Karnataka High Court
D.R. Puttanna Sons Pvt. Ltd. vs Commissioner Of Income-Tax on 1 March, 1986
Equivalent citations: [1986]162ITR468(KAR), [1986]162ITR468(KARN)
JUDGMENT
K. Jagannatha Shetty, Actg. C.J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question :
"Whether the Tribunal was right in law in holding that the income derived by the company was assessable under the head 'Property' ?"
2. The facts are simple and lie in a narrow compass. The assessee is a private limited company. The company has taken on lease a site on December 6, 1973, on payment of stipulated rent for a period of 30 years. The lease, inter alia, stipulated that the assessee had to put up a building within certain time and upon expiry of the period of 30 years, the entire property with the building constructed thereon should revert to the lessor. Accordingly, the assessee constructed a building and let it out on rent. The income derived by way of rent was shown in the return as income from business. The Income-tax Officer, however, held that since the assessee had taken on lease the site in question and constructed the building at its own cost, the assessee had to be treated as the owner of the building during the period of the lease and the income derived from the property had to be assessed under the head "Property" and not under the head "Business".
3. On appeal, the said assessment order has been upheld by the Appellate Assistant Commissioner. On further appeal, the Tribunal considered the various decisions of other High Courts and also perused the terms of the lease as between the assessee and the tenant and came to the conclusion that since the subject-matter of the lease was the land and not the constructed property, the assessee became the owner of the building put up on the land for a period of 30 years during which the lease was in operation. It also held that for the purpose of considering the nature of the income derived by the assessee, the memorandum of association of the company need not be looked into. So stating, the Tribunal upheld the order of the Appellate Assistant Commissioner and dismissed the appeal.
4. Now, the sole question for consideration is, whether the income derived by the assessee by way of rent could be assessed under the head "Property" or under the head "Business" ? jIt is not in dispute that the assessee remained the owner of the building for the period of 30 years and upon expiry of that period, the land leased to the assessee with the building constructed thereon would revert to the lessor. The income by way of rent recovered from the tenant inducted by the assessee cannot, therefore, be considered as business income so long as the assessee remained the owner thereof.
5. A similar question came up for consideration before the Supreme Court in S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700. The assessee therein was also a private limited company. The objects of that company as per the memorandum of association were, among others, to purchase, take on lease or otherwise acquire and to hold, cultivate, improve, lease, sell, exchange, mortgage, or otherwise dispose of land, houses, mines, minerals, mining and other real and personal property and to deal with the same commercially. While considering the activities of the company and the income derived therefrom, the Supreme Court observed thus (at pages 700 and 701) :
"The liability to tax under section 9 of the Income-tax Act, 1922, of the owner of the buildings or land appurtenant thereto. In case, the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under section 9 even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon. 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."
6. It would be clear from the above observation that the purpose for which the company was incorporated or the terms with which the memorandum of association has been couched are not relevant for the purpose of determining the nature of the income derived from the property of which the assessee was the owner. If the assessee is the owner of the buildings or lands appurtenant thereto, the income derived therefrom should be assessed as income from "property" and not from "business".
7. A similar case came up for consideration before this court in Y. V. Srinivasamurthy v. CIT [1967] 64 ITR 292 (Mys), wherein it was observed that if the assessee was the owner of the building during the period of the lease, he would be entitled to claim depreciation.
8. In Tinsukia Development Corporation Ltd. v. CIT [1979] 120 ITR 466, the Calcutta High Court has also adopted a similar line of reasoning.
9. From these decisions, it will be clear that so long as the title and ownership of the structure built by the assessee remained vested in the lessee (assessee), the income derived from the property will have to be assessed as income from the "property" and not that of a "business"
10. Counsel for the assessee, however, invited our attention to the recent judgment of the Madras High Court in CIT v. Admiralty Flats Motel [1982] 133 ITR 895 in which a contrary view has been taken. We have perused the decision, but we do not find there any reference to the decision of the Supreme Court in S. G. Mercantile Corporation's case [1972] 83 ITR 700. With respect, therefore, we are unable to agree with the view taken by the Madras High Court.
11. In the result, we answer the question in the affirmative and against the assessee. jIn the circumstances, we make no order as to costs.