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Smart Summary

Structured Summary of the Opinion (K. Raviraja Pandian, J.)

Factual and Procedural Background

The appellant (a company owning property at No. 2, Harrington Road, Chetpet, Chennai) filed its return for the assessment year 2001-02 showing an income of Rs. 9,92,06,410. On scrutiny assessment the Assistant Commissioner of Income-tax computed income from house property at Rs. 38,46,982, long-term capital gains at Rs. 12,03,90,674 and income from other sources at Rs. 38,22,070, yielding a total assessed income of Rs. 12,80,59,730.

The core disputes were (a) classification of lease income received from M/s. Shoppers Stop Limited — whether it should be assessed as business income or as income from house/property, and (b) the fair market value (FMV) of the land as on April 1, 1981, for computation of long-term capital gains (the Assessing Officer adopted a FMV that produced long-term capital gains of Rs. 12,03,90,674).

The Assessing Officer assessed the lease receipts under the head "Income from house property" after verifying lease deeds and applied section 22 conditions. The appellant appealed to the Commissioner of Income-tax (Appeals) who confirmed the AO on the lease-income issue but granted partial relief on capital gains valuation. The Tribunal affirmed the lower authorities on the classification issue and did not favour the appellant on valuation. The present appeal to this court raised five substantial questions of law reflecting these controversies.

Legal Issues Presented

  1. Whether the Appellate Tribunal is correct in law in holding that the income derived by the appellant from leasing of the ‘commercial property’ is not business income and has to be assessed as income from property?
  2. Whether, on the facts and in the circumstances of the case, the Tribunal, having found that the transaction is a business activity, was justified in concluding that the income has to be assessed as ‘Income from property’?
  3. Whether the Tribunal is correct in law in sustaining the stand of the respondent on the assessment of lease income under the head ‘Property’ even though it was not a case letting simpliciter and on the contrary letting with amenities and services, warranting computation under the head ‘Business’ granting deduction of expenses incurred?
  4. Whether the Tribunal is correct in law in sustaining the stand of the respondent on the assessment of lease income under the head ‘Property’ even though the facts and circumstances warrant assessment under the head ‘Other sources’ alternatively upon taking into consideration the expenses incurred in relation thereto?
  5. Whether the Tribunal is correct in law in sustaining the fair market value as on April 1, 1981, at Rs. 3,43,485 per ground in the computation of long-term capital gains determined by the lower authorities as against Rs. 4 lakhs on the facts and in the circumstances of the case ?

Arguments of the Parties

Appellant's Arguments

  • The appellant relied on the memorandum of association stating its main object was to carry on commercial activities (hotels, restaurants, cafes, etc.), and argued that the property was being exploited commercially; accordingly the receipts from letting should be treated as business income.
  • On the capital gains valuation issue, the appellant contended that the fair market value as on April 1, 1981, should be Rs. 4,00,000 per ground (as reiterated before the authorities).

Respondent/Revenue Position (as recorded in the opinion)

