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KPMG FLASH NEWS
KPMG IN INDIA
Rental from commercial property being declared as Income from House
Property does not render the property as a residential property
24 June 2013
Background
Recently, the Chennai Bench of Income-tax Appellate
Tribunal (the Tribunal) in the case of Mr. I. Ifthiqar
Ashiq
1
(the taxpayer) held that commercial property
cannot be treated as a residential property on the
grounds that rental income received from it is offered
under the head Income from House Property.
The Income-tax Act, 1961 (the Act) provides that
annual value of the property (any building or land
appurtenant thereto), owned by an individual, other
than such portion of the property that he may occupy
for purpose of business or profession, shall be
chargeable to income-tax under the head income from
house property. The Act does not make any distinction
between rental income from residential property or from
commercial property.
____________________
1
Mr. I. Ifthiqar Ashiq v. ITO (ITA No. 232/Mds.2013 dated 11 J une 2013)
Assessment Year 2009-10
Facts of the case
The taxpayer was owner of a residential house, a
land and a commercial property.
The land was sold by the taxpayer and
subsequently a new residential house property
was purchased from the sale proceeds.
Accordingly the taxpayer claimed exemption from
capital gains tax
2
.
The taxpayer was showing the rental income
received from commercial property as Income
from House Property.
The Assessing Officer (AO) rejected the claim of
the taxpayer regarding exemption of capital gain
tax on the grounds that the taxpayer was the
owner of two residential house properties, at the
time of purchase of the new property.
___________________
2
Section 54F of the Act
2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.
AO held that as per the Act, it is essential that the
individual should not own more than one residential
house property other than the new asset and since the
term residential property and commercial property are
not defined in the Act, the commercial property should
be treated as a residential property.
The matter was thereafter carried to Commissioner of
Income-tax (Appeals) [CIT(A)] who dismissed the
appeal of the taxpayer, upholding the AOs order.
Issue before the Tribunal
Whether commercial property is to be treated as a
residential property considering the fact that rental
income received from commercial property is reported
under Income from House Property?
Tribunals ruling
The Tribunal observed that the Act does not create any
distinction between the rental income received from a
residential property and rental income received from a
commercial property. Both incomes are reported under
Income from House property.
Mere reporting of the rental income from commercial
property under the head Income from house property
does not make the same a residential property.
Further, in the subject case, rent agreements between
the taxpayer and his various tenants along with utilities
bills raised by The Chennai Metropolitan water supply
and Sewerage Board, were placed before the Tribunal
which were taken on records clearly depicting that the
property was being used for commercial purpose only.
The Tribunal also relied on the Supreme Court ruling in
Shambhu Investment P Ltd.
3
and Karnataka High Court
ruling in case of Bhoopalam Commercial complex and
Industires P Ltd
4,
wherein it was held that income from
letting out of commercial buildings is assessable under
Income from House Property.
Thus the Tribunal rejected the Revenues contention
that since the rent received from commercial property
was taxed under the head Income from house
property, it could be construed that the taxpayer owned
two residential house properties.
____________________
3
Shambhu Investment P Ltd. v. CIT [2003] 263 ITR 143 (SC)
4
CIT v. Bhoopalam Commercial Complex &Industries (P) Ltd [2003] 262 ITR 517
(Kar)
Our comments
This decision has reaffirmed that a commercial
property cannot be treated as a residential property
merely because rental income is taxed as Income
from House Porperty. There are several precedents
where the issue of whether rent from commercial
property is to be treated as income from house
property or business income has been analyzed. The
current judgment will help the taxpayer in claims
where they have commercial properties and
investments in new residential properties are made.
2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved.
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