Under the Indian Income Tax Act, 1961, the taxability of income from letting out of machinery, plant, or furniture is governed by Section 56(2)(ii). This section provides the provisions related to the taxation of income from such sources.
income from machinery, plant or furniture, belonging to the assessee and let on hire, is chargeable as income from other sources, if the income is not chargeable to income-tax under the head “Profits and Gains of Business or Profession”.
In case any such assets are hired out as a part of the business activity carried on by the assessee or as commercial assets belonging to the assessee, the income derived therefrom is assessable as business income under section 28 and not as income from other sources under section 56.
Section 56(2)(ii) applies to individuals, Hindu Undivided Families (HUFs), firms, companies, or any other person. It pertains to any income that arises from the letting out of machinery, plant, or furniture.
Computation of Income:
Under this section, the income arising from the letting out of machinery, plant, or furniture is treated as income from other sources. This means it is subject to tax under the head “Income from Other Sources.”
Valuation of Income:
The income is generally computed based on the fair market value of the machinery, plant, or furniture. This is typically the rental income or hiring charges received for the use of these assets. The fair market value is determined based on prevailing market rates.
The income is taxable at the recipient’s applicable income tax slab rates. It is added to the recipient’s total income and taxed accordingly. It is important to note that this income is taxed as per the individual’s or entity’s income tax slab rates, and there may not be specific deductions or exemptions applicable under this section for such income.
Deductions permissible from Letting Out of Machinery, Plant or Furniture and Buildings [Section 57(ii) and (iii)]
The following deductions are allowable:
(a) Current repairs, to the premises held otherwise than as tenant.
(b) Insurance premium against risk of damage or destruction of the premises.
(c) Repairs and insurance of machinery, plant or furniture.
(d) Depreciation based upon block of assets, in the same manner as allowed under section 2 in the case of Income from Business and Profession subject to the provisions of section 38, i.e., if it is partly let and partly used for own purpose, deduction of expenses (including depreciation) shall he allowed to the extent it is let out.
(e) Any other expenditure:
Any other expenditure, not being an expenditure of a capital nature, laid out or expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction.
However, there are certain exemptions provided for specific situations or types of income. For example, if the machinery, plant, or furniture is used for business purposes and the income is incidental to the main business activity, it may be exempt from taxation under certain circumstances. Such exemptions are typically governed by other sections and provisions of the Income Tax Act, and they should be evaluated on a case-by-case basis.
The income from letting out of machinery, plant, or furniture is taxed at the normal slab rates applicable to the taxpayer. It is added to the total income of the taxpayer and taxed accordingly.
There are certain compliance requirements that need to be fulfilled by the taxpayer when deriving income from letting out of machinery, plant, or furniture. These include:
Filing of Income Tax Return: The taxpayer needs to file their income tax return disclosing the income from letting out of machinery, plant, or furniture.
Maintenance of Books of Accounts: The taxpayer should maintain proper books of accounts, including records of rental income, expenses, and other relevant details.
Tax Audit: If the total income from letting out of machinery, plant, or furniture exceeds the specified threshold, a tax audit may be required as per the provisions of the Income Tax Act.
In cases where the income from letting out machinery, plant, or furniture is earned by a minor child, it may be clubbed with the income of the parent or guardian as per the clubbing provisions of the Income Tax Act.
Where an assessee lets on hire the machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, known as composite rent, if it is not chargeable to income-tax under the head “Profits and Gains of Business or Profession”, shall be chargeable as income from other sources.