Madras High Court: Rental Income from Property to be Assessed as Property Income, Not Business Income

The High Court of Madras ruled that rental income derived by the assessee-company from letting out properties should be assessed under the head of 'Property Income' and not 'Business Income'. The Court did not address the applicability of section 43B for disallowing Urban Land Tax and non-deductibility of water supply costs from property income due to the classification of rental income as 'Property Income'.

---

---

Issues involved:
The assessment year is 1986-87.
1. Whether rental income derived by the assessee-company from letting out properties should be assessed under the head 'Business' allowing expenses as business expenditureRs.
2. Whether provisions of section 43B should be considered for disallowing Urban Land Tax if income is assessed under 'Business' and non-deductibility of the cost of supplying drinking water from property incomeRs.

Issue 1: Rental Income Classification
The assessee, an incorporated company, derives income from letting out properties in Madras. The Assessing Officer categorized the rental income as 'income from property' instead of 'Income from business'. The Commissioner upheld this view, but the Tribunal ruled in favor of the assessee, treating the income as 'business income'.
The Supreme Court precedent in East India Housing and Land Development Trust Ltd. v. CIT highlighted that income from property remains so even if received by a company formed for property development. This aligns with the present case where the income is from property and should be assessed under that head.

Issue 2: Applicability of Section 43B
Given the resolution of the first issue, the second question regarding the applicability of section 43B for disallowing Urban Land Tax and non-deductibility of water supply costs from property income does not necessitate consideration.

Therefore, the High Court of Madras ruled in favor of the Revenue, determining that the rental income from letting out properties should be assessed under the head of 'Property Income' and not 'Business Income'. The second question was not addressed due to the resolution of the first issue.

---