Commissioner Of Income-Tax v. Chennai Properties And Investments Ltd.

The Judgment of the Court was delivered by

R. Jayasimha Babu, J.:— At the instance of the Revenue, the following questions have been referred:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the rental receipts derived from letting out of properties should be assessed under the head ‘Business’?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the expenses incurred for the purpose of letting out of the properties should be allowed as ‘business expenditure’?

2. The assessment years are 1979-80, 1983-84 and 1984-85. The assessee owns two buildings in the city of Chennai, “Chennai House” and “Firhavan Estates” and received rental income by letting out those buildings. The assessing officer declined to assess that rental income under the head ‘Income from business’ and assessed the same under the head ‘Income from property’. The Commissioner having allowed the assessee's appeal, the Revenue carried the matter to the Appellate Tribunal which has confirmed the view of the Commissioner.

3. The main objects of the assessee-company which was registered on May 24, 1974, with a capital of Rs. 1,00,000 are as under:

“(1) To purchase or otherwise acquire and hold the properties known as ‘Chennai House’, at Esplanade, Madras and ‘Firhaven Estate’ at South Beach Road, Madras, and lands, buildings and other property of any tenure and any interest therein, and to let out such properties and to make advances upon the security of lands or buildings or other property, or any interest therein.

(2) To buy, sell, underwrite, invest in, exchange or otherwise acquire, and to hold, manage, develop, deal with and turn to account any bonds, stocks, obligations or securities of British, Foreign or Colonial Governments, states, dominions, sovereigns, provinces, municipalities, or ruling or public authorities, or the bonds, debentures, debenture stocks, scrips, obligations, shares, stocks, whether preference or ordinary, and whether fully paid or not, or securities of railway and other companies, public works and undertakings incorporated or established by Act of Parliament, Royal Charter, or under the Joint Stock Companies Acts in England or the Colonies, or by the state authority, or under the laws of any foreign country or State, and to invest in or upon real estate, whether incumbered or otherwise, including equities of redemption, and whether by way of contributory mortgage or otherwise.

4. The Tribunal, relying on those objects, held that letting out space in the building owned by the assessee is the business of the assessee and, therefore, the income derived from such letting is business income in respect of which expenses incurred by it for the purpose of letting are deductible. Learned senior counsel for the Revenue submitted that the view taken by the Tribunal is unsustainable having regard to the law laid down by the apex court and this court.

5. A Constitution Bench of the Supreme Court, in the case of Sultan Brothers Pvt. Ltd. v. CIT [1964] 51 ITR 353, while approving the decision rendered by the three-judge Bench in the case of East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC) has held thus (page 358):

“The object of the appellant company no doubt was to acquire land and buildings and to turn the same into account by construction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling the same. The activity contemplated in the aforesaid object of the company, assuming it to be a business activity, would not by itself turn the lease in the present case into a business deal. That would follow from the decision of this court in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 where it was observed that ‘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.

6. In the case of Sultan Brothers Pvt. Ltd. v. CIT [1964] 51 ITR 353 (SC), the assessee had leased out the building fully equipped and furnished to be used as a hotel, and the matter in issue was as to whether the income derived under that lease was taxable as business income or income from property, or income from other sources more specifically under sub-section (4) of section 12 of the Indian Income-tax Act, 1922, which dealt with composite income in the case of letting out of furniture with building. The court held that lease was a composite one and therefore, income so collected was to be dealt with under section 12(4). While so holding the court observed that:

“Because of the composite character of the income it becomes a new kind of income, not covered by section 9, i.e, income not from the ownership of the building alone, but, income which though arising from a building would not have been arising if the plant and machinery and furniture had not also been let along with it.

7. Prior to the decision of the Constitution Bench, but, subsequent to the decision in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49, a three-judge Bench of the court in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 considered the case of an assessee which held a mining lease for coal and received rental income from sub-lessees to whom portions of the leased area had been sub-leased. The principal object of that assessee was to acquire mining leases for coal, develop them as coalfields and then sub lease the same to collieries and other companies. In the context of the facts of that case, the court held that (page 378):

“Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation.

8. The Constitution Bench in the case of Sultan Brothers [1964] 51 ITR 353 (SC) did not refer to the case of Karanpura [1962] 44 ITR 362 but, specifically referred to and approved the reasoning in the case of East India Housing and Land Development Trust Ltd. [1961] 42 ITR 49. The law laid down in East India Housing and Land Development Trust Ltd. [1961] 42 ITR 49 is therefore required to be regarded as being entitled to the same weight as that of a decision of the Constitution Bench. It is of interest to note that Hidayatullah J., as he then was, was a member of the Bench in all the three cases.

