Rayala Corporation Pvt. Ltd vs. ACIT (Supreme Court)

DATE: August 11, 2016 (Date of pronouncement)
DATE: August 17, 2016 (Date of publication)
AY: -
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S. 28: Income from letting of property on rent by an assessee engaged in the business of letting is assessable as "business profits" u/s 28 and not as "Income from house property" u/s 22

The assessee, a private limited company, had house property, which was rented and the assessee was receiving income from the said property by way of rent. The Supreme Court had to consider whether the income so received should be taxed under the head “Income from House Property” or “Profit and gains of business or profession”. The assessee claimed that though it is having house property and is receiving income by way of rent, the assessee is in business of renting its properties and is receiving rent as its business income and so the said income should be taxed under the Head “Profits and gains of business or profession”. The Revenue claimed that as the income is arising from House Property, the said income must be taxed under the head “Income from House Property”. HELD by the Supreme Court:

(i) The issue involved in these appeals is no more res integra as this Court has decided in the case of Chennai Properties and Investments Ltd. v. Commissioner of Income Tax [2015] 373 ITR 673 (SC) that if an assessee is having his house property and by way of business he is giving the property on rent and if he is receiving rent from the said property as his business income, the said income, even if in the nature of rent, should be treated as “Business Income” because the assessee is having a business of renting his property and the rent which he receives is in the nature of his business income.

(ii) The afore-stated judgment in the case of Chennai Properties (supra) has referred to all the judgments on the subject and more particularly, the judgment in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC) which has summed up as under:-

“As has been already pointed out in connection with the other two 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 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.”

(iii) The assessee is a private limited company and even as per its Memorandum of Association its business is to deal into real estate and also to earn income by way of rent by leasing or renting the properties belonging to the assessee company. The High Court and the authorities below had come to a specific finding to the effect that the assessee company had stopped its other business activities and was having only an activity with regard to the leasing its properties and earning rent therefrom. Thus, except leasing the properties belonging to the assessee company, the company is not having any other business and the said fact is not in dispute at all.

(iv) As 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.

(S.G. Mercantile Corpn. (P) Ltd. v. CIT, Calcutta (1972) 1 SCC 465 distinguished)

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