S. G. Mercantile Corpn. (P) Ltd. Vs.
The C.I.T., Calcutta [1972] INSC 3 (4 January 1972)
KHANNA, HANS RAJ KHANNA, HANS RAJ SHELAT,
J.M.
DUA, I.D.
MITTER, G.K.
CITATION: 1972 AIR 732 1972 SCR (2) 980 1972
SCC (1) 465
ACT:
Income Tax Act, 1922, ss. 10, 12-Company
formed with the object of acquiring or taking on lease lands buildings etc.
and dealing with them commercially-Company
taking on lease market place and letting it out-Income from the leasehold
property whether to be assessed under s. 10 or s. 12-Tests for determining.
HEADNOTE:
The appellant company was formed with the
object, inter alia, to purchase, take on lease or otherwise acquire and to
hold, cultivate, improve, lease, sell, exchange, mortgage, or otherwise dispose
of lands or houses and other real and personal property and to deal with the
same commercially. The company took on lease a market place on a monthly rent
with the right to sub-let the different portions. The company's activity during
the period covered by the assessment years 1956-'56, 1957-'58and 1959-'59 was
that of developing the demised premises and letting out the portions of the
same as shops, stalls and ground space. In assessment proceedings, the company
claimed that its income from the lease hold property for the assessment years
had to be assessed under s. 10 of the Income Tax Act, 1922 as letting out of
properly was its business authorised by the memorandum of association. The
Income Tax Officer, and the Appellate Assistant Commissioner in appeal,
rejected the company's claim and made assessment under s. 12 of the Act as
"income from other source." The appellate Tribunal held that the
income of the appellant company from sub-letting of the stalls was income from
business taxable under s. 10 of the Act. According to the Tribunal the decision
could only turn upon the object for which the company was formed and upon the
activities of the company during the relevant accounting years. The High Court,
on reference, answered that the income was not assessable under s. 10. It observed
that by letting out shops and stalls the assessee could not be said to be
carrying on any activity in the nature of trade or was dealing with them
commercially.
In appeal by special leave, HELD: The income
was assessable under s. 10 and not under s. 12 of the Act.
(i) There is no finding in the present case
that the appellant company is the owner of the property in question or any part
thereof. Therefore, s. 9 does not apply. The liability under s. 9 of the Act is
of the owner of the buildings or lands appurtenant thereto. In case the
assessee is the owner he would be liable to pay tax under s. 9 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 market 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 s. 10 of the Act. [985 D-G] East India
Housing Estate case, [1961] 42 I.T.R. 49, referred to.
981 (ii) Section 12 which deals with the
residuary head of income can be resorted to only if none of the specific heads
is applicable to the income in question. Therefore, s. 12 can be invoked in the
present case only if the applicability of s. 10 is excluded by holding that the
income of the appellant company from the property in question is not income
from business. [987 D] (iii) The definition of the word "business" in
s. 2(4) embraced with, in 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 business and trading activity of the
assessee. The question as to whether the activity is being carried on by an
individual or a company and in the latter case the further question as to
whether carrying on of the said activity was the object of the incorporation of
the company as given in the Memorandum of Association would also have some
relevance. [1987 F-H] The conclusion of the Tribunal that the activities of the
appellant in taking lease and sub-letting demised premises were under-taken
with the object of doing business was Warranted on the facts of the case.
Likewise the conclusion of the Tribunal that the appellant company in letting
out the lease-hold property was not active as owner but as trader was borne out
by the material on record. [1990 B] Commissioner of Inland Revenue v. Korean
Syndicate Ltd., [1921] 12 'Tax Cas. 181 and Karanpura Development Co. Ltd. v.
Commissioner of Income-tax, West Bengal [1962] 44 1,T.R.
362, referred to.
Fry v.. Salisbury louse Estate Ltd., [1030]
A.C. 432 and East India Housing Estate case, [1961] 42 I.T.R. 49,
distinguished.
(iv) Therefore. where, as in the present case
the income can appropriately fall under s. 10 as being business income, no
resort can be made to s. 1' of the Act.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 1748-1750 of 1968.
Appeals by special leave from the judgment
and order dated July 20. 1967 of the Calcutta High Court in Income tax
Reference No. 144 of 1963.
