Anurag Konduru Vs DCIT (ITAT Bangalore)
Salary Earner, Commercial Tenant, Sub-Lessor: Which Head Applies to the ₹95 Lakh Receipts?
A person takes commercial premises on lease, pays rent to the owner, sub-lets the entire space and provides facilities to the occupant. The payments he receives are described as “rent”. Must they be taxed as income from house property, or can they be business income?
The Bengaluru ITAT decided this question in favour of Anurag Konduru. It held that the receipts from the sub-lessee arose from the commercial exploitation of premises leased from BMTC, together with obligations to provide related services. The assessee was not the owner of the property, and the Tribunal directed the Assessing Officer (AO) to compute the income under “Profits and gains of business or profession” in accordance with law.
The arrangement with BMTC and the sub-lessee
For assessment year 2023–24, the assessee filed a return declaring total income of ₹18,01,930. During assessment, the AO noticed receipts of approximately ₹95 lakh from Reliance Projects and Property Management Services Limited in Form 26AS and AIS.
The assessee explained that he had entered into an agreement with the Bangalore Metropolitan Transport Corporation (BMTC) on 26 February 2022 for commercial office space. He subsequently entered into a lease deed dated 2 December 2022 with Reliance Projects and Property Management Services Limited, sub-letting the premises to that company.
He maintained that he was a tenant, not the owner, and that his activity involved more than passing on possession of a property. He was required to provide facilities and services connected with the premises. He had offered the resulting income as business income under section 44AD.
The AO disagreed. One reason given was that the assessee also earned salary as an employee and, in the AO’s view, taking premises on lease and sub-letting them could not be regarded as his regular business activity. The AO took gross receipts of ₹95,00,090, reduced them by ₹59,13,894 paid to BMTC, and treated the balance of ₹35,86,196 as rental income. After accounting for income already offered, he made an addition of ₹24,46,185.
The assessee appealed, reiterating that the premises belonged to BMTC and that his receipts arose from a commercial arrangement. The CIT(A) upheld the assessment after the assessee did not respond to subsequent notices in the appellate proceedings.
Why ownership mattered
Before the ITAT, the immediate dispute was the head of income. The Tribunal began with section 22, under which the annual value of property is charged under “Income from house property” in the hands of its owner.
On the facts before it, the assessee had acquired leasehold rights from BMTC and then sub-let the premises. He did not own the underlying property. The Tribunal also held that the deemed ownership provisions did not cover a mere tenant sub-letting leased premises. It therefore found that the basic ownership requirement for the house property head was absent.
That finding answered an important part of the AO’s approach. The fact that the payment from the sub-lessee was called “rent” could not, by itself, make the recipient the owner of the property or determine the correct head of income.
Was the activity commercial?
The Tribunal also examined what the assessee undertook to do under the arrangement. Apart from taking the premises from BMTC and sub-letting the entire space, he had obligations concerning common area maintenance, cleaning, water facilities and repairs. The order also records his submission that security and other related services were provided.
The Bench viewed the arrangement as a whole. The assessee had paid substantial lease rent, acquired rights in commercial premises, arranged for a sub-lessee and undertaken continuing service obligations. In its view, these features showed systematic commercial exploitation of the leasehold rights, rather than an incidental letting of part of a space retained for personal use.
The AO’s reliance on the assessee’s salary income did not persuade the Tribunal. An individual can earn salary and carry on a separate business at the same time. The character of receipts from one activity must be determined by that activity, not by the existence of another source of income.
The ITAT also considered decisions of the Mumbai and Chennai Benches cited for the proposition that receipts from commercially exploited leased premises must be examined in light of the actual arrangement.
What the ITAT directed
The Tribunal set aside the treatment of the receipts as income from house property. It held that the amounts received from Reliance Projects and Property Management Services Limited were to be considered under “Profits and gains of business or profession” and directed the AO to compute the income accordingly as per law. The appeal was allowed.
There is an important distinction in the result. Although the assessee had offered income under section 44AD, the operative direction decides the head of income and calls for computation according to law. The order should not be read as a separate, reasoned ruling that every condition for applying section 44AD has been satisfied.
Author’s comment
This case shows why the label “rent” in a lease deed or Form 26AS is not the complete tax analysis. The first question is what right the taxpayer holds in the property. Here, the assessee was BMTC’s tenant, and the Tribunal found no basis to assess him as an owner under section 22.
The next question is what the taxpayer actually does to earn the receipts. Sub-letting the entire commercial space alongside maintenance and other facility obligations supported the business income treatment on these facts. For similar arrangements, the underlying lease, sub-lease and service obligations will be central to showing the true character of the activity.
Cases Discussed
- Tulsidas V. Patel vs. DCIT, ITA No. 556/Mum/2023, order dated 11.08.2023 — relied upon on commercial exploitation of leased premises and treatment of Leave & License Fee as business income.
- Mangla Homes Private Limited Vs. ITO: [2010] 325 ITR 281 (Bombay) — considered in Tulsidas V. Patel and distinguished on facts.
