Contentions of the Revenue Authorities/Tribunal

• The Revenue Authorities are placing reliance on the Supreme Court ruling of East India Housing and Land Development Trust Limited vs. Commissioner of Income Tax, West Bengal, Calcutta ³ (‘East India Housing’), held that income received by the taxpayer from the leasing of properties must be assessed as income from House Property and not as Business income.

Arguments of the Taxpayer

• The taxpayer contended that the Revenue Authorities cannot recharacterize the income solely basis the East India Housing case as the facts and circumstances of that case were materially different from the facts of the taxpayer. In the East India Housing case, the assessee entity was formed with the object of promoting and developing markets, and deriving rental income from shops and stalls was not its intent or purpose. However, in the present case, the taxpayer’s Memorandum of Association (‘MOA’) clearly demonstrated that the main object of its business was to carry on the business of leasing real estate properties.

• This contention of the Assessee is directly supported by the Supreme Court ruling of M/s. Chennai Properties & Investments Ltd., Chennai vs. The Commissioner of Income Tax, Central-III, Tamil Nadu⁴, wherein the appellant assessee being a company was incorporated with main objective of acquiring and renting commercial properties as stated in its MOA. In that factual background, the Supreme Court opined that the rental income must be treated as PGBP and not IHP.
• Further, from AYs 1993-94 to 1999-2000 and AYs 2000-01 to 2004-05, the AO had consistently assessed the rental income as PGBP. There is no change in facts and circumstances, and applying the principles of consistency, the Revenue Authorities cannot change their position for assessing the rental income as IHP as against PGBP. In this regard, reliance was placed on the ruling of the Supreme Court in the case of M/s. Radhasoami Satsang, Saomi Bagh, Agra v. Commissioner of Income Tax⁵  wherein the Hon’ble Supreme Court has accepted the rule of consistency as a settled principle of law.

Judgement of Hon’ble Bombay High Court

• The primary business of the taxpayer is leasing and renting of commercial properties. It is the main object stated in the MOA of the company. The company’s main objective must be analysed to consider whether any income derived from renting of leased properties is IHP or PGBP.
• Placing reliance on the ruling of the East India Housing case is unwarranted, as the facts in that case were materially different. There, the company under consideration was incorporated with the main object of ‘buy and develop landed properties and to develop and promote the market’. However, in the current case, the main object of the taxpayer is to purchase properties and rent them out as contained in its MOA. Therefore, the income must be assessed under the head PGBP, not IHP. The facts of the taxpayer are similar to the facts of Chennai properties (supra) wherein the SC had opined that the rental income must be assessed as PGBP.
• Also, even on the grounds of consistency, the contention of the Revenue cannot be accepted.

KNAV Comments

This judgment brings clarity to the taxation of rental income, especially where the primary business objective of the company is leasing and renting commercial properties. This judgment re-emphasizes the importance of documenting the position and demonstrating the objective while carrying on the activity since the onus is always on the taxpayer to justify the position adopted at the stage of filing the tax return.

Also, the ruling reaffirmed the well-accepted principle of consistency, which requires that when facts & circumstances continue to remain the same, there should not be a variation in tax treatment from past concluded years.

Further, it is important to note the recent ruling in the case of Principal Commissioner of Income-tax vs. M.P Entertainment and Developers Pvt Ltd.⁶ where the Hon’ble Supreme Court has dismissed the special leave petition filed by the Revenue Authorities against the Madhya Pradesh High Court’s ruling. In this case, the Supreme Court has concurred with the Madhya Pradesh High Court’s ruling that for a taxpayer having the primary business objective of developing, selling, and leasing commercial real estate, rental income derived by the taxpayer from the leasing of property must be taxed under the head PGBP and not as IHP. This decision reinforces the proposition that the primary objective of the taxpayer is a key determinant for determining the taxability of rental income.

However, please note that the principles of this judgment will not apply to renting a residential house in view of the amendment made to Section 28 of the Income-tax Act, 1961, w.e.f. AY 2025-26. In view thereof, any income from letting out of a residential house or a part thereof by the owner will be considered as IHP and not PGBP.

1. [2024] 168 taxmann.com 39 (Bombay)
2. The ruling does not provide any reasons as to why income for the said AY was offered as IHP by the taxpayer.
3. (1961) 42 ITR 49 (SC)
4. [2015] 56 taxmann.com 456 (SC)
5. [1992] 60 Taxman 248 (SC)
6. [2024] 469 ITR 428 (SC)

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