Income Tax Appellate Tribunal - Cochin
New Paris Complex vs Assistant Commissioner Of Income-Tax on 9 September, 2001
Equivalent citations: [2002]83ITD254(COCH)
ORDER
O.K. Narayanan, Accountant Member
1. This appeal is filed by the assessee. It relates to the assessment year 1993-94. It is filed against the order of the Dy. Commissioner of Income-tax (Appeals), Calicut, dated 24th July, 1996 and arises out of the regular assessment completed under Section 143(3) of the Income-tax Act, 1961.
2. The assessee is a firm constituted on the basis of a partnership deed dated 10-10-1990. There are ten partners in the firm. As a part of its activities, the assessee-firm has constructed a shopping complex-cum-lodging house at Tellicherry. During the previous year relevant to the assessment year under appeal, the construction of the said property was not complete. In fact, the»construction was completed over a period of time involving different previous years. A portion of the ground floor of the building was completed in the previous year relevant to the assessment year under appeal. That completed portion was leased out to Nedungadi Bank Ltd., on the basis of a lease agreement and fixing the monthly rent to be paid by the Bank. The assessee-firm has received rent from the Bank during the year under consideration. The assessee had made certain deposits with banks, on which it has received some interest also. The rental income and interest income, as mentioned above, are the only two items of credits in the profit and loss account of the assessee.
3. The assessee filed its return of income on 21 -7-1994 admitting a net loss of Rs. 24,820. In its computation of taxable income, the assessee has treated the rental income as well as the interest income as the "business income" of the assessee.
4. In the course of assessment proceedings, the Assessing Officer found that the assessee had received only rental income and interest income and it had not conducted any business during the relevant previous year. Even though the partnership deed reads a number of objects that may be pursued by the assessee-firm, it had not in fact carried out any business activity during the relevant previous year. Therefore, the Assessing Officer found that the rental income received by the assessee-firm from Nedungadi Bank Ltd., as per the lease agreement could not be considered as business income. For the above reasons, the Assessing Officer held that the assessee could not be treated as a firm by status; it could be treated only as an A.O.P. Having found that the rental income received by the assessee could not be treated as business income, the Assessing Officer also held that the bank interest received by the assessee has to be assessed as income from other sources. Accordingly, the Assessing Officer completed the assessment by treating the rental income as income from house property and treating the bank interest as income from other sources. As a result, the total income of the assessee was determined at Rs. 9,990, as against a loss of Rs. 24,820 admitted by the assessee. The assessment was completed in the status of AOP.
5. The assessment was carried in first appeal before Dy. CIT(Appeals), Calicut. The first point considered by the DC (Appeals) was the status to be assigned to the assessee. On going through the objects described in the partnership deed, the DC (Appeals) found that the firm could carry on the business of purchasing, constructing, taking on lease or acquiring otherwise and running of lodging houses, tourist homes, hotels, restaurants and shopping complexes, etc. It was also possible for the assessee to carry on any other business or activities desired by the partners from time to time. In the light of the objects of the firm as stated above, the DC (Appeals) held that the status of the assessee cannot be changed from that of the firm only for the reason that no specific business activity was carried on by the assessee during the relevant previous year. The construction of the property has been done by the assessee as part of its business activities and therefore the assessee did not cease to be a firm only for the reason that it had not carried out any other specific activities during the year under appeal. Accordingly, the DC (Appeals) directed the Assessing Officer to treat the assessee as a firm for the purpose of assessment. But in the case of the classification of income, the DC (Appeals) agreed with the Assessing Officer and held that the Assessing Officer has rightly treated the rental income as the income from house property and the bank interest as income from other sources. The first appeal was disposed of on the above lines. It is against the decision of the DC (Appeals), that the receipts mentioned by the assessee could not be treated as business income, that the assessee-firm has come in appeal before the Tribunal.
6. The assessee has raised the following effective grounds before the Tribunal:
1. The learned Asstt. Commissioner ought to have found that the object of the firm is business activity and income derived on business activity is assessable under the head income from business and not under any other head.
2. The learned Asstt. Commissioner ought to have found that construction and letting out of building is a business activity and rental income derived on such activity is a business income and assessable under the head income from business.
