TaxTMI 
TaxTMI 
2006 (4) TMI 196
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....dings of the AO and confirmed by the CIT(A) are contrary to the Tribunal order in ITA No. 7214 for the asst. yr. 1980-81, in ITA No. 5151 for the asst. yr. 1982-83 and the Tribunal order dt. 29th April, 1993 for the asst. yr. 1983-84 to 1987-88 and subsequent years?" 2. The facts which are relevant and material to consider and decide the above question are as follows. The assessee in the present case is a company incorporated on 19th Dec., 1978 with the following main objects as specified in its memorandum of association: "1. To purchase, sell, deal and traffic in lands, estates, houses or other landed properties of any tenure, whether freehold, leasehold or otherwise, and any interest therein and generally to deal in, traffic develop and turn to account land by laying out and preparing the same for building purposes, to act as builders and/or contractors and in that connection construct, alter, pull down and improve buildings, flats, garages, offices, hotels and theatres. 2. To carry on the business of land, real estate and property agents, brokers, representatives, and dealers and to render services of hiring, renting, leasing, sale or purchase of buildings, ....
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....me the owner of the said building in the previous year relevant to asst. yr. 1980-81, the rental income could not be assessed under the head "Income from house property" and the same, therefore, was chargeable to tax only under the residuary head "Income from other sources" as held by the AO as well as by the learned CIT(A). Since it was not. even the case of the assessee that the rental income in question was assessable under the head "Income from house property", the Tribunal proceeded to consider and decide the limited issue as to whether the rental income was chargeable to tax under the head "Income from business" as claimed by the assessee or under the head "Income from other sources" as held by the Revenue authorities. In this context, the Tribunal agreed with the submissions made on behalf of the assessee-company that a huge investment of Rs. 75 lakhs was made by it not merely to earn a meager rental income but to exploit the said property acquired as stock-in-trade commercially in the course of its business. Accordingly, the Tribunal held that the letting out of a portion of the said property was only incidental to the main business of the assessee of acquiring, developing ....
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....s case for asst. yr. 1981-82 onwards vis-a-vis 1980-81 inasmuch as the assessee was not the owner of the property in the previous year relevant to asst. yr. 1980-81 whereas as a result of execution and registration of sale deed on 31st May, 1980, he had become the owner thereof in the subsequent years. According to the Tribunal, this material change in the factual position, however, escaped the attention of the Tribunal which resulted in inadvertently accepting the claim of the assessee that the rental income was chargeable to tax under the head "Income from business" in the subsequent year holding that this issue was covered by the Tribunal's order for asst. yr. 1980-81. The Tribunal, therefore, proceeded to examine the issue afresh in asst. yr. 1992-93 in the light of this change in the factual position and held on such examination vide its order dt. 31st July, 2002 in ITA No. 4416/Del/1996 [reported as Atma Ram Properties (P) Ltd. vs. Dy. CIT (2004) 86 TTJ (Del) 88-Ed.] that the property in question was not the stock-in-trade of the assessee and even if the same was to be held as stock-in-trade, the rental income received from the said property was chargeable to tax under th....
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....hat the huge investment of Rs. 75 lakhs for acquiring the said property was not made by the assessee-company just to earn the meager rental income but the same was made to construct flats on the third floor of the said property which was clearly evident from the fact that even the advances had been received by the assessee-company from the prospective purchasers of tile flats proposed to be constructed as such. He submitted that after evacuation of some of the tenants, the vacant tenements were sold by the assessee-company from time to time which again goes to show that the earning of rental income was never the intention of the assessee-company behind acquiring the property in question. He invited our attention to the details of tenements/units so sold by the assessee-company given on pp. 88 to 91 of his paper book and pointed out that the selling price realized by the assessee from such sale vis-a-vis the rental amount of the relevant tenements again shows that earning of rental income could not have been the real intention of the assessee-company. 8. The learned counsel for the assessee further submitted that the property in question was shown by the assessee-company in its b....
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....on of Hon'ble Supreme Court in the case of Karanpura Development Co. Ltd. vs. CIT (1962) 44 ITR 362 (SC) wherein it was held that a company formed with the specific object of acquiring properties not with a view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of business, cannot be said to treat them as land owner but as trader. It was further held that where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business. It was also held that the deciding factor in this regard is not the ownership of land or leases, but the nature of activity of the assessee and the nature of the operations in relation to them. The objects of the company must also be kept in view to interpret the activity. 11. The learned counsel for the assessee also relied on the decision of Hon'ble Supreme Court in the case of S.G. Mercantile Corporation (P) Ltd. vs. CIT wherein it wa....
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....operty on 31st May, 1980 on execution and registration of sale deed, but this material and relevant change in the factual position, however, was lost sight of by the Tribunal while deciding this issue in favour of the assessee in the subsequent years upto asst. yr. 1991-92 following the appellate order for asst. yr. 1980-81. He contended that the Tribunal in its order for asst. yr. 1992-93, however, took note of this change in the factual position and considering that the assessee-company had become the owner of the property, it was held that the rental income received by it in respect of the said property was chargeable under the head "Income from house property" relying on the decisions of Hon'ble Supreme Court in the case of CIT vs. Chugandas & Co. and S.O. Mercantile Corporation (P) Ltd. He contended as per the proposition propounded in the said decisions of Hon'ble Supreme Court as well as in the various other judicial pronouncements available on this issue, if the assessee is the owner of a house property, then the rental income received from the said property is chargeable to tax under the specific head "Income from house property" irrespective of the nature of asset....
