Some fundamental tax questions never seem to go out of fashion, irrespective of numerous judicial precedents on the matter. One such matter is the taxability of income from renting of immovable properties (Land and Buildings). The Income can broadly fall under the following two heads of income in the Income Tax Act:
1. Income from House Property (HP)
2. Income from Business and Profession (PGBP)
Taxability as HP provides (or limits) a standard deduction of 30% of the income along with a deduction on interest paid on borrowed capital for the purposes of acquisition, construction, repair, reconstruction, etc. (subject to limitations provided under the Act).
On the other hand, when taxed as PGBP, any expenditure laid out or expended wholly and exclusively for the business of leasing shall be allowed as a deduction for tax purposes.
As there are no limits or restrictions on deductions under the head PGBP, taxpayers veer towards classifying rental income received from lease of immovable property as PGBP. Obviously, this requires the support of facts in every case. The tax authorities, on the other hand, argue that rental income should be chargeable to tax as HP Income, perhaps the ease (and limitation) of deductions under HP being the driving force.
This is the genesis of the tussle between taxpayers and the department on taxability of rental income from lease of immovable property. However, thanks to the judiciary, over time and after many cases, certain key principles have emerged as cornerstones or templates for characterisation of rental income under the head PGBP.
Some of the salient ones are as follows:
1. Intent of the taxpayer – this intention can be gathered from the agreement for lease, Memorandum of Association and subsequent conduct of the parties.
2. Active ownership of property – if a property yields rental income by virtue of its own legal existence it would be classified as passive ownership and may be classified as HP.
3. Constitution documents of the taxpayer provide that the main object is to hold the properties (presumably not for gains) and let them out to earn rental income – the activities carried out by the taxpayer should be in line with the constitution documents.
The trend of judicial precedents and directions released by the Central Board of Direct Taxes (CBDT) reveal that the authorities are now accepting that ownership of property and leasing it out may also be done as part of a “business,” apart from as a mere owner. Some of these judicial precedents and directions are as follows:
The Apex court in Chennai Properties & Investments Limited v. CIT,[1] Karanpura Development Co. Limited[2] and Rayala Corporation (P.) Limited v. ACIT,[3] held that the deciding factor is not the ownership of the land or leases, but the nature of the activity of the taxpayer and the nature of the operations in relation to the same. Further, the Apex court has emphasised that for income to be characterised as “business income,” the activities actually carried out by the taxpayer need to be in line with its main object, according to its constitution documents.
Further, the CBDT has issued circular no. 16/ 2017 dated 25 April, 2017, wherein it has been clarified that the income from letting out of premises/ developed space along with other facilities in an industrial park/ SEZ is to be charged to tax under the head PGBP and has guided the department in not filing any appeals on this issue and to withdraw/ not press upon appeals already filed.
In the case of Raj Dadarkar & Associates v. ACIT,[4] the Apex court has held that apart from relying on the object clause, the taxpayer would be required to produce or refer any other material to show the conduct of activities as per its constitution documents. Based on the material produced by the taxpayer, the Apex court held that the taxpayer was unable to establish that he was engaged in any systematic or organised activity of providing services to the occupiers of the shops to constitute receipts from them as business income.
Therefore, when taxpayers are able to provide factual material to substantiate that their activities are in the nature of business and in line with their constitution documents, we hope to see reduced litigation on this issue. Needless, judicial precedents also seem to test the substance over form of transactions. Risk of litigation and related cash tax outflows could impact transaction values in the real estate sector.
(Views expressed are personal to the author. Article includes inputs from Janardhan Rao Belpu – Director – M&A Tax, PwC India, Kunal Singhaniya – Assistant Manager – M&A Tax, PwC India and Soumya Rastogi – Associate – M&A Tax, PwC India.)
[1] [2015] 373 ITR 673 (SC)
[2] [1962] 44 ITR 362 (SC)
[3] [2016] 386 ITR 500 (SC)
[4] Civil Appeal Nos 6455-6460 of 2017
Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.
