Property letting after business closure was treated as house property income, with assessment shifted to the partners
Ordinary letting of rooms, shops and other portions of a building after discontinuance of lodge business was treated as realisation of property rights, not trading activity, because incidental amenities such as maintenance, utilities and watch and ward did not change the essential character of the receipts; the income was therefore assessable as income from house property. Where no business activity survived in the firm and the receipts arose only from ownership of the property, the firm was not the proper taxable unit and assessment in the partners' hands in their respective shares was justified.
Issues: (i) Whether the rental income from rooms, shops and other portions of the building let out by the assessee after discontinuance of the lodge business was assessable as business income or as income from house property. (ii) Whether, in the absence of any continuing business activity in the firm, the rental income could be assessed in the hands of the partners in their respective shares and the firm's assessment cancelled.
Issue (i): Whether the rental income from rooms, shops and other portions of the building let out by the assessee after discontinuance of the lodge business was assessable as business income or as income from house property.
Analysis: The decisive test is the true character of the receipts and the nature of the operations by which they are earned. Bare or ordinary letting by an owner, even with normal attendant facilities such as maintenance, internal utilities or watch and ward, remains a realisation of property rights and does not become trading activity. Income is treated as business income only where the property is a complex commercial subject or where letting is merely incidental to an active business. Here, the assessee had discontinued the lodging business and thereafter simply let out the rooms, shops and additions to various occupants. The provision of amenities did not alter the essential character of the receipts.
Conclusion: The rental receipts were rightly assessed as income from house property, not as business income.
Issue (ii): Whether, in the absence of any continuing business activity in the firm, the rental income could be assessed in the hands of the partners in their respective shares and the firm's assessment cancelled.
Analysis: A partnership assessment presupposes that the firm is carrying on business. Where the only receipt is property income and no business activity survives, the firm cannot be treated as the proper taxable unit for that receipt. On the facts found, the firm had ceased business and the income arose only from ownership of the property. In that situation, assessment in the hands of the partners as co-owners in their definite shares was justified.
Conclusion: The direction to assess the rental income in the partners' hands and to cancel the firm's assessment was upheld.
Final Conclusion: The appeals failed, and the lower appellate order treating the receipts as house property income and shifting assessment to the partners was sustained.
Ratio Decidendi: Where an assessee merely lets out property after discontinuing the business in which the property was earlier employed, and the letting is only ordinary letting with incidental amenities, the receipts are assessable as income from house property; if no business survives, the income may be assessed in the hands of the co-owners or partners rather than the firm.
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