Income Tax Appellate Tribunal - Delhi
Atma Ram Properties (P) Ltd. vs Joint Commissioner Of Income Tax on 7 April, 2006
Equivalent citations: (2006)102TTJ(DELHI)345
ORDER
P.M. Jagtap, A.M.
1. This Special Bench has been constituted under Section 255(3) of the IT Act, 1961 to decide the following question arising out of the present appeals involving asst. yrs, 1993-94 to 1998-99 :
On the facts and circumstances of the case, the CIT(A) has erred in confirming the AO's action in holding that the assessee-company was assessable in relation to rental income from Scindia House under the head "Income from property" and not under the head "Business" as claimed by the assesses and further erred in disallowing the expenses claimed by the assessee for carrying on the said business. The findings of the AO and confirmed by the CIT(A) are contrary to the Tribunal order in ITA No. 7214 for the asst. yr. 1980-81, in ITA No. 5151 for the asst. yr. 1982-83 and the Tribunal order dt. 29th April, 1993 for the asst. yr. 1983-84 to 1987-88 and subsequent years ?
2. The facts which are relevant and material to consider and decide the above question are as follows. The assessee in the -present case is a company incorporated on 19th Dec., 1978 with the following main objects as specified in its memorandum of association :
1. To purchase, sell, deal and traffic in lands, estates, houses or other landed properties of any tenure, whether freehold, leasehold or otherwise, and any interest therein and generally to deal in, traffic develop and turn to account land by laying out and preparing the same for building purposes, to act as builders and/or contractors and in that connection construct, alter, pull down and improve buildings, flats, garages, offices, hotels and theatres.
2. To carry on the business of land, real estate and property agents, brokers, representatives, and dealers and to render services of hiring, renting, leasing, sale or purchase of buildings, lands and real estate on a commission, fee or brokerage basis.
3. In pursuance of the aforesaid objects, the assessee-company executed an agreement to sell on 31st Jan., 1979 in respect of a double-storeyed building complex known as "Scindia House" situated at Connaught Place, New Delhi with the owners thereof. As per the terms of the said agreement, the owners agreed to transfer the said property in favour of the assessee-company for a consideration of Rs. 75 lakhs and possession thereof was also delivered to the assessee-company by the owners on execution of the agreement to sell. At that time, the entire property was tenanted and the assessee-company became entitled to receive the rent from the tenants as per the terms of the agreement. During the previous year ending on 30th Sept,, 1979 relevant to asst. yr. 1980-81, the assessee-company received the total rental income of Rs. 2,30,397 and the same was shown by it in the return of income under the head "Income from business". In the assessment completed for asst, yr. 1980-81, the AO, however, held that the said rental income was chargeable to tax under the head "Income from other sources". This action of the AO was upheld by the learned CIT(A) vide his appellate order dt. 26th July, 1989, Aggrieved by the same, the assessee preferred an appeal before the Tribunal and it was argued on behalf of the assessee before the Tribunal that its intention for acquiring the property was not to enjoy a meager rental income but to earn profit by exploiting a commercial asset in pursuance of its main business activity, It was pointed out that the said property was acquired by the assessee-company as stock-in-trade with a purpose to construct flats on the third storey of the said building for which advances had also been received from the prospective buyers, The contentions raised on behalf of the Revenue before the Tribunal, on the other hand, were that the assessee was not allowed to raise construction of flats on the third storey of the property and, therefore, it could not be regarded as its stock-in-trade. It was also contended on behalf of the Revenue that there was no commencement of business of the assessee-company and the question of assessing rental income as business income, therefore, did not arise. It was further contended on behalf of the Revenue before the Tribunal that since the assessee had not become the owner of the said building in the previous year relevant to asst, yr. 1980-81, the rental income could not be assessed under the head "Income from house property" and the same, therefore, was chargeable to tax only under the residuary head "Income from other sources" as held by the AO as well as by the learned CIT(A). Since it was not even the case of the assessee that the rental income in question was assessable under the head "Income from house property", the Tribunal proceeded to consider and decide the limited issue as to whether the rental income was chargeable to tax under the head "Income from business" as claimed by the assessee or under the head "Income from other sources" as held by the Revenue authorities. In this context, the Tribunal agreed with the submissions made on behalf of the assessee-company that a huge investment of Rs. 75 lakhs was made by it not merely to earn a meager rental income but to exploit the said property acquired as stock-in-trade commercially in the course of its business. Accordingly, the Tribunal held that the letting out of a portion of the said property was only incidental to the main business of the assessee of acquiring, developing and selling the properties and thus, the rental income earned by it during the previous year relevant to asst. yr. 1980-81 was assessable to tax under Section 28 as "Income from business". The Tribunal also held that if the said income was chargeable to tax under a specific head, i.e., "Income from business", the same could not be brought to tax under the head "Income from other sources" which is a residuary head.
