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Whether rental income or business income

Rajesh Poddar (Chartered Accountant) (321 Points)

12 September 2009

Dear Friends

A Partnership firm has let out commercial property. there are two agreements made of 50% each one as rental income and other as business centre income. TDS is deducted at 20% on rental income and at 2 % on business centre income.

My query is that in reality it seems that it is Rental income only and as an auditor i should take the entire 100 % income as Rental income only. Client is opinion that since two agreements are made and two rates of TDS are deducted i should take the balance 50 % as business income.

Also what is important to note is that there has been no actual business activity been carried out by the lesse during the last 12 months as therir project failed. And the components of business centre are mostly of the types of payment made to salary staff, telephone , gardener, watchman. etc. (approx 10% of 50% of total income)

Please reply with case laws your expert views

Rajesh Poddar

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6 Replies

VARUN (PCC STUDENT) (523 Points)
Replied 12 September 2009

sir according to me .. 50% will be rental income and balance is income u/h business profession ....

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(Guest)

As per my opinion entire sud b taken as rent income as its not the business of the firm to let out properties...

shreyas (Student) (260 Points)
Replied 12 September 2009

i think entire income should be taken as rental income since firm is not engaged in property dealings...

Late CA Sampat Jain (Chartered Accountant) (4772 Points)
Replied 12 September 2009

Lease of business assets - In the light of various decisions of the Supreme Court the following propositions emerge regarding taxability of income from leasing out of business assets— (1) No precise test can laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head ‘Profits and gains of business or profession’. (2) It is a mixed question of law and fact and has to be determined from the point of view of a businessmen in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out. (3) Where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same. (4) If only a few of the business assets are let out temporarily while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than by employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets - Universal Plast Ltd. v. CIT [1999] 103 Taxman 493/237 ITR 454 (SC). From the decided cases the following principles emerge : (1) In order to be a business income within the meaning of section 10 of the 1922 Act [corresponding to section 28 of 1961 Act], there must be evidence of exploitation of a commercial asset. (2) Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause 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 clauses of option to renew. (3) But in order that the income derived from the lease may be taxable it must be shown that the lessor’s intention was that during the period of the lease the asset leased out must remain and treated as a commercial asset and exploited as such. (4) 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 - Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 (Cal.).

saurabh (student) (59 Points)
Replied 13 September 2009

In my opinion it is rental income as the main business of the partnership firm is not to let out property

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Sunil (Trader) (2611 Points)
Replied 21 September 2009

If the business of the firm or company is to run a business centre these are under mandap and shamiana contractors. A business centre is a business akin to running a hotel. You check in for a period of say 3 days and use services provided. You are not given a possession of the property to use as you like within the scope of contract. When you lease a property you are giving the right to possess and use as per the agreement for a continuous period.

If 50% of the agreement is for rent on the same premises, even though there is a business centre agreement for 50%, it is technically null and void ab initio because if you have given anyone a premises on rent, you cannot have a business centre running on the same premises as the occupant has the right of possession for the temporary period. Substance prevails over form. If you hire out a cabin in your office, you can make a business centre agreement. If you hire out the entire office, it will be a lease even if you make a business centre arrangement. Refer to the stamp acts of various states on this.

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