Income Tax Appellate Tribunal - Delhi
Dy. Cit vs Chintels India Ltd. on 7 July, 2006
ORDER
Vimal Gandhi, President
1. These appeals by the revenue for assessment years 1996-97 and 1998-99 are directed against order of Commissioner (Appeals) holding rental income received by the assessee from a property as business income.
2. The revenue, in the memo of appeal has raised the following ground:
The learned Commissioner (Appeals) has erred in directing to treat the rental income from House Property as income from business as against income from house property assessed by the assessing officer."
3. On scrutiny of accounts of the assessee for the period relevant to assessment year 1996-97, the assessing officer found that rental income of Rs. 6,44,198 has been set off and adjusted against business losses. He was, however, of the view that assessee being owner of house property, its rental income was liable to be computed under the head, "Income from house property". In this connection, the assessing officer referred to decision of Honble Bombay High Court in the case of CIT v. National Storage (P) Ltd. which was subsequently affirmed by the Supreme Court in the case of CIT v. National Storage (P) Ltd. . According to the assessing officer as per above decision, house owning, howsoever profitable, cannot be a business or trade under the Income-Tax Act and where the income is derived by the exercise of property rights, the income has to be assessed under the head "Income from house property".
In the light of his above view, the assessing officer held that business losses could not be adjusted against house property income disclosed by the assessee as per provision of Section 72(1) of Income-Tax Act. The assessing officer for above view also referred to and relied upon decision of Supreme Court in the case of S.G. Mercantile Corpn. (P) Ltd. v. CIT . Their Lordship in the above case observed as under:
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 (that is under Section 9 of the IT Act, 1922 corresponding to Section 22 of the IT Act, 1961) 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 markets thereon."
4. The assessing officer also quoted decision of Honble Madras High Court in the case of O.RM.SP.SV Firm v. CIT (1960) 139 ITR 327 (Mad) to the effect that rental income is to be assessed only under the head "Income from house property" even if property constitutes stock-in-trade of a business and business of assessee is let out of house property. Therefore, assessing officer held that even in this case if house property in question were stock-in-trade or trading assets, it would make no difference and rental income was liable to be taxed only under the head "House property".
5. In the light of above, the assessing officer refused to adjust or set off rental income against business losses and assessed the same at Rs. 4,76,798.
6. In a similar manner for the assessment year 1998-99, house property income was taken at Rs. 4,99,200.
7. The assessee impugned above assessments in appeal before the Commissioner (Appeals) who disposed them through a consolidated order dated 29-1-2003. Before the Commissioner (Appeals), it was contended that rental income in earlier years was taken as business income and adjusted against business loss. The assessing officer while changing the head of income, totally disregarded past history of the case and reasons submitted by the assessee before him. This action of the assessing officer was claimed to be arbitrary and against principle of natural justice.
8. The assessee also made submissions as to how rental income in its case was not house property income but was business income. The aforesaid submissions are not reproduced in detail as learned Commissioner (Appeals) allowed relief to the assessee by following principle of consistency and by observing as under:
I have considered the rival submissions and find merit in the contentions of the appellant. The jurisdictional pronouncements relied upon by the appellant apply to the facts of his case squarely. For instance the judgment of the jurisdictional High Court in the case of CIT v. Neo Poly Pack (P) Ltd. 245 ITR 492 (Delhi), is totally applicable to the facts of the appellants case. In this case rental income had consistently been assessed as business income in the earlier assessment years but during the year under appeal, the assessing officer had assessed it as "income from house property" without bringing any distinguishing feature on record to change his opinion. In the case of Birumal Gaurishanker Jain & Co. v. Settlement Commission 195 ITR 792 (SB), the Honble Supreme Court followed the principle of consistency by referring to its own judgment in the case of Radhasoami Satsang v. CIT 193 ITR 321 (SC). Under these circumstances, the first issue in both assessment years 1996-97 and 1998-99 are decided in favour of the appellant and against revenue. The assessing officer is accordingly directed to treat the rental income from property of the company as income from business and not as income from house property."
9. The revenue is aggrieved and has brought the issue in appeal. I have heard both the parties. I find from record that this matter was adjourned several times as a similar question was pending before a Special Bench and decision of the said Bench was awaited. The Special Bench in the case of Atma Ram Properties (P) Ltd. v. A CIT (2006) 102 TTJ (Delhi) 345 vide order dated 7-4-2006 has held that rental income in that case is liable to be taxed under the head "House property income" and not under the head "Profits and gains of business or profession".
