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'REPORTABLE'

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 4494 OF 2004

M/S CHENNAI PROPERTIES  & INVESTMENTS LTD., CHENNAI         ... Appellant

VERSUS THE COMMISSIONER OF INCOME TAX  CENTRAL III, TAMIL NADU     ...Respondent WITH CIVIL APPEAL NOS. 4491-4493 OF 2004 M/S CHENNAI PROPERTIES  & INVESTMENTS LTD., CHENNAI         ... Appellant

VERSUS THE COMMISSIONER OF INCOME TAX,  TAMIL NADU-I        ...Respondent

J U D G M E N T A. K. SIKRI, J.

CIVIL APPEAL NO. 4494 OF 2004 The appellant-assessee is a company incorporated under

the Indian Companies Act.  Its main objective, as stated in the Memorandum of Association, is to acquire the properties in the city of Madras (now Chennai) and to let out those properties.  The assessee had rented out such properties and  the  rental  income  received  therefrom  was  shown  as income from business in the return filed by the assessee. The assessing officer, however, refuse to tax the same as business income.  According to the assessing officer, since

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the income was received from letting out of the properties, it was in the nature of rental income.  He, thus, held that it would be treated as income from house property and taxed the same accordingly under that Head.   

The assessee filed the appeal before the Commissioner of Income Tax (Appeals) who allowed the same by his orders dated 06.04.1989 holding it to be income from business and directed  that  it  should  be  treated  as  such  and  taxed accordingly.  Aggrieved by that order, the Department filed appeal  before  the  Income  Tax  Appellate  Tribunal  which declined to interfere with the order of the Commissioner of Income  Tax  (Appeals)  and  dismissed  the  appeal.   The Department approached the High Court.  This appeal of the Department  has  been  allowed  by  the  High  Court  vide  its order dated 05.09.2002 holding that the income derived by letting  out  of  the  properties  would  not  be  income  from business  but  could  be  assessed  only  income  from  house property.  A perusal of the impugned judgment of the High Court would show that it has primarily rested its decision on the basis of the judgment of this Court in 'East India Housing and Land Development Trust Ltd. v. Commissioner of Income Tax, West Bengal [(1961) 42 ITR 49] as well as the Constitution  Bench  judgment  of  this  Court  in  'Sultan Brothers (P) Ltd. v. Commissioner of Income Tax' [1964 (5) SCR 807].

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From  the  aforesaid  facts,  it  is  clear  that  the question which is to be determined on the facts of this case is as to whether the income derived by the company from letting out this property is to be treated as income from business or it is to be treated as rental income from house property.   

We have heard the learned counsel for the parties on the aforesaid issue.  Before we narrate the legal principle that  needs  to  be  applied  to  give  the  answer  to  the aforesaid  question,  we  would  like  to  recapitulate  some seminal features of the present case.   

The Memorandum of Association of the appellant-company which is placed on record mentions main objects as well as incidental or ancillary objects in clause III. (A) and (B) respectively.  The main object of the appellant company is to acquire and hold the properties known as “Chennai House” and “Firhavin Estate” both in Chennai and to let out those properties as well as make advances upon the security of lands  and  buildings  or  other  properties  or  any  interest therein.  What we emphasise is that holding the aforesaid properties  and  earning  income  by  letting  out  those properties is the main objective of the company.  It may further  be  recorded  that  in  the  return  that  was  filed,

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entire income which accrued and was assessed in the said return was from letting out of these properties.  It is so recorded and accepted by the assessing officer himself in his order.

It transpires that the return of a total income of Rs.244030  was  filed  for  the  assessment  year  in  question that is assessment year 1983-1984 and the entire income was through letting out of the aforesaid two properties namely, “Chennai House” and “Firhavin Estate”.  Thus, there is no other income of the assessee except the income from letting out of these two properties.  We have to decide the issue keeping in mind the aforesaid aspects.   

With this background, we first refer to the judgment of this Court in  East India Housing and Land Development Trust Ltd.'s case  which has been relied upon by the High Court.  That was a case where the company was incorporated with the object of buying and developing landed properties and  promoting  and  developing  markets.   Thus,  the  main objective  of  the  company  was  to  develop  the  landed properties into markets.  It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and  stalls.   In  those  facts,  the  question  arose  for consideration  was:  whether  the  rental  income  that  is

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received  was  to  be  treated  as  income  from  the  house property or the income from the business.  This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all.  The court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties.   

Before we refer to the Constitution Bench judgment in the case of  Sultan Brothers (P) Ltd., we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in 'Karanpura Development Co. Ltd. v.  Commissioner of Income Tax, West Bengal'  [44 ITR 362 (SC)].  That was also a case where the company, which was the assessee, was formed with the object,  inter alia, of acquiring  and  disposing  of  the  underground  coal  mining rights in certain coal fields and it had restricted its activities  to  acquiring  coal  mining  leases  over  large areas, developing them as coal fields and then sub-leasing them to collieries and other companies.  Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee.  The income which was received from letting out of those mining

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leases was shown as business income.  Department took the position that it is to be treated as income from the house property.   It  would  be  thus,  clear  that  in  similar circumstances,  identical  issue  arose  before  the  Court. This Court first discussed the scheme of the Income Tax Act and  particularly  six  heads  under  which  income  can  be categorised / classified.  It was pointed out that before income,  profits  or  gains  can  be  brought  to  computation, they have to be assigned to one or the other head.  These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under,  another  head.   Thereafter,  the  Court  pointed  out that the deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them.  It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities.  In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel, House of Lords in England and US Courts were taken note of.  The position in law, ultimately, is summed up in the following words: -

“As  has  been  already  pointed  out  in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation.  The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall  and  to  what  head  the  income  is  to  be

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assigned.”

After applying the aforesaid principle to the facts, which  were  there  before  the  Court,  it  came  to  the conclusion that income had to be treated as income from business and not as income from house property.  We are of the  opinion  that  the  aforesaid  judgment  in  Karanpura Development Co. Ltd.'s case  squarely applies to the facts of the present case.

No  doubt  in  Sultan  Brothers  (P)  Ltd.'s  case, Constitution  Bench  judgment  of  this  Court  has  clarified that  merely  an  entry  in  the  object  clause  showing  a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon  the  circumstances  of  each  case,  viz.,  whether  a particular business is letting or not.  This is so stated in the following words: -

“We think 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.  We do not further think that a thing can by its very nature be a commercial asset.  A commercial asset is only an asset  used  in  a  business  and  nothing  else,  and business  may  be  carried  on  with  practically  all things.  Therefore, it is not possible to say that a particular  activity  is  business  because  it  is concerned with an asset with which trade is commonly carried on.  We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature.”

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We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment.  It is for this reason, we have,  at  the  beginning  of  this  judgment,  stated  the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee.  The assessee therefore, rightly disclosed the income under the Head Income from Business.  It cannot be treated as 'income from  the  house  property'.   We,  accordingly,  allow  this appeal and set aside the judgment of the High Court and restore  that  of  the  Income  Tax  Appellate  Tribunal.   No orders as to costs.

CIVIL APPEAL NOS. 4491-4493 OF 2004 The appeals are disposed of in terms of the aforesaid  

order in Civil Appeal No. 4494 of 2004.    

..........................., J. [ A.K. SIKRI ]

..........................., J. [ ROHINTON FALI NARIMAN ]

New Delhi; April 09, 2015.

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