Income Tax Appellate Tribunal - Bangalore
Bhoopalam Commercial Complex & ... vs Commissioner Of Income-Tax on 15 April, 1999
Equivalent citations: [2000]72ITD262(BANG)
ORDER
S. Bandyopadhyay, A.M.
1. Both these appeals have been filed by the assessee for the two successive years against the common order passed by the CIT under s. 263 of the IT Act, 1961. The assessee-company derives income from a building put-up on lease hold land. The CIT discusses in his impugned order that the land was taken on lease for a period of 36 years. For both the years under consideration, the assessee declared the income received by it by way of rent under the head "Income from business" and claimed deductions towards depreciation, ground rent, light and water charges, etc. In the assessment orders, the ITO accepted the above mentioned claims of the assessee and assessed the income at figures of loss very near the returned figures.
2. In the impugned order under s. 263, the CIT stated that the return receivable was required to be computed under the head "Income from house property" and hence the ITO ought not to have allowed the aforesaid deductions. The CIT also discussed that the buildings were owned by the assessee and as such the income should have been computed under the head "Income from house property". The assessee contended before the CIT that the assessee-company had been formed with the object, inter alia, to carry on the business to purchase, take on lease or otherwise acquire lands and construct structures thereon and to lease or deal in such structures on commercial lines. It was furthermore submitted by the assessee that in pursuance to the above mentioned object clauses, the assessee had constructed a commercial complex on leasehold land and hence the income therefrom had rightly been assessed under the head 'business'. The CIT however, did not agree with the contention of the assessee. He held that the case of the assessee was covered by the decision of the Karnataka High Court in the case of D. R. Puttanna Sons (P) Ltd. vs. CIT (1986) 162 ITR 468 (Kar). Respectfully following the said decision of the jurisdictional High Court, the CIT rejected the objections of the assessee, set aside both the assessments and directed the AO to make fresh assessments, computing the income from rentals received from the commercial complex under the head "Income from house property".
3. It is required to be mentioned here that both these appeals were originally decided by the Tribunal, Bangalore Bench by its consolidated order dt. 25th March, 1997 in ex parte manner, in absentia of the assessee and in favour of the Revenue by following the aforesaid judgment of the Karnataka High Court in the case of D. R. Puttanna Sons (P) Ltd. (supra). Later on however, in a combined order in M.P. No. 54/Bang/1998 dt. 10th November, 1998, the earlier orders passed by the Tribunal were recalled and the appeals were heard afresh, this time in the presence of the representative of the assessee Sri S. Venkatesan.
4. Sri Venkatesan strongly argued that actually the case of the assessee is fully covered by another judgment of Karnataka High Court in the case of Balaji Enterprises vs. CIT (1997) 225 ITR 471 (Kar). He also relied on certain other judgments of different Courts, to which we shall advert later on.
5. Sri Venkatesan furthermore argued that inasmuch as the assessee had constructed a property on leasehold land for a limited period of 36 months, it could not be considered to be the absolute owner of the property and hence the income derived therefrom should not be assessed as income from house property. He also contended that since the business of the assessee was to develop properties, the commercial complex constructed by the assessee was its commercial asset utilised by it in its business and hence the entire income derived therefrom should be treated as business income.
6. On the other hand, the learned Departmental Representative strongly relied on the aforesaid judgment of the Karnataka High Court in the case of D. R. Puttanna Sons (P) Ltd. (supra) and contended that the facts of the present case are in all force with those of the said case. He also relied on an order of the Tribunal, Bangalore Bench dt. 1st June, 1998 in ITA No. 1718/Bang/91 in the case of Bux-Ranka Developers (P) Ltd., asst. yr. 1989-90, in which case the Tribunal had held by relying on the judgment of the Supreme Court in the case of CIT vs. Podar Cement (P) Ltd. (1997) 226 ITR 625 (SC) that the term "owner" as appearing in the sections relating to income from house property has got a wider connotation and in that view a person who is entitled to receive income from the property in his own right will have to be treated as the owner of the property and the income from the property will have to be assessed in his hands as income from house property.
7. On the issue as to whether the assessee renders common service of various nature to its tenants, the learned Departmental Representative tried to point out by making reference to the P&L a/c for both the years that the expenses provided for such common services were just nominal and that the main bulk of the income of the assessee arose out of letting out of the house property constructed by it.
