Hemali Shanghvi (Owner) (136 Points)
22 September 2011Hi,
My client has a partnership firm, and that firm owns a factory property forthe purpose of running the business. However, the firm is currently not generating any income so they decided to rent out the above property. Does this attract any tax due to conversion of principal office property to an investment (rental) property?
Thanks in advance!
Hemali
C.A SHASHANK GOYAL
(Chartered Accountant)
(362 Points)
Replied 22 September 2011
Hi , I am of the opinion that Yes , rentals generated from that property will be treated as investment income and wil be taxed in the hands of firm under the head "income from other sources" , if property is in the name of the firm.
Sanat kumar
(Chartered Accountant)
(265 Points)
Replied 22 September 2011
The conversion of principal office property to investment is not taxable,as it will not come under section 45(2). Section 45(2) deals with conversion of capital asset into stock in trade, which is considered as Transfer.
And I do agree with Mr. Shashank that the rental income generated from those properties will be taxable under 'other source'.
Suraj Agarwal
(Self Practitioner in Income Tax & GST)
(782 Points)
Replied 22 September 2011
Hello,
As in My Opinion, Answer will be different.
As per my view, Your Client rental Income from that property will be taxable in the head of House Property, because your client decided to earn the rental charge on that building.
Besides this, I agree that conversion of owned property to a rental property does not attract any tax burden, because it is not covered u/s 45(2).
CA Lovenish Bansal
(JOB)
(343 Points)
Replied 22 September 2011
Agree with Mr Suraj Agarwal
Regd
Lovenish Bansal
Hemali Shanghvi
(Owner)
(136 Points)
Replied 23 September 2011
Hi,
Thanks all for the replies. However, as per sec 45(2) " the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset". Does this mean that there will be capital gains charged on the difference of market value and cost of the property?
Thanks again!
Hemali
hello
As soon as the property is shown under the head current assets section 45(2) gets attracted. But so long as assets is shown under investment or fixed assets capital gain do not arises.
Renting out the property does not change the character of the property.
Rent shall be charged under the business since it shall be treated as commercial exploitationn of the asset. There is a case law on this which I do not remember. Please search it on google.
But if objective is to earn rental income then income is charged under the head Other Sources.
In your case objective is not to earn rental income but it has been let out for a short period.
Thanks
kaushal
Gayathri
(s)
(24 Points)
Replied 23 September 2011
Hi,
I agree with kaushal.
It depends upon the intention of the client. if renting is to overcome the financial crisis ie., short term, rent received from renting can be shown under " Income from Business"
Regards
Gayathri
surender
(Manager Accounts)
(149 Points)
Replied 23 September 2011
Agree with Mr. kaushal.Earn rental income then income is charged under the head Other Sources.Because its buiness property.property if shown under the head current assets gets attracted.
Suraj Agarwal
(Self Practitioner in Income Tax & GST)
(782 Points)
Replied 25 September 2011
Hello hemali,
As I already said that this case is not covered u/s 45 (2) because here business property is not converted into stock in trade. When Sec 45 (2) is not attracted then no capital gain is arised. When this property will be sold out, Then capital gain will be calculated on the diffrence of sale value & Book Value of property.
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