Facts of the Case

Jay Metal Industries Pvt. Ltd., the assessee, had leased out a commercial building situated at Udyog Vihar, Gurgaon, under a lease deed dated 5 October 2007, to Feedback Ventures Pvt. Ltd. The lease covered the basement, ground floor, first floor, and second floor of the premises for a period of four years.

The premises were leased as a fully furnished, centrally air-conditioned commercial property with power backup through a 200 KVA diesel generator set, along with fixtures and fittings.

For Assessment Year 2009-10, the assessee declared rental income under the head “Income from House Property” and claimed statutory deduction under Section 24(a) of the Income Tax Act, 1961.

However, the Assessing Officer treated the rental income as composite rental income taxable under Section 56(2)(iii) under the head “Income from Other Sources”, disallowing deduction under Section 24(a). The CIT(A) allowed the assessee’s appeal, but the ITAT reversed that order and restored the AO’s findings. The matter reached the Delhi High Court.

Issues Involved

  1. Whether rental income from a furnished commercial building with fixtures, air-conditioning, and generator backup should be assessed as Income from House Property or Income from Other Sources?
  2. Whether the lease constituted an inseparable composite letting under Section 56(2)(iii) of the Income Tax Act, 1961?
  3. Whether deduction under Section 24(a) was admissible?
  4. Whether the assessee was entitled to deduction under Section 57(iii) if assessed under “Income from Other Sources”? 

Petitioner’s Arguments (Assessee’s Contentions)

The assessee contended that:

  • The primary intention of the lease was letting out the building, and amenities were merely incidental.
  • There was no separate rent allocated for furniture, fixtures, air-conditioning, or generator.
  • The amenities formed part of the building and were not separate plant or machinery.
  • Therefore, the rental income should be taxed under Income from House Property.

Alternatively, it argued that:

  • If Section 56(2)(iii) was applicable, only that portion attributable to furniture and fixtures should be taxed as “Income from Other Sources,” and the balance should remain under “House Property.”
  • If the entire income was treated under Section 56, deduction under Section 57(iii) should be allowed. 

Respondent’s Arguments (Revenue’s Contentions)

The Revenue argued that:

  • The lease deed clearly evidenced composite letting of building along with furniture, fixtures, air-conditioning, and power backup.
  • The letting of the building was inseparable from the letting of the equipment and amenities.
  • Hence, the case squarely fell within Section 56(2)(iii).
  • The assessee could have entered into separate agreements if it intended separate tax treatment.

Court Findings / Observations

The Delhi High Court examined the lease deed and observed:

  • The lease was not merely of the building but included furniture, fixtures, generator, and air-conditioning facilities.
  • Clause 2(d) of the lease deed specifically mandated handing over the office along with furniture and equipment.
  • Applying the Supreme Court’s test laid down in Sultan Bros. (P) Ltd. v. CIT, the Court held that the intention of the parties showed inseparable letting.

The Court distinguished Dr. P.A. Varghese v. Commissioner of Income Tax because, in that case, the amenities were integral parts of the building itself and not separately hired assets.

The Court upheld the ITAT’s conclusion that the lease constituted composite letting under Section 56(2)(iii).

Court Order / Final Decision

The Delhi High Court held:

Rental income from the furnished commercial premises was taxable as Income from Other Sources under Section 56(2)(iii).

Deduction under Section 24(a) was not allowable.

The assessee’s plea for apportionment of rent was rejected because such plea was not raised earlier.

The assessee was entitled to claim deduction under Section 57(iii) while computing income from other sources.

The appeal was disposed of in favour of the Revenue.

 Important Clarification

This judgment clarifies that where commercial property is let out along with substantial furniture, machinery, and operational infrastructure under one composite lease, the tax treatment depends on the inseparability test and intention of the parties.

If the letting of building cannot be separated from fixtures and equipment, Section 56(2)(iii) applies.

However, related expenditure can still be claimed under Section 57(iii).

 Sections Involved

  • Section 56(2)(iii) – Income from Other Sources (Composite Letting)
  • Section 24(a) – Standard Deduction from House Property Income
  • Section 57(iii) – Deduction against Income from Other Sources
  • Section 260A – Appeal to High Court
  • Section 143(2) – Scrutiny Assessment


 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:3497-DB/SMD13072017ITA3082016.pdf

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