4. Subsequently, a sale deed in respect of the aforesaid property was executed and registered on 31st May, 1980 and the assessee thereby became the owner of the said property. Taking note of this, the AO brought to tax the rental income of Rs. 6,92,795 received by the assessee-company under the head "Income from house property" in the assessment completed for asst. yr, 1982-83 rejecting the claim of the assessee that the said income was its "business income". This treatment given by the AO was confirmed by the learned CIT(A) and the matter again was carried before the Tribunal. In its appellate order dt. 27th July, 1992 passed in ITA No. 5151/Del/1989 for asst. yr. 1982-83, the Tribunal took note of the fact that the assessee-company has now become owner of the property on 31st May, 1980 and that the dispute now was about the taxability of rental income under the head "Income from house property" or "Income from business". Still, the Tribunal proceeded to hold that the rental income received by the assessee-company in asst. yr. 1982-83 was changeable to tax as "business income" under Section 28 relying on its appellate order dt. 20th April, 1992 (supra) passed in assessee's own case for asst. yr. 1980-81. The Tribunal observed that the facts involved in asst. yr. 1982-83 are similar to that of asst. yr. 1980-81. These orders of the Tribunal for asst. yrs. 1980-81 and 1981-82 were subsequently followed by it in the subsequent years, i.e., asst. yr. 1983-84, 1984-85, 1985-86, 1986-87, 1987-88, 1989-90, 1990-91 and 1991-92 to hold consistently that the rental income received by the assessee in respect of the aforesaid property was chargeable to tax in the hands of the assessee-company under the head "Income from business".
5. The similar controversy again arose in assessee's case for asst. yr. 1992-93 and when the matter travelled to the Tribunal, it was noted by the Tribunal that there has been a material change in the facts involved in the assessee's case for asst. yr. 1981-82 onwards vis-a-vis 1980-81 inasmuch as the assessee was not the owner of the property in the previous year relevant to asst. yr. 1980-81 whereas as a result of execution and registration of sale deed on 31st May, 1980, he had become the owner thereof in the subsequent years. According to the Tribunal, this material change in the factual position, however, escaped the attention of the Tribunal which resulted in inadvertently accepting the claim of the assessee that the rental income was chargeable to tax under the head "Income from business" in the subsequent year holding that this issue was covered by the Tribunal's order for asst. yr. 1980-81. The Tribunal, therefore, proceeded to examine the issue afresh in asst. yr. 1992-93 in the light of this change in the factual position and held on such examination vide its order dt. 31st July, 2002 in ITA No. 4416/Del/1996 [reported as Atma Ram Properties (P) Ltd. v. Dy. CIT (2004) 86 TTJ (Del) 88--Ed.] that the property in question was not the stock-in-trade of the assessee and even if the same was to be held as stock-in-trade, the rental income received from the said property was chargeable to tax under the head "Income from house property" and not under the head "Income from business". To arrive at this conclusion, the Tribunal relied on the decisions of Hon'ble Supreme Court in the case of CIT v. Chugandas & Co. (1965) 55 TTR 17 (SC) and in the case of S.G, Mercantile Corporation (P) Ltd. v. CIT . This view taken by the Tribunal in asst. yr. 1992-93 was contrary to the view taken by the Tribunal on a similar issue in the earlier years in assessee's own case and taking note of the same, the said issue has now been referred to this Special Bench for fresh consideration and decision under Section 255(3).
