The issue when rental income is chargeable under the head “Income from house property” and when under the head “Profits and Gains of business” has been an issue of controversy and repeatedly the matter has gone before the Courts for consideration. Recently, the Hon’ble Supreme Court in the case of
Chennai Properties and Investment Ltd. v. Commissioner of Income Tax, (2015) 373 ITR 673 (SC) and also High Court of Calcutta in the case of Shyam Burlap Co. Ltd. v. Commissioner of Income Tax in ITA No. 163/2005 decided on 4-9-2015 have held that income in case of companies where Memorandum of Association provides for carrying on the business of letting out is in the nature of business income and chargeable accordingly and not under the head “Income from house property”. An attempt is being made in this Article to analyze the effect on above decisions on the controversy in regard to the matter.

The leading decision in regard to the matter has been of the Hon’ble Supreme Court in the case of
East India Housing and Land Development Trust Ltd. v. Commissioner of Income Tax (1961) 42 ITR 49 (SC). In the facts of above case the company was incorporated with the object of developing a market on the land purchased for this purpose. Accordingly, shops and stalls were constructed on the land purchased. Certain shops were let out to different tenants and rental income was received by the assessee company. The issue accordingly, arises whether the income was chargeable to tax under the head “Income from house property” or same was chargeable as business income as was claimed by the assessee. The Hon’ble Supreme Court primarily proceeded on the basis that there is separate head of income provided in the Income-tax Act for taxability of income from house property and, therefore, the income is chargeable under the above head. It was observed that distinct heads specified in section 6 including the sources are mutually exclusive and income derived from different sources following under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within specified head set out in sections, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head. In this regard reference had been made to decision of Hon’ble Supreme Court in the case of
United Commercial Bank Ltd. v. Commissioner of Income Tax (1957) 32 ITR 688, wherein the Hon’ble Supreme Court had taken a view after exhaustive review of the authorities that under the Scheme of Income-tax Act, 1922, the heads of income, Profit and Gains enumerated in difference clauses of section are mutually exclusive. Each specific head covering items of income arising from a particular source. Accordingly, notwithstanding that the market was constructed pursuant to object of the company, rental income received from the shops held to be assessable under the head “Income from other sources” and not as business income.

After above referred decision of Hon’ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. (supra) the issue came up repeatedly before the Hon’ble Supreme Court and various High Courts. In large number of cases following the above decision of Hon’ble Supreme Court view had been taken that income is chargeable under the head “Income from house property”. In certain cases, however, a view was taken on the basis of facts of cases that income is chargeable as business income. In the case of
Karanpura Development Co. Ltd. v. Commissioner of Income Tax (1961) 44 ITR 362 (SC). The facts before the Supreme Court have been that income had been received pursuant to leasing of coal mining rights. The assessee company was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. The assessee had shown the income as business income. The Hon’ble Supreme Court observing that the object and the manner of its activities and the nature of its dealings with its properties have to be considered and accordingly had held the income to be in the nature of business income for the purpose of above case and not as income from house property.

The issue had again come up for consideration before the Hon’ble Supreme Court in the case of
Sultan Brothers (P) Ltd. v. Commissioner of Income Tax, (1964) 51 ITR 353 (S.C.). In the facts of above case, the Appellant had let out building fully equipped and furnished for a term of six years for running a hotel and for other ancillary purpose. The Hon’ble Supreme Court observed that whether a particular letting is business has to be decided in the circumstances of each case. Further, it was observed that “each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner”. It was also observed that merely an entry in the object clause showing a particular object would not be 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 the particular business is letting or not. Accordingly, in the facts of above case the Hon’ble Supreme Court held the income to be in the nature of business income.

In the case of S.G. Mercantile Corporation P. Ltd. v. Commissioner of Income (1972) 83 ITR 700 (SC) again the Hon’ble Supreme Court considered the issue in the circumstances where the assessee company was having its object of developing the market and had let out shops, stalls and ground spaces. The assessee company had taken the market place on lease and thereafter sub-leases were made. In this circumstances the question for consideration was whether the income was chargeable under the head “Business income” or under the head “Income from other sources”. The Hon’ble Supreme Court held that income in the facts of the case was assessable as business income and not under the head “Income from other sources”.

