Where renting out properties is main business, then income is rightly taxed as Business Income- SC

Notable words:

It is our genuine belief that, every income that is received from a property is to be taxed as Income from House Property. Our belief is based on the various decisions favoring such belief. However the facts of recent case have forced us to give different thought.

Sections involved

Section 22 of Income Tax Act, 1961

Section 28 of Income Tax Act, 1961

Brief Facts:

Appellant assessee Company, incorporated with main objective as stated in MOA is to acquire the properties in the city of Chennai (Earlier named as Madras) and to let out those properties. The company had returned it income, as income from Business, where as the view of Department was that the rental income should have been taxed under the head “Income from House Property” instead of treating it as Business Income.

Question of Fact/Law (mixed question)

Whether the income so received from renting properties, should be treated as business income U/s 28 considering the main object clause of MOA and other facts or should it be taxed U/s 22 treating income from House Properly.

Contention of the Revenue:

The contention of the revenue is that, since the company received income from letting out the properties, hence it should be treated as rental income and should be taxed under the head “Income from House Property” instead of treating the same as business income.

Contention of the Assessee:

The assessee’s contention was that, the company was in the business of renting the properties and as such the income should be taxed as business income i.e. u/s 28.

Held:

The honorable Supreme Court held that, the letting of the properties is the main business of assessee and hence income therefrom is rightly stated as income from Business and not as income from House property.

Notes

1. The main object of the company was to rent the properties.
2. The very nature of the transaction was to do business, which led to cover the case u.s 28.
3. The company has no other income except the above. (For me, this basis seems to be illogical, since the nature of one income should not be derived from other income).

Analysis of the sections:

Section 22 reads an exception for property to be taxed as income from house property i.e. those properties which are occupied (acquired and occupied for business will also be covered) for the purpose of any business of profession carried by assessee.

Whereas section clause (i) of section 28, reads in an inclusive manner to cover the activities amounting as trade/business.

Compiled by CA Ramesh Nanasaheb Thete