Rent held Business Income not House Property income when the business of the company was to lease its property and to earn rent-Supreme Court

Rent held Business Income not House Property income 
When the the assessee company had only one business and that is of leasing its property and earning rent therefrom,  the income so earned should be treated as its business income and not as income from house property-Supreme Court

ABCAUS Case Law Citation:
984 2016 (08) SC

Date/Month of Judgment: August 2016

Brief Facts of the Case:
The appellant-assessee was a private limited company having house property, which had been rented and the assessee company was receiving income from the said property by way of rent. The main issue in all clubbed appeals was whether the income so received should be taxed under the head “Income from House Property” or “Profit and gains of business or profession”.

Contentions of the Assessee Company:
The assessee company was aggrieved by the judgment of the High Court of Madras in directing that the income earned by the appellant assessee should be treated as “Income from House Property”. The case of the assessee was that it was in the business of renting its properties and is receiving rent as its business income, the said income should be taxed under the Head “Profits and gains of business or profession”. The assessee relied on the judgment of the Supreme Court delivered in the case of Chennai Properties and Investments Ltd. v. Commissioner of Income Tax [2015] 373 ITR 673 (SC) and submitted that the issue involved in these appeals is no more res integra.

In the said judgment, the SC had held that  if an assessee is having his house property and by way of business he is giving the property on rent and if he is receiving rent from the said property as his business income, the said income, even if in the nature of rent, should be treated as “Business Income” because the assessee is having a business of renting his property and the rent which he receives is in the nature of his business income.

It was submitted that  the aforesaid judgment in the case of Chennai Properties (supra) had considered all the judgments on the subject and more particularly, the judgment in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC) which had summed up as under:-

“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 dividing 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.”

It was also submitted that the assessee was a private limited company and even as per its Memorandum of Association its business was to deal into real estate and also to earn income by way of rent by leasing or renting the properties belonging to the assessee company.

The assessee company also drew attention to the fact that the High Court of Madras and the authorities below themselves had come to a specific finding to the effect that the assessee company had stopped its other business activities and was having only an activity with regard to the leasing its properties and earning rent therefrom. Thus, except leasing the properties belonging to the assessee company, the company was not having any other business and the said fact was not in dispute.

Contentions of the Revenue:
The case of the Revenue was that as the income is arising from House Property, the said income must be taxed under the head “Income from House Property”. 

The Revenue also relied upon the another judgment delivered by Supreme Court in the case of M/s. S.G. Mercantile Corpn. (P) Ltd. v. CIT, Calcutta (1972) 1 SCC 465. According to Revenue, the important question which would arise in all such cases was whether the acquisition of property for leasing and letting out all the shops and stalls would be essentially a part of business and trading operations of the assessee.

The Revenue submitted that leasing and letting out of shops and properties was not the main business of the assessee as per Memorandum of Association and therefore, the income earned by the assessee should be treated as income earned from House Property.

Observations made by the Supreme Court:
The Hon’ble Supreme Court held that the law laid down by it in the case of Chennai Properties (supra) present the correct position of law and looking at the facts of the case in question, the case on hand was squarely covered by the said judgment. The Court noted that it was an admitted fact that the assessee company had only one business and that is of leasing its property and earning rent therefrom.

Held:
The business of the company was to lease its property and to earn rent and therefore, the income so earned should be treated as its business income.
 

Rent held Business Income not House Property income

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