CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1748-1750 of 1968. Appeals by special leave from the judgment and order dated July 20. 1967 of the Calcutta High Court in Income tax Reference No. 144 of 1963. M. C. Chagla and D. N. Mukherjee, for the appellant (in all the appeals). S. C. Manchanda’ R. N. Sachthey and B. D. Sharma, for the respondent (in all the appears). The Judgment of the Court was delivered by Khanna j.- This judgment would dispose of civil appeals No. 1748 to 1150 of 1968 filed by special leave against -L735SupCI/72 the judgment of the Calcutta High Court whereby the question referred to that Court under section 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act, was answered in favour of the revenue and against the appellant company. The appellant, a private limited company, was incorporated on January 25, 1955. The objects for which the Company was established were given in the clauses of paragraph 3 of the Memorandum of Association. A number of business activities were mentioned in those clauses. Clauses 6 and 7 of that paragraph were as under :-
"6. To purchase take on lease or otherwise
acquire and to hold, cultivate, improve,
lease, sell, exchange, mortgage, or,
otherwise, dispose of land, houses, mines,
minerals, mining and other real and personal
property and to deal with the same
commercially.
7. To develop the resources of the same
property by building, reclaiming, clearing,
draining, and otherwise improving framing and
planting on any terms or system that may be
considered advisable." With effect from February 5, 1955, the appellant company took on lease a market place known as Tal Olla Bazar in the city of Calcutta from Shrimati Sujata Tagore and her sons on a monthly rent of Rs. 3,000 for a term of 50 years, with option to the lessee to renew the lease for the further period of 40 years. The deed of lease in this connection was executed on September 5, 1956. Clauses 4, 5 and 13 of the lease deed were as under :
"4. The Lessee shall have the option to erect,
rebuilt, remodel and reconstruct and repair
the existing structures upon the demised
premises from time to time during the term of
these presents at its own costs in a sub-
stantial and workmanlike manner with good
material of the several kinds in accordance
with the plans elevations sanctions and
specifications according to the choice of the
Lessee (and whenever necessary to get such
plans sanctioned by the Corporation of
Calcutta) under the supervision of a first
class Engineer to he elected by the Lessee on
notice to the Lessors and shall spend upon
such works such sum or sums as the Lessee may
in its absolute discretion think fit and
proper but the entire total sum or sums so to
be expended by the Lessee as aforesaid shall
not be less than Rupees Five Lacs and the same
shall be spent within the period of five years
from date of these presents. The Lessors
shall be at liberty to appoint at their own
costs a valuer
and surveyor to verify such expenditure if,
required for their satisfaction after the
completion of the said work.
5. If the Lessee constructs any new
structures and/ or buildings as mentioned in
the preceding clauses the said structures
and/or buildings or erections together with
all alterations renovation remodelling
reconstruction thereto shall belong absolutely
to the Lessors on the expiration or sooner
determination of the term hereby granted
and/or the renewed period thereof as
hereinafter mentioned.
13. That the Lessee shall not assign this
lease without first obtaining the permission
in writing of the Lessors but such consent
shall not be unreasonably withheld. The
lessee shall prior to any such assignment of
this demise give notice thereof to the Lessors
in writing containing the name of the assignee
and furnish other necessary particulars
concerning such assignment. Notwithstanding
anything hereinbefore contained the Lessee
shall subject to the conditions and convenants
herein contained be entitled to sublet or
under let the demised premises or any part ’or
portion thereof and/or grant sub-lease or sub-
leases in respect of the demised premises or
any portion or portions thereof for a term not
exceeding or beyond the term hereby granted
including the renewed and/or optional period
in case of renewal subject to the terms and
conditions of these presents." The appellant company’s activity during the period covered by assessment years 1956-57, 1957-58 and 1958-59 was that of developing the demised premises and letting out portions of the same as shops, stalls and ground spaces to shopkeepers, stall holders and daily casual market vendors. The appellant claimed that its income from the leasehold property for the above mentioned three assessment years should be assessed under section 10 of the Act as letting out of that property was its business authorised by the Memorandum of Association. The appellant had shown losses in its return for all the three years and the above claim was made on its behalf obviously for the purpose of carrying forward such losses. The Income-tax Officer rejected the appellant’s claim and made assessments under section 12 of the Act. The Appellate Assistant Commissioner in appeal by a consolidated order held that the appellant had been rightly assessed under section 12 of the Act. On further appeal to the Income-tax Appellate Tribunal, the Tribunal referred to clauses 6 and 7 of paragraph 3 of the Memorandum of Association and came to the conclusion that the activities of the appellant company in taking the lease and subletting the demised premises were undertaken with the object of doing business. The