2006 (1) TMI 457 - AT - Income Tax

Nature of income - Rental income - Income from house property Or business income - expenses incurred for earning interest income - HELD THAT - We find that the assessee has been enjoying the tenanted premises uninterruptedly for the last 9 years with the permission to sublet or to make addition or alteration in the tenanted premises without effecting the stability of the building. The assessee has sublet this premises by virtue of lease and license agreement for a period of 3 years initially commencing from 1st of February, 1995 with two further renewal options of three years and one year respectively, which shall be exercised at the sole discretion of the licensee, meaning thereby, it was known to every body that assessee is not a temporary tenant for a period of less than a year. He was rather a permanent tenant i.e., lessee in perpetuity and kept on letting out the property for a period of more than 7 years in part and with that understanding the licensee has paid a sum as interest-free security deposit. Having read both these lease and license agreements, we are of the considered opinion that it is not a case where it can be held that assessee has taken the lease from month to month or for a period not exceeding one year or excluded from the clutches of sub-section ( iiib ) of section 27 of the I.T. Act. We, therefore, hold that assessee acquires a permanent right in tenancy in the property with the permission to sublet and make an addition and alteration in the property, as such, he is deemed owner of the property as per provision of section 27( iiib ) of the I.T. Act. In the instant case, assessee has subletted this property only to one person against the fixed rent which according to the assessee was called to be a license-fee. From the perusal of the record, we do not find any iota of evidence on the basis which it can be said that assessee was engaged in the business of licensing the tenanted premises as there was only one tenant in the premises and assessee was not required to do any other activity except recovering rent. We, therefore, of the considered view that rental income earned by the assessee on subletting of the tenanted property is income from house property and not a business income and the assessee is only entitled to those deductions permissible u/s 24(1)( i ) of the I.T. Act. We, therefore, do not find any infirmity in the order of the CIT(A). In the result, the appeal of the assessee is dismissed.

Summary

Issues:
Assessment of rental income as business income and deduction of expenses for interest income.

Analysis:
The appeal was against the CIT(A)'s order regarding the assessment of rental income and deduction of expenses. The assessee had leased premises from a trust and sublet them to another company. The Assessing Officer deemed the assessee as the owner of the property under section 27(iiib) of the I.T. Act, taxing the income as house property, not business income. The CIT(A) upheld this decision, leading to the appeal before the Tribunal.

The Tribunal analyzed the lease deed and found that the assessee had acquired the property for an unlimited period with the right to sublet and make alterations without affecting the building's stability. The lease was not from month to month, as claimed by the assessee. The Tribunal interpreted section 27(iiib) to include long-term tenants who sublet properties for rental income, deeming them as owners. The Tribunal held that the assessee fell under this category, being a long-term tenant with subletting rights.

Regarding the nature of income, the Tribunal determined that the rental income from subletting was income from house property, not business income. The assessee had sublet to only one tenant, and there was no evidence of engaging in a licensing business. Therefore, the deductions were limited to those allowed under section 24(1)(i) of the I.T. Act. The Tribunal dismissed the appeal, upholding the CIT(A)'s order.

In conclusion, the Tribunal affirmed the assessment of rental income as house property income and disallowed additional deductions claimed by the assessee. The judgment emphasized the interpretation of the lease deed, application of relevant sections of the I.T. Act, and differentiation between house property income and business income in determining the tax liability of the assessee.