Chennai Properties and Investments Ltd v CIT

Facts

• Chennai Properties and Investments Ltd was a company whose main object (per Memorandum of Association) was to acquire, hold, and let properties
• The company earned substantial rental income from leasing its properties
• The AO assessed rental income under "Income from House Property" (S.22-27)
• The assessee claimed it should be assessed as "Profits and Gains of Business or Profession" (S.28-44)
• This affected the deductions available (business expenses vs notional deductions under S.24)

Issues

1. Whether rental income of a company whose main business is property leasing is "Business Income" or "Income from House Property"
2. How to determine the appropriate head of income when an activity could fall under two heads

Held

• Where the main object of the company is to hold, lease, and deal in property, and the company systematically lets out property as its principal business activity, the income is assessable as business income
• The real test is: is the letting the business? Or is it merely exploitation of a property held as investment?
• Chennai Properties' MOA established letting as the primary business; rental income is business income
• Business deductions under S.28-44 are available

Ratio Decidendi

The head of income is determined by the nature and character of the activity, not the nature of the asset. Where letting of property IS the business (as established by the MOA, systematic activity, and predominant source), income falls under "Business." Where property is merely held as investment with incidental letting, it falls under "House Property." Object of the company and dominant intention determine the correct head.