[Opinion] Income From House Property vs. Business Income

Akanksha Bohra – [2023] 148 taxmann.com 231 (Article)

Introduction

The concept of Chargeability of Income Tax has been dealt under Section 4 of the Income Tax Act, 1961. According to the provisions, the amount earned as income is subjected to tax on the basis of its classification under the five heads of income i.e.

(i) salaries

(ii) income from house property

(iii) profits and gains of business or profession

(iv) capital gains and

(v) income from other sources”.

Section 22 of the Act provides for treatment of Income from House Property and Section 28 of the Act provides for the computation of income under the head Profits and Gains of Business or Profession. The underlining issue arises in circumstances where the income has to be distinguished i.e. whether it is to be treated under which head as the method of creating a charge is significantly different under both the heads and there exists a continuous dispute between the assessee and tax department in order to treat the income in such a manner which is beneficial to them respectively.

This paper seeks to analyse Section 22 and 28 of the Act and the treatment of income that falls under these heads of Income. The paper further tries to analyse the treatment of income arising from letting out of property and determine the factors essential for characterizing the nature of the income. For doing so, the researcher would essentially deal with the various judicial pronouncements of the Indian courts wherein they have thrown light upon the treatment of the rental income as per the provisions of the Income Tax Act 1961.

Chapter 1 – Heads of Income

Section 22, Income Tax Act 1961: Income from House Property

Section 22 of the Income Tax Act 1961 is the charging section for the “Annual value of a property owned by the assessee”. The head of Income from House Property (hereinafter referred as IFHP) includes house property consisting of “buildings, lands appurtenant thereto”. In case, if an income is derived by an individual from any vacant plot of land, it would not be charged under this head, rather it would be charged under either Section 28 of the Act i.e. Business Income or Section 56 of the Act i.e. Income from other sources. Further no tax can be imposed under this head if the property is occupied by the owner for business, profession or vocational purposes, the profits of which are assessable to tax. The tax under this head is levied on the owner, either legal or beneficial and not on the occupant of the premise. The charge created under this head is on the annual value of the concerned house property that is the “deemed income” and not the property itself. Prior, the charge was created on the annual value as defined under Section 23 and not on the basis of the actual income from the property. Now, a legislative shift is witnessed wherein it has shifted from tax on deemed income and closer to tax on actual income.

Hence the conditions necessary for creating a charge under Section 22 of the Income Tax Act, 1961 are as follows:

• The house property must include any building or land appurtenant thereto.
• The owner of the house property must be the assessee.
• The property must not be engaged for the purpose of any business or profession carried on by the owner, the profits of such engagement are chargeable to tax.

Section 28, Income Tax Act 1961 – Profits and Gains of Business or Profession

Section 28 of the Act states the tax treatment for any Profits and Gains of Business or Profession (hereinafter referred as PGBP) carried on by the assessee. According to Section 2(36) of the Act, profession includes vocation. In order to create a charge under this section, the “business, profession or vocation” must be carried out for a particular time period during the accounting year and not necessarily for the entire year. The section is applicable only on those business the profits of which are subject to assessment under the act, irrespective of the fact that whether any amount of taxable profit has been earned or not by the business. In Universal Radiators v. CIT, it was held by the court that in order to create a charge under this section, the income must have been accrued out of the business carried on by the assessee.

“An income directly or ancillary to the business may be an income from business, but any income to an assessee carrying on business does not become an income from business unless the necessary relationship between the two is established”.

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