Income from renting out property cannot be claimed as business income

To classify income from letting out property as business income, the taxpayer needs to exploit the property commercially by providing furniture, facility management, amenities and security

Treatment of rent has been a common point of dispute between the income-tax department and taxpayers. An individual would prefer to show rent as business income, which allows him to deduct all the expenses incurred to maintain the property, claim depreciation and don't need to pay notional rent when the property is not let out. All this also means revenue loss for the government. The I-T department, therefore, scrutinises every such case in detail to dissuade taxpayers from claiming it as business income.

The disputes also occur as the I-T Act doesn’t provide definite guidelines on the treatment of rent. “Assessees need to rely on the past judgments of the various income-tax appellate tribunals (ITATs) and courts. The rulings offer broad guidelines,” says Naveen Wadhwa, a chartered accountant with Taxmann.com. He adds that the facts of each case would differ and if the assessing officer denies claiming rent as business income, the only option is to appeal against the order and fight it out.

In a recent decision, the Kerala High Court held that income derived from letting out shops in a shopping mall must be treated as business income and assessed to tax under the head “profits and gains of business”. “The court observed that the primary intention of the taxpayer was commercial exploitation of property, from which it had derived a substantial part of its income by way of a complex set of activities,” according to a note from PwC India.

The taxpayer, a company engaged in constructing and promoting residential and commercial complexes, had earned income from letting out of shops in the shopping-mall constructed and managed by it. The company managed and conducted day-to-day operations of the shopping mall such as car parking facilities, security, housekeeping services, and electrical support, among others.

Initially, when it offered its earnings as business income, the tax officer assessed the income under the head “income from house property”. The case went to the ITAT, which ruled in favour of the taxpayer. When it went to the high court, the tax department cited past judgments of the Supreme Court and contended that rental income should be treated as “income from house property”. But the court observed the taxpayer was not only letting out the property but also involved in the management of the mall, providing amenities and facilities, which shows that it wants to exploit the property commercially. The income derived by the taxpayer cannot be regarded as simply from the exercise of the property right, and the court upheld the plea of the taxpayer.

If you are merely letting out the property and enjoying the rent as an individual or as a company, in most cases, you will need to mention rental income under the head “income from house property” in the income-tax return (ITR) form. It doesn’t matter whether it’s a house (residential) or an office (commercial). The same would hold true if the taxpayer is running a paying guest house (without a hotel licence), letting out the property on platforms such as Airbnb.

Rental income can be business income when, say, a business and its assets are leased as a going concern, or assets are leased along with furniture and fittings and other associated structures, or in addition to leasing properties, various other services are regularly provided (like lifts, security, or other amenities such as machinery, canteen, housekeeping, etc).

The right classification

Income from house property: A house let out, paying guest accomodation, or commercial property leased out

Income from other sources: When a tenant sublets a property

Business income: When business and assets are leased as going concern Along with leasing, other services, such as plant and machinery, are also provided