business income as in the case of commercial complexes, where it is not unusual for the service element to predominate. The High Court in A. R. Complex v. ITO [2007] 292 ITR 615 (Mad) remanded the case to be decided on the inference, that​​ it is a service-cum-lease agreement, so that bifurcation is necessary as between rental receipts and service charges, with latter to be assessed under “Other sources” following its own earlier decision in CIT v. Chennai Properties and Investments Ltd. [2004] 266 ITR 685 (Mad). The remand order may well be vulnerable, if the service element represented the dominant part. It appears that the assessee wanted it to be treated as business income, only on the ground that it is exploiting a commercial asset and that at any rate, the fact that it was earning income from a commercial complex was itself enough justification for treating it as business income, while the Revenue would take the view that the entire amount would be property income, since no material was allegedly placed before the authorities. Provisions for common reception, telephone booth and generator were all that were noticed for urging the claim that the entire income was from business. It is under these circumstances, that bifurcation of amount as​​ ordered by the High Court became unavoidable.​​ 

Treatment of income from land

House property has been defined under section 22 to include land appurtenant thereto. But where such land is put to use, not as part of the building to which it is contiguous, the​​ income from such land could not be assessed as income from property. It could be assessed only under the head “Other sources” as was pointed out in Gowardhan Das and Sons v. CIT ​​ [2007] 288 ITR 481 (P&H). In coming to the conclusion, the High Court reviewed various dictionaries and law lexicons besides the view taken by the Madras High Court in M. Ramalakshmi Reddi v. CIT [1998] 232 ITR 281.

Lease rent is income from property

Where assessee received lease rent, such rent could be assessable as only income from the property as was held in Keyaram Hotels P. Ltd. v. Asst. CIT [2008] 300 ITR 118 (Mad). Rent from hotel, which was used for business,​​ does not mean that the rental income could be business income. There was no commercial exploitation of the property by the assessee company. In coming to the conclusion that the income was assessable as property income, the High Court followed its own decision in CIT v. Chennai Properties and Investments Ltd. [2004] 266 ITR 685 (Mad).​​ 

Income from letting of godowns

The assessee-company, which was doing rice-milling business, had previously been running an oil mill and soap manufacturing business which​​ were discounted. It let out to the Government for storing grains certain godowns which it was previously using in its discontinued business. ​​ [1971] 082 ITR 0023- ​​​​ Rampur Industries Ltd. vs. Commissioner of Income-tax (Allahabad High Court) Held that the rental income was chargeable as income from property. The assessee-company was not established for earning profit from godowns. Godowns were let out incidentally.​​ Rent from godowns was clearly income from property. If an item is covered by a specific head,​​ it cannot be covered by a head which touches the item only incidentally. ​​ 

Taxation of composite rent (mix income)

Where a lodging house is let out along with furniture and fixtures with two separate agreements, one for bare property and the other for furniture and fixtures, the mere fact that there are two agreements would not mean that part of the income would be assessable under the head "Income from house property" and the other as income from "Other sources".​​ The transaction was a single one and the consideration should, therefore, be treated as a composite one. [1964] 051 ITR 0353- ​​ Sultan Brothers Pvt. Ltd. vs. Commissioner of Income-tax (SC). The High Court in CIT v. Smt. P. Andal Ammal [2000] 243 ITR 715 (Mad) decided that the entire income in such​​ a case will be assessable only as income from other sources / Business Income.​​ 

Letting of cinema house / operating cinema house

Universal Plast Ltd. v. CIT [1999] 237 ITR 454 the Supreme Court laid down that : (1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head “Profits and gains of business or profession” ; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out ; (3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same ; (4) if only a few of the business assets are let out temporarily while the assessee is carrying out his other business activities then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business ; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets. In the instant case all the assets of the business owned by the assessee had been leased out. The period for which the assets were let out was a relevant factor. The period of lease was short.​​ After leasing out the property the assessee had come back to its business and had restarted the same. Hence the income was assessable as business income. Universal Plast Ltd. v. CIT [1999] 237 ITR 454 (SC) applied.​​ [2008] 298 ITR (A.T.) 0394- ​​​​ Income-tax Officer v. Skipper Properties P. Ltd. (Income-tax Appellate Tribunal--Delhi)

Operating shopping centre

The issue whether income from a shopping centre could be treated as income from property was considered by the Tribunal in PFH Mall and Retail Management Ltd. v. ITO [2008] 298 ITR (AT) 371 (Kolkata) in the context of an appeal against the revisional order of Commissioner under section 263 favouring the view that it should have been assessed as income from property.​​ The Tribunal found that the assessee was providing various services and facilities for the occupants by way of security system, cleaning and maintenance, lighting, lifts, escalators and elevators, management of parking space, provision for fire extinguishment, diesel generators and insurance of property, besides telephone and fax lines, computers and internet lines and similar other amenities. It is in this context that the income from shopping malls or business centre, it was held, would be rightly assessable as business income.​​ 

