Income Tax Appellate Tribunal - Hyderabad
Lakshmi Venkateswara Kalyana Mandapam vs Income-Tax Officer on 25 February, 1994
Equivalent citations: [1994]50ITD546(HYD)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. These are appeals preferred by the assessee against the common order of the Deputy Commissioner of Income-tax (Appeals), Visakhapatnarn dated 19-3-1991 relating to assessment years 1985-86 to 1988-89.
2. The question at issue in these appeals is whether the income earned by the assessee is liable to be taxed at maximum marginal rate by applying provisions of Section 161 (1A) of the Income-tax Act which came into effect from 1-4-1985. Admittedly the assessee returned income for these four assessment years describing it as business income. The assessments were completed in the status of AOP and in the original assessments, tax was levied at ordinary rates. After the assessments were thus over, the Assessing Officer found out that since the income returned was business income, even according to the assessee, taxing the income at ordinary rates was a mistake and in violation of the provisions of Section 161(1A) which came into effect from 1 -4-1985 and in order to rectify the said defect, the Income-tax Officer gave notice dated 16-2-1990 under Section 154, seeking to rectify the assessment orders passed for each of these four assessment years. It is stated in these notices that as this is a private trust deriving income from business and all the beneficiaries are not relative-dependents of the author of the trust, the proviso under Section 161(1A) is not applicable and tax should have been levied at maximum marginal rate. However, instead the tax was levied only at ordinary rates which is a mistake. After receipt of the notices, the assessee ultimately failed to file any objections though it had requested adjournments to file its objections. The failure to file the objections was considered to be 'no objection' by the Income-tax Officer for the proposed rectification and, therefore, he passed rectificatory orders all dated 30-3-1990 separately for each of these four assessment years. The tax levied at maximum marginal rate, the tax at ordinary rate and the balance amount for which demand notices are served for each of these years are shown in the table given below:
____________________________________________________________________________ Asst. Yr. Total income Tax at max. Tax at Balance tax marginal rate ord. rate for which d/n was sent ____________________________________________________________________________ 1985-86 Rs. 24,900 Rs. 15,407 Rs. 788 Rs. 14,204 1986-87 Rs. 25,490 Rs. 12,945 Rs. 1,897 Rs. 11,048 1987-88 Rs. 19,240 Rs. 9,620 Rs. 310 Rs. 9,310 1988-89 Rs. 21,140 Rs. 11,099 Rs. 785 Rs. 10,314 Against the separate rectificatory orders dated 30-3-1990, the assessee went in appeal before the Deputy Commissioner (Appeals), Visakhapatnam. The Deputy Commissioner (Appeals) had consolidated all the appeals since all of them involved a common point and disposed of all the appeals by his consolidated order dated 19-3-1991. The contentions raised were all common and they are the following:
(1) The assessee was not given adequate opportunity to file its objections for the rectificatory notices.
(2) The question whether the income of the assessee was to be taxed at maximum marginal rate is a debatable issue and outside the scope of Section 154.
(3) The Assessing Officer could have followed the correct procedure by initiating proceedings under Section 147. It is contended that the assessee was hitherto assessed at rates applicable to individuals and subsequent change in the said method is a mere change of opinion and application of Section 161 (1A) on the ground that beneficiaries are not relative dependents of the author of the Trust was wrong.
The Deputy Commissioner (Appeals) repelled each one of the above contentions and in his impugned orders held that Section 161(1A) was introduced with effect from 1 -4-1985. The assessee's case was never tried to be brought under the exception provided under Section 161 (1 A). He held that since the assessee was an AOP and was earning business income, it should be taxed at the maximum marginal rate and the mistake of not taxing the assessee at maximum marginal rate is a mistake apparent from records and, therefore, the Assessing Officer was correct in rectifying any such mistakes by applying the provisions of Section 154. The mistake found out was clear and capable of rectification under Section 154 and for that reason initiation of proceedings under Section 147 is besides the point. There is no possibility of two opinions being present about the applicability of Section 161(1A) to the assessee. The contention does not bear any merit and, therefore, he dismissed the appeals for all these four years.
