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Kunal

Kunal (Confidential)     21 March 2018

House propety or business income??

In case of Individual there is no debat , it will always be HP

The Apex court in Chennai Properties & Investments Limited v. CIT,[1] Karanpura Development Co. Limited[2] and Rayala Corporation (P.) Limited v. ACIT,[3] held that the deciding factor is not the ownership of the land or leases, but the nature of the activity of the taxpayer and the nature of the operations in relation to the same. Further, the Apex court has emphasised that for income to be characterised as “business income,” the activities actually carried out by the taxpayer need to be in line with its main object, according to its constitution documents.

Further, the CBDT has recently issued circular no. 16/ 2017 dated 25 April, 2017, wherein it has been clarified that the income from letting out of premises/ developed space along with other facilities in an industrial park/ SEZ is to be charged to tax under the head PGBP and has guided the department in not filing any appeals on this issue and to withdraw/ not press upon appeals already filed.



 16 Replies

Ratan Deep Saxena

Ratan Deep Saxena (Asstt Manager (Accounts & Finance))     22 February 2010

Dear Puja,

Plz see the belowmentioned questionnaire for your kind reference. that will definitely helps u.

What income will be considered 'Income from House Property'?

The annual value of property, consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income tax, shall be chargeable to income tax under the head "Income from House Property".

Is income from any property covered under this section?

No. Only the income from buildings or part of a building, held by the assessee as the owner and the income from land appurtenant to the buildings is covered under this section. Income from other property such as open land is out of the purview of this section. Income from such land will be taxed under the head, 'income from other sources.'

When the property is used by the owner for his business or profession, the income of which business or profession is chargeable to income tax, the income of that property is not charged in the hands of the owner. Similarly, when a firm carries on business or profession in a building owned by a partner, no income from such property is added to the income of the partner, unless the firm pays the partner any rent for the same. If the assessee is not the owner of the building but is a lessee and he sublets the property, he would be taxed under the head 'Income from other sources'.

What is included in the term 'buildings' for the purpose of this section?

The term 'buildings' includes any building (whether occupied or intended for self-occupation), office building, godown, storehouse, warehouse, factory, halls, shops, stalls, platforms, cinema halls, auditorium etc. Income arising out of the building or a part of the building is covered under this section.

What is meant by the term "land appurtenant"?

Land appurtenant includes land adjoining to or forming a part of the building. It would depend on the nature of the land, whether it is appurtenant to the residential building, factory building, hotel building, club house, theatre etc. and will include courtyards, compound, garages, car parking spaces, cattle shed, stable, drying grounds, playgrounds and gymkhana.

Is the income arising from vacant land covered under this section?

Any income, arising out of vacant land, is not covered under this section even though it may be received as rent, ground rent or lease rent. Such income would be assessable as income from other sources. Even rent, arising out of open spaces, or quarry rent, is taxed as income from other sources.

If a company is formed with the sole object of acquiring and letting out immovable properties, what head would the rental income be taxable under?

Even if a company is formed for the sole object of acquiring and letting out immovable properties, the rental income would be taxable as "Income from House property" and not as "business income."

If a building is used as a market and the owner/landlord provides certain other services as required by the municipal license, what head would the income fall under?

The income from letting out shops would be considered income from house property.

When is the income from house property wholly exempt from tax?

In the following cases, income from house property is completely exempt from any tax liability:

  1. Income from any farmhouse forming part of agricultural income;
  2. Annual value of any one palace in the occupation of an ex-ruler;
  3. Property Income of a local authority;
  4. Property Income of an authority, constituted for the purpose of dealing with and satisfying the need for housing accommodation or for the purposes of planning development or improvement of cities, towns and villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete this provision.);
  5. Property income of any registered trade union;
  6. Property income of a member of a Scheduled Tribe;
  7. Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
  8. Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group;
  9. Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
  10. Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities;
  11. Property income of an institution for the development of Khadi and village Industries;'
  12. Self-occupied house property of an assessee, which has not been rented throughout the previous year;
  13. Income form house property held for any charitable purposes;
  14. Property Income of any political party.

