Income Tax--Current Issues

Practice Update

CA V.K. Subramani

BUSINESS INCOME VIS A VIS INCOME FROM HOUSE PROPERTY

Income Tax Act, 1961 has heads of income which are intended to provide clarity and certainty for computing the income chargeable to tax. Still, the controversy remains as regards the head of income say business income or property income and similarly business income or income from other sources. These kinds of controversies continue to emerge and remain due to the reason that the lawmakers could not visualise very many situations while drafting the legal provisions. Section 23(5) is a testimony to the effect that it was inserted by the Finance Act, 2017 to provide relief in the case of taxpayers who hold any building or land appurtenant thereto as stock in trade of business.

In the case of taxpayers, having building or land appurtenant thereto as stock in trade and which is not let out during the whole or part of the previous year the annual value of the same shall be treated as 'nil' for a period of 2 years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.

Thus, if a taxpayer has building as stock in trade and let out for whole or part of the previous year it is liable to tax. One can visualise a situation where a property held as stock in trade is let out for part of the year and thus being liable to tax (and out of the benevolent provisions of section 23(5)).

In Asstt. CIT v. S.N. Damani Infra (P) Ltd. (2022) 96 ITR (Trib) 707 (Chennai) : 2021 TaxPub(DT) 6606 (Chen-Trib) the assessee was engaged in the business of providing warehousing and supply chain solutions. The assessee offered rental income in respect of a property let out and offered the same under the head 'income from house property'. The Revenue sought to tax the income under the head 'business' by taking note of the assessee's memorandum of association etc. The tribunal held that the assessing officer has not brought on record any evidence to substantiate that the assessee was in the business of letting out properties on rental income as a systematic business activity. Accordingly, it was held that the income could not be taxed as income from property.

It may be of interest to know that in CIT v. Malabar and Pioneer Hosiery (P) Ltd. (1996) 221 ITR 117 (Ker) : 1996 TaxPub(DT) 0947 (Ker-HC) held that when a commercial asset is let out and income is earned it is taxable as business income regardless of the manner in which it is exploited by the owner for earning such income. The same High Court in Travancore Sugars and Chemicals Ltd. v. CIT (2022) 444 ITR 371 (Ker) (FB) : 2022 TaxPub(DT) 2658 (Ker-HC) distinguished its own precedent and held that source of income is one of the tests and not an absolute proposition to treat such income as business income. Readers may observe how the legal minds keep on evolving over a period of time.