AI Structured Summary
Not yet generated for this judgment
Judgment
THE CHIEF JUSTICE - The following question has been referred to us by the Commissioner of Income Tax, Madras in pursuance of this High
Courts order in O.P. No. 108 of 1932, dated the 30th August, 1932, namely,
Whether the rentals derived from properties taken over in discharge of debts in the course of foreign money-lending business and treated as assets
of that business can be assessed as part of the profits of that business when remitted to British India under s. 4 (2) of the Indian Income Tax Act.
The petitioner is a Nattukottai Chetti and is the proprietor of a money-lending business in Burma and also a partner with a 7/8ths share in a
banking business at Kuala Lampur in the Federated Malay States, namely, the ""A.S.P.L.V.R."" Firm. In the year of account a large sum of money
was shown in the books of the firms at Burma and Kuala Lampur to have been remitted from Kuala Lampur to Burma during that year. The
question arose during the assessment whether that sum included any part or the whole of the petitioners share of profits of the Kuala Lampur
business during the three years prior to the year of account which would be liable to tax under s. 4 (2) of the Act. In considering this question, the
Income Tax Officer had to deal with the rental income derived from 15 house properties in Kuala Lampur, all the houses except one admittedly
having been taken over in discharge of the debts due from the customers of the business. The one house also was acquired with a view to secure
overdrafts from banks for the purposes of the money-lending business. All these houses are shown as assets of the money-lending business; and
the rentals from the houses and the expenditure relating to them are accounted for in the books and the net result is taken periodically to the Profit
and Loss account of the business. All the houses except one have now been sold and the profits derived by the sale of the house properties have
been assessed already as business profits. The Income Tax Officer held that the rents received amounting to $ 9,219 should be treated as part of
the petitioners income from business. He, therefore, included that amount in the profit available for remittance u/s 4 (2) of the Act. In the opinion of
the Commissioner of Income Tax that assessment was correct; and, in dealing with the question referred by him, he observes that u/s 9 (1) of the
Act, tax is payable by an assessee under the head ""Property"" in respect of the bona fide annual value of buildings, etc., of which he is the owner
that there is nothing in the section to indicate that the buildings, etc., must be situate in British India but that this section is governed by Section 4
(1), which requires that income, to be assessable, must accrue or arise or be received in British India. He draws the conclusion that as what is
assessed is the annual value of the buildings and not the rent, even if the owner of buildings situate elsewhere receives the rent in British India. That
does not constitute u/s 4 (1) a receipt of income taxable under the head ""Property"". As regards the annual value of buildings, he contends that
Section 9 of the Act is of no application to buildings situate elsewhere than in British India. His contention, therefore, is that, where these rents are
received abroad from foreign property, they cannot be reached by Section 9 of the Act and can only be reached by Section 4 (2) and then only if
the facts warrant that income to be properly described as profits and gains of a foreign business. The petitioner, on the other hand, contends that
income of this nature is not and cannot be business income. He points out that Income Tax is paid by an assessee under various heads for which
sections are provided, that, had this income accrued in British India, the tax would have been payable by the assessee u/s 9 of the Act and not
Section 10 which deals with the profits or gains of a business and that the two sections are quite distinct, the one relating to property and the other
relating to the profits or gains of a business and this, of course, is quite true. In support of this argument it is contended that the House of Lords
have decided that income derived from the letting of premises is assessable as income derived from property in land and not as business profits.
