The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that rental income earned from letting out a furnished office premises on a long-term basis is taxable under the head “Income from House Property” and not as business income. However, the Tribunal remanded the issue of allowability of interest expenditure to the Assessing Officer for fresh examination. The appeal filed by M/s Gogia Developers was partly allowed for statistical purposes by Accountant Member Ramit Kochar.

The case arose after the Income Tax Department reopened the assessment for AY 2020-21 on the basis of information received through the Insight Portal indicating that the assessee had earned rental income of ₹20.73 lakh but had not filed its return of income. During reassessment proceedings, the assessee filed a return declaring income of ₹5.23 lakh after claiming deduction under Sections 24(a) and 24(b) against rental income received from a property situated at West Patel Nagar, New Delhi.

During the assessment, the Assessing Officer found that the assessee had availed a loan of Rs.70 lakh by mortgaging the rented property and utilised the funds to acquire another property. The assessee consequently withdrew its claim of interest deduction under Section 24(b) and sought deduction of the interest as a business expenditure. The Assessing Officer held that the assessee was engaged in leasing activities and that the rental receipts constituted business income. The standard deduction under Section 24(a) was therefore denied, though depreciation and interest expenses were allowed while computing business income.

After examining the leave and licence agreement, the Tribunal noted that the premises had been let out primarily for earning rental income and that there was no intention to carry on any systematic commercial activity of operating or managing a business centre.

“It is very clear from the terms of the agreement that the assessee has let out the vacant premises for earning rental income, and there is no intention of undertaking any systematic business activity of running and maintaining the premises.”

The Tribunal further observed that merely charging GST on rent would not determine the head under which income is taxable under the Income-tax Act.

“GST on the premises is a statutory levy on rental income, however, the same will not determine its taxability under the heads of income prescribed under the 1961 Act. Both operate in different field.”

Accordingly, the Tribunal held that the licence fee received from the tenant was assessable as “Income from House Property” and that the assessee was entitled to the standard deduction available under Section 24(a).

However, regarding the claim of interest expenditure, the Tribunal noted that the borrowed funds had been utilised for acquiring another property and that no details had been furnished regarding its use, tax treatment, or eligibility for deduction. Finding that necessary facts were not available on record, the Tribunal restored the matter to the Assessing Officer for fresh examination of the interest claim under the appropriate head of income.

Thus, the appeal was partly allowed, with the Tribunal granting relief on the head of income issue while remanding the question of interest deduction for fresh adjudication.

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