Tribunal observed that normally Where the assessee was not the owner of the building but earned rent by subletting the same, such income could only be charged under section 12 as income from other sources. The difficulty, however, arose in cases where letting out of lease hold property was the business of the assessee. In such cases, according to the Tribunal, the decision could only turn upon the object for which the company was formed and upon the activities of the company during the relevant accounting years. It was held that if the activity of the appellant company amounted to carrying on the business of taking on lease and letting out the leasehold property, the company was not acting as owner but as trader. The income accruing from such a source, in the opinion of the Tribunal, must be held to be income from business assessable under section 10 of the Act. The Tribunal accordingly held that the income of the appellant company from subletting of the stalls in question was income from business taxable under section 10 of the Act. At the instance of the respondent, the Tribunal referred the following question to the High Court
"Whether, under the facts and in the
circumstances of the case, the income from
subletting the stalls of Taltolla Bazar was
assessable under section 10 or section 12 of
the Income-tax Act, 1922?" The learned judges of the High Court held that the income from subletting of the stalls in question was not assessable under section 10 of the Act. In arriving at this conclusion, the learned judges observed :
"The assesses had taken lease of a market or
Bazar. After having reconstructed or
renovated the building,,;, it is letting Out
shops and stalls to shopkeepers and
stallholders. This is, a to normal activity
of a owner of it lessee of such a market or
Bazar. It could not be said that by letting
out the shops find stalls to shopkeepers and
stallholders the assessee Was carrying on any
activity in the nature of trade and Was
utilising or exploiting real estate in the
best possible way or in other words was
dealing with it Commercially. The ratio of
the Suprem Court decision in East india
Housing Estate case (1) is fully applicable to
the case before us and it must be held that
the Tribunal was in error in its conclusion
that the income of the assessee from (1) [1061] 42 I.T.R 49. .lm15 subletting the stalls of Taltolla Bazar was assessable under section 10 of the Indian Income-tax Act 1922. In the premises the question referred to this Court is answered in the following manner, that is to say, that the income from subletting the stalls of Taltolla Bazar was not assessssable under section 10." We have heard Mr. Chagla on behalf of the appellant and Mr. Manchanda on behalf of the respondent and are of the view that the judgment of the High Court cannot be sustained. Section 6 of the Act enumerates the various heads of income, profits and gains chargeable to income-tax. Those heads are (i) Salaries; (ii) Interest on securities; (iii) Income from property; (iv) Profits and gains of business, professions or vocation; (v) Income from other sources; and (vi) Capital gains. Section 9 of the Act deals with income from property. According to that section, the tax shall be payable by an assessee under the, head "Income from Property" in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, subject to certain allowances which are mentioned in that section but with which we are not concerned. It is noteworthy that the liability to tax under section 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under the above provision even if the object of the assessee in purchasing the landed property was to promote and develop market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting no markets thereon. The income derived by such a company from the tenants of the shops and stalls, constructed on the land for the purposes of setting up market, would not be taxed as "business income" under section 10 of the Act, to which a more detailed reference would be made hereafter, but under section 9 of the Act. A concrete instance of this type is afforded by the case of East India Housing and Land Development Trust Ltd. v. Commissioner of Income-tax, West Bengal (1). The appellant company in that case had been incorporated with the objects of buying developing landed properties and promoting and, setting up markets. The company purchased ten bighas of land in the town of Calcutta and set no a market thereon. The question which arose for determination was whether the income (1) [1961] 42 L.T.R. 49 realised from the tenants of shops and stalls was liable to be taxed as business income under section 10 of the Act or income from property under section 9. This Court held that the income derived by the company from shops and stalls was income received from property and fell under the specific head described in section 9. It was observed in this connection :
"Income-tax is undoubtedly levied on the total
taxable income of the taxpayer and the tax
levied is a single tax on the aggregate
taxable receipts from all the sources; it is
not a collection of taxes separately levied on
distinct heads of income. But the distinct
heads specified in section 6 indicating the
sources are mutually exclusive and income
derived from different sources falling under
specific heads has to be computed for the
purpose of taxation in the manner provided by
the appropriate section. If the income from a
source falls within a specific head set out in
section 6, the fact that it may indirectly be
covered by another head will not make the
income taxable under the latter head.