That is in the case of The Salisbury House Estate Company, Limited v. Fry. In that case, the appellant company was the owner of a large block of
buildings and let out the rooms as unfurnished offices to tenants. The company had no other business except the letting out and management of the
one property. Their Lordships held that the company was properly assessable under Schedule A and not under Schedule D. It is argued by the
petitioner here that this is a decision directly in point because the opinion expressed by their Lordships in this case was that the assessee in such a
case cannot be said in respect of the income from land to be earning profits from trade. Putting out of consideration any question of distinct
classification of income such as the determination of which schedule the income falls within for the purpose of its being taxed, if the judgment of
their Lordships means that income derived by a trading company from land can never be profit earned from trade of business, although that may be
the only business carried on by an assessee, then this case is strongly in point. But it has to be remembered that what their Lordships were
considering was whether that particular income stood to be assessed under Schedule A or Schedule D and not whether it was liable to be
assessed at all and whether the Income Tax authorities as they claimed had any option to include that income in Schedule D not withstanding the
fact that it might also have been included in Schedule A. This claim of the Income Tax authorities their Lordships negatived. They held that the
Income Tax authorities had no such option and that, where the assessees were capable of being assessed under Schedule A, they could not, in
respect of the same income, be assessed under Schedule D; in other words, where there are various classes of income and the taxing statute says
that income of a particular class is to be charged under that section or schedule, then, it is to be charged under that section or schedule only.
Exactly similar is the case under the India Income Tax Act. But it must be remembered that in the House of Lords case what was being deal with
was income derived from property within the United Kingdom and not property elsewhere. If the contention put forward by the petitioner here is
correct, it means that this class of income, having once been labelled ""property."" Wherever that income is derived, whether in British India or in any
other part of the world, it is still ""property"" and has to be dealt with under S. 9 of the Act as such. In my view, that argument is unsound; and it is
important to see whether under the English Act such income, once having been assessable under Sch. A, must still be so when it is derived from
property in a foreign country. It is clear that such income is no longer assessed under Sch. A, but under Case V of Sch. D, namely, tax in respect
of income arising from stocks, shared and rents out of the United Kingdom. This certainly shows that it is only when the property in respect of
which the assessment is made is in the United Kingdom that Sch. A is of application and that, when the income accrues from foreign property, it is
health with in Sch. D in the same way as are all profits and gains from whatever source accruing in the foreign country to a resident in England and
in which Schedule all profits of any trade, profession, employment and vocation in England also are assessable, nor is the assessment based on the
annual value as it is in Sch. A but on actual profit. It seems to me, therefore, that, by the analogy of the English Act, S. 9 of the Indian Act cannot
be applied to income from property in a foreign country and that it is only when income is derived from property in British India that S. 9 is of any
application at all. How then is this income to be taxed when it is brought into British India ? The petitioners contention is that, if S. 9 does not
apply, the income is not taxable at all. With that contention I am unable to agree. If there is evidence upon which the Income Tax authorities can
find that these are the profits and gains of a business, then it seems to me that they are taxable u/s 4 (2) of the Act; and the fact that they would, if
the property had been in British India, be classified u/s 9 instead of Section 10 of the Act cannot alter that description if they are capable of bearing
it. It then becomes a question of fact, namely whether these rentals can be said to be the profits and gains of the petitioners banking business. I do
not understand their Lordships in the Salisbury House Case to say that in law under no circumstances can a company or firm deriving profit from
land be described as traders and those profits the profits of a trade. They were merely deciding a question of Income Tax. At page 328 of the
report in The Salisbury House Estate Company Limited v. Fry (1928) 15 Tax Cases 267, Lord Macmillan says speaking of the companys
activities :
Land-owning, however profitable, is not a trade within the meaning of the Income Tax Code. Property in land as a source of income is dealt with,
and can only be dealt with, under Sch. A, and the rules of that schedule prescribe how the income from landed property is to be ascertained and
measured.
