CHENNAI PROPERTIES & INVESTMENTS LTD v CIT [CIVIL APPEAL NOS. 4491-4493 OF 2004 dated 09.04.2015] SUPREME COURT Background: The assessee is a company incorporated under the Indian Companies Act. Its main object, as stated in the Memorandum of Association, is to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business in the return filed by the assessee. The Assessing Officer held since that the income was received from letting out of the properties, it was in the nature of rental income and thus it would be treated as income from house property.
Income from House Property
Woodland Associates (P.) Ltd. v ITO [ITA No. 5031 (Mum.) of 2011] Mumbai ITAT Background: Assessee during the year had credited the sum of Rs. 4,52,000/- on account of rent. The flats had been let out to Ms. Rekha Jalan, Managing Director of the company for a sum of Rs. 26,000/- per month and Ms. Snehal Jalan who is her daughter at a monthly rent of Rs. 12,000/-. Ms. Rekha Jalan held 81.71% shares in the company whereas Ms. Snehal Jalan held 13.33% shares. The assessee had declared income from property as business income and the actual rent received had been shown as annual value. The property had been held as a business asset and as per memorandum of association, it was business of the company to let out properties. The AO stated that leasing out the property could not be considered as trade or commerce. AO referred to the judgment of Hon’ble Supreme Court in the case of Shambhu Investments (P.) Ltd. v. CIT [2003] 263 ITR 143/129 Taxman 70. He, therefore, assessed the rental income under the head “house property”. As regards the fair rental value, the AO contended that letting out the flats to the persons who were controlling the company was only an arrangement to reduce tax. AO after analyzing the comparative rates observed that the average rent charged in respect of similar flat in the same society was 125 per sq.ft. According to the AO, annual value which is defined as sum for which property may be let out from year to year would be the fair rent available in the market. CIT(A) held that the property was covered under Maharashtra Rent Control Act, 1999 and, therefore, Annual letable value had to be taken as standard rent and therefore, the AO was not justified in taking the market rent.
Rent from let out of flat to a director is Business Income – Mumbai ITAT
CIT v Pelican Investments (P.) Ltd. [ITA No: 3424 of 2010 dtd 21 August 2012] Bombay High Court Background: The assessee by an agreement dated 7th November, 1984 with Hotel Leelaventure Limited (HLL) was granted a licence to occupy a shopping arcade for a period of 11 years. The assessee was required to pay to HLL, compensation for the said licence commencing from the date of occupation certificate, at the rate of Rs. 150/- per sq. mtr. per month during the period of the licence. Thereafter, the assessee and HLL entered into a fresh agreement dated 24th January, 1999, by which HLL granted the assessee further licence in respect of the same premises for a period of 10 years. The assessee filed its return of income on 29th October, 2006 for , declaring a total loss of Rs. 48,626/-. The AO made an order under section 143(3). The annual value under section 23(1)(a) was computed at Rs. 60,27,027/-. A deduction under section 24 at 30% amounting to Rs. 18,08,108/- was allowed. The AO, accordingly, assessed a sum of Rs. 42,18,919/- to be income from house property.