Commissioner of Income Tax vs Sanmar Holdings Ltd.

N.V. Balasubramanian, J.

In pursuance of the directions of this court, the Income Tax Appellate Tribunal has stated the case and referred the following question of law in

relation to the assessment years 1984-85 to 1986-87 of the assessee for our consideration u/s 256(2) of the Income Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the rental income derived

from the leasing-out of the property at Cathedral Road, Madras should be assessed under the head Profits and gains of business or profession''

only and not under the head ''Income from house property''?

The necessary facts of the case are as under :

The assessee is a company in which the public are substantially interested and the assessment years with which we are concerned are 1984-85 to

1986-87. The assessee was driving income from property situated at Cathedral Road, Madras upon its being let out to M/s. Chemicals and

Plastics India Limited. The assessee claimed that the income from the building should be treated as income derived from its business and hence

assessable under the head ''Profits and gains of business or profession''. The assessing officer disallowed the assessee''s claim and assessed the

same under the head ''Income from house property''. The Commissioner (Appeals) confirmed the order of assessment. On appeal by the assessee,

the Appellate Tribunal allowed the appeals preferred by the assessee and held that the income from the property should be assessed as income

from business after allowing admissible deductions.

We heard Mrs. Pushya Sitharaman, learned senior standing counsel for the revenue and Mr. P.P.S. Janarthana Raja learned counsel appearing

for the assessee.

We find from the order of the Tribunal that the Tribunal held that the rental income should be assessed under the head ''Income from business or

profession'' as business on the basis of the object clause of the assessee''s company. The object clause, which was relied on by the Tribunal, reads

as under :

To carry on the business of dealers in shares, stocks, debentures, stocks, bonds, obligations, whits, securities and to purchase, take on lease or in

exchange, hire or otherwise acquire and deal in any movable or immovable property, pattas, licences, rights or privileges and to develop and turn

them to account.

The Tribunal was of the view that the object clause would be sufficient to hold that the income from the property should be treated as income from

the business. The Tribunal held that the expression ""turn them into account"" in the object clause would include the transaction of lease because

essentially, the object of the assessee was to derive profit from the properties and such income could be derived not only by sale but also by letting

out. Thereafter, the Tribunal held that the income from the building should be assessed as ''Income from business''.

However, we are unable to accept the view of the Appellate Tribunal as the Tribunal has focussed its attention only to the object clause of the

assessee''s company. This court in Anaikar Traders and Estates (P.) Ltd. (No. 1) Vs. Commissioner of Income Tax, has held that there must be

material to show that the assessee treated the property as commercial asset. This court in the said case noticed the decision of the Supreme Court

in Karanpura Development Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, and after noticing the said decision laid down the law as

under :

Earlier, on a consideration of the memorandum of association relating to the main object of the company, it has been found that its object is to

acquire and possess property. What is significant is that in the memorandum of association, there is no indication that the assessee-company

intended to sell those properties or even turn them to account by way of leasing them as part of its business activities. We may mention in passing

that in the course of the order of the Appellate Assistant Commissioner, a clear finding had been recorded to the effect that on a perusal of the

records of the assessee-company, the assessee-company had not carried on any business in real estate. We, therefore, hold that the assessee-

company cannot be regarded as having acquired the properties as commercial assets for purposes of any business carried on by it and, therefore,

the receipt of income from the properties held by the assessee-company cannot be referred to a substituted user of the commercial asset by the

assessee-company, as claimed by it, so as to constitute the income from the properties as ''Profits and gains of the business'' carried on by the

assessee-company. Inasmuch as we have come to the conclusion that the properties were not held by the assessee-company as part of its business

assets, it follows that the income from those properties were rightly assessed under the head ''Income from property'', subject to the deductions

provided u/s 24 of the Act. In the view we have taken, it is unnecessary to refer to the several decisions relied on by counsel on both sides. We,

therefore, answer the common question referred to us in the affirmative and against the assessee-company. . .."" (p. 179)

This court held that there must be some material to show that the assessee treated the property as commercial asset.

On the facts of the case, we find that the Commissioner (Appeals) decided the matter or the ground that the Company did not have any object

clause and hence he held that the income should be assessed as income from house property. The Appellate Tribunal decided on the basis of the

object clause. The Tribunal did not examine the question as to what are the main objects and what are the incidental objects of the company, but

decided the case on the basis of the object clause, particularly, with reference to the expression ""turn them to account"" in the said object clause.

We are of the view that there must be some material before the Tribunal to show that the property in question was a commercial asset and the

assessee must establish that the property was a commercial asset apart from the object clause then only the income derived from the property must

be treated as income derived from commercial asset.

We find that the Calcutta High Court in Commissioner of Income Tax Vs. Shambhu Investment Pvt. Ltd., considered the matter in detail and

laid down the principles of law. We are in respectful agreement with the law laid down by the Calcutta High Court in Shambhu Investment (P)

Ltd.''s case (supra).

Learned counsel appearing for the assessee brought to our attention the decision of this court in Commissioner of Income Tax, Tamil Nadu-I

Vs. B. Nagi Reddy, and also the decision in Commissioner of Income Tax Vs. V.S.T. Motors P. Ltd., . In all these cases, it was found that the

asset was a commercial asset and therefore there was no difficulty in holding that the income derived from the commercial asset would amount to

business income.

Since the essential facts are lacking, we are of the view that the matter should go back to the Tribunal to decide the question in the light of the

principles laid down earlier. It is also relevant to refer the earlier decision of this court in Commissioner of Income Tax Vs. Indian Warehousing

Industries Ltd., wherein this court has held that the source of income being the warehouses, it mattered little as to who the lessee for the time being

was, whether it was the same lessee continuing over a period of time or a shifting class of lessees who occupied the spaces for shorter periods and

paid rental for such use. This court held that income was assessable as income from property. However, it is not necessary to express for opinion

as it is the case of the assessee that the Company has necessary, object clause and the property was a commercial asset but it is for the assessee

to establish the same. Since the Tribunal has not gone into the factual questions, we remit the matter to the Tribunal with a direction to reconsider

the question afresh in accordance with law. The tax cases are disposed of accordingly. No costs.