PERSONAL TAX: Rental income could be business income

A taxpayer was carrying on a manufacturing business since 1963 in an industrial shed, which was taken on rent. In 2004, the taxpayer discontinued the business and sublet the business premises to another company.

In the return for assessment year 2012-13 (relevant year), the taxpayer had shown rental income of Rs 29.05 lakh received from the said premises as business income. The tax officer observed that the rental income for AY 2010-11 was assessed as income from house property. During the course of assessment for the relevant year, the tax officer formed the view that as per the lease agreement, the taxpayer was the absolute owner and in possession of the premises, and hence the rental income received from letting out the property has to be assessed as income from house property. Accordingly, the tax officer allowed the statutory deductions permissible for income under house property and added back an income of Rs 20.16 lakh under the head house property.

The taxpayer preferred an appeal against the said order at the first level of appellate authority, who agreed with the tax officer's decision.

At the second level, the taxpayer argued that the basic premise on which the rental income has been assessed as house property by the tax officer is completely wrong, as the taxpayer is not the owner of the property. In support of his argument, the taxpayer submitted a copy of the leave and license agreement, where it was clearly mentioned that the taxpayer is not the owner of the property but only a monthly tenant.

Though the taxpayer is a tenant of the said property since 1963, he cannot be held be as an owner, as neither the taxpayer is appearing as owner in government records nor any other authority. The tax officer argued that the taxpayer is a deemed owner of the said property and hence the addition to income was correct.

The tax tribunal summarised the core issue in this case as whether the taxpayer can be treated as owner or deemed owner of the property to consider the rental income received from subletting as income from house property. The tribunal was of the view that for treating the income derived from subletting of the property as house property income, the tax officer must establish the fact whether the taxpayer is owner or deemed owner of the property. While the tenant agreement papers demonstrate that the taxpayer is in possession/occupation of the property as a monthly tenant; it was incumbent upon the tax officer to prove that the taxpayer is enjoying ownership rights in the said property. For this purpose, it was also necessary to examine whether provisions of the Income Tax Act for deemed ownership in case of long leases (for a term greater than 12 years) would be applicable. The tribunal observed that none of these factual aspects have been properly examined before treating the rental income as income from house property by the tax officer.

In view of the same, the tribunal remanded the case back to the tax officer for verification and a fresh assessment.

The writer is a Sebi-registered advisor