Rental Income - Income Under the Head ‘House Property’ or ‘Business Income’, Where to Disclose?

Treatment of income from renting immovable properties for the purpose of calculating taxes has been a common point of dispute between the Income Tax department and the taxpayers. Rental income of property has different connotations depending on whether it is treated as house property or business income. Accordingly, such income may broadly fall under the following two heads of income in the Income Tax Act –

• Income from House Property, or

• Income from Business and Profession

In case the property income is declared as income from house property, then according to section 24 of the Income Tax Act, 1961, a maximum tax deduction of 30% of Net Annual Value may be claimed. This deduction is towards the repair and maintenance of the property. Besides standard deduction, only municipal taxes and interest paid on capital borrowed for the purposes of acquisition, construction, reconstruction, repair, etc. (subject to limitations provided under the Act) are allowed as a deduction against the rental income. This deduction is irrespective of the actual expenses incurred by the owner. It limits the overall tax benefits available to the assessee.

On the other hand, if taxed as income from business, any expense incurred wholly and exclusively for the business of renting shall be permitted as a deduction for tax determination.

As there are no constraints on deductions under the head PGBP, assessees prefer classifying rental income received from the lease of immovable property as income from business, which will, in turn, mean revenue loss for the government. Therefore, the Income Tax department scrutinizes every such case to dissuade taxpayers from claiming it as business income.

The stand taken by the department in such cases is based on the judgement in the case of East India Housing and Land Development Trust Ltd vs CIT wherein the Hon’ble Supreme Court held that specific provisions prevail over general provisions and hence the income derived by the company from shops and stalls is income received from property and falls under the specific head ‘Income from House Property’ only as it is received by the company formed with the object of developing and setting up markets.

Hence, the department believes that when there is a particular head for property income, i.e., ‘Income from House Property’ under the Act, then the income earned from renting of immovable property should be charged under such head only.

This is the point of dispute between taxpayers and the department on the taxability of rental income earned from leasing the immovable property. However, over time and after many judicial pronouncements, certain fundamental principles have emerged as cornerstones for characterizing rental income under the head PGBP.

Prominent principles to classify Rental Income as Business Income –

• The intent of the assessee is to do business – this intention may be inferred from the agreement for lease, objectives listed in the Memorandum of Association and consequent conduct of the parties.

• Active ownership of property – if property yields rental income because of its own legal existence, it would be categorized as passive ownership and may be classified as House Property.

• Constitution documents of the assessee provide that the principal objective is to hold the properties (presumably not for gains) and lease them out to earn rental income – the activities conducted by the assessee should be in line with the constitution documents.

To have a better understanding of the principles as mentioned above, let’s have a look at some of the related case judgements –

Chennai Properties and Investment Ltd. vs Commissioner of Income Tax, (2015)

In this case, the assessee company was incorporated with the primary objective, as mentioned in the Memorandum of Association, to procure the properties in the city and let out those properties.

The Hon’ble Supreme Court held that since holding the properties and earning income by letting them out is the main objective of the company, as stated in the Memorandum of Association, the income so derived is in the nature of business income and shall be disclosed under the head ‘Income from Business or Profession’ and not under ‘Income from House Property’.

Rayala Corporation (P.) Limited vs ACIT, (2016)

In this case, the assessee company was in the business of renting its properties and was receiving rent as its business income. The assessee company claimed that the said income should be taxed under the head ‘Profits and Gains from Business or Profession’ and not under ‘Income from House Property’. In the appeal filed before the High Court, the revenue department argued that leasing and letting out of shops and properties was not the main business of the assessee-company as per the Memorandum of Association and, therefore, the income earned by the assessee-company should be treated as income earned from house property.

However, the Apex court held that the assessee company has only one business: leasing its property and earning rental income. Therefore, the income so derived should be treated as its business income.

Raj Dadarkar & Associates vs ACIT, (2017)

In the above-mentioned case, the Hon’ble Supreme Court held that apart from relying on the object clause, the assessee would be required to provide or refer any other material to prove the conduct of activities according to its constitution documents.

Based on the material provided by the taxpayer, it was held that the assessee was not able to establish that he was engaged in any systematic or organized activity of rendering services to the occupiers of the shops to consider receipts from them as income from the business.

Sultan Brothers (P) Ltd. vs Commissioner of Income Tax, (1964)

In this case, the Appellant had let out the building fully equipped and furnished for a period of six years for running a hotel and for other ancillary purposes.

The Apex court observed that whether a particular letting is business has to be determined as per the circumstances of every case. Further, it was observed that “every case has to be looked at from the point of view of a businessman to find out whether the renting out was the doing of a business or the utilization of his property by an owner”.

Accordingly, in the facts of the above case, the Supreme Court held the income to be in the nature of business income.

Karanpura Development Co. Ltd. vs Commissioner of Income Tax, (1961)

The facts before the Supreme Court, in this case, were that the income had been received pursuant to the leasing of coal mining rights. The assessee company was incorporated with the object of acquiring and disposing of the underground coal mining rights in specific coal fields. It had limited its activities to procuring coal mining leases over large areas, developing them as coalfields and then sub-leasing them to collieries and other companies.

The taxpayer had shown the income as business income. The Supreme Court observed that the objective and the manner of its activities and the nature of its dealings with its properties need to be taken into account. Accordingly, it had held the income to be in the nature of business income for the above case and not as house property income.

Interpretation

Hence, the trend of judicial pronouncements and directions issued by the Central Board of Direct Taxes (CBDT) show that the authorities are now accepting that owning a property and renting it out may also be done as part of a business, besides as a mere owner of the property.

The Hon’ble Supreme Court, in several cases, held that the deciding element is not the ownership of the property but the nature of the activity of the assessee and the nature of the operations concerning the same. Further, it has emphasized that for income to be characterized as business income, the activities actually carried out by the assessee need to be in line with its primary object, according to its constitution documents.

As seen above, in the case of Raj Dadarkar & Associates vs ACIT, Supreme Court held that apart from depending on the object clause, the assessee would be required to provide or refer any other material to show that the conduct of activities is as per its constitution documents. Therefore, reduced litigation is expected on this issue if taxpayers are able to provide factual material to prove that their activities are in the nature of their business and according to their constitution documents.

Moreover, the CBDT released circular no. 16/2017 on 25^th April 2017, wherein it has been clarified that the income from renting out of premises/developed space with other facilities in an industrial park/ Special Economic Zone is to be leviable to tax under the head PGBP and has instructed the revenue department to not file any appeals on this matter and to withdraw/not press upon appeals already filed.

Another point worth noting here is that residential and commercial properties are treated in the same way from a tax perspective. The deciding factor is the main line of business of the owner, irrespective of the fact that whether the property is residential or commercial. If the individual is in the business of letting out property, then the rental income, even from the residential property, will be accounted for as a business income.

Conclusion:

• The Rental Income may only be considered under the head ‘Profits or Gains from Business or Profession’ if the person can substantiate that the same is in accordance with the firm’s primary objective from its constitution documents and conduct of activities.

• Since it is mandatory to substantiate that the rental income is in accordance with the ancillary or the main objective of business, it is prudent for the individuals to consider the rental income under the head 'Income from House Property' if they are not having a business of a similar objective.

• And if they wish to consider it as business income, they must have solid grounds and documentary evidence to substantiate that the rental income is in line with the ancillary/main objective of its business activity.

• The above-discussed treatment is applicable to rental income from both residential and commercial properties in the same manner for the purpose of their classification.

Disclaimer-The information given above is to provide a general guidance to the readers. This information should not be sought as a substitute for legal opinion.

 Source: https://www.manishanilgupta.com/blog-details/rental-income-income-under-the-head-house-property-or-business-income-where-to-disclose

 

COVID 19 – A Turning Point for E-Commerce Industry

Covid-19 was a challenging phase for the entire economy. But at the same time, it proved to be a boon for the e-commerce industry. The pandemic has forced consumers to switch from shops, supermarkets, and shopping malls to online portals to purchase products, ranging from essential commodities to branded goods.

