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Raj Dadarkar & Associates v. ACIT-CC-46

Civil Appeal · 2017 INSC 457Decided 9 May 2017
Civil Appeal Nos. 6455-6460 of 2017
Justice A.K. Sikri · Justice Ashok Bhushan

Background

The appellant firm won an auction from the Market Department of the Municipal Corporation of Greater Bombay to run a municipal market on a "market portion" of land (originally built by MHADA), on a monthly licence/stallage-charges basis, and in turn sub-let individual shops and stalls to sub-licensees. The Income Tax Department treated the income the firm earned from these shops as "income from house property" under Section 22 of the Income Tax Act, 1961, taxing it as a deemed owner under Section 27(iiib), while the firm argued it was really running a business of sub-letting and the income should be taxed as business income with the benefit of business-related deductions.

Decision Breakdown

The Supreme Court held that where a person has acquired rights akin to ownership over a building (such as a long-term licence or lease entitling exclusive possession and control) and lets it out, the resulting income is taxable as "income from house property" under Section 22, and such a person is a "deemed owner" under Section 27(iiib) even without formal legal title. The Court distinguished cases like Chennai Properties & Investments Ltd., where the company's actual business object was constructing and letting out properties, from the present case, where the appellant's business was merely running/sub-letting a market and it did not independently prove it was carrying on a genuine business of property exploitation. On facts, since the appellant held a licence over the market premises and merely sub-let the shops, the income was correctly assessed as house property income rather than business income. The appeals were accordingly dismissed with costs.

Lesson Learnt

Whether rental income is taxed as "house property income" or "business income" turns on whether the taxpayer's real business object is actually commercial exploitation of property (as in a company whose core business is developing and letting out properties): merely sub-letting premises held under a licence or lease, without more, will usually be taxed as house property income even if the taxpayer calls it a business activity.

Official source (sci.gov.in)View Judgment (PDF)

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