8. Firstly, we will take into consideration some decisions relied upon by Sri Venkatesan as below :
(1) CIT vs. V.S.T. Motors (P) Ltd. (1997) 226 ITR 155 (Mad) In this case it was held that when the building was constructed by the assessee for use as business premises and part of the business was let to the Government Department on account of shifting of some of the offices of the assessee outside the city, the building was a commercial asset belonging to the assessee and hence rent receipts were taxable as business income.
(2) CIT vs. M. P. Bazaz & Ors. (1993) 200 ITR 131 (Ori) It was held in this particular case that the finding of the Tribunal that obtaining of loan, commercial construction of the building and subsequent lease of the building constituted its business activities was valid.
(3) CIT vs. Admiralty Flats Motel (1982) 133 ITR 895 (Mad)
9. It was held by the Madras High Court that meaning of "business" should not be considered to be restricted to the concept as envisaged under the IT Act, and on the other hand construction of building and running lodging house amounted to business for the purpose of Indian Partnership Act. This particular judgment related to allowance of registration of the firm and does not seem to be having much relevance to the present issue under consideration.
10. It is, therefore, required of us to examine the facts of the present case in detail and to decide the issue in the light of the two judgments of the Karnataka High Court in the case of D. R. Puttanna Sons (P) Ltd. (supra) and Balaji Enterprises (supra).
11. In the case of D. R. Puttanna Sons (P) Ltd. (supra) that assessee was also a private limited company and took on lease a site 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 Karnataka High Court ultimately held that the income by way of rent should be treated as income from property and not as business income. In coming to its judgment as above, the Karnataka High Court, in that case relied upon certain discussions made by the Supreme Court in the case of S. G. Mercantile Corpn. (P) Ltd. vs. CIT (1972) 83 ITR 700 (SC) to the effect that in case the assessee is the owner of the buildings or land appurtenant thereto, he would be liable to pay tax under s. 9 of the IT Act, 1922 (corresponding to s. 22 of the 1961 Act), even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon. The Karnataka High Court furthermore held 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.
12. On the other hand in the case of M/s Balaji Enterprises (supra) the facts were that the assessee-firm in that case, was originally constituted to carry on the business of dealing in real estate and setting up, development and exploitation of the commercial complex and market. The partnership deed also provided in that line. As to the question of whether the assessee was carrying on a business activity or not and whether the income derived by way of rent from the property developed by the assessee should be considered as income from business or as income from house property, the Hon'ble Karnataka High Court held that there was no finding by the Tribunal that the assessee was the owner of the property, that the partnership deed itself provided that at the end of the lease period, the surviving partners had to handover possession of the leased property with the building constructed on the said property to the lessors that the object itself of the assessee-firm was to obtain the lands either on leasehold or on freehold basis and set up commercial complex and lease them out. The Karnataka High Court thereafter held that the assessee-firm had received the income as part of their business activities and that the leasing out of the commercial complex made by the assessee-firm was part of its business and it amounted to business activities.
13. In coming to the above conclusion, this time also the Hon'ble Judges of the Karnataka High Court relied on certain discussions made by the Supreme Court in the case of S. G. Mercantile Corpn. (P) Ltd. (supra). Special emphasis was laid on the discussions made by the Supreme Court at p. 706 of the reported judgment as below :
"The definition of the word "business" as given in s. 2(4) and reproduced above shows its wide amplitude and we agree with Mr. Chagla that it can embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the market. The important question which arises, in the latter case is whether the acquisition of the property on lease and letting out of the shops and stalls was in the course of investment or whether it was essentially a part of the business and trading operation of the assessee. The paramount consideration which would weigh is whether the acquisition of the property was by way of investment and whether the property was let out because of the assessee having a title in the same or whether the acquisition and letting out of the property constituted the business and trading activity of the assessee."
14. The Karnataka High Court furthermore quoted the discussions made by the Supreme Court at p. 707 of the above mentioned judgment :
"Ownership of property and leasing it out may be done as a part of business or it may be done as landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done ........
But a company formed with the specific object of acquiring properties not with the 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 its business, cannot be said to treat them as land owner but as trader."
