Should Your Home Office Be Taxed Under Residential Or Commercial Establishment?

A serene residential locality attracts more homebuyers or tenants than a society or housing complex where, say, your next-door neighbour is running a coaching centre or a boutique. In fact, many would not be willing to live next door to an apartment that runs a home office and experiences an unusual footfall every day, the constant hustle-bustle and noise, and many unknown people, putting your privacy and security at stake.

While home offices are commonly found in residential localities, various states across India have their own building byelaws and zoning regulations that prohibit residents to double up their residences as commercial setups. Also, the property is taxed differently if it is being used for commercial purposes.

Recently, the City and Industrial Development Corporation (CIDCO) launched a special drive against misuse of residential properties in Aurangabad. As a part of the drive, notices will be issued to errant residents during the month of November. Such residents will also be asked to regularise their buildings to avoid punishment. 

The rules

In a case, R.K. Mittal & Ors. vs. State of Uttar Pradesh & Ors., (2012) 2 SCC 232, the Supreme Court (SC) held that the Master Plan and the zonal plan specify the user as residential and, therefore, these plots cannot be used for any other purpose. If the scheme/master plan is being nullified by arbitrary acts and in excess and derogation of the power of the development authority under law, the Court will intervene and would direct such authorities to take appropriate action and wherever necessary even quash the orders of the public authorities. In short, the Master Plan has the force of law.

However, certain professional works are allowed to be carried out within a residential complex. In Delhi, for instance, Clause 15.8 of the MPD 2021, permits professional activities from residences upon certain conditions. It says, “Subject to the general terms and conditions specified, professional activity is permissible in plotted development and group housing under the following specific conditions:

*Professional activities shall mean those activities involving services based on professional skills namely doctor, lawyer, architect, and chartered accountant, company secretary, cost and works accountant, engineer, town planner, media professionals and documentary film maker and management professionals (one holding MBA degree/diploma from AICTE/UGC/Centrally-recognised institutions or institutes of national importance and having membership of Delhi Management Association)

*In a group housing, and a plotted development with multiple dwelling units, professional activity shall be permitted on any floor subject to a maximum of 50 per cent of the permissible or sanctioned floor area ratio or FAR, whichever is less, of each dwelling unit.

*In the case of a plotted development with single dwelling unit, professional activity is permissible on any one floor but restricted to less than 50 per cent of the permissible or sanctioned FAR whichever is less on that plot.

*Professional activity in basements is permissible in plotted development, subject to relevant provisions of the Building Bye-Laws, structural safety norms and fire safety clearance. In case, the use of basement for professional activity leads to exceeding the permissible FAR on the plot, such FAR in excess shall be used subject to payment of appropriate charges prescribed with the approval of the government.

In all the above-mentioned cases, the premises for tax and other purposes remain residential.

Some other cases worth your attention

*In Satya Prakash Singh and Anr. vs. State of U.P. & Ors. Writ Petition No.16843/2011, the Allahabad High Court held that the work of a doctor, a chartered accountant or a lawyer or any consultant, is a profession which is distinct from any trade or business. The Court further held that running a clinic/dispensary/laboratory from a residential area would not be covered by the expression 'commercial establishment' or a 'shop'.

*Property consultants would also be entitled to the benefit of using 25 per cent of the covered area or 50 square metres (sqm), whichever is less, of their residential flats for their professional activity, provided such flats are in the occupation of such property consultants. He must use the flat only to the extent permissible for purely professional activity i.e., the providing consultancy to their clients in property matters. They cannot carry on any commercial activity as per the verdict of the court in the Association of Property Consultants vs. Delhi Development Authority, (2004) 113 DLT 161.

In another case, State of W.B. v. Kesoram Industries Ltd. & Others, (2004) 10 SCC, when taxing any person it must be shown that he falls within the ambit of the charging section by clear words used in the section; and if the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject. There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the legislature's failure to express itself clearly.