The Bombay High Court evaluated whether rental income from leasing properties should be classified as "Income from House Property" or "Income from Business and Profession". The case hinged on whether the rental income aligned with the company's primary business objectives, a distinction that could shift the income under different tax heads per the Income Tax Act, 1961.

The Court emphasized that if a company's primary business is leasing properties, the rental income should be assessed as business income. The judgment drew upon the Supreme Court decisions in East India Housing and Chennai Properties, ultimately ruling in favor of National Leasing Ltd., establishing the income as "Profits and Gains of Business" rather than "House Property" income.

1. Introduction

   • The appeal concerns multiple assessment years, challenging whether National Leasing Ltd.'s rental income should be classified as "Income from House Property" or "Profits and Gains of Business"​.

2. Background of National Leasing Ltd.

   • Established in 1983 with the objective to lease properties, National Leasing Ltd. generated its primary revenue through rental income. The Income Tax Tribunal initially classified this income under "House Property," a decision the company disputed, advocating it as business income​.

3. Contentions by National Leasing Ltd.

   • The company argued that the rental income aligned with its primary objective of leasing properties. It referenced cases where similar activities were taxed as business income due to the company’s objectives, including Chennai Properties​.

4. Revenue’s Argument

   • The Revenue contended that since rental income is traditionally classified under "House Property" per Section 9 of the Income Tax Act, the same should apply to National Leasing Ltd. The Revenue relied on the East India Housing case​.

5. Court’s Analysis

   • The Court examined precedents, particularly Chennai Properties, and concluded that National Leasing’s primary business was leasing, distinguishing it from East India Housing. Thus, rental income should fall under "Business Income"​.

6. Decision and Ratio Decidendi

   • The Court held that where leasing is a company’s main business, income derived should be categorized as "Profits and Gains of Business." The assessment must consider the company’s primary objective rather than merely the income source​.

Acts and Sections Discussed

• Income Tax Act, 1961:
  • Section 9: Defines "Income from House Property," often applied to rental income.
  • Section 28: Classifies "Profits and Gains of Business or Profession" for business-related income, which was crucial for reclassifying leasing income.

Ratio Decidendi

The primary basis for the judgment is that rental income should align with the company's main business objectives. If leasing forms the core of a company’s business model, as in this case, rental income should not be limited by the "House Property" classification but treated as business income.

Subjects:

Taxation of Rental Income for Leasing Companies

Income Tax Act, Business Income, House Property, Leasing