M/S CHENNAI PROPERTIES & INVEST. LTD. Vs. COMMR. OF INCOME TAX CENTRAL III,T.N.
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 4494 of 2004, Judgment Date: Apr 09, 2015
'REPORTABLE'
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4494 OF 2004
M/S CHENNAI PROPERTIES
& INVESTMENTS LTD., CHENNAI ... Appellant
VERSUS
THE COMMISSIONER OF INCOME TAX
CENTRAL III, TAMIL NADU ...Respondent
WITH
CIVIL APPEAL NOS. 4491-4493 OF 2004
M/S CHENNAI PROPERTIES
& INVESTMENTS LTD., CHENNAI ... Appellant
VERSUS
THE COMMISSIONER OF INCOME TAX,
TAMIL NADU-I ...Respondent
J U D G M E N T
A. K. SIKRI, J.
CIVIL APPEAL NO. 4494 OF 2004
The appellant-assessee is a company incorporated under 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 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” 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
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 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 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.
..........................., J.
[ A.K. SIKRI ]
..........................., J.
[ ROHINTON FALI NARIMAN ]
New Delhi;
April 09, 2015.
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