Income Tax Appellate Tribunal - Mumbai
The Dy. Cit, Special Range 54 vs Godrej Properties And Investments Ltd. on 14 November, 2003
Equivalent citations: [2005]93ITD308(MUM), (2005)94TTJ(MUM)7
ORDER
R.V. Easwar, Judicial Member
1. The appeal is by the Department and the cross objection is by the assessee. They pertain to the assessment year 93-94. The assessee is a company, incorporated on 8th February 1985. According to Clause (1) of the main objects as per the memorandum of association, it was to carry on business as dealers, re-sellers, house and estate agents, auctioneers, lessors, builder, developers, experts etc. in real estate, immovable and movable properties and for that purpose to acquire, hold, take on lease, sell, deal, dispose of, turn to account etc. immovable and movable properties and other properties such as lands, flats, dwelling houses, shops, offices, markets, commercial complex etc. Pursuant to this object, the company had constructed a property at Noida. It was given on rent of Rs. 5000 per month to another company by name Godrej Soaps ltd. For the year ended 31-3-1993, the assessee-company received a rent of Rs. 60,000 and claimed in the return of income that the same should be assessed under the head "Business" so that it can claim allowance of Rs. 67,563 as depreciation Under Section 32 of the IT Act. The AO took the view that even though the company was formed for the purpose of carrying on the business of constructing and letting out properties, since there is a specific head under which the rental income from property is to be assessed, viz., "Income from House Property", the rent received from Godrej Soaps has to be assessed only under that head. He therefore brought the rental income to tax under this head, and since there was no provision in the computation sections relating to the income under this head to allow depreciation, disallowed the claim.
2. On appeal, the CIT(A) accepted the assessee's claim and held that since it is the business of the assessee-company to construct and let out properties, the rental income shall be assessed under the head "Business". He therefore directed the AO to allow the claim of depreciation also.
3. The Department is in appeal to contend that the CIT(A) is wrong in holding that the rental income has to be assessed under the head "Business". It is contended, on the strength of the judgments of the Supreme Court in S.G. Mercantile Corporation v. CIT (83 ITR 700) and the Madras High Court in O. Rm. SP. Sv. Firm v. CIT (39 ITR 32) that where a specific head is provided in the Income Tax Act to cover a particular type of income, the assessment of that income shall be made under that head alone and not under any other head. It is thus contended that since the rental income from property falls under the head "Income from House Property", it cannot be assessed under the head "Business" merely because the assessee-company was incorporated for the purpose of constructing and letting out properties. Reference was also made to the order of the Delhi Bench of the Tribunal in the case of Atmaram Properties (P) Ltd. (85 ITD 86). The Id. representative for the assessee on the other hand strongly relied on the judgment of the Supreme Court in Karanpura Development Co. v. CIT 44 ITR 362 to contend that in the case of an assessee, which is a company and whose business it is to earn income from property, the assessment of the income shall be made under the head "business" and not under the head "property". In support of Ground No. 1 of the cross objection, it is argued that even if the assessment of the rental income is to be made under the head property, depreciation under Section 32 has to be allowed, because it is only for purposes of the Income-tax Act that the rental income is to be taxed under the head "property" and for general purposes the income represents the income arising from the assessee's business operations and therefore it is permissible for the assessee to rely on the provisions of Sections 28 to Section 43 of the Income-tax Act, which pertain to allowances and deductions while computing the income under the head business, and claim that depreciation Under Section 32 shall be allowed, even if the income by way of rent is assessable under the head "property. It is contended that the assessee has satisfied the conditions of Section 32 and hence the claim is allowable. In support of this proposition, the Id. representative for the assessee relied on the following rulings :-
(1) Addl. CIT v. Laxmi Agents P. Ltd. (125 ITR 227) (Guj) (APP) (2) CIT v. Anniversary Investments (175 ITR 199) (Cal) (3) CIT v. National and Grindlays Bank (202 ITR 559) (Cal) (4) CIT v. Jardine Hinderson (210 ITR 981) (Cal) (5) Shaan Finance Ltd. (231 ITR 308 at 314) (SC) It is contended on behalf of the assessee that the proposition laid down in these cases is that even though the income is computed under a particular head, expenditure can be allowed under a different head. This contention is contested on behalf of the Department by submitting that it is opposed to the very scheme of the Income Tax Act, under which the computation of income under a particular head must be made strictly in accordance with the provisions relating thereto under that head and there cannot be any crossing over of one computation provision under one head to another head.