Reference in this regard can also be made to the decision of Hon’ble Supreme Court in the case of
Shambhu Investment P. Ltd. v. Commissioner of Income Tax (2003) 263 ITR 143 (SC). In the facts of above case the assessee company was owning a immovable property. It had occupied a portion of the property. Rest of the property was let out to be used as table space by the occupants with furniture and fixtures and lights and air conditioners. The assessee also provided services like watch and ward staff, electricity, water and other common amenities. The monthly rent was being charged was inclusive of above facilities. The Calcutta High Court held that income from property was assessable in the hands of assessee as income from house property.
(2001) 249 ITR 7 (Cal.). On appeal to the Supreme Court, the Hon’ble Supreme Court dismissed the appeal holding that there was no reason to interfere with the conclusion arrived at by the High Court.

In regard to the issue, as mentioned above, there have been large numbers of decisions of different Courts including of Hon’ble Supreme Court in regard to the matter. Reference of above decisions has been made herein only with a view to indicate that there has been consistently an issue in regard to the matter and the Hon’ble Supreme Court and High Courts have taken view considering facts and circumstances of each of the case and if we strictly go through the facts of each case and the holding of Hon’ble Court, it is very difficult to make out what has been the consistent line of thinking and why decision in a particular case has been taken in one way or another.

The Hon’ble Supreme Court has considered the issue recently in the case of Chennai Properties and Investment Ltd. (supra). In the facts of this case the assessee company was having its main object in the Memorandum of Association to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The rental income from such properties was shown as income from business in the return of income filed by the assessee. The Department considered the same as income chargeable under the head “Income from house property”. The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee holding it to be income from business. The Income Tax Appellate Tribunal also affirmed the order of Commissioner of Income Tax (Appeals). In appeal filed by the Department before the High Court of Chennai the Hon’ble High Court held that income was chargeable under the head “Income from house property”. The Madras High Court basically rested its decision on the judgment of Hon’ble Supreme Court in the case of East India Housing Land Development Trust Ltd. (supra). Against the decision of High Court the assessee filed appeal before the Hon’ble Supreme Court. The Hon’ble Supreme Court analyzed decisions of Supreme Court in the cases of East India Housing and Land Development Trust Ltd. and also in the case of Sultan Brothers (P) Ltd. (supra) and Karanpura Development Co. Ltd. (supra). In the facts of the case the Hon’ble Supreme Court also observed that the entire income of the assessee was through letting out of two properties, namely, “Chennai house” and “Firhavin Estate” and there was no other income of the assessee. Further, the Hon’ble Supreme Court observed that main object of the company was to acquire and hold properties and to let out those properties. After taking specific note of the decision of Constitutional Bench of Hon’ble Supreme Court in the case of Sultan Brothers (P) Ltd. (supra) in which case it was observed by the Hon’ble Court that each case has to be looked at from businessman’s point of view, held that in the facts of the case income was chargeable as business income.

The issue had also recently come up for consideration before the High Court of Calcutta in the case of Burlap Co. Ltd. v. Commissioner of Income Tax (supra) decided on 4-9-2015. In the facts of above case the assessee company was in earlier years has been showing the income under the head “Income from house property” and same was being accepted as such by the Department. During the year under consideration the assessee company paid compensation to two of its tenants for vacating the property and intention of the company was to earn higher rental income by letting the property to new tenants. In these circumstances the assessee company claimed that its rental income was in the nature of business income and compensation paid by it was also deductible as business expenditure. The Department in these circumstances had taken a view that since the assessee company itself has been showing the income in earlier years as income from house property, it could not change its stand in this year and cannot claim the income as business income. The Commissioner allowed the claim of the assessee company after examining the Memorandum of Association and noting the fact that 85% of its income was by way of rent. The Tribunal, however, held that income was chargeable under the head “Income from house property”. Accordingly, the assessee filed appeal before the Calcutta High Court. Before the Calcutta High Court amongst other decisions, decision of Hon’ble Supreme Court in the case of Chennai Properties and Investment Ltd. (supra) has also been cited by counsel on behalf of the assessee. There is, however, no specific discussion in the Judgement in regard to aforesaid decision of the Supreme Court. The Hon’ble High Court, however, proceed in the matter taking cognizance of the object clause in the Memorandum permitting the assessee to carry on business in letting out of properties. Further, it has been noted that 85% of income of the appellant was by way of deriving rent and lease rentals. Accordingly, it has been held by High Court that income from rent constituted the business income of the assessee.

