2015 (5) TMI 46 - SC - Income Tax

Rental Income Classified as Business Income When Letting Is Assessee's Main Business Activity Under Tax Law

M/s Chennai Properties & Investments Ltd Versus The Commissioner Of Income Tax

The SC held that rental income from letting properties should be classified based on the nature of the assessee's activities and circumstances. Where ... Rental income from letting out of properties - Business income or Income from House property - Letting out of property is the main objective of the company - Income classification depend on the circumstances of each case - Held that:- We are of the opinion that the judgment in Karanpura Development Co. Ltd. [1961 (8) TMI 7 - SUPREME COURT] squarely applies to the facts of the present case. In this case it was held that 'As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned'. No doubt in Sultan Brothers (P) Ltd. [1963 (12) TMI 4 - SUPREME COURT], Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is for this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as 'income from the house property' - Decided in favour of assessee. Issues:Determining whether income derived from letting out properties should be treated as income from business or rental income from house property.Analysis:The appellant, a company incorporated under the Indian Companies Act, rented out properties in Chennai, showing the rental income as business income. The assessing officer disagreed, treating it as income from house property. The Commissioner of Income Tax (Appeals) ruled in favor of the appellant, but the High Court reversed the decision, citing precedents like 'East India Housing and Land Development Trust Ltd. v. Commissioner of Income Tax' and 'Sultan Brothers (P) Ltd. v. Commissioner of Income Tax.' The main issue was whether the income from property rental should be classified as business income or house property income.The Memorandum of Association of the company highlighted acquiring properties and letting them out as the main objective. The entire income for the assessment year in question was from letting out two properties, emphasizing the core business activity. Referring to 'East India Housing and Land Development Trust Ltd.' and 'Karanpura Development Co. Ltd. v. Commissioner of Income Tax,' the court analyzed the nature of the company's activities and the income source. It was established that the income should be treated as business income based on the company's objectives and operations.In 'Sultan Brothers (P) Ltd. v. Commissioner of Income Tax,' the Constitution Bench clarified that the nature of the business activity determines the income classification. The court emphasized analyzing each case based on whether the letting activity is a business operation or property exploitation. In this case, the court concluded that letting properties was the business activity of the assessee, justifying the income classification as business income. The judgment favored the appellant, setting aside the High Court's decision and restoring the Income Tax Appellate Tribunal's ruling. The appeal was allowed, with no costs imposed.The civil appeals related to the same issue were disposed of in line with the main judgment.