  • The Assessing Officer classified the lease receipts as income from house/property after examining the lease deeds (noting a supplementary lease agreement dated July 25, 2000, operative from July 15, 2000, with specified monthly rents).
  • The Assessing Officer recorded that the statutory conditions under section 22 of the Income-tax Act were satisfied (the assessee was the owner and did not use the property for its own business), making the income chargeable as income from property.
  • The Commissioner (Appeals) and the Tribunal concluded there was no commercial or business activity carried out by the appellant to earn the rentals; at best the appellant provided additional facilities to the tenant, which did not convert the letting into a business operation.
  • On valuation, the Commissioner (Appeals) reviewed evidence (including documents for 1982) and after an on-site visit fixed the FMV for April 1, 1981 at Rs. 3,40,000 per ground (which was affirmed by the appellate authority and accepted by this court as a factual determination).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. Chennai Properties and Investments Ltd., [2004] 266 ITR 685 The Division Bench decision is cited as authority supporting the proposition that the object in the memorandum alone does not convert lease receipts into business income. The Tribunal followed this decision; the court noted that the Division Bench in Chennai Properties' case held similarly and applied that precedent to support classification of the receipts as property income rather than business income.
Universal Plast Ltd. v. Commissioner Of Income Tax, Calcutta, [1999] 237 ITR 454 (SC) Expresses the principle that no precise test exists to determine whether leasing income is business income; it is a mixed question of law and fact to be decided from the standpoint of a businessman in that trade on the facts and circumstances of each case. The court relied on this well-established principle to emphasize that classification depends on factual matrix and true interpretation of the agreement in each case; it supported the conclusion that the present leasing was not business income.
Sultan Brothers P. Ltd. v. CIT, [1964] 51 ITR 353 Held (approving a prior three-judge Bench) that even if the object of a company is to acquire and exploit land (construct, lease, sell), that object alone does not convert every lease into a business deal. The court cited this Constitution Bench authority (and the earlier three-judge Bench decision in East India Housing) to support the proposition that the memorandum of association's object does not by itself change the legal nature of lease receipts to business income.
East India Housing and Land Development Trust Ltd. v. CIT, [1961] 42 ITR 49 (SC) Earlier three-judge Bench decision approved in Sultan Brothers: the company's objects to develop and exploit land do not automatically convert leasing into business. The court referred to this earlier decision as part of the chain of authority establishing that the appellant's stated objects cannot alone transform the rental receipts into business profits.

Court's Reasoning and Analysis

The court's analysis proceeds from the factual findings recorded by the tax authorities and the absence of material placed by the appellant to show the property was used for the purpose of its own business.

Key factual findings relied on by the court:

  • The assessee was the owner of the premises and had let out 25,393 sq.ft. under agreement to M/s. Shoppers Stop Limited.
  • The Assessing Officer examined lease documentation, including a supplementary lease agreement dated July 25, 2000 (operative from July 15, 2000) specifying monthly rents for ground and first floors.
  • The Assessing Officer concluded that conditions in section 22 of the Income-tax Act were satisfied (owner status and non-use by owner for his own business), which makes the receipts chargeable as income from property.
  • The appellant did not produce evidence before the authorities or the Tribunal to show that the letting constituted part of the appellant's business or that the property was used as business property by the appellant.

Legal principles applied:

  • The court applied the established principle (citing Universal Plast) that there is no precise single test; classification of rental/lease receipts as business income is a mixed question of law and fact determined by the facts, the nature of the agreement, and commercial reality.
  • The court relied on the constitutional and precedential line (Sultan Brothers and East India Housing) that an object's memorandum alone does not convert leasing into a business transaction: even where a company's objects include acquisition and leasing of property, that alone will not convert every lease receipt into business income.

Application of law to facts:

  • Given that the appellant produced no material to show it was conducting commercial or business activity through the property (it was exploiting the property as owner and receiving rent), the court accepted the factual determinations of the Assessing Officer and the Commissioner (Appeals) that the receipts were property income, not business income.
  • Although the appellant argued its objects indicated business exploitation, the court held that the memorandum of association would not alter the factual nature of the activity; the lease agreement did not indicate that letting was in the nature of a business activity by the appellant.
  • On the capital gains valuation, the Commissioner (Appeals) examined evidence (documents pertaining to 1982), undertook a site visit to assess locality and commercial potential, and fixed an FMV at Rs. 3,40,000 per ground; the court found this to be a factual determination properly supported by evidence and affirmed by appellate authority, requiring no reconsideration by this court.

Holding and Implications

Holding: APPEAL DISMISSED.

Direct consequences for the parties (as reflected in the opinion):

  • The lease income received by the appellant from M/s. Shoppers Stop Limited is to be assessed as income from house/property (under section 22), and not as business income.
  • The fair market value adopted by the Commissioner (Appeals) for April 1, 1981 (fixed at Rs. 3,40,000 per ground) was affirmed as a factual determination and therefore the Assessing Officer's computation of long-term capital gains (as adjusted) stands as affirmed by the appellate authorities and this court.

Broader implications:

The court concluded that there was no substantial question of law warranting interference. The decision rests on factual findings and application of established precedents; it does not purport to lay down a new legal principle or depart from the cited authorities.

