Keyaram Hotels (P) Ltd. vs Assistant Commissioner of Income Tax

K. Raviraja Pandian, J.—The appeal is filed by formulating the following questions of law:

Whether the Tribunal is correct in law in holding that the income derived by the appellant from leasing of the ''commercial property'' is not business income and has to be assessed as income from property?

Whether on the facts and in the circumstances of the case, the Tribunal, having found that the transaction is a business activity was justified in concluding that the income has to be assessed as ''income from property''?

Whether the Tribunal is correct in law in sustaining the stand of the respondent on the assessment of lease income under head ''Property'' even though it was not a case of letting ''simpliciter'' and on the contrary letting with amenities and services, warranting computation under the head ''Business'' granting deduction of expenses incurred?

Whether the Tribunal is correct in law in sustaining the stand of the respondent on the assessment of lease income under head ''Property'' even though the facts and circumstances warrant assessment under head ''Other sources'' alternatively upon taking into consideration the expenses incurred in relation thereto?

Whether the Tribunal is correct in law in sustaining the fair market value as on 1st April, 1981 at Rs. 3,43,485 per ground in the computation of long-term capital gains determined by the lower authorities as against Rs. 4 lakhs on the facts and in the circumstances of the case?

For the asst. yr. 2001-02, the appellant company has filed its return of income on 30th Oct., 2001 showing an income of Rs. 9,92,06,410. In the scrutiny assessment, the Asstt. CIT, Company Circle 11(4), Chennai had computed income from house property at Rs. 38,46,982, long term capital gains at Rs. 12,03,90,674 and income from other sources at Rs. 38,22,070. The total income computed in the said order of assessment was Rs. 12,80,59,730. According to the assessee company, the lease income derived from M/s Shoppers Stop Ltd. by leasing out the property of the assessee should be assessed under the head of "Business income". The AO computed the said lease income under the head of income from house property after verifying the lease deeds entered into by the assessees with the lessees. As regards the computation of long term capital gains, the AO had reworked the taxable capital gains at Rs. 12,03,90,674 as against the admitted amount of Rs. 9,88,63,664 by adopting the fair market value of the land as on 1st April, 1981.

Aggrieved by that order, the assessee carried the matter on appeal to the CIT(A), Chennai, who in respect of the first issue confirmed the order of the AO but in respect of the second issue granted partial relief. The second appeal filed before the Tribunal also has not yielded any result in favour of the appellant/assessee. Hence, the present appeal.

We heard the argument of the learned Counsel for the appellant, who assailed the order of the Tribunal contending inter alia that as per the memorandum of association, the main object of the assessee was to carry on business of hotel, restaurant, roadhouse, motel, cafe, tavern, beer house, refreshment, etc., as such the property has been exploited commercially and the income earned from the exploitation of commercial property has to be regarded as business income. In respect of the valuation of the capital gain, the learned Counsel appearing for the assessee has reiterated what was stated before the authorities to the effect that the fair market value to be adopted as on 1st April, 1981 should be Rs. 4 lakhs per ground.

From the materials on record, it is clear that the assessee company is the owner of the property at No. 2, Harrington Road, Chetpet, Chennai. The assessee had let out the premises in an extent of 25,393 sq. ft. upon entering into an agreement and received the income.

Before the authorities under the Act as well as the Tribunal, the assessee has not placed any materials to support its case that the property from which income has been derived was used as business property and the exploitation of the property was in the nature of the business of the assessee company.

The AO has recorded a factual finding to the effect that the rental income from M/s Shopper''s Stop Ltd. was supported by supplementary agreement of lease executed on 25th July, 2000 which was operative from 15th July, 2000. The lease agreement executed on 25th July, 2000 clearly specified that the rent payable for the premises let out to Shoppers Stop was Rs. 3,58,020 and Rs. 2,79,059 per month for ground and first floors respectively. The conditions for chargeability of property income as provided under the provisions of Section 22 of the IT Act were all available in this case i.e., the assessee was the owner of the property and has not been used by him for the purpose of his business. Thus the income was chargeable as income from property and not as business income.

On appeal, the CIT(A) after hearing the argument and perusal of the material on record, has recorded a finding that the income was generated out of exploitation of the property by letting out the same to M/s Shoppers Stop. There was no commercial activity or business activity carried out by the appellant to earn such income. Some additional facilities extended to the tenant might be useful to the tenant to exploit the property commercially. This finding of fact has been confirmed by the Tribunal. The Tribunal followed the decision of this Court in Commissioner of Income Tax Vs. Chennai Properties and Investments Ltd., .

The well established and recognised principle of law is that no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rent or licence fee) received by an assessee from leasing or letting out the assets would fall under the head of "Profits and gains of business or profession". It is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case including true interpretation of the agreement under which the assets are let out. See Universal Plast Limited Etc. Vs. Commissioner of Income Tax, Calcutta, .

In this case, the assessee earned income out of exploitation of the property by letting it out to M/s Shoppers Stop. There is neither commercial activity nor business activity carried out by the assessee to earn such income. The object clause contained in the memorandum of association of the assessee company would not alter the nature of activity of the assessee company. The income earned cannot be under the head of "Business income". The agreement did not even suggest that the letting out of the property by the assessee is in the nature of business activity.

A constitution Bench of the Supreme Court in the case of Sultan Brothers (P) Ltd. Vs. Commissioner of Income Tax, while approving the decision rendered by three Judges Bench in the case of East India Housing and Land Development Trust Ltd. Vs. Commissioner of Income Tax, West Bengal, has held that though the object of the assessee company no doubt was to acquire land and building and turn the same into account by construction, reconstruction and leasing and selling the same assuming to be a business activity would not by itself turn the lease into business deal. After taking note of the aforesaid judgment of the Supreme Court, the Division Bench of this Court in Chennai Properties (supra) in which one of us (K. Raviraja Pandian, J.) was a party, has also held to the same effect.

On the facts of the case, it is clear that the assessee company was only exploiting the property as owner by leasing out the same and realised income by way of rent. Such rental income is liable to be assessed as income from house property.

In respect of the capital gain, the assessee has entered into an agreement with the builder M/s Heeral Constructions (P) Ltd. and as per the developer''s agreement dt. 6th Jan., 2000, 39 per cent of land area has been transferred for construction of 78,295 sq. ft, of built up area. Out of 78,295 sq. ft. of built up area, the assessee has sold 52,902 sq. ft, along with undivided shares to M/s SSI Technologies Ltd. and the balance 25,393 sq. ft. has been retained by the assessee. The AO after taking note of the sale consideration, purchase cost, cost of investments, development cost and selling expenses, has determined the long term capital gain. Before the first appellate authority, the assessee filed documents in document No. 1966/1982. The first appellate authority took the pain of visiting the properties in order to consider the aspect of location and its potentiality.

The CIT(A) after considering that the property taken up for comparison by the AO had certain disadvantages, found that the property under consideration was almost at the cross road of Chetpet over bridge and was in the prime commercial locality. The commercial potentiality of the property has also been taken note of by the CIT(A) and having given due regard to all the factors, the fair market value of the property of the appellant was fixed at Rs. 3,40,000 per ground. Thus, the value of the property has been determined on the basis of the evidence adduced i.e., the documents produced by the assessee pertaining to the year 1982 and this amount has been fixed after taking stock of the factual situation of the locality by a personal visit Hence, we are of the considered view that the fair market price fixed by the CIT(A), which has been affirmed by the appellate authority requires no reconsideration in this appeal, which is factual in nature.

For the abovesaid reasons, we find no question of law, much less a substantial question of law so as to entertain this appeal. The appeal is dismissed.