Income Tax Appellate Tribunal - Madras
Kandaswamy Shopping Complex And ... vs Assistant Commissioner Of Income-Tax on 25 July, 1994
Equivalent citations: [1995]54ITD55(MAD)
ORDER
S. Kannan, Accountant Member
1. These two appeals by the assessee which are directed against the common order dated 29-5-1991 of the CIT(A), Coimbatore relating to the assessment years 1988-89 and 1989-90, were heard together and are disposed of by a common order.
2. The assessee, a firm of three partners, was previously doing business of running a lodge, the income from which was assessed to tax under the head 'Profits and gains of business' right upto and including assessment for the assessment year 1987-88. During the previous year relevant to the assessment year 1988-89, it discontinued the lodging business and let the rooms on monthly basis to various parties, such as small shop owners, advocates and others. Certain additions to the existing building were also made and let to the State Bank of India/P & T Deptt.
3. The assessee filed its return of income for the assessment year 1988-89 disclosing an income of Rs. 85,930 under the head 'Profits and gains of business'. The return was duly supported by an income and expenditure statement and balance-sheet.
4. The assessee's case before the Assessing Officer was that the building in question was earlier being used as a business asset in the lodging business of the assessee. On the lodging business being discontinued, the rooms in the building (including the units in the addition made in the building) were let on rent to various parties. Further, such letting entailed employment of a few persons for attending to the maintenance of the building; and that, therefore, the rental income should be brought to charge under the head 'Profits and gains of business'.
5. The said arguments did not find favour with the Assessing Officer. He held that the rental income must be brought to charge under the head 'Income from house property' observing :
Every asset which is once used as a business asset or which is capable of being so used cannot be regarded as a commercial asset in order that an asset may be regarded as a commercial asset it must be the asset of a running business. If the business is stopped, then the assets employed in such business ceased to be a commercial asset - Seth Banarsi Das Gupta v. CIT [1977] 106 ITR 559. The above decision applies to the facts of the case under consideration squarely and as such the rental income will be considered under the head 'House property'.
6. In the assessment for the assessment year 1989-90 also the Assessing Officer took a similar line.
7. Predictably the assessee took up the matter before the first appellate authority canvassing the following points :
(i) The firm itself came into existence with the specific object of deriving income from lodging, shopping complex and also other activities to be decided upon by the firm from time to time.
(ii) Previously the rooms or units on the outer periphery of the ground floor were let to shops and the other side of the ground floor as well as a portion of the first floor were used for purposes of lodging business.
(iii) When the lodging business was discontinued all the units and the portion added to the building were let to various persons including State Bank of India/Post & Telegraph Department.
(iv) The assessee provided watch and ward staff by way of security for the whole complex.
(v) It provided sanitation, water, electricity, telephone, etc., to the whole shopping complex.
(vi) There is also a public telephone booth with STD facilities.
In the circumstances, therefore, the rental income must be brought to tax under the head 'Profits and gains of business'. In this regard, reliance was placed on the decision of the Supreme Court in the case of Karnani Properties Ltd. v. CIT[1971] 82 ITR 547 and Seth Banarsi Das Gupta v. CIT [1987] 166 ITR 783.
8. The said arguments did not impress the CIT(A). According to him, the case before him was one of letting simpliciter. Providing of water, sanitation, electricity, etc., is of the nature normally associated with letting of property. This cannot amount to business activity or trading activity. Further, in the case before him, the letting of property was done by the assessee in his capacity as owner of the property. In this regard, the CIT(A) referred to and relied upon the decision of the jurisdictional High Court in the case of Anaikar Traders & Estates (P) Ltd., No. 1 v. CIT [ 1990] 186 ITR 175 (Mad). He also referred to and relied upon the decision of the ITAT Hyderabad Bench in K. RamiReddy & Sons v. ITO[1985] 14 ITD 108.