3. Before the Deputy Commissioner (Appeals), apart from the regular ground, some additional grounds also were filed. The third of such common additional ground filed was the following:
The Income-tax Officer ought to have held that Section 161 (1A) applies to income from business alone and in the instant case as the income is from property, Section 161(1A) had no application.
4. I have heard Shri D.V. Anjaneyulu, learned C.A. for the assessee and Shri C.V. Surya Prakash Rao, the learned Departmental Representative. The learned authorised represen ative for the assessee contended that no doubt, the assessee returned it incomes only under the head 'business income under a mistaken notion'. In fact the income returned would properly come under the head 'property income'. Shri D.V. Anjaneyulu contended that the income-tax return filed for each of these four assessment years contained an admission under a mistaken notion of law. Hence it is an erroneous admission which does not bind the assessee and in support of his proposition that an erroneous admission is not an admission, the assessee relied upon the following decision namely, the Allahabad High Court's decision in Abdul Qayume v. CIT [1990] 184ITR 404 at 411. It is further contended that in view of the administrative instructions in F. No. 81/27/65-IT(B), dated 18-5-1965, a copy of which is now furnished to this Tribunal in a paper compilation, ordains that the officers of the department should not take advantage of the assessee's ignorance as to his rights. It is one of their duties to assist a taxpayer in every reasonable way particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding the taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. At some other place in the instructions it is said that whatever the legitimate tax, it must be assessed and must be collected. The purpose of the circular is merely to emphasise that the department should not take advantage of the assessee's ignorance to collect more tax out of him than is legitimately due from him. In view of the above instructions, the Department should not take advantage of the ignorance of law exhibited by the assessee in this case and is not justified to collect tax at maximum marginal rate under Section 161(1A) and in fact the whole income earned by the assessee is in its true nature 'property income'. The assessee relied upon the following decisions:
(1) CIT v. Khalid Mehdi [1987] 165 ITR 685 (AP), (2) CITv. Phabiomal & Sons [1986] 158 ITR 773 (AP), (3) ITO v. K. Rami Reddy & Sons [1988] 24 ITD 228 (Hyd.), and (4) CIT v. New India Industries Ltd. [1993] 201 ITR 208 (Guj.).
If the assessee is able to substantiate its plea that the correct income head under which the income earned by the assessee should be assessed is 'property income' then Section 161 (1 A) does not apply since it applies only to business income and not property income and as such there is no scope for rectification of the assessment at all and on that ground the rectificatory orders are to be held as illegal arid all the appeals should be allowed.
5. Shri C.V. Surya Prakash Rao, the learned Departmental Representative, on the other hand, contended that the income earned by the assessee cannot be 'property income' because the marriage hall was not let out for any long-term specific purpose. Marriage halls cannot be treated as house property. Marriage halls can be treated only as commercial assets. Rest rooms also are part of the same building and the charges collected from the occupiers of those rooms were only business income and not property income and as such the following decisions cited on behalf of the assessee, viz., Khalid Mehdi's case (supra), Phabiomal & Sons' case (supra), K. Rami Reddy & Sons' case (supra). New India Industries Ltd. 's case (supra) and CITv. Shankaranarayana Hotels (P.) Ltd. [1993] 201 ITR 138 (Kar.) do not apply to the facts of the case. Further, the assessee itself admitted that the nature of the income it derived is only 'business income' in its income-tax returns voluntarily for each of the four assessment years. Therefore, the revenue can validly rely upon the admission made by the assessee and since the assessee which is an AOP being a private trust and since it earned business income, the income earned must be assessed at maximum marginal rate and the Income-tax Officer is perfectly justified in rectifying the original assessments since ordinary rates only were collected instead of maximum marginal rate and thus while framing the original assessments, the provisions of Section 161 (1 A) are ignored or lost sight of and the mistake committed was apparent from records.
6. Thus I have heard the argument on both sides. The learned Counsel for the assessee had filed a paper book containing 14 pages. At pages 1 to 8 of the paper book, the assessee provided English translation of the will under which the assessee trust was constituted by the testator which is dated 2-6-1972. At page 9 they provided the assessment order under Section 143(3) for assessment year 1983-84. At page 10, copy of the objection filed objecting to the application of maximum marginal rate for assessment year 1983-84 was filed. At page 11, copy of the assessment order under Section 143(3) for assessment year 1984-85 was provided. At pages 12 and 13, copy of the assessment order under Section 143(3) for assessment year 1985-86 was provided and at page 14, CBDTs circular No. 387, dated 6-7-1984 was provided.