In my view, when Section 9 is put out of consideration as touching this matter, all that has to be seen is whether this banking firm as a part of its
business activities derived this profit. This is a question of fact. If the Commissioner of Income Tax holds that this income is a profit of the business
because it has accrued to that business irrespective of whether it did so in the ordinary way of the business, then I think that he has not applied the
proper test. What has to be seen is whether the transaction which resulted in this profit can fairly be described as a part of the assessees ordinary
business. I think it can. This is a banking business and it is the business of bankers to lend money and in the course of that business the loans are
repaid usually, of course, in cash but certainly, not uncommonly, by the sale of jewels and other valuable articles pledged with the bankers. When
loans are repaid, the money is ordinarily invested in the business. This is particularly so where the assessee carried on a banking business abroad
and has normally no intention of becoming a land-owner in that foreign country. The interest on the investment is a business profit clearly. Does
what took place in this case differ materially from the bankers ordinary transaction ? Instead of taking cash payments from the debtors the assessee
took their equivalent, the houses, in discharge of their debts. That was as much a part of the assessees banking business as if he had received the
repayment in cash. During the interval between the receipt of the houses and their sale, rents were received from the tenants of the houses and their
sale, rents were received from the tenants of the houses so handed over in discharge of the debts. It is not as though the assessee had invested
some of his profits in Immovable property. That is not the case here at all. That rents were received by him instead of interest on the returned loans
was merely due to the accident that instead of being repaid in cash the assessee was repaid in kind. In my view, therefore, the rents received by the
assessee were not only received by him in the course of his business but were received by him as a banker and the transaction was a banking
transaction.
I would, therefore, answer the question referred to us in the affirmative and direct the petitioner to pay Rs. 250 costs of the Commissioner of
Income Tax.
CORNISH, J. - The sole question for decision on this reference is whether income derived as rent from property situated outside British India, but
received by the assessee owner within British India, can be charged to Income Tax u/s 4 (2) as ""profits and gains of a business accruing or arising
without British India.
It is admitted by Mr. Patanjali Sastri on behalf of the Income Tax Commissioner that if the property in question had been situate in British India the
assessee would have been chargeable to tax u/s 9. It does not, of course, follow that because this income is not taxable u/s 9, on account of the
property being situate outside British India, it could not be chargeable to tax u/s 4 (2) if the income received by the assessee from the property is a
profit of a business. It is only on that footing that this income can be made taxable. But in order to bring the income within the reach of Section 4
(2) it must be shown that it is a profit a business -which means that the source of the profit is a business carried on by the assessee, be the assessee
a business man or a business concern. Rents derived from property do not become profits of a business concern, and it makes no difference, in my
opinion, that the property was acquired by the profits of the business or in the course of the business. The rent may be a profit of the business man;
but it is not a profit of the business unless it is derived from the business. In the present case, the assessee acquired the property in the course of his
money-lending business. Certain customers to whom he had lent money were unable to pay their debts and the assessee took over the security, the
property, in satisfaction of his claim. By that operation the money-lender became a land-owner and let the property for rent to tenants. He dealt
with the property as a landlord. The payment of rent by his tenants was entirely independent of any money-lending business carried on by him. The
rent was paid to him and received by him because he was the landlord and not on account of any transaction in his money-lending business.
Applying the language of Lord Warrington in The Salisbury House Estate Company, Limited v. Fry :
There is nothing in the facts stated in the case which would properly lead to the conclusion that in dealing with the property the company (the
words the money-lender may here be substituted for the company) is acting otherwise than an ordinary landlord would act in turning to profitable
account the land of which he is the owner.
The Income Tax Commissioner relies on the facts that the assessee was carrying on a business of money-lending; that the house properties were
assets of his business and were treated by the assessee as such; and the Commissioners conclusion is that any income from the property must be a
receipt of the business - therefore, a profit of the business. I have already endeavoured to show that, according to my judgment, the acquisition of
property by a business concern in the course of its business does not ipso facto render the rent received from that property profits of the business.
In the Salisbury House Estate Company, Ltd. v. Fry (1928) 15 Tax Cases 267, Lord Atkin stated at p. 318 that it made no difference that rents
received from property owned by a trading company formed part of the annual profits of the company; the income would be assessable under
Schedule A and not as income from trading under Schedule D. I take that to mean that the rents received by the company from its house property
could not become assessable by reason of the company treating those rents as part of its profits. That seems to me decisive against the argument of
the Income Tax Commissioner, to which I have just referred, that income from property owned by a business concern is a profit of the business.
I would, therefore, answer the reference by saying that the income received by the assessee from the property in question cannot be assessed
under S. 4 (2) as profits of business.
BARDSWELL. J. - I have had the advantage of reading in advance the judgments just delivered by my Lord the Chief Justice and my learned
brother, