Sudera Enterprises (P.) Ltd. vs Commissioner of Income Tax

Suhas Chandra Sen, J.—The Tribunal has referred the following question of law u/s 256(1) of the income tax Act, 1961 (''the Act''):

"Whether, on the facts and in the circumstances of the case, and on a true construction of the various terms of the Indenture dated the 7th July, 1967, the income from the multi-storeyed building in the accounting period relevant to the assessment year 1971-72 was assessable under the head ''Income from house property'' u/s 22 of the income tax Act, 1961?"

In this case the assessment year involved is 1971-72 for which the relevant accounting period is the year ended on 31-3-1971. The assessee-company was incorporated in 1963 and some of the objects of the company, inter alia, were to acquire by purchase, lease, exchange or otherwise land, building, etc., and also to create, sell and deal in freehold and lease-hold ground rents and generally to deal in traffic by way of sale, lease, exchange or otherwise of land and house property and any other property, whether immovable or real or movable or personal. The object was also to develop and turn to account any land, house or other property acquired by or in which the company is interested. One of the objects was to manage land, buildings and other property situated, whether belonging to the company or not and to collect rents and income and to supply to tenants and occupiers and others, refreshments, attendance messengers, light, waiting rooms, reading rooms, lavatories, laundry conveniences, electric conveniences, stables and other advantages. Besides these, the company had objects like carrying on business of the theatrical proprietors, distribution of films, running of hotels, agency business, business of general manufactures and business of mining and minerals etc. In the year under consideration the assessee was busy in constructing a multi-storeyed building at No. 1 Shakespeare Sarani, Calcutta and for the year under consideration a part of the building had been constructed and the remaining part was still under construction. Some rents were received from this multi-storeyed building and that income was shown in the profit and loss account of the assessee. By a lease deed dated 7-7-1967 the land of the property bearing No. 1 Shakespeare Sarani, Calcutta was taken on lease by the assessee-company from Surendra Kumar Rampuria on the terms and conditions stated therein for a period of 99 years commencing from 1-11-1966. Thereunder the assessee was to pay to the lessor a monthly rent of Rs. 1,500 for the first two years and a monthly rent of Rs. 4,500 for the remaining 97 years on or before the 7th day of each and every month succeeding the month for which the rent shall become due. It was a condition of the lease that the assessee was to construct within five years upon the demised land certain building and the cost of construction shall not be less than Rs. 40 lakhs. The assessee-company was to obtain necessary permissions and sanctions from the local authorities and the consent of the lesser was to be given wherever required. The assessee as the lessee had to keep and maintain the erections and constructions as well as fixtures and fittings in good repair and condition. The assessee-company was not to damage or allow to be damaged any erections or constructions but it was not prevented from making any additions or alterations whatsoever that may from time to time be made or caused to be made by the lessee for beneficial enjoyment of any construction, buildings, structures to be erected. The lessor and his agents had the right to enter upon the demised land to satisfy themselves that they were kept in proper condition. The buildings to be constructed were not to be used for illegal or immoral purposes and at the expiration of or sooner determination of this lease the assessee had to yield up the demised land and all buildings and structures to the lessor who would be entitled thereto absolutely only upon this lease coming to an end. The lessor had agreed to let the assessee quietly and peacefully hold and enjoy the demised land and the buildings, structures to be constructed thereon without any interruption by the lessor. It was further provided in the said lease deed that if the lease rent was not paid or any condition of the lease was not fulfilled, it was to be lawful for the lessor to re-enter upon the demised land and building without payment of any compensation. The lessee of his nominee shall be always entitled to assign this lease or part thereof to a cooperative society that may hereafter be formed for the purpose of erecting and constructing buildings and such assignee society shall be entitled to sell or to lease out flat or flats which might be constructed on "Own Your Own Flat" Scheme basis and for this purpose the assessee-company was not required to obtain any permission or consent whatsoever of the lessor and to enjoy all benefits, advantages, rents and profits thereof. The assessee-company had also the power to let, sub-let demise and sub-demise the demised land along with the basement or any construction without any permission of the lessor.

For the year under consideration the assessee had disclosed a huge loss from all its activities taken together and the ITO had proceeded to compute the income on the basis of the profit and loss account. While the ITO assessed the income of some of the properties as income from property he did not consider the income received from the tenants at No. 1 Shakespeare Sarani, Calcutta as income from property. That income as was considered as income from business along with other business of the assessee-company. It appears from the order of the ITO that the construction of the building was still being carried on and he had, therefore, disallowed certain expenses from the claims of salary and interest on the ground that the same related to the construction of the building and he treated the same as capital expenditure. The said assessment order was passed on 30-3-1974.

