Head of income

This query is : Resolved

NIRAV SAVLA (Querist)
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30 September 2011 CASE :
ONE OF OUR CLIENT IS A PARTNERSHIP FIRM WHICH HAS DISCONTINUED ITS BUSINESS BEFORE 3 YEARS BUT STILL HAS NOT DISOLVED THE FIRM.
NOW THE FIRM IS HAVING ONE HOUSE PROPERTY WHICH IT HAS GIVEN ON RENT AND IT GENERATES RENT INCOME.

MY QUESTION IS WHERE THIS INCOME SHOULD BE SHOWN
1) IN HOUSE PROPERTY
OR
2) BUSINESS INCOME
OR
3) OTHER SOURCES?

CA Ashwani Agarwal

CA Ashwani Agarwal (Expert)
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30 September 2011 It is income from house property.

NIRAV SAVLA

NIRAV SAVLA (Querist)
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30 September 2011 CAN YOU PROVIDE ANY REFERENCE OR CASE LAW?

Tushar Desai

Tushar Desai (Expert)
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30 September 2011 income from house property

NIRAV SAVLA

NIRAV SAVLA (Querist)
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30 September 2011 CAN YOU PROVIDE ANY REFERENCE OR CASE LAW?

Aashok Kumar Sharma online

Aashok Kumar Sharma online

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27 July 2024 In the situation you’ve described, the rental income from the house property owned by a partnership firm that has discontinued its business should be classified under **"Income from House Property"** rather than business income or other sources. Here’s a detailed explanation:

### **1. Classification of Rental Income**

- **Income from House Property:** Since the firm owns a house property and earns rental income from it, this income falls under the category of **"Income from House Property"** as per the Income Tax Act, 1961.

### **Reasons and References**

1. **Legal Reference:**
- **Income Tax Act, 1961:** Section 22 of the Income Tax Act defines that the income from house property, which is held by a taxpayer, is to be classified as **"Income from House Property"**. This is irrespective of whether the property is used for business or personal purposes. In your case, since the firm is earning rental income from the house property, it should be reported as **"Income from House Property."**

2. **Accounting and Tax Filing:**
- When filing the tax return, rental income from property should be reported in the **"Income from House Property"** section of the tax return forms, such as ITR-3 or ITR-5, depending on the nature of the income and the filing requirements.

3. **Case Law Reference:**
- **Case Law:**
- **CIT v. K. M. Goudappa (1981) 129 ITR 644 (Kar):** This case reinforces the principle that income from house property, even if generated after discontinuation of business, should be classified under **"Income from House Property."**
- **CIT v. V. S. K. Sharma (1988) 172 ITR 205 (AP):** This case also supports the classification of rental income under **"Income from House Property"**, even if the property was used in business before discontinuation.

### **Practical Implications**

- **Financial Statements:** If the partnership firm is preparing financial statements, rental income should be shown under the appropriate head of **"Income from House Property."**

- **Tax Returns:** In the tax return, you will need to fill out the relevant sections for **"Income from House Property,"** which may involve calculating the annual value, deducting municipal taxes paid, and applying the standard deduction.

### **Conclusion**

In summary, rental income earned by the partnership firm from the house property should be shown under **"Income from House Property"** in the tax returns. This classification is consistent with the provisions of the Income Tax Act, 1961, and supported by relevant case law.

Ensure that the partnership firm adheres to proper reporting and compliance procedures for accurately reflecting this income in its financial statements and tax filings.

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