2021 (4) TMI 1121 - AT - Income Tax

Correct head of income - Rental income earned by the assessee from letting out of property - taxable under the head income from house property OR income from other sources - HELD THAT - It is clearly seen from the perusal of the lease agreements that the rental income, both from property as well as equipment let out by the assessee, are separately identifiable in the lease agreements. It is also clear that the letting out of building as well as letting out of equipment are separable. The leasing of factory premises have given rise to major receipt of rental income and leasing of equipment is only incidental and both are clearly separable. Almost 85% of the total rent receipts is on account of leasing factory premises and leasing of equipment is only of minor items such as Cranes, Aircompressor, power generator etc. The provisions of section 56 of the I.T.Act states that in case the property and equipment are let out and if the rent receivable are inseparable, then only the rent shall be taxable as income from other sources . In other words, if letting out of property is separable from letting out of other assets, as in the instant case, then the rent for house property is taxable u/s 22 of the I.T.Act, whereas, rent for other assets is taxable either u/s 28 of the I.T.Act as profits and gains of business or profession or u/s 56 of the I.T.Act as income from other sources, as the case may be. We hold that the rental income earned by the assessee from letting out of property is taxable under the head income from house property and not income from other sources, for the following reasons - (i) the assessee is the owner of the property in terms of section 22 of the I.T.Act. (ii) the rental income on lease of factory premises is taxable under the head house property in view of the judgment of the Hon ble jurisdictional High Court in the case of D.R.Puttanna Sons Private Limited 1986 (7) TMI 73 - KARNATAKA HIGH COURT (iii) the rental income earned by the assessee from property and from equipment are separable in the facts of the given cases. Accordingly, the provisions of section 56 is not applicable in respect of income received from leasing of property, namely, factory building. Appeals filed by the assessee are allowed.

Issues Involved:
1. Classification of rental income from a factory building as "income from house property" versus "income from other sources."
2. Deduction of expenses incurred for earning rental income under section 57 of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Classification of Rental Income:
The primary issue in these appeals is whether the rental income from the factory building should be classified as "income from house property" or "income from other sources." The assessee had leased part of its factory building and offered the rental income under "income from house property" in its revised return. However, the Assessing Officer (A.O.) reclassified this income as "income from other sources" and disallowed the standard deduction claimed under section 24(a) of the Income Tax Act. The A.O. based this reclassification on two grounds: (i) the assessee was a tenant and not the owner of the property, and (ii) the assessee had let out certain plant and machinery along with the property.

The CIT(A) accepted the assessee's contention that it was the owner of the factory premises but upheld the A.O.'s decision by concluding that the rental income from the factory building and equipment was a composite and inseparable transaction, thus justifying its classification as "income from other sources."

Upon appeal to the Tribunal, it was noted that the lease agreements clearly identified the rental income from the property and equipment separately. The Tribunal referenced the Hon’ble Madras High Court's decision in CIT v. Chennai Properties and Investments Ltd. and the Hon’ble Apex Court’s decision in Sultan Brothers Private Limited v. CIT, which state that rental income from buildings is generally assessable under "income from house property" unless it is inseparable from the letting of machinery, plant, or furniture.

The Tribunal found that the rental income from the property and equipment was separable, with the majority of the rental income arising from the leasing of the factory premises. The Tribunal also cited section 56(2)(iii) of the Income Tax Act, which stipulates that rental income is taxable as "income from other sources" only if the letting of the building is inseparable from the letting of machinery, plant, or furniture. Since the rental income from the factory premises was separable from the equipment, it should be classified under "income from house property."

2. Deduction of Expenses:
The assessee argued that if the rental income were to be treated as "income from other sources," the expenses incurred to earn this income should be deductible under section 57 of the Income Tax Act. However, since the Tribunal concluded that the rental income from the factory premises should be classified under "income from house property," this issue became moot.

Conclusion:
The Tribunal held that the rental income from the factory premises should be classified under "income from house property" for the following reasons:
(i) The assessee is the owner of the property in terms of section 22 of the Income Tax Act.
(ii) The rental income from leasing the factory premises is taxable under "income from house property" as per the Hon’ble jurisdictional High Court's decision in D.R.Puttanna Sons Private Limited v. CIT.
(iii) The rental income from the property and equipment is separable, making section 56 inapplicable for the income received from leasing the factory building.

Judgment:
The appeals filed by the assessee were allowed, and the rental income from the factory premises was classified under "income from house property."

Order Pronounced:
The order was pronounced on the 1st day of April, 2021.

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