Income Tax Appellate Tribunal - Madras
Khivraj Motors (P.) Ltd. vs Deputy Commissioner Of Income-Tax on 21 February, 1994
Equivalent citations: [1994]50ITD576(MAD)
ORDER
S. Kannan, Accountant Member
1. The assessee is the appellant and the appeals are directed against the orders of the CIT (Appeals) dated 4-10-1991, 21-10-1991 and 6-8-1992. As common issues are involved in all these appeals, they were heard together and disposed of by this common order for the sake of convenience.
2. Common issue No. 1 : Valuation of the property situated at No. 35, Mount Road, Nandanam, Madras. The facts of the case are that in May 1974 the assessee purchased a site admeasuring about 41 grounds, together with some structures standing therein, for a stated consideration of Rs. 11,72,097. Initially, it is common ground, the assessee treated the said site as investment. Accordingly it disclosed the said site in its balance-sheet under the head "Investments at cost".
3. Subsequently, in early 1980, the assessee decided to enter into real estate business for which purpose it made suitable amendments to its Memorandum of Association, which were approved by the Company Law Board, Southern Region, Madras, on 4-7-1980.
4. Thereafter, it demolished the old structure, parcelled out a piece of land admeasuring about four grounds and constructed a building thereon. The assessee sold this building together with the four ground plot to one M/s. C. Abdul Rehman and Others, Periamet, Madras for a stated consideration of Rs. 22 lakhs.
5. In relation to its assessment to income-tax and for the purposes of ascertaining the profit on the sale of the said building, the assessee went on the footing that it had converted what was previously its investment into stock-in-trade on 23-7-1980. Accordingly, it valued the land in question at the rate of Rs. 3 lakhs per ground as on 23-7-1980. It was on this basis that it arrived at the profit on the sale of the said building at Rs. 1,97,827.
6. To make the picture complete, it. may be mentioned that on his part the Assessing Officer took the value of the plot as on 23-7-1980 at Rs. 1,56,000 per ground and computed the profit on the sale of the building on that basis. Predictably, the assessee appealed and the assessment was set aside by the CIT (Appeals) for fresh consideration and decision - see order dated 1 -9-1988 of the CIT (Appeals) relating to the income-tax assessment year 1982-83. In the fresh assessment that came to be made, the 23-7-1980 value of the site was taken at Rs. 2,40,000 per ground.
7. On the remaining portion of the plot the assessee put up two structures, namely, Khivraj Complex-I (KC-I) and Khivraj Complex-II (KC-II). KC-I comprised an aggregate area of 108,545 Sq. ft.
Except, for units having an aggregate area of 38,090 Sq. ft. all the units in the said complex were sold between March 1981 and December 1983. The assessee let on rent the aforesaid units having an aggregate area of 38,090 sq. ft. To a specific question in this regard from the Bench, the learned Counsel for the assessee stated that the said units still remain unsold and have been let on rent.
8. KC-II has an aggregate built up area of 94,886 sq.ft. Initially, the assessee wanted to keep for its own use 17,500 sq. ft. and to sell the balance of 77,386 sq.ft. and actually sold units having aggregate built up area of 48,292 sq.ft. between April 1981 and September 1986.
9. As for the 17,500 sq.ft. which the assessee initially kept for its own use, the units representing of this portion were also sold between March 1986 and August 1986.
As in the case of KC-I, so in the case of KC-II, it is admitted that, even as on date, 29,094 sq.ft. remained unsold and have been let on rent.
10. A few other material facts necessary for a proper appreciation of the issue under consideration may be abstracted as follows:
Details of net rent realised by the assessee Year of account ending on Net rent received Rs.
30-6-1985 18,21,393 30-6-1984 22,32,590 30-6-1986 22,54,322 30-6-1987 16,61,650
Comparative details of the value of the unsold Nandanam units as disclosed by the assessee in its wealth-tax returns and as determined by the Assessing Officer :
______________________________________________________________________ Wealth-tax Valuation Value returned Value determined asst. year date by the assessee by the Assessing Officer ______________________________________________________________________ Rs. Rs.
______________________________________________________________________ 1985-86 30-6-1984 28,54,000 * 2,27,73,662 1986-87 30-6-1985 19,47,775 * 2,79,07,375 198,7-88 30-6-1986 13,38,575 * 2,81,79,038 1988-89 30-6-1987 @ 2,07,70,256 ______________________________________________________________________ Notes : * For these three wealth-tax assessment years the assessee had disclosed In its return of net wealth, inter alia, the value of the units remaining unsold in KC-I and KC-II. It was only before the first Appellate Authority that the assessee made the claim that no wealth-tax was exigible thereon because the said units represented closing stock of the assessee.