6. The learned Counsel for the assessee submitted before us that the intention of the assessee-company behind acquiring the property in question, i.e., Scindia House was never to earn the rental income from the tenants occupying the said property, but the same all along was to exploit the said property commercially in the ordinary course of its business of acquiring, developing and selling the properties. He contended that this was the main object for which the assessee-company was incorporated and having regard to this object as well as the purpose for which the said property was acquired by the assessee-company, the rental income earned by it from the tenants occupying the said property was incidental to the assessee's business as rightly held by the Tribunal consistently right from asst. yr. 1980-81 to 1991-92. Reliance was placed by the learned Counsel for the assessee on the decision of Hon'ble Supreme Court in the case of Universal Plast Ltd v. CIT (1999) 153 CTR (SC) 95 : (1999) 237 TTR 454 (SC) to contend that the question as to whether the rental income received by the assessee would fall under the head "Profits and gains of business" has to, be determined from the point of view of a businessman after considering facts and circumstances of each case. He also relied on the decision of Hon'ble Bombay (sic-Gujarat) High Court in the case of CIT v. New India Industries Ltd. (1992) 106 CTR (Guj) 374 : (1993) 201 1TR 208 (Guj) to contend that whether an income falls under one head or another has to be decided according to the common notions of a practical and reasonable man after considering facts and circumstances involved in each case.
7. The learned Counsel for the assessee also submitted that the huge investment of Rs. 75 lakhs for acquiring the said property was not made by the assessee-company just to earn the meager rental income but the same was made to construct flats on the third floor of the said property which was clearly evident from the fact that even the advances had been received by the assessee-company from the prospective purchasers of the flats proposed to be constructed as such. He submitted that after evacuation of some of the tenants, the vacant tenements were sold by the assessee-company from time to time which again goes to show that the earning of rental income was never the intention of the assessee-company behind acquiring the property in question. He invited our attention to the details of tenements/units so sold by the assessee-company given on pp. 88 to 91 of his paper book and pointed out that the selling price realized by the assessee from such sale vis-a-vis the rental amount of the relevant tenements again shows that earning of rental income could not have been the real intention of the assessee-company.
8. The learned Counsel for the assessee further submitted that the property in question was shown by the assessee-company in its books of account as stock-in-trade and this treatment given by the assessee was accepted by the Department by assessing the profit on sale of tenements declared by the assessee-company under the head "Income from business". He pointed out from the Tribunal orders passed in the wealth-tax proceedings of the assessee for different years that the said property was held to be stock-in-trade of the assessee by the Tribunal. He contended that the property in question thus, was the commercial asset of the assessee-company of trading nature and the income earned in the form, of rent was nothing but the exploitation of the said commercial asset by the assessee. Reliance was placed by him on the decision of Hon'ble Calcutta High Court in the case of CIT v. Shambhu Investment (P) Ltd. (2001) 168 CTR (Cal) 237 : (2001) 249 TTR 47 (Cal) in support of his contention that merely because income is attached to any immovable property cannot be the sole factor for assessment of such income as income from property. What has to be seen is what was the primary object of the assessee while -exploiting the property and in case it is found that the main intention is to exploit the immovable property by way of complex commercial activities, it must be held that the income earned from such exploitation is a "business income".
9. The learned Counsel for the assessee invited our attention to the copy of agreement to sell executed by the assessee in respect of the said property placed at page No. 82 of his paper book and pointed out that as per Clause 8 of the said agreement, the assessee-company was entitled to get the sale deed in respect of the said property executed by the owners in the name of vendee. He contended that this specific clause contained in the agreement to sell further supports that the assessee's real intention was to develop and construct the said property for further sale and not to hold the same as owner with an intention to earn the rental income. He contended that all these aspects were duly considered and appreciated by the Tribunal in its appellate orders passed in the case of the assessee upto asst. yr. 1991-92 while holding that the rental income received in respect of the property was assessable as "business income" in the hands of the assessee.
10. In support of his contention, reliance was placed toy the learned Counsel for the assessee on the decision of Hon'ble Supreme Court in the case of Kaianpuia Development Co. Ltd. v. CIT (1962) 44 TTR 362 (SC) wherein it was held that a company formed with the specific object of acquiring properties not with a view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of business, cannot be said to treat them as land owner but as trader. It was further held that where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business. It was also held that the deciding factor in this regard is not the ownership of land or leases, but the nature of activity of the assessee and the nature of the operations in relation to them. The objects of the company must also be kept in view to interpret the activity.