The Commissioner, Rajasthan was of the view that the ITO for the accounting period relevant to the assessment year 1971-72 had passed an erroneous order which was prejudicial to the interests of revenue. According to him, the income from No. 1 Shakespeare Sarani, Calcutta had wrongly been assessed as income from business and it was properly assessable as income from property in view of the fact that the building in question was owned by the assessee. Before the Commissioner it was contended that the rental income from the said property was taxable as business income. The assessee relied on the decision of the Supreme Court in the case of S.G. Mercantile Corporation P. Ltd. Vs. Commissioner of Income Tax, Calcutta, The Commissioner was, however, of the view that the above decision of the Supreme Court was not applicable to the case of the assessee as in the case before the Supreme Court the assessee was not the owner of the building and there was no dispute on the point. The Commissioner observed that as far as this case was concerned, the assessee was the owner of the building and, hence, the income was assessable as income from property. Before the Commissioner the assessee has stated that the land at No. 1 Shakespeare Sarani, Calcutta had been taken on lease and the assessee-company constructed a building at its own cost on the said land in terms of the said lease. It was further submitted that the assessee-company was carrying on business of running diverse services and letting out of the premises. It was also submitted that the tenants were supplied with air-conditioning from the Central plant owned by the assessee. The tenants were also supplied with electric current purchases in bulk by the company. The electric current was purchased at high tension and it was converted into low tension and then supplied to the tenants. For that purpose the company had installed its own transformers and other equipments. It was further contended that the company provided the tenants the services of watch and ward, lift services, sanitary service and car parking facilities. For those purposes the company maintained staff and huge expenditure was incurred for rendering those services. It was also submitted that the company recovered from the tenants besides rent, charges for air-conditioning and electric current and for rendering various other services. It was, therefore, contended that these activities were in the nature of business. Without prejudice to the above contention it was submitted before the Commissioner that the amounts realised for service charges, air-conditioning charges, supply of electric current could not be assessed as income from house property. The Commissioner was of the view that many of the facilities were such which were invariably provided by the land-lords to the tenants and they did not result in the entire income from the property being transformed into business income. He further observed that there was due provision in sections 22 to 24 of the Act which deal with property income to take note of such services and the income from such services. He was further of the view that the decision of the Supreme Court in the case of Karnani Properties Ltd. Vs. The Commissioner of Income Tax, West Bengal, was not applicable as the facts in the present case were different. The Commissioner, therefore, held that the ITO erred in treating the income as business income whereas the same was taxable as income from house property. The Commissioner, therefore, amended the assessment order and directed the ITO to treat the income from the said property as income from house property. The ITO was to modify the assessment accordingly.

The assessee went up in appeal before the Tribunal. It was contended that this was a case, where the assessee was not the owner of the building; the building was owned by the lessor who had ownership of the land also. It was argued on the basis of the judgment of the Supreme Court in the case of S.G. Mercantile Corpn. (P.) Ltd.''s case (supra) that it must be held that the assessment should have been made u/s 28 and not u/s 22.

