Case Law Details
Introduction:
Whether the income from letting out of property is business income or not depends upon the facts & circumstances of each case.
Recently, in Rayala Corp. Pvt Ltd vs. ACIT [Civil Appeal No.6437 of 2016 with Civil Appeals Nos. 6438, 6439, 6440, 6441 respectively of 2016, decided on 11 August, 2016], the business of the appellant-company was to lease its property and to earn rent therefrom. The Supreme Court, on the facts & circumstances of the case, held that the income so earned should be treated as the business income of the appellant-company.
Facts & Decision In Brief of the Rayala Corp. case(supra):
Being aggrieved by the judgment delivered by the High Court of Madras on 4th October, 2013 in Tax Case (Appeal) Nos.91, 99 and 212 of 2012; and 230 and 231 of 2007, the appellant-company filed the appeals before Hon’ble Supreme Court of India. The issue involved in all the appeals filed was common but it pertained to different Assessment Years and therefore, all these appeals had been heard together.
The appellant, a private limited company was having house property, which had been rented and the appellant was receiving income from the said property by way of rent. The main issue in all the above 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”.
The learned counsel of the appellant submitted that the impugned judgment delivered by the High Court was not proper for the reason that the High Court had directed that the income earned by the appellant should be treated as “Income from House Property”. He relied on the case of Chennai Properties and Investments Ltd. vs. CIT [2015] 373 ITR 673 (SC) and submitted that in this case all the judgments on the subject have been referred and more particularly, the judgment in the case of Karanpura Development Co. Ltd. vs. CIT [1962] 44 ITR 362 (SC), which has 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.”
The learned counsel of the respondent- Revenue made an effort to justify the reasons given by the High Court in the impugned judgment. The learned counsel also relied upon the judgment delivered by the Supreme Court in the case of S.G. Mercantile Corpn. (P) Ltd. vs. CIT, Calcutta (1972) 1 SCC 465. According to him, the important question which would arise in all such cases is 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 appellant. According to the learned counsel appearing for the Revenue, leasing and letting out of shops and properties was not the main business of the appellant as per Memorandum of Association and, therefore, the income earned by the appellant should be treated as income earned from House Property. He, therefore, submitted that the impugned judgment was just legal and proper and therefore, the above-mentioned appeals should be dismissed.
According to the learned counsel of the Revenue the rent should be the main source of income or the purpose for which the company is incorporated should be to earn income from rent, so as to make the rental income to be the income taxable under the head “Profits and Gains of Business or Profession”. The learned judges of the Hon’ble Supreme Court observed that it is an admitted fact, in the instant case, that the appellant-company had only one business and that was 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.
The learned judges of the Hon’ble Supreme Court held that the law laid down by the Supreme Court in the case of Chennai Properties (supra) squarely covers the facts of the case involved in the appeals. 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. The High court was not correct while deciding that the income of the appellant should be treated as Income from House Property. The income of the appellant shall be subject to tax under the head “Profits and gains of business or profession”.
Goldline:
The decision of the Hon’ble Supreme Court in Rayala’s case(supra) is a guiding factor but facts & circumstances of each case shall have bearing on the issue.
