Rental Income from Property: Business Income or Income from House Property

Several heads of income are mutually exclusive - each head being specific to cover the income arising from a particular source [Sultan Bros. (P) Ltd. v. CIT [1964] 51 ITR 353 (SC)].

The heads of income described under the Income-tax Act do not exhaustively delimit sources from which income arises (CIT v. Chugandas & Co. [1965] 55 ITR 17 (SC).

The residuary head ofincome can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded. If the income from a source falls within a specific head set out in section 6 of the I.T. Act, 1922 (which corresponds to section 14 of the I.T. Act, 1961), the fact that it may indirectly be covered by another head will not make the income taxable under the latter head [S. G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC)].

According to section 22 the annual value of property consisting of any buildings or lands appurtenant thereto of which assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "income from house-property". 

Income from Property held as Business Income

[2015] 56 taxmann.com 456 (SC)

SUPREME COURT OF INDIA

Chennai Properties & Investments Ltd.

v.

Commissioner of Income-tax, Central -III, Tamil Nadu

Where in terms of memorandum of association, main object of assessee-company was to acquire properties and earn income by letting out same, said income was to be brought to tax as business income and not as income from house property■■■

Calcutta High Court has enunciated certain broad principles in Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 (App) which are as follows:

(i)		In order to be a business income within the meaning of section 10 of IT Act, 1922 (which corresponds to section 28 of I.T. Act, 1961) there must be evidence of exploitation of a commercial asset.
(ii)		Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily let it to be exploited by another person against payment of consideration and for this purpose may also execute a lease for a fixed period even with an option to renew it.
(iii)		But in order that the income derived from the lease may be taxable under section 10 of I.T. Act, 1922, it must be shown that the lessor's intention was that during the period of the lease the asset leased out must remain and be treated as a commercial asset and exploited as such.
(iv)		This intention of the lessor referred to above has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances.

Income from Property held as income from House Property

income from property under whatever circumstances derived can never be comprised in the category of business income (O. RM. M. SP. SV. Firm v. CIT [1964] 52 ITR 801 (Mad.)).

Section 22 of the Income-tax Act, 1961 – Income from house property – Chargeable as – Assessee constructed godown for being used in business. However, instead of using godown for its own business, assessee gave same on rent – Whether rental income must be computed under head of income from property – Held, yes . Maharashtra Fertilisers & Chemicals v. CIT [1984] 150 ITR 317 (Bom.)

Rental income derived in respect of one factory building after closure of business was chargeable under the head "income from house property" and no depreciation was allowable in respect thereof. CIT v. New India Industries Ltd. [1993] 201 ITR 208 (Guj.)

Where shops situated in hotel premises which included commercial complex also, were let out on rent without any dominant incidental services as part of this arrangement for purposes of running offices and commercial establishments, it was not a case of anything more than simple letting out of property as emphasis was on property itself rather than services; rental income is to be taxed under the head 'income from house property'

[2015] 56 taxmann.com 156 (Delhi - Trib.)  IN THE ITAT DELHI BENCH 'A' A.B. Hotels Ltd. v. Assistant Commissioner of Income-tax, Central Circle-3, New Delhi

Income from Property held as income from Other Sources

In CIT v. Ajmera Industries (P.) Ltd. [1976] 103 ITR 245 (Cal.), the assessee-company was formed with the main object of manufacturing pipes. It constructed factory sheds and installed therein high tension wires and a transformer. The manufacturing business could not be started for want of certain machinery for which it had obtained import licenses. The assessee let out the factory sheds and claimed that the rental incomewas assessable as income from business. It was held by the Calcutta High Court that as the assessee had not started its manufacturing business, it could not be said that the assessee had derived its income by exploiting its commercial asset through other agencies. The rental income could not be assessed as income from business. The factory sheds were let out along with the electrical installations. These electrical equipments could not be utilised separately from the factory sheds. The income from rent was, therefore, assessable under section 56(2)(iii) of the Act as income from other sources.