When does rental income fall under the head "Profits and gains of business or profession"?

Rental income is treated as 'Profits and gains of business or profession' when the letting of buildings is inseparable from the letting of machinery, plant, or furniture. The key factor is the intention to carry on a business of complex commercial letting, rather than simply renting out property. Even with multiple agreements, if the overall intention is to exploit the property as a whole for business purposes, the income derived is considered business income.

The letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, and the intention is to carry on the business of letting out the commercial property and carrying out complex commercial activity and getting rental income therefrom, then such a rental income falls under the heading of "Profits and gains of business or profession"

Rao Computers Consultants (P.) Ltd. v. Deputy Commissioner of Income-tax (OSD), Circle 5(1)(1), Bangalore [2021] 128 taxmann.com 408 (Karnataka)

Brief facts

Assessee derived income from complex commercial activities of letting outbuildings along with the other amenities in an industrial park. The authorities treated this income as partly as income from house property and partly as income from other sources ignoring the law laid down by this Hon'ble Court in the case of Velankani Information Systems (P.) Ltd. and the Circular issued by the Department and the authorities disallowing the expenditure incurred wholly and exclusively for the purposes of the business of complex commercial letting out services. The income earned by the appellant from letting out of the building along with other amenities in the industrial park shall be treated as 'income from house property' is perverse and illegal?

It held that

It found that the main intention is to exploit immovable property by way of complex commercial activities, in that event it must be held as business income. It is not the number of agreements, which are entered into between the parties which are decisive in determining the nature of the transaction. We have to find out in that context what was the intention of the parties in entering into the lease transaction. Notwithstanding the fact that there is more than one agreement or one lease deed, the transaction is one. The object is to enjoy the entire property, viz., building, furniture, and the accessories as a whole which is necessary for carrying on the business, then the income derived therefrom cannot be separated based on the separate agreement entered into between the parties. If the intention is for letting out the property or any portion thereof, the same may be considered as rental income or income from properties. Section 56 makes it clear that income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "income from other sources",

Section 56(2) Clause(ii) & Clause (iii) provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to Income-tax under the head "Profits and gains of business or profession", it shall fall under the head "Income from other sources".