Income from property leased to sister concerns is Income from House Property

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4. We have considered the rival submissions on either side and also perused the material available on record. The claim of the assessee is that construction of the dwelling units and leasing out the same to sister concerns amounts to exploiting of a commercial asst. In fact, the sister concerns which took the property on lease utilized the same for their business of producing films by exploiting the same. The assessee as owner let out the same to the sister concerns and received rental income. A copy of the rental agreement, said to have been executed with Margadarsi Apparels, is available at page 20 of the paper book. Even though the nomenclature was stated as “leave and license agreement”, the terms of the agreement clearly show that it is only a lease and not a license. The lease was granted for 10 years commencing from 1-10-2000. The rent was Rs. 3,000 per annum. Therefore, it is not a case of a temporary exploitation of a commercial property. In fact, it is a long term lease. The assessee, being the owner of the property, let out the building to the sister concern for a long term and received rental income, eve though the nomenclature in the agreement has been stated as a licence. It is also not in dispute that tax was deducted at source by the respective sister concerns while paying the so-called licence fee. The question that arises for consideration is, when the assessee leased out the property to sister concern and received rental income, whether such income has to be classified as income from house property or as income from business. As rightly pointed out by the learned departmental representative, the assessee was not doing any incidental service after letting out the property.

After letting out the property, the assessee was simply receiving rent as landlord and did not carry out any further activity which could be termed as an adventure in the nature of business. Exploitation of the property by the sister concern cannot be construed as exploitation of the property by the assessee. Though the lessee is a sister concern, all the sister concerns are assessed separately. Under the Income-tax Act, they are separate legal entities. Therefore, exploitation of the property by one of the group concerns cannot be construed as exploitation by the assessee company. The commercial asset has to be exploited by the assessee in the course of its business activity for the purpose of claiming the income as business income. In this case, admittedly, the property was leased out to the sister concern and the sister concern was utilizing the same for film production. Therefore, it may not be corrected to say that the assessee was exploiting the commercial asset in the course of business activity. In those circumstances, in our opinion, the income therefrom has to be assessed only as income from house property and not as income from business.

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