The income derived by the company from shops
and stalls is income received from property
and falls under the specific head described
in section 9. The character of that income is
not altered because it is received by a
company formed with the object of developing
and setting up markets." There is no finding in the present case that the appellant company is the owner of the property in question or any part thereof. As such, no reference was made to section 9 of the Act in the assessment proceedings. The learned counsel for both the parties agree, and in our opinion rightly, that the question of making the assessment against the appellant, in the circumstances under section 9 of the Act does not arise. The stand of Mr. Chagla, or behalf of the appellant, is that the assessment against the appellant in respect of the income from the property in question should be made under section 10, while according to Mr. Manchanda, learned counsel for the respondent, the assessment should be under section 12 of the Act. Section 10 of the Act deals with income from business and the material Portion with which we are concerned is given in sub-section (1) of that section. According to that subsection, the tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits and gains of any business, profession or vocation carried on by him. "Business", according to section 2(4) of the Act, includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Section 12 of the Act deals with income from other sources. Sub-section (1) of that section reads as under :
"(1) The tax shall be payable by an assessee
under the head "Income from other sources" in
respect of income, profit and gains of every
kind which may be included in his total income
(if not included under any of the preceding
heads.)" Section 12 deals with the residuary head of income and applies to all such taxable income, profits and gains as are not covered by preceding specific heads. The residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded. It is, therefore, manifest that section 12 of the Act can be invoked in the present case only if we exclude the applicability of section 10 by holding that the income of the appellant company from the property in question is not income from business. The definition of the word "Business", as given in section 2(4) and reproduced above shows its wide amplitude and we agree with Mr. Chagla that it can embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the market. The important question which arises in the latter case is whether the acquisition of the property on lease and letting out of the shops and stalls was in the course of investment or whether it was essentially a part of the business and trading operation of the assessee. The paramount consideration which would weigh is whether the acquisition of the property was by way of investment and whether the property was let out because of the assessee having a title in the same or whether the acquisition and letting out of the property constituted the business and trading activity of the assessee. The question as to whether the above activity is being carried on by an individual or a company, and in the latter case, the further question as to whether the carrying on of the said activity was the object of the incorporation of the company as given in the Memorandum of Association would also have some relevance. Reference in this context may be made to the observations of Lord Sterndale, M. R. in the case of Commissioners of Inland Revenue v. Korean Syndicate Lid.(1) :
"If you once get the individual and the
company spending exactly on the same basis,
then there would be no difference between them
at all. But the fact that the limited company
comes into existence in a different way is a
matter to be considered. An individual comes
into existence for many purposes, or perhaps
sometimes for none, whereas a limited company
comes into existence for the particular
purpose of carrying out a t an action by
getting possession of concessions and turning
them to account, then that is a matter to be
considered when you come to decide whether
doing that is carrying on a business or not." The above observations were quoted with approval by this Court in the case of Karanpura Development Co. Ltd. v. Commissioner of Income-tax, West Bengal(2). The assessee company in the last mentioned case was formed with the objects, inter alia, of acquiring and disposing of underground coal mining rights in certain coa fields. The Memmorandum of Association of the company enumerated other objects, such as coal raisin-, but the assessee restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then subleasing them to collieries and other companies. The leases were acquired for a term of 999 years and the coal fields were sublet for the balance of the term of the respective leases minus two days. The company never worked the coal fields with a view to raising coal, nor did it acquire or sell coal raised by the sub-leases. As against a salami of Rs. 40 per bigha which the assessee had paid, it realised from the sublessees Rs. 400 per bigha as salami. In addition, the assessee charged certain royalties at rates higher than those it had agreed to pay under the head leases. The question which arose for determination was whether the amount received by the assessee as salami for granting sublease constituted trading receipts and the profits therefrom was assessable. It was held that the transactions of acquiring leases and granting sub-leases were in the nature of trading within the objects of the company and not enjoyment of the property as landowner. It was observed in this connection
"As has been already pointed out in connection
with the other two cases where there is a
letting out of premix@ and collection of rents
the assessment on property basis may be
correct but not so, where, the letting (2) [1962] 44 I.T.R. 362. (1) [1921] 12 Tax Cas. 181.
or subletting is part of a trading operation.
The dividing line is difficult to find; but in
the, case of a company with its professed
objects and the manner, of its activities and
the nature of its dealings’ with its property,
it is possible to say on which side the
operations fall and to what head the income is
to be assigned.