7. After hearing the advocates on both sides and after going through the records of the case as well as the documents relied upon and also considering the legal and other factual arguments, I am of the opinion that the assessee should succeed in these appeals for the following reasons. Whether an income falls under one head or another has to be decided according to common norms or in a practical manner for the Income-tax Act does not provide any guideline in the matter. The question under which of the heads enumerated in Section 14 of the IT Act a particular income falls has to be decided having regard to the facts and circumstances of the case. In Addl. CIT v. Hindustan Machine Tools Ltd. [1980] 121 ITR 798 (Kar.) the assessee was a manufacturer of heavy machinery. It had constructed industrial sheds in industrial estate with the object of having ancillary units which would manufacture components required by it. The dominant object was to have a ready source of supply of components to keep up its own production. The question was what is the nature of income derived from letting out the sheds. While answering the question that the nature of the income is not property income but business income, the Karnataka High Court held that the question under which of the heads, enumerated in Section 14 of the IT Act, 1961, the particular income falls has to be decided; having regard to the facts and circumstances of the case. The Karnataka High Court also held the following:
Section 22 of the IT Act, 1961, indicates that merely because a person is the owner of a property, it does not follow that the income therefrom should be assessed under the head 'income from house property'. It excepts such portions of the property as may be occupied for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax. The guidance to be sought is to find out the user of the property and the character in which that property is used.
Therefore, it is the user of the property and the character in which that property is used would decide whether the income derived from that property is property income or business income. In this connection the registered will dated 2-6-1972 under which the assessee-trust came into being and the several directions and conditions given by the testator which should govern the administration of the Trust would go to prove whether the collections made from letting out of the marriage hall to marriage parties and whether the 12 rest rooms constructed on the first floor of the building were in fact used as regular lodging house and whether the income derived there from is property income or business income. The testator is one Shri Karaka Appalaswamy, son of Sanyasi Garu. He was aged 85 years at the time of executing the impugned will dated 2-6-1972 which cancels the earlier will dated 17-9-1969. He got the will dated 2-6-1972 also registered on 8-6-1972. He appointed four trustees under the terms of the will and they are as follows :
(1) His grand daughter's husband, Shri Chintala Pydiraju, (2) His adopted son, Srirama Veera Venkata Satyanarayana, (3) His grand daughter's son-in-law Shri Bandaru Sreeramamurthy, s/o. Appalaswamy, and (4) His factory manager's son, Shri Vaddiparthi Lakshminarayana, s/o. Suryanarayana.
The testator, inter alia, was having a building bearing Door No. 3/241A on the Main Road in Innispet, Rajahmundry town. He was having another house at Kothapeta and was also having a business in manufacturing steel trunks by name Sri Krishna Trunk Manufacturing Co. There used to be one old house at Door No. 3/241A and the old house was demolished and a new complex was built. It was intended to be a marriage hall (Kalyana Mandapam). Kitchen rooms, bath rooms, septic-tank-latrines and for purpose of accommodating guests for performance of ceremonies during marriage occasions 8 living rooms were all constructed in the ground floor of that complex. Further on the first floor 12 rooms were constructed with bath rooms, septic-tank-latrines attached. Fans were fixed in each of the rooms and folding cots were provided in the rooms. Those rooms were all intended as living accommodation to the passengers coming and going from Rajahmundry. This complex was captioned as 'Sri Lakshmi Venkateswara Kalyana Mandapam' (Marriage Hall). When happy religious functions take place, the testator allowed to collect electricity consumption charges and the charges necessary to defray expenses to provide other amenities. Even the first floor rooms also were desired to be let out on same considerations of collecting rusum. Prior to his death the testator himself has been collecting token rent as stated above, both for Kalyana Mandapam as well as for rest rooms in the first floor. The complex itself was constructed in memory of his deceased wife Smt. Karaka Appalamma and the testator determined to continue to use the said building as at present lie has been doing. It is clearly stated that the four trustees appointed to take possession of the building and use the building in furtherance of the principles which he had entertained regarding its user. With the amounts collected, the trustees have to lay some concrete slab on the rooms constructed in the first floor for construction of a roof garden and to convert the kitchen sheds downstairs as RCC roofed one as well as dining hall and they have to provide and spend amounts over such permanent constructions. The income derived should be spent for these permanent constructions and after defraying all the expenses the remaining should go to constitute reserve and the said reserve fund should be spent firstly for providing constructions and secondly for the maintenance of the building and subsequently, the first three trustees should enjoy the remaining amount in three equal shares permanently son after the father. The trustees have no right to alienate the property. The trustees are entitled to collect such of the rusum which they consider proper and let out the marriage hall to those persons who require it. So also they can let out the rooms on the first floor after collecting whatever they may feel reasonable from the persons who are entitled to live in those rooms. From the income derived not less than 1/5th should be reserved for the development works that are to be carried out. The trustees also are entitled to allow occupation of the 12 rooms on the first floor even without collecting any rusum if they so desire. From the reserve amount every year on the festival day of Sriram Navami, the blind and lame beggars are to be fed in memory of his late wife. The trustees are under an obligation to maintain proper accounts.
