One of the mysteries of the 21^st Century is the taxation of rental income under the IT Act[1]. The classification of such rental income is quite challenging and garnering a unanimous view among tax practitioners itself is impossible, forget about the authorities and courts. In this article, we try to analyse the various judgements on the issue and provide our conclusions about the classification.

Before proceeding to analyse the various judgments, a quick look at the scheme of IT Act is essential. Section 4 of the IT Act deals with charge of income tax on total income earned by the assessee in the previous year. The tax on the total income of the previous year has to be classified under the heads of income as provided in Section 14 of Act and accordingly the liability has to be computed. Each head of income is different from other head and has different entitlements, restrictions and prohibitions in the total scheme of the act. Hence, classifying an income under the appropriate head is important because of different tax consequences. For example, an income which is classified under IFHP[2] is eligible only for a standard deduction of expenditure as against actuals, however, the same income, which if classified under PGBP[3], does not have any restriction for claiming the expenditure. Hence, it is important to classify the income under appropriate head to avoid any future litigations on the said count.

Read more: Rental Income – IFHP vs PGBP vs IFOS - A Challenging Tax Puzzle

In this edition, we bring you, one of the most complicated classifications under the income tax laws, that is, classification of lease income. Whether the same would be classified under income from house property or profits and gains from business or profession or income from other sources is a complicated issue and we tried to discuss on the same with the help of a case study.

The next article is on the various issues under the residency under Section 6 of Income Tax Act. We have covered the most asked issues, whether the day of arrival is counted for purposes of computation of days present in India for determining the residential status and similar items.  

I hope that you will have good time reading this edition and please do share your feedback. I will also urge clients to mail us topics or issues on which you want us to deliberate in our future editions, so that we can contribute to the same.

Key Topics:

DIRECT TAX

• LEASE INCOME - IFHP VS PGBP VS IFOS
• VARIOUS ISSUES OF RESIDENCY UNDER SECTION 6

Re-Opening of Assessment – Challenge before Delhi High Court

As the legislature has permitted re-assessment to be made only in accordance with the substituted provisions, it can only be done in this manner, or not at all - Delhi High Court.

Background:

During the outbreak of COVID-19 pandemic, in order to provide sufficient time to comply with various provisions under the Income Tax Act, 1961 (‘ITA’) and other laws, Central Government (‘CG’) has enacted Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘TOLA, 20’)

Read more: SBS I 19th Edition

The recent judgment of Bombay High Court in the matter of Abu Dhabi Investment Authority[1] is a judgment for many firsts. The judgment is a result of challenge of AAR[2] ruling in Abu Dhabi Investment Authority (for brevity ‘ADIA’).

Issue:

ADIA is a public institution owned by and subject to the supervision of Emirate of Abu Dhabi. ADIA has challenged the ruling passed by AAR, wherein the later denied inter-alia the benefit of India-UAE[3] DTAA[4] in respect of the income accruing to the investments made or proposed to be made by Green Maiden A 2013 Trust (‘Trust’), which was established by ADIA as settlor and Equity Trust (Jersey) Limited as the trustee (ETL/Trustee). ADIA has invested USD[5] 200 million in India on revocable basis through the above trust, wherein ETL acted as trustee with sole beneficiary as ADIA.

Read more: Beneficiary in Revocable Transfer vis-à-vis Resident in DTAA & Others - Bombay High Court in Abu...