Before we jump on to the central aspect of this article, let us first revise the definition of e-commerce. E-Commerce means a business model that allows companies and individuals to buy and sell goods and services over the internet. The e-commerce transactions can be of different types such as business to business (B2B) (Eg. Alibaba), Business to Consumer (B2C) (Eg. Walmart) and Consumer to Consumer (C2C) (Eg. eBay).

Hence, e-commerce does not require any brick-and-mortar buildings to sell goods or services, which is why this was the only option left for people during the pandemic.

The pandemic brought about a notable shift in shopping behaviour, with more and more customers and businesses relying on e-commerce. The necessity for social distancing and prioritising safety throughout the pandemic led to millions of people adapting to e-commerce platforms.

Statistics

• According to NASSCOM, India's US$14 billion Indian e-commerce market, which began as a niche industry a few years ago, is accelerating and shows more than 25 per cent growth.

• India's e-commerce market is projected to cross US$200 billion by 2030 due to increased analytics, transactions, and internet penetration.

• India is viewed as the fastest expanding and most attractive e-commerce economy in the world. According to an IBEF report, India's retail sector is estimated at over US$ 883 Billion, ranked 5^th largest globally and expected to cross US$ 1.3 Trillion in 2024. Of this, e-commerce is anticipated to reach US$ 111 Billion by 2024.

As per Grant Thornton, e-commerce in India is foreseen to be worth US$188 billion by 2025.

Social media – A boon for E-Commerce

• E-commerce is extending its reach to the general public on the back of social media, which provides a mechanism for advertising and receiving feedback, building brand image, and promoting new launches.

• Retailers also use social media to trace the first-time and repeat buyers of a product.

• Social media plays an essential role in studying consumer lifestyles and spending patterns.

Consequences of Increased Reliance on E-commerce

• Opportunities for consumers

E-commerce, driven by digitisation and internet penetration in the rural market, creates enormous options for consumers. Competitive prices, deals, and efficient delivery, along with the convenience of avoiding long queues, have entirely altered the buying experience.

• Moment for Start-ups

The continuous change in the buying patterns of Indian consumers led to the growth of start-ups in the e-commerce market. Online retailers have maintained and grown their base of online consumers by granting options for payment on delivery and return policies with attractive deals and discounts.

• Increased Competitiveness

E-commerce in India is booming because of increased access to the internet. This generates diverse business opportunities that will encourage organisations to become more up-to-date and enable increased competitiveness.

Government Initiatives to Promote E-commerce

Many initiatives/schemes have been announced by the Government of India, namely Digital India, Make in India, Start-up India, Skill India, etc., to promote e-commerce. The proper implementation of such programs will likely support the growth of e-commerce in the nation. Some of such initiatives taken by the government to support e-commerce in India are as follows –

• National Retail Policy

The government had recognised five areas in its national retail policy: ease of doing business, rationalisation of the licensing process, digitisation of retail, focus on reforms, and an open network for digital commerce, stating that offline retail and e-commerce need to be administered integrally.

• MoU for cashless and transparent payment

Government e-Marketplace signed a Memorandum of Understanding with the Union Bank of India to facilitate a cashless, paperless, transparent payment system for various services in October 2019.

• Digital India Movement

Under the Digital India movement, the Government of India launched various initiatives like Umang, Start-up India Portal, Bharat Interface for Money (BHIM), etc., to boost digitisation.

• Hike in Limit of FDI

To enhance the participation of foreign businesses in E-commerce, the Indian government hiked the limit of FDI in the E-commerce marketplace model to up to 100% (in B2B models).

• Imposition of tax on foreign e-commerce operators

In October 2020, the government amended the equalisation levy rules of 2016 and mandated foreign companies running e-commerce platforms in India to have permanent account numbers (PAN). It levied a 2% tax in the Financial Year 2021 budget on the sale of goods or delivery of services by a non-resident e-commerce operator.

