KPMG FLASH NEWS
KPMG in India
6 May 2015
Rental income from letting of property is assessable as business
income, and not income from house property – Supreme Court

Background
Recently, the Supreme Court of India (Supreme Court)
1
in the case of Chennai Properties & Investments Ltd
(the taxpayer) held that rental income received from
letting of property is assessable as ‘business income’,
and not ‘income from house property’ since the main
object of the taxpayer was to acquire and hold the
properties and to let out those properties.
The Commissioner of Income-tax (Appeals)
[CIT(A)] and Income-tax Appellate Tribunal (the
Tribunal) held that rental income received from
letting of property is to be treated as business
income. However, the High Court, relying on the
decision of East India Housing and Land
Development Trust Ltd. and Sultan Brothers (P)
2
Ltd. held that the income derived by letting out of
the properties would not be income from business
but could be assessed only as income from
house property.
Facts of the case
Issue before the Supreme Court

The taxpayer Company having its main object
clause in the Memorandum of Association (MoA) as
being acquisition of properties and letting out of the
same.


During the year under consideration, the taxpayer
had rented out some properties and the rental
income received there from was shown as business
income in the return of income.
Supreme Court’s ruling


The Assessing Officer (AO) held that the income
received from letting of properties was in the nature
of rental income. Accordingly, it would be treated as
income from house property and not as business
income.
Whether the income derived by the taxpayer from
letting out property is to be treated as income
from business or it is to be treated as income
from house property?
On a reference to the MoA of the taxpayer, it
indicates that the main object of the taxpayer was
to acquire and hold properties 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.

___________________
In the return of income, the entire income was
assessed as letting out of the aforesaid
properties. Thus, there is no other income of the
taxpayer except the income from letting out of
these properties.
______________
1
Chennai Properties & Investments Ltd. v. CIT (Civil Appeal No. 4494 of 2004) –
Taxsutra.com
2
East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR
49 (SC) and Sultan Brothers (P) Ltd. v. CIT [1964] 51 ITR 353 (SC)
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

In the case of East India Housing and Land
Development Trust Ltd. the Supreme Court held that
the income shall be treated as income from the
house property, and rested its decision in the context
of the main objective of the company and observed
that letting of the property was not the object of the
company at all. Therefore, the Supreme Court was
of the opinion that the character of income which
was from the house property had not altered since it
was received by the company, formed with the
object of developing and setting up properties.

In the case of Karanpura Development Co. Ltd. the
Supreme Court observed that the deciding factor is
not the ownership of land or leases but the nature of
the activity of the taxpayer and the nature of the
operations in relation to them. It was highlighted that
the objects of the company must also be kept in view
to interpret the activities.

The Supreme Court, while relying on various
decisions of other jurisdictions i.e. Privy Counsel,
House of Lords in England and U.S. Courts,
observed that 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 a part of a trading operation.
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.
3

Applying the aforesaid principle to the facts of the
present case, the Supreme Court held that income
had to be treated as income from business and not
as income from house property. Thus, the decision
in the case of Karanpura Development Co. Ltd.
squarely applies to the facts of the present case.

No doubt in the case of Sultan Brothers (P) Ltd., the
Supreme Court had clarified that 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
business income. Therefore, such a question would
depend upon the circumstances of each case and
the Supreme Court is conscious of the aforesaid
4
dicta laid down by the Constitution Bench decision.

In the present case, letting of the properties is the
business of the taxpayer. Therefore, the taxpayer
correctly disclosed the income under the head
income from business and it cannot be treated as
income from house property. Accordingly, the
Supreme Court set aside the judgment of the
High Court.
Our comments
This is a welcome ruling of the Supreme Court where
it has been held that rental income received from
letting of property is assessable as business income,
and not income from house property. The Supreme
Court referred to the MoA of the taxpayer and
observed that as per the MoA, the main object of the
taxpayer was to acquire and hold the properties and
to let out those properties and therefore, the taxpayer
correctly disclosed the income under the head,
income from business.
The Supreme Court also dealt with the observation of
its earlier decision in the case of Sultan Brothers (P)
Ltd. with respect to reliance on the object clause in
the MoA as a determinative factor for characterisation
of income from letting of property. The Supreme
Court in the instant case observed that it was
conscious of the observations given in the Sultan
Brother’s (P) Ltd. case and the question of
classification of income as business income or
property income would depend upon the
circumstances of each case.
____________
3
4
Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC)
a formal statement
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.