Professional Documents
Culture Documents
KPMG in India
6 May 2015
The taxpayer Company having its main object Whether the income derived by the taxpayer from
clause in the Memorandum of Association (MoA) as letting out property is to be treated as income
being acquisition of properties and letting out of the from business or it is to be treated as income
same. from house property?
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
In the case of East India Housing and Land In the present case, letting of the properties is the
Development Trust Ltd. the Supreme Court held that business of the taxpayer. Therefore, the taxpayer
the income shall be treated as income from the correctly disclosed the income under the head
house property, and rested its decision in the context income from business and it cannot be treated as
of the main objective of the company and observed income from house property. Accordingly, the
that letting of the property was not the object of the Supreme Court set aside the judgment of the
company at all. Therefore, the Supreme Court was High Court.
of the opinion that the character of income which
was from the house property had not altered since it
was received by the company, formed with the Our comments
object of developing and setting up properties.
3 This is a welcome ruling of the Supreme Court where
In the case of Karanpura Development Co. Ltd. the
Supreme Court observed that the deciding factor is it has been held that rental income received from
not the ownership of land or leases but the nature of letting of property is assessable as business income,
the activity of the taxpayer and the nature of the and not income from house property. The Supreme
operations in relation to them. It was highlighted that Court referred to the MoA of the taxpayer and
the objects of the company must also be kept in view observed that as per the MoA, the main object of the
to interpret the activities. taxpayer was to acquire and hold the properties and
to let out those properties and therefore, the taxpayer
The Supreme Court, while relying on various correctly disclosed the income under the head,
decisions of other jurisdictions i.e. Privy Counsel, income from business.
House of Lords in England and U.S. Courts,
observed that where there is a letting out of The Supreme Court also dealt with the observation of
premises and collection of rents the assessment on its earlier decision in the case of Sultan Brothers (P)
property basis may be correct but not so, where the Ltd. with respect to reliance on the object clause in
letting or sub-letting is a part of a trading operation. the MoA as a determinative factor for characterisation
In the case of a company with its professed objects of income from letting of property. The Supreme
and the manner of its activities and the nature of its Court in the instant case observed that it was
dealings with its property, it is possible to say on conscious of the observations given in the Sultan
which side the operations fall and to what head the Brother’s (P) Ltd. case and the question of
income is to be assigned. classification of income as business income or
property income would depend upon the
Applying the aforesaid principle to the facts of the circumstances of each case.
present case, the Supreme Court held that income
had to be treated as income from business and not
as income from house property. Thus, the decision
in the case of Karanpura Development Co. Ltd.
squarely applies to the facts of the present case.
____________
3
Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC)
4
a formal statement
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
www.kpmg.com/in
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.