Strategies for the E-commerce Boom in India

E-commerce in India has undergone rapid growth driven by the Covid-19 outbreak. However, there are some factors that form the base for the expansion of e-commerce. Some of such elements are as follows–

• Ease of access

Growing internet usage at affordable rates and the rise of smartphones lead to easier access to e-commerce. This connectivity enables services like booking train/hotel/cab/movie tickets, mobile and electric bill payments, placing online orders, etc.

• Logistics

Logistics is one of the significant challenges confronting e-commerce players. Local logistics firms in India are usually not up to satisfying the requirements of e-tailers; hence e-commerce firms have to make substantial investments to build their own logistics.

• Infrastructure

E-commerce players also need to upgrade the infrastructure to overcome payment difficulties, create offline presence, execute more push-marketing, manage price-sensitive consumers, and compete globally.

• Competitive Analysis

E-commerce companies have to focus on matters pertaining to rapid additions of customer segments and product portfolios. Information should be gathered related to market intelligence on growth, size and share, and managing multiple customer engagement platforms to expand into new geographies, brands & products; while simultaneously controlling a very competitive pricing environment.

• Mode of Transactions

Concerns about security, privacy, and tracking fraudulent purchases are some outside forces that affect a business. Other factors like back-end service tax, cross-border tax, and regulatory issues can have severe implications for e-commerce companies.

• Other concerns e-commerce businesses must address include the incompetence of the organisational structure to keep pace with the speedy changes, cybersecurity for curbing fraudulent transactions and insider threats, tax restructuring, and legal compliance.

• The expansion in the number of people buying online suggests that e-commerce companies should concentrate on customer experience and technological advancements to accelerate growth.

Apart from this, to provide a range of goods & services and extend reach, companies should ensure faster speed for their websites and devise easier-to-use mobile apps to improve user experience.

Summary:

E-commerce is a combination of convenient shopping, competitive pricing, discounts, flexible and speedy purchasing, etc.

The E-commerce industry has been directly influencing micro, small & medium enterprises (MSME) in India by providing means of financing, technology and training.

The Indian e-commerce sector has been on track with upward growth. It is anticipated to surpass the US to become the second-largest E-commerce market in the world by 2034. Technology-enabled innovations like digital payments, hyper-local logistics, analytics-driven customer engagement and online advertisements will apparently promote growth in the sector.

The expansion of the e-commerce industry will also raise employment, increase revenues from export, raise tax collection by ex-chequers, and render better products and services to customers in the long term.

A richer user experience will substitute traditional foundations based on price and quality through guidance on selecting the right product, personalisation, etc. The growth of online retailers in India is making brick-and-mortar stores revamp their operations across regions.

Looking at the customers' preference in the new normal, it can be inferred that e-commerce has now come to stay, well beyond Covid-19.

Disclaimer-The information given in this article is for general guidance to the readers. This information should not be sought as a substitute for legal opinion.

 

Source: https://www.manishanilgupta.com/blog-details/covid-19--a-turning-point-for-e-commerce-industry

Hiring a Professional Accountant for your Business

As per the present statistics, there are over 1.3 million accountants only in the US, and with the growing pace of the businesses in India, people need the assistance of professional accountants to take care of the important aspects of their company. It does not matter, whether you are an entrepreneur or an established businessman, you need a professional accounting service to do the needful tasks such as trademark registration in Delhi and other such essential odd accounting jobs.

In this article, you will know about some of the services that you get on hiring the professional accounting firms for your business in India.

Bookkeeping

The business owners fail miserably to keep track of the business whereabouts and especially bookkeeping. Most of the business owners are also unaware of this aspect. Do not worry as professional accounting services in West Delhi can help in explaining to you about bookkeeping and can also offer you an accountant to do the needful. Under bookkeeping, the accountant will keep track of business accounts, cashbooks, transactions, ledgers and all the expenses of the business.

Business asset management

Coming together to the business asset management, they help you in managing your business assets and channel them adequately to give productive outcomes to your business. They will also help you compile all the business reports to find the loopholes and negative aspects to correct them for better management.

