Conversion of business property to investment property

This query is : Resolved

Hemali Shanghvi (Querist)
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22 September 2011 Hi,

My client has a partnership firm, and that firm owns a factory property forthe purpose of running the business. However, the firm is currently not generating any income so they decided to rent out the above property. Does this attract any tax due to conversion of principal office property to an investment (rental) property?

Thanks in advance!

Hemali

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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22 September 2011 The nature of the factory property has not changed. Has the firm re-classified the asset as current assets? I suppose not. The firm has simply let out the factory on hire.

The rental income will be taxable under the head income from other sources.

Further, if the annual rental exceeds Rs. 9lakhs, the firm is liable to obtain service tax registration and levy service tax on the rent.

Hemali Shanghvi

Hemali Shanghvi (Querist)
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23 September 2011 Hi,
thanks for the reply. No, we have not classified the property as current assets. But once we give out for rent, the property will become an investment property, right? Then when we transfer that property, would'nt capital gains be applicable?
thanks again!
hemali

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CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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23 September 2011 Firstly, the property does not become an investment property by mere letting out of the property.

Secondly, when you transfer (sell) the property, capital gain will arise irrespective of the nature of the property. Even if it is a fixed asset, capital gain will be chargeable.

However, if the property is part of block of assets in which there are other properties apart from this property, the sale price of this property will be reduced from the WDV of the block and if the residual value is positive, no capital gain arises.

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