8. Having regard to all the stipulations and conditions set out in the Will executed by the testator, the question is whether the amount collected either from marriage party for letting out the marriage hall and the adjoining living rooms, kitchens, bath rooms and the amounts collected from floating populations coming and going from/to Rajahmundry for being allowed to occupy the 12 rooms on the first floor would amount to carrying on the business and whether the income earned can be properly called as business income. In Raja Dnanraj Girji v. CIT [1971] 79 ITR 563 (AP), His Lordship, Justice Chinnappa Reddy, as he then was, laid the test as follows at page 564 of the head note of the decision :
While there are several tests which may be applied and several factors which may be considered to ascertain whether a transaction is impressed with the character of trade, there is not a single test which is conclusive and not a single factor which is decisive. The ultimate test is, taking all factors and circumstances into consideration and giving due weight to all of them what is the dominant impression left in the mind.
9. Having regard to the stipulations and conditions set out in the Will executed by the testator, I have got the impression that the profit motive is not there at all, while maintaining the marriage hall and also while letting out the rooms of first floor to the passengers. The impression which I gather from the various terms of the Will was that the testator intended that the hall complex should be used for celebrating marriage and other happy occasions and to provide accommodation to the general public to perform such occasions. Therefore, I have the impression that the intention of the testator is that this complex should more be put to use for the general public utility rather than for running the complex as a business concern. There are certain provisions in the Will which give a free hand to the trustees to let out the marriage hall and the adjoining rooms, etc., on whatever terms they like and to the persons they like, if they so feel. After having gone through the terms of the Will, I am unable to subscribe myself to the theory that the income derived by the assessee is income from business. In any view of the matter, I am unable to agree with the contention that the whole building should be considered as a commercial asset. In Khalid Mehdi's case (supra) the question which fell for consideration was whether the income derived from lease of cinema hall was to be considered as income from house property or income from other sources. Ultimately it was held to be income from other sources. This decision, in my opinion, does not help the assessee in any way. In Phabiomal & Sons' case (supra) the Andhra Pradesh High Court held that letting out a building realising rent therefrom did not amount to carrying on of business but it was incidental to ownership. They held that there was no business in the act of letting out of a building of which one is the owner. In this case, the trustees did not join voluntarily to carry on any business nor did they contribute their capital, labour, etc., and tried to derive profit from joint venture if any carried on by them. It is only the obligation of the trustees under the terms of the Will which they have executed. In K. Rami Reddy & Sons' case (supra), the assessee-firm constructed godowns according to specifications laid down by the Food Corporation of India and leased it out to that Corporation on rent. It was not rendering any service other than those expected from a property owner. The question was whether the said income was received by the assessee should be considered as income from house property and not as business income. In that case, we held that where the assessee merely lets out his property and renders no further services other than those services associated with the letting out of the house property, the income has to be assessed under house property and the activity should not be considered as an activity for the purpose of business. We also held that the services mentioned in the lease agreement includes providing electricity, water supply, inner approach roads and fencing and we took the view that normally all of them go with letting out of property and there was nothing special about it. Now in this case, even assuming that letting out the marriage hall as well as rest rooms on the first floor of the house were for commercial considerations, the question will be what is the nature of income that is derived. Is the income derived by exercising ownership rights in the property or any other extra services are being rendered. To my mind it is nothing but income derived only as an owner and not for any services rendered extra. Electricity and water supply provided in the complex goes with the ownership of the property and letting out the marriage hall for one or two days to each of the marriage parties who may approach the trustees, cannot result in business income. In my considered opinion, it amounts to only property income.
