Rental Income Taxed as Business Income

National Leasing Limited Vs ACIT (Bombay High Court), Income Tax Appeal No. 685 of 2007, 21/10/2024

Summary: In the case of National Leasing Limited Vs. The Assistant Commissioner of Income, the Bombay High Court addressed whether rental income from properties leased by National Leasing Ltd. should be taxed as “Income from house property” or as “Income from profits and gains of business or profession.” National Leasing Ltd., incorporated in 1983, has been in the business of purchasing and leasing immovable properties, generating income solely from leasing activities. Initially, rental income was assessed as business income, but for AY 1989-90, it was declared under “income from house property.” The Assessing Officer recalculated the property’s annual value based on gross rent, and the CIT(A) upheld the decision, stating additional grounds raised at the appeal stage were not permissible. The ITAT further ruled that the rental income should be taxed as “income from house property,” referencing the East India Housing case. However, the High Court disagreed, emphasizing that leasing properties was the company’s core business and rental income was a direct result of this business activity. Citing the Chennai Properties case, the Court ruled that the rental income should be taxed under “profits and gains of business” and not as house property income, overturning the ITAT’s decision.

Facts of the Case:

• The case involves appeal filed by National Leasing Ltd. challenging order passed by the Income Tax Appellate Tribunal (ITAT). The question of law which arises whether the rental income derived from properties owned by the petitioner should be taxed as “Income from house property” or “Income from profits and gains of business or profession”.
• National Leasing Ltd., incorporated in 1983, primarily engaged in purchasing and leasing immovable properties. The company has consistently derived income solely from leasing properties, with no other sources of revenue.
• From the year 1983 to 1989, its lease income as derived from its properties was assessed by the respondents under the head “Income from Profits and Gains of Profession or Business”.
• However for AY 1989-90, the petitioner declared rental income under head “income from house property”. The Assessing Officer issued show cause as to why the annual letting value of the leased premises should not be the higher figure.
• After considering submissions made by the petitioner, Ld. Assessing Officer passed an Assessment Order calculating the annual value of the property on the basis of gross rent instead of actual rent issued by the petitioner as shown in its returns.
• The assessee being aggrieved by the assessment order filed an appeal before the CIT(A). Petitioner filed additional ground and also filed its revised return computing the rental income under the head “income from profits and gains of business”. The CIT(A) passed an order wherein, it was held that additional grounds cannot be raised by the assessee at the appeal stage to raise a contention that the income of the assessee was required to be taxed under the head “profits or gains from business or profession”.
• After filing appeal before Tribunal, it was held that the income of the assessee from leasing of the properties fell under the head “income from house property” and not income from business basis on a decision of the Supreme Court in East India Housing and Land Development Trust Limited Vs. Commissioner of Income Tax.
• These orders passed by the Tribunal are subject matter of challenge in the present appeal.

Held by the Court:

• The Court held in favor of the petitioner, ruling that the rental income should be categorized as “Income from profits and gains of business.”
• The Court emphasized that the core business of the petitioner, as per its Memorandum of Association, was leasing properties, making rental income a direct outcome of its business activity.
• The Tribunal’s reliance on East India Housing (Supra) was misplaced, as the facts of that case were distinguishable. Instead, the Court found Chennai Properties & Investments Ltd. (Supra) applicable since the leasing of properties was the petitioner’s main business.
• The Court also invoked the principle of consistency, noting that for over 11 years, the rental income had been treated as business income.
• The Court set aside the Tribunal’s orders and directed that the petitioner’s income be taxed as business income.