1928 (1) TMI 1 - HC - Income Tax

Court rules property income from building ownership as taxable under Section 9, not business profits under Section 10.

In Re: Commercial Properties Ltd. Versus Direct Taxation

In Re: Commercial Properties Ltd. Versus Direct Taxation - AIR 1928 Cal 456, (1928) 1 LR 55 Calcutta Issues:Determining whether the assessees are liable to income-tax under Section 9 or Section 10 of the Income-tax Act, 1922.Analysis:The judgment by Rankin, C.J. of the Calcutta High Court addresses the question of whether the assessees are liable to income-tax under Section 9 or Section 10 of the Income-tax Act, 1922. The case involves a registered company, The Commercial Properties, Limited, whose sole business is acquiring land, building houses, and letting premises to tenants in Calcutta or elsewhere in India. The company's assets consist of three properties, and its business activities primarily involve managing and collecting rents from these properties. The Commissioner of Income-tax opines that even if the assessees are considered a business, they should be assessed according to the special provisions related to property. This raises the issue of whether the company's income should be taxed under the head of 'property' or 'business' as per the Income-tax Act.Section 6 of the Income-tax Act outlines the heads of income chargeable to tax, including 'property' and 'business.' Section 9 specifies that tax shall be payable under the head of 'property' for the annual value of property owned by the assessee, with deductions for repairs, insurance, mortgage interest, and ground-rent. The annual value is determined based on the property's potential rental income, not solely on actual rent received. On the other hand, Section 10 pertains to the 'profits or gains of any business carried on by the assessee,' with specific rules for computing profits, including allowances for premises used for business purposes. In this case, the company owns three estates, and the question arises whether its activities constitute a business under Section 10 or fall under the provisions of Section 9 as property income.The judgment discusses precedents from England and Burma to determine the classification of income derived from property ownership. The case of Kaladan Suratee Bazar Co. Ltd. in Burma highlighted that income from property was not necessarily considered business income under the Indian Income-tax Act. Similarly, English cases like Commissioners of Inland Revenue v. Sangster and Korean Syndicate Ltd. emphasized the distinction between business activities and property ownership for tax purposes. These cases provide insights into interpreting the scope of business income under tax laws and the criteria for determining whether property income should be taxed as business income.Rankin, C.J. concludes that the company's income, derived from owning and managing buildings, falls under the category of property income rather than business profits. Despite the company's activities involving management and rent collection, the nature of the income is deemed as derived from property ownership, not from business operations. Therefore, the assessees are to be assessed under Section 9 of the Income-tax Act, and they are liable to pay the costs of the reference. The concurring opinions of C.C. Ghose, J. and Mukerji, J. affirm this decision, establishing that the income from property ownership is to be taxed under the provisions of Section 9, distinguishing it from business income under Section 10.