    Keyaram Hotels P. Ltd. v. Assistant Commissioner Of Income-Tax

    K. Raviraja Pandian, J.:— The appeal is filed by formulating the following substantial questions of law:

    “1. Whether the Appellate Tribunal is correct in law in holding that the income derived by the appellant from leasing of the ‘commercial property’ is not business income and has to be assessed as income from property?

    2. Whether, on the facts and in the circumstances of the case, the Tribunal, having found that the transaction is a business activity, was justified in concluding that the income has to be assessed as ‘Income from property’?

    3. Whether the Tribunal is correct in law in sustaining the stand of the respondent on the assessment of lease income under the head ‘Property’ even though it was not a case letting simpliciter and on the contrary letting with amenities and services, warranting computation under the head ‘Business’ granting deduction of expenses incurred?

    4. Whether the Tribunal is correct in law in sustaining the stand of the respondent on the assessment of lease income under the head ‘Property’ even though the facts and circumstances warrant assessment under the head ‘Other sources’ alternatively upon taking into consideration the expenses incurred in relation thereto?

    5. Whether the Tribunal is correct in law in sustaining the fair market value as on April 1, 1981, at Rs. 3,43,485 per ground in the computation of long-term capital gains determined by the lower authorities as against Rs. 4 lakhs on the facts and in the circumstances of the case ?”

    2. For the assessment year 2001-02, the appellant-company has filed its return of income on October 30, 2001, showing an income of Rs. 9,92,06,410. In the scrutiny assessment, the Assistant Commissioner of Income-tax, Company Circle II(4), Chennai, had computed income from house property at Rs. 38,46,982, long-term capital gains at Rs. 12,03,90,674 and income from other sources at Rs. 38,22,070. The total income computed in the said order of assessment was Rs. 12,80,59,730. According to the assessee-company, the lease income derived from M/s. Shoppers Stop Limited by leasing out the property of the assessee should be assessed under the head of “Business income”. The Assessing Officer computed the said lease income under the head of “Income from house property” after verifying the lease deeds entered into by the assessee with the lessees. As regards the computation of long-term capital gains, the Assessing Officer had reworked the taxable capital gains at Rs. 12,03,90,674 as against the admitted amount of Rs. 9,88,63,664 by adopting the fair market value of the land as on April 1, 1981. Aggrieved by that order, the assessee carried the matter on appeal to the Commissioner of Income-tax (Appeals), Chennai, who in respect of the first issue confirmed the order of the Assessing Officer but in respect of the second issue granted partial relief. The second appeal filed before the Tribunal also has not yielded any result in favour of the appellant/assessee. Hence, the present appeal.

    3. We heard the arguments of learned counsel for the appellant, who assailed the order of the Tribunal contending, inter alia, that as per the memorandum of association, the main object of the assessee was to carry on business of hotel, restaurant, roadhouse, motel, cafe, tavern, beer house, refreshment, etc., as such the property has been exploited commercially and the income earned from the exploitation of commercial property has to be regarded as business income. In respect of the valuation of the capital gain, learned counsel appearing for the assessee has reiterated what was stated before the authorities to the effect that the fair market value to be adopted as on April 1, 1981, should be Rs. 4 lakhs per ground.

    4. From the materials on record, it is clear that the assessee-company is the owner of the property at No. 2, Harrington Road, Chetpet, Chennai. The assessee had let out the premises in an extent of 25,393 sq.ft, upon entering into an agreement and received the income.

    5. Before the authorities under the Act as well as the Tribunal, the assessee has not placed any materials to support its case that the property from which income has been derived was used as business property and the exploitation of the property was the nature of the business of the assessee-company.

    6. The Assessing Officer has recorded a factual finding to the effect that the rental income from M/s. Shoppers Stop Limited was supported by supplementary agreement of lease executed on July 25, 2000, which was operative from July 15, 2000. The lease agreement executed on July 25, 2000, clearly specified that the rent payable for the premises let out to Shoppers Stop was Rs. 3,58,020 and Rs. 2,79,059 per month for ground and first floors, respectively. The conditions for chargeability of property income as provided under the provisions of section 22 of the Income-tax Act were all available in this case, i.e, the assessee was the owner of the property and has not been used by him for the purpose of his business. Thus, the income was chargeable as income from property and not as business income.

