We are a FCRA registered non-religious Society. We have received certain non-restricted foreign grants, which we want to utilise for acquiring immovable property for the purpose of Society activity. However, some of its portion will be let out and will generate rental income.
My query is whether the rent received will be treated in the nature of Commercial receipts or FCRA receipts in the Society’s financials.
Kindly enlighten.
Thanking You Deepak Tayal
Rental income can be categorized into two main types: active and passive. The classification of rental income determines its treatment for various purposes, including taxation and regulatory compliance.
Active rental income pertains to properties utilized for commercial purposes such as hostels, serviced accommodations, convention halls, or similar facilities. It involves active management and provision of services to tenants or guests. active rental is a not advisable due to potential legal challenges.
Passive rental income refers to the straightforward letting out of land or buildings for long-term leases without active involvement in additional services or commercial.
Rental income of passive nature received from asset created out of foreign contribution is considered as foreign contribution.
In terms of income tax implications, Section 11(5) permits immovable property as a permitted investment. Therefore, rental income derived from immovable property is considered as investment income for tax purposes.
When receiving donations intended for investment in property for rental income purposes, it is advisable to get the donation amount as corpus and consider the amount spent on immovable property as earmarked investment rather than claiming it as an application
Rental Receipt from Asset created out Foreign Contribution shall be deemed to be Foreign Contribution as per Explanation 2 to Sec.2(h) of FCR Act 2010. Hence, the Rental Receipts can be applied only for purposes approved by/under the FCR Act 2010.
Rental Receipts under Income Tax have to be evaluated in the context of OVERALL charitable activity and can not be decided in isolation. We have to check whether the commercial renting is incidental to main objects just like book shop in a school and is within the 20% limit of receipts from charitable purpose prescribed under Proviso to sec.2(15) of Income Tax Act, 1961.
Also to check GST applicability to commercial renting.
Rental receipts will need to be accounted under FCRA, since rent is coming from a property, which would be capitalised in the FCRA Balance sheet. Thus the funds have to be used according to FCRA rules.
As far as whether rental income will be treated as commercial (i.e. whether subjected to Income Tax) is a complicated issue and would depend on case to case basis, depending upon activities of your organisation, as well as other income etc. In this regard I suggest you should consult your tax consultants. For background you may refer to this case, which was decided in favour of assessee by Tribunal https://taxguru.in/income-tax/rental-income-intended-charitable-educational-purposes-eligible-section-1023cvi-exemption.html#google_vignette