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Chennai Properties A... v. Commissioner Of Inco...
Factual and Procedural Background
The appellant, Chennai Properties & Investments Ltd., is a company incorporated under the Companies Act whose main object, as recorded in its memorandum of association, is to acquire specified properties in Chennai (“Chennai House” and “Firhavin Estate”) and let them out. For Assessment Year 1983-1984 the company returned an income of Rs 2,44,030, all of which arose from letting out those two properties and was shown under the head “business income.”
The Assessing Officer rejected this classification, taxed the receipts as “income from house property,” and passed an assessment order accordingly. The assessee succeeded before the Commissioner of Income Tax (Appeals), and the Department’s appeal to the Income Tax Appellate Tribunal (ITAT) was dismissed. On further appeal, the High Court (order dated 05-09-2002) reversed the ITAT and held that the income must be assessed under the head “house property.” The present civil appeal (No. 4494 of 2004) challenges that High Court judgment before the Supreme Court of India.
Legal Issues Presented
- Whether the income earned by a company whose primary object is to own and let out specific immovable properties should be assessed as “income from business” or as “income from house property” under the Income-tax Act.
Arguments of the Parties
Assessee’s Arguments
- The memorandum of association declares that acquiring and letting out “Chennai House” and “Firhavin Estate” is the company’s main object; therefore, rental receipts constitute its core business activity and should be assessed as business income.
- The entire income for the relevant year stems exclusively from this activity, reinforcing that letting is a trading operation rather than mere property ownership.
Department’s Arguments
- Relying on the Supreme Court ruling in East India Housing and Land Development Trust Ltd. v. CIT, the Department contends that rental income derived from property ownership retains its character as “income from house property,” regardless of the assessee’s objects clause.
- The High Court accepted this view, adding support from the Constitution Bench decision in Sultan Bros. (P) Ltd. v. CIT.
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) | Where letting is not the object of the company, rental receipts are taxable as “income from house property.” | Relied upon by the High Court; the Supreme Court distinguished it because, in the present case, letting is the company’s primary objective. |
| Sultan Bros. (P) Ltd. v. CIT, AIR 1964 SC 1389 (Constitution Bench) | An entry in the objects clause is not conclusive; determination depends on whether, from a business perspective, the letting amounts to carrying on a business. | The Court applied this test and concluded that, on the facts, the assessee’s activity constitutes its business. |
| Karanpura Development Co. Ltd. v. CIT, 1962 44 ITR 362 (SC) | The head of income depends on the nature of operations; where leasing is a trading operation, receipts are business income. | Treated as squarely applicable; guided the Court to classify the receipts as business income. |
Court's Reasoning and Analysis
Justice A.K. Sikri, writing for the Court, began by highlighting that the assessee’s memorandum expressly lists the acquisition and letting of “Chennai House” and “Firhavin Estate” as its main object, and that the company had no other source of income during the relevant assessment year.
Reviewing the statutory scheme, the Court recalled that income must be placed under the appropriate head and that those heads are mutually exclusive. It then:
- Examined Karanpura Development Co. Ltd., which emphasizes the nature of the assessee’s activity and its objects in deciding the head of income. The Court found that decision “squarely applies.”
- Considered Sultan Bros., acknowledging that an objects clause alone is not decisive but insisting the issue be viewed from a business perspective. Applying that yardstick, the Court held that the assessee’s exploitation of the properties constituted the carrying on of a business.
- Distinguished East India Housing on the basis that, in that case, letting was incidental, whereas here it is central to the company’s business.
On these premises, the Court concluded that the rental receipts were business income and that the High Court had erred in re-characterising them as income from house property.
Holding and Implications
Appeal Allowed. The judgment of the High Court dated 05-09-2002 is set aside, and the order of the Income Tax Appellate Tribunal—treating the receipts as “business income”—is restored.
Implications: The decision grants the assessee tax treatment consistent with its business classification and confirms that, where letting immovable property is the very business of a company, related receipts fall under the head “profits and gains of business or profession.” The ruling reiterates the importance of examining the company’s objects and activities in tandem; however, it does not lay down any new legal test beyond existing Supreme Court precedent.
Dr A.K Sikri, J.—
Civil Appeal No. 4494 of 2004
1. The appellant assessee is a company incorporated under the 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, refused 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.
2. The assessee filed the appeal before the Commissioner of Income Tax (Appeals) who allowed the same by his order dated 6-4-1989 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 an 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 5-9-20021 holding that the income derived by letting out of the properties would not be income from business but could be assessed only as income from house property.
3. 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. CIT East India Housing and Land Development Trust Ltd. v. CIT, 1961 42 ITR 49 SC as well as the Constitution Bench judgment of this Court in Sultan Bros. (P) Ltd. v. CIT Sultan Bros. P Ltd. v. CIT, AIR 1964 SC 1389.
4. 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?
5. 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.
6. The memorandum of association of the appellant Company which is placed on record mentions the main objects as well as the incidental or ancillary objects in Clauses (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.
7. It transpires that the return of a total income of Rs 2,44,030 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.
8. With this background, we first refer to the judgment of this Court in East India Housing and Land Development Trust Ltd. 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 which 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.
9. Before we refer to the Constitution Bench judgment in Sultan Bros. (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. CIT 1962 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 coalfields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coalfields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coalfields 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. The 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: (Karanpura Development case, ITR p. 377)
“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.”
10. 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. case squarely applies to the facts of the present case.
11. No doubt in Sultan Bros. (P) Ltd. 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 the 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: (AIR p. 1391, para 7)
“7. … 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.”
12. 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 the 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 Appeals Nos. 4491-93 of 2004
13. The appeals are disposed of in terms of the aforesaid order passed in Chennai Properties & Investments Ltd. v. CIT Set out in paras 1 to 12, above..
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