By Ajay R. Singh
Advocate
3. M/s PSTS Heavy Lift and Shift Ltd. vs. The
Dy. CIT Company Circle – V(2) Chennai M/s CeeDeeYes IT
Parks Pvt. Ltd. vs. The Asst. CIT Company Circle I(3) [Tax Case Appeal
Nos. 2193 to 2195 of 2008 & 979 of 2009; Date of order: 30th
January, 2020] (Madras High Court)
[ITAT, Chennai ‘B’
Bench, dated 20th March, 2008 in ITA Nos. 1179/Mds/2007,
1180/Mds/2007 and 1181/Mds/2007; Chennai ‘B’ Bench, dated 18th May,
2009 in ITA No. 998/Mds/2008 for the A.Ys. 1999-2000, 2000-2001, 2001-2002 and
2005-2006, respectively]
Letting of
immovable property – Business asset – Rental income – ‘Income from Business’ or
‘Income from House Property’
There were two
different appeals before High Court for different A.Ys. In both cases the
substantial question of law raised was as under:
Whether the
income earned by the assessees during the A.Ys. in question from letting out of
their warehouses or property to lessees is taxable under the head ‘Income from
Business’ or ‘Income from House Property’?
M/s PSTS Heavy Lift and Shift Limited –
For the A.Y. 1999-2000, the Assessing Authority held that the assessee owned
two warehouses situated near SIPCOT, Tuticorin with a total land area of 3.09
acres and built-up area of approximately 32,000 sq.ft. each. The assessee
earned income of Rs. 21.12 lakhs during A.Y.
2000-2001 by letting out the warehouses to two companies, M/s W.
Hogewoning Dried Flower Limited and M/s Ramesh Flowers Limited, and out of the
total rental income of Rs. 21.12 lakhs it claimed depreciation of Rs. 6.02
lakhs on the said business asset in the form of warehouses. The assessee
claimed that warehousing was included in the main objects of the company’s
Memorandum of Association and not only warehouses were utilised for storing
their clients’ cargo, but other areas were used to park their equipment such as
trucks, cranes, etc., and amenities like handling equipment like pulleys,
grabs, weighing machines were fixed in the corners and such facilities were
also provided to the clients. The assessee claimed it to be business income and
said such income ought to be taxed as ‘Income from Business’. But the Assessing
Authority as well as the Appellate Authority held that the said income would be
taxable under the head ‘Income from House Property’. The Assessing Authority
also inter alia relied upon the judgment in the case of CIT vs.
Indian Warehousing Industries Limited [258 ITR 93].
M/s CeeDeeYes IT Parks Pvt. Ltd. – As
per the assessment order passed in the said case, the assessee company was
incorporated to carry out the business of providing infrastructure amenities
and work space for IT companies; it constructed the property in question and
let it out to one such IT company, M/s Cognizant Technology Solutions India
Ltd. The assessee claimed the rental income to be taxable as its ‘Business
Income’ and not as ‘Income from House Property’, but the Assessing Authority as
well as the Appellate Authorities held against the assessee and held such
income to be ‘Income from House Property’.
The assessee
contended that it will depend upon the facts of each case and if earning of
rental income by letting out of a business asset or the properties of the
assessee is the sole business of the assessee, then the income from such
rentals or lease money cannot be taxed as ‘Income from House Property’ but can
be taxed only as ‘Income from Business’. He submitted that the Assessing
Authorities below, in order to deny deductions or depreciation and other
expenditure incurred by the assessee to earn such business income, deliberately
held that such rental income was taxable under the head ‘Income from House
Property’ so that only limited deductions under that head of ‘Income from House
Property’ could be allowed to the assessee and a higher taxable income could be
brought to tax.
The assessee relied
upon the following case laws:
(a) Chennai Properties Investments Limited
vs. CIT [(2015) 373 ITR 673 (SC)];
(b) Rayala Corporation Private Limited
vs. Asst. CIT [(2013) 386 ITR 500 (SC)]; and
(c) Raj Dadarkar & Associates vs. Asst.
CIT [(2017) 394 ITR 592 (SC)].
The Revenue, apart
from relying on the Tribunal decision, also submitted that as far as the
separate income earned by the assessee from the amenities provided to the
clients in the warehouses or the property of the assessee was concerned, such
portion of income deserved to be taxed under the head ‘Income from Other
Sources’ u/s 56 and not as ‘Income from Business’.