11. The learned Counsel for the assessee also relied on the decision of Hon'ble Supreme Court in the case of S.G. Mercantile Corporation (P) Ltd. v. CIT (supra) wherein it was held that where an assessee who, as part of his essential trading activity, takes lease of property and sublets part thereof with a view to make profits, the profits would have to be treated as "business income." Reliance was also placed by him on the decision of Hon'ble, Supreme Court in the case of CIT v. Chugandas & Co. (supra) to contend that the nature of property as well as income has to be seen to ascertain the head under which such income is assessable to tax. He also cited the decision of Hon'ble Supreme Court in the case of Brooke Bond & Co. Ltd. v. CIT wherein it was observed that it is not unusual that commercial considerations may properly describe the source of particular income differently. He also cited the decision of Hon'ble Punjab & Haryana High Court in the case of CIT v. Bedi Techno Projects (P) Ltd. and that of Hon'ble Supreme Court in the case of CIT v. Indian Bank Ltd. in support of assessee's case.
12. Without prejudice to his aforesaid submissions, the learned Counsel for the assessee also contended that there was no dispute about the fact that the property in question was the business asset of the assessee being stock-in-trade and therefore, the expenditure incurred in connection with the maintenance of the said property representing stock-in-trade of the assessee's business should have been allowed in full and the resultant loss under the head "Income from business", if any, should be adjusted against the "Income from house property". In support of this contention, he relied on the decision of Hon'ble Punjab & Haryana High Court in the case of Batra Films (P) Ltd. v. CIT and that of Hon'ble Delhi High Court in the case of CIT v. Excellent Commercial Enterprises & Investments Ltd. (2005) 197 CTR (Del) 187.
13. The learned Departmental Representative, on the other hand, submitted that in the previous year relevant to asst. yr. 1980-81, the assessee-company was not the owner of the property in question and, therefore, the question of assessing the rental income from the said property in the hands of the assessee-company under the head "Income from house property" had not arisen for the consideration of the Tribunal. He submitted that the assessee-company became owner of the said property on 31st May, 1980 on execution and registration of sale deed, but this material and relevant change in the factual position, however, was lost sight, of by the Tribunal while deciding this issue in favour of the assessee in the subsequent years upto asst. yr. 1991-92 following the appellate order for asst. yr. 1980-81. He contended that the Tribunal in its order for asst. yr. 1992-93, however, took note of this change in the factual position and considering that the assessee-company had become the owner of the property, it was held that the rental income received by it in respect of the said property was chargeable under the head "Income from house property" relying on the decisions of Hon'ble Supreme Court in the case of CIT v. Chugandas & Co. (supra) and S.G. Mercantile Corporation (P) Ltd. (supra). He contended as per the proposition propounded in the said decisions of Hon'ble Supreme Court as well as in the various other judicial pronouncements available on this issue, if the assessee is the owner of a house property, then the rental income received from the said property is chargeable to tax under the specific head "Income from house property" irrespective of the nature of asset as well as the nature of assessee's business. In support of this contention, he relied on the following judicial pronouncements :
(i) East India Housing & Land Development Trust Ltd. v. CIT ;
(ii) Shambhu Investment (P) Ltd. v. CIT ;
(iii) Madras Silk & Rayon Mills (P) Ltd v. ITO;
(iv) CIT v. Bhoopalan Commercial Complex & Industries (P) Ltd. ;
(v) Scindia Potteries (P) Ltd. v. CIT ;
(vi) CIT v. New India Maritime Agencies (P) Ltd. ;
(vii) CIT v. Chennai Properties & Investments Ltd. .