It can be observed on the basis of various decisions of the Courts in the past that in the case of East India Housing and Land Development Trust Ltd. the Hon’ble Supreme Court had proceeded on the basis that since there is a separate head of income for taxability of income from house property, the income should be assessed under the above head. Thereafter in various decisions following the aforesaid view of the Hon’ble Supreme Court it was held that rental is chargeable under the head “income from house property”. In the case of
Commissioner of Income Tax v. Ansal Housing Finance & Leasing Co. Ltd. & Ors. (2013) 354 ITR 180 (Del.)
the Hon’ble High Court had gone to the extent of holding that in respect of unsold flats owned by the assessee in the business of developing and selling the properties, which are held as stock-in-trade, taxability is to be determined under the head “Income from house property” on the basis of Annul Letting Value regardless whether actual income is received or not. The Hon’ble Court had not accepted the contention of the assessee company that since it was engaged in the business of building activity and flats held were part of its inventory of stock-in-trade and there was no actual letting out. Therefore, deemed income, which is the basis for assessment under the Annual Letting Value method should not be applied. The Hon’ble Court expressed its view that “This Court is of the opinion that arguments, though attractive, cannot be accepted. As repeatedly held in East India, Sultan and Karanpura, the levy of income-tax in the case of one holding house property is premised not an whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership.”

It can be said in the conclusion that broadly there has been thinking of the Courts that since property is held as a owner and rental income is being received as a result of ownership of the property the same is chargeable under the head “Income from house property”, notwithstanding it may be stock-in-trade of the business or the rental income is received as part of its business activities. Whereas the Courts from time to time have also been taking the view that income from properties is in the nature of business income. In the case of Chennai Properties and Investment Ltd. (supra) and thereafter Calcutta High Court in the case of Shyam Burlap Co. Ltd. has held that where rental income is being received as a result of carrying on the business of letting out, income would be in the nature of business income notwithstanding that there is separate head of income in the Income-tax Act, namely, income from house property. It is, therefore, submitted that the rental income where it is in the nature of business income keeping in view the activities of an assessee, should be considered as business income and not as income from house property. Similarly in case of developers no income should be assessed on the basis of notional annual value on the ground of ownership as the flats etc. are held by the builders/developers as stock-in-trade and not for the purpose of letting out and same are held only for the reason that they have not been able to sell the same. A distinction should be drawn whether the property is held as business asset or an investment. The basis and the criteria adopted in determining the nature of income earned in respect of shareholding, whether capital gain or business income, should equally be applicable for determining the nature of rental income for the purpose of taxability.

In this regard reference can also be made to the decisions where the issue had arisen in the context of dividend income, which is chargeable under the head “Income from other sources”. The Courts have taken a view that notwithstanding that it is taxable under the head “Income from other sources”, its nature is business income when dividend is received on shares held as stock-in-trade. In this regard reference can be made to the decisions of Supreme Court in the cases of
United Commercial Bank Ltd. v. Commissioner of Income Tax (`957) 32 ITR 688 (SC) and Western State Trading Co. Pvt. Ltd. v. Commissioner of Income Tax (1971) 80 ITR 21 (SC) and the dividend income has been allowed to be set off against brought forward loss arising in share deals. To the same effect have been number of other cases also.

(Source: Article published in souvenir of National Tax Conference held at Varanasi on 10 & 11 October 2015)