But the High Court
observed that the Tribunal as well as the authorities below were under the
misconceived notion that income from letting out of property, which was the
business asset of the assessee company and the sole and exclusive business of
the assessee, was to earn income out of such house property in the form of
business asset, was still taxable only as ‘Income from House Property’. Such
misconception emanated from the judgment in the case of CIT vs. Chennai
Properties and Investment Pvt. Ltd. [(2004) 266 ITR 685], which was
reversed by the Hon’ble Supreme Court in Chennai Properties Investments
Limited vs. Commissioner of Income Tax (Supra), wherein it is held that
where the assessee is a company whose main object of business is to acquire
properties and to let out those properties, the rental income received was
taxable as ‘Income from Business’ and not ‘Income from House Property’,
following the ratio of the Constitution Bench judgment of the Supreme
Court in Sultans Brothers (P) Ltd. vs. Commissioner of Income Tax [(1964)
51 ITR 353 (SC)]; therein, it was held that each case has to be looked
at from the businessman’s point of view to find out whether the letting was
doing of a business or the exploitation of the property by the owner.
The said decision
subsequently was followed by the Supreme Court in the cases of Rayala
Corporation (Supra) and Raj Dadarkar & Associates (Supra).
The Court further
observed that once the property in question is used as a business asset and the
exclusive business of the assessee company or firm is to earn income by way of
rental or lease money, then such rental income can be treated only as the
‘Business Income’ of the assessee and not as ‘Income from House Property’. The
heads of income are divided in six heads, including ‘Income from House
Property’, which defines the specific source of earning such income. The income
from house property is intended to be taxed under that head mainly if such
income is earned out of idle property, which could earn the rental income from
the lessees. But where the income from the same property in the form of lease
rentals is the main source of business of the assessee, which has its business
exclusively or substantially in the form of earning of rentals only from the
business assets in the form of such landed properties, then the more
appropriate head of income applicable in such cases would be ‘Income from
Business’.
A bare perusal of
the scheme of the Income Tax Act, 1961 would reveal that while computing the
taxable income under the Head ‘Income from Business or Profession’, the various
deductions, including the actual expenditure incurred and notional deductions
like depreciation, etc., are allowed vis-a-vis incentives in the form of
deductions under Chapter VIA. But the deductions under the Head ‘Income from
House Property’ are restricted to those specified in section 24 of the Act,
like 1/6th of the annual income towards repairs and maintenance to
be undertaken by landlords, interest on capital employed to construct the
property, etc. Therefore, in all cases such income from property cannot be
taxed only under the head ‘Income from House Property’. It will depend upon the
facts of each case and where such income is earned by the assessee by way of
utilisation of its business assets in the form of property in question or as an
idle property which could yield rental income for its user, from the lessees.
In the earlier provisions of income from house properties, even the notional
income under the head ‘Income from House Property’ was taxable in the case of
self-occupied properties by landlords, is a pointer towards that.
The Court observed
that in both the present cases it is not even in dispute that the exclusive and
main source of income of the assessee was only the rentals and lease money
received from the lessees; the Assessing Authority took a different and
contrary view mainly to deny the claim of depreciation out of such business
income in the form of rentals without assigning any proper and cogent reason.
Merely because the lease income or rental income earned from the lessees could
be taxed as ‘Income from House Property’, ignoring the fact that such rentals
were the only source of ‘Business Income’ of the assessee, the authorities
below have fallen into the error in holding that the income was taxable under
the head ‘Income from House Property’. The said application of the head of
income by the authorities below was not only against the facts and evidence
available on record, but also against common sense.
The amended
definition u/s 22 now defines ‘Income from House Property’ as the annual value
of property as determined u/s 23 consisting of buildings or lands appurtenant
thereto of which the assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession
carried on by him, the profits of which are chargeable to income tax, shall be
chargeable to income tax under the head ‘Income from House Property’. Thus,
even the amended definition intends to tax the notional income of the
self-occupied portion of the property to run the assessee’s own business
therein as business income. Therefore, the other rental income earned from
letting out of the property, which is the business of the assessee itself,
cannot be taxed as ‘Income from House Property’.
The Court also observed that the heads of income, as defined in section
14 do not exist in silos or in watertight compartments under the scheme of tax
and, thus, these heads of income, as noted above, are fields and heads of
sources of income depending upon the nature of business of the assessee. Therefore,
in cases where the earning of the rental income is the exclusive or predominant
business of the assessee, the income earned by way of lease money or rentals by
letting out of the property cannot be taxed under the head ‘Income from House
Property’ but can only be taxed under the head ‘Income from Business income’.
In view of the
aforesaid, both the assessees in the present case carry on the business of
earning rental income as per the memoranda of association only and the fact is
that they were not carrying on any other business; therefore, the appeals of
both the assessees were allowed. The question of law framed above was answered
in favour of the assessees and against the Revenue.