M. C. Chagla and D. N. Mukherjee, for the
appellant (in all the appeals).
S. C. Manchanda' R. N. Sachthey and B. D.
Sharma, for the respondent (in all the appears).
The Judgment of the Court was delivered by
Khanna This judgment would dispose of civil appeals No. 1748 to 1150 of 1968
filed by special leave against -L735SupCI/72 982 the judgment of the Calcutta
High Court whereby the question referred to that Court under section 66(1) of
the Indian Income-tax Act, 1922, hereinafter referred to as the Act, was
answered in favour of the revenue and against the appellant company.
The appellant, a private limited company, was
incorporated on January 25, 1955. The objects for which the Company was
established were given in the clauses of paragraph 3 of the Memorandum of
Association. A number of business activities were mentioned in those clauses.
Clauses 6 and 7 of that paragraph were as under :"6. 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.
7. To develop the resources of the same
property by building, reclaiming, clearing, draining, and otherwise improving
framing and planting on any terms or system that may be considered
advisable." With effect from February 5, 1955, the appellant company took
on lease a market place known as Tal Olla Bazar in the city of Calcutta from
Shrimati Sujata Tagore and her sons on a monthly rent of Rs. 3,000 for a term
of 50 years, with option to the lessee to renew the lease for the further
period of 40 years. The deed of lease in this connection was executed on
September 5, 1956. Clauses 4, 5 and 13 of the lease deed were as under :
"4. The Lessee shall have the option to
erect, rebuilt, remodel and reconstruct and repair the existing structures upon
the demised premises from time to time during the term of these presents at its
own costs in a substantial and workmanlike manner with good material of the
several kinds in accordance with the plans elevations sanctions and
specifications according to the choice of the Lessee (and whenever necessary to
get such plans sanctioned by the Corporation of Calcutta) under the supervision
of a first class Engineer to he elected by the Lessee on notice to the Lessors
and shall spend upon such works such sum or sums as the Lessee may in its
absolute discretion think fit and proper but the entire total sum or sums so to
be expended by the Lessee as aforesaid shall not be less than Rupees Five Lacs
and the same shall be spent within the period of five years from date of these
presents. The Lessors shall be at liberty to appoint at their own costs a
valuer 983 and surveyor to verify such expenditure if, required for their
satisfaction after the completion of the said work.
5. If the Lessee constructs any new
structures and/ or buildings as mentioned in the preceding clauses the said
structures and/or buildings or erections together with all alterations
renovation remodelling reconstruction thereto shall belong absolutely to the
Lessors on the expiration or sooner determination of the term hereby granted
and/or the renewed period thereof as hereinafter mentioned.
13. That the Lessee shall not assign this
lease without first obtaining the permission in writing of the Lessors but such
consent shall not be unreasonably withheld. The lessee shall prior to any such
assignment of this demise give notice thereof to the Lessors in writing
containing the name of the assignee and furnish other necessary particulars
concerning such assignment. Notwithstanding anything hereinbefore contained the
Lessee shall subject to the conditions and convenants herein contained be
entitled to sublet or under let the demised premises or any part 'or portion
thereof and/or grant sub-lease or subleases in respect of the demised premises
or any portion or portions thereof for a term not exceeding or beyond the term
hereby granted including the renewed and/or optional period in case of renewal
subject to the terms and conditions of these presents." The appellant
company's activity during the period covered by assessment years 1956-57,
1957-58 and 1958-59 was that of developing the demised premises and letting out
portions of the same as shops, stalls and ground spaces to shopkeepers, stall
holders and daily casual market vendors. The appellant claimed that its income
from the leasehold property for the above mentioned three assessment years
should be assessed under section 10 of the Act as letting out of that property
was its business authorised by the Memorandum of Association. The appellant had
shown losses in its return for all the three years and the above claim was made
on its behalf obviously for the purpose of carrying forward such losses. The
Income-tax Officer rejected the appellant's claim and made assessments under
section 12 of the Act. The Appellate Assistant Commissioner in appeal by a
consolidated order held that the appellant had been rightly assessed under
section 12 of the Act. On further appeal to the Income-tax Appellate Tribunal,
the Tribunal referred to clauses 6 and 7 of paragraph 3 of the Memorandum of
Association and 984 came to the conclusion that the activities of the appellant
company in taking the lease and subletting the demised premises were undertaken
with the object of doing business.
