Relief for tax on lease rental income

[Swati Dodhi]

A recent ruling by the Cochin Bench of the Income-Tax Appellate Tribunal is expected to provide relief to tax-paying entities who lease out property. The ruling sought to characterise lease rental income as income from business, as against the Assessing Officer treating it as income from house property.

The ruling was given in a case involving Kenton Leisure Services, which had entered into three separate agreements with Tata Consultancy Services. While agreeing that this could provide relief to service providers, the Tax Knowledge Management Team of KPMG said this was fact-specific. This is because the Bangalore Tribunal of the Tax Department has held that lease rental income arising from a complex commercial activity, which includes provision of space along with provision of facilities/amenities, would be taxable under the head income from business, as against income from house property.

DIRECT TAXES CODE

The proposed Direct Taxes Code also seeks to tax such lease rental income as income from house property, as against income from business, but with a specific exclusion to developers of Special Economic Zones. In the Cochin case, the tax payer company had entered into three separate agreements with TCS.

These were (i) a construction agreement for construction of hostel/transit facilities to provide residential accommodation for TCS trainers/new recruits; (ii) an agreement for lease, for letting out hostel premises for a term of 10 years; and (iii) an agreement for provision and maintenance of amenities/facilities during the period of the lease. The taxpayer declared the entire income form the aforesaid three agreements as income from business.

While completing the assessment for 2004-05 and 2006-07, the Assessing Officer treated the lease rentals received as income from house property which was confirmed by the Commissioner of Income-Tax (Appeals).

SEPARATE RIGHTS

The Tax Department held that though the three agreements run concurrently, they reserve separate rights and duties for the parties thereto. As such, where the consideration for the lease has been separately defined and enumerated, it would be taxable as income from house property. The taxpayer company argued that the three agreements constitute a part of a composite arrangement for provision of hostel facilities. Accordingly, the consideration from the said agreements constitutes part of that indivisible business.

There is no scope for artificially segregating the consideration into income from business and income from house property. The Tribunal noted that the inseparability of the three agreements can be ascertained based on the intention of the parties, which necessarily has to be inferred from the agreements entered into, and the subsequent conduct of the parties in pursuance thereto.

Agreement for Lease and Agreement for Provision of Facilities form part of the Construction Agreement, which can be regarded as the parent agreement.