Taxation Processes

Along with the management tasks, the professional accountants will also handle all the taxation jobs for your businesses. They will handle the ROC filing services in Delhi, Income tax filing and all other works associated with it. It might be difficult for the business owners to keep a track about all the taxation details and end up paying the extra amount to the authorities. A professional accountant can help you come up with better ideology and taxation schemes to save you the right amount of money in the long run.

These are a few of the services that you get on hiring a professional accountant for your service. There are many other services that one gets on hiring the professional accounting firms in Delhi. Manish Anil Gupta & Co. is one of the top companies in Delhi and has a team of professional accountants to deal with all types of business management jobs. If you want an affordable but efficient accounting service, then contact them today to know more and get a free price quote.

Thinking Of Starting a New Business!

 Which one suits you the most?

Brainstorming the idea for a business is a difficult task but deciding the appropriate form of organisation to shape your business idea is just next in the row. Choosing the right form and structure of organisation for a business is crucial as it has long term implications. It requires careful, thorough thinking and analysis to determine the number and nature of future obligations and compliances. Factors like owner's liability, taxation, control, applicable laws, compliances, life span etc., should be collectively considered to make a sound judgment. To help you analyse and decide better, in this text, we have tried to cover the various forms of organisation and their suitability that one can opt for his business.

SOLE-PROPRIETORSHIP FIRM

 

To start with, let's discuss the simplest form of business which is the sole proprietorship firm. If you desire to start and operate your business single-handedly, this form is the best for you. 

 

It is the most suitable when one is looking for an organisation that allows and offers-

• Sole authority and personal supervision over the business

• Easy and economical business set-up.

• Fewer government regulations

• Lesser tax burden and compliances as the proprietor is liable to pay tax once only that too on his personal income as per the different slab rates.

• No profit-sharing

 

Less fit due to the following reasons-

• Limited funds 

• Liability is personal and unlimited

• Limitation of continuity and management

• No loss is shared 

 In India, its registration is not mandatory, but it is advisable to get it done to avail of all the benefits given by the government. Some acts like the Shops and Commercial Establishments Act, Micro, Small and Medium Enterprises Development Act, 2006, Intellectual Property laws may require a sole proprietorship firm to get registered. All in all, a sole proprietorship firm is best for those who desire to start a small business with the full authority of their own and lesser compliances and tax liabilities. Businesses that provide only personal services, like retail shops, tailoring services, professional services, etc., should opt for this. 

 

PARTNERSHIP FIRMS

 

Next on the list is a Partnership Firm which the Indian Partnership Act, 1932 govern. To overcome all the constraints faced in the sole proprietorship firm, one can opt for this type of business form. Partners can pool their resources together and overcome the problem of capital.

One demerit it has is related to the taxation aspect. It is taxed at a flat rate of 30% and cannot benefit from the slab rates like individuals and HUF. Also, there is a limit of a maximum of 100 partners (as per the Companies Act, 2013 in a partnership firm. But the Central Government has prescribed maximum number of partners in a firm to be 50 by the rules issued in 2014 limiting the number of partners to 50 only, which can become a constraint if a point comes where the partnership requires more funds and the partners don't have it. This can limit its expansion. One more limitation is that the liability of the partners is unlimited. 

 

Its formation is very simple as it is created with merely drafting a partnership deed among the partners, and its registration is not compulsory but yet advisable. A registered partnership, of course, has the edge over an unregistered one as it cannot sue any third party for the enforcement of any right arising from the contract. This form is suitable for starting a business on a small scale where few agreements and debts are entered into.   

 

LLP (LIMITED LIABILITY PARTNERSHIP)

 

If you are confused to choose one between a company and a partnership firm, choose an LLP. LLP is a very convenient form of business to start with as it offers the benefits of both a partnership firm and a company. Unlike a general partnership firm, the partners can be unlimited in number and have limited liability. Compared to a company, it has lower compliance costs. Its structure is less complicated, and MCA also gives relaxation to it from time to time. 

 

An LLP requires to get its account audited only if the partner's contribution exceeds Rs 25 Lakhs or the turnover exceeds Rs 40 Lakhs. Partners have the flexibility to decide the terms and conditions governing their partnership as per their choice. Only two partners are enough to start an LLP with the condition of at least one partner being a resident in India. 