The Tribunal observed that normally Where the
assessee was not the owner of the building but earned rent by subletting the
same, such income could only be charged under section 12 as income from other
sources. The difficulty, however, arose in cases where letting out of lease
hold property was the business of the assessee. In such cases, according to the
Tribunal, the decision could only turn upon the object for which the company
was formed and upon the activities of the company during the relevant
accounting years. It was held that if the activity of the appellant company
amounted to carrying on the business of taking on lease and letting out the
leasehold property, the company was not acting as owner but as trader. The
income accruing from such a source, in the opinion of the Tribunal, must be
held to be income from business assessable under section 10 of the Act.
The Tribunal accordingly held that the income
of the appellant company from subletting of the stalls in question was income
from business taxable under section 10 of the Act.
At the instance of the respondent, the
Tribunal referred the following question to the High Court "Whether, under
the facts and in the circumstances of the case, the income from subletting the
stalls of Taltolla Bazar was assessable under section 10 or section 12 of the
Income-tax Act, 1922?" The learned judges of the High Court held that the
income from subletting of the stalls in question was not assessable under section
10 of the Act. In arriving at this conclusion, the learned judges observed :
"The assesses had taken lease of a
market or Bazar. After having reconstructed or renovated the building,,;, it is
letting Out shops and stalls to shopkeepers and stallholders. This is, a to
normal activity of a owner of it lessee of such a market or Bazar. It could not
be said that by letting out the shops find stalls to shopkeepers and
stallholders the assessee Was carrying on any activity in the nature of trade
and Was utilising or exploiting real estate in the best possible way or in
other words was dealing with it Commercially. The ratio of the Suprem Court
decision in East india Housing Estate case (1) is fully applicable to the case
before us and it must be held that the Tribunal was in error in its conclusion
that the income of the assessee from (1) [1061] 42 I.T.R 49.
985 .lm15 subletting the stalls of Taltolla
Bazar was assessable under section 10 of the Indian Income-tax Act 1922. In the
premises the question referred to this Court is answered in the following
manner, that is to say, that the income from subletting the stalls of Taltolla
Bazar was not assessssable under section 10." We have heard Mr. Chagla on
behalf of the appellant and Mr.
Manchanda on behalf of the respondent and are
of the view that the judgment of the High Court cannot be sustained.
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, professions 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 the 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 no 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, West Bengal (1). The appellant
company in that case had been incorporated with the objects of buying
developing landed properties and promoting and, setting up markets. The company
purchased ten bighas of land in the town of Calcutta and set no a market
thereon. The question which arose for determination was whether the income (1)
[1961] 42 L.T.R. 49 realised from the tenants of shops and stalls was liable to
be taxed as business income under section 10 of the Act or income from property
under section 9. This Court held that the income derived by the company from
shops and stalls was income received from property and fell under the specific
head described in section 9. It was observed in this connection :
"Income-tax is undoubtedly levied on the
total taxable income of the taxpayer and the 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." There is no finding in the present case that the appellant
company is the owner of the property in question or any part thereof. As such,
no reference was made to section 9 of the Act in the assessment proceedings.
The learned counsel for both the parties agree, and in our opinion rightly,
that the question of making the assessment against the appellant, in the
circumstances under section 9 of the Act does not arise.
The stand of Mr. Chagla, or behalf of the
appellant, is that the assessment against the appellant in respect of the
income from the property in question should be made under section 10, while
according to Mr. Manchanda, learned counsel for the respondent, the assessment
should be under section 12 of the Act.
