My company's only business is letting its warehouses and its IT park. The Assessing Officer has taxed the rent as income from house property and knocked out my depreciation. Can I get it assessed as business income?
Yes, where letting the property is the company's sole and exclusive business. The Madras High Court held that once the property is a business asset and the exclusive business of the company or firm is to earn rental or lease money, that rent can only be business income, and it answered the question of law in the assessee's favour for both a warehousing company and an IT park company.
Decided by the High Court (Dr. Vineet Kothari J and R. Suresh Kumar J) on 2020-01-30, reported as Tax Case Appeal Nos. 2193 to 2195 of 2008 and 979 of 2009 (Madras High Court). It bears on section 22, section 23, section 24, section 28, section 56, section 14 of the Income Tax Act 1961, in House Property and How Tax Law Is Read matters.
The whole fight is about deductions. Under section 22 to 24 you get a flat thirty per cent under section 24(a) and interest under section 24(b) and nothing else; under section 28 you get depreciation and every actual expense. The Court said in terms that the Assessing Officer had taken the house property view mainly to deny depreciation. The limit is that this is a facts-and-objects test, not a label: Sultan Brothers (SC, Constitution Bench) holds that an entry in the objects clause is not by itself determinative, and Raj Dadarkar (SC) shows that an assessee who cannot prove the letting was its business will be taxed under section 22 instead. Note also that the Madras High Court's own earlier decision in CIT v Chennai Properties and Investment Pvt Ltd [(2004) 266 ITR 685], on which the Department still relies in that State, was reversed by the Supreme Court in 2015 and cannot now be cited.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Two assessees were heard together. CeeDeeYes IT Parks Pvt. Ltd. was incorporated to provide infrastructure amenities and work space for IT companies; it constructed the property and let it to Cognizant Technology Solutions India Ltd. (assessment year 2005-06). PSTS Heavy Lift and Shift Ltd. owned two warehouses near SIPCOT Tuticorin on 3.09 acres, each with about 32,000 sq. ft. of built-up area, which it let to W. Hogewoning Dried Flower Ltd. and Ramesh Flowers Ltd., earning Rs 21.12 lakhs in assessment year 2000-2001 against which it claimed depreciation of Rs 6.02 lakhs; warehousing was among the main objects in its memorandum, the warehouses stored clients' cargo, other areas were used to park trucks and cranes, and handling equipment such as pulleys, grabs and weighing machines was fixed and made available to clients (assessment years 1999-2000, 2000-2001 and 2001-2002). In both cases the Assessing Officer, the first appellate authority and the Tribunal held the receipts to be income from house property, the Tribunal relying on the Madras High Court's decision in CIT v. Chennai Properties and Investment Pvt. Ltd. [(2004) 266 ITR 685]. The assessees appealed under section 260A.
The appeals were allowed and the substantial question of law was answered in favour of the assessees and against the Revenue, with no costs (paragraph 22). Where the property 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, the rental income can be treated only as business income and not as income from house property (paragraph 17).
The Court held that the premise of the Tribunal and the authorities below was misconceived and had come from the Madras High Court's decision in Chennai Properties, which the Supreme Court had since reversed (paragraphs 11 and 16). It followed the Supreme Court in Chennai Properties Investments Ltd. v. CIT [(2015) 373 ITR 673], which applied Karanpura Development Co. Ltd. for the proposition that the deciding factor is not ownership of the land or leases but the nature of the assessee's activity and its objects, and which acknowledged Sultan Brothers' caution that an objects clause entry is not by itself determinative (paragraphs 12 and 13). It then applied Rayala Corporation, where the assessee's only business was leasing its property, and Raj Dadarkar, where the Supreme Court set out the overlap between the two heads (paragraphs 14 and 15). On the deduction consequences, the Court noted that under the business head actual expenditure and depreciation are allowed whereas the house property head confines deductions to section 24, so income from property cannot in every case be taxed only under the house property head (paragraph 18). It found that the Assessing Officer had taken the 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' (paragraph 19), and that the heads of income in section 14 are fields of source and do not exist in watertight compartments (paragraph 21). Since it was undisputed that the exclusive source of income of both assessees was rentals and lease money and neither carried on any other business, the appeals had to be allowed (paragraph 22).