    7. On appeal, the Commissioner after hearing the argument and perusal of the material on record, has recorded a finding that the income was generated out of exploitation of the property by letting out the same to M/s. Shoppers Stop. There was no commercial activity or business activity carried out by the appellant to earn such income. Some additional facilities extended to the tenant might be useful to the tenant to exploit the property commercially. This finding of fact has been confirmed by the Tribunal. The Tribunal followed the decision of this court in CIT v. Chennai Properties and Investments Ltd. reported in [2004] 266 ITR 685.

    8. The well established and recognised principle of law is that no precise test can be laid down to ascertain whether the income (referred to by whatever nomenclature, lease amount, rent or licence fee) received by an assessee from leasing or letting out the assets would fall under the head of “Profits and gains of business or profession”. 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 the true interpretation of the agreement under which the assets are let out. (see Universal Plast Ltd. v. Commissioner Of Income Tax, Calcutta, [1999] 237 ITR 454 (SC).

    9. In this case, the assessee earned income out of exploitation of the property by letting it out to M/s. Shoppers Stop. There is neither commercial activity nor business activity carried out by the assessee to earn such income. The objects clause contained in the memorandum of association of the assessee-company would not alter the nature of the activity of the assessee-company. The income earned cannot be under the head of “Business income”. The agreement did not even suggest that the letting out of the property by the assessee is in the nature of business activity.

    10. A constitution Bench of the Supreme Court in the case of Sultan Brothers P. Ltd. v. CIT, [1964] 51 ITR 353, while approving the decision rendered by three-judge Bench in the case of East India Housing and Land Development Trust Ltd. v. CIT, [1961] 42 ITR 49 (SC) has held that though the object of the assessee-company no doubt was to acquire land and building and to turn the same into account by construction, reconstruction and leasing and selling the same assuming to be a business activity would not by itself turn the lease into business deal. After taking note of the aforesaid judgment of the Supreme Court, the Division Bench of this court reported in Chennai Properties' case, [2004] 266 ITR 685 in which one of us (K. Raviraja Pandian J.) was a party, has also held to the same effect.

    11. On the facts of the case, it is clear that the assessee-company was only exploiting the property as owner by leasing out the same and realised income by way of rent. Such rental income is liable to be assessed as income from house property. In respect of the capital gain, the assessee has entered into an agreement with the builder M/s. Heeral Constructions Private Limited and as per the developer's agreement dated January 6, 2000, 39 per cent. of the land area has been transferred for construction of 78,295 sq.ft, of the built-up area. Out of 78,295 sq.ft of the built-up area, the assessee has sold 52,902 sq.ft, along with undivided shares to M/s. SSI Technologies Limited and the balance 25,393 sq.ft has been retained by the assessee. The Assessing Officer after taking note of the sale consideration, purchase cost, cost of investments, development cost and selling expenses, has determined the long-term capital gain. Before the first appellate authority, the assessee filed documents in document No. 1966/1982. The first appellate authority took the pain of visiting the properties in order to consider the aspect of location and its potentiality. The Commissioner (Appeals) after considering that the property taken up for comparison by the Assessing Officer had certain disadvantages, found that the property under consideration was almost at the cross road of Chetpet overbridge and was in the prime commercial locality. The commercial potentiality of the property has also been taken note of by the Commissioner (Appeals) and having given due regard to all the factors, the fair market value of the property of the appellant was fixed at Rs. 3,40,000 per ground. Thus, the value of the property has been determined on the basis of the evidence adduced, i.e, the documents produced by the assessee pertaining to the year 1982 and this amount has been fixed after taking stock of the factual situation of the locality by a personal visit. Hence, we are of the considered view that the fair market price fixed by the Commissioner (Appeals), which has been affirmed by the appellate authority, requires no reconsideration in this appeal, which is factual in nature.

    12. For the abovesaid reasons, we find no question of law, much less a substantial question of law so as to entertain this appeal. The appeal is dismissed.

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    Keyaram Hotels P. Ltd. v. Assistant Commissioner Of Income-Tax
    (Jan 29, 2008)