CHARGEABILITY OF RENTAL INCOME

[Mr. M. GOVINDARAJAN]

If the rent had been received qua the owner, the income was normally taxable under the head ‘Income from house property’.  However, if assets, not required for business, were temporarily given on rent, the income would be business income.   The basic principles in the matter of chargeability of rental income to income tax under the head ‘Income from house property’ or ‘Profits and gains of business’ have been laid down by the Hon’ble Supreme Court in various decisions were summarized in the case ‘Batra Gulati Hotels V. Income Tax Officer’ – (2011) 9 ITR (Trib) 345 (Mumbai) by the Mumbai Tribunal as follows:

• House owning, however profitable, cannot be a business or trade in the Income Tax Act and where income is derived from house property by the exercise of property rights properly so called, the income falls under the head ‘Income from house property’ chargeable under Section 22;
• If the income falls under the head ‘income from house property’ which is chargeable under Sec. 22, it has to be taxed under that section only and cannot be taken to section 28 on the ground that the business of the assessee was to exploit property and earn income or because the income was obtained by a trading concern in the course of its business;
• Where house property is given on leave or licence basically for earning income there from, the true character of the income derived from house property falling under Section 22 and the said character is not changed and the income does not become business income even if the hiring is inclusive of certain additional services such as cleaning, lighting or sanitation which are relatively insignificant and only incidental to the use and occupation of the terms;
• In cases where the income received is not from bare letting of tenements or from letting accompanied by incidental services or facilities, but the subject hired out is a complex one and the income obtained is not so much because of the bare letting of tenements but because the facilities and services rendered, the operation involved in such letting of the properties may be of the nature of business or trading operations and income derived may be income not from exercise of property rights but income from operations of trading nature falling under Section 28;
• In cases where the letting is only incidental and subservient to the main business of the assessee, income derived from letting will not be the income from property falling under section 22;
• If only a few of the business assets are let out temporarily what the assessee is carrying on his other business activities, then it is a case of exploiting business assets otherwise than employing them for his own use for making profit of that business.   However, if the business never started or has started but ceased with no intention to the resumed, the assets also ceased to be business assets and the transaction will only be exploitation of property by an owner thereof but not the exploitation of the business.

In the above said case the Tribunal applied the above principles. In this case the appellant is a partnership firm which filed its return of income for the year under consideration on 25.10.2005 declaring total income as NIL. The Assessing Officer, during the course of assessment noticed that practically no business activity was carried on by the assessee during the year except collecting rent from the buildings owned by it and given on lease to run hotel business. The rent received Rs.35,04,000 was declared by the appellant as business income and various expenses were deducted against the said income. The appellant submitted before the Assessing Officer that hotel buildings owned by it were its commercial assets and income from exploitation thereof was business income irrespective of whether the exploitation was done directly by the assessee or through some agency.  The Assessing Officer did not accept the contentions of the appellants and held that the rental income received by the assessee was chargeable to tax in its hands under the head ‘income from house property’.  According deduction under Sec. 24 amounting to Rs.10,51,2000/- was allowed  as deduction for repairs and maintenance and the other deductions was disallowed by him. 

Aggrieved by the order of the Assessing Officer, an appeal was filed by the appellant before the Commissioner of Income Tax (Appeals) challenging the treatment given by the Assessing Officer to its rental income as income from house property instead of business income.  The Commissioner of Income Tax (Appeals) found that there was no evidence produced by the assessee to show that any business activity was carried out by it from the premises given on lease. No evidence was produced to show that the leasing out of premises was only a temporary feature and it was planning to continue to carry on the hotel business in future. There was no merit in the claim of the appellant that the arrangement of leasing its premises was only a temporary feature.  The main intention of the appellant was to let out the property owned by it and the income from such letting out was chargeable to tax in its hands under the head ‘income from house property’. He therefore upheld the order of the Assessing Officer.

The appellant filed the present appeal before the Tribunal against the order of the Commissioner of Income Tax (Appeals) on the following grounds:

• The findings of the Assessing Officer are contrary to the propositions laid down by the Supreme Court;
• The lower authorities have grossly erred in disallowing entire of expenses claimed.  The reasons assigned for the impugned disallowance are wholly wrong and contrary to the provisions of law and evidence on regard.

According to the appellant the activity of the appellant was a complex commercial activity and the income arising from such activity in the form of gross rental amount is chargeable to tax under the head ‘Profits and gains of businesses or profession’. Regarding the claim of deduction the appellant contended that the major expenditure incurred was on account of interest in respect of funds borrowed for the purpose of acquisition of assets and eligible for full deduction.

The Department contended that there was no involvement of the assessee in the restaurant business carried on in the said premises nor there was any other business activity independently carried out by the assessee. 

The main issue taken by the Tribunal was whether the rental income received by the appellant under the agreement is chargeable to tax in its hand under the head ‘Income from house property’ as held by the authorities below or under the head ‘Profits and gains of business’ as claimed by the appellant.  The Tribunal found that although its premises were given on rent by the assessee with the specific condition to use the same for running restaurant and the same were given along with furniture and fixtures as well as other equipment required for running the restaurant the main intention of the assessee as is evident from the terms and conditions of the relevant agreements was to derive income by the exercise of property rights in the form of fixed monthly rent.  There were no other services which the assessee was required to render except giving possession of the premises owned by it to the tenant to run the restaurant. The assessee was in no way either directly or indirectly involved in the business of running the restaurant in the said premises and its intention was clearly to exploit the property to earn income in form of rent.   The property thus was given by the assessee on leave or licence basically for earning income there from in the form of rent and the character of income so derived was income from house property falling under Section 22 as held by the authorities below. When all the facts of the assessee’s case are considered in the light of principles laid down by the Hon’ble Supreme Court it becomes abundantly clear that the rental income received by the assessee is chargeable to tax under the head ‘Income from house property’ as rightly held by the authorities below and not under the head ‘Profits and gains of business’ as claimed by the assessee.