15. On the basis of the above discussions made by the Supreme Court in the case of S. G. Mercantile Corpn. (P) Ltd. (supra), the Karnataka High Court discussed at p. 476 of the reported judgment in the case of M/s Balaji Enterprises (supra) as below :
"From the aforesaid decision of the Supreme Court it is clear that if a person receives rental income by leasing out the property as its owner, then the income may come under s. 22 of the IT Act, 1961. But if the leasing of the property was done as part of the business concern, the income received therefrom, cannot be said to be received as a landowner but as a trader. In other words, if the property is taken on lease thereafter developed and leased out to various tenants as part of the business activity of the assessee and not in its activity as the owner, then the income has to be treated as business income".
16. It thus appears that both the Supreme Court in the case of S. G. Mercantile Corpn. (P) Ltd. (supra) and the Karnataka High Court in the case of M/s Balaji Enterprises (supra) wanted to dichotomise the activity of leasing out a property developed by the assessee according to the intention behind such leasing out operation. Both the Courts also seem to take different views of the situation when the leasing out operation is done by the assessee as landowner as distinguished from when the same activity is carried on as a trader or businessman. The Karnataka High Court has clearly held in the case of the Balaji Enterprises (supra) that in the latter case i.e., when leasing out of the property developed by the assessee is done merely as a trader or as a businessman, the income derived from the rent from the tenants would have to be assessed as business income. First consideration in this regard, therefore, seems to be to decide what the role of the assessee in the instant case was i.e., whether the assessee wanted to remain satisfied merely as a landowner or as a businessman interested in developing the property, exploiting of the same as commercial asset and deriving rental income therefrom by way of business income only. From the object clause of the assessee-company, it would appear that the assessee-company wanted to develop the property into a commercial complex and wanted to derive the rental income as a businessman. Whether much common service were rendered in the process or not, therefore, does not seem to be of much concern.
17. Apart from the above, the crux of the problem seems to be whether the assessee, in the instant case can be treated as the "owner" of the property developed by it. Shri Venkatesan has pointed out that even in the notice issued by the CIT at the stage of initiating the proceedings under s. 263, he himself came out with the finding that the assessee was not the absolute owner of the properties. To find out the exact position of the ownership of the properties, we will have to go down to the lease agreement under which the assessee took up the operation of taking the lease and constructing the commercial complex thereon. In this connection, it has been found out that originally, the lease of the properties under consideration was granted by one Smt. Chokkamma to the lessee Sri B. R. Kapanipathy on 20th December, 1972 under a lease agreement entered into by both the parties on that date. Lateron the same lease was transferred by Sri B. R. Kapanipathy to the assessee-company by a deed of transfer of lease dt. 27th January, 1975. However, in the latter deed of transfer of lease, all the stipulations provided in the original lease deed, dt. 20th December, 1972 were incorporated. Hence, and since the assessee-company stepped into the shoes of Sri B. R. Kapanipathy, in order to appraise the nature and extent of the rights of the assessee in the leasehold property, it will be necessary for us to examine in detail the aforesaid original lease deed dt. 20th December, 1972.
18. Under the aforesaid lease deed, the part of the premises consisting of the main buildings, out house and vacant land forming part of Nos. 39-40 Seshadri Road were leased out to the lessee for the purpose of constructing a commercial complex therein, subject to the lessee obtaining necessary permission and license from the authorities concerned. The lease deed also provided that the period of lease would continue for 36 years.
19. Clause 4 of the aforesaid lease deed provides for payment of rent by the lessee to the lessor at certain rates. It is required to be noted that the aforesaid amount of monthly rent was liable to be increased substantially on completion of the premises to be constructed by the lessee and occupation of the same by the lessee.
20. Under cl. 5, the lessee was at liberty to demolish the existing buildings and trees on the demised land and any other superstructures and was to build a commercial complex at a cost of not less than Rs. 4 lakhs. The lessee was also required to equip the building with latest sanitary, electric and water installations with all conveniences, etc.
21. Under cl. 6, the lessee was required, during the period of the lease to bear and discharge all existing and future rates, taxes, assessments, duties impositions and outgoings, etc. Under cl. 7 again, the lessee was also required to bear and pay all expenses relating to the conduct of the business, such as deposits to be paid to the Electricity Board, consumption charges, water charges, police charges, etc.
22. Under cl. 8, again, the lessee was required to insure and keep insured the buildings and other structures, etc. at its own cost. The lessee was also required to produce, whenever required by the lessor, the policy of insurance and the receipt for the current year's premia.