9. In the case of Karnani Properties Ltd. v. Commissioner Of Income Tax, West Bengal [1971] 82 ITR 547 (SC), a two judge Bench of the Supreme Court considered the question as to whether rendering of service to tenants by the company which owned a building and whose object was to own and let out building, by supplying electric current, hot and cold water, maintaining lifts and providing other amenities would constitute business activity of the assessee and therefore, assessable under section 10 of the Indian Income-tax Act, 1922. The building owned by the assessee in that case was situated on Park Street, Calcutta, and consisted of numerous residential flats and over a dozen shops. Those tenants in addition to paying rents, had to make separate payments which included charges for electric current, for use of lifts, for supply of hot and cold water, for arrangement for scavenging, for providing watch and ward and other amenities. The apex court proceeded on the basis that the assessee had two sources of income, one by way of rental income and the other from service charges. The service charges collected by the assessee was held by the court to be income from business.

10. The law laid down in the case of Karnani Properties [1971] 82 ITR 547 (SC), thus, was that rent derived from letting would be assessable as income from property. That decision is clearly in accordance with the decision of the Constitution Bench in the case of Sultan Brothers [1964] 51 ITR 353 (SC) which had approved the decision of the three-judge Bench in the case of East India Housing and Land Development Trust Ltd. [1961] 42 ITR 49 (SC).

11. S.G Mercantile Corpn. (P) Ltd. v. Cit, Calcutta [1972] 83 ITR 700 (SC) was a case of an assessee-company which had obtained a market place on lease and sublet portions of the same to different tenants, decided by a four-judge Bench. The court did not regard the law laid down in East India Housing and Land Development Trust Ltd. [1961] 42 ITR 49 (SC) as being applicable to the case of the assessee before it in that case, who was a tenant and not the owner. The observations made in that decision, therefore, are not to be regarded as having laid down the law with regard to the manner in which the rental income derived by the owner from letting out of the building owned by it is to be treated whether as income from business, or income from property.

12. In the case of Universal Plast Ltd. v. Commissioner Of Income Tax, Calcutta [1999] 237 ITR 454 (SC), a three-judge Bench considered the question as to whether income received by the owner of a factory by letting out the factory was assessable as income from business. The court, after referring to the cases in Sultan Brothers Pvt. Ltd. v. CIT [1964] 51 ITR 353 (SC); CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC); CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC); CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 (SC) and Narain Swadeshi Weaving Mills v. Commissioner Of Excess Profits Tax [1954] 26 ITR 765 (SC)) culled out the following propositions (page 461 of [1999] 237 ITR):

“(1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rent or licence fee) received by an assessee from leasing or letting out of assets would fall under the head ‘Profits and gains of business or profession’; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out; (3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same; (4) if only a few of the business assets are let out temporarily, while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if, the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.”

13. On the facts of the case before it, the court affirmed the findings of the High Court that income received by the assessee from the properties was not business income.

14. This court in the case of Commissioner Of Income-Tax, Tamil Nadu-I, Madras v. V. Shanmugham. [1984] 147 ITR 692 (Mad), on the facts of the case before it and without reference to any of the decisions of the apex court or this court held that income derived by way of charges received from the changing body of occupants in lodging houses was to be assessed as business income. It was held that running of lodging house, on the facts of that case was not as owner of the property.

15. In the case of Anaikar Traders and Estates (P.) Ltd. (No. 1) v. CIT [1990] 186 ITR 175 this court, after referring to the decisions of the apex court in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC) as also the case of CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 and United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 held that the income derived from the letting out of buildings owned by the assessee whose object was acquisition and possession of property with the incidental object of selling or leasing the same was not income from business but income from property. Similar view has been taken by this court, in the case of CIT v. Smt. P. Andal Ammal [2000] 243 ITR 715 (Mad); Indian Overseas Bank Ltd. v. Commissioner Of Income-Tax [2000] 246 ITR 206 (Mad) and Commissioner Of Income-Tax v. Indian Warehousing Industries Ltd. [2002] 258 ITR 93 (Mad).