10. Learned Counsel for the assessee vehemently argued that decision of Special Bench has no application in the case of the assessee and is distinguishable. He emphasized that in the past, rental income in this case was assessed as business income and, therefore, there was no scope to change the view on same set of facts. In this connection, learned Counsel placed great reliance on the decision of the Supreme Court in the case of Radhasoami Satsangv. CIT as also on the decision of Birumal Gaurishanker Jain & Co. v. Income-tax Settlement Commission .
The learned Counsel further drew my attention to the chart of rental income for different years placed at page 16 of the paper book. He also drew my attention to the fact that assessee had three properties and out of which properties at Greater Kailash, New Delhi and Station Road, Lucknow were sold in earlier years but profit realized on sale was shown and assessed as business income and not as capital gain. In the period under consideration, assessee had only one property at Kailash Colony, New Delhi from which assessee had realized rent of Rs. 8 lakhs and Rs. 18 lakhs in the period relevant to assessment years 1994-95 and 1995-96 respectively. In the next year i.e., in the period relevant to assessment year 1996-97, rental income was reduced to Rs. 6,44,198 as part of property measuring 446 sq. ft. area was sold. The rental income was realized from this property till the year March, 1999 and thereafter the said property was under self-occupation being used as administrative office by the assessee-company. The learned Counsel submitted that property was purchased with intention to exploit commercially and for realizing profit. The property was all along held as stock-in-trade and not as a capital asset. The property was retained for long as market for sale was found to be not favourable. Whenever market was favourable, part of the property was sold. Thus intention of the assessee right from beginning was clear that property was to be retained as a business asset for earning business income and not retained for enjoying rental income.
The learned Counsel for the assessee further relied upon decision of Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. , as also on the decision of Honble Delhi High Court in the case of CWT v. Allied Finance (P) Ltd. (2005) 195 CTR 528 (Del).
11. The learned Departmental Representative opposed above submissions. He appreciated that principle of consistency is to be followed having regard to facts and circumstances of the case. Assessment under the Income-Tax Act has to be made in accordance with law and if it is found that income was assessed under a wrong head in one year or more, then nothing prevents the department from rectifying the error or correcting its approach. The principle of res judicata or estoppels are not applicable to income-tax proceedings. The assessing officer while making assessment had given good basis and it was necessary for learned Commissioner (Appeals) to see whether on the basis of decision given by the assessing officer, rental income was rightly taken under the head "House property income" or not. Instead of considering that question on merit in accordance with law, the learned Commissioner (Appeal) wrongly non-suited the revenue by following alleged principle of consistency which had no application to the facts of the case. Learned Departmental Representative also argued that decision of Special Bench in tile case of Atma Ram Properties (P) Ltd. (supra) fully supported the view taken by the assessing officer. The authorities relied upon by the assessing officer were incorporated and applied by the Special Bench in the same manner as done by the assessing officer. In the above circumstances, the order of the assessing officer was required to be restored.
12. I have given careful thought to the rival submissions of the parties. There is no dispute that question before the Special Bench in the case of Atma Ram Properties (P) Ltd. (supra) was whether the rental income was liable to be assessed under the head "Business" or as "income from house property". There is no dispute that aforesaid question was required to be determined on the basis of facts and circumstances involved in that case. But for determining the question, Special Bench considered the question in the light of decisions of Supreme Court as to under what circumstances rental income is to be taken as "business income" and not as "income from house property". It was also considered as to "when and where provisions of sections 22 to 27 would be applicable and income taken under the head "House property".
13. It would be relevant to take note of the observations made by Honble Members of Special Bench. At page 6, the Honble Members noted decision of Honble Bombay High Court in the case of CIT v. New India Industries Ltd. , wherein it was laid down that whether an income falls under one head or another has to be decided according to the common notions of a practical and reasonable man after considering facts and circumstances involved in each case. The Honble Members also noted decision of Honble Calcutta High Court in the case of CIT v. Shambhu Investment (P) Ltd. wherein it was held that what has to be seen was the primary object of the assessee while exploiting the property and in case it was found that main intention was to exploit the immovable property by way of complex commercial activity, it must be held that income earned from such exploitation was a "business income".
The learned Members also noted decision of Honble Supreme Court in the case of Karanpura Development Co. Ltd. v. CIT wherein it was held that a company formed with the specific object of acquiring properties not with a 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 business, cannot be said to treat them as land owner but as trader. It was further held that where a company acquired properties which it sold out with a view to acquiring other properties to be dealt within the same manner, the company was not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business. It was also held that the deciding factor in this regard is not the ownership of land or leases, but the nature of activity of the assessee and the nature of the operations in relation to them.