We are of the clear opinion that once the property in question is used as 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'.
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Handle my notice → Ask a CA on WhatsAppYes, where letting the property is the company's sole and exclusive business. The Madras High Court held that once the property is a business asset and the exclusive business of the company or firm is to earn rental or lease money, that rent can only be business income, and it answered the question of law in the assessee's favour for both a warehousing company and an IT park company. This was decided by the High Court (Dr. Vineet Kothari J and R. Suresh Kumar J) and bears on section 22, section 23, section 24, section 28, section 56, section 14 of the Income Tax Act 1961. It is reported as Tax Case Appeal Nos. 2193 to 2195 of 2008 and 979 of 2009 (Madras High Court). The whole fight is about deductions. Under section 22 to 24 you get a flat thirty per cent under section 24(a) and interest under section 24(b) and nothing else; under section 28 you get depreciation and every actual expense. The Court said in terms that the Assessing Officer had taken the house property view mainly to deny depreciation. The limit is that this is a facts-and-objects test, not a label: Sultan Brothers (SC, Constitution Bench) holds that an entry in the objects clause is not by itself determinative, and Raj Dadarkar (SC) shows that an assessee who cannot prove the letting was its business will be taxed under section 22 instead. Note also that the Madras High Court's own earlier decision in CIT v Chennai Properties and Investment Pvt Ltd [(2004) 266 ITR 685], on which the Department still relies in that State, was reversed by the Supreme Court in 2015 and cannot now be cited. If it applies to you, the first step is this: Put the memorandum of association on record and show that letting is the main or ancillary object actually being carried on, and that no other business is being carried on.
Two assessees were heard together. CeeDeeYes IT Parks Pvt. Ltd. was incorporated to provide infrastructure amenities and work space for IT companies; it constructed the property and let it to Cognizant Technology Solutions India Ltd. (assessment year 2005-06). PSTS Heavy Lift and Shift Ltd. owned two warehouses near SIPCOT Tuticorin on 3.09 acres, each with about 32,000 sq. ft. of built-up area, which it let to W. Hogewoning Dried Flower Ltd. and Ramesh Flowers Ltd., earning Rs 21.12 lakhs in assessment year 2000-2001 against which it claimed depreciation of Rs 6.02 lakhs; warehousing was among the main objects in its memorandum, the warehouses stored clients' cargo, other areas were used to park trucks and cranes, and handling equipment such as pulleys, grabs and weighing machines was fixed and made available to clients (assessment years 1999-2000, 2000-2001 and 2001-2002). In both cases the Assessing Officer, the first appellate authority and the Tribunal held the receipts to be income from house property, the Tribunal relying on the Madras High Court's decision in CIT v. Chennai Properties and Investment Pvt. Ltd. [(2004) 266 ITR 685]. The assessees appealed under section 260A. The matter was decided on 2020-01-30 by the High Court (Dr. Vineet Kothari J and R. Suresh Kumar J). On those facts the High Court held as follows. The appeals were allowed and the substantial question of law was answered in favour of the assessees and against the Revenue, with no costs (paragraph 22). Where the property 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, the rental income can be treated only as business income and not as income from house property (paragraph 17).
