Income Tax

ITAT directed Lease Income to be considered as Business Income

The Income Tax Appellate Tribunal has held in a case that lease income from sub-lease shall be deemed to be business Income because it was generated by the business of the assessee.

Facts of the case: Lease income to be considered as Business Income

In the case of Shri Shanthilal Movji Bhai Thakker vs. The Income Tax Officer [ITA No. 2267-2270/Chennai/2019 dated November 3, 2021], the Income Tax Appellate Tribunal in Chennai (“ITAT”) decided that rental income from a sub-lease should be treated as business income since the assessee was in the real estate development industry and the property in issue was sub-leased to help them grow their business.

Shri Shanthilal Movji Bhai Thakker (“the Appellant of the case”) dissatisfied by the order (called the “Impugned Order”) issued by the Assessing Officer had filed this appeal. The order of the Assessing Officer recognized lease income derived by the appellant as income from House Property as opposed to business Income offered by the appellant.

The Honourable ITAT noted that the petitioner obtained the property in question through a 27-year lease, i.e., over a considerable length of time, and that it is sub-leased to several tenants.

It was further noted that the appellant and his affiliated businesses/companies were involved in the real estate development industry, and also that the property in question was subleased in order to receive rental revenue from the tenants, therefore such income could not be classified as income from home property.

During the appellate processes, the assessee claimed that it had been in the real estate development, hotel, and lease rental industry for more than two decades. The partnership business of the assessee, ‘Sriji Developers,’ as well as the corporate entity, ‘Sriji Foundation Private Ltd.,’ were both engaged in real estate operations. The leased premises were a building with stores available for rent. The major goal was to rent out the premises, and the revenues were correctly provided as ‘business income.’ The assessee further contested the disallowance of interest and the disallowance under Section 14A.

Lease income to be considered as Business Income: The decision of ITAT and accompanying judgements

The ITAT cited the Hon’ble Supreme Court’s decision in the case-law of Raj Dadarkar & Associates vs. ACIT [81 Taxmann dot com 193] to determine that in circumstances where a given income seems to fall under more than one heading of income tax provisions, the income must be regarded as either the income from home property or business income.

It was highlighted that the petitioner and his affiliated organizations were in the business of real estate development, and the property/asset in question was subleased in order to receive rental revenue from the tenants, i.e., for the enhancement of their business.

Moreover, by applying the outcome of the case named Sultan Bros.(P) Ltd. vs. CIT [1964, 51 ITR 353 (SC)], it was held by the Court that the type of income varies depending upon the fact that whether the sub-letting was done as exploitation of the asset/property by the owner or was done by the owner in furtherance of his or her business. And by applying the same criteria in the present case, it was decided that the income received by the petitioner was to be treated as income from the business.

The ITAT also cited the case of M/s Chennai Properties & Investment Pvt. Ltd. Vs CIT (373 ITR 673). In this case, the entire revenue of the assessee was derived from renting out the properties it owned, and there was no other source of income for the assessee other than the money derived from letting out the aforementioned properties, which constituted the taxpayer’s business. As a result, the claim of the taxpayer that it was his business income was allowed by the Hon’ble Apex Court in Chennai Properties & Investments Ltd.

As a result, based on the aforesaid judgements and by applying these case laws, the ITAT^[1] decided that the rental income from the sub-lease should be treated as business income because the assessee (i.e., Shri Shanthilal Movji Bhai Thakker) was in the real estate development industry and the property in question was sub-leased to help them expand their operations.

Conclusion

In the aforementioned case, it was discovered that the primary source of income of the assessee was rental revenue. The assessee got a long-term lease on the property and sub-leased it in a systematic and regular manner with the intent of earning rental revenue from such operations in a business-like manner. A review of financial accounts reveals that the assessee got loans to purchase the properties and that the assessee’s business investments were largely in the form of various properties. Given the facts of the case, the income was correctly submitted as ‘Business Income,’ and the assessee’s claim in this regard was to be approved.

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