23. Under cl. 9 again, the lessee was required to carry out periodical white-washing and colourwashing, painting and other repairs if and when required by the authorities and was also bound to keep the property and other structures and installations in good and repaired conditions.
24. Under cl. 10, the lessee should permit the lessor and/or her agent at all reasonable times to enter and study the conditions of the demised land and other buildings constructed thereon.
25. Under cl. 11 again, the lessee shall not use the demised land or buildings constructed thereon for any trade or business of obnoxious or offensive or dangerous nature or for any purpose calculated to cause damage or injury to the demised property and the buildings constructed thereon.
26. In cl. 12 it was provided that in the event of acquisition of the premises, the compensation in respect of the land thus acquired shall go to the lessor and that attributable to the building shall be divided in such proportion between the lessor and the lessee as assessed by a valuer or by mutual agreement.
27. In cl. 13 again, the lessee was required to provide the necessary furniture to the commercial buildings in rooms, balcony and lounge, etc. However, it was specifically mentioned that such furniture shall be the property of the lessee.
28. In cl. 15 provides that the lessee shall not without the previous consent of the lessor make any permanent structural alterations of any constructions, in the buildings provided however that if the lessee is required to make such alterations or constructions by any authority, the lessee shall be entitled to do so without the consent of the lessor.
29. Clause 17 which is very important provides that on the expiry of the lease period, the demised premises and all other buildings constructed by the lessee in pursuance of the lease deed shall become the property of the lessor and the lessor shall be the absolute owner of the same.
30. Clause 20 on the other hand provides that the lessee shall be at liberty to lease the commercial building constructed on the scheduled land to any other person or firm or company on his own terms but shall restrict the period of such lease to the period of the lease granted to him under the lease deed. It was furthermore provided that the lessee alone shall be directly responsible to the lessor in regard to the observance of the terms and conditions contained in the lease deed.
31. According to cl. 21, the lessor covenants that the lessee paying the rent and observing the performing the covenants and agreements as mentioned in the lease deed shall peacefully hold and enjoy the demised premises during the aforesaid term without any observation, let or hindrance by the lessor or any other person.
32. It would appear from the different terms and conditions under the lease deed that this was not simply a case of leasing out the land owned by the lessor to the lessee and allowing the lessee to have a complete free hand thereon. On the other hand, all the stipulations in the lease deed as discussed by us above clearly show that the lessor intended to maintain her right even on the property to be constructed by the lessee at his own cost and would also be entitled to some portion of the compensation on acquisition of the building also, if any. The lessor made the lessee bound in various respects even with regard to the user of the property and the lessee remained responsible and accountable to the lessor in the matter of enjoying the property to be constructed by him in various ways. All these facts clearly show that the ultimate lessee i.e., the assessee-company was not the absolute owner of the property although the same was constructed by it at its own cost and that the lessor clearly retained some rights and even lien over the said property under the lease deed itself. We should therefore, hold that the assessee-company did not derive rental from the property just as owner thereof but more so, as a businessman exploiting the said property. Ultimately therefore, we are of the opinion that the present case is covered by the detailed discussions made by the Hon'ble Karnataka High Court in the case of M/s Balaji Enterprises (supra) to which we have already alluded to. We therefore, feel that on the facts of the present case, the income though rental in nature will have to be treated as business income of the assessee and not as its income from house property inasmuch as the assessee did not have full proprietary rights over the property in accordance with the different restricting conditions under the lease deed. The case of Poddar Cements (P) Ltd. (supra), as decided by the Supreme Court, stands on a different footing. In that case that assessee had made the full payment in respect of the property acquired by it and was also enjoying the same. Only hitch was that the property had not been transferred to that assessee under a duly registered transfer deed. In the instant case however, such is not at all the case. We have already discussed above that although the assessee-company incurred the cost for constructing the commercial complex, it was bound by the different restricting provisions and stipulations of the lease deed with the original lessor and hence the assessee-company cannot be considered to be enjoying all the property as absolute owner thereof. Ultimately, we would hold that the treatment of the rental income received by the assessee in the original assessments, as income from business, was correct and hence the assessment orders passed by the AO cannot be considered to be erroneous or prejudicial to the interest of Revenue. The CIT was therefore, not entitled to exercise his jurisdiction under s. 263 and the pass orders under that section. We, therefore, cancel the impugned order passed by the CIT under s. 263 as unwarranted, for both the years under consideration.
33. In the result, the appeals filed by the assessee are allowed.