3. The learned Asstt. Commissioner ought to have found that the appellant deposited its business funds in the bank, hence the interest received on such deposit of business fund is a business income and assessable under the head "income from business".
4. The learned Asstt. Commissioner went wrong in not verifying properly the nature of the income of the appellant and not allowing the expenses and the interest paid on loan taken to deposit the amount and derive interest income while assessing the interest on deposit under the head income from other sources.
5. The Hon'ble Dy. CIT (Appeals) held that the activity of the appellant is business activity and the status of the appellant is firm but directed to assess the income from business activity under the head income from house property which is against the law.
7. Shri M.R. Vijaya Raghavan, Chartered Accountant, Tellicherry, appeared for the assessee-firm and argued the case. The learned Chartered Accountant contended that the assessee is a firm constituted on the basis of a valid partnership deed. The various objects described in the partnership deed are of business nature. The activities carried on by the assessee-firm were in the course of contemplating those objectives. There is a real and intimate nexus between the objects of the partnership firm and the activities carried on by the assessee-firm during the relevant previous year. Therefore, any income or receipt arising or accruing to the assessee as a result of the activities carried on by the assessee-firm during the relevant previous year need to be construed as receipts or income arising or accruing to the assessee from the business carried on by it. He submitted that the assessee-firm was constructing the shopping-cum-lodging complex as a business proposition and not for the purpose of earning rental income in the status of a landlord. The building constructed by the assessee is that of a composite structure, where the assessee is mainly carrying on his lodging business and incidentally letting out the shop rooms available in the ground floor as a part of its overall business activities. The assessee had let out the ground floor rooms to Nedungadi Bank Ltd. even before the entire building was completed and it was let out as an interim measure to earn income at the earliest point of time and the letting out of the ground floor to Nedungadi Bank Ltd., cannot be treated as an independent activity of earning income from house property, different from the proclaimed objects of the assessee-firm to carry on its business. Shri Vijayaraghavan relied on a decision of the Kerala High Court in the case of Issue Ninon v. State of Kerala [1995] 2 KLJ 555, to bring home the point that constructing buildings and letting them out for rent to tenants would fall within the ambit of the expression "business". The learned Chartered Accountant submitted that there is no inherent limitation that any income from a let out building should always be treated as income from house property. Citing the above decision, the learned Chartered Accountant pointed out that the expression "business" covers even an activity of letting out buildings to tenants and earning rent therefrom. The learned Chartered Accountant also relied on a decision of the Kerala High Court in CIT v. Malabar & Pioneer Hosiery (P.) Ltd., wherein the Court has held that rental income was assessable as business income and not as income from house property in such circumstances where a commercial asset owned by the assessee was temporarily let out to others as it was not possible for the assessee to use the building for its business purpose during that period. The learned Chartered Accountant further invited our attention to the decision of the Orissa High Court in CIT v. M.P. Bazaz [1993] 200 ITR 131, wherein it was held that income from constructing a building and letting it out could be business income. He also relied on the recent decision of the Calcutta High Court in CIT v. Shambhu Investment (P.) Ltd. [2001] 249 ITR 472, wherein the Court has held the principle to be applied in deciding whether income arising out of letting out would become business income or property income. The learned Chartered Accountant relying on the above decision submitted that merely because income is attached to any immovable property, that cannot be the sole factor for assessment of such income as income from property. If the main intention of the assessee is to let out the property or any portion thereof, the income must be considered as rental income or income from property, whereas if the primary object is to exploit the immovable property by way of complex commercial activities, in that event it must be held as business income. Citing the facts of the present case, the learned Chartered Accountant submitted that the rent received by the assessee during the relevant previous year from Nedungadi Bank Ltd., was only a part of its activities carried on in the nature of business and the receipt of rent has to be considered in the totality of the business contemplated by the assessee-firm to be carried on after completing the entire project.
