Income from letting out machinery, furniture, and buildings is a unique category under the Income Tax Act, 1961, and is governed by Sections 56(2)(ii) and 56(2)(iii). These provisions ensure that such income is taxed appropriately under the head ‘Income from Other Sources’ when it does not qualify as business income.

Taxability Under Section 56(2)(ii)

1. Scope of Section 56(2)(ii):
   • This section applies when a taxpayer earns income from letting out machinery, plant, or furniture, and such assets are not part of the taxpayer’s regular business operations.
2. Condition for Taxability:
   • The assets must be rented out independently (i.e., without a building) or as part of an agreement where the rent is specifically attributable to the machinery, plant, or furniture.
3. Nature of Taxable Income:
   • The income is taxed under ‘Income from Other Sources’ and added to the taxpayer’s gross total income.

Taxability Under Section 56(2)(iii)

1. Scope of Section 56(2)(iii):
   • This section applies when machinery, furniture, or plant is let out along with a building, and the two are inseparable.
2. Composite Letting:
   • If the rent is charged for the machinery, plant, or furniture along with the building, and the two cannot be rented separately, the entire income is taxable under this section.
3. Nature of Taxable Income:
   • The composite income is taxed under the head ‘Income from Other Sources,’ unless it qualifies as business income.

Allowable Deductions Under Section 57

Taxpayers can claim deductions for expenses incurred in earning income under Sections 56(2)(ii) and 56(2)(iii):

Type of Deduction	Details
Repairs and Maintenance	Expenses incurred for the upkeep of machinery, furniture, or buildings.
Depreciation	Depreciation on machinery, plant, furniture, and buildings, as applicable.
Insurance Premiums	Premiums paid for insuring the assets.

Examples of Tax Treatment

1. Letting Out Machinery and Furniture Only:
   • Mr. A rents out machinery and furniture for ₹1,00,000 annually. Since these assets are not part of his business, the income is taxed under Section 56(2)(ii) as ‘Income from Other Sources.’
2. Composite Letting of Machinery with a Building:
   • Ms. B lets out a building along with furniture for ₹5,00,000 annually. The rental agreement specifies that the rent covers both the building and furniture. The entire income is taxable under Section 56(2)(iii).

Judicial Precedents

In Sultan Bros. Pvt. Ltd. vs. CIT, the Supreme Court clarified that composite letting is taxable as ‘Income from Other Sources’ unless it is an integral part of the taxpayer’s business operations.

Compliance Tips for Taxpayers

1. Maintain Proper Records:
   • Clearly distinguish between income from independent letting and composite letting.
2. Claim Allowable Deductions:
   • Keep documentation for all expenses incurred in maintaining the rented assets.
3. Consult a Professional:
   • For complex cases, seek advice to determine the correct head of income and deductions.

Conclusion

Sections 56(2)(ii) and 56(2)(iii) provide clear guidelines for taxing income from letting out machinery, furniture, and buildings. Proper classification of such income ensures compliance and avoids legal complications. Taxpayers must accurately report this income and utilize allowable deductions to optimize their tax liability.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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