42. ‘A’ company is formed solely to do the business of building houses and letting them on rent. Is the income of the company taxable? If so, under what head of the Income?

1. Facts of the Case

‘A’ Company is incorporated with the main object of carrying out the business of constructing residential houses and letting them out on rent. The company does not engage in any other activity apart from building and renting these houses. During the relevant financial year, it earns rental income from the properties it constructed and let out.

The company claims that since renting is its core business activity, the income earned should be assessed as business income and not as income from house property.

2. Issues in the Case [Questions]

1. Is the rental income earned by ‘A’ Company taxable under the Income Tax Act, 1961?
2. If taxable, under which head of income should such rental income be assessed—“Profits and Gains of Business or Profession” or “Income from House Property”?
3. Does the main object clause in the memorandum of association (MoA) influence the classification of income under the Act?

3. Legal Principles Covered

A. Section 22 – Income from House Property

Section 22 of the Income Tax Act, 1961 states:

“The annual value of property consisting of any building or lands appurtenant thereto of which the assessee is the owner shall be chargeable to income tax under the head ‘Income from House Property’.”

This provision applies regardless of whether the property is held as a business asset or investment, so long as the income is derived by letting out a building.

B. Relevant Case Laws

1. East India Housing & Land Development Trust Ltd. v. CIT (1961) 42 ITR 49 (SC):
   The Supreme Court held that even if a company is incorporated to deal in immovable property, the letting out of property will result in income that is taxable under “Income from House Property”, and not under business income.
2. Chennai Properties & Investments Ltd. v. CIT (2015) 373 ITR 673 (SC):
   In this case, the Supreme Court took a contrary view and held that if the main object of the company is to earn income by letting properties, and the entire income is from letting, the income should be assessed under the head “Business Income.”
3. Rayala Corporation Pvt. Ltd. v. ACIT (2016) 386 ITR 500 (SC):
   Reiterated the Chennai Properties ruling, emphasizing that motive and object of the company is crucial. If renting properties is the core business, then rental income is business income, not house property income.

C. Conclusion from Legal Principles

The head under which income is taxable depends on:

• The nature of the activity carried out;
• The intention behind holding the property;
• The main object clause of the company.

If renting is done as a commercial exploitation of property, and is the main business, income may be taxable as business income.

4. Possible Judgement

In the case of ‘A’ Company:

• The company was specifically formed to construct and let out houses.
• The entire income is earned from renting such properties.
• The main object clause supports this activity as the core business purpose.

Applying the principle laid down in Chennai Properties and Rayala Corporation, it can be concluded that:

The rental income of ‘A’ Company is taxable under the head “Profits and Gains of Business or Profession,” and not under “Income from House Property.”