2016 (8) TMI 522 - SC - Income Tax

Rental income from property leasing is business income under Profits and Gains of Business, not House Property income

M/s. Rayala Corporation Pvt. Ltd. Versus Assistant Commissioner of Income Tax

The SC held that rental income earned by the assessee company, whose sole business is leasing property, should be classified as business income under the ... Nature of Rental income - to be taxed under the head “Income from House Property” or “Profit and gains of business or profession” - Held that:- It is an admitted fact in the instant case that the assessee company has only one business and that is of leasing its property and earning rent therefrom. Thus, even on the factual aspect, we do not find any substance in what has been submitted by the learned counsel appearing for the Revenue. In view of the law laid down by this Court in the case of Chennai Properties [2015 (5) TMI 46 - SUPREME COURT] and looking at the facts of these appeals, in our opinion, the High court was not correct while deciding that the income of the assessee should be treated as Income from House Property - The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income. We, therefore, set aside the impugned judgments and allow these appeals with no order as to costs. We direct that the income of the assessee shall be subject to tax under the head “Profits and gains of business or profession”. Issues involved:Classification of income received from renting property as 'Income from House Property' or 'Profit and gains of business or profession.'Detailed Analysis:Issue 1: Classification of income- The appeals were filed challenging the High Court's judgment regarding the tax treatment of income received from renting a property.- The main issue in all appeals was whether the income from the rented property should be taxed under 'Income from House Property' or 'Profit and gains of business or profession.'- The appellant argued that the income should be treated as 'Business Income' based on the business of renting properties.- The Revenue contended that the income should be taxed under 'Income from House Property' as leasing properties was not the main business activity as per the Memorandum of Association.Issue 2: Legal Precedents- The appellant cited the case of Chennai Properties and Investments Ltd. v. Commissioner of Income Tax, which established that income from renting properties can be treated as 'Business Income' if it is part of the business operations.- Reference was made to the judgment in Karanpura Development Co. Ltd. v. CIT, emphasizing the distinction between property-based assessments and income from trading operations.Issue 3: Business Activity- The appellant, a private limited company, primarily engaged in leasing properties as per its Memorandum of Association.- It was noted that the company had ceased other business activities and focused solely on leasing properties to earn rental income.Issue 4: Court's Decision- The Supreme Court analyzed the legal principles established in previous judgments and found that the appellant's case aligned with the law laid down in the Chennai Properties case.- The Court concluded that the income earned from leasing properties should be treated as 'Profits and gains of business or profession' based on the company's business activities.- The High Court's decision to classify the income as 'Income from House Property' was overturned, and the appeals were allowed with no costs, directing the taxation of the income under the appropriate head.By considering the legal precedents, the nature of the appellant's business activities, and the purpose of income generation, the Supreme Court clarified the classification of income from renting properties, emphasizing the importance of aligning tax treatment with the underlying business operations.