Rental receipts from leasing buildings taxable as Income from House Property under Section 22, not business income

Madras HC held that rental receipts from letting out buildings are assessable under the head "Income from house property" under the 1961 Act, not as business income. The court reasoned section 22 applies to income from property consisting of any building or land appurtenant thereto, regardless of use as a dwelling, and that an owner exploiting property by leasing it realizes rent taxable under Income from house property. Both posed questions were answered negatively and in favor of the Revenue.

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Issues Involved:
1. Whether the rental receipts derived from letting out of properties should be assessed under the head 'Business'.
2. Whether the expenses incurred for the purpose of letting out of the properties should be allowed as 'business expenditure'.

Issue-wise Detailed Analysis:

Issue 1: Assessment of Rental Receipts
The primary question was whether rental receipts from letting out properties should be assessed under 'Business' or 'Income from property'. The assessee owned two buildings in Chennai and received rental income from them. The assessing officer initially assessed this income under 'Income from property', but the Commissioner and subsequently the Appellate Tribunal held it should be under 'Business'.

The Tribunal based its decision on the main objects of the assessee-company, which included acquiring and letting out properties. However, the Revenue argued that this view was unsustainable based on precedents set by the Supreme Court and other courts.

The Constitution Bench in *Sultan Brothers Pvt. Ltd. v. CIT* [1964] 51 ITR 353 (SC) held that merely having an object to lease properties does not convert rental income into business income. This was consistent with *East India Housing and Land Development Trust Ltd. v. CIT* [1961] 42 ITR 49 (SC), where rental income from shops and stalls was treated as 'Income from property'.

In *Karanpura Development Co. Ltd. v. CIT* [1962] 44 ITR 362 (SC), it was held that if a company acquires properties to lease them out for profit, it is business income. However, this was not referred to in *Sultan Brothers*, which approved the reasoning in *East India Housing*.

In *Karnani Properties Ltd. v. CIT* [1971] 82 ITR 547 (SC), the Supreme Court held that service charges collected by an assessee from tenants were business income, but rental income was 'Income from property'.

The case of *S.G. Mercantile Corporation P. Ltd. v. CIT* [1972] 83 ITR 700 (SC) distinguished between a lessee subletting a property and an owner leasing it out, holding that the latter's income is 'Income from property'.

In *Universal Plast Ltd. v. CIT* [1999] 237 ITR 454 (SC), the Supreme Court laid out that whether rental income is business income depends on the facts and circumstances, including the intention behind letting out the property.

The Madras High Court in *CIT v. V. Shanmugham* [1984] 147 ITR 692 (Mad) and *Anaikar Traders and Estates (P.) Ltd. (No.1) v. CIT* [1990] 186 ITR 175 (Mad) held that income from letting out properties owned by an assessee is 'Income from property'.

Conclusion on Issue 1:
The High Court concluded that the assessee was exploiting the property as an owner and the rental income should be assessed under 'Income from house property'. The Tribunal's decision was erroneous.

Issue 2: Deductibility of Expenses as 'Business Expenditure'
Given the conclusion on Issue 1, the second issue regarding the deductibility of expenses incurred for letting out properties as 'business expenditure' was also resolved. Since the income is not 'business income', the related expenses cannot be treated as 'business expenditure'.

Conclusion on Issue 2:
The expenses incurred for letting out the properties should not be allowed as 'business expenditure' as the rental income is assessed under 'Income from house property'.

Final Judgment:
Both questions were answered in favor of the Revenue. The rental income should be assessed under 'Income from house property', and the related expenses are not deductible as 'business expenditure'.

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