Thereafter reference is made to decision of Supreme Court in the case of S.G. Mercantile Corpn. (P) Ltd. (supra) wherein it was held that where an assessee who, as part of his essential trading activity takes lease of property and sublets part thereof with a view to make profits, the profits would have to be treated as "business income". Reliance was also placed by him on the decision Honble Supreme Court in the case of CIT v. Chugandas & Co. , to contend that the nature of property as well as income has to be seen to ascertain the head under which such income is assessable to tax. The decision of Honble Supreme Court in the case of Brooke Bond & Co. Ltd. v. CIT , wherein it was observed that it is not unusual that commercial considerations may properly describe the source of particular income differently has also been cited and considered.
Reference is also made to decision of Supreme Court in the case of Chugandas & Co. (supra) and S.G. Mercantile Corpn. (P) Ltd. (supra). It was emphasized by the learned Departmental Representative in that case that if assessee was owner of house property, then rental income was chargeable to tax under the specific head "Income from house property irrespective of nature of asset as well as nature of assessees business.
After considering rival submissions of the parties and material on record, the Bench in the light of judicial pronouncements held, that no precise test can be laid down to ascertain whether rental income received by an assessee from letting out of property would fall under the head, "Income from house property" or "Profits and gains of business or profession". The Bench thereafter considered various decisions of Honble Supreme Court and other Courts and observed as under:
The earliest of these decisions is in the case of East India Housing & Land Development Trust Ltd. v. CIT (supra) wherein it was held by the Honble Supreme Court that the income derived by the company from shops and stalls is income received from property which falls under the specific head "Income from house property" and the character of that income is not altered because it is received by the company formed with the object of developing and setting up markets. This decision of Honble Supreme Court in the case of East India Housing & Land Development Trust was referred to by the Constitution Bench of Honble Supreme Court in the case of Sultan Brothers v. CIT (supra) with approval. In the case of Karnani Properties Ltd. v. CIT 82 ITR 547 (SC), the assessee-company, in addition to the letting out of a building owned by it, was providing other amenities/services to the tenants and those tenants in addition to paying rents, were making separate payments for the other services/ amenities provided by the assessee-company. The question before the Honble Apex Court was whether rendering of such services to the tenants by the assessee-company which owned building would constitute its business activity and it was held by their Lordships that the assessee had two sources of income, one by way of rental income and other from service charges. The service charges collected by the assessee were held by the Honble Apex Court to be "income from business" whereas the rent derived from letting out the building owned by the assess ee-company was held to be assessable as "income from property".
In the case of S.G. Mercantile Corpn. (P) Ltd. v. CIT (supra) as well as in the case of Karanpura Development Co. Ltd. v. CIT (supra) relied upon by the learned Counsel for the assessee, the assessees were not the owner of the property but they were holding the leasehold rights of the subject property and considering that the liability to tax under the head Income from house property" under the relevant provisions is that of the owner of the buildings or lands appurtenant thereto, Honble Supreme Court proceeded to hold the income derived by the assessee from the property not owned by them as assessable under the head "Income from business" and not "Income from house property. While doing so, the law laid down in the case of East India Housing & Land Development Trust Ltd. v. CIT (supra) was held to be inapplicable by the Honble Supreme Court on the ground that the assessee in the said case was owner of the property whereas in the case of S.G. Mercantile Corpn. (P) Ltd. (supra) before it, the assessee was a tenant and not the owner.
** ** **
18. It is thus clear that the facts involved in the case of S.G. Mercantile Corpn. (P) Ltd. (supra) and Karanpura Development Co. Ltd. (supra) cited by the learned Counsel for the assessee were materially different and the decisions were came to be rendered in the light of such different facts. Similar is the position as regards the other cases cited by the learned Counsel for the assessee. On the other hand, a careful reading of all these decisions relied upon by the learned Counsel for the assessee reveals that the ratio laid down therein is in consonance with the proposition propounded by the Honble Supreme Court in its earlier decisions in the cases of East India House & Land Development Trust Ltd. (supra) and Karnani Properties Ltd. (supra).
19. It is no doubt true that in the case of Sultan Brothers (supra), the Constitution Bench of Honble Supreme Court has held that whether a particular letting is a business has to be decided in the circumstances of each case and that each case has to be looked at from a businessmans point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. At the same time, it is also true that in all the cases which have been decided by the Honble Supreme Court involving commercial or residential buildings owned by the assessee, it has been held that the income realized by such owners by way of rental income from a building, whether commercial building or residential house, is assessable under the head "Income from house property". While taking note of this position in its judgment rendered in the case of Karanpura Development Co. Ltd. (supra), Honble Supreme Court held that the only exception to this proposition are cases where the letting of building is inseparable from the letting of the machinery, plant and furniture etc. where the rental received for the building is to be assessed under the head "Income from other sources" alongwith the rental received for other assets such as machinery, plant, furniture, etc.
