1985 (3) TMI 85 - AT - Income Tax

Appellate tribunal alters property rental income classification, withdrawing relief under proviso (c)

The appellate tribunal partially allowed the appeal, withdrawing the relief under proviso (c) to section 23(1) for a property let out for commercial ... Meaning of 'residential unit' for proviso (c) to section 23(1) - relief limited to units actually used as residence - proviso (c) to section 23(1) - availability of deduction to residential unit only - income from house property under section 22 - inclusion of rent for fixtures and fittings - essential fittings as part of the building - interpretation of lease recitals and contractual allocation of rentMeaning of 'residential unit' for proviso (c) to section 23(1) - relief limited to units actually used as residence - proviso (c) to section 23(1) - availability of deduction to residential unit only - Assessee not entitled to benefit under proviso (c) to section 23(1) because the property was let out for a non-residential (commercial) purpose. - HELD THAT: - The Tribunal held that the proviso confers relief only in respect of a residential unit, and whether a property is a residential unit must be judged by the use to which it has been put. A newly constructed property cannot be treated as a residential unit without evidence that it has been used as such. Where the property has been let for commercial purposes, it cannot be treated as a residential unit for the purpose of the proviso. Consequently the AAC's allowance of the relief under proviso (c) was contrary to this principle and was withdrawn. [Paras 3]Relief under proviso (c) to section 23(1) is not allowable as the property was let for a purpose other than residence.Income from house property under section 22 - inclusion of rent for fixtures and fittings - essential fittings as part of the building - interpretation of lease recitals and contractual allocation of rent - Entire composite rent (including amount described as for fittings and booster pump) is assessable as income from house property under section 22. - HELD THAT: - The Tribunal accepted the AAC's finding that the listed fittings (fans, tube-lights, brackets, wash basin, looking glass, and a booster pump) are part and parcel of the building and necessary to make it fit for habitation. Such items are embedded in the building and cannot be separated or let out independently; a booster pump, like a traditional well, is an essential part of modern buildings. A recital in the lease allocating part of the rent to fixtures does not override the correct legal characterisation under section 22. On this basis the AAC's direction to include the amount earlier treated as income from other sources into income from property was upheld, consistent with the authority cited by the AAC. [Paras 6]The whole rent paid under the lease is to be treated as income from house property under section 22; the amount earlier assessed under other sources is to be recomputed as part of income from property.Final Conclusion: The departmental appeal is partly allowed: the AAC's allowance of relief under proviso (c) to section 23(1) is set aside, but the AAC's decision to treat the entire rent, including amounts for fittings and a booster pump, as income from house property under section 22 is upheld. Issues:1. Assessment of income from property and fixtures under different heads.2. Claim of relief under proviso (c) to section 23(1) for a property let out for commercial purposes.3. Classification of rent from property and fixtures as income from property under section 22 of the Income-tax Act.Analysis:1. The judgment addresses the issue of the assessment of income from property and fixtures under different heads by the Income Tax Officer (ITO). The ITO assessed the income from property at Rs. 16,400 and income from fixtures at Rs. 10,000. The assessee appealed to the AAC, arguing that the benefit of proviso (c) to section 23(1) should apply to the property. The AAC allowed a relief of Rs. 2,400 under the proviso. However, the appellate tribunal held that the property was let out for commercial purposes, making it ineligible for the relief under proviso (c) to section 23(1). Therefore, the relief allowed by the AAC was withdrawn.2. The second issue pertains to the claim of relief under proviso (c) to section 23(1) for a property let out for commercial purposes. The AAC had granted a relief of Rs. 2,400 to the assessee under the proviso. The appellate tribunal, however, determined that the property, being let out for commercial use, did not qualify as a residential unit eligible for the relief under proviso (c) to section 23(1). The tribunal emphasized that the use of the property determines its classification as a residential unit, and since the property was utilized for commercial purposes, it was not entitled to the relief.3. The final issue involves the classification of the entire rent of Rs. 4,500 as income from the property under section 22 of the Income-tax Act. The AAC directed the Income Tax Officer to reconsider the income from property, including the amount assessed as income from other sources. The department appealed this decision, arguing that the buildings and fixtures were separately let out. The appellate tribunal, after careful consideration, upheld the AAC's decision, stating that the fittings described were integral to the building's habitability and could not be separated. The tribunal ruled that the entire rent of Rs. 4,500 should be treated as income from the property, in line with the decision of the Kerala High Court in a similar case. The tribunal disregarded the lease deed's recitation, emphasizing the legal principles and interpretation of section 22 in determining the income classification.In conclusion, the appellate tribunal partially allowed the appeal, withdrawing the relief under proviso (c) to section 23(1) and affirming the classification of the entire rent as income from the property under section 22 of the Income-tax Act.