My company's only activity is letting out its properties. Is the rent taxable as house property income or as business income?
As business income, on these facts. The Supreme Court held that where a company's business is to lease its property and earn rent, the income so earned is business income, and set aside the Madras High Court's contrary view. It applied Chennai Properties and Investments Ltd, in which it had held that if an assessee has house property and by way of business gives it on rent, the receipt, though in the nature of rent, is business income. It rejected the Revenue's argument that the memorandum of association must make letting the main object, noting that on the admitted facts the company had stopped its other activities and had only this one business.
Decided by the Supreme Court (Supreme Court of India - Anil R. Dave and L. Nageswara Rao JJ; judgment by Anil R. Dave J) on 2016-08-11, reported as AIR 2016 Supreme Court 3796; 2016 (15) SCC 201; (2016) 7 SCALE 697; AIR 2016 SC (Civil) 2431; Civil Appeal No. 6437 of 2016 with connected appeals. It bears on section 28, section 22 of the Income Tax Act 1961, in House Property matters.
This is the case that carries Chennai Properties from a company whose objects were expressly to acquire and let property to one whose other businesses had simply ceased, so that letting was all that remained. That is the situation practitioners actually meet. It also answers the Revenue's standard reply, which is to insist that the memorandum must show letting as the main object: the Court found no substance in that, on the facts, where the company had only one business. The test it applies is the old one from Karanpura Development, quoted in the judgment - assessment on the property basis may be correct where there is a letting of premises and collection of rents, but not where the letting or sub-letting is part of a trading operation, and in the case of a company the professed objects, the manner of its activities and the nature of its dealings with the property show which side the operations fall on.
Binding on every court and authority in India.
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The appellant is a private limited company which owns house property that it has let out and from which it receives rent. The appeals arose from a common judgment of the Madras High Court dated 4 October 2013 in Tax Case (Appeal) Nos. 91, 99 and 212 of 2012 and 230 and 231 of 2007, and concerned several assessment years on the same issue. The company's case was that it is in the business of renting its properties and receives the rent as business income, so that it falls under profits and gains of business or profession; the Revenue's case was that because the income arises from house property it must be taxed under that head. The memorandum of association provided that the company's business is to deal in real estate and also to earn income by way of rent by leasing or renting the properties belonging to it. The High Court and the authorities below had recorded a specific finding that the company had stopped its other business activities and had only the activity of leasing its properties and earning rent from them, so that apart from that letting it had no other business; that finding was not in dispute. The High Court had nevertheless directed that the income be treated as income from house property.
The appeals were allowed and the impugned judgments set aside, with no order as to costs, and it was directed that the income of the assessee be subject to tax under the head profits and gains of business or profession. The Court held that the law laid down in Chennai Properties and Investments Ltd shows the correct position and that the case was squarely covered by it: where an assessee has house property and by way of business gives it on rent and receives the rent as business income, the income, even if in the nature of rent, is to be treated as business income. It dealt specifically with the Revenue's submission that the rent must be the main source of income, or the purpose of incorporation must be to earn rental income, before the receipt can be business income, holding that on the admitted facts the company has only one business, that of leasing its property and earning rent, so that even on the factual aspect there was no substance in the submission. The business of the company being to lease its property and earn rent, the income so earned should be treated as its business income.
The Court decided the appeals by applying Chennai Properties, which it noted had referred to all the judgments on the subject and in particular to Karanpura Development Co. Ltd, the passage from which was set out: where there is a letting of premises and collection of rents the assessment on the property basis may be correct, but not 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, its professed objects, the manner of its activities and the nature of its dealings with its property make it possible to say on which side the operations fall and to what head the income is to be assigned. Applied here, the objects clause covered dealing in real estate and earning rent by leasing the company's properties, and the concurrent finding was that no other activity remained. The Revenue relied on S.G. Mercantile Corporation for the proposition that the question is whether the acquisition of property for leasing and letting out shops and stalls is essentially part of the assessee's business and trading operations, and argued that letting was not the main business under the memorandum. The Court found the assessee's authority squarely applicable and the Revenue's submission without substance on the facts.
