CIVIL APPEAL NO. 4494 OF 2004
The appellant-assessee is a company incorporated under JUDGMENT the Indian Companies Act. Its main objective, as stated in
the Memorandum of Association, is to acquire the properties
in the city of Madras (now Chennai) and to let out those
properties. The assessee had rented out such properties
and the rental income received therefrom was shown as
income from business in the return filed by the assessee.
The assessing officer, however, refuse to tax the same as
business income. According to the assessing officer, since
the income was received from letting out of the properties,
it was in the nature of rental income. He, thus, held that
it would be treated as income from house property and taxed
the same accordingly under that Head.
The assessee filed the appeal before the Commissioner
of Income Tax (Appeals) who allowed the same by his orders
dated 06.04.1989 holding it to be income from business and
directed that it should be treated as such and taxed
accordingly. Aggrieved by that order, the Department filed
appeal before the Income Tax Appellate Tribunal which
declined to interfere with the order of the Commissioner of
Income Tax (Appeals) and dismissed the appeal. The
Department approached the High Court. This appeal of the
Department has been allowed by the High Court vide its
order dated 05.09.2002 holding that the income derived by
letting out of the properties would not be income from
business but could be assessed only income from house
property. A perusal of the impugned judgment of the High JUDGMENT Court would show that it has primarily rested its decision
on the basis of the judgment of this Court in 'East India
Housing and Land Development Trust Ltd. v. Commissioner of
Income Tax, West Bengal [(1961) 42 ITR 49] as well as the
Constitution Bench judgment of this Court in 'Sultan
Brothers (P) Ltd. v. Commissioner of Income Tax' [1964 (5)
SCR 807].
From the aforesaid facts, it is clear that the
question which is to be determined on the facts of this
case is as to whether the income derived by the company
from letting out this property is to be treated as income
from business or it is to be treated as rental income from
house property.
We have heard the learned counsel for the parties on
the aforesaid issue. Before we narrate the legal principle
that needs to be applied to give the answer to the
aforesaid question, we would like to recapitulate some
seminal features of the present case.
The Memorandum of Association of the appellant-company
which is placed on record mentions main objects as well as
incidental or ancillary objects in clause III. (A) and (B)
respectively. The main object of the appellant company is
to acquire and hold the properties known as “Chennai House” JUDGMENT and “Firhavin Estate” both in Chennai and to let out those
properties as well as make advances upon the security of
lands and buildings or other properties or any interest
therein. What we emphasise is that holding the aforesaid
properties and earning income by letting out those
properties is the main objective of the company. It may
further be recorded that in the return that was filed,
entire income which accrued and was assessed in the said
return was from letting out of these properties. It is so
recorded and accepted by the assessing officer himself in
his order.
It transpires that the return of a total income of
Rs.244030 was filed for the assessment year in question
that is assessment year 1983-1984 and the entire income was
through letting out of the aforesaid two properties namely,
“Chennai House” and “Firhavin Estate”. Thus, there is no
other income of the assessee except the income from letting
out of these two properties. We have to decide the issue
keeping in mind the aforesaid aspects.
With this background, we first refer to the judgment
of this Court in East India Housing and Land Development
Trust Ltd.'s case which has been relied upon by the High
Court. That was a case where the company was incorporated
with the object of buying and developing landed properties JUDGMENT and promoting and developing markets. Thus, the main
objective of the company was to develop the landed
properties into markets. It so happened that some shops
and stalls, which were developed by it, had been rented out
and income was derived from the renting of the said shops
and stalls. In those facts, the question arose for
consideration was: whether the rental income that is
received was to be treated as income from the house
property or the income from the business. This court while
holding that the income shall be treated as income from the
house property, rested its decision in the context of the
main objective of the company and took note of the fact
that letting out of the property was not the object of the
company at all. The court was therefore, of the opinion
that the character of that income which was from the house
property had not altered because it was received by the
company formed with the object of developing and setting up
properties.
Before we refer to the Constitution Bench judgment in
the case of Sultan Brothers (P) Ltd., we would be well
advised to discuss the law laid down authoritatively and
succinctly by this Court in 'Karanpura Development Co. Ltd.
v. Commissioner of Income Tax, West Bengal' [44 ITR 362
(SC)]. That was also a case where the company, which was
the assessee, was formed with the object, inter alia, of JUDGMENT acquiring and disposing of the underground coal mining
rights in certain coal fields and it had restricted its
activities to acquiring coal mining leases over large
areas, developing them as coal fields and then sub-leasing
them to collieries and other companies. Thus, in the said
case, the leasing out of the coal fields to the collieries
and other companies was the business of the assessee. The
income which was received from letting out of those mining
leases was shown as business income. Department took the
position that it is to be treated as income from the house
property. It would be thus, clear that in similar
circumstances, identical issue arose before the Court.
This Court first discussed the scheme of the Income Tax Act
and particularly six heads under which income can be
categorised / classified. It was pointed out that before
income, profits or gains can be brought to computation,
they have to be assigned to one or the other head. These
heads are in a sense exclusive of one another and income
which falls within one head cannot be assigned to, or taxed
under, another head. Thereafter, the Court pointed out
that the deciding factor is not the ownership of land or
leases but the nature of the activity of the assessee and
the nature of the operations in relation to them. It was
highlighted and stressed that the objects of the company
must also be kept in view to interpret the activities. In
support of the aforesaid proposition, number of judgments
of other jurisdictions, i.e. Privy Counsel, House of Lords JUDGMENT in England and US Courts were taken note of. The position
in law, ultimately, is summed up in the following words: -
“As has been already pointed out in
connection with the other two cases where there is
a letting out of premises and collection of rents
the assessment on property basis may be correct but
not so, where the letting or sub-letting is part of
a trading operation. The diving 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.”
After applying the aforesaid principle to the facts,
which were there before the Court, it came to the
conclusion that income had to be treated as income from
business and not as income from house property. We are of
the opinion that the aforesaid judgment in Karanpura
Development Co. Ltd.'s case squarely applies to the facts
of the present case.
No doubt in Sultan Brothers (P) Ltd.'s case,
Constitution Bench judgment of this Court has clarified
that merely an entry in the object clause showing a
particular object would not be the determinative factor to
arrive at an conclusion whether the income is to be treated
as income from business and such a question would depend
upon the circumstances of each case, viz., whether a
particular business is letting or not. This is so stated
in the following words: -
“We think each case has to be looked at from
a businessman's point of view to find out whether
the letting was the doing of a business or the
exploitation of his property by an owner. We do not
further think that a thing can by its very nature be
a commercial asset. A commercial asset is only an
asset used in a business and nothing else, and
business may be carried on with practically all
things. Therefore, it is not possible to say that a
particular activity is business because it is
concerned with an asset with which trade is commonly
carried on. We find nothing in the cases referred,
to support the proposition that certain assets are
commercial assets in their very nature.”
We are conscious of the aforesaid dicta laid down in
the Constitution Bench judgment. It is for this reason, we
have, at the beginning of this judgment, stated the
circumstances of the present case from which we arrive at
irresistible conclusion that in this case, letting of the
properties is in fact is the business of the assessee. The
assessee therefore, rightly disclosed the income under the
Head Income from Business. It cannot be treated as 'income
from the house property'. We, accordingly, allow this
appeal and set aside the judgment of the High Court and
restore that of the Income Tax Appellate Tribunal. No
orders as to costs.
CIVIL APPEAL NOS. 4491-4493 OF 2004
The appeals are disposed of in terms of the aforesaid
order in Civil Appeal No. 4494 of 2004.
New Delhi; April 09, 2015.