2020 (2) TMI 213 - HC - Income Tax

Correct head of income - income from letting out of warehouses or property to lessees - 'Income from Business' or 'Income from House Property' - HELD THAT - It is not even in dispute that all the exclusive and main source of income of the Assessee was only the rentals and lease money received from the lessees in both the cases and the Assessing Authority took a different and contrary view mainly to deny the claim of depreciation out of such business income in the form of rentals, without assigning any proper and cogent reason. Merely because the lease income or rental income earned from the lessees, could be taxed as 'Income from House Property', ignoring the fact that that such rentals were the only source of 'Business Income' of the Assessee, the Authorities below have fallen into the error in holding that the income was taxable under the Head Income from house property. The said application of the Head of Income by the Authorities below was not only against the facts and evidence available on record, but against the common sense itself. Even the amended definition intends to tax the notional income of the self occupied portion of the property to run Assessee's own business therein as business income. Therefore, the other rental income earned from letting out of the property, which is the business of the Assessee itself, cannot be taxed as Income from house property. Heads of Income, as defined in Section 14 of the Act do not exist in silos or in watertight compartments under the Scheme of tax and thus, these Heads of Income, as we have noted above, are fields and heads of sources of income depending upon the nature of business of the Assessee. Therefore, in cases where the earning of the rental income is the exclusive or predominant business of the Assessee, the income earned by way of lease money or rentals by letting out of the property cannot be taxed under the Head 'Income from hosue property', but can only be taxed under the Head 'Income from business income'. Where the facts of the cases are undisputed that both the Assessees in the present case carry on the business of earning the rental income, as per the Memorandum of Associations only and the fact is that they were not carrying on any other business, compels us to come to the conclusion that the present appeals of the Assessees are required to be allowed. The same are accordingly allowed and the question of law framed above is answered in favour of the Assessee

Issues Involved:
1. Taxability of income from letting out warehouses or properties.
2. Classification of income as 'Income from Business' or 'Income from House Property'.
3. Applicability of previous judgments and their impact on current cases.

Issue-Wise Detailed Analysis:

1. Taxability of income from letting out warehouses or properties:
The core issue in the appeals was whether the income earned by the Assessees from letting out warehouses or properties should be taxed as 'Income from Business' or 'Income from House Property'. The Tribunal and lower authorities had classified such income under 'Income from House Property', relying on a previous judgment by the Madras High Court in CIT v. Chennai Properties and Investment Pvt. Ltd., which was later reversed by the Supreme Court.

2. Classification of income as 'Income from Business' or 'Income from House Property':
The Assessees argued that their rental income should be classified as 'Income from Business' because their primary business activity involved letting out properties. The Assessees cited the Supreme Court's reversal of the Chennai Properties judgment, which established that if the main business of a company is to let out properties, the rental income should be treated as business income.

3. Applicability of previous judgments and their impact on current cases:
The Assessees relied on several Supreme Court judgments, including:
- Chennai Properties Investments Limited v. Commissioner of Income Tax [(2015) 373 ITR 673 (SC)]
- Rayala Corporation Private Limited v. Assistant Commissioner of Income Tax [(2013) 386 ITR 500 (SC)]
- Raj Dadarkar & Associates v. Assistant Commissioner of Income Tax [(2017) 394 ITR 592 (SC)]

These judgments emphasized that when the primary business of a company is to let out properties, the rental income should be classified as business income. The Revenue, on the other hand, supported the Tribunal's decision and cited older judgments to argue that the income should be taxed under 'Income from House Property'.

Judgment Analysis:

1. Misconception by Tribunal and Lower Authorities:
The court observed that the Tribunal and lower authorities had a misconception that income from letting out business assets should still be classified as 'Income from House Property'. This misconception stemmed from the now-reversed judgment in CIT v. Chennai Properties and Investment Pvt. Ltd.

2. Supreme Court's Clarification:
The Supreme Court in Chennai Properties Investments Limited v. Commissioner of Income Tax clarified that if the main business of a company is to acquire and let out properties, the rental income should be treated as 'Income from Business'. This principle was reiterated in subsequent cases like Rayala Corporation and Raj Dadarkar & Associates.

3. Businessman's Point of View:
The court emphasized that each case should be evaluated from a businessman's point of view to determine whether the letting out of property constitutes a business activity. The court noted that the nature of the activity and the company's objectives should guide this determination.

4. Scheme of the Income Tax Act:
The court highlighted that the Income Tax Act categorizes income under specific heads, and these categories are not mutually exclusive. The court reasoned that when a company's primary business is to earn rental income from properties, such income should be classified as 'Income from Business'.

5. Deductions and Taxable Income:
The court pointed out that classifying rental income as 'Income from Business' allows for various deductions, including depreciation and business expenses, which are not available under 'Income from House Property'. The court criticized the lower authorities for denying these deductions by misclassifying the income.

6. Conclusion and Decision:
The court concluded that since the Assessees' primary business was to earn rental income from properties, such income should be classified as 'Income from Business'. The appeals were allowed, and the question of law was answered in favor of the Assessees. The court emphasized that the heads of income under the Income Tax Act should be applied based on the nature of the business and the specific facts of each case.

Final Judgment:
The appeals filed by the Assessees were allowed, and the income earned from letting out properties was classified as 'Income from Business'. The court ruled that the lower authorities had erred in classifying such income under 'Income from House Property', and the Assessees were entitled to the benefits and deductions available under 'Income from Business'.

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