4. We have carefully considered the issue in the light of the rival contentions and the authorities cited. As regards the head of income under which the rental income is to be assessed, we may refer to a few decisions. In United Commercial Bank Ltd. v. CIT, West Bengal (32 ITR 688)(SC), the assessee was a bank and it claimed that the interest on securities held by it should be assessed under the head "business" and not under the head "interest on securities". The Supreme Court held that under the Income-tax Act, 1922, the income of an assessee is one and Sections 7 to 12 direct the modes in which income-tax is to be levied. It was held further that none of those sections can be treated to be general or specific for the purpose of any one particular source of income and that they were all specific and dealt with various heads under which an item of income, profits and gains of an assessee falls. It was held further that these sections are mutually exclusive and where an item of income specifically falls under one head, it has to be charged under that head and no other. On this basis, it was held that the interest on securities fell for being assessed under Section 8 of the Act and not under Section 10, which provided for the head "business", even though the securities were held by the bank as part of its trading assets in the course of the business. In East India Housing & Land Development Trust Ltd. v. CIT (42 ITR 49) (SC), the company was incorporated with the object of buying and developing landed properties and markets. The company purchased land in Calcutta and set up a market. It realised income from the tenants of the market and the question arose as to the head of income under which it was assessable. The Supreme Court held that the income should be assessed under the head "property" and not under the head "business" as claimed by the assessee. The following observations in this decision are pertinent :-
" Income-tax is undoubtedly levied on the total taxable income of the taxpayer and tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in Section 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in Section 6, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head.
The income derived by the company from shops and stalls is income received from property and falls under the specific head described in Section 9. The character of that income is not altered because it is received by a company formed with the object of developing and setting up markets."
In Parekh Traders v. CIT, Pune (150 ITR 310), the above observations were applied by the Hon'ble Bombay High Court to a case arising under the Income-tax Act, 1961, and it was held that the heads of income enumerated in Section 14 of the 1961 Act are mutually exclusive and each specific head covers items of income arising from the specific source. Income derived as rent from property must be computed under that specific head regardless of the fact that the property had at one time been utilized by the assessee for business purposes. It was held that such property cannot be treated as a business asset to assess the rent as business income.
5. The above judgments of the Supreme Court and the Bombay High Court are sufficient to dispose of both the appeal as well as point raised by the assessee in ground No. 1 of its Cross Objection. If the principle laid down is that the heads of income are mutually exclusive and that a particular item of income which falls under a particular head shall be computed only in accordance with the provisions relating to that head, we should have thought that the appeal of the department must be decided in its favour. But the Id. representative for the assessee has drawn our attention to a later judgment of the Supreme Court in Karanpura Development Co. Ltd. v. CIT, West Bengal (supra). A perusal of the facts in that case shows that the company was formed with the object of acquiring and disposing of underground coal mining rights in certain coal fields. The assessee acquired leases for a term of 999 years which were sub-let to others for a consideration of salami. The assessee had acquired the leases by paying Rs. 40 per bigha, whereas in respect of sub-leases granted by it, it charged salami of Rs. 400 per bigha. The question arose as to whether the amounts received by the assessee as salami for granting sub-leases can be assessed under the head "business". The Supreme Court held that in acquiring the head leases and granting the sub-leases, the company carried on the business and the amounts received by way of salami were trading receipts liable to tax under the head "business". It will be seen from the facts of this case that the assessee in this case was not the owner of the land and therefore there was no question of income being assessed under the head "property". This aspect of the matter has been noted by the Supreme Court in S.G. Mercantile Corporation (supra). At page 708 (of 83 ITR), the Supreme Court noted that the assessee in the cited case of Karanpura Development Co. Ltd. was a lessee of the coal fields and so far as such assessees are concerned, who as part of their essential trading activity take leases of property and sublet parts thereof with a view to make profits, the dictum laid down in that case would hold good and the profits have to be treated as business income. In S.G. Mercantile Corporation (supra) itself, the assessee was not the owner of the property and therefore the Supreme Court ruled out the applicability of Section 9 of the 1922 Act (see pages 705, 708 & 709 of 83 ITR). The only question was whether the income by leasing out the properties of which the assessee was not the owner, could be assessed as business income or as income from other sources. Following Karanpura Development Co. (supra), where the facts were similar, it was held that the income from the lease was chargeable to tax as business income. In S.G. Mercantile Corporation (supra), even though the controversy centred around the question whether the income was assessable as "business income" or under the head "other sources", the Supreme Court referred to the provisions of Section 9 of the 1922 Act which dealt with income from property, as is done by Section 22 of the 1961 Act. The following observations are relevant :-
"Section 6 of the Act enumerates the various heads of income, profits and gains chargeable to income-tax. Those heads are (i) Salaries; (ii) Interest on securities; (iii) Income from property; (iv) Profits and gains of business, profession or vocation; (v) Income from other sources; and (vi) Capital gains.
