Skip to main content

Tax on property income depends on owner’s business

Be careful before categorising it as business income to claim deductions. Court judgements have clearly defined rules for such classification

Nowadays, many individuals are investing in real estate to create a regular income stream from rent. Apart from residential property, they are increasingly looking at spaces they can rent out to banks for ATMs, godowns, small shops and even commercial complexes. However, filing tax on the income received from such rent can be tricky—it can be classified business income, income from house property, or as other income depending on owner’s main line of business.

Claiming deduction Whether your income from real estate is treated as business income or as income from house property will have a significant impact on the tax deductions you can claim. For example, there are no specific restrictions on the deductions you can claim for business income. The tax payer is free to deduct all eligible expenses from his business income. However, the tax laws do prescribe limits on the quantum of deductions a tax payer can avail on income from house property.

Only 30 per cent standard deduction, municipal taxes and interest on borrowed capital can be claimed as deductions. Classify appropriately If an owner does not use a property for her business or professional purposes, the rental income from that property will be treated as income from house property. In other cases, it will be treated as business income. Suppose that the owner’s main business is to let out property. In that case, rental income from the property, even if it is a residential property, will be considered as business income. There is a court judgement in this regard which states that if the owner runs a paying guest establishment, the income received will be assessed as business income.

However, if letting out is not the property owner’s main business, then the rental income from either commercial or residential property will be taxed as income from house property. Further, if the owner holds a few properties as stock-in-trade and receives rental income from them, this will also be taxed as income from house property, unless letting out is the business of the owner.

All this makes it clear that income earned from letting out commercial property does not necessarily fall under the category of business income. This was highlighted by the Madras High Court in the case of Keyaram Hotels vs Deputy Commissioner of Income Tax.

The court ruled that if the owner is not engaged in the business activity of letting out properties, rental income received even from commercial property would be assessed as income from house property and not as business income. It observed that the owner had derived income from leasing out his property and had then disclosed it as business income. However, he had not undertaken any commercial or business activity to earn such income. Treatment of composite rent When an owner lets out a property along with other assets, for instance, a building with furniture or a factory building with machinery, the rent he receives is not just for the building but also for the other assets. At times, a person may also let out property and provide various facilities along with it, such as supply of water, security, etc. The rent he receives in all these cases is referred to as composite rent.

If the composite rent is inseparable, then the entire amount is charged under the head of business income or income from other sources, as the case may be. A Bombay
High Court judgment clarifies this in the case of CIT vs DL Kanhere (1972). An individual had leased a cinema building with furniture. As a cinema hall and furniture are inseparable, the court ruled that his rental income was to be treated as income from other sources without any apportionment.

If the property has been let out but the tenant has been provided with additional right to use furniture and fixtures, then the rental income is income from house property whereas the income from letting out of furniture will be treated as income from other sources or business income (if the owner is in the business of letting out furniture). Income from sub-letting With rental charges surging, many tenants consider sub-letting a portion of their rented premises. In such a situation, the income from sub-letting cannot be treated as income from house property as the tenant can never be the owner of the property.

It has to be treated as income from other sources. However, the Income Tax department has held a contrary view. According to it, since the tenant is in full control of the property, there is nothing to suggest that ownership of the premises is essential for levying tax under income from house property. In such situations, the .matter will be decided on case-by case basis.

Rental income will not be considered as income from house property in three situations: one, the property is used by the owner for his business or professional purposes; two, the owner’s main activity is to let out property; and three, if rental income from the property is inseparable from rental income received for furniture or fixtures.

They key principle that tax payers must bear in mind is that the nature of the property is immaterial for determining tax treatment. This depends primarily on what the owner’s main line of business is.

Business Standard New Delhi, 03rd July 2017


Popular posts from this blog

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…

New money laundering norms stump jewellery sector

New money laundering norms stump jewellery sector Dealers with turnover of Rs 2 crore and above covered; industry says threshold too low The central government has notified the money laundering rules for the gems and jewellery sector with immediate effect. Now, any entity deals in precious metals, precious stones, or other high-value goods and has a turnover of Rs 2 crore or more in a financial year will be covered under the Prevention of Money Laundering Act, 2002 (PMLA, 2002). The limit of Rs 2 crore would be calculated on the basis of the previous year’s turnover, said the notification. The directorate general of goods and service tax intelligence has been appointed under the Act. Sources said the government’s move to apply the PMLA to the jewellery sector was a fallout of income-tax raids on jewellers soon after demonetisation last November, when it was found that they sold gold and jewellery at a huge premium and accepted old currency notes as payment. The notification, issued on Augus…

Confusion over branded food GST

Confusion over branded food GST The GST Council's statement over the weekend on applying tax on branded food items has left most of the trade confused.

Even though the Council has not changed the rates on food -0 per cent on unbranded stuff and 5 per cent on brands -many small traders who didn't levy GST earlier said they could come under the 5 per cent slab after the clarification.

While they predicted some increase in consumer prices, large players said they can absorb GST in many ways and keep prices steady.

"Trade is confused and hence on behalf of our chamber, we have asked our members to go ahead and charge 5 per cent GST," said Sushil Sureka, general secretary of the Ahilya Chamber of Commerce and Industry in Indore.

The statement clarifying the application of GST came after some businesses were found deregistering their brands and selling under corporate brand name without paying tax, after the Council exempted unbranded food from the new all-encompassing indirec…