Ownership of property and leasing it out may
be done as a part of business, or it may be
done as landowner. Whether it is the one or
the other must necessarily depend upon the
object with which the act is done. It is not
that no company can own property and enjoy it
as property, whether by itself or by giving
the use of it to another on rent. Where this
happens, the appropriate head to apply is
"income from property" (section 9), even
though the company may be doing extensive
business otherwise. But a company formed with
the specific object of acquiring properties
not with the view to leasing them as property
but to selling them or turning them to account
even by way of leasing them out as an integral
part of its business, cannot be said to treat
them as landowner but as trader." The above observations have a direct bearing. It is not necessary for the purpose of this case to say anything, beyond what has already been said while dealing with section 9 of the Act, about the view expressed in the above passage regarding the rental income of an owner being, treated as business income in case it is received as part of trading activity, because we are concerned in the instant case with an assessee who is lessee and not the owner of the property in question. The assessee in the cited case of Karanpura Development Co. Ltd. too was lessee of the coal fields. So far as such assessees are concerned, who as part of their essential trading activity take lease of property and sublet parts thereof with a view to make profits, the dictum laid down above, in our opinion, would hold good and the profits would have to be treated as business income. The appellant company, as stated earlier was incorporated on January 25, 1955. The object for which the company was formed, inter alia, was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of, land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the appellant company took on lease the property in question and undertook to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site. The appellant was also given the right to sublet the different portions. The appellant’s activity during the period of three years in question consisted of developing the demised property and letting out portions of the same as shops, stalls and ground spaces. All thee facts point to the conclusion that the taking of the property on lease and subletting portions of the same was part of, the business and trading activity of the appellant. The conclusion of the Tribunal that the activities of the appellant in taking lease and subletting the demised premises were undertaken with the object of doing business was warranted on the facts of the case. Likewise, the conclusion of the Tribunal that the appellant company in letting out the leasehold property was not acting as owner but as trader was borne out by the material on record. Reference on behalf of the respondent has been made by Mr. Manchanda to the decision of the H,use of Lords in Fry v Salisbury House Estate Ltd.(1) In that case the assessee company which had been formed to acquire, manage and deal with a block of buildings, let out the rooms as unfurnished offices to tenants. The company provided a staff to operate the lifts and to act as porters and watch and protect the building. The company also provided certain services-such as beating and cleaning-for the tenants if required, at an additional charge. For four years the company was assessed under Schedule A to income-tax on the gross value of the building as appearing in the valuation list. The company admitted its liability to be assessed in respect of profits from the service supplied to the tenants under Schedule D but he Crown claimed in making the assessment under Schedule D to include the rents of the offices as part of the receipts of trade making allowance for tax assessed under Schedule A. It may be mentioned that the scheme of the English Income-tax Act is to provide for the taxation of specific properties under schedules appropriate to them and under a general Schedule D to provide for taxation of income not dealt with specifically. Schedule A provides for the Taxation of income derived from property in land, B for incomes derived from occupation of land, C for income derived from Government securities and E for income from employment in the public service. The House of Lords held in the above cited case that ’he rents were profits arising from the ownership of land in respect of which the assessment under Schedule A was exhaustive and that they, therefore, could not be included in the assessment under Schedule D as trade receipts of the company. The assessee company, in the cited case, was the owner of the Salisbury House, and the decision of The House of Lords rested on the view that Schedule A was exhaustive in respect of Profits arisin- from ownership of land. The above decision is not of much help to the, respondent because the assessee in the present case is not the owner (1) [1930] A.C. 432. but only a lessee of the property in question, and section 9, which is analogous to Schedule A of the English Act, applies to income from property consisting of buildings or lands appurtenant hereto of which the assessee is the owner. The respondent can also have not much support from the decision of East India Housing and Land Development Trust V. Commissioner of Income-tax(1) because what was decided therein was that in the case of income from landed property by the-. owner company, the income would fall under the specific head described in section 9 and not under section 10 even though the. company had been incorporated with the object of buying and developing landed property and promoting a market thereon. Section 9, as mentioned earlier, does not apply to the present case because the appellant is not owner of the property in question. As such there arises no question in this case of the exclusion of section 10 on the ground that section 9 is the specific head. In the instant case the revenue relies not upon the specific head given in section 9 but upon the residuary head given in section 12 of the Act. It is plain that the considerations which would weigh for applying section 9 on the ground of being a. specific head would not hold good for invoking section 12 which can come into picture only if all the preceding heads of income, including business income as Riven in section 10, are ruled out.. Where, as in the present case, the income can appropriately fall under section 10 as being business income, no resort can be mad& to section 12 of the Act. As a result of the above, we accept the appeal and set aside the judgment of the High Court. The answer to the question referred by the Tribunal is that the income in question was asses-sable under section 10 and not under section 12 of the Act. The appellant shall be entitled to the costs of this Court as well as: those of the High Court. One hearings, fee. K.B.N. Appeal allowed(1) [1961] 42 I.T.R. 49.