9. But the matter did not rest there. The CIT(A) further found that the assessee did not have any business activity at all. He, therefore, went on to observe:
Where a firm has got some other business income, the income from property should also be assessed in its hands. But where the firm has not done any business at all in view of the provisions of Section 26 of the Income-tax Act the property income alone cannot be assessed to tax in the hands of the firm. In Ramniklal Sunderlal's case reported in 36 ITR 464 where the only income received by that firm was by way of collection of rent from certain properties, it was held that there was no firm in existence, in the eyes of law. The said decision will equally apply to the facts of the appellant's case. Since C.I.T. (Appeals) has plenary powers co-extensive with that of the Assessing Officer to do what he has failed to do or direct him to do what he has so failed to, I hold that the income from property should be only assessed to tax in the individual hands of the partners with reference to their definite share both for the assessment years 1988-89 and 1989-90. Inasmuch as the firm has got no other income in the nature of business activity the assessment made on the firm for both the assessment years are cancelled.
10. It is in these circumstances that the assessee is now before us.
11. Shri N. Devanathan, the learned counsel for the assessee, took us through the facts and circumstances of the case and reiterated the arguments that had earlier been advanced unsuccessfully before the lower authorities. He particularly stressed the fact that the provision of water, electricity, etc., amounted to business activity.
Relying on the decision in the case of Karnani Properties Ltd (supra), he contended that that part of the rent that is attributable to the provision of services must be brought to charge under the head 'Income from business'.
12. On his part, the learned Departmental Representative strongly supported the conclusion of the lower authorities to the effect that the rental income must be brought to charge only under the head Income from house property'.
13. We have looked into the facts of the case. We have considered the rival submissions.
14. The basic question that arises for consideration is: What is the nature of the rent recoverable by the assessee from the tenants ? Is it income from property simpliciter or is it income from business ?
The general rule is that when the owner of house-property lets the property on rent, he is merely turning to profitable account, his proprietary right and interest in the property. In such cases, the rent received is income from house property.
In the case of Commercial Properties Ltd. In re 3 ITC 23 - a case that arose under Section 9 of the Income-tax Act, 1922 - the assessee-company was owning three properties and was earning rental income by letting out the properties. The assessee's case was that it was incorporated with the sole object of acquiring lands, building houses and letting the premises to tenants on rent, and that consequently rental income must be assessed under the head Income from business'. This contention was negatived by the High Court for two reasons. First, the mere fact that the properties were owned by a company did not change the incidence of tax and convert the rental income (assessable to tax under sec. 9) into business income (assessable to tax under Section 10). To quote Rankin, C.J. "... I entirely refuse my assent to the proposition that because it happens that the owner of a property is a company which has been incorporated for the purpose of owning such property, therefore, the income derived from 'property' must be regarded as income derived from 'business'. In my judgment, income derived from 'property' is a more specific category applicable to the present case.
15. Secondly, mere management of property does not amount to a business, and income derived from such property cannot be regarded as the profits and gains of a business. To quote Rankin C.J. "The income of the assessee is income derived from its ownership of buildings and their cartilages. To obtain such income a certain amount of management is always necessary, but the Act does not regard such income as profit of management. To own houses one must buy or build them, but the Act does not regard such income as profits of investment.
16. In the English case of Salisbury House Estate Ltd. v. Fry [1930] 15 TC 266 - the assessee-company's main objects were acquisition, development, management, leasing and letting of land and property. It took over some lands with a block of buildings upon it in the City of London, known as Salisbury House. At the time when it was taken over by the company, Salisbury House was in the course of erection or had been recently completed and the object for which the company was formed was to hold the same and let it out as offices and turn it to account in any way which might be possible or expedient. Salisbury House had a very large floor space and contained some 800 rooms. These rooms were let out by the company to some 200 tenants singly or in suites, which may or may not be self-contained. The company provided and operated the lifts in the building, which was of nine floors and also provided uniformed staff of 25 persons for that purpose and to act as porters and to watch and protect the building. The company also engaged cleaners and a house-keeper. It provided radiators for heating purposes and also supplied lights in the passage of the building.
17. The Revenue's case was that the entire receipts from the building is chargeable under Schedule-D (analogous to the head of income 'Income from business'). The House of Lords held that the rent received by the company fell under Schedule-A (analogous to the head 'Income from house property') and not under Schedule-D. Starting from the proposition that income-tax is one tax and not an aggregate or collection of different taxes under the different Schedules, the House of Lords went on to point out that to see which head of income you are to apply, you have to consider the nature and the constituent parts of the items of income. In that case, it was held that there was nothing in the facts stated in the case which would properly lead to the conclusion that in dealing with the property the company was acting otherwise than as an ordinary landowner would act in turning to profitable account the land of which he is the owner. It was also held that the circumstance that a taxpayer was a limited company did not distinguish its operations from those of an individual.