16. Learned counsel for the Revenue invited our attention to two decisions one rendered by the Andhra Pradesh High Court and another by the Kerala High Court. In the case of CIT v. George Oommen and Co. [2001] 247 ITR 574 (Ker) it was held that earning from letting out property and receiving income from investments do not amount to carrying on business. In the case of CIT v. Veerabhadra Industries [1999] 240 ITR 5 (AP), it was held that the single act of constructing godown and letting out does not constitute business. These two decisions were rendered in the context of registration of firms and do not really answer the question as to how income from building owned by a company whose object is to acquire and hold buildings is to be assessed.

17. Learned counsel for the assessee further submitted that the very head under which this income is sought to be assessed does not permit the income being treated as income of that nature. In the Income-tax Act, 1961, classification of income is under different heads. Section 14 refers to “income from house property”. It is also the caption of Part C Chapter IV, of the Act as also of section 22 of the Act. Further section 24 also refers to deductions from income from house property.

18. It is true that there is a difference in the classification of income between the 1922 Act and the 1961 Act. Section 6 of the 1922 Act classifies income under the heads salaries, interest on securities, income from property, profits and gains from business, income from other sources and capital gains. The 1961 Act, while substantially retaining those heads of income, modified the head “Income from property” which was the description given in the 1922 Act to “Income from house property”. However, section 22 of the Act does not refer to “house property” despite its caption. The language employed in the section shows that the income referred to therein is not necessarily income from houses. It is income from property “consisting of any building or lands appurtenant thereto of which the assessee is the owner”.

19. The word “building” is not confined in its scope only to dwelling houses. “House” is defined in the Oxford Dictionary of English, 10th edition, as: a building for human habitation especially one that is lived in by a family or by a small group of people consisting of ground floor and one or more number of stories. The word “house” in association with other words also has many other meanings. But, a commercial building is not regarded as a house. That, however, would not take the income from such buildings out of the ambit of section 22.

20. Though it is not clear from the context as to why the Act describes income from property as income from house property, the substantive provision of law which creates the charge and obligates the person who receives such income to have it assessed under that head does not confine its application only to house property, but extends to all buildings whether such building is used as dwelling house or for other purposes.

21. It has been held by the Supreme Court uniformly in all cases where the issue was the head under which the rental income from buildings is to be assessed, that such income is to be assessed under the head “Income from properties/income from house properties”. The earliest of these decisions is in the case of East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49, which received the approval of the Constitution Bench in the case of Sultan Brothers Pvt. Ltd. v. CIT [1964] 51 ITR 353. Though the decision rendered by the Bench in the case of S.G Mercantile Corpn. (P) Ltd. v. Cit, Calcutta [1972] 83 ITR 700, appears to strike a different note, the judgment itself clarifies that the law declared in East India Housing [1961] 42 ITR 49 (SC) was in no way altered by that ruling. The case of East India Housing [1961] 42 ITR 49 (SC) was distinguished on the ground that that case pertained to the owner of a building while the assessee in S.G Mercantile Corporation [1972] 83 ITR 700 was not the owner but was the lessee of the building. In that case, the court made the following observation with reference to the provisions of the Indian Income-tax Act, 1922 (page 704):

“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 the 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 up 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. CIT [1961] 42 ITR 49.

22. After referring to the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC), which was a case of a lessee receiving rental income from its sub-lessee, the lease and sub-lease being coal mining leases, the court observed thus (page 708 of [1972] 83 ITR):

“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.”

23. Although it was held by the Constitution Bench in the case of Sultan Brothers [1964] 51 ITR 353 (SC) that whether a particular letting is business has to be decided in the circumstances of each case and that 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, in all the cases which have come before the courts involving commercial or residential buildings owned by assessees it has been held that the income realised by such owners by way of rental income from a building, whether a commercial building or residential house, is assessable under the head “Income from house property”. The only exceptions are cases where the letting of the building is inseparable from the letting of the machinery, plant and furniture. In such cases, it has been held that the rental would not have been realised but for the letting out of the machinery, plant or furniture along with such building and therefore the rental received for the building is to be assessed under the head “Income from other sources”. On the facts of this case, it is clear that the assessee, as owner of the building, was only exploiting the property as owner by leasing out the same and realising income by way of rent. Such rental income is liable to be assessed under the head “Income from house property”. The Tribunal was in error in holding otherwise.

24. The first question referred to us is, therefore, answered in favour of the Revenue. Having regard to that answer the second question is also required to be and is answered in favour of the Revenue.