Section 9 of the Act deals with income from property. According to that section, the tax shall be payable by an assessee under the head "Income from property" in respect of bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, subject to certain allowances which are mentioned in that section but with which we are not concerned. It is noteworthy that the liability to tax under Section 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under the above provision even if the object of the assessee in purchasing the landed property was to promote and develop 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. The income derived by such a company from the tenants of the shops and stalls constructed on the land for the purposes of setting up market would not be taxed as "business income" under Section 10 of the Act, to which a more detailed reference would be made hereafter, but under Section 9 of the Act. A concrete instance of this type is afforded by the case of East India Housing and Land Development Trust Ltd. v. Commissioner of Income-tax [1961] 42 I.T.R. 49, 51 (S.C.)."
6. In the light of the three judgments of the Supreme Court, the judgment of the Supreme Court in Karanpura Development Co. Ltd. (supra) cited by the Id. representative for the assessee cannot be held applicable to the facts of the present case. As already noted, in Karanpura Development Co. Ltd. (supra), the assessee was not the owner of the property and therefore the question of applying Section 9 did not fall for consideration. In the present case, the assessee is the owner of the property and therefore the rental income has to be assessed only under the head "income from house property". It follows therefrom that the assessee can claim only such deductions as are permissible under Section 22 to 27. There is no provision to allow depreciation in respect of the property in these sections.
7. The above conclusion is sufficient to dispose of even the point raised in the Cross Objection, namely, that though the rental income received by the assessee herein is assessable under the head "property", the depreciation must be allowed under Section 32, which falls under the computation provisions relating to business income. But, then the Id. representative for the assessee argued the point with considerable vehemence by placing reliance mainly on the judgment of the Gujarat High Court in Addl. CIT v. Laxmi Agents (supra). We are unable to give effect to the argument. It seems to us that the judgments of the Supreme Court to which we have referred earlier have not been placed before the Gujarat High Court for consideration. Further, the attention of the court does not appear to have been drawn to the provisions of Section 29 of the Income-tax Act, 1961 which says that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Section 30 to 43D. Section 28(i) says that the profits and gains of any business carried on by the assessee at any time during the previous year shall be chargeable to income-tax under the head "profits and gains of business or profession". Reading these two provisions together, it is seen that the provisions of Sections 30 to 43D come into play only where the income is charged under the head "business". By implication, where the income is not charged to tax under the head "business", it follows that the provisions of Sections 30 to 43D are not attracted. Each head of income mentioned in Section 14 of the Act is to be computed in the manner provided in the computation provisions under that head. The heads of income have been held to be mutually exclusive. It follows that the computation provisions are also mutually exclusive and one cannot intrude on the other by travelling beyond the particular head. Section 24 provides for deductions from income from house property. It lists out the deductions which are allowable in computing the said income. This section does not provide for allowance of depreciation. The income of the assessee having been assessed under the head "property", no depreciation allowance is therefore permissible. It is not open to travel beyond the computation provisions of the particular head under which the income is assessed to allow a claim of the assessee which falls under the computation provisions relating to a different head. In P.V.G. Raju v. CIT (66 ITR 122) (AP), the Andhra Pradesh High Court, holding that the position has been placed beyond all controversy by the Supreme Court in United Commercial Bank (supra), held that the income derived from a distinct source falling under a specific head has to be computed for the purposes of taxation in the manner provided by the appropriate section and therefore if the assessee is in receipt of income from property it is to be dealt with under Section 9. This means that the computation has to be made only in accordance with the provisions relating thereto under that head. In CIT v. Vysya Bank Ltd. (190 ITR 77)(Kar), the Karnataka High Court was concerned with a situation where the assessee-bank claimed that in granting deduction for entertainment expenditure Under Section 37(2A) of the Income-tax Act, the limit stated therein should be applied not only with reference to the income computed under Section 28 under the head "business" before the allowance of such expenditure, but also taking into account the income computed under the head "interest on securities". While rejecting the assessee's claim, it was held as under :-
"Section 14 itself clearly indicates that income is classified into, in the relevant year, under heads A, B, C, D, E and F. In addition to that, if one looks at the scheme of the Act, other types of income, i.e., special sources of income like from shipping business, etc., are also taxable income. (See Sections 44B and 172 of the Act). Therefore, it is not difficult to reasonably conclude that the legislative intent is to classify the income under various heads and permit such income to be assessed in the manner provided in the machinery provisions of the Act for the purpose of computation and recovery of tax. One such provision made to compute the income is Section 37 of the Act. Section 37 has relation, by the language employed, to the "income of profits and gains from business or profession". Whereas, at the relevant time, computation of income and assessment of income from interest on securities was under Sections 18, 19 and 20 of the Act, Section 20 permitted certain allowances which alone was admissible in respect of income by way of interest on securities and not available to other incomes under other heads. Therefore, if an assessee has income from more than one source, each of his income from different sources has to be assessed having regard to the provisions which govern the computation of that income and allowances permissible to the source of that income. It is not unusual that an assessee may derive income by way of salary, by way of house property, by way of private lands, by way of business, by way of profession and capital gains, etc. Viewed thus, it would not be open to the bank to claim the benefit of classification of its income under two different heads for the sole purpose of claiming benefit of Section 37(2A) of the Act to be one type of income falling under the single head, viz., "gains from business or profession."