- Dodla International Ltd vs. ACIT, ITA No. 3155/Chny/2018, order dated 08.02.2021 — relied upon for treating licence fee from commercial exploitation as business income.
- Assistant Commissioner of Income-tax Vs Palmshore Hotels (P.) Ltd. — precedent referred to in Dodla International Ltd concerning the character of receipts from licensing hotel premises.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal filed by the assessee pertaining to A.Y. 2023-24 is directed against the order of the learned Commissioner of Income Tax (Appeals) (hereafter, the Ld. CIT(A)) u/s 250 of the Income Tax Act, 1961 (hereafter, the Act) vide order dated 24.10.2025.
2. In the memo of appeal, the assessee has raised eight grounds of appeal which are interconnected and revolves around the common issue as to whether the income earned by the assessee by taking commercial premises on lease and further sub-letting the same is assessable under the head “Profits and gains of business or profession” or “Income from house property”. Therefore, all the grounds are taken up together for adjudication.
3. The brief facts of the case are that the assessee is an individual and filed his return of income declaring total income of Rs. 18,01,930. During the assessment proceedings, the AO noticed from Form 26AS/AIS that the assessee received Rs. 95,00,088/- from Reliance Projects and Property Management Services Limited towards rent. The AO called upon the assessee to explain why the said receipts should not be assessed under the head “Income from house property” instead of “Profits and gains of business or profession”.
4. In response, the assessee submitted that he had entered into an agreement dated 26.02.2022 with the Chief Traffic Manager, Bangalore Metropolitan Transport Corporation (BMTC), for operating a commercial office space. The assessee thereafter sub-let the said premises to Reliance Projects and Property Management Services Limited vide lease deed dated 02.12.2022. It was submitted that the assessee was not the owner of the property and was commercially exploiting the premises. The assessee further submitted that he was providing maintenance, security, cleaning and other services and had offered the income as business income u/s 44AD of the Act.
5. The AO did not accept the explanation of the assessee. The AO observed that the assessee was also an employee deriving salary income and, therefore, the activity of taking the premises on lease and further sub-letting the same could not be regarded as his regular business activity. Accordingly, the AO considered Rs. 95,00,090/- as gross rent received from Reliance Projects and Property Management Services Limited and reduced therefrom rent of Rs. 59,13,894 paid by the assessee to BMTC. The balance amount of Rs. 35,86,196 was treated as rental income. After considering the income already offered by the assessee, the AO made an addition of Rs. 24,46,185 to the total income of the assessee.
6. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee reiterated that the premises in question were not owned by him and had been taken on lease from BMTC for commercial exploitation. The premises were thereafter sub-let to Reliance Projects and Property Management Services Limited. It was contended that the receipts arose from the commercial activity carried on by the assessee and were, therefore, assessable under the head “Profits and gains of business or profession”.
7. However, the assessee did not respond to the notices subsequently issued during the appellate proceedings. The Ld. CIT(A), therefore, proceeded on the basis of the materials available on record and upheld the action of the AO. Accordingly, the appeal of the assessee was dismissed.
8. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. The Ld. AR submitted a paper book running from pages 01 to 88 and reiterated that the assessee is not the owner of the property in question. The property was taken on lease from BMTC under the agreement dated 26.02.2022 and was subsequently sub-let to Reliance Projects and Property Management Services Limited vide lease deed dated 02.12.2022. It was submitted that the assessee was commercially exploiting the leased premises and was also providing maintenance, security, cleaning and other related services. Therefore, the income arising from such activity was rightly offered as business income.
8.1 The Ld. AR further submitted that merely because the assessee was also earning salary income, the independent commercial activity carried on by him could not be disregarded. The Ld. AR also placed reliance on the decisions of the coordinate Benches of the Tribunal in ITA No. 556/Mum/2023 and ITA No. 3155/Chny/2018 and submitted that the receipts in question are liable to be assessed as business income and not as income from house property.
9. The Ld. DR, on the contrary, vehemently supported the orders of the lower authorities. The Ld. DR submitted that the receipts were in the nature of rent received from Reliance Projects and Property Management Services Limited and the AO had rightly assessed the same as rental income after giving credit for the rent paid by the assessee to BMTC.
10. We have heard the rival submissions of both the parties and perused the materials available on record. The short controversy before us is whether the receipts arising from the premises taken on lease by the assessee and further sub-let to Reliance Projects and Property Management Services Limited are liable to be assessed as business income or income from house property.
10.1 The material facts are not in dispute. The assessee is not the owner of the premises in question. The premises were taken by the assessee from BMTC under an agreement dated 26.02.2022 for operating a commercial office space. Thereafter, the assessee entered into a lease deed dated 02.12.2022 with Reliance Projects and Property Management Services Limited. Thus, the receipts in question arose from the commercial premises which the assessee himself had taken on lease and thereafter exploited by further letting it out.