The Court held that the premise of the Tribunal and the authorities below was misconceived and had come from the Madras High Court's decision in Chennai Properties, which the Supreme Court had since reversed (paragraphs 11 and 16). It followed the Supreme Court in Chennai Properties Investments Ltd. v. CIT [(2015) 373 ITR 673], which applied Karanpura Development Co. Ltd. for the proposition that the deciding factor is not ownership of the land or leases but the nature of the assessee's activity and its objects, and which acknowledged Sultan Brothers' caution that an objects clause entry is not by itself determinative (paragraphs 12 and 13). It then applied Rayala Corporation, where the assessee's only business was leasing its property, and Raj Dadarkar, where the Supreme Court set out the overlap between the two heads (paragraphs 14 and 15). On the deduction consequences, the Court noted that under the business head actual expenditure and depreciation are allowed whereas the house property head confines deductions to section 24, so income from property cannot in every case be taxed only under the house property head (paragraph 18). It found that the Assessing Officer had taken the 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' (paragraph 19), and that the heads of income in section 14 are fields of source and do not exist in watertight compartments (paragraph 21). Since it was undisputed that the exclusive source of income of both assessees was rentals and lease money and neither carried on any other business, the appeals had to be allowed (paragraph 22). In the words reproduced by the source cited on this page: "We are of the clear opinion that once the property in question is used as 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 decision followed or applied Chennai Properties Investments Limited v. CIT [(2015) 373 ITR 673 (SC)] — followed; Rayala Corporation Private Limited v. ACIT — followed; Raj Dadarkar & Associates v. ACIT [(2017) 394 ITR 592 (SC)] — applied; Karanpura Development Co. Ltd. v. CIT [44 ITR 362 (SC)] — applied through Chennai Properties; Sultan Brothers (P) Ltd. v. CIT [(1964) 51 ITR 353 (SC)] — considered; CIT v. Chennai Properties and Investment Pvt. Ltd. [(2004) 266 ITR 685 (Mad)] — noted as reversed by the Supreme Court and no longer available to the Revenue.
It was decided by the High Court on 2020-01-30 and is reported as Tax Case Appeal Nos. 2193 to 2195 of 2008 and 979 of 2009 (Madras High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 22, section 23, section 24, section 28, section 56, section 14, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed and the substantial question of law was answered in favour of the assessees and against the Revenue, with no costs (paragraph 22). Where the property 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, the rental income can be treated only as business income and not as income from house property (paragraph 17). It arises in House Property and How Tax Law Is Read matters, on section 22, section 23, section 24, section 28, section 56, section 14 of the Income Tax Act 1961, and was decided by Dr. Vineet Kothari J and R. Suresh Kumar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show the property was treated as a business asset in the books, and show what was actually provided with the space (storage, handling equipment, amenities), because the Court relied on those facts. Show the consistency of treatment across years and that the Department accepted the business head in other years, which weighed in both this case and in the Calcutta High Court's decision in Oberoi Building and Investment. If the Assessing Officer relies on any Madras High Court decision founded on CIT v Chennai Properties and Investment Pvt Ltd [(2004) 266 ITR 685], point out that it stands reversed by the Supreme Court in (2015) 373 ITR 673. Be ready for the Department's fallback that the amenities component is income from other sources under section 56; the Revenue argued that here and the Court did not accept it on these facts.
Validity check could not be completed. Validity check could not be completed. No search for later treatment of this judgment was carried out, and it is not known whether the Revenue took it further. What can be said from the judgment itself is that it rests on three Supreme Court decisions (Chennai Properties 2015, Rayala Corporation and Raj Dadarkar) and that at paragraph 16 the Court recorded that it had found no later contrary view of the legal position. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Three things in the report need flagging. First, at paragraph 18 the Court describes the deductions under the house property head as including '1/6th of the annual income towards repairs and maintenance'; that is the pre-2002 section 24(1)(i), and since assessment year 2002-03 section 24(a) gives a flat thirty per cent of the annual value. Second, paragraph 20's description of section 22 is garbled: section 22 excludes from the head those portions of the property the owner occupies for his own business, it does not tax their notional income as business income. Third, at paragraph 7 the report cites Rayala Corporation as '(2013) 386 ITR 500 (SC)' although that decision was delivered on 11 August 2016; the Court's own paragraph 14 treats it as following Chennai Properties (2015). Paragraphs 1 to 22 were read in full in two separate fetches and the quoted sentence was re-verified through the phrase index. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed and the substantial question of law was answered in favour of the assessees and against the Revenue, with no costs (paragraph 22). Where the property 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, the rental income can be treated only as business income and not as income from house property (paragraph 17).
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