Friday, 27 September 2013

UNDERSTANDING INCOME FROM HOUSE PROPERTY WITH LATEST CASE LAWS :

In this article, we will discuss recent decisions of various courts & tribunals in respect of income from house property which will enable us better understanding of the subject and also help us to take better business decisions in this respect.  .
01. Income from Service charges : In the decision of Vikram Golecha Vs DCIT , 319 ITR 22, the court decided that Intention of Land lord to be considered  in determining wheather charging of service provided in terms of agreement  with tenants business income or not. Agreements entered with occupants only conferred contractual right to occupy space for business not vested with any right , title or interest of any kind in service and facilities provided by assessee. Hence to be treated as Income from Business. Again in the case of CIT v Mysore International Hotels (P) Limited, 322 ITR 116,it was held that When property is let out for composite rent , then service part will be business Income.


02. Ownership of Property : Possession of Flats handed over and consideration received by assesseee and hence assessee ceased to owner of property. This had been decided in the case of Pallonji M Mistry V CIT 167 ITR 319. Delhi High court in the case of CIT vs. C. J. International Hotels 53 ITR 92 held that  Assessee having constructed the building on land taken on lease from NDMC, which is owner, further in view of the provisions of section 27(iii) it is the sub licensee who would be “deemed owner” of those premises which the sub licenses transferred to the occupiers and those occupiers are paying rent/ license fee to the sub-licensees and assessee only collected interest free security deposits from sub licensees and no rent, therefore, provisions of section 23 are not applicable. (A. Y. 1999-2000).  In the case of CIT vs. Babu Khan Builders & Ors., 55 DTR 329, it was held that Where the builder had received full consideration against the sale of shops and flat the annual value of the property cannot be assessed in the hands of the builder even though the sale deed of the shops and flat were not registered.

03. Temporary let out :  Assessee company’s main object being investment in properties, flats, shops, warehouses, commercial properties. Due to recession certain flats not sold & let out on license basis for temporary period. Held, the rental income is taxable as income from property. Refer, Mangla Homes (P) Ltd. vs. ITO, 215 Taxation 511.

04. Brokerage : Brokerage paid by assessee to different brokers for introducing parties for renting out premises is not a charge created on property and thus same can neither be deducted from rent under section 23 nor is it allowable as deduction under section 24. Refer, Aravali Engineers P. Ltd . v. CIT,  335 ITR 508.

05. Association : Income of the association of flat owners is not taxable on the principle of mutuality, despite the fact that most of the flats are let out and tenants are paying the contribution. Interest earned from bank on surplus funds deposited in the bank is not taxable on the principle of mutuality. Refer, Wellington Estate Condominium vs. ITO, ITAT ‘I’ Bench Delhi, ITA No. 2846/Del./2007, dated on 16-10-2009 (BCAJ 42-A, June 2010 pg. 346).  In the case of Sujeer Properties (AOP) v ITO, it was held that Quantification of annual value of co-owned property in assessment of AOP is not a condition precedent for taxability of individual share of such income in hands of co-owners

06. Fair Rental Value : The benefit derived by the assessee from interest– free deposit could be taken in to consideration for determination of fair rental value u/s. 23(1)(a) but the benefit derived by the assessee can not be more than lending rate at which the deposits were available in the market at particular point of time. Refer, Baker Technical Services (P) Ltd. 126 TTJ 455. Again in the case of CIT vs. Moni Kumar Subba, 333 ITR 38 it was held that Whether notional interest on interest free security deposit is to be taken in to consideration to arrive at the notional value of the property in all cases or only in some glaring cases where the security deposit is completely disproportionate to the actual contractual rent or whether even a huge interest free security deposit can be totally ignored while determining the “fair rent” of the property is recommended to be referred to a Full Bench. However, merely making addition of notional interest in actual rent received is not calculation of the sum for which the property might is expected to let from year to year. Refer, Bada Saab Properties (P) Limited v ACIT.

Mumbai ITAT in the case of Dy. CIT vs. Reclamation Reality India Pvt. Ltd. Held that In view of Circular 204 dated 24.7.1976, the CBDT has accepted that under section 23(1)(a) the “sum for which the property might reasonably be expected to let from year to year” is the municipal valuation of the property. Thus notional interest on deposit not includible in Annual Value under section 23(1)(a) & 23(1)(b). The same view that the has been taken in CIT vs. Prabhabati Bansali 141 ITR 419 (Cal.) & M. V. Sonavala vs. CIT 177 ITR 246 (Bom.).

Mumbai ITAT again in the case of Tivoli Investment and Trading Co. vs. ACIT, held that It was held that for purpose of determining the ALV under section 23(1)(a) the Assessing Officer has to determine the fair / reasonable rent expected to be fetched by the property. Various factors must be considered by Assessing Officer. Therefore, Notional Interest on interest free security cannot be considered as determinative factor to arrive at fair sent. In the instant case, the matter was remanded back as no inquiry was made by Assessing Officer to determine fair rent under section 23(1)(a). (A. Y. 1992- 93, 1993-94). Again in the case of CIT v. K. Streetlite Electric Corporation, 336 ITR 438, it was held that Interest-free security deposit taken by assessee hugely disproportionate to monthly rent charged seems to be device to circumvent liability to income-tax hence, Notional interest on security deposit to be treated as income from house property    

07. Business Center : Assessee running business centre by exploiting property and not merely letting out the property, receipt from such activity be considered as business income and not income from house property. Refer, Harvindarpal Mehata HUF, T.L.R. 285. (Mumbai Bench “G”).