In this case, the Karnataka High Court also rejected as inapposite the reliance placed by the assessee on the judgment of the Supreme Court in Cocanada Radhaswamy Bank Ltd. (57 ITR 306) and explained that the Supreme Court in that case did not examine the scope for claiming an allowance under the relevant provisions of the Act for the purpose of relief and that the Supreme Court was only concerned with the totality of the taxable income under various heads. To add thereto, we may also state that the question before the Supreme Court in Cocanada's case was whether the loss from banking business can be brought forward and set off against the income from securities under Section 24(2) of the 1922 Act. Though the condition imposed by the section was that the loss should have been computed under the head "business", while permitting the same to be set off in the subsequent year, there was no condition that it can be set off only against income assessed under the head "business". The only condition was that the loss can be set off only against profits and gains of the assessee from the same business. On the language of Section 24(2), the Supreme Court held that since there was no requirement that the loss could be set off only against income assessed under the head "business" and that the only requirement being that the assessee should have earned profits from the same business, the income from securities, though assessed under the head "interest from securities" under Section 8 of the 1922 Act, represented profits and gains of the banking business as understood in the general sense and therefore the loss can be adjusted against the interest from securities. It will thus be seen that this decision turned on the particular language of Section 24(2) which, to repeat, did not require that the income against which the loss from banking business was sought to be set off, should be assessed under the head "business". A further perusal of the decision shows that in this very judgment, the Supreme Court has recognised the distinction between treating an income as part of the assessee's business understood in the general sense on the one hand and the classification and computation of the various types of income, on the other. At page 309-310 (of 57 ITR), the Supreme Court observed that Section 6 of the old Act (Section 14 of the new Act) "classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. Though for the purpose of computation of income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of the income from business if the securities are part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of Section 6 but on commercial principles." (underlining ours). The quoted observations show that what was held by the Supreme Court in this judgment, for which reliance was placed on the earlier judgment in CIT v. Chugandas & Co. (55 ITR 17), was that the section providing for classification of the income derived by the assessee into various heads of income is not decisive of the nature of the income and if a question arises as to whether a particular income is income from business, regard must be had to commercial principles and on this aspect Section 6 of the old Act or Section 14 of the new Act does not provide any assistance. Having laid down this principle, in the very same judgment, a distinction was made between the principles applicable for determining whether a particular item of income is business income in the commercial sense and the principles applicable for computation of income under a particular head. These two judgments of the Supreme Court cannot be read, divorced from their context, as laying down the proposition that even though the income is assessable under a particular head, any expenditure or allowance against that income can be allowed under the computation provisions relating to another head of income, in the absence of any such provision in the computation provisions relating to the former head of income. This is our humble understanding of these two Supreme Court judgments.
