By TIOL News Service

NEW DELHI, JULY 20, 2017: THE ISSUE BEFORE THE COURT IS - Whether when the owner had let out his building together with equipments & furniture, then the rental income is composite one and has to be treated as income from other sources. YES is the verdict.

Facts of the case:

The Assessee entered into a lease with Feedback Ventures Private Limited (Lessee) whereby the basement, ground floor, first floor and second floor of the building at Gurgaon, were given on rent to the Lessee for a period of four years. The assessee filed its return for the AY 2009-10 declaring income of Rs. 98,56,790. The return was picked up for scrutiny and notice was issued u/s 143 (2). The assessment order dated 5th December, 2011 passed by the AO noted that by an order dated 1st November, 2011, the Assessee was asked to show cause as to why income from letting out premises in question "should not be treated as composite rent as per the provisions of Section 56 (2) (iii) of the Act. The AO further noted that no reply to the said question was received from the Assessee. The Assessee had submitted in those proceedings that the said premises are furnished and centrally air conditioned with power back up. The furnishing of building is just ordinary and comprises of minor part of the whole value of the property. Similarly, central air conditioning is also an integral part of building. It was thus submitted by the assessee that since the said property is owned by and belongs to the Assessee, there is no question of treating the rental income as composite rental income. However, the AO rejected the above contentions. Consequently, the amount of Rs. 24,73,500 claimed for deduction under Section 24 (a) of the Act was disallowed and added back to the net income of the Assessee. The CIT(A) agreed that the Assessee as the owner of the building was exploiting the property by letting out the same and realizing income by way of rent. It was held that such rental income was liable to be assessed under the head of 'income from house property'. Accordingly, the AO was directed to allow deduction under Section 24 (a) of the Act.

On appeal, the HC held that,

++ in the present case, it is plain that letting is not merely of the building but a composite letting of both, the building as well as the equipment, furniture etc. and thereby Section 56 (2) (iii) of the Act was attracted. Applying the test laid down in Sultan Bros., the income from the letting in the hands of the Assessee was "a new kind of income" which could be considered to be income from house property since the income not from the ownership of the building alone "but an income which though arising from a building would not have arisen if the plant, machinery and furniture had not also been let along with it." The Court is, therefore, not persuaded to take a view different from that by the ITAT in the present matter. Consequently, the question urged, viz., whether the ITAT erred in holding that the rental income should be treated as 'income from other sources', is answered in the negative.

(See 2017-TIOL-1338-HC-DEL-IT)