 

As we say, everything has its pros and cons; LLPs also have some downsides related to compliances. LLPs are regularly required to submit some forms and comply with the governing laws, and if it fails to do so, heavy penalties get attracted. In India, people often ignore the compliances, so an LLP is not an attractive option for a compliance ignorant person. And it is not easy for a non-compliant LLP to wind up. For winding up an LLP, it is necessary to become fully compliant first by filing annual returns and statements of accounts with the registrar.

 

HINDU UNDIVIDED FAMILY BUSINESS

 

This form of business organisation can only be found in India. It is created by the operation of law and has no separate act to rule it. Provisions of the Hindu Law governs it. A vast difference between a HUF and others is that a person becomes a member of the HUF only by birth or by marrying a male member of the family. There is no requirement for any consent or agreement by the members to admit a member to the HUF.

The person who manages all the works and leads the HUF is called KARTA of the HUF. He has the final say in all the decisions taken by the HUF and has unlimited liability. The liability of all the other members is limited to the extent of their shares. A minor can also be admitted as a member of it. If the members want to dissolve the HUF, it can only be done with every member's consent.

 

This form is suitable for those with a joint family with a business the members run jointly with mutual compatibility and affection.  

The taxability of a HUF is the same as an individual, so it enjoys the benefits of slab rates that an individual does. A deed is entered into and registered by the members; after that, the HUF can obtain a PAN and open a bank account in its name. 

 

COMPANIES

 

Forming a company is the most appropriate choice to start a business on a massive scale with many investors to invest in.  

 

Unlike partnership firms, a company can have an unlimited number of members (public companies). A company has many advantages and peculiarities like better market reach, limited liability, etc., but the number of compliances is beyond number compared to others. There are various types of companies that one can start, but each has different features that help us choose. Here, we have briefly talked about the three most common types and their peculiarities.

 

• Private company: In the case of a private company, a minimum of two directors and two members are required. Share transferability and acceptance of public deposits are restricted. It cannot list its shares on any stock exchange, so there is no public trading. Earlier, it was prescribed that a private company can only be incorporated with a minimum paid-up share capital of Rupees One Lakh, but now this provision has been done away with. 

• Public company: A public company can be started with a minimum of 3 directors and seven members. One of the essential features of a public company that distinguishes it from others is the unlimited number of members, and the transferability of shares is not restricted. Unlike private limited companies, public companies are not outrightly prohibited from receiving public deposits. It can also list its shares on the stock exchange, and people can trade its shares. Like a private company, public companies were also required to have a minimum paid-up share capital of Rupees 5 lakhs, but now it is no more required. 

• ONE PERSON COMPANY-

 In India, this company emerged as a new type of company with the Companies Act, 2013. Small entrepreneurs can start their business in the style of a company without complying with n number of compliances. An OPC is a company incorporated by only one member. But it is mandatory to appoint a nominee for the member so that in case if the member becomes incompetent in any way, then the nominee takes the place of the member. Only an Indian citizen who is a natural person and a resident in India can be the member or the nominee of an OPC. 

 

A question that often arises is that why a person should choose OPC over sole proprietorship?

The answer to this question is related to the liability aspect in both forms. A sole proprietor's liability is unlimited, whereas, in the case of a member of OPC, the member's liability is limited. 

 

An OPC is a very beneficial revolution for the small entrepreneurs as the benefits a company gets; an OPC receives almost all of them. It is very privileged because it has very few compliances.

 

To know a few, here is a list-

• No annual general meeting

• Only one director is enough to incorporate an OPC

• Annual report needs not be signed by a company secretary in practice

• Less number of board meetings are required (No board meeting required if the board has only one member)

 

From the above, we can conclude that no form is perfect for every type of business. When weighing the pros and cons of the form of entity and selecting the best, it must be kept in mind that these factors do not exist in isolation and have to be taken into account collectively as they are interdependent. 

 

Source:https://www.manishanilgupta.com/blog-details/thinking-of-starting-a-new-business