2011 (2) TMI 372 - HC - Income Tax

Retrospective tax law applied to deem appellant owner of properties based on rental income classification

The court held that Section 27(iiib) of the Income-tax Act has retrospective operation, deeming the appellant the owner of leasehold properties. The ... Business income or house property - Retrospective amendment to section 27(iiib) - use of the verb 'acquires' - term 'owner' - Held that: - the amendment was intended to supply an obvious omission or to clear up doubts as to the meaning of the word 'owner' in section 22 of the said Act. The language of clause (iii)(b) of section 27 of the said Act shall be deemed to be declaratory and clarificatory and not substantive in nature. - When it is clarificatory in nature, it cannot change the basic character of the said section for one of the objects of classification is to keep basic purpose of original statutory provision untouched. Hence following the established principle of law relating to interpretation of statutes, we hold that the said provision with amendment has retrospective operation though it has been inserted on 1-4-1988.Ownership interest of leasehold interest - nature of income - Held that: - appellant/assessee is deemed owner for holding the leasehold interest. - it is possible in this case the assessee/appellant though might be an owner by applying the deeming provision in section 27(iiib), having regard to the nature of activity of the company as mentioned in the object Clause of the Memorandum of Association, to classify appropriately the income fetched in connection with house property. - matter remanded back to AO to come to findings with reference to the object clause of the Memorandum of Association and also the accounts whether this income fetched by way of sublease is part of the business activity or not? On examining closely if it is found that it is part of the business activity obviously the income fetched therefrom should be classified under the heading income from and profit and gains of business, and not from the income from house property. Issues Involved:1. Prospective or retrospective operation of Section 27(iiib) of the Income-tax Act, 1961.2. Classification of rental income as business income or income from house property.3. Validity of proceedings under Section 148/147 of the Income-tax Act.Detailed Analysis:1. Prospective or Retrospective Operation of Section 27(iiib):The primary issue was whether the verb 'acquires' in Section 27(iiib) of the Income-tax Act, 1961, which was introduced with effect from 1st April 1988, applies retrospectively or prospectively. The court examined whether this section relates back to past transactions, especially considering that Section 269UA(f) came into force on 1st April 1986.The appellant argued that the leases were acquired between 1967 and 1970, and the language of the amended provision indicates no retrospective operation. The respondent contended that the amendment aimed to enlarge the meaning of 'owner of building' and should apply from 1st April 1988 onwards.The court concluded that the amendment was clarificatory and declaratory in nature, thus having retrospective operation. This conclusion was based on judicial precedents, including the Supreme Court's decision in CIT v. Podar Cement (P.) Ltd., which clarified that such amendments are intended to clear doubts and are retrospective.2. Classification of Rental Income:The second issue was whether the rental income from house property should be classified as business income or income from house property, particularly when the main business of the assessee is to acquire buildings on lease and let them out.The appellant argued that their business involved acquiring properties on lease and sub-letting them, and thus, the income should be classified under 'income from profits and gains of business and profession.' The respondent maintained that the income should be classified as income from house property as the assessee is deemed to be the owner under Section 27(iiib).The court referred to the Supreme Court's decisions in Karanpura Development Co. Ltd. v. CIT and S.G. Mercantile Corpn. (P.) Ltd. v. CIT, which established that if a company acquires properties as part of its business activities, the income derived should be treated as business income. The court directed the Assessing Officer to examine the object clause of the Memorandum of Association and the accounts to determine if the income from sub-leasing is part of the business activity. If it is, the income should be classified under 'income from profits and gains of business.'3. Validity of Proceedings under Section 148/147:The third issue was whether the proceedings under Section 148/147 of the Income-tax Act were validly initiated. This issue was not elaborately discussed in the judgment as the primary focus was on the applicability of Section 27(iiib) and the classification of rental income.Conclusion:The court held that Section 27(iiib) has retrospective operation and that the appellant is deemed the owner of the leasehold properties. The classification of rental income should be determined based on whether it is part of the business activity of the company. The matter was remanded to the Assessing Officer for further examination, with instructions to complete the process within ten weeks. The appeal was disposed of without costs.