8. In Addl. CIT v. Indian Overseas Bank (123 ITR 790), the Madras High Court was concerned with a question somewhat similar to the question dealt with by the Karnataka High Court in the case of Vysya Bank (supra). The Madras High Court understood the judgment of the Supreme Court in the case of United Commercial Bank (supra) as laying down that even in the case of banking business, the provisions of Section 8 of the 1922 Act would continue to be operative and that the computation would have to be made under that provision which provided for the head "interest on securities". With reference to the judgment of the Supreme Court in Cocanada's case (supra), the Madras High Court held that, that decision would have to be understood in the context of the claim for computation of the loss and that it does not do away with the distinction that has been pointed out in United Commercial Bank's case (supra), with reference to the computations under different heads. In the course of the judgment, the Madras High Court referred to a later judgment of the Supreme Court in Bengal and Assam Investors Ltd. v. CIT (59 ITR 547) and noticed that in this judgment, the Supreme Court pointed out that the earlier decision in Chugandas (supra) and Cocanada (supra) had no bearing on the question as to whether the dividend income had to be computed under Section 10 or Section 12 of the 1922 Act (business income or income from other sources). It was observed by the Madras High Court on the basis of the later judgment of the Supreme Court in Bengal and Assam Investors Ltd. that for purposes of computation of income as such, the distinction pointed out by Section 14 and the deductions specified in the other provisions following it in respect of each head will have to be borne in mind and applied. In CIT v. Dr. Rameshwarlal Pahwa (123 ITR 681) (Del), at page 690, Hon'ble Justice S. Ranganathan (as His Lordship then was) has observed that "it is well settled that where income falls in a particular head its computation has also to be made under the same head".
9. It is now necessary to refer to the judgment of the Bombay High Court in Great Eastern Shipping Co. Ltd. v. CIT (206 ITR 505). One of the questions posed before the High Court was whether on the facts and in the circumstances of the case, the amount of deduction under Section 33 by way of development rebate could be set off against the income from capital gains in the first instance. The High Court held that the classification under Section 14 of the income of the assessee into different heads has been done for the purposes of charge of income-tax and computation of the total income. At page 507, the High Court observed as under :-
" It is well-settled that each head of income is a distinct head. Income under that head has to be computed in the manner laid down in the Act for that purpose, and it is the aggregate income under different heads computed in such manner which forms the "total income". In that view of the matter, we find it difficult to understand the logic of the argument of learned counsel for the assessee that the total income should be arrived first for the purpose of giving deduction under Section 33 of the Act. It seems learned counsel is trying to put the cart before the horse. The argument of counsel goes counter to the clear scheme of the Act which provides for computation of income under each head first and sets out the manner of computation thereof including the various deductions and allowances permissible in the computation of such income. The question of aggregation of income from all sources to arrive at the total income can arise only thereafter.
Section 28 of the Act specifies the income that shall be chargeable to income-tax under the head "Profits and gains of business or profession". Section 29 lays down the manner of computation of income from profits and gains of business or profession. It provides that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43A of the Act. Section 33 of the Act provides for allowance of a deduction of the sum computed in the manner laid down therein by way of development rebate. This deduction, evidently, is to be made as provided in Section 29 while computing the income from business referred to in Section 28 of the Act.
In that view of the matter, we do not find any merit in the contention of learned counsel for the assessee that the development rebate allowable under Section 33 of the Act should be allowed as deduction from capital gains as claimed by it and not from business income."
10. Thus, there is ample authority for the proposition that once an item of income has been classified to fall under a particular head of income, the computation thereof has to be made only in accordance with the computation provisions relating to that head of income and no other. In view of the preponderance of the authorities, we are unable to give effect to the argument of the Id. representative for the assessee based on the judgment of the Gujarat High Court in Addl. CIT v. Laxmi Agents (supra) that the assessee should be allowed depreciation under Section 32 in respect of the properties, the rental income from which is assessed under the head "income from house property". The judgments of the Calcutta High Court cited by him are all on the question of computing the deduction Under Section 80-M. In CIT v. National & Grindlays Bank Ltd. (supra), the ITO restricted the deduction by apportioning a part of the expenditure incurred by the assessee towards earning of the dividend income. The High Court noted that the entire business of the assessee was to deal in shares and the dividends were earned in the course of such business and though because of the provisions of Section 56 the dividend is assessed under the head "other sources" the expenditure does not cease to be related to the business of the assessee as a whole and therefore no part of the same can be apportioned towards the earning of dividend income. The view taken by the other judgments of the Calcutta High Court, cited by the assessee, is the same. This principle is quite different from what we are considering in the present case. Accordingly, the first ground in the Cross Objection is rejected.
11. The second ground in the Cross Objection is that the assessee has been wrongly denied the statutory deduction of 1/5th for repairs Under Section 24(1)(i) of the Act. The department has relied on Clauses 5 & 8 of the leave and licence agreement. But these clauses are routine clauses which oblige the licencee to maintain the premises in good and clean condition and in proper repair. Under these clauses, the tenant cannot be said to have undertaken to carry out the repairs. In our opinion, therefore, the assessee is entitled to the allowance under Section 24(1)(i). We hold accordingly and allow the ground.
12. In the result, the appeal by the Department is allowed and the Cross Objection by the assessee is partly allowed.