The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income.
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Handle my notice → Ask a CA on WhatsAppAs business income, on these facts. The Supreme Court held that where a company's business is to lease its property and earn rent, the income so earned is business income, and set aside the Madras High Court's contrary view. It applied Chennai Properties and Investments Ltd, in which it had held that if an assessee has house property and by way of business gives it on rent, the receipt, though in the nature of rent, is business income. It rejected the Revenue's argument that the memorandum of association must make letting the main object, noting that on the admitted facts the company had stopped its other activities and had only this one business. This was decided by the Supreme Court (Supreme Court of India - Anil R. Dave and L. Nageswara Rao JJ; judgment by Anil R. Dave J) and bears on section 28, section 22 of the Income Tax Act 1961. It is reported as AIR 2016 Supreme Court 3796; 2016 (15) SCC 201; (2016) 7 SCALE 697; AIR 2016 SC (Civil) 2431; Civil Appeal No. 6437 of 2016 with connected appeals. This is the case that carries Chennai Properties from a company whose objects were expressly to acquire and let property to one whose other businesses had simply ceased, so that letting was all that remained. That is the situation practitioners actually meet. It also answers the Revenue's standard reply, which is to insist that the memorandum must show letting as the main object: the Court found no substance in that, on the facts, where the company had only one business. The test it applies is the old one from Karanpura Development, quoted in the judgment - assessment on the property basis may be correct where there is a letting of premises and collection of rents, but not where the letting or sub-letting is part of a trading operation, and in the case of a company the professed objects, the manner of its activities and the nature of its dealings with the property show which side the operations fall on. If it applies to you, the first step is this: Establish what the company actually does now, not only what its objects clause says; the finding that all other activities had stopped and only letting remained was decisive here.
The appellant is a private limited company which owns house property that it has let out and from which it receives rent. The appeals arose from a common judgment of the Madras High Court dated 4 October 2013 in Tax Case (Appeal) Nos. 91, 99 and 212 of 2012 and 230 and 231 of 2007, and concerned several assessment years on the same issue. The company's case was that it is in the business of renting its properties and receives the rent as business income, so that it falls under profits and gains of business or profession; the Revenue's case was that because the income arises from house property it must be taxed under that head. The memorandum of association provided that the company's business is to deal in real estate and also to earn income by way of rent by leasing or renting the properties belonging to it. The High Court and the authorities below had recorded a specific finding that the company had stopped its other business activities and had only the activity of leasing its properties and earning rent from them, so that apart from that letting it had no other business; that finding was not in dispute. The High Court had nevertheless directed that the income be treated as income from house property. The matter was decided on 2016-08-11 by the Supreme Court (Supreme Court of India - Anil R. Dave and L. Nageswara Rao JJ; judgment by Anil R. Dave J). On those facts the Supreme Court held as follows. The appeals were allowed and the impugned judgments set aside, with no order as to costs, and it was directed that the income of the assessee be subject to tax under the head profits and gains of business or profession. The Court held that the law laid down in Chennai Properties and Investments Ltd shows the correct position and that the case was squarely covered by it: where an assessee has house property and by way of business gives it on rent and receives the rent as business income, the income, even if in the nature of rent, is to be treated as business income. It dealt specifically with the Revenue's submission that the rent must be the main source of income, or the purpose of incorporation must be to earn rental income, before the receipt can be business income, holding that on the admitted facts the company has only one business, that of leasing its property and earning rent, so that even on the factual aspect there was no substance in the submission. The business of the company being to lease its property and earn rent, the income so earned should be treated as its business income.