20. In the case of CIT v. National Storage (P) Ltd. 48 ITR 577 (Bom.), which came to be affirmed by the Honble Supreme Court in 66 ITR 596 (SC), it was held that income that falls under any specific head has got to be computed under that head only in the manner specified in the relevant provisions and if the income falls under the head "Income from property", it has to be taxed under the relevant section only and cannot be taken to the other head 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. It was also held that house owning however, profitable, cannot be a business or trade under the Income-Tax Act and where income is derived from house property by the exercise of property rights properly so-called, the income falls under the head "Income from house property" 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 which are relatively insignificant and only incidental to use and occupation of the tenements.
21. In the case of CIT v. Bhoopalam Commercial Complex & Industries Pvt. Ltd. 262 ITR 517, the assessee-company had built a commercial complex on the land taken on lease and allotted the same to various parties and earned income therefrom. In these facts and circumstances of that case, Honble Karnataka High Court held that the assessee who was deriving rental income in its own right by letting out the commercial complex constructed by it on leasehold land was owner thereof for the purpose of Section 22 and therefore, the rental income was assessable to tax under the head "Income from house property" irrespective of the fact that leasing of site and construction thereon is one of the objects of the assessee-company.
24. The learned Counsel for the assessee has also laid heavy emphasis on the nature of subject property held by the assessee-company as stock-in-trade of its business of acquiring, developing and selling of the said property. However, this aspect also is hardly of any relevance to decide the head under which the rental income from the said property is to be assessed. Even if the said property was held by the assessee-company as stock-in-trade in its capacity as a trader going by the nature of its business activities, the rental income was not earned by it from the tenants in its capacity as a trader. On the other hand, when the vacant possession of the tenements was obtained by the assessee-company and the vacant tenements were sold to the different parties from time to time, the assessee-company acted as a trader in the said transactions and the income arising out of such transaction was rightly assessed to tax under the head "Profits and gains of business or profession". However, when it comes to the rental income, the said income was earned by the assessee-company not as a trader but as an owner of the said property and there was no business connection between the tenants and the assessee-company but it was a case of tenant-owner relationship. In the case of CIT v. Chugan Das & Co. (supra), Honble Supreme Court has held that if an assessee carries on business of purchasing and selling buildings, the profits and gains earned by transaction in buildings will be shown under the head "Profits and gains of business or profession", but income received from the buildings so longas they are owned by the assessee will be shown under the head Income from house property". In the case of CIT v. New India Maritime Agencies Pvt. Ltd. (supra), the rental income received by the assessee from properties owned by it and let out to others was held to be assessable to tax under the head "Income from house property "and not under the head "Profits and gains of business or profession". It was also held by the Honble Madras High Court that the question as to whether buildings owned by the assessee are capable of being regarded as commercial assets is not relevant for deciding as to whether, when those assets had not been used in the business of the assessee but were only let out, such rental income was to be assessed as "Income from house property".
26. In the present case, the subject property let out by the assessee-company was undisputedly owned by it and it was a case of bare letting of tenement and the subject hired out was not a complex one. It was thus a case of letting out of a property owned by the assessee simplicitor and not a case of exploitation of the property by way of complex commercial activity. The rental income earned from the said property thus was chargeable to tax under the head "Income from house property" and not under the head "Profits and gains of business or profession" as claimed by the assessee." [Emphasis supplied]
14. It is clear from above that Special Bench has analyzed and considered the relevant law on the question and seen the circumstances under which rental income is to be assessed under the head "House property income" or "Business income". Starting from the decision of Honble Supreme Court in the case of East India Housing & Land Development Trust Ltd. v. CIT and other cases of Sultan Brothers v. CIT , Karnani Properties Ltd. v. CIT , S.G. Mercantile Corpn. (P) Ltd. (supra) it has been authoritatively laid down that where income is realized by letting out of a building owned by the assessee, then such a rental income is to be assessed under the head "House property". It would not make any difference if along with letting of building other amenities or services are provided to the tenant. At best income received in respect of other services can be treated as income from "business" but rental income was held to be income from house property. The cases of S.G. Mercantile Corpn. (P) Ltd. (supra) and that of Karanpura Development Co. Ltd. (supra) relied upon by the learned Counsel for the assessee were considered by the Special Bench and rightly distinguished with sound reasoning. In those cases assessee was not the owner of the property and, therefore, question of taking rental income under the head "House property" did not arise. Even in above cases, the principle laid down by the Supreme Court in the case of East India House & Land Development Trust Ltd. (supra) were accepted but held to be not applicable to the facts of the case. The Special Bench has held that reasoning given in above cases was also in consonance with the decision earlier taken by the Honble Supreme Court in the cases referred to above.
