M/S Chennai Properties & Invest. Ltd. vs Commr. Of Income Tax Central Iii,T.N.

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

Signature Not Verified income from business in the return filed by the assessee. Digitally signed by Meenakshi Kohli Date: 2015.04.30 16:59:42 IST Reason: The assessing officer, however, refuse to tax the same as

business income. According to the assessing officer, since

C.A. No. 4494/2004 etc. 1 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].

C.A. No. 4494/2004 etc. 2 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,

C.A. No. 4494/2004 etc. 3 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

C.A. No. 4494/2004 etc. 4 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

C.A. No. 4494/2004 etc. 5 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

C.A. No. 4494/2004 etc. 6 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.”

C.A. No. 4494/2004 etc. 7 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.

C.A. No. 4494/2004 etc. 8 ITEM NO.104 COURT NO.14 SECTION IIIA

S U P R E M E C O U R T O F I N D I A RECORD OF PROCEEDINGS

Civil Appeal No(s). 4494/2004

M/S CHENNAI PROPERTIES & INVEST. LTD. Appellant(s)

VERSUS

COMMR. OF INCOME TAX CENTRAL III,T.N. Respondent(s)

(with office report)

WITH C.A. No. 4491-4493/2004 (With Office Report)

SLP(C) No. 19013-19018/2012

Date : 09/04/2015

These appeals and petition were called on for hearing today.

CORAM :

HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE ROHINTON FALI NARIMAN

For Appellant(s) Mr. Pridesh Kapur, Adv.

Ms. Radha Rangaswamy, Adv.

Mr. Rupinder Singh, Adv.

Mr. V. Balachandran, Adv.

For Respondent(s) Mr. Guru Krishna Kumar, Sr. Adv. Ms. Niranjana Singh, Adv.

Mr. S. A. Haseeb, Adv.

Mrs. Anil Katiyar, Adv.

Mr. B. V. Balaram Das, Adv.

UPON hearing the counsel the Court made the following O R D E R

Civil Appeal No. 4494/2004 The appeal is allowed in terms of the signed reportable judgment.

C.A. No. 4494/2004 etc. 9 Civil Appeal Nos. 4491-4493/2004 The appeals are disposed of in terms of the signed reportable judgment.

SLP(C) No. 19013-19018/2012 The special leave petitions are dismissed.

(Nidhi Ahuja) (Suman Jain) COURT MASTER COURT MASTER

[Signed reportable judgment is placed on the file.]

C.A. No. 4494/2004 etc. 10