House Property or Business Income - Rayala Corporation Vs Assistant Commissioner of IT

If you own a house property and let it out on rent, the rent income will be taxable as “income from house property” and not as “income from business or profession”, you must be wondering how it makes a difference, as the income is eventually taxable in both the cases. Yes, income is definitely taxable in both cases but if it is taxable as “income from house property” then the amount of expenses that you can claim against the income is limited such as:

• Municipal Taxes are actually paid;
• Standard Deduction @30%
• Interest is paid on loans with certain restrictions.

No deduction is available even if you have actually made the expenses to earn such income.

However, if the rent income is treated as “income from business or profession” then no restriction applies on the deduction that can be claimed if actual expenses have been incurred.

So, there is a tax advantage if rent income is taxed as “income from business or profession” vis-a-vis if taxed as “income from house property”. However, as per tax laws, any income from house property (here house property covers all types of properties) owned by the taxpayer shall be charged under the head “income from house property” unless such property is used by the taxpayer in the business or profession. The issue regarding this was decided by the Supreme Court of India in the case of Rayala Corporation Pvt Ltd vs. Assistant Commissioner of IT (Civil Appeal No. 6437 to 6441 of 2016)

Facts of the Case

• The taxpayer owns the properties and is in the business of renting the properties.
• It is in receipt of rental income from such renting business.
• The taxpayer has been offering such income under the heading “income from business or profession,” even though the taxpayer's memorandum of association (MOA) did not specify renting properties as their business object.
• The tax authorities considered such income to be offered as “Income from House Property.”

Question under Consideration

Should a taxpayer in the business of renting of property should offer rental income as “Business Income” or “Income from house property”?

Supreme Court Observations

• Apex court relied on its own earlier decision in the case of Chennai Properties and Investments Ltd. v. Commissioner of Income Tax [2015] 373 ITR 673 (SC). Here the court had observed that if a taxpayer is having his/her house property and as part of his/her business he/she is giving the property on rent, the rental income received should be treated as “Business Income” because the taxpayer is having a business of renting his property.
• Based on the above, the court, in the case of Rayala Corporation, ruled that income from house property received where the taxpayer is into the business of letting out of the property will be taxed as “Income from Business” and not as “Income from House Property” even if the MOA does not have an object clause as renting from properties.