14. The learned Departmental Representative submitted that in the case of Chennai Properties & Investments Ltd. (supra), Hon'ble Madras High Court has analyzed the various case laws cited before it in detail on the issue in dispute and on such analysis, it has been held that even if the main object of the assessee-company was to purchase or otherwise acquire and hold the properties and to let out such properties, the income earned from rent in respect of such property owned by it was chargeable to tax under the specific head "Income from home property" and the same could not be assessed as "business income" on the ground that the business of the assessee was to exploit property and earn income or because the income was obtained by a trading concern in the course of its business. He contended neither the nature of property being stock-in-trade nor the nature of rental income earned from the property being incidental to the assessee's main business is relevant to decide the head under which the rental income is assessable to tax and once it is established that the assessee is the owner of the said property and the rental income is earned by him in his capacity as owner, the same is to be assessed to tax under the head "Income from house property". He contended that even the intention of the assessee of not acquiring the said property for earning the meager rent will not change this settled position. He submitted that no permission from the local authority, i.e., NDMC could be obtained by the assesses-company to alter or develop/construct further the said property and in the absence of such permission, it cannot be said that the assessee-company has ever commenced its business as rightly held by the authorities below. He also contended that the owning of the house property and letting it out on rent cannot be considered as a business activity.
15. In the rejoinder, the learned Counsel for the assessee submitted that all the authorities relied upon by the learned Departmental Representative only lay down the principles on the basis of which the issue in dispute can be decided. He contended that the said principles, however, are required to be applied to the facts of the present case to ascertain and decide as to whether the rental income earned by the assessee-company was chargeable to tax under the head "Income from business" or "Income from house property". He also submitted that even though the assessee-company has not been able to obtain the necessary permission from NDMC for further development/construction of the property in question, it was contemplating such permission which is very much evident from the fact that the advances were received by it from the prospective purchasers.
16. We have considered the rival submissions in the light of material placed on record before us as well as the judicial pronouncements cited at the Bar. It is no doubt true that no precise test can be laid down to ascertain whether rental income received by an assessee from leasing or letting out of assets would fall under the head "Income from house property" or "Profit and gains of business or profession" as observed by Hon'ble Supreme Court in the case of Universal Plast Ltd. (supra) cited by the learned Counsel for the assessee. Further, as held by Hon'ble Bombay (sic-Gujarat) High Court in the case of New India Industries Ltd. (supra), no general principle could be laid down which is applicable to all cases and each case has to be decided on its own facts and circumstances. However, the general principles for deciding this issue have been laid down in the various judicial pronouncements by the higher Courts including Hon'ble Supreme Court and as agreed by the learned representatives of both the sides before us, the issue under consideration can be decided by applying the said principles to the facts of the case on hand. The earliest of these decisions is in the case of East India Housing & Land Development Trust Ltd. v. CIT (supra) wherein it was held by the Hon'ble Supreme Court that the income derived by the company from shops and stalls is income received from property which falls under the specific head "Income from house property" and the character of that income is not altered because it is received by the company formed with the object of developing and setting up markets. This decision of Hon'ble Supreme Court in the case of East India Housing & Land Development Trust (supra) was referred to by the Constitution Bench of Hon'ble Supreme Court in the case of Sultan Brothers v. CTT (supra) with approval. In the case of Karnani Properties Ltd. v. CIT , the assessee-company, in addition to the letting out of a building owned by it was providing other amenities/services to the tenants and those tenants in addition to paying rents, were making separate payments for the other services/amenities provided by the assessee-company. The question before the Hon'ble apex Court was whether "rendering of such services to the tenants by the assesses-company which owned building would constitute its business activity and it was held by their Lordships that the assessee had two sources of income, one by way of rental income and other from service charges. The service charges collected by the assessee were held by the Hon'ble apex Court to be "Income from business" whereas the rent derived from letting out the building owned by the assessee-company was held to be assessable as "Income from property".