In the alternative it was contended by the learned counsel that even if the assessee was held to be the owner of the super-structure the income from rendering of the various services to the tenants should be treated as a business activity and should be assessed accordingly. The Tribunal found that the submission of the counsel on behalf of the assessee that the assessee was not the owner of the super-structure but the legal owner of the super-structure and was Surendra Kumar Rampuria, a lessor of the land, was not borne out by the various documents, which were placed before it. The Tribunal observed: "We have carefully gone through the documents of lease deed and we do not find anything in the provisions of that deed, which militates against the legal ownership of the super-structure as belonging to the assessee-company. The various restrictions placed on the assessee as the lessee, the right of inspection as agreed to in favour of the lessor, the various conditions for keeping the property in good repair and the lessor''s right of reversion in case conditions of the lease deed were not fulfilled, do not show that the assessee was not the owner of the super-structure. It is very clear from the terms of the lease deed that the subject-matter of lease was the land and not the building. The lessor could not give the building on lease as it never belonged to the lessor. Everywhere in the deed only the land has been mentioned as ''demised-land''. The construction of super-structure was, no doubt, a condition of the grant of lease. The lease rent fixed was in respect of land only. It was the assessee who had to construct super-structure and it was agreed that the cost of construction could not be less than Rs. 30 lakhs. The lessee of the land was to enjoy all the rights of letting out the super structure, making addition or alteration in it and also was responsible for keeping it in good repair. The fact that at the expiration or the termination of the lease the land and the super-structure was to go back to the lessor could not affect the position of ownership during the currency of the lease. The lease was for a period of 99 years. It was also clear that the assessee as the lessee had the full ownership and enjoyment of the super-structure during the said term of the lease without any interruption by the lessor. What would have happened if the conditions of the lease were broken could not decide the issue of ownership of the super-structure when the lease was still current. The assessee had full right of either letting out the building to various tenants or to hand over the flats to a co-operative society for any purpose. Reading the deed as a whole we are not inclined to accept the contention of the learned counsel for the assessee that the legal ownership of the building did not belong to the assessee-company. Under similar circumstances the Calcutta High Court had decided the case of BALLYGUNGE BANK LTD., CALCUTTA Vs. COMMISSIONER OF Income Tax, BENGAL., already referred to above. Therefore, applying the law as interpreted by the Courts we hold that on the facts of the present case the assessee-company was the legal owner of the super-structure during the currency of the lease. In view of this, as far as the income from the property as such was concerned, it fell to be assessed under the provisions of section 22. Dealing with the alternative arguments, the Tribunal directed the ITO to look into the matter relating to income from the property and ascertain the income, which was assessable as income from the property. The ITO was directed to find out the nature and extent of the income arising as a result of rendering some service in respect of the property in question. To that extent the Commissioner''s order was modified by the Tribunal.

The assessee raised as many as four questions for reference before the Tribunal. The questions involving alternative submissions made before the Tribunal, however, were not referred by the Tribunal as the Tribunal was of the view that it had remanded the case to the ITO to determine whether the amounts which were realised from the tenants were taxable under the head ''Income from the business'' or ''Income from the house property''. The Tribunal had not decided the questions. Only one question was referred. That relates to the first part of the controversy.

Dr. Pal appearing on behalf of the assessee had strongly relied on the judgment of the Supreme Court in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra). Dr. Pal argued that on similar facts and on the same terms and conditions contained in the lease deed and also the objects of the company, the Supreme Court had held that in case of a property let out by a company the income from sub-letting of shops and stalls should be treated as business income. Strong reliance was placed on the observation of the Supreme Court that the learned counsel for both the parties had rightly agreed that the question of making assessment against the appellant on the facts and circumstances of the case u/s 9 of the Act did not arise.

But it must be noted that the aforesaid observation was preceded by an observation, viz.:

"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...." (p. 705)

In the present case, whether the assessee-company was the owner of the property or not was a specific issue before the Tribunal. The Tribunal had gone into the question and concluded that the assessee was the owner of the property. In a case where the assessee is the owner of the property, the answer would inevitably be that the income from the property whether by letting out or by sub-lease or otherwise must be assessed u/s 22. This aspect of the matter was made clear in the judgment itself by the Supreme Court. It was observed :

"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 u/s 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'' u/s 10 of the Act to which a more detailed reference would be made hereafter, but u/s 9 of the Act. A concrete instance of this type is afforded by the case of East India Housing and Land Development Trust Ltd. Vs. Commissioner of Income Tax, West Bengal, The appellant-company in that case had been incorporated with the objects of buying and developing landed properties and promoting and setting up markets. The company purchased ten bighas of land in the town of Calcutta and set up a market thereon. The question which arose for determination was whether the income realised from the tenants of shops and stalls was liable to be taxed as business income u/s 10 of the Act or income from property u/s 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 tax-payer 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 purposes 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''." (p. 704)

Therefore, the Supreme Court made it specifically clear that if the assessee was the owner of the building or property, he will be liable to pay tax u/s 22 even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon. It will make no difference, if the assessee is a company, which has been incorporated with the object of buying and developing landed properties and promoting and setting up markets thereon. The Supreme Court reiterated the principles laid down in the case of East India Housing and Land Development Trust Ltd. Vs. Commissioner of Income Tax, West Bengal, One will have to distinguish that case on the basis of the facts. In this case there is a finding that the assessee-company was the owner of the property. But in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra) the appellant-company was not the owner.

In the instant case, the finding made by the Tribunal that the assessee is the owner of the property, has not been challenged. In view of the finding made by the Tribunal the question is answered in the affirmative and in favour of the revenue. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.

I agree.