@ In its return for the wealth-tax assessment year 1988-89 the assessee did not disclose the value of the said units on'the ground that they constituted its closing stock.
11. For the four assessment years that are now before us, one of the questions that naturally arose for consideration was whether the unsold units in KC-I and KC-II, which have been let on rent by the assessee, constituted the assessee's closing stock and consequently not chargeable to wealth-tax. As pointed out earlier, in relation to the first three assessment years the assessee did not make this claim before the Assessing Officer. It made the claim for the first time before the CIT (Appeals). It was therefore that the assessments for the said three assessment years came to be completed on the footing that wealth-tax was exigible on the said units. The Assessing Officer determined the market value of the said units as on the relevant valuation dates by capitalising the net annual rent actually received by the assessee. For this purpose he adopted the multiplier of 12.5.
12. In the assessment for the assessment year 1988-89, the Assessing Officer adopted the same line, rejecting the assessee's claim that no tax was exigible on the value of the said units because they constituted its stock-in-trade.
13. The CIT (Appeals) declined to interfere in the matter for the following reasons:
(i) The assessee had let the unsold units and had disclosed the rental income under the head "income from house property'. The assessment was also made on the same basis. Therefore, there is no question of treating the unsold units as the stock-in-trade of the assessee.
(ii) The decision of the Appellate Tribunal in the case of Varadarqja Theatres (P.) Ltd. 29 ITD 29 was distinguishable on facts.
(iii) The 1988 amendment to Section 40(3) of the Finance Act, 1983 is not retroactive, but prospective in operation with effect from 1-4-1989. Therefore, the said amendment cannot help the assessee.
It is in these circumstances that the assessee is now before us.
14. Shri V. Ramachandran, the learned Counsel for the assessee took us through the facts of the case and contended that the lower authorities were not justified in rejecting the assessee's claim that the unsold units were the stock-in-trade of the assessee and were as such eligible for exemption. First, he drew our attention to the fact that in the income-tax proceedings the assessee's claim that the units in the two complexes were the assessee's stock-in-trade was accepted and the assessment completed on that basis. Secondly, as before the CIT (Appeals) so before us, he referred to and relied upon the decision of the Tribunal in the case of Varadarqja Theatres (P.) Ltd. [supra). He also relied on the Tribunal decision in the case of Prakash Talkies (P.) Ltd. v. First WTO [1989] 28 ITD 213 (Bang.). Following the ratio of the said cases, Shri Ramachandran contended that the benefit of the 1988 amendment should be extended to the assessment years that are now before us.
15. An alternative contention was also made and that was that the value adopted by the lower authorities was on the high side inasmuch as the application of the multiplier 12.5 per cent was itself high.
16. On his part, the Departmental Representative opposed the contention of the assessee. He argued that it is a matter of record that the assessee did not sell all the units of the two complexes. It had kept for its use some of the units, together with the proportionate undivided interest in the land relating thereto. The unsold units were not used for the purposes of the assessee's business. They were let on rent, and the rental income declared by the assessee in the income-tax proceedings under the head 'income from property'. True, it was as a dealer in real estate that the assessee put up the two complexes and sold some of the units therein. But the significant fact to be noted is that it has retained with it some of the units in both the complexes and let the units on rent. In the circumstances, therefore, the unsold units could not be treated as the stock-in-trade of the assessee.
17. According to the Departmental Representative, the two decisions of the Tribunal referred to supra are not applicable to the facts of this case. Here we are concerned with the 1988 amendment to Section 40(3) of the Wealth-tax Act, which is clearly prospective and not retrospective in operation.
As for the alternative contention of the assessee that the unsold units had been valued at a very higher figure, the Departmental Representative contended that the units have been properly valued by adopting rent capitalisation method. The multiplier of 12.5 adopted is also correct, inasmuch as that is the multiplier given in Schedule-Ill of the Wealth-tax Act.
18. We have looked into the facts of the case. We have considered the rival submissions. The question that arises for consideration is whether the unsold units of the two complexes are eligible for exemption from wealth-tax on the ground that they constituted the stock-in-trade of the assessee? The answer to this question will depend upon the answers to the two further questions, namely:
(i) Whether, on the facts and in the circumstances of the case, the unsold units could be treated as stock-in-trade of the assessee? and
(ii) If the answer to the above question is Yes', whether the 1988 amendment could avail assessee?
As regards the question at SI. No.($ above, to a specific query in this regard from the Bench, the learned Counsel for the assessee fairly stated that even as on date, the units in question continue to be in the occupation of tenants. This significant factor, as we see it, goes counter to the assessee's claim that the unsold units which had been let on rent by the assessee and which continue to be in the occupation of tenants must be regarded as the assessee's stock-in-trade. True, when the assessee developed the site in question and put up two commercial complexes thereon, the assessee was doing so in its capacity or role as a real estate dealer. But when it retained some of the units and let them on rent, the assessee was doing so not in its role as a real estate developer, but in its role as the owner of the property turning to profitable account its proprietary interest in the property.
