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Whether rental income earned from letting out of premises is to be treated as business income or as income from house property?

Raj Dadarkar and Associates v. Assistant Commissioner of Income Tax [2017] 394 ITR 592 (SC)

Facts of the case:

The assessee had acquired the right to conduct a market on certain land from Municipal Corporation, Greater Bombay under an auction on May 28, 1993. The premises allotted to the appellant was a bare structure and it was for the appellant to make the premises fit to be used as a market. The appellant spent substantial sums to construct 95 shops and 30 stalls. From the years 1999 to 2004, the assessee treated income from sub-letting of such shops and stalls as business income. The return of the assessee for assessment year 2000-2001 was reopened by Assessing Officer by issuing notice under section 148.

Issue:

Whether the income earned by the appellant is to be taxed under the head ‘Income from house property’ or ‘Profits and gains from the business or profession’?

Supreme Court’s Observations:

The Supreme Court held that wherever there is an income from leasing out of premises, it is to be treated as income from house property. However, it can be treated as business income if letting out of the premises itself is the business of the assessee. The question has to be decided based on the facts of each case as was held in Sultan Brothers Pvt Ltd. v. CIT [1964] 51 ITR 353 (SC)

In the given facts, it was an undisputed fact that the assessee would be considered to be a deemed owner under section 27(iiib) read with section 269UA(f) as it had a leasehold right for more than 12 years. The only evidence adduced for proving that letting out and earning rents is the main business activity of the appellant was the object clause of the partnership deed. The clause provided that “The Partnership shall take the premises on rent to sub-let or do any other business as may be mutually agreed by the parties from time to time.” The Supreme Court held the clause to be inconclusive and observed that the assessee had failed to produce sufficient material to show that its entire or substantial income was from letting out of the property.

Supreme Court’s Decision:

The Supreme Court, accordingly, held that, in this case, the income is to be assessed as “Income from house property” and not as business income, on account of lack of sufficient material to prove that the substantial income of the assessee was from letting out of the property.

Note – In Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673, the Supreme Court observed  that holding of the properties and earning income by  letting out of these properties is the main objective of the company. Further, in the return of income filed by the company and accepted by the Assessing Officer, the entire income of the company comprised of income from letting out of such properties. The Supreme Court, accordingly, held that such income was taxable as business income. Likewise, in Rayala Corporation (P) Ltd. v. Asst. CIT (2016) 386 ITR 500, the Supreme Court noted that the assessee was engaged only in the business of renting its properties and earning rental income therefrom and accordingly, held that such income was taxable as business income. In this case, however, on account of lack of sufficient material to prove that substantial income of the assessee was from letting out of property, the Supreme Court held that the rental income has to be assessed as “Income from house property”.

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