The Special Bench has also held that only exception to the above rule can be in the cases where letting of building is inseparable from letting of machinery, plant and furniture and in such cases rental income received from the building is to be assessed under the head "Income from other sources". The learned Members of Special Bench also noted as having been laid down by the Supreme Court that house owning howsoever profitable cannot be a "business or trade" under the Income-Tax Act and where income is derived by exercise of property rights properly so-called, the income falls under the head "Income from house property". The learned Members held that even when property was taken for development and for sale as a trader and was held as "stock-in-trade", the rental income received before sale of property, was liable to be assessed under the head "House property". For the above proposition, decision of Supreme Court in the case of Chugan Das & Co. (supra) and case of New India Maritime Agencies (P) Ltd. have been cited and relied upon.
There is no doubt that in the case of National Storage (P) Ltd. (supra) income from letting out of vaults for storage of films was held to be not assessable under the head "House property" with the following observations:
Held, that the respondent was carrying on an adventure or concern in the nature of trade and the subject which was hired out was a complex one, The respondent was in occupation of all the premises for the purpose of its own concern, the concern being the hiring out of specially built vaults and providing special services to the licensees. The return received by the respondent was not income derived from the exercise of property rights only, but was income received from carrying on an adventure or concern in the nature of trade. The income arising from licensing the vaults to vault-holders had therefore to be computed under Section 10 of the Indian Income-Tax Act, 1922, and not under Section 9."
15. Now moving to the facts of the case and applying principle laid down by Special Bench, after review of relevant case law, I find that assessee had made out no case for taking rental income under the head "Business". It is a case where rental income is being realized by the assessee on account of ownership of the house property. No commercial or complex activity having semblance of an adventure has been shown to be carried by the assessee, Rent is enjoyed by the assessee because it purchased the property and was owner thereof. Even when primary importance is not given to ownership and nature of activity is considered as held by their Lordship in the case of Karanpura Development Co. Ltd. (supra), there is nothing on record to treat earning of rent as complex activity or commercial exploitation. The facts of the present case are not comparable to the facts of the case involved in National Storage (P) Ltd. (supra) where rent was realized by hiring specially built vaults and providing special services to the licensees. There is no material in this case to show that building in the present case is special or such special activities in the building are carried and rental income realized it is not rent from a building simplicitor. Facts emerging from record, are that the building was retained for long without making any change in the building. It was under occupation of tenants and rent was realized. After tenants vacated, the building is being used by owner for administration of business. There is nothing on record to show that assessee made any change to make it extraordinary and complex. Realisation of rent can in no way be treated as an adventure or commercial exploitation. No indication of above is available on admitted facts. Rent received from the building is directly attributable to ownership of the building.
16. The assessee has contended that the building in question was stock-in-trade and even on its sale business income was shown and not capital gain. It may be so. But for determining the present question well laid down tests by Honble Supreme Court are required to be applied. Having regard to clear cut law, it would not make any material difference that the assessee had showed income from transfer of part of this building and other buildings under the head "Business" and not under the head "Capital gain".
Another plea strongly advanced by the assessee was that on account of principle of consistency, the view that rental income is business income, cannot be altered or changed. I find from record that revenue had all along been challenging the conclusion that rental income is house property income and matters are shown to be carried right up to High Court where they are admitted to be pending. It is not that some decision of High Court was accepted and that issue had attained finality. Principles of consistency are applied by Courts where a decision of a High Court or higher courts is accepted and on facts similar decision is sought to be challenged without any plausible explanation why such a course is being adopted. No such circumstances have been brought on record. There is no ground to apply principles of estoppels and of res judicata. Each assessment year is independent assessment year. There is no need to perpetuate an error and close your eyes to crystal clear facts and well settled principles of law. There is no legal justification to disregard direct decision of the Honble Supreme Court. Special Bench has also shown new lights and is required to be followed. It is not shown that above material circumstances were considered while deciding the matter in favour of the assessee.
There is no commercial exploitation of asset involved in realization of rental income which is realized due to ownership right held by the assessee in the building in question. Therefore, for the aforesaid reasons, I hold that rental income has to be assessed under the head "House property income" in accordance with law. The impugned order of the Commissioner (Appeals) is accordingly set aside and that of the assessing officer is restored.
17. In the result, the appeals are allowed.