Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether In The Hands Of Developer, Rental Income To Be Taxed Under Head “Business Income” Or “Income From House Property”?

QUERY: Assessee is a developer of housing complex. He intends to sell all the flats in a building constructed. However later on instead of selling flats assessee gave them on the rent. Under which head of income such rental income would be taxable? Further it sells such flats after 7/8 years to same tenants. Whether sale proceeds be taxed as business income or capital gains?
ANSWER: Under the Income-tax Act 1961, the income of an assessee is one and various sections direct the modes in which the income is to be charged. No one of those sections can be treated as general or specific for the purpose of any one particular source of income; they all are specific and deal with various heads in which an item of income of an assessee falls. These sections are mutually exclusive and where an item of income falls specifically under one head, it has to be charged under that head and no other.

In view of this, the Calcutta High Court in Azimganj Estate Pvt. Ltd. vs. CIT [352 ITR 82] has held that what is to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between two is a narrow one and has to depend upon certain facts peculiar to each case. Commercial assets like machinery, plant, tools, industrial sheds or godowns having high business potential stand on a different footing from assets like land and building. The subject matter of explanation being unsold flats still owned by the assessee, the Commissioner (Appeals) rightly concluded that the income therefrom should be treated as “income from house property” by way of letting it out.

So, in this case, rent from letting out flats by a developer would be assessed under the head “income from house property” and in consequence he sells of those flats to the same tenants would be assessed under the head “capital gains”, as the flats were held for 7/8 years and to be treated as “Investments”.

Posted in Income-tax

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