By TIOL News Service

NEW DELHI, MAY 05, 2015: THE issue before the Bench - Whether income from letting out of properties is liable to be treated as 'business income' of assessee and not 'rental income', where the business of assessee involves acquiring and letting out of those properties. YES is the answer.

Facts of the case

The assessee company is engaged in the business of acquiring and letting out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business in the returns filed by the assessee. The AO however, refused to tax the same as business income, on the ground that 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. On appeal, the CIT(A) as well as the Tribunal reversed the order of AO by holding it to be income from business. On further apeal, the High Court allowed the appeal of Revenue by holding that the income derived by letting out of the properties would not be income from business but could be assessed only as income from house property.

Having heard the parties, the Supreme Court held that,

++ the Memorandum of Association of assessee which is placed on record mentions main objects as well as incidental or ancillary objects. The main object of the assessee is 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 said properties and earning income by letting out those properties is the main objective of the company. It may further be recorded that in the return that was filed, entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the AO himself in his order. It transpires that the return of a total income of Rs.2,44,030/- was filed for the A.Y 1983-1984 and the entire income was through letting out of the said two properties namely, "Chennai House" and "Firhavin Estate". Thus, there is no other income of the assessee except the income from letting out of these two properties;

++ it is seen that in the case of Karanpura Development Co. Ltd. v. CIT, this court has held that: "As has been already pointed out in connection with the cases 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 diving 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." After applying the said principle to the facts, this court in the case of Karanpura Development Co. came to the conclusion that income had to be treated as income from business and not as income from house property. No doubt in Sultan Brothers (P) Ltd.'s case, the 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. Therefore, in the present 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'.

(See 2015-TIOL-93-SC-IT)