Secondly, the units retained by the assessee were not used by it for the purposes of its business of dealing in motor cycles, scooters, spare parts and the servicing of the vehicles, etc. All that had happened was that the assessee had let the unsold units on rent, which units, admittedly, are even today under occupation of the tenants. When the owner of a property lets it on rent, all that he does is to turn to profitable account his proprietary interest in the property. Here, the dominant role of the owner of the property comes into play. Therefore, there cannot be a business of letting property on rent.
If any authority for the proposition is needed, it is to be found in, (a) the Calcutta case of Commercial Properties Ltd., In re AIR 1928 Cal. 456, and (b) the House of Lords case of Salisbury House Estate Ltd. [1930] 15 TC 266.
19. Commercial Properties Ltd. 's case (supra) was a case under Section 9 of the old Act. There the assesee-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 charge under Section 9) into business income (assessable to charge 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".
20. 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 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".
21. In the English case of Salisbury House Estate Ltd. (supra) 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 anyway 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 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.
22. 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 of 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 land-owner 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.
23. Two English authorities, namely, Russell (Surveyor of Taxes) v. Aberdeen Town & County Bank 2 Tax. Cas. 321 and Usher's Wiltshire Brewery Ltd. v. Bruce (Surveyor of Taxes) 6 Tax. Cas. 399 provide a study in contrast.
In the former case, the assessee-bank owned buildings in which the business of the Bank was carried on and portions of the buildings 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.
In User's Wiltshire Brewery Ltd.'s case [supra] 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.
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 publication 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 is a tied house gives, must find a tenant who sleeps as well as sells on the premises".
24. The foregoing avalysis will indicate that the unsold units of the two complexes which have been let on rent by the assessee could not be regarded as stock-in-trade/business asset. For a fact, it is a matter of record that under the income-tax proceedings, the rental income was returned by the assessee, and brought to charge under the head "Income from house property".
25. In the view that we have taken on question No. (i) supra, it is unnecessary to answer question No. (ii). Even so, let us assume that somehow the unsold units which had been let on rent by the assessee are the stock-in-trade of the assessee. The question that then arises for consideration is whether the 1988 amendment to Section 40(3) could avail the assessee.
26. Now, the Finance Act, 1988 inserted, with effect from 1-4-1989, the following proviso to Section 40(3) of the Act :
Provided that this section shall not apply to any asset referred to in Clause (i), U(ii), (iii), (iv), (v) or (vi), which is held by the assessee as stock-in-trade in a business carried on by it or, in the case of motor-cars referred to in Clause (vii), they are held as stock-in-trade in such business or registered as taxis and used as such in a business of running motor-cars on hire carried on by the assessee.
Having been inserted into the Act from 1-4-1989, the said proviso will naturally apply to the assessment year 1989-90 and the subsequent assessment years. Yet, it is contended on behalf of the assessee that the benefit of the principle underlying the proviso is available to the assessee in relation to the earlier assessment years also. It is in this connection that reliance has been placed on behalf of the assessee on the cases of Prakash Talkies (P.) Ltd. (supra) and Varadarqja Theatres (P.) Ltd. [supra).
27. It is well-settled that any new provision of the Act cannot have retrospective operation unless such a conclusion follows either as a result of the express provisions made to that effect by Parliament or by necessary intendment. A plain reading of the newly inserted proviso referred to above will indicate that it contained nothing, even remotely suggesting, that it should have retrospective operation. Secondly, the Budget Speech of the Finance Minister [170 ITR (St.) 32 etc.] is silent on the rationale behind the insertion of the said proviso. The Notes on Clauses appended to the Finance Bill, 1988 is also silent on this issue. Paragraph 54 of the memorandum explaining the provisions in the Finance Bill, 1988 merely states that under the existing provision wealth-tax is leviable even in cases where the assets specified in the section are held as stock-in-trade and that with a view to removing the unin tended hardship, the said proviso has been introduced.
The said paragraph then goes on to say that the amendment will take effect from 1-4-1989 and will accordingly apply in relation to the assessment year 1989-90 and subsequent assessment years.
28. One thing will be clear from the foregoing and that is that the Finance Act, 1988 has not expressly stated that the proviso in question will be retrospective in operation.
29. The question that then arises for consideration is whether such retroactivity can be imported into the proviso by necessary intendment. It is here that the learned Counsel for the assessee had relied on the two decisions of the Tribunal referred to above.