Section 10 of the Act deals with income from
business and the material Portion with which we are concerned is given in
sub-section (1) of that section. According to that subsection, the tax shall be
payable by an assessee under the head "Profits 997 and gains of business,
profession or vocation" in respect of the profits and gains of any
business, profession or vocation carried on by him. "Business", according
to section 2(4) of the Act, includes any trade, commerce, or manufacture or any
adventure or concern in the nature of trade, commerce or manufacture. Section
12 of the Act deals with income from other sources. Sub-section (1) of that
section reads as under :
"(1) The tax shall be payable by an
assessee under the head "Income from other sources" in respect of
income, profit and gains of every kind which may be included in his total
income (if not included under any of the preceding heads.)" Section 12 deals
with the residuary head of income and applies to all such taxable income,
profits and gains as are not covered by preceding specific heads. The residuary
head of income can be resorted to only if none of the specific heads is
applicable to the income in question; it comes into operation only after the
preceding heads are excluded.
It is, therefore, manifest that section 12 of
the Act can be invoked in the present case only if we exclude the applicability
of section 10 by holding that the income of the appellant company from the
property in question is not income from business. The definition of the word
"Business", as given in section 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. The question as to whether
the above activity is being carried on by an individual or a company, and in
the latter case, the further question as to whether the carrying on of the said
activity was the object of the incorporation of the company as given in the
Memorandum of Association would also have some relevance. Reference in this
context may be made to the observations of Lord Sterndale, M. R. in the case
988 of Commissioners of Inland Revenue v. Korean Syndicate Lid.(1) :
"If you once get the individual and the
company spending exactly on the same basis, then there would be no difference
between them at all. But the fact that the limited company comes into existence
in a different way is a matter to be considered. An individual comes into
existence for many purposes, or perhaps sometimes for none, whereas a limited
company comes into existence for the particular purpose of carrying out a t an
action by getting possession of concessions and turning them to account, then
that is a matter to be considered when you come to decide whether doing that is
carrying on a business or not." The above observations were quoted with
approval by this Court in the case of Karanpura Development Co. Ltd. v. Commissioner
of Income-tax, West Bengal(2). The assessee company in the last mentioned case
was formed with the objects, inter alia, of acquiring and disposing of
underground coal mining rights in certain coa fields. The Memmorandum of
Association of the company enumerated other objects, such as coal raisin-, but
the assessee restricted its activities to acquiring coal mining leases over
large areas, developing them as coal fields and then subleasing them to
collieries and other companies. The leases were acquired for a term of 999
years and the coal fields were sublet for the balance of the term of the respective
leases minus two days. The company never worked the coal fields with a view to
raising coal, nor did it acquire or sell coal raised by the sub-leases. As
against a salami of Rs. 40 per bigha which the assessee had paid, it realised
from the sublessees Rs. 400 per bigha as salami. In addition, the assessee
charged certain royalties at rates higher than those it had agreed to pay under
the head leases. The question which arose for determination was whether the
amount received by the assessee as salami for granting sublease constituted
trading receipts and the profits therefrom was assessable. It was held that the
transactions of acquiring leases and granting sub-leases were in the nature of
trading within the objects of the company and not enjoyment of the property as
landowner. It was observed in this connection "As has been already pointed
out in connection with the other two cases where there is a letting out of
premix@ and collection of rents the assessment on property basis may be correct
but not so, where, the letting (2) [1962] 44 I.T.R. 362.
(1) [1921] 12 Tax Cas. 181.
899 or subletting is part of a trading
operation.
The dividing line is difficult to find; but
in the, case of a company with its professed objects and the manner, of its
activities and the nature of its dealings' with its property, it is possible to
say on which side the operations fall and to what head the income is to be
assigned.
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. It is not that no company can own property and enjoy it as property,
whether by itself or by giving the use of it to another on rent. Where this happens,
the appropriate head to apply is "income from property" (section 9),
even though the company may be doing extensive business otherwise. 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 landowner but as trader." The above observations
have a direct bearing. It is not necessary for the purpose of this case to say
anything, beyond what has already been said while dealing with section 9 of the
Act, about the view expressed in the above passage regarding the rental income
of an owner being, treated as business income in case it is received as part of
trading activity, because we are concerned in the instant case with an assessee
who is lessee and not the owner of the property in question. The assessee in
the cited case of Karanpura Development Co. Ltd. too was lessee of the coal
fields. So far as such assessees are concerned, who as part of their essential
trading activity take lease of property and sublet parts thereof with a view to
make profits, the dictum laid down above, in our opinion, would hold good and
the profits would have to be treated as business income.
