Rental income received from letting out the property shall be taxed under House Property or as Business Income? Whenever we receive any rental income, we wonder under which head it shall be taxed. This doubt arises to most of us.   

Though it is a frequent asked question, doubt still continues. Whenever we tax the rental income under House Property we ultimate find that the AO charges it under Business Income and vice versa. So, it’s get very difficult to understand the basic concept behind this. As a result we opt either going for higher appeal which leads to higher cost or we surrender at that stage only. But, at the end we are not sure about the correct decision.

In this regard, there are many case laws. But again, the issue is same. Too many case laws create more confusion. Bewilderment regarding which case law shall apply to your case. This is sometimes due to lack of understanding the keywords of the case.

Let us read and understand few case laws which shall clear the ambiguity about heads of income under which your rental income shall fall:

‘East India Housing and Land Development Trust Ltd. v. Commissioner ofIncome Tax, West Bengal’

The company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets.

While developing the properties, it rented out some shops and stalls which were developed by it. Thus, rental income was derived from the renting of the said shops and stalls.

Now, the question was to treat the same as income from House Property or the income from Business.

The Court here, highlighted the object clause of the company. The company was formed with the object of developing and setting up properties. Renting the properties was in the course of developing such properties and was not the object of the company.

Thus, the object of company was not to earn income from renting. Hence, such income shall be Income from House Property and not the Business Income.

‘Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal’

Object of company:  Acquiring and disposing of the underground coal mining rights in certain coal fields.

It restricted its activities to acquire coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies.

Though not stated in the object clause we can say, leasing out of the coal fields to the collieries and other companies was the business of the assessee. The letting or sub-letting is part of a trading operation.

A company with its professed objects and the manner of its activities and the nature of its dealings with its property, it shall be concluded that the income shall be classified as Business Income.

 ‘Chennai Properties & Investments Ltd. v. Commissioner of Income Tax’

The main object of the company was 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.

Further to be noted that the entire income of the company recorded in the return was from letting out of these properties.

Thus, concluded that the letting of the properties is the business of the assessee.

Crux:

The deciding factor shall not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It is to be noted that the objects of the company must also be kept in view to interpret the activities. Merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at a conclusion whether the income is to be treated as income from business.

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