17. In the case of S..G. Mercantile Corporation (P) Ltd. v. CIT (supra) as well as in the case of Karanpura Development Co. Ltd v. CIT (supra) relied upon by the learned Counsel for the assessee, the assessees were not the owner of the property but they were, holding the leasehold rights of the subject property and considering that the liability to tax under the head "Income from house property" under the relevant provisions is that of the owner of the buildings or lands, appurtenant thereto, Hon'ble Supreme Court proceeded to hold the income derived by the assessee from the property not owned by them as assessable under the head "Income from business" and not "Income from house property". While doing so, the law laid down in the case of East India Housing & Land Development Trust Ltd. v. CIT (supra) was held to be inapplicable by the Hon'ble Supreme Court on the ground that the assessee in the said case was owner of the property whereas in the case of S.G. Mercantile Corporation (P) Ltd. (supra) before it, the assessee was a tenant and not the owner. It was, however, observed by the Hon'ble Supreme Court in their judgment rendered in the case of S.G. Mercantile Corporation (supra) that in case the assessee is the owner of the buildings or lands appurtenant thereto, the income derived from rent in respect of the property owned by him would be liable to tax under the head "Income from house property" even if the object of the assessee in purchasing the landed property was to promote and develop market thereon. It was further observed by the Hon'ble Supreme Court that it would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting up markets thereon.
18. It is thus clear that the facts involved in the case of S.G. Mercantile Corporation (P) Ltd. (supra) and Karanpura Development Co. Ltd. (supra) cited by the learned Counsel for the assessee were materially different and the decisions came to be rendered in the light of such different facts. Similar is the position as regards the other cases cited by the learned Counsel for the assessee. On the other hand, a careful reading of all these decisions relied upon by the learned Counsel for the assessee reveals that the ratio laid down therein is in consonance with the proposition propounded by the Hon'ble Supreme Court in its earlier decisions in the cases of East India House & Land Development Trust Ltd. (supra) and Kamani Properties Ltd. (supra). The learned Counsel for the assessee, however, has attempted to pick out and rely on some sentences from the said judgments in support of the assessee's case. It is a first and foremost principle of reviewing the binding nature of precedents that the precedent is an authority for what it actually decides and not what may remotely or even logically follow from it. As held by Hon'ble Supreme Court in the case of the CIT v. Sun Engineering Works (P) Ltd. , it is neither desirable nor permissible to pick out a word or sentence from the judgment of the Court divorced from the context of the question under consideration and to treat it to be the law declared by the Court.
19. It is no doubt true that in the case of Sultan Brothers (supra), the Constitution Bench of Hon'ble Supreme Court has held that whether a particular letting is a business has to be decided in the circumstances of each case and that 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. At the same time, it is also true that in all the cases which have been decided by the Hon'ble Supreme Court involving commercial or residential buildings owned by the assessee, it has been held that the income realized by such owners by way of rental income from a building, whether commercial building or residential house, is assessable under the head "Income from house property". While taking note of this position in its judgment rendered in the case of Karanpura Development, Co. Ltd. (supra), Hon'ble Supreme Court held that the only exception to this proposition are cases where the letting of building is inseparable from the letting of the machinery, plant and furniture, etc. where the rental received for the building is to be assessed under the head "Income from other sources" along with the rental received for other assets such as machinery, plant, furniture, etc.
20. In the case of CIT v. National Storage (P) Ltd. which came to be affirmed by the Hon'ble Supreme Court in CIT v. National Storage (P) Ltd. , it was held that income that falls under any specific head has got to be computed under that head only in the manner specified in the relevant provisions and if the income falls under the head "Income from property", it has to be taxed under the relevant section only and cannot be taken to the other head on the ground that the business of the assessee was to exploit property and earn income or because the income was obtained by a trading concern in the course of its business. It was also held that house owning, however, profitable, cannot be a business or trade under the IT Act and where income is derived from house property by the exercise of property rights properly so-called, the income falls under the head "Income from house property". The said character is not changed and the income does not become income from trade or business if the hiring is inclusive of certain additional services which are relatively insignificant and only incidental to use and occupation of the tenements. It was also held that in cases where the income received is not from the bare letting of the tenement or from letting accompanied by incidental services or facilities, but the subject hired out is a complex one and the income obtained is not so much because of the bare letting of the tenement but because of the facilities and services rendered, the operations involved in such letting of the properties may be of the nature of business or trailing operations and the income derived may be income not from exercise of property rights properly so-called but income from operations of a trading nature under the head "Profits and gains of business or profession".