30. In the case of Prakash Talkies (P.) Ltd. (supra), in relation to assessment years 1984-85 and 1985-86, the assessee claimed exemption in respect of the value of the cinema theatre. This exemption was claimed on the ground that the cinema theatre building was a plant not chargeable to tax under Section 40(3)(ut) of the Finance Act, 1983. Alternatively, it was contended that the 1988 amendment which exempts theatre building from wealth-tax should be given retrospective effect.
31. The Tribunal allowed the assessee's claim on both the aforesaid grounds. The cinema theatre being actually a source of the assessee's income was a plant both for income-tax and wealth-tax purposes. Secondly, the Finance Act, 1988 substituted a new Clause (vi) for the existing Clause (vi) in Section 40(3), so as to extend the benefit of the exemption from wealth-tax to cinema houses also. According to the Tribunal :
...the provisions of the Finance Act, 1988 led one to presume that a cinema house was intended to be included in the list of assets exempt from wealth-tax even from the inception because the connotation of substituted' was that new clause should be taken to have been incorporated in place of the old clause from the very inception. This was also clear from the wording of the original clause itself which stated that building used by the assessee for the purpose of its business should be exempt.
32. In the case of Varadarqja Theatres (P.) Ltd. (supra), the assessee claimed that the cinema theatre building was exempt from wealth-tax on the ground that the said building was used exclusively for the purposes of its film exhibition business. The Assessing Officer accepted the said contention and completed the assessments accordingly. Thereafter, the Commissioner passed an order in revision holding that the theatre building could not be categorised in any of the exempted categories mentioned in Section 40(3)(vi) of the Finance Act, 1983. The Tribunal allowed the assessee's claim. In this regard, the Tribunal followed the line of reasoning that it had earlier adopted in the case of Prakash Talkies (P.) Ltd. (supra).
33. The aforesaid two cases were centred on the provisions of not only the old Section 40(3)(vi) but also the substituted Section 40(3)(vi) of the Finance Act, 1983. Particularly in the case of Prakash Talkies (P.) Ltd. (supra), the Tribunal had held:
...that a cinema house was intended to be included in the list of assets exempt from wealth-tax even from inception because the connotation of 'substituted' is that new clause shall be taken to have been incorporated in place of the old clause from the very inception. This is also clear from the wording of the original clause itself which stated that building used by the assessee for the purpose of its business shall be exempt. The list of items such as factory, go down, warehouse, etc. cannot be exhaustive but only illustrative of the buildings exempt from wealth-tax. The clause itself has to be read ejusdem generis. This rule applies when '(0 the statute contains an enumeration of specific words; (ii) the subjects of enumeration constitute class or category; (iii) that class or category is not exhausted by the enumeration; (iv) the general terms follow the enumeration; and (v) there is no indication of a different legislative intent' (see Amos Chandra Chakrabortyv. Collector of Excise MR 1972 SCI 863 at page 1866).
We find that all these conditions are satisfied in this case to attract this rule so that we are convinced that a cinema theatre was intended to be included in the category of building's exempt from tax even from the very inception.
34. In relation to the newly introduced proviso to Section 40(3), however, the position is different. The proviso was newly inserted by the Finance Act, 1988, therefore, the arguments based on the connotation of the term 'substituted' are not available here. Secondly, unlike in the case of Section 40(3)(nfl, there is no question of importing the concept of ejusdem generis.
May be, the proviso was newly inserted to remove unintended hardship. But it does not follow there from that each and every provision that is newly inserted to remove unintended hardship must invariably or necessarily have retrospective effect.
35. In view of the foregoing, therefore, we are unable to accept the contention of the learned Counsel for the assessee that the provisions of the newly inserted proviso to Section 40(3) should be given retrospective effect.
36. In view of the foregoing, therefore, we decline to interfere in this aspect of the matter.
37. This brings us on to the alternative contention that the value placed on the units in question is on the high side. In this regard, a two-fold contention was urged on behalf of the assessee. The first was that under Part D of Schedule-Ill of the Wealth-tax Act, the book value of the assets ought to have been taken into account. Secondly, in any event, the multiple of 12.5 adopted by the lower authorities is very much on the high side.
38. On hearing both the sides, we decline to interfere in this matter too. Reasons : First, Schedule-III is applicable with effect from the assessment for the assessment year 1989-90. Secondly, it is well-settled that rent capitalisation method is the proper method to apply to value tenanted properties. For a fact, the Courts have gone to the extent of saying that while applying rent capitalisation method, even the reversionary value cannot be taken into account. Thirdly, the multiple of 12.5 adopted by the lower authorities cannot be considered to be high.
39. In view of the foregoing, therefore, we reject the alternative contention for the assessee.
40. Common issue Nos. 2 & 3 : Valuation of Delhi property and valuation of motor car vehicles.
At the time of hearing, the related grounds were not pressed. They are, therefore, dismissed as such.
41. In the result, all the appeals are dismissed.