If earning rent income is the main object of a Company, it cannot be taxed as ‘Income from House Property’ – SC


CHENNAI PROPERTIES & INVESTMENTS LTD v CIT [CIVIL APPEAL NOS. 4491-4493 OF 2004 dated 09.04.2015] SUPREME COURT

Background:

The assessee is a company incorporated under the Indian Companies Act. Its main object, as stated in the Memorandum of Association, is to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business in the return filed by the assessee. The Assessing Officer held since that the income was received from letting out of the properties, it was in the nature of rental income and thus it would be treated as income from house property. 

In the first appellate level, the CIT(A) allowed assessee’s appeal holding it to be income from business. Aggrieved by that order, the Tax Authorities filed appeal before the Income Tax Appellate Tribunal which declined to interfere with the order of the CIT (A) and dismissed the appeal. The Tax Authorities filed appeal before the High Court. The High Court vide its order dated 05.09.2002 allowed the Department’s appeal holding that the income derived by letting out of the properties would not be income from business but could be assessed only income from house property

HELD:

  • The High Court has primarily rested its decision on the basis of the judgment of Supreme Court in ‘East India Housing and Land Development Trust Ltd. v. Commissioner of Income Tax, West Bengal [(1961) 42 ITR 49] as well as the Constitution Bench judgment of this Court in ‘Sultan Brothers (P) Ltd. v. Commissioner of Income Tax’ [1964 (5) SCR 807]
  • The Memorandum of Association mentions main object as to acquire and hold the properties known as “Chennai House” and “Firhavin Estate” both in Chennai and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. Thus, holding the aforesaid properties and earning income by letting out those properties is the main objective of the company.
  • The entire income of the assessee was through letting out of the aforesaid two properties. Thus, there is no other income of the assessee except the income from letting out of these two properties.
  • In the case of East India Housing and Land Development Trust Ltd. (supra), the main objective of the company was to develop the landed properties into markets.  It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls. It was held that the income shall be treated as income from the house property and rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all
  • In Sultan Brothers (P) Ltd.’s case, Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the 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 a particular business is letting or not.
  • It is for this reason, at the beginning of this judgment, it is stated that the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as ‘income from the house property’. 

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