21. In the case of CIT v. Bhoopalam Commercial Complex & Industries (P) Ltd. (supra), the assessee-company had built a commercial complex on the land taken on lease and allotted the same to various parties and earned income therefrom. In these facts and circumstances of that case, Hon'ble Karnataka High Court held that the assessee who was deriving rental income in its own right by letting out the commercial complex constructed by it on leasehold land was owner thereof for the purpose of Section 22 and, therefore, the rental income was assessable to tax under the head "Income from house property" irrespective of the fact that leasing of site and construction thereon is one of the objects of the assessee-company. In the case of P.V.G. Raju, Rajah of Vizianagaram v. CIT. (1967) 66 FIR 122 (AP), Hon'ble Andhra Pradesh High Court held that letting out of the market property was only a normal feature of exploitation of the property as owner and was in no sense a business activity even though the tenants were doing business therein.
22. In the case of CIT v. New India Industries Ltd. (supra), it was held by the Hon'ble Bombay (sic-Gujarat) High Court that 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 for renting out the same would more appropriately fall under the head "Income from house property" as, like any other owner of the property, he gets income from that property as owner. In such cases, it is not 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 the present case, the assessee-company was not in a position to use the property in question owned by it for the purpose of its business of turning the same into account for the reason that the permission from the local authority, i.e., NDMC was not available and that the property was already occupied by the tenants. In these circumstances, the rental income was received by it because of the ownership of the said property and not because of its business or commercial activity which brought that rental income to it. The rental income thus was received by the assessee-company as owner and not as a businessman/trader. On the other hand, efforts were being made by the assessee-company to evacuate the tenants and get the possession thereof so as to turn the same into account in the ordinary course of its business which again goes to show that the rental income was being received by it merely because of owner of the said property and not because of any business or commercial activity undertaken by him. As submitted on behalf of the assessee-company before the authorities below and reiterated before us, acquiring and holding the subject property to earn the rental income was never the intention of the assessee-company going by the meager rental income visa-vis the huge investment made and thus, the decision to let out the said property could not be said to have been taken by the assessee-company as a businessman/trader.
23. Much emphasis has been laid by the learned Counsel for the assessee before us on the commercial exploitation of the subject property by the assessee-company which constituted its stock-in-trade. However, as held by the Hon'ble Calcutta High Court in the case of CIT v. Shambhu Investment (P) Ltd. (supra) relied upon by the learned Counsel for the assessee, what has to be seen in this context is what was the primary object of the assessee while exploiting the property. If it is found applying such test that main intention is for letting out the property or any portion thereof, the same must be considered as rental income or income from property. In case it is found that the main intention is to exploit the immovable property by way of complex commercial activities, in that event, it must be held as "business income" In our considered opinion, the facts of the present case as borne out from record clearly show that the case of the assessee falls under the former category and not in the latter since it was a case of letting out the house property owned by the assessee-company simplicitor and not by way of complex commercial activities. Here, a useful reference can be made to the decision of Hon'ble Bombay High Court in the case of National Storage (P) Ltd. (supra) to understand the concept of exploitation of immovable property by way of complex commercial activity In the said decision, the assessee-company had been promoted by the film distributors for carrying on the business of storing and preserving of films, chemicals, cinema accessories and any articles or merchandise in cinema industry in suitable wards specifically constructed for the purposes and equipped with all the necessary arrangements. The company purchased a place approved by the Chief Inspector and constructed some units on plot of land in conformity with Cinematograph Film Rules, 1948 and permitted the wards to be used by the film distributors on payment of a monthly charge. The company also rendered certain services to the ward-holders such as fire services for which, it paid an annual amount to the municipality, railway booking offices in the premises free of charge for the convenience of the ward-holders and also maintained the regular staff for running the aforesaid services. The exploitation of immovable property in the said case thus was by way of complex commercial activities and it was, therefore, held that the activity of the company earning the income was a business activity and the source of the income was not ownership of house property but was the business of the assessee. The subject hired in the said case, therefore, was a complex one and the income derived was not so much because of the bare letting of the tenement but because of the facilities and services rendered and the income derived was held to be income not from exercise of property rights properly so-called so as to fall under the head "Income from house property" but income from operations of a trading nature falling under the head "Profits and gains of business or profession".