The foregoing are instances of bare letting of property and in such instances the rent received is income assessable to tax under the head 'Income from house property'.
18. But there are cases in which, having regard to the special or the complex nature of the property let, it has been held that the income from such property is business income.
19. Thus, in CIT v. National Storage (P.) Ltd. [1963] 48 ITR 577 (Bom.), the assessee-company was formed by film distributors for the specific purpose of constructing premises for storing and preservation of films and for providing other related amenities to the film industry. The assessee-company accordingly purchased a piece of land with the approval of Chief Inspector of Explosives and constructed vaults on the said plot of land in conformity with the Cinematograph Film Rules, 1948 and permitted the vaults to be used by the film distributors on payment of a monthly charge. The vault-holder was given a key of the vault but the key of the entrance which permitted access to the vaults remained in the exclusive possession of the company.
The company also rendered certain services to the vault-holders, such as fire fighting facilities, railway booking offices, telephones, a canteen, and watch and ward staff. The ITO took the line that the income in question was assessable under sec. 9 of the old Act. The Tribunal, by a majority, held that the income was chargeable to tax under Section 10 of the Act. The High Court agreed with the view of the majority. In the process, on a review of reported cases, the High Court abstracted the following principles which are to be applied in determining whether a certain income is income from house property or income from business :
(1) Income-tax is a single tax levied on the total income classified and chargeable under the various heads and not an aggregate of the distinct taxes levied separately on each head of income.
(2) That the heads of income are specific heads which are exclusive and exhaustive.
(3) The income which falls under any of these specific heads has got to be computed under that head only in the manner specified in the Act.
(4) If the income falls under the head 'Income from property', which is chargeable under sec. 9 of the old Act, it has to be taxed under sec. 9 only, and cannot be taken to Section 10 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.
(5) House-owning, however, profitable, cannot be a business or trade under the Income-tax Act. Where income is derived from house property by the exercise of property rights properly so-called, the income falls under the head 'Income from property' chargeable under sec. 9. It is the nature of the operations and not the capacity of the owner that must determine whether the income is from property or from trade. Where the operations involved in the activity of earning income from house property are not different from those of an ordinary house-owner turning to profitable account the property of which he is the owner, the income derived is income from property chargeable under sec. 9, irrespective of whether the operations are carried on by a company one of whose objects or even the sole object is to indulge in the activity of earning income from house property. Thus, where house property is given on lease or licence basis for earning income therefrom, the true character of the income derived is income from property falling under sec. 9. 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 such as heating, cleaning, lighting or sanitation, which are relatively insignificant and only incidental to the use and occupation of the tenements.
(6) In cases where the income received is not from the bare letting of the tenement or from the 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 property may be of the nature of business or trading operations and the income derived may be income not from exercise of property rights properly so called so as to fall under sec. 9 but income from operations of a trading nature falling under Section 10 of the Act; and (7) In cases where the letting is only incidental and subservient to the main business of the assessee, the income derived from the letting will not be the income from property falling under sec. 9 and the exception to sec. 9 may also come into operation in such cases.
20. The Department thereafter took the matter to the Supreme Court, which affirmed the decision of the Bombay High Court - see CIT v. National Storage (P.) Ltd. [1967] 66 ITR 597 (SC). The Supreme Court applied the ratio of the case of Governors of the Rotunda Hospital v. Coman 7 TC 517 in which Viscount Finlay, having regard to the fact that "the subject which is hired out is a complex one", held that the return received by the assessee is not the income derived from the exercise of property rights only but is derived from carrying on an adventure or concern in the nature of trade.
21. There is yet another type of cases in which letting of house property is incidental to business. In such cases, it has been held that the income from property is business income.