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....y the assessee-company to alter or develop/construct further the said property and in the absence of such permission, it cannot be said that the assessee-company has ever commenced its business as rightly held by the authorities below. He also contended that the owning of the house property and letting it out on rent cannot be considered as a business activity. 15. In the rejoinder, the learned counsel for the assessee submitted that all the authorities relied upon by the learned Departmental Representative only lay down the principles on the basis of which the issue in dispute can be decided. He contended that the said principles, however, are required to be applied to the facts of the present case to ascertain and decide as to whether the rental income earned by the assessee-company was chargeable to tax under the head "Income from business" or "Income from house property". He also submitted that even though the assessee-company has not been able to obtain the necessary permission from NDMC for further development/construction of the property in question, it was contemplating such permission which is very much evident from the fact that the advances were received by it from th....
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....t was held by their Lordships that the assessee had two sources of income, one by way of rental income and other from service charges. The service charges collected by the assessee were held by the Hon'ble apex Court to be "Income from business" whereas the rent derived from letting out the building owned by the assessee-company was held to be assessable as "Income from property". 17. In the case of S.G. Mercantile Corporation (P) Ltd. vs. CIT as well as in the case of Karanpura Development Co. Ltd. vs. CIT relied upon by the learned counsel for the assessee, the assessees were not the owner of the property but they were. holding the leasehold rights of the subject property and considering that the liability to tax under the head "Income from house property" under the relevant provisions is that of the owner of the buildings or lands appurtenant thereto, Hon'ble Supreme Court proceeded to hold the income derived by the assessee from the property not owned by them as assessable under the head "Income from business" and not "Income from house property". While doing so, the law laid down in the case of East India Housing & Land Development Trust Ltd. vs. CIT was held to be ....
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.... declared by the Court. 19. It is no doubt true that in the case of Sultan Brothers, the Constitution Bench of Hon'ble Supreme Court has held that whether a particular letting is a business has to be decided in the circumstances of each case and that each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. At the same time, it is also true that in all the cases which have been decided by the Hon'ble Supreme Court involving commercial or residential buildings owned by the assessee, it has been held that the income realized by such owners by way of rental income from a building, whether commercial building or residential house, is assessable under the head "Income from house property". While taking note of this position in its judgment rendered in the case of Karanpura Development, Co. Ltd., Hon'ble Supreme Court held that the only exception to this proposition are cases where the letting of building is inseparable from the letting of the machinery, plant and furniture, etc. where the rental received for the building is to be assessed under the head ....
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....onstructed by it on leasehold land was owner thereof for the purpose of s. 22 and, therefore, the rental income was assessable to tax under the head "Income from house property" irrespective of the fact that leasing of site and construction thereon is one of the objects of the assessee-company. In the case of P.V.G. Raju, Rajah of Vizianagaram vs. CIT (1967) 66 ITR 122 (AP), Hon'ble Andhra Pradesh High. Court held that letting out of the market property was only a normal feature of exploitation of the property as owner and was in no sense a business activity even though the tenants were doing business therein. 22. In the case of CIT vs. New India Industries Ltd. it was held by the Hon'ble Bombay (sic-Gujarat) High Court that when the asset is in the nature of land or building capable of being used for any other purpose and when the assessee ceases, to use it as a commercial asset either himself or even through others, the income derived by him for renting out the same would more appropriately fall under the head "Income from house property" as, like any other owner of the property, he gets income from that property as owner. In such cases, it is not factum of his busines....
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....usiness income" In our considered opinion, the facts of the present case as borne out from record clearly show that the case of the assessee falls under the former category and not in the latter since it was a case of letting out the house property owned by the assessee-company simplicitor and not by way of complex commercial activities. Here, a useful reference can be made to the decision of Hon'ble Bombay High Court in the case of National Storage (P) Ltd. to understand the concept of exploitation of immovable property by way of complex commercial activity In the said decision, the assessee-company had been promoted by the film distributors for carrying on the business of storing and preserving of films, chemicals, cinema accessories and any articles or merchandise in cinema industry in suitable wards specifically constructed for the purposes and equipped with all the necessary arrangements. The company purchased a place approved by the Chief Inspector and constructed some units on plot of land in conformity with Cinematograph Film Rules, 1948 and permitted the wards to be used by the film distributors on payment of a monthly charge. The company also rendered certain services....
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....that if an assessee carries on business of purchasing and selling buildings, the profits and gains earned by transaction in buildings will be shown under the head "Profits and gains of, business or profession", but income received from the buildings so long as they are owned by the assessee will be shown under the head "Income from house property". In the case of CIT vs. New India Maritime Agencies (P) Ltd., the rental income received by the assessee from properties owned by it and let out to others was held to be assessable to tax under the head "Income from house property" and not under the head "Profits and gains of business or profession". It was also held by the Hon'ble Madras High Court that the question as to whether buildings owned by the assessee are capable of being regarded as commercial assets is not relevant for deciding as to whether, when those assets had not been used in the business of the assessee but were only let out, such rental income was to be assessed as "Income from house property". 25. While citing various case laws in support of the Revenue's case that the rental income received by the assessee-company in the present case is chargeable to tax u....