Rental Income From Trust Property cannot be Treated as Business Income: ITAT [Read Order]

ITAT held that rental income from trust property is taxable as house property income, not business income

26 March 2025 1:35 PM IST

The Mumbai bench of Income Tax Appellate Tribunal (ITAT) ruled that a trust's rental income cannot be taxed as business income since the property was leased without additional services, confirming it should be classified as "income from house property" with applicable deductions. The assessee, Punit Deora Trust, is a private specified beneficiary trust. It was established to benefit...

Read the full article.

The assessee, Punit Deora Trust, is a private specified beneficiary trust. It was established to benefit five beneficiaries, each holding a 20% share of the trust’s income. The trust owned a property leased to Schlumberger Asia Ltd. since 2003 without offering any additional services or amenities.

How to Audit Public Charitable Trusts under the Income Tax Act Click Here

The trust filed its income tax return for 2018-19, declaring nil income after distributing rental income to beneficiaries, who duly reported it on their tax returns. The Centralized Processing Centre (CPC), however, assessed the income under business income at the maximum marginal rate, disallowing the deduction under Section 24(a) of the Income Tax Act for ₹1,97,80,200 and denying the Tax Deducted at Source (TDS) credit claimed by the beneficiaries.

Aggrieved by the CPC’s assessment, the assessee appealed to the Commissioner of Income Tax (Appeals) CIT(A), which upheld the denial which prompted the Assessee to approach the Mumbai Bench of Income Tax Appellate Tribunal (ITAT).

The assessee's counsel, S.L. Jain, and Satish Jain argued before the tribunal that the rental income should be assessed as "income from house property," as it had been in previous years. They highlighted that in past scrutiny assessments for the annual year’s 2011-12, 2012-13, 2014-15, and 2016-17, the department had accepted this classification without objection.

The counsel relied on the case of Raj Dadarkar & Associates v. CIT (2017), where the Supreme Court held that rental income is treated as house property income unless additional services are provided.

Tax Planning For Trusts and cooperation Societies, Click Here

They also pointed out that the individual beneficiaries had already entered this income on their tax returns and had paid higher rates of tax. In such cases, reassessing the income in the hands of the trust under Section 166 was unjustified.

This was supported by the cases of CIT v. Alfred Herbert (India) Pvt. Ltd. (1986) and CIT v. Ushaben Trust (1990), where courts held that once income is taxed in the hands of individual beneficiaries, the same cannot be reassessed in the hands of the trust as a representative assessee.

On the other hand, the department’s counsel, Mahesh Pamnani, defended the CPC’s decision, stating that the trust’s substantial rental income should be taxed as business income. He argued that the trust’s failure to respond to the CPC’s notice dated December 23, 2019, justified the adjustments made.

He also pointed out that the trust had credited the rental income in its profit and loss account. As per the department’s interpretation, such income should be subject to the maximum marginal rate of taxation.

The bench, comprising Amit Shukla (Judicial Member) and Renu Jauhri (Accountant Member), carefully examined the facts and submissions. The tribunal noted that the trust had consistently declared rental income under "Income from House Property," and the department had accepted this classification in previous years.

Want a deeper insight into the Income Tax Bill, 2025? Click here

The bench referred to Raj Dadarkar & Associates v. CIT (2017), where the Supreme Court ruled that rental income should be taxed as house property income unless the owner provides additional services. Based on this precedent, the tribunal distinguished rental income from business income.

The tribunal also agreed with the assessee's point of view on beneficiary taxation. Since the individual beneficiaries had already reported the trust’s income in their tax returns and paid tax at higher rates, taxing the same income in the hands of the trust was incorrect. The tribunal allowed the assessee's appeal and directed that the TDS credit be distributed among the beneficiaries by their respective income shares.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates