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Assistant Commissioner Of Income-Tax v. Saptarshi Services Ltd.
Structured Summary of the Legal Opinion
Factual and Procedural Background
The Revenue filed five consolidated appeals against the Commissioner of Income-tax (Appeals)'s order dated July 31, 1996, concerning assessment years 1990-91 to 1994-95. Because the appeals involve the same assessee and a common issue, they were heard together and disposed of by a common order.
The assessee (M/s. Saptarashi Services (P) Ltd.) entered into an unregistered sub-lease (effective October 1, 1987) of leasehold land in Jabalpur from M/s. Kohinoor Tobacco Products (P) Ltd. for a monthly rent of Rs. 1,000. The lease was for an indefinite period (characterised in the opinion as a perpetual lease). The assessee constructed a building on the existing plinth, called Saptarshi Centre, intending to operate a business centre.
The assessee rented out different portions of the building to third parties and treated the receipts as service charges under the head "Income from business and profession." The services offered (as described in the record) included: lift services; receptionist services; telephone services; secretarial/steno assistance; data processing and word processing; conference room facilities; message service and local transport.
The Assessing Officer assessed the receipts as income from house property, relying inter alia on the ratio in East India Housing and Land Development Trust Ltd. v. CIT, and questioned whether the assessee provided services (noting absence of electricity expenses in the assessee's accounts). The assessee appealed to the Commissioner of Income-tax (Appeals), submitting detailed written submissions about its objects, activities, expenditures (lift, air cooling plant, furniture and fixtures), and the nature and continuity of services rendered.
The Commissioner of Income-tax (Appeals) held that the activities constituted an organised business activity (a composite whole of letting out space plus rendering services) and directed the Assessing Officer to assess the income as business income, allow depreciation and determine business loss accordingly. The Revenue appealed to the Tribunal. The Tribunal upheld the Commissioner of Income-tax (Appeals). The Department further appealed to the High Court, which, through R.K. Abichandani, J., dismissed the appeal summarily stating that no question of law arose from the Tribunal's order.
Legal Issues Presented
- Whether the income derived by the assessee from the building (Saptarshi Centre) should be taxed as "income from business" (on the assessee's case that it ran a business centre providing services) or as "income from house property" (as assessed by the Assessing Officer).
Arguments of the Parties
Assessing Officer / Revenue (as recorded)
- The Assessing Officer found that no electricity expenses were claimed by the assessee in the profit and loss account and observed that the services asserted by the assessee could not be provided without electricity; therefore, he questioned whether services were in fact provided.
- The Assessing Officer expressed the view that the assessee had arranged its affairs to take advantage of case law decisions and avoid tax.
- The Assessing Officer relied on the ratio laid down in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC) and assessed the entire receipts as income from house property.
- At the Tribunal hearing, the learned Departmental Representative supported the Assessing Officer's order.
Assessee (M/s. Saptarashi Services (P) Ltd.)
- The assessee's memorandum and articles stated objects including purchasing, acquiring, holding, developing and letting immovable property and providing office space and business accommodation with administrative, security and communication services.
- The assessee contended that it had developed an office building complex, incurred expenditure on lift, air cooling plant, furniture and fixtures, and provided multiple services to members/tenants — making the activity systematic, continuous and profit-oriented (i.e., business activity).
- With respect to electricity expenses during the year, the assessee explained that electricity bills were paid by one of the members (M/s. Mohanlal Hargovandas) because the meters were in other names; the assessee later reimbursed that member and produced confirmation of payment.
- The assessee acknowledged that certain services (data processing, word processing, local transport) were not provided during the year because members did not request them, but maintained that core services (lift, receptionist, telephone, conference room, message services, security) were provided.
- The assessee relied on several judicial decisions (listed before the Commissioner of Income-tax (Appeals)) to support its position that the receipts should be treated as business income.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC) | Identified in the record as a ratio relied upon by the Assessing Officer. | The Assessing Officer relied on this ratio to support assessment of the receipts as income from house property. The Tribunal considered the Assessing Officer's reliance but ultimately upheld the Commissioner of Income-tax (Appeals)'s view that income should be business income. |
| Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 363 (SC) | Listed by the assessee as a decision relied upon before the Commissioner of Income-tax (Appeals). | The Commissioner of Income-tax (Appeals) considered the case as supporting the assessee's position; the Tribunal noted that case law relied upon by representatives was taken into consideration though not specifically mentioned. |
| CIT v. Prem Chand Jute Mills Ltd. [1978] 114 ITR 769 (Cal) | Listed by the assessee as a decision relied upon before the Commissioner of Income-tax (Appeals). | The Commissioner of Income-tax (Appeals) considered this decision in support of classifying the activity as business; the Tribunal stated that the case law relied on was taken into account. |
| CIT v. National Mills Co. Ltd. [1958] 34 ITR 155 (Bom) | Listed by the assessee as a decision relied upon before the Commissioner of Income-tax (Appeals). | The Commissioner of Income-tax (Appeals) took such authorities into consideration in concluding that the composite activity amounted to business; the Tribunal upheld that conclusion. |
| CIT v. Ajmera Industries (P.) Ltd. [1976] 103 ITR 245 (Cal) | Listed by the assessee as a decision relied upon before the Commissioner of Income-tax (Appeals). | The Commissioner of Income-tax (Appeals) considered this authority among others relied on by the assessee; the Tribunal recorded that relied case law had been taken into account. |
| Addl. CIT v. Hindustan Machine Tools Ltd. [1980] 121 ITR 798 (Karn) | Listed by the assessee as a decision relied upon before the Commissioner of Income-tax (Appeals). | The Commissioner of Income-tax (Appeals) considered this decision in reaching the view that the composite activity amounted to business; that view was upheld by the Tribunal. |
| CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC) | Listed by the assessee as a decision relied upon before the Commissioner of Income-tax (Appeals). | The Commissioner of Income-tax (Appeals) took this case into consideration in support of assessing the income as business income; the Tribunal upheld the appellate authority's conclusion. |
Note: The opinion expressly states that "all the case law relied on by the learned representatives has been taken into consideration but they are not specifically mentioned here." The table above records only those precedents that were specifically named in the opinion and describes their usage as stated in the opinion.
Court's Reasoning and Analysis
The Tribunal considered the factual matrix and rival submissions and declined to interfere with the Commissioner of Income-tax (Appeals)'s findings. The Tribunal's analysis, as reflected in the opinion, proceeded along the following lines:
- Ownership and Legal Position: The Tribunal noted that the Revenue did not place on record any material showing the assessee was the owner of the land. Kohinoor Tobacco Products (P) Ltd. was the owner of the old house and had granted the lease to the assessee (by an unregistered deed dated October 5, 1987). The assessee thus had interest as sub-lessee while being the owner of the building constructed on the land.
- Assessee's Objects and Activities: The Tribunal observed that the assessee's memorandum included objects consistent with acquiring, developing and letting property and providing office space and services. The Tribunal took note of the works and expenditures (lift, air-cooling plant, furniture and fixtures) and the facilities provided.
- Services Actually Provided: The Tribunal recorded factual findings that the assessee provided services such as lift, receptionist, telephone services (assisted by an EPABX), secretarial services, data processing (when requested), conference room facilities and other support services. It also noted the factual point that certain services (data processing and transport) were not provided where members did not request them.
- Composite Nature of Income: The Commissioner of Income-tax (Appeals) had found two components in the receipts — income attributable to letting out the building and income attributable to rendering services. He concluded that, being part of a single line of activity and constituting a composite whole, the entire activity should be classified as business activity (analogous to a hotel providing accommodation plus services). The Tribunal accepted this characterisation.
- Assessment Characterisation and Relief: Given the finding that services were rendered by the assessee and that the activity was an organised business-like operation, the Tribunal agreed with the Commissioner of Income-tax (Appeals) that the income should be taxed under the head "Income from business" rather than "Income from house property." The Tribunal directed that the Assessing Officer should determine business loss and allow depreciation in accordance with the rules.
- Consideration of Precedents: The Tribunal noted that all the case law relied upon by the parties had been considered, though specific discussion of each authority was not recorded in the text of the opinion.
The Department appealed to the High Court, which (R.K. Abichandani, J.) held that no question of law arose from the Tribunal's order and dismissed the appeal summarily.
Holding and Implications
Holding: The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) and directed that the assessee's receipts be treated as business income. The Assessing Officer was directed to determine business loss and allow depreciation in accordance with the rules. The subsequent appeal to the High Court was dismissed, with the High Court stating that no question of law arises.
Implications:
- The immediate, direct effect is that the receipts from the Saptarshi Centre are to be assessed as income from business for the assessment years in question, not as income from house property.
- The Assessing Officer must re-determine tax consequences consistent with that classification, including allowing depreciation and determining business loss.
- The opinion contains no explicit statement that it sets a new legal precedent; it records that the Tribunal considered the case law relied upon and reached its decision on the facts and law as applied to this assessee. Therefore, the decision's practical effect is to resolve the classification issue for this assessee on the facts before the authorities; no broader precedent-creating statement is articulated in the opinion.
Availability of Information
This summary is prepared exclusively from the text of the provided opinion. No information beyond what appears in that opinion has been added or inferred.
S.K. Yadav, Judicial Member
1. All these five appeals have been filed by the Revenue against the consolidated order of the Commissioner of Income-tax (Appeals) dated July 31, 1996, for the assessment years 1990-91 to 1994-95. Since all these appeals pertain to the same assessee and the issue involved is common, these appeals were heard together and are being disposed by this common order for the sake of convenience.
2. The common ground in all these appeals is as under :
"On the facts and in the circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) erred in directing to tax the income derived by the assessee from house property as 'income from business', as against the same assessed as income from house property by the Assessing Officer."
3. The facts of the case are that the assessee-company had entered into a deed of lease with M/s. Kohinoor Tobacco Products (P) Ltd. According to the lease agreement which is unregistered M/s. Kohinoor Tobacco Products (P) Ltd., had leasehold land on which construction till the plinth level was carried out. The leasehold land was located in Jabalpur. The assessee took this land on sub-lease from M/s. Kohinoor Tobacco Products (P) Ltd. with effect from October 1, 1987, at a monthly rent of Rs. 1,000. The assessee took this property on lease with the idea of building a structure on the existing plinth laid down by the lessor. The lease was for an indefinite period and has therefore got to be regarded as perpetual lease. The assessee thereon constructed a building on the land known as Saptarshi Centre with the idea of having a business centre. The different portions of the building were given on rent to third parties and the assessee treated rent as service charges under the head "Income from business and profession". The assessee explained to the Assessing Officer that the building was developed as a business centre for giving services to the third party such as secretarial services facility, phone, fax and other services. The compensation received from the third parties by the assessee was shown as income from business and not income from house property. It was submitted that the assessee had used the building as a commercial asset and not as an investment and therefore the income from the said building would not be treated as income from house property. The services to be provided to the said tenants were as under :
(a) Services of lift;
(b) Services of receptionist to greet the visitors of members and accept the message on behalf of the members ;
(c) Telephone services for directing the calls ;
(d) Secretarial services/assistance like steno services ;
(e) Data processing and word processing facility ;
(f) Conference room facility ; and
(g) Message service and local transport facility.
4. The Assessing Officer examined the accounts of the assessee and found that no electricity expenses have been claimed in the profit and loss account and that the services rendered could not be provided without electricity. It was also the view of the Assessing Officer that the assessee had designed its affairs in such a way that it could take the benefit of various case law and thus avoid the payment of tax. The Assessing Officer also relied on the ratio laid down in the case of East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC). He was therefore of the view that the entire receipts had to be taxed as income from house property and not income from business.
5. The matter was carried in appeal before the first appellate authority wherein the assessee submitted a written submission which is as under :
"1.02. The assessee is a public limited company registered on September 28, 1987, with the object of carrying on the business of providing the services in accordance with the present commercial practices having the following object as its main object stated in the memorandum and articles of association of the company.
To purchase or otherwise acquire, hold, develop, sell, dispose of or let on hire, manage and deal in any kind of movable or immovable properties of any description or right therein in any part of India and to provide office space, business accommodation or conveniences with or without the provision of various services such as administrative, security, communication.' 1.03. The learned Assistant Commissioner of Income-tax vide its order dated March 15, 1996, determined the total income of the assessee as Rs. 53,500. The main issue in the appeal is the treatment of the receipt of service charges from the different members as income from house property or business income.
1.04. The assessee had taken on lease the premises situated at Jabalpur with an old structure. After taking the lease, your assessee has spent sizeable amount and developed an absolutely modern office building complex. The assessee had further spent in putting lift in the building so that all the areas can be covered as business centre. Further the assessee had spent enormous amount on acquiring air cooling plant for the same building. The assessee has also spent sizeable amount in acquiring furniture and fixtures to be fitted in the same building. The details regarding the acquisition of lift, acquisition of air cooling plant and acquisition of furniture and fixtures had been given along with the balance-sheet and profit and loss account.
1.05. During the course of assessment proceedings, the learned Assessing Officer has asked to show cause as to why the rent received from the tenants be not treated as income under the head "Income from house property". In response to this notice, the assessee had submitted detailed reply vide letter dated February 5, 1996, where it had been pointed out that the company was dealing in real property, as also the activity of taking property on lease, setting up the premises for the purpose of business centre and giving it to the members for the purposes of using it as an office. The number of services offered are enormous and it depends upon the requirement of the members. In short, the assessee submitted that the activity of the assessee was nothing but systematic activity on a continuous basis and to earn profit out of the same activity.
1.06. The assessee submitted that during the year under review, though electricity expenses had been incurred but not debited to the company, the same had been paid by one of the members, M/s. Mohanlal Hargovandas. Unfortunately, due to the old building, electrical metres were in the name of other persons and hence the company had not paid the said bills. As mentioned hereinabove, the said bills had been paid by M/s. Mohanlal Hargovandas and further the assessee submitted herewith the letter received from M/s. Mohanlal Hargovandas confirming the payment made by them regarding electricity bills of the said premises.
1.07. The assessee further informed that regarding the services related to data processing, word processing and local transport facility, the present members had not shown any interest into it; hence it was not provided to them. Otherwise services of lift, services of receptionist, telephone services, conference room facility, message services and security services were provided by the assessee."
6. Besides this, the assessee relied on the following decisions before the Commissioner of Income-tax (Appeals) :
(i) Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 363 (SC);
(ii) CIT v. Prem Chand Jute Mills Ltd. [1978] 114 ITR 769 (Cal);
(iii) CIT v. National Mills Co. Ltd. [1958] 34 ITR 155 (Bom) ;
(iv) CIT v. Ajmera Industries (P.) Ltd. [1976] 103 ITR 245 (Cal);
(v) Addl. CIT v. Hindustan Machine Tools Ltd. [1980] 121 ITR 798 (Karn); and
(vi) CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC).
