Income from rental property has different connotations depending on whether it is treated as house property or business income.
- Rental income from a property could be treated as income from house property and/or income from business and profession.
- If the property income is declared as business income, then the owner can claim a tax deduction on actual expenses.
- Property income is considered income from house property if the property is not used by the owner for business or professional purposes.
An individual would prefer to show rent as business income, which allows her/him to deduct all the expenses incurred to maintain the property, claim depreciation, and not pay notional rent when the property is not let out. Whereas, Taxability as House Property provides a standard deduction that is limited to 30% of the income along with a deduction on interest paid on borrowed capital for the purposes of acquisition, construction, repair, and reconstruction (subject to limitations provided under the Act). Taxpayers will always go to the option of including rental income as business income, which will in turn mean revenue loss for the government.
The Finance Act (No. 2) 2024 inserted the 3rd explanation to Section 28 of the Income Tax Act as follows, w.e.f. 01-04-2025 - 17 [Explanation 3. - It is hereby clarified that any income from letting out of a residential house or a part of the house by the owner shall not be chargeable under the head "Profits and gains of business or profession" and shall be chargeable under the head "Income from house property."]
However, for the period before this, the debate continues.
In the case of NATIONAL LEASING LIMITED vs. THE ASSISTANT COMMISSIONER OF INCOME, CIRCLE 3(6), MUMBAI [2024-VIL-192-BOM-DT], the appellant claimed that such income from renting property should be classified under "Income from Profits and Gains of Business or Profession" rather than "Income from House Property.".
The Hon'ble High Court gave various principles for determining the same
1. Primary business activity to be seen: The nature of the business and the main objective as defined in the Memorandum of Association should be seen. As per the Supreme Court's judgment in M/s. Chennai Properties & Investments Ltd., Chennai vs. The Commissioner of Income Tax, Central-III, Tamil Nadu [(2015) 14 SCC 793], when leasing properties is the primary business activity, such income should be classified as business income. The SC judgment in the case of East India Housing and Land Development Trust V/s. CIT (1961) 42 ITR 49 (SC) is distinguished.
2. Principle of consistency to be seen: The principle of consistency as established in M/s. Radhasoami Satsang, Saomi Bagh, and Agra v. Commissioner of Income Tax [(1992) 1 SCC 659] is important. In case the department had treated similar income as business income for many previous assessment years and there is no change in the business, the stand cannot change now.
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