8. The learned Chartered Accountant further contended that the lower authorities have also gone wrong in treating the interest income as income from other sources. The Bank deposits were made out-of assessee's business funds and again the business fund was made available out of the funds borrowed by the assessee for utilising for its projects and it is not the case of the Revenue that any surplus funds available with the assessee was invested in the Bank so as to earn an independent interest income. The learned Chartered Accountant submitted that deposits were made in the bank, as that much cash was not immediately necessary. It does not mean that the deposits were made in the bank solely for the purpose of earning interest. In the circumstances, the learned Chartered Accountant submitted that the orders of the lower authorities may be set aside to the extent whereby the Tribunal may give directions to treat the rent as well as the interest received by the assessee-firm as its business income.
9. Smt. T. Prasannakumari, the learned departmental representative appearing for the Revenue submitted that it cannot be held in the facts and circumstances of the case that the assessee was carrying on any business in its act of letting out of the completed portion of his property for the use of Nedungadi Bank Ltd., on the basis of the lease agreement. The learned departmental representative relied on the decision of the Gujarat High Court in CIT v. Smt. Minal Rameshchandm [1987] 167 ITR 507', where the Court has pointed out certain essential requirements of a business; which are an element of risk, uncertainty, foresightedness to visualize the imponderable and the capacity to overcome the unforeseen hurdles. Uncertainty about the return to be received from the investment and facing risk of losing the capital invested are also inherent in an activity called business. The learned departmental representative submitted that in the activity of letting out the property to Nedungadi Bank Ltd., none of the above features are answered and therefore, the act of letting out of the property as such could not be considered as a business activity. She also relied on the decision of the Kerala High Court reported in Dr. P.A. Varghese v. CIT [1971] 80 ITR 180, where it was held that income from let out property has to be assessed as income from house property. The learned departmental representative also relied on the decision of the Gujarat High Court in New India Industries Ltd. v. CIT[1 993] 203 ITR 933. She submitted that the income realized from tenants was the income received from property and the character of that income cannot be altered because it was received by the firm formed for carrying on the business of setting up a commercial complex and lodging house.
In the circumstances, she submitted that the orders of the lower authorities on these points may be upheld.
10. We heard both sides in detail and considered the rival arguments. We have also respectfully gone through the general propositions of law declared by various High Courts in the various judicial pronouncements cited before us in support of the point that income earning out of the letting out of a property could be either an income from house property or income from business depending upon the facts and circumstances of the case and the intention of the parties involved therein. It is not safe to say all the time that every income arising out of a building is an income from house property. One has to examine whether the building was in the nature of a commercial asset and it was exploited in the course of a business carried on by the assessee as part of its organised business activity. Likewise, it is also not safe to conclude that the income arising out of a let out property, has to be considered as a business income only for the reason that the declared objects of the assessee gave permission to carry on business activities also. The Supreme Court of India in CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 has considered the issue of rent received from let out property vis-a-vis the concept of business. The decision was rendered in the context of Excess Profit Tax Act, 1940. The court held that the term "business" is a word of very wide, though by no means determinate, scope. It is neither practicable nor desirable to make any attempt at de-limiting the ambit of its connotation. Each case has to be determined with reference to the particular kind of activity and occupation of the person concerned. Though ordinarily "business" implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called "quiescent". Therefore, the Court held that if the realisation of rental income by the assessee was in the course of its business in prosecution of one of its objects, then the same is liable to be included in its business profit. If the objects of a company permits management of property and realisation of rents as one of its business activities, then the realisation of rent had to be considered as income from business.
Again in the case of Karanpura Development Co. Ltd v. CIT [1962] 44 ITR 362 the Apex Court has examined a similar circumstance and has held that ownership of property and leasing it out may be done as a part of business or as a landlord. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property", even though the company may be doing extensive business otherwise.
11. The Gujarat High Court in CIT v. New India Industries Ltd. [1993] 201 ITR 208 has laid down the general principles to be borne in mind in deciding whether income from letting out an asset is business income or income from property. Those principles are as follows:
(i) No general principles could be laid down which is applicable to all cases and each case has to be decided on its own facts and circumstances.
(ii) Whether an income falls under one head or another has to be decided according to the common notions of a practical and reasonable man, for the Act does not provide any guidance in the matter.
(iii) In each case, what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend on certain facts peculiar to each case. Pure and simple commercial assets like machinery, plant, tools, industrial sheds or godowns having high business potentials stand on a different footing from assets like land or building.