How is the annual value of the property determined?

Under S 23 (1) of the Income tax Act, annual value of property shall be deemed to be the following:

  1. The sum for which the property might reasonably be expected to be let out from year to year;
  2. Where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable;
  3. Where the property or part of the property is let and was vacant during the whole or any part of the previous year and, owing to such vacancy, the actual rent received or receivable by the owner in respect thereof is less than the sum referred to clause (a) the amount so received or receivable.

The taxes levied by any local authority in respect of the property shall be deducted while determining the annual value of the property of that previous year in which such taxes are actually paid by him. Further, the amount of actual rent received or receivable by the owner shall not include the amount of rent, which the owner cannot realize.

Sub-section 2: The annual value of a house or part of a house shall be taken as nil if the property consists of such house or part of the house and is occupied by the owner himself for the purpose of his own residence or, if such house or part thereof cannot be occupied by him because his employment, business or profession is carried on at any other place and, he has to reside at that other place in a building that does not belong to him.

Nevertheless, the above provision would not apply if the house or part thereof is actually let during the whole or any part of the previous year; or if any benefit therefrom is derived by the owner.

If the property consists of more than one house, the provisions of the sub-section (2) shall apply in respect of only one of such houses, which the assessee may at his option specify. The annual value of the house(s), other than the house in which the assessee has exercised an option, shall be determined under sub-section (1) as if the house (s) had been let out

What are the deductions permitted to be made from Income from house property"?

S 24 lays down that 'income chargeable under the head 'Income from house property' shall be computed after making the following deductions:

  1. A sum equal to 30% of the annual value;
  2. If the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital. Where such property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, on or after 1st April 2003, the amount of deduction under this clause shall not exceed Rs 1, 50,000.

The amount of deduction shall not exceed Rs 30,000 where the property consists of a house or part of a house, which the owner occupies for his own residence or which cannot be occupied by him because his employment, business or profession is carried on at any other place and he has to reside at that other place in a building which is not his own.

Can rental income be treated as business income?

The main criteria for deciding whether the rent is assessable as income from property or as business income depends upon the assets are exploited commercially or whether the same are let out for enjoying the rent.

regards,

ratan

CA Dhiraj Ramchandani

CA Dhiraj Ramchandani (CA, M. com)     22 February 2010

Hi puja, once the assessee lets out his property., its not his business what tenant is doing with that property.. Its HPI for assessee...

 

Now, whether the tenant has purchased those chambers for commercial or residential purpose, its his matter and not of assessee....

 

 

Amir

Amir (Learner)     22 February 2010

Dear Puja,

Income under House property is to be computed even if House Property is commercial in nature, i m saying this bcos I think this might be causing doubt.......

This question has no set replies but principle can be understood If property is let out is as part of carrying on business then it is classified as "BUSINESS INCOME" otherwise "HOUSE PROPERTY"

Eg:- Rent from an ATM situated in the Building in which assesee is carrying on his business - Now the purpose of this is to facilitate cash withdrawals for business purposes as well as for employees & therefore this can be said as letting out in course of business

PLZ REFER THESE JUDGEMENTS -

If letting out of premises is part of business operations income from such premises is business income - Where there is a letting out of premises and collection of rents, the assessment of income as property income may be correct, but not so where the letting or sub-letting is part of a trading operation. In latter case it would be a trading receipt. A company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be treated as landowner but has to be treated as trader. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter - Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC).

 

Income from godown initially self-used but later let out, is assessable as property income - Where the assessee had constructed a godown and used it for storing its raw materials and finished products, but subsequently the assessee let out the same and derived income from rent, it was held that the income derived by the assessee by letting out the godown was income derived from property and not income derived from business - Rampur Industries Ltd. v. CIT [1971] 82 ITR 23 (All.)/Parekh Traders v. CIT [1984] 150 ITR 310 (Bom.)/Maharashtra Fertilizers & Chemicals v. CIT [1984] 150 ITR 317 (Bom.).

