Heads of Income – Where letting of property is the business of the assessee, the income is to be assessed under the head “Income from business”

The appellant – assessee was incorporated under the Indian Companies Act, with its main object, as stated in the memorandum of association, 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, however, refused to tax the same as business income. According to the Assessing Officer, since the income was received from letting out of the properties, it was in the nature of rental income. He, thus, held that it would be treated as income from house property and taxed the same accordingly under that head.

The assessee filed the appeal before the Commissioner of Income-tax (Appeals) who allowed the same holding it to be income from business and directed that it should be treated as such and taxed accordingly. Aggrieved by that order, the Department filed an appeal before the Incometax Appellate Tribunal which declined to interfere with the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal. The Department approached the High Court. This appeal of the Department was allowed by the High Court, holding that the income derived by letting out of the properties would not be income from business but could be assessed only income form house property. The High Court primarily rested its decision on the basis of the judgment of the Supreme Court in East India Housing and Land Development Trust Ltd. vs. CIT [1961] 42 ITR 49 (SC) and in Sultan Brothers (P) Ltd. vs. CIT [1964] 51 ITR 353(SC).

On appeal to the Supreme Court, the Court noted that as per the memorandum of association of the appellantcompany the main object of the appellant company was to acquire and hold the properties known as “Chennai House” and “Firhaven 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. The entire income of the appellant company was through letting out of the aforesaid two properties namely, “Chennai House” and “Firhaven Estate”. There was no other income of the assessee except the income from letting out of these two properties.

According to the Supreme Court the judgment in Karanpura Development Co. Ltd. vs. CIT [1962] 44 ITR 362 (SC) squarely applied to the facts of the present case. In that case the position in law was summed up in following words:

“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 Supreme Court held that in this case, letting of the properties was in fact the business of the assessee. The assessee, therefore had rightly disclosed the income under the head “Income from business”. It could not be treated as “Income from the house property”. The Supreme Court accordingly allowed the appeal and set aside the judgment of the High Court and restored that of the Income-tax Appellate Tribunal.