7. Finally, the assessee submitted that the impugned income should be assessed as income from business and not as income from house property. The Commissioner of Income-tax (Appeals) held as under :
"4. I have considered the facts of the case. The appellant-company is not the owner of the land though the building was constructed by it. In the land the appellant had interest as sub-lessee whereas it was the owner of the building constructed on the said land. Under the Indian civil law somebody can be the owner of the land and another person can be the owner of the house constructed on the said land. Therefore in this case the appellant is in fact the owner of the building. The main object of the appellant-company is to purchase, acquire, hold, develop, any kind of movable or immovable property and provide office space, business accommodation and other convenience. The activities of the appellant are in accordance with the main object as incorporated in the memorandum of the association of the company. The appellant had not only given space to its tenants but had also provided facilities such as lifts, air cooling, furniture and fixtures, conference room and telephone services. In the opinion of the appellant the whole object of constructing the office premises was that facilities are provided with the building. This amounts to an organised activity and is in the same class as that provided by a hotel. On the other hand, the Assessing Officer was of the view that the appellant had arranged its affair in such a way that it can take the benefit of the decisions of various High Courts and the Supreme Court. The Assessing Officer had also argued that as the electricity was not paid by the appellant no services were provided by the appellant and therefore the income should be assessed under the head 'Income from house property'. The appellant's arguments are that the expenses were made by the sister concern of the appellant which was to be reimbursed to the sister concern. It was stated that leaving out the facilities of the transport and data processing all the other facilities were provided by the appellant to its tenants. Regarding data processing services and transport facilities, it was stated that the users of the business centre did not ask for the services and therefore they were not provided. In this case the entire income earned has two components, i.e.,--
(i) part of the income is attributable to the letting out the building, (ii) the other part is attributable to rendering of services by the appellant to its tenants.
As both the activities belong to one line of activity and as they are one composite whole in my opinion the entire activity can be classified as a business activity. This view is supported by the various case law on which the appellant has placed reliance, Further, the Assessing Officer in the assessment order has admitted that all these cases were relevant to the appellant's case. It was only his view that the services were not provided by the appellant and that the income was earned from the renting of premises. He therefore assessed the income under the head 'Income from house property'. In my view the findings of the Assessing Officer are incorrect as services were rendered by the appellant to its tenants and therefore the income has to be taxed under the income from business. As a result, the Assessing Officer is directed to determine the business loss and allow the depreciation in accordance with the rules to the appellant."
8. Before us the learned Departmental Representative supported the order of the Assessing Officer and, on the other hand, learned counsel for the assessee relied on the order of the Commissioner of Income-tax (Appeals) and argued the matter at length.
9. After considering the rival submissions and going through the material on record, we are not inclined to interfere with the findings of the Commissioner of Income-tax (Appeals). The Revenue has not brought anything on record that the assessee is the owner of the property in question. So, it is difficult to believe that the assessee is earning income from the property as far as this income is concerned. Kohinoor Tobacco Products (P) Ltd. was the owner of an old house bearing Corporation No. 1080 of 1970 at Gold Bazar, Jabalpur. By an unregistered lease deed dated October 5, 1987, Kohinoor gave the lease of the land at Rs. 1,000 per month to M/s. Saptarashi Services (P) Ltd to construct a new building thereon, as per the plan approved by the municipal corporation. Accordingly, M/s. Saptarashi Services (P) Ltd. constructed the service centre. The directors of Kohinoor Tabacco Products (P) Ltd., are :
1. Shri Vadilal D. Pandya,
2. Shri Chimanbhai D. Patel.
10. Whereas, the directors of M/s. Saptarashi Services (P) Ltd., are :
1. Shri Lalitbhai R. Patel, Baroda,
2. Shri Jayeshbhai N. Patel, Baroda,
3. Shri Girishbhai A. Patel, Ahmedabad.
11. The directors of M/s. Saptarashi Services (P) Ltd., are not related to the directors of M/s. Kohinoor Tabacco Products (P) Ltd. The electricity charges from October 1, 1989, to March 31, 1990, were paid to M/s. Mohanlal Hargovandas who were one of the members of the service centre and M/s. Saptarshi Services (P) Ltd., reimbursed them later. The assessee is having EPABX machine which facilitates providing telephone services to the occupants of the service centre. Besides this, the assessee is providing various services to the occupants like services of lift, services of receptionists, secretarial services, data processing, conference room, etc. The object of the said complex is that facilities to be provided with the building. Thus the assessee is providing a working place along with the various facilities.
12. In the facts and circumstances of the case, we uphold the order of the Commissioner of Income-tax (Appeals). It is pertinent to mention here that all the case law relied on by the learned representatives has been taken into consideration but they are not specifically mentioned here.
[The Department appealed to the High Court] JUDGEMENT R.K. Abichandani, J.
No question of law arises from the order of the Tribunal. The appeal is, summarily, dismissed.
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