In ITO v. Skipper Properties P. Ltd. [2008] 298 ITR (AT) 394 (Delhi), the income from lease of a theatre for a short period was claimed to be business income, because of the short period of lease with the assessee resuming possession of the theatre as its business shortly thereafter, so that it was held to be business income by the Tribunal following the decision of the Supreme Court in Universal Plast Ltd. v. CIT [1999] 237 ITR 454 and other precedents on the subject.​​ 

Cold storage letting

263 ITR 0143- ​​​​ SHAMBHU INVESTMENT P. LTD. VS. CIT (SC)

The issue, whether a property can be exploited in a​​ manner that its income may fall either wholly or partly under any other head arises from time to time. Where a service element is predominant with consideration being a lump sum one, income has sometimes been treated as business income, as for example in the case of a cold storage, or a fully equipped cinema theatre. There are instances, where the courts approved splitting up of the consideration as between property income and other sources.​​ Where the element of hire rental is considered more important, the​​ entire income may well be assessable as property income but the borderlines have been too thin and quite often the inference has not merely been one on the facts but one of perception.​​ 

In this case, the assessee had let out some portion of commercial space for use as table space with all facilities like security, power, water and other common amenities. The Assessing Officer had accepted the assessee's claim to treat the receipt as business income, often found to be of greater advantage to the taxpayer, because of the deduction for depreciation. The Commissioner of Income-tax acting under section 263 remanded the matter for fresh consideration. But his order was taken up in appeal to the Tribunal. The Tribunal found fault with the order of the Commissioner​​ of Income-tax on the ground that there was no case for presuming that the order of the Assessing Officer was in any manner adverse to revenue. The court, after elaborate review of the case law, found that the agreement was one of tenancy and that the assessment of the income as business income was not correct on the basis of the finding that the primary intention to let out the premises was to get rent.​​ 

Operating business centers

265 ITR 0379- ​​​​ ACIT VS. SAPTARSHI SERVICES LTD. (GUJ)

The controversy as to​​ whether income from a business centre should be treated as business or property income was resolved with reference to the facts in Asst. CIT v. Saptarshi Services Ltd. [2004] 265 ITR 379 (Guj), where it was found after review of the case law on the subject, that the income of a sub-lessee developing the property as a business centre and providing various services like provision of lift, services as those of receptionist besides secretarial services, data processing, conference room, etc. with many facilities, has necessarily to be assessed as business income. Special leave against this decision has also since been refused by the Supreme Court [2003] 264 ITR (St.) 36.

Lease of factory

266 ITR 0106- ​​​​ SRI HANUMAN SUGAR AND INDUSTRIES LTD. VS. CIT ​​ (CAL)

Income​​ from lease of property should ordinarily be property income.​​ Where it is a composite lease of factory, it would be assessable as income from other sources. But in cases, where the business is merely suspended with the lease agreement itself providing an option to the assessee-company to determine the lease before the expiry of the period of lease, it could well be assessable as business income as held in Sri Hanuman Sugar and Industries Ltd. v. CIT [2004] 266 ITR 106 (Cal).​​ This decision rendered after review of case law indicates that in such cases, what is relevant is the inference on the facts as to whether the assessee still carried on business, though temporarily suspended or whether the assessee had chosen finally to be content with the reward for the​​ lease till such time as it is in a position to revive. The decision follows the principles well-established on the subject. Merely because what is let out is a commercial property, the lease income therefrom does not become business income. This proposition was reiterated without any precedents obviously because the proposition does not admit of any controversy in CIT v. Gambhir Mal Pandey P. Ltd. [2004] 266 ITR 274 (Raj).​​ 

Lease of theatre​​ 

277 ITR 0088- ​​​​ COMMISSIONER OF INCOME-TAX VS. SMT. SURESHINI​​ MITTAL (ALLAHABAD HIGH COURT)

In CIT v. Smt. Sureshini Mittal [2005] 277 ITR 88 (All), the firm was deriving only rental income, but because hiring was of a cinema hall along with machinery, it was assessed as business income in the hands of the firm. The​​ income even in the hands of a partner, who took over the business, was also returned as business income and it was found assessable as business income, because the agreement was a composite one for the theatre as well as the machinery with lease rent being​​ in the nature of tenancy agreement terminable at three months’ notice. The Tribunal upheld the claim of the assessee and the High Court endorsed the same. The claim of the Department in the context of the lease agreement covering equipment, furniture, etc. before the High Court, that it should be assessed as property income is not understandable. If it were not assessable as business income, the more appropriate head of income is “Other sources” in such cases.​​ 

Lease income should ordinarily be assessable​​ under “other sources”. But, where the amount received is a composite lease rent for property together with machinery in a lease of a theatre by a partnership firm, it could be business income, because the objective of the partnership was not only to hire theatre, but also do business in partnership for exhibition of motion picture.​​ This aspect of the decision is non-controversial, because the very definition of partnership under section 4 of the Indian Partnership Act, 1932 is that “it is the relationship between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.