10.2 At this stage, it is relevant to note that u/s 22 of the Act, the annual value of a property is chargeable under the head “Income from house property” in the hands of its owner. In the present case, the assessee is merely a tenant, and the property belongs to BMTC. Further, the provisions relating to deemed ownership do not cover a mere tenant who sublets the leased premises. Therefore, the basic requirement for assessing the impugned receipts under the head “Income from house property” is not satisfied.
10.3 We also do not find merit in the reasoning of the AO that since the assessee was earning salary from employment, the activity in question could not constitute his business. There is nothing under the Act which prevents an individual earning salary income from simultaneously carrying on an independent business activity. The character of the income has to be determined from the nature of the activity carried on by the assessee and not merely from the existence of another source of income.
10.4 In the present case, the assessee took commercial premises on lease from BMTC, paid lease rent of Rs. 59,13,894 and thereafter sub-let the premises to Reliance Projects and Property Management Services Limited. The assessee also provided maintenance, security, cleaning and other related services in connection with the premises. Thus, the activity was not confined to mere sub-letting but involved commercial exploitation of the leased premises along with ancillary services. Considering the arrangement as a whole, the activity was carried on in a systematic and commercial manner and, therefore, the income arising therefrom is appropriately assessable under the head “Profits and gains of business or profession”. Merely describing the receipts as rent cannot alter the true character of the income.
10.5 We have also considered the decisions of the coordinate Benches relied upon by the Ld. AR in ITA No. 556/Mum/2023 and ITA No. 3155/Chny/2018. The decisions relied upon support the contention that where premises are taken on lease and thereafter commercially exploited by further letting, the nature of the income has to be examined having regard to the commercial arrangement and the fact that the assessee is not the owner of the underlying property. The relevant paras of the said judgements are reproduced below:
ITA No. 556/MUM/2023 Tulsidas V. Patel vs. DCIT order dated 11.08.2023
11. We note that the Assessing Officer had placed reliance on the judgment of the Hon‟ble Bombay High Court in the case of Mangla Homes Private Limited Vs. ITO: [2010] 325 ITR 281 (Bombay). However, in our view, the facts in that case were different to the extent that the renting/leasing was part of ancillary objects of the assessee-company whereas the main objects included purchase and sale of flats. Further, in that case the assessee was free to and did undertook the business of purchase and sale of flats during the relevant previous year ***
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13. In view of the above, the Assessing Officer is directed to re-compute the income of the Appellant by treating the Leave & License Fee as income assessable under the head Profit & Gains of Business‟.
ITA No 3155/CHNY/2018 Dodla International Ltd vs. The ACIT order dated 08.02.2021
9. In this view of the matter and by following decision of Hon’ble High Court of Kerala in the case of M/s.Palmshore Hotels (P) Ltd., we are of the considered view that, license fee received by the assessee for licensing a fully furnished hotel along with license to run the hotel is a business receipt, which is assessable under the head ‘income from business or profession’ but not a rental income, which is assessable under the head ‘income from house property’. Therefore, we are of the considered view that the AO as well as the ld.CIT(A) were grossly erred in assessing license fee under the head ‘income from house property’ and hence, we reverse the findings of the CIT(A) and direct the AO to assess license fee under the head ‘income from business or profession’ as claimed by the assessee.
10.6 In view of the above principles laid down by the Hon’ble Tribunals, we have examined the facts of the present case. On perusal of the agreement dated 26.02.2022, we find that the assessee had taken the commercial premises on lease from BMTC and thereafter sub-let the said premises to Reliance Projects and Property Management Services Limited vide lease deed dated 02.12.2022. Thus, the assessee was not the owner of the property but had taken the premises on lease for its commercial exploitation.
10.7 On further perusal of the lease deed dated 02.12.2022, we note that the arrangement was not confined merely to sub-letting of the premises. The assessee was also required to provide various ancillary services and facilities such as common area maintenance, cleaning services, water facilities and repair work in connection with the premises. Therefore, the receipts earned by the assessee have to be examined in the light of the entire commercial arrangement and not merely on the basis that the payment received from the sub-lessee was described as rent.
10.8 We further note that the assessee had sub-let the entire premises taken by him on lease and, therefore, this is not a case where only a portion of the premises was incidentally sub-let while the remaining portion was retained by the assessee for his own use. Considering the nature of the arrangement, the sub-letting of the entire commercial premises together with the obligation to provide various ancillary services shows that the assessee was commercially exploiting the leasehold rights acquired by him from BMTC.
10.9 Considering the above facts in totality, we are unable to sustain the action of the lower authorities in assessing the impugned receipts under the head “Income from house property”. The assessee is not the owner of the property, and the receipts have arisen from the exploitation of premises taken by him on lease from BMTC. Accordingly, the receipts from Reliance Projects and Property Management Services Limited are liable to be considered under the head “Profits and gains of business or profession”. The AO is directed to compute the income accordingly as per law. In view of the above, the grounds raised by the assessee are allowed.
11. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 24th Sept. 2026.
