Page 246 - DCOM301_INCOME_TAX_LAWS_I

Unit 8: Income from House Property

The lessee shall employ his own workers and pay the electricity and water bills. Notes
The company shall retrench 90% of its staff and workers and would employ contractual
labour, mostly of the lessee, for the purpose of its own manufacturing. The manufacturing
turnover post-letting-out is 20% of the original turnover, though the overall turnover in
all trades would probably exceed the existing turnover. A few relevant clauses of the
agreement are as follows:
1. The clause granting the right of use reads: “To conduct and operate the aforesaid
Industrial undertaking for carrying out the industrial activity of processing viz.
Rerolling at and from the industrial premises and for that purpose (and limited only
for that purpose) the owner will permit the conductors to use:
(a) The said industrial premises,
(b) The said machinery (described and listed in the said List hereto annexed and
marked ‘B’), and
(c) The benefit of the said licences/permits listed in the Statement hereto annexed
and marked ‘C’.”
2. Clause 3 of the agreement reads: “For the purpose of carrying out the said industrial
activities referred to above and limited for that purpose and limited for the duration
referred to in clause 2 above, the conductors shall be at liberty:
(a) Enter and use the said Industrial premises,
(b) Make use of the said machinery, and
(c) Avail of the benefit of the said licences and permits.

On the above facts, the company seeks opinion as to whether the compensation received
for letting out the manufacturing facilities would be income from house property or
business income.
Reply to the Case
Section 22 of the Income-tax Act charges to tax annual value of any building or land
appurtenant thereto as income from house property except for such portion of property
which is occupied for the purpose of business or profession.
Income for hiring out of property, in most cases would be assessable under the head
‘income from house property’ except in certain circumstances. For such income to be
assessable as business income, the property must have been occupied for the purpose of
business carried on. The querist is not in business of hiring out of premises or plant or
machinery and therefore it cannot contend that the hiring out is in itself user of premises
for business.
However, prior to the proposed restructuring, the property was used for the purpose of
business. As such, the issue is whether after the proposed restructuring, the factory premises
continue to be occupied for the purpose of business. Before adverting to the law on the
subject, let us reiterate the facts of the case:

1. The factory along with plant and machinery were used for the purpose of business
of rerolling and there have been losses incurred in the immediate past.
2. The company has been advised that its installed capacity is more than it can utilise.

3. The facilities as a whole have been let out on conductorship basis and the agreement
provides that the lessee shall be entitled to use the facilities only for the purpose of
rerolling.
Contd...

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