(Republished with Amendments by Team Taxguru)
Author Bio
If I purchase a small shop by taking personal loan, Can 30% standard deduction and Interest paid on loan be deducted, While adding rental income to income under HP in Total income?
I am 74 years of the senior citizen. As per my understanding, we are excused from paying advance tax unless we have earned business income.
I have a certain share of profit withdrawn from the partnership firm whose primary income is rent received from the lease of the property,
My question is that the share of income derived from the firm is business income or rental income? If I show as rental income then I do not have to pay advance tax. But if my income is considered as business income then I am liable for advance tax which is not paid and hence I have to interest on advance tax not paid.
Can we show income from the rented partnership property as rent income in our Income Tax return and take excuse not paying Advance tax?
Requesting some guidance on the above matter in our email if possible. Our email address is ” tarun1946@gmail.com “.
As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the hands of the partner.
There is no age limit for partnership firm and it will be liable for advance tax.
If we are working in an Hotel then the Owner’s House Tax comes under which head in tally?
Mam,
3 Partners own a property. Now we want to get into partnership with object of constructing house and renting out the same. Does the income from this property would be business income?
Thanks,
As differently viewed:
PROPOSITIONs (as reframed, for a further insight):
‘House Property’ –
1. If let out by its owner, is taxable under the head of ‘Income from HP ‘or as ‘business income’?
SEE the itat Orders, in later cases in which, the same SC Judgments cited in the write-up have been relied on; in particular, the crux of the ruling of the SC in re. Raj Dadarkar & Associates vs CIT has been explained in a better perspective. One such case –
Nile Tech Ltd., New Delhi vs Acit, Circle-18(2)
2. A non-owner, having taken on lease, is taxable under which of the two heads?
< Provided / granting , of course, in terms of the lease agreement, the lessee is permitted to either use it for ITS OWN occupation / its own purposes – regardless of whether it is for own commercial use or for leasing it out (sub-lease) and earn rental income)
Cross refer the post @ https://taxguru.in/income-tax/law-case-law-role-professional-ca-lawyer.html (2 PARTS)- some of the observations made therein may be found to be of relevance.
3. Had the implications of sec 269 UA, if were of relevance hence considered, what possibly the view the adjudicating authorities would have taken?
OVER / back to …
courtesy
“Income from Business AND Profession (PGBP) <?
AND < ? Is it not 'OR' (CH IV – D-) !!!
The points of discussion with 'house property' as the cornerstone may not be of relevance to 'profession' by any logic.
In a jugular vein: May be, the legislature , in its wisdom, thought it appropriate to , hence chose upfront to have the two distinct kind of activities covered in the same head (of income) having in mind that with the passage of time both are most likely to have 'commercialization' as the driving force !?
Incidentally, itching to know, – is anyone aware of instance (s) in which the Explanation 1. inserted in 1998 but with full retrospective effect from 1-4-1962 has ever been invoked (foisted upon) in the case of any 'professional' !
For an analysis of the implications of the referred amendment of the law may look up, besides many other, such as decided court cases, the Article, – (2004) 270 ITR 33 .
A HUF holds a commercial property. Can renting of properties is treated the main business of the huf and the rental income shown as business income?
There is no other income for the HUF.
I am working in PSU and I am having house in my own name, if I gifted that house to my wife shall the rental income of that house can be shown in my wife account
Mam , If a person( Individual) builds a commercial building and give full building on rent from the first day , WHAT will be the implication ?
In which head we will take rental income ; HOUSE PROPERTY or BUSINESS HEAD ?
Suppose four person buy an office in co ownership. One of the co owner is using the office. The question is whether he should calculate depreciation on his part and what about other 4 co owners.
I feel the arguments before the SC were basically wrong. Paying service tax on renting of Immovable property should have been made the main issue. On one hand the Government accepted that renting Immovable property is business and therefore charging Service Tax on the same. How can the same Minisery treat the same as income from House or property? Therefore all properties being used for commercial purposes on which Service Tax is chargeable has to be treated as business Income.