22. Thus in the case of Jamshedpur Engg. & Machine Mfg. Co. Ltd. v. CIT [1957] 32 ITR 41 (Pat.) the assessee-company, which carried on the business of manufacturing and selling agricultural implements, had constructed residential quarters for its employees and let the quarters to them in the course of its business. The assessee incurred expenditure for the repairs and maintenance of the residential quarters. The assessee's claim for revenue deduction under Section 10(2)(xv) of the 1922 Act in respect of the sums spent on repairs and maintenance of the residential quarters was negatived by the Income-tax Officer on the ground that the rent realised by the assessee-company from its employees was chargeable to tax under sec. 9 of the Act. The High Court held that the construction of the residential quarters and the letting thereof to the assessee's employees were incidental to the business of the assessee and that such letting was necessary for the proper performance of the business carried on by the assessee. It, therefore, allowed the assessee's claim.
23. The High Court found that the aforesaid view was supported by two English authorities. In Russell (Surveyor of Taxes) v. Aberdeen Town & County Bank 2 TC 321, the assessee-bank owned buildings in which the business of the Bank was carried on and portions of the building were occupied as residences by the bank managers and agents. It was held, in these circumstances, by the House of Lords, that the assessee was entitled to deduct the annual value of the whole premises in calculating the assessee's business profits.
24. In Usher's Wiltshire Brewery Ltd. v. Bruce (Surveyor of Taxes) 6 TC 399, the assessee, a brewery company, had a number of premises licensed to sell beer. Some of the premises were owned by them, while others had been taken on rent/lease. The question that arose for consideration was whether the assessee-company was entitled to claim deduction of cost of repairs and other expenditure relating to the licensed premises in the computation of its business profits under Schedule-D. It was found that the company had acquired the premises solely in the course of and for the purposes of its business as brewers. The licensed premises were let to 'tied tenants' who were bound under a contract to purchase beer, etc., from the company. In such circumstances, it was held that the cost of repairs and other items of expenditure relating to the houses could properly be claimed as deduction in the computation of the business profits of the assessee as being money wholly and exclusively laid out or expended for the purpose of the trade of the assessee.
25. In that regard, Lord Sumner observed that "On the findings here the brewer is a brewer first and a landlord only afterwards. His role as landlord is subsidiary, an incident of his trade as brewer". He went on to point out: "Further, the fact that the publican sleeps over the bar does not in itself preclude the possibility that his bedroom when so used for the brewer's trade, if, as here, the brewer, in order to get the outlet for his beer which a tied house gives, must find a tenant who sleeps as well as sells on the premises.
26. Summarising the legal position, Patna High Court at page 55 of the report observed:
In the present case the assessee is no doubt the owner of the residential buildings let out to its employees, but the main business of the assessee is the business of manufacture and sale of agricultural implements, and upon the facts stated in the case it is manifest that the letting out of residential quarters is subservient to and incidental to the main business of the assessee, namely, the business of manufacture and sale of agricultural implements. In such a case we are of the opinion that the proper section to be applied for assessment is not Section 9 but Section 10(2)(xv) of the Income-tax Act.
27. It may here be highlighted that in the case of Salisbury House Estate Ltd. (supra), the House of Lords noticed rather closely the Rotunda Hospital case and Usher's case and held that the principles underlying those cases were not applicable to the case before them. This was because, in the case before them, the assessee-company was merely turning to profitable account the property which it owned just as any ordinary landlord would.
28. The following typology emerges from the foregoing analysis : TYPE A : CASES TO WHICH ROTUNDA HOSPITAL RATIO APPLIES :
The basic principle that has been applied in the cases falling under this category is that the subject property which is hired out is a complex one. They are not akin to cases where an ordinary landlord, exercising his proprietary right over the property, lets the property on hire, thus turning it to profitable account. These are not cases of bare letting. In these cases, the property is user-specific. And, the property is either specially constructed or is rendered suitable for the specific end-use. For a fact, without being rendered suitable for the specific end-use, the property will be useless. Yet another principle underlies these cases, and that is that the owner did not part with any estate in the property. This significant factor distinguishes these types of cases from cases of ordinary tenancy where the tenant takes some estate or interest in the property itself.
The rent received is treated as business income.
TYPE B: CASES TO WHICH USHER'S WILTSHIRE BREWERY LTD.'SCASE (SUPRA) RATIO APPLIES:
The principle underlying the cases falling under this category is that the owning and the letting of property was a mere incident of the trade carried on by the assessee. Here, the dominant role of the assessee as a trader is the determining factor. Recall Lord Sumner's observation in Usher's Wiltshire Brewery Ltd. 's case (supra): "On the findings here the brewer is a brewer first and landlord only afterwards. His role as landlord is subsidiary, an incident of his trade as brewer". Here also, the rent received is treated as business income.