The Court decided the appeals by applying Chennai Properties, which it noted had referred to all the judgments on the subject and in particular to Karanpura Development Co. Ltd, the passage from which was set out: where there is a letting of premises and collection of rents the assessment on the property basis may be correct, but not 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, its professed objects, the manner of its activities and the nature of its dealings with its property make it possible to say on which side the operations fall and to what head the income is to be assigned. Applied here, the objects clause covered dealing in real estate and earning rent by leasing the company's properties, and the concurrent finding was that no other activity remained. The Revenue relied on S.G. Mercantile Corporation for the proposition that the question is whether the acquisition of property for leasing and letting out shops and stalls is essentially part of the assessee's business and trading operations, and argued that letting was not the main business under the memorandum. The Court found the assessee's authority squarely applicable and the Revenue's submission without substance on the facts. In the words reproduced by the source cited on this page: "The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income."
It was decided by the Supreme Court on 2016-08-11 and is reported as AIR 2016 Supreme Court 3796; 2016 (15) SCC 201; (2016) 7 SCALE 697; AIR 2016 SC (Civil) 2431; Civil Appeal No. 6437 of 2016 with connected appeals. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 28, section 22, 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 impugned judgments set aside, with no order as to costs, and it was directed that the income of the assessee be subject to tax under the head profits and gains of business or profession. The Court held that the law laid down in Chennai Properties and Investments Ltd shows the correct position and that the case was squarely covered by it: where an assessee has house property and by way of business gives it on rent and receives the rent as business income, the income, even if in the nature of rent, is to be treated as business income. It dealt specifically with the Revenue's submission that the rent must be the main source of income, or the purpose of incorporation must be to earn rental income, before the receipt can be business income, holding that on the admitted facts the company has only one business, that of leasing its property and earning rent, so that even on the factual aspect there was no substance in the submission. The business of the company being to lease its property and earn rent, the income so earned should be treated as its business income. It arises in House Property matters, on section 28, section 22 of the Income Tax Act 1961, and was decided by Supreme Court of India - Anil R. Dave and L. Nageswara Rao JJ; judgment by Anil R. Dave 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. Put the memorandum on record as well, since the Court looked at the objects together with the activity, and the Revenue will argue from it if you do not. Keep in mind what turns on the answer - the standard deduction and interest allowance under the house property head against the ordinary business deductions and depreciation - and be consistent across years. Where the letting is incidental to a continuing business of another kind, do not assume this case helps; it turns on letting being the whole of the activity.
Still good law. A Supreme Court judgment of August 2016 applying Chennai Properties; the harvested page records it as cited in 52 later decisions, which I have not read. Note that the judgment is marked non-reportable on its face, so it is an application of Chennai Properties to these facts rather than a fresh statement of principle, and Chennai Properties is the citation of first resort. 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.
The judgment is marked non-reportable although it has been widely reported and cited. It does not identify the assessment years in issue or the amounts, and it does not analyse the objects clause or the facts beyond adopting the concurrent findings that all other activities had ceased. It therefore decides the head of income where letting is the whole of the company's activity and does not address the harder case of letting alongside a continuing business of another kind, nor does it deal with the consequences of the classification for deductions or depreciation. The batch line's section 28(i) is the relevant clause of section 28. 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 impugned judgments set aside, with no order as to costs, and it was directed that the income of the assessee be subject to tax under the head profits and gains of business or profession. The Court held that the law laid down in Chennai Properties and Investments Ltd shows the correct position and that the case was squarely covered by it: where an assessee has house property and by way of business gives it on rent and receives the rent as business income, the income, even if in the nature of rent, is to be treated as business income. It dealt specifically with the Revenue's submission that the rent must be the main source of income, or the purpose of incorporation must be to earn rental income, before the receipt can be business income, holding that on the admitted facts the company has only one business, that of leasing its property and earning rent, so that even on the factual aspect there was no substance in the submission. The business of the company being to lease its property and earn rent, the income so earned should be treated as its business income.
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