The appellant company, as stated earlier was
incorporated on January 25, 1955. The object for which the company was formed,
inter alia, was to take on lease or otherwise acquire and to hold, improve,
lease or otherwise dispose of, land, houses and other real and personal
property and to deal with the same commercially. Within less than two weeks of
its incorporation the appellant company took on lease the property in question
and undertook to spend Rs. 5 lakhs for the purpose of remodelling and repairing
the structure on the site. The appellant was also given the right to sublet the
different portions. The appellant's 990 activity during the period of three
years in question consisted of developing the demised property and letting out portions
of the same as shops, stalls and ground spaces.
All thee facts point to the conclusion that
the taking of the property on lease and subletting portions of the same was
part of, the business and trading activity of the appellant. The conclusion of the
Tribunal that the activities of the appellant in taking lease and subletting
the demised premises were undertaken with the object of doing business was
warranted on the facts of the case.
Likewise, the conclusion of the Tribunal that
the appellant company in letting out the leasehold property was not acting as
owner but as trader was borne out by the material on record.
Reference on behalf of the respondent has
been made by Mr. Manchanda to the decision of the H,use of Lords in Fry v
Salisbury House Estate Ltd.(1) In that case the assessee company which had been
formed to acquire, manage and deal with a block of buildings, let out the rooms
as unfurnished offices to tenants. The company provided a staff to operate the
lifts and to act as porters and watch and protect the building. The company
also provided certain services-such as beating and cleaning-for the tenants if
required, at an additional charge. For four years the company was assessed
under Schedule A to income-tax on the gross value of the building as appearing
in the valuation list. The company admitted its liability to be assessed in
respect of profits from the service supplied to the tenants under Schedule D
but he Crown claimed in making the assessment under Schedule D to include the
rents of the offices as part of the receipts of trade making allowance for tax
assessed under Schedule A. It may be mentioned that the scheme of the English
Income-tax Act is to provide for the taxation of specific properties under
schedules appropriate to them and under a general Schedule D to provide for
taxation of income not dealt with specifically. Schedule A provides for the
Taxation of income derived from property in land, B for incomes derived from
occupation of land, C for income derived from Government securities and E for
income from employment in the public service. The House of Lords held in the
above cited case that 'he rents were profits arising from the ownership of land
in respect of which the assessment under Schedule A was exhaustive and that they,
therefore, could not be included in the assessment under Schedule D as trade
receipts of the company. The assessee company, in the cited case, was the owner
of the Salisbury House, and the decision of The House of Lords rested on the
view that Schedule A was exhaustive in respect of Profits arisinfrom ownership
of land. The above decision is not of much help to the, respondent because the
assessee in the present case is not the owner (1) [1930] A.C. 432.
991 but only a lessee of the property in
question, and section 9, which is analogous to Schedule A of the English Act,
applies to income from property consisting of buildings or lands appurtenant
hereto of which the assessee is the owner.
The respondent can also have not much support
from the decision of East India Housing and Land Development Trust V.
Commissioner of Income-tax(1) because what
was decided therein was that in the case of income from landed property by
the-. owner company, the income would fall under the specific head described in
section 9 and not under section 10 even though the. company had been
incorporated with the object of buying and developing landed property and
promoting a market thereon. Section 9, as mentioned earlier, does not apply to
the present case because the appellant is not owner of the property in
question. As such there arises no question in this case of the exclusion of
section 10 on the ground that section 9 is the specific head. In the instant
case the revenue relies not upon the specific head given in section 9 but upon
the residuary head given in section 12 of the Act. It is plain that the
considerations which would weigh for applying section 9 on the ground of being
a. specific head would not hold good for invoking section 12 which can come
into picture only if all the preceding heads of income, including business
income as Riven in section 10, are ruled out.. Where, as in the present case,
the income can appropriately fall under section 10 as being business income, no
resort can be mad& to section 12 of the Act.
As a result of the above, we accept the
appeal and set aside the judgment of the High Court. The answer to the question
referred by the Tribunal is that the income in question was asses-sable under
section 10 and not under section 12 of the Act. The appellant shall be entitled
to the costs of this Court as well as: those of the High Court.
One hearings, fee.
K.B.N. Appeal allowed(1) [1961] 42 I.T.R. 49.
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