TYPE C : CASES TO WHICH SALISBURY HOUSE RATIO APPLIES :
The type subsumes cases of what is variously described as "mere letting", "bare letting", "ordinary letting", "letting simpliciter". Here ownership, and the attendant management of the property - and nothing more - is the source of rent. The landlord turns to profitable account his proprietary rights in the property.
Here the rent received is treated as income from property.
29. As we see it, the rent received by the assessee by letting office space/ shops and the like in the building properly falls under Type-C referred to above. It should, therefore, follow that the rental income in question must be brought to charge under the head 'Income from house property'.
30. One of the contentions urged by Shri Devanathan, it may be recalled, was that the assessee was maintaining some staff in the building in question and that, therefore, the rental income is business income. We are unable to agree. In the case of Commercial Properties Ltd. (supra) a similar argument was rejected by Rankin C.J. who observed :
The income of the assessee is income derived from its ownership of buildings and their curtilages. To obtain such income a certain amount of management is always necessary, but the Act does not regard such income as profit of management. To own houses one must buy or build them, but the Act does not regard such income as profits of investment.
It was also Shri Devanathan's case that the assessee was providing water supply etc. to the tenants and that, therefore, the rental income must be treated as business income. Here again, we are unable to agree. For more reasons than one. First, no material was produced by the assessee either before the Assessing Officer, or before the CIT(A), or even before us to show that it was the assessee who supplied water, electricity, etc. True, every building that is let on rent must necessarily have internal connections for water and electricity, water and electricity being supplied by the municipal authorities. Simply because internal connections for water and electricity supply are provided in the building, it cannot be said that assessee is engaged in a business activity. Indeed, without such internal provision nobody will take the property on rent. We, therefore, reject the related arguments.
31. Reliance was also placed on behalf of the assessee on the Supreme Court case of Karnani Properties Ltd. (supra). But, as we see it, that case is distinguishable on facts. For a fact, the concluding portion of the judgment makes it clear that even according to the Supreme Court, the said judgment does not lay down any rule of universal application. We, therefore, reject the related arguments.
32. The assessee had also contended that the building in question was previously used for purposes of conducting lodging business therein; and that, therefore, the building must be treated as a business asset and the rent received therefrom must, on that basis, be regarded as business income. We are unable to accept this contention. It is a matter of record that the assessee discontinued its lodging business. That means that the assessee lost its character and role as businessman and became a mere owner of the property. And when it let the property on rent, it was merely turning to profitable accounts its proprietary interest in the building. In such cases the well-settled legal position as pointed out earlier is that the rental income must be brought to charge under the head 'Income from house property'. This is exactly what the lower authorities have done.
33. In view of the foregoing, therefore, we decline to interfere with the order of the first appellate authority on this issue.
34. This brings us on to the question whether the CIT(A) was justified in cancelling the assessment of the firm and in directing the Assessing Officer to bring to tax the rental income in the hands of the respective partners, of course in their profit sharing ratio. We fail to see how the CIT(A) could be faulted on this score. The concept of partnership postulates the carrying on of the business on the basis of mutual agency amongst the partners. In this case, the CIT(A) held first that the rental income received by the assessee cannot be regarded as business income. Secondly, he noticed that the assessee-firm was not carrying on any business at all. He, therefore, came to the conclusion that the partners must be treated as co-owners of the property and the rental income assessed in their hands on that basis. In this regard, he rightly relied on the Bombay High Court case of Ramniklal Sunderlal v. CIT[1989] 36 ITR 464 which is directly to the point. We, therefore, dismiss the related grounds.
35. Before taking leave of the case, we may add that a firm, which was granted registration at a time when it was carrying on business and which was given the benefit of continuation of registration ignoring the significant fact that in the subsequent year in which such benefit was given it did not carry on any business, cannot hang on to that benefit that had been erroneously given to it. In any event, the powers of the first appellate authority, it is well settled, are wide enough to deal with the issue in the manner the CIT(A) has done in this case. He cannot be faulted on this score too.
36. In the result, the assessee's appeals are dismissed.