Case Details:

Rao Computers Consultants Private Limited vs. DCIT

Appeal No.:

I.T.A. No. 710 of 2017

Order pronounced by:

Karnataka High Court

Date of Order:

26-05-2021

In Favour of:

Assessee

The appeal has been preferred by the assessee against the impugned order of ITAT on the issue “whether income earned by the appellant from letting out of the building along with other amenities in the industrial park shall be treated as ‘income from house property”.

The assessee claimed that the authorities erred in treating the business income derived from complex commercial activities of letting out building along with other amenities in an industrial park partly as income from house property and partly as income from other sources ignoring the law laid down by this Hon’ble Court in the case of Velankani Information Systems and the Circular issued by the Department.

Referring CIT vs. Velankani Information System Pvt. Ltd. (2014) ITR-OL 138 KAR:

• We have to find out what was the intention of the parties in entering into the lease transaction. It is not the number of agreements, which are entered into between the parties which is decisive in determining the nature of transaction. What is the object of entering into more than one said transactions is to be looked into.
•  However, if for enjoyment of lease, the subject matter of all the agreements is necessary, then notwithstanding the fact that there is more than one agreement or one lease deed, the transaction is one. As all the agreements are entered into contemporaneously and the object is to enjoy the entire property viz. building, furniture and the accessories as a whole which is necessary for carrying on the business, then the incomed derived therefrom cannot be separated based on the separate agreement entered into between the parties.

• What has to be seen is, what was the primary object of the assessee while exploiting the property. If it is found applying such principle that the intention is for letting out the property or any portion thereof, the same may be considered as rental income or income from properties. In case, it is found that the main intention is to exploit immovable property by way of complex commercial activities, in that event it must be held as business income.

• Clause (ii) of Section 56(2) provides that income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income tax under the head “profits and gains of business or profession”. Clause (iii) also provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head “Profits and gains of business or profession”. Therefore, the intention of the legislature is explicit and clear.

• The provision is clear i.e. if the letting of building, plant, machinery and furniture is inseparable, the income from such letting should ordinarily fall within the head “profits and gains of business or profession”. But for any reason, if it does not fall under that head, it shall fall under the head “Income from other sources”, but certainly not under the head “income from house property”.