 

Income from commercial complexes - Even in the case of commercial complexes, mere letting out the property and deriving income should be assessed only under the head ‘Income from house proper­ty’ and not under ‘Income from business’. However, where the lease agreements provided that certain independent services are also covered apart from the letting of premises and a composite rent is received, the authorities should bifurcate the receipts into portion thereof which is attributable to the provision of such services and assess them under ‘Income from business’ or ‘Income from other sources’. The remaining portion will be taxa­ble under ‘Income from house property’ - A.R. Complex v.  ITO [2008] 167 Taxman 46 (Mad.).

 

 

 Now in ur case u said that Assessee is also carring on ANOTHER business, which I feel is not related with the letting out of properties therefore Income will be taxable under "House Property" 

 

Aditya Maheshwari

Aditya Maheshwari (CA in Practice)     22 February 2010

 

If letting out could be demonstrated as part of complex commercial activity then rental income is to be assessed as income from business.

 

ITAT, ‘H’ BENCH, MUMBAI

Hiranandani Developers P. Ltd.

v.

JCIT

ITA No. 4117/Mum/2008

October    , 2009


Aditya Maheshwari

Aditya Maheshwari (CA in Practice)     22 February 2010

 

 

IN THE ITAT MUMBAI BENCH ‘A’

Marwar Textiles (Agency) (P.) Ltd.

v.

Income-tax Officer, 5(2)(3), Mumbai

K.C. SINGHAL, JUDICIAL MEMBER

AND B. RAMAKOTAIAH, ACCOUNTANT MEMBER

IT APPEAL NO. 7781 (MUM.) OF 2003

[ASSESSMENT YEAR 2000-01]

APRIL 24, 2008

In the instant case, the assessee had failed to prove that any business activity was carried on by it. Mere statement of the assessee that it was running a business centre was not enough. No facility or services were provided by the assessee. It was mere case of letting out of furnished accommodation on long-term basis. In case of business centre, the purpose is to provide space to business people on short-term basis for holding conferences, exhibitions, etc., which was missing in the instant case. The case of the assessee was akin to the case before the Apex Court in the case of Shambhu Investment (P.) Ltd. (supra). Therefore, the charges in question received by the assessee were rightly  assessed as ‘income from house property’. [Para 17]


C.Balaji

C.Balaji (Learner)     22 February 2010

Dear Puja....

Assessee has let out the property to a tenant , his HP income...

don't think abt the tenant use( Residential purpose or commercial purpose)....

Chintan Shah

Chintan Shah (-)     22 February 2010

Dear Puja,

If the intention for letting out the property is to passively earn rental income than be it any property, residential or commercial will be taxed under Income From HP.

However if there is some services etc. provided along with the premises such as electricity, watchman, maintanence, etc. than it siezes to be passive rental income and will be taxable as business, since business means any activity in nature of trade or commerce. Here the activity is in nature of commerce and hence it would be taxable under PGBP.

In your case I feel that the assessee only wants to passively earn income by letting property and therefore it would be taxed under IHP.

Sumiti Jain

Sumiti Jain (FP)     22 February 2010

Income from letting out of property whether for commercial or residential purpose will come under "INCOME FROM HOUSE PROPERTY" Head.

kckinn

kckinn (CA)     22 February 2010

As far as my knowledge goes, it's income from House Property. Letting out buildings for commercial purpose is also income from House property and not Business Income.

Sumiti Jain

Sumiti Jain (FP)     22 February 2010

Income from letting out of property whether for commercial or residential purpose will come under "INCOME FROM HOUSE PROPERTY" Head.


(Guest)

house property

Ayushraj

Ayushraj (Professional)     22 February 2010

My Brother an NRi has a Shop Premises (Commercial), which he has rented to McDonalds. The agreement executed between them is Conducting Agreement is the Income Taxable under Business or HP. He has another Shop in a Shopping Mall which is also rented, but here the agreement made is of Leave & License. So is this Income a Business Income or HP. He has loan for one property now the loan given by Bank for purchasing the shop is Business Loan & not Housing loan. The asseement of property taxes for both shops are commercial.

CA AYUSH AGRAWAL

CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai)     22 February 2010

This Should Be House property......


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