(iv) If an assessee derived income from a commercial asset which is capable of being used as a commercial asset, then it is income from his business, whether he uses that commercial asset himself or lets it out to somebody else to be used. The asset would not cease to be a commercial asset simply because temporarily it was put out of use or it was let out to another person for his use.
(v) So long as the commercial asset is capable of being exploited as such, its income is business income irrespective of the manner in which the asset is exploited by the owner of the business.
(vi) If the commercial asset is not capable of being used as such, then its being let out to others does not result in the accrual of business income.
(vii) When the assessee has stopped doing business altogether and when the asset ceases to have the character of a business or a commercial asset, it becomes a capital asset giving rise to property income.
(viii) When the asset is in the nature of land or building capable of being used for any other purpose, and when the assessee ceases to use it as a commercial asset, the income derived by him by renting out the same would fall under the head income from house property.
(ix) In deciding this matter one has to look into the substance of the matter.
The very same principles have been referred to by the Madras High Court in CIT v. V.S.T. Motors (P.) Ltd. [1997] 226 ITR 155'.
12. Now we have to examine the facts of the present case in the light of the judgments and ratios referred to above. The assessee is a firm. As per the objects described in the partnership deed, the assessee could carry on business in constructing buildings and running lodging houses, shopping complexes, etc. etc., and any other business of convenience permitted by law. With the above objects in mind, the assessee-firm was constructing a shopping complex-cum-lodging house at Tellicherry. The business of running the lodging house may be carried on by the assessee directly or let out to somebody else to carry on the said business.
Regarding the shop rooms, the intention of the assessee was to let it out to others for the purpose of carrying on different business in different shop rooms. It was the intention of the assessee to let out the rooms available in the ground floor of the shopping complex to different parties as tenants. It is in the above overall scheme of utilisation of the building complex that the assessee-firm has let out rooms in the ground floor to Nedungadi Bank Ltd. Even though the construction of the entire building complex was not completed during the previous year relevant to the assessment year under appeal, the construction of the ground floor of the complex was completed and certain part of the ground floor had become fully functional. What the assessee has let out to Nedungadi Bank Ltd. during the relevant previous year is that part of the ground floor of the building complex which had become functional. Even though the rooms let out to Nedungadi Bank Ltd. in the ground floor is an indivisible part and parcel of the total building complex constructed by the assessee-firm, that part of the ground floor let out to Nedungadi Bank Ltd. was functionally independent. Even though the part of the building let out to Nedungadi Bank Ltd. was not divisible physically, functionally it could be construed as an independent unit. The assessee-firm never had an intention to carry on banking business. It is Nedungadi Bank Ltd., which carries on banking business in the premises let out by the assessee-firm. It clearly shows that the assessee had no intention to carry out any business either directly or through some tenants in the premises let out to Nedungadi Bank Ltd. That part of the property has been let out with the intention of earning rental income. The fact that the property let out to Nedungadi Bank Ltd. is an integral and indivisible part of the total commercial complex owned by the assessee-firm, does not change the character of the property let out to Nedungadi Bank Ltd., that the said property was let out for earning rent. The fact that the accommodation let out to Nedungadi Bank Ltd. is an integral and indivisible part of the commercial complex constructed by the assessee-company is only a feature of the physical citus of the property let out to Nedungadi Bank Ltd. But for this physical integration and the indivisibility, the accommodation let out to Nedungadi Bank Ltd. was made by the assessee-firm for earning rental income. Moreover, during the relevant previous year the construction of the commercial shopping complex and lodging house as contemplated by the assessee-firm was not completed and therefore, the assessee could not carry on any other business activity during the previous year under appeal. The only activity that the assessee has done was to let out the completed portion of the ground floor to Nedungadi Bank Ltd. for rent. One has to view things from year to year as every assessment year is different from another. As far as this particular assessment year is concerned, the assessee has not carried on any business activity during the relevant previous year. The only activity carried on by the assessee was to let out the completed portion of the building (ground floor) to Nedungadi Bank Ltd. for the consideration of payment of monthly rent. Therefore, it is not possible to presume that the letting out of the property was incidental to the carrying on of any business made by the assessee during the relevant previous year. The one and only act done by the assessee during the relevant previous year was to let out the property to Nedungadi Bank Ltd. Therefore, without much saying, it goes to show that there is no business connection for the rent received by the assessee from Nedungadi Bank Ltd. during the relevant previous year. In the facts and circumstances of the case, it is our considered view that the Assessing Officer was justified in treating the rent received by the assessee as income from house property.