24. The learned Counsel for the assessee has also laid heavy emphasis on the nature of subject property held by the assessee-company as stock-in-trade of its business of acquiring, developing and selling of the said property, However, this aspect also is hardly of any relevance to decide the head under which the rental income from the said property is to be assessed. Even if the said property was held by the assessee-company as stock-in-trade in its capacity as a trader going by the nature of its business activities, the rental income was not earned by it from the tenants in its capacity as a trader. On the other hand, when the vacant possession of the tenements was obtained by the assessee-company and the vacant tenements were sold to the different parties from time to time, the assessee-company acted as a trader in the said transactions and the income arising out of such transaction was rightly assessed to tax under the head "Profits and gains of business or profession". However, when it comes to the rental income, the said income was earned by the assessee-company not as a trader but as a owner of the said property and there was no business connection between the tenants and the assessee-company but it was a case of tenant-owner relationship. In the case of CIT v. Chugandas & Co. (supra) Hon'ble Supreme Court has held that if an assessee carries on business of purchasing and selling buildings, the profits and gains earned by transaction in buildings will be shown under the head "Profits and gains of business or profession", but income received from the buildings so long as they are owned by the assessee will be shown under the head "Income from house property". In the case of CIT v. New India Maritime Agencies (P) Ltd. (supra), the rental income received by the assessee from properties owned by it and let out to others was held to be assessable to tax under the head "Income from house property" and not under the head "Profits and gains of business or profession". It was also held by the Hon'ble Madras High Court that the question as to whether buildings owned by the assessee are capable of being regarded as commercial assets is not relevant for deciding as to whether, when those assets had not been used in the business of the assessee but were only let out, such rental income was to be assessed as "Income from house property".
25. While citing various case laws in support of the Revenue's case that the rental income received by the assessee company in the present case is chargeable to tax under the head "Income from house property", the learned Departmental Representative has heavily relied on the decision of Hon'ble Madras High Court in the case of CIT v. Chennai Properties & Investments Ltd. (supra). In the said decision, Hon'ble Madras High Court has discussed and analyzed various decisions of the different High Courts as well as that of Hon'ble Supreme Court available on the issue. On a careful perusal of the said decision of Hon'ble Madras High Court cited by the learned Departmental Representative and keeping in view the various judicial pronouncements discussed above, the legal position which emerges can be summarized as follows. If in the given case, the assessee is found to be the owner of the property and rental income is earned by him by letting out predominantly the said property, such rental income will be assessable under the head "Income from house property" and not "Profits and gains of business or profession". What is let out should be predominantly the said property inasmuch as the rental income should be from the bare letting of the tenements or from letting accompanied by incidental services or facilities. The subject hired out should not be a complex one and the income obtained should not be so much because of the facilities and services rendered than because of their letting of the tenements. If such a situation is found to be obtained, the other aspects such as nature of the property being commercial/business asset, etc. in the hands of the assessee as well as nature of the business of the assessee do not change the character of the income and the rental income does not become income from trade or business.
26. In the present case, the subject property let out by the assessee-company was undisputedly owned by it and it was a case of bare letting of tenement and the subject hired out was not a complex one. It was thus a case of letting out of a property owned by the assessee simplicitor and not a case of exploitation of the property by way of complex commercial activity. The rental income earned from the said property thus was chargeable to tax under the head "Income from house property" and not under the head "Profits and gains of business or profession" as claimed by the assessee. As such, considering all the facts of the case and keeping in view the legal position emanating from the various judicial pronouncements discussed hereinabove, we hold that the rental income received by the assessee in the year under consideration was assessable to tax under the head "Income from house property" and not under the head "Profits and gains of business". Accordingly, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee.
27. As regards the alternative contention of the learned Counsel for the assessee that the expenses incurred in connection With the repairs and maintenance of the subject property held as stock-in-trade by the assessee be allowed under the head "Profits and gains of business" and that the resultant loss under the head be allowed to be adjusted against the income assessable under the head "Income from house property", we are of the view that this issue is beyond the scope and ambit of the question specifically referred to this Special Bench under Section 255(3). Even the assessee-company has raised this issue separately in the other grounds taken in its appeals filed before the Tribunal, It will therefore, be open to the assessee to raise this issue before the Division Bench which shall deal with the same in accordance with law.
28. The matter will now go before the regular Bench for disposing of the appeals keeping in view our decision rendered hereinabove.