10. In New India Industries Ltd.'s case (supra) certain principles or guidelines were given to decide whether income from letting out an asset is business income or income from property. At pages 209 and 210 of the head note, the following is what is held :
In deciding whether income from letting out an asset is business income or income from property, the following principles should be borne in mind:
(i) no general principle could be laid down which is applicable to all cases;
(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 go downs having high business potentials stand on a different footing from assets like land or building; (iv) if an assessee derived income from a commy cial 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; (u) 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. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else; (vii) if the commercial asset is not capable of being used as such or as a commercial asset, 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. Qua such asset the assessee is not carrying on any business. As the owner of the asset, he may exploit such asset but, in such circumstances, income which he receives is no longer business income but income from property owned by him; (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 either himself or even through others, the income derived by him by renting out the same would more appropriately fall under the head 'income from house property' as, like any other owner of property, he gets income from that property as owner. In such cases, it is not the factum of his business or commercial activity which brings income to him but it is his investment in property or his ownership of property which brings income to him. In such cases, the leasing of property itself is the activity. It is leased with a view to produce income, a transaction quite apart from the ordinary business activities of the assessee; (lx) in deciding whether an assessee dealt with its property as owner or as a businessman or prudent man of commerce, one must see not the form which it gave to the transaction but to the substance of the matter. It will be essential to find out the user of the property and the character in which that property is used. Ownership of property and leasing it out may be done as part of business or it may be done as a landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. If the dominant object of leasing out is incidental to and for the purposes of the assessee's business, the income would be business income. What was to be discovered is whether the property is subservient to the main business of the assessee.
Among several principles which are to be borne in mind, principle (viii) enumerated above is very very important, for our purposes. The asset in question is a building capable of being used for any other purpose. In such a case when it ceases to be used as a commercial asset either himself or through others, the income derived by letting out the same would more appropriately fall under the head 'income from house property'. Like any other owner of the property he gets income from property as owner.
11. Having regard to the above, I find it very easy to conclude that the real nature of the income derived from the property called 'Sri Lakshmi Venkateswara Kalyana Mandapam' is only property income and not business income. When it is property income, the question of application of Section 161(1 A) does not apply. Unless the nature of income derived is business income, Section 161 (1 A) does not come into play at all. I hold from the facts and circumstances of this case that the Income-tax Officer had wrongly included the income derived by the assessee as income from business instead of correctly appreciating its nature and correctly assessing the same as income from property. An income wrongly included by the Assessing Officer under one head can be taken out from that head and included under the correct head in the appeal proceedings and for this proposition, I rely upon the decision of the Allahabad High Court in Smt. Sneh Lata v. CIT [1966] 61 ITR 139 at 143 and the decision of the Bombay High Court in Shapoorji Pallonji Mistry v. CIT [1958] 34 ITR 342 at 347. In fact I have already seen ground No. 3 raised before the Deputy Commissioner (Appeals). In that ground the assessee disputed the nature of income derived by the assessee and he raised the plea that the income derived was property income but not business income. However, the Deputy Commissioner (Appeals) failed to consider that important aspect of the matter in his impugned orders and decided the issue against the assessee. I hold for all the above reasons that I am entitled to consider as an appellate authority what should be the real nature of income and whether it comes under the head 'income from property or income from business'. In this case, I hold that the income should be considered as income from property. For all the above reasons, I hold that the rectificatory orders dated 30-3-1990 passed for each of these four assessment years are illegal. Hence they are cancelled and the original assessments stand.
12. In the result, the appeals are allowed.