2003 (3) TMI 28 - HC - Income Tax

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 ... Rental income - Income from Business/Property - Whether Tribunal was correct in law in holding that the rental receipts derived from letting out of properties should be assessed under the head 'Business'? - HELD THAT:- It is true that there is a difference in the classification of income between the 1922 Act and the 1961 Act. Section 6 of the 1922 Act classifies income under the heads salaries, interest on securities, income from property, profits and gains from business, income from other sources and capital gains. The 1961 Act, while substantially retaining those heads of income, modified the head 'Income from property' which was the description given in the 1922 Act to 'Income from house property'. However, section 22 of the Act does not refer to 'house property' despite its caption. The language employed in the section shows that the income referred to therein is not necessarily income from houses. It is income from property' consisting of any building or lands appurtenant thereto of which the assessee is the owner'. Though it is not clear from the context as to why the Act describes income from property as income from house property, the substantive provision of law which creates the charge and obligates the person who receives such income to have it assessed under that head does not confine its application only to house property, but extends to all buildings whether such building is used as dwelling house or for other purposes. Assessee, as owner of the building, was only exploiting the property as owner by leasing out the same and realising income by way of rent. Such rental income is liable to be assessed under the head 'Income from house property' - Both questions are answered in negative and in favour of Revenue. 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 ReceiptsThe 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'.