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Income from Sub-letting of Property is taxable as Other Income

Kolkata bench of Income Tax Appellate Tribunal (ITAT) recently held that income earned by the assessee from sub-letting of property under leave and license agreement for a temporary period is taxable under the head income from other sources and not under the head business income since the sub-letting was not an object of the assessees’ business.

ITO Vs. M/s Natraj Vinimay Pvt. Ltd. (ITAT Kolkata)

Assessee is not owner of the property and had merely sublet the same to another person the said property was not shown in the books of accounts of the assessee. Since, the assessee is not the owner of the property the said rental income cannot be held as income from house property. Since, the assessee was not engaged in the business of subletting, the same cannot be construed as business income of the assessee. Accordingly, ITAT upheld the action of the assessee by treating the rental income as income from other sources.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

1. This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax (Appeals)-9, Kolkata [ in short the ld CITA] in Appeal No. 574/CIT(A)- 9/Ward-6(3)/2014-15/Kol dated 06.04.2016 against the order passed by the ITO, Ward6(3), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 29.12.2011 for the Assessment Year 2009-10.

2. The only issue to be decided in this appeal is as to whether the ld CITA was justified in deleting the addition of Rs. 12,94,60,000/- by treating the share trading loss as speculative loss, in the facts and circumstances of the case.

3. The brief facts of this issue is that the assessee is a company engaged in the business of trading of shares, deriving income from profit on sale of shares, brokerage etc. and profit on sale of landed properties. The assessee also derived rental income of Rs. 60,000/- which had been offered under the head income from other sources in the return of income. The assessee made profit from negotiation of sale of vacant land to the tune of Rs. 12,99,11,802/-. The assessee incurred loss on share transaction amounting to Rs. 12,94,60,000/-. The assessee incurred business expenditure that were debited in the profit and loss account to the tune of Rs. 4,69,729/-. The net loss from business out of aforesaid transactions worked out to Rs. 17,917/- (129911802 – 129460000- 469719 = -17917). In other words, the assessee claimed net business loss of Rs. 17,917/- in the return of income and the same was adjusted/set off with rental income offered under income from other sources to the tune of Rs. 60,000/- and gross total income of Rs. 42,083/- was disclosed in the return of income. The Ld. AO sought to treat the loss on account of share transactions of Rs. 12,94,60,000/- as speculation loss by invoking the provisions of explanation to Section 73 of the Act. The ld. AO also observed that the assessee had not owned any landed property and hence, there cannot be any sale for such landed property, and thereby the profit of Rs. 12,99,11,802/- was made only out of negotiation of sale of such vacant land and hence, the same was nothing but the commission/brokerage income derived by the assessee. However, the Ld. AO accepted the stand of the assessee of this income being offered under the head income from business. The Ld. AO only treated the loss on share transaction of Rs. 12,94,60,000/- as speculation loss and disallowed the same in the assessment and allowed the same to be carried forward for future set off with speculation income.

4. The Ld. CIT(A) observed that since the income from other sources of Rs. 60,000/- is higher than the income from business as reported in the return, the explanation to Section 73 of the Act cannot be applied which falls under the first exception provided thereon. The Ld. CIT(A) observed that the assessee has dealt in the purchase and share of the properties for the purpose of making profits. Whenever the assessee found that the price of the land purchased has appreciated after purchase, it had sold the same before getting it registered in its name. Hence the name of the assessee is appearing as the confirming party in the sale deed. The Ld. CIT(A) observed that even otherwise the Ld. AO had only considered this profit from landed property as commission/ brokerage income and had also accepted the head of income of the assessee as income from business in respect of such profits. Hence he held that it does not make any difference with regard to character of transaction as the head of income remained the same.

5. With regard to direction of the Ld. AO for treating the rental income of Rs. 60,000/- as business income of the assessee, the Ld. CIT(A) observed that the assessee had merely derived this rental income out of sub-letting of the property. In this regard, he observed that the assessee had allowed M/s Sanamex Imfinance Pvt. Ltd. to occupy and use the space at 2E, Cornfield Road, Ground Floor, Kolkata- 700019 on the basis of leave and license for a temporary period on a monthly rent of Rs. 5,000/-. Since, the assessee is not owner of the property and had merely sublet the same to another person the said property was not shown in the books of accounts of the assessee. Since, the assessee is not the owner of the property the said rental income cannot be held as income from house property. Since, the assessee was not engaged in the business of subletting, the same cannot be construed as business income of the assessee. Accordingly, he upheld the action of the assessee by treating the rental income as income from other sources. The Ld. CIT(A) based on these facts and placing reliance of the decision of the Honorable Jurisdictional High Court in the case of Eastern Aviation & Industries Ltd. vs. CIT reported in 208 ITR 1023 (Cal) and Mumbai Tribunal decision in the case of Rajan Enterprises Pvt. Ltd. vs. ITO reported in 41 ITD 469 ; Special Bench of Mumbai Tribunal in the case of ACIT vs. Concord Commercial Pvt. Ltd. reported in 95 ITD 117; Kolkata Tribunal decision in the case of ACIT vs. Blue Cheap Capital Market in I.T.A. No. 2211/Kol/2004 & Kolkata Tribunal in the case of Lokpriya Trade and Agency Pvt. Ltd. in I.T.A. No. 1781/Kol/2010, held that the assessee’s case based on the income criterion, falls outside the ambit of explanation to section 73 of the Act, since the income computed under the head income from other sources is more than the income / loss under the head business. Accordingly, he directed the Ld. AO to treat the loss suffered on share transaction of Rs. 12,94,60,000/- as normal business loss. Aggrieved, the revenue is in appeal before us on the following grounds:

1. The Ld. CIT(A) erred in law as well as in fact by deleting the addition of Rs. 12,94,60,000/- made u/s 73 of the Income Tax Act.

2. That the appellant craves the leave to add, alter, modify, include or delete any ground of appeal.

6. We have heard the rival submissions. We find that the rental income derived by the assessee has been correctly held by the Ld. CIT(A) as income from other sources as admittedly the assessee is not the owner of the property and had merely sublet the property to another concern thereby deriving rental income of Rs. 60,000/-. Hence, the Ld. CIT(A) had rightly treated the same as income from other sources as has been reported by the assessee in its return of income.

7. We find that the income from other sources is more than the loss incurred by the assessee in the sum of Rs. 17,917/- under the head income from business. Hence, the assessee’s case squarely falls under the first exception under “income criterion” provided in explanation to section 73 of the Act which reads as under:

“Where any part of the business of a company ([other than a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”], or a company [ the principal business of which is the business of trading in shares or banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]

Hence, we hold that the Ld. CIT(A) had rightly observed and treated this loss on account of share transaction as normal business loss of the assessee and not as speculation loss. Hence, we hold that the impugned transaction is falling within the ambit of exception provided in explanation to Section 73 of the Act. Accordingly, we do not find any infirmity in the order of the Ld. CIT(A) in this regard.

8. In the result, the appeal of the revenue is dismissed.

Order pronounced in the Court on 10.01.2018

Categories: Income Tax
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