The income from letting out of property is to be treated as income from house property: Says Supreme Court

 

Issue

What should be the treatment of rental income earned from letting out of premises? Whether it is to be treated as business income or as income from house property?

Provision

The Supreme Court in Rayala Corporation Pvt. Ltd vs. ACIT  and Chennai Properties & Investments Ltd vs. CIT  held that rental income is to be treated as income from business if the main business is to let out. That is if the business of the assessee is letting out of property than it can be treated as business income.

There is another case of Raj Dadarkar & Associates vs. ACIT where Supreme Court held that as the assessee was not engaged systematically in providing service to the occupiers of the shop, it does not constitute the income from business. Thus, the Supreme Court Judgement in Rayala Corporation Pvt. Ltd vs. ACIT  and Chennai Properties & Investments Ltd vs. CIT  is not applicable in case of Raj Dadarkar & Associates.

In Raj Dadarkar & Associates vs. ACIT Assessee acquired the right in the land for more than 12 years and therefore by virtue of section 27(iiib) of Income Tax Act 1961, it would be regarded as “deemed owner” of the premises. Further assessee was not engaged systematically in providing service to the occupiers of the shop. Thus it does not constitute the income from business.  Income earned by assessee from sub licensing would be treated as income from house property and not income from business.

The only evidence adduced for proving that letting out and earning rents is the main business activity of the appellant was the object clause of the partnership deed. The clause provided that “The Partnership shall take the premises on rent to sub-let or do any other business as may be mutually agreed by the parties from time to time.” The Supreme Court observed that the assessee had failed to produce sufficient material to show that its entire or substantial income was from letting out of the property.

Section 27(iiib) – a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner if that building or part thereof;

Conclusion

The income from letting out of property is to be treated as income from house property and not as business income on account of lack of sufficient material to prove that the substantial income of the assessee was from letting out of the property.

The judgement has all the more relevant in view of the fact that the builders are now liable to pay the tax on notional rental income after one year from the end of financial year in which completion.