08. Restaurant : In the case of Batra Gulati Hotels v ITO, it was held that Restaurant given on rent is income from house property.

09. Interest on Loan : If Interest paid on original loan is allowable as deduction, then interest paid on second loan for repayment of original loan is also allowable. Refer, K.S.Kamalakannan v Asst CIT, 126 ITD 231 (Chennai).

10. Under construction House : In the case of Ashok Kumar Modi vs. ITO, 45 DTR 158, it was held that Where the assessee filed returns of income for two consecutive years, each categorically stating that the construction of the assessee’s residential house was yet to be completed, interest on house loan under section 24(b), could not be allowed.

11. Lease Rights : Where assessee has exploited lease rights in a property as an owner, rent received by assessee there from will be assessable under head " House Property" and not under Head : Income from Business". Refer, ACIT v Kanwalijeet Singh (HUF). In the case of Jasmine Commercials Ltd. vs. CIT, 56 DTR 159, it was held that Where the assessee was assessed to tax under the head income from house property with respect to notional income of rent deemed to have earned by the assessee after the expiry of lease period, year after year. Thereafter, the compensation actually received by the assessee from the lessee under a settlement agreement, for the occupation of the leased premise after lease period cannot be taxed under a different head than income from house property. 

12.  Agricultural Land : Ancestral agricultural land inherited by various co-owners cannot be held as business assets and its income is not liable to tax under the head Income from Business. Refer, Bhinabhai Ajabhai Satvara bv ITO. Please note that rent received from other land to be treated as business income and not income from house property.

13. Non receipt of rent :  In the case CIT v C J International Hotels Limited, it was held that When no amount of rent/ lease  or licence fee is received, by a licence of property owned by NDMC, said licence cannot be liable to pay any tax on fixation of ALV of said property by AO on notional basis. However, in the case of Vivek Jain v Asss CIT, 63 DTR 174, it was held that Where property has not been let out at all during previous year under consideration assessee is not entitled for vacancy allowance as provided under section 23 (1)(c). (A.Y 2002-03).

14.  Rental Vs Business : Rental Income by whatever name called is to be assessed as Income from HP and cannot be assessed under head " Income from business". Refer, ACIT v Kirpa Ram Bros. (HUF).  Again in the case of Sheetal Khurana Foods P. Ltd., the Punjab ITAT held that Where the assessee was engaged in business of manufacturing and sale of food items property on lease for a long period and in turn sub let the same, the income there from, was held to be taxable under the head income from house property and not business income as letting out property was not its business activity. Further the letting out was not temporary arrangement. (A. Y. 2003-04). Similarly, in the case of CIT v Sran Holdings (P) Ltd,  57 DTR 82 (Pat) (High Court), it was held that Assessee letting out flats in a multi storied complex . Assessee was nether in possession of the property nor doing any business there . Income was rightly taxes as income from house property.   

Mumbai ITAT in the case of Roma Builders (P) Ltd v JCIT, held that residential/commercial units and where there was no material on record to show that leasing of residential/commercial units was one of the principal objects of the company and that lease rent received by it was from exploitation of property by way of complex activities, the rent income derived as owner of property will be assessed as `Income from House Property’.

15. Film Studio : Mumbai ITAT in the case of ITO vs. Shanaya Enterprises,  held that Property Rental assessable as “business profits” if commercial activities carried out -The assessee let out its studio to production houses for shooting TV serials etc and offered the hire charges to tax as “business income”. The AO relied on Sultan Brothers vs. CIT 51 ITR 353 (SC) & CIT vs. Shambhu Investments 263 ITR 143 (SC) and held that as the “main intention” was letting out of property, the hire charges was assessable as “Income from house property“. The AO noted that TDS on the hire charges was deducted u/s 194-I. On appeal, the CIT (A) reversed the AO on the ground that the assessee had “exploited the property by way of commercial activity” and the receipts constituted “business income“. On appeal by the department to the Tribunal, HELD dismissing the appeal.

16. Sham Transaction : The assessee let out its premises to Minicon pursuant to a leave and license agreement. Minicon thereafter let out the said premises to various third parties. One director was common between the assessee and Minicon. It was held that save and except the fact that one of the directors of the  company was also a director in Minicon, there is nothing on record to show that the transaction between the assessee and Minicon is a sham transaction. Accordingly, the decision of the Tribunal that the amounts received by Minicon on account of letting out the premises is liable to be assessed in the hands of the assessee on the ground that the transaction between the assessee and Minicon is a sham and bogus transaction cannot be accepted. Sahney Kirwood Pvt. Ltd vs ACIT.

17. Rent Control Act : Assessee having two self occupied properties. In case of the second property, relevant provisions of the Rent control Act were applicable. The Assessing Officer is bound to determine the standard rent of the premises in accordance with provisions of Act. However ,where the standard rent has not been determined by the rent control authority , the Assessing Officer is duty bound to do the excise him self and determine the standard rent as per the provisions of the relevant Rent Control Act. Refer, Jayantibhai Meghibhai v Addl CIT, ACAJ Vol 35 Part 5. August 2011 P. 320.


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