13. A similar issue was considered by the Supreme Court in East India Housing & Land Development Trust Ltd. v. CIT[1961] 42 ITR 49. The assessee in that case had been incorporated with the objects of buying and developing landed properties and promoting and setting up markets. The company purchased land and set up a market thereon. The question which arose for determination was whether the income realised from the tenants of shops and stalls was liable to be taxed as business income or income from property. The Supreme Court held that the income derived by the assessee-company from shops and stalls was income received from property. It was observed in this connection :
Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in Section 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in Section 6, the fact that it may be indirectly be covered by another head will not make the income taxable under the latter head.
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.
14. As pointed out by the Hon'ble Supreme Court, if the income from a source falls within a specific head set out in the Act, the fact that it may indirectly be covered by another head will not make the income taxable under the other head. The character of income from house property has been provided in Section 22 of the Act. It reads as follows :
The annual value of property consisting of any buildings or land appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "income from house property".
In the instant case, the assessee-firm is the owner of the property let out to Nedungadi Bank Ltd. Nedungadi Bank is carrying on the business of banking. Carrying on the business of banking is not the object of the assessee-firm. Therefore, there is no reason to believe that the portion of the building let out by the assessee to Nedungadi Bank Ltd. was occupied for the purpose of the business or profession sought to be carried on by the assessee. Therefore, on a plain reading of Section 22, it has to be seen that the rent received by the assessee-firm from Nedungadi Bank has to be treated as income from house property. The nature of the rent received by the assessee-firm would not alter because it was received by the assessee-firm formed with the object of constructing and running of shopping complexes and lodging house. Once the rent received is straightaway bracketed under the head income from house property, it cannot be considered under the head 'profits of the business' only for the reason that the portion of the property let out by the assessee-firm has an indirect connection with the properties constructed by the assessee-firm to pursue its business objectives.
15. Therefore, in the facts and circumstances and in the light of the law moulded by various judicial prouncements considered in this order, we find that the Assessing Officer has rightly treated the rental income received by the assessee as income from house property. Therefore, the ground raised by the assessee on this point fails.
16. The next issue raised in this appeal relates to the treatment to be given to the bank interest received by the assessee. It is the contention of the learned Chartered Accountant that the interest received by the assessee on its bank deposits has to be treated as business income for the reason that the deposits were made out of the business funds of the assessee-firm and the deposits were made only as an interim measure on a temporary basis and not for the purpose of earning interest as such. In the course of the arguments, the learned Chartered Accountant has also brought to our notice that the funds for those deposits itself came from the larger funds borrowed by the assessee for the purpose of construction of its shopping complex project. '
17. In our view, howsoever logical it might be, the contention of the assessee is not likely to succeed. The Supreme Court had an occasion to consider a similar issue in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT[1997] 227 ITR 172'.
Without referring to the facts of the case considered by the Supreme Court in the said decision, it is useful to extract the finding of the Court, as found in the edited head-notes of the report:
Interest income is always of a revenue nature, unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. When the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law, and not in accordance with accountancy practice. Accounting practice cannot override Section 56 or any other provisions of the Income-tax Act.
Under the Income-tax Act, 1961, the total income of a company is chargeable to tax under Section 4.
The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. It is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of the heads under which a company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. The company may keep the surplus funds in short-term deposits in order to earn interest. Such interests will be chargeable under Section 56. In other words, if the capital of a company is fruitfully utilised, instead of being kept idle, the income thus generated will be of a revenue nature and not an accretion to capital. Whether the company raised the capital by issue of shares or debentures or by borrowing, will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be a capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. Any set off or deduction of any expenditure can only be made in accordance with the provisions of the Act.
18. We are of the view that the issue raised by the assessee is squarely covered by the above decision of the Supreme Court. Therefore, it has to be held that the Assessing Officer has rightly treated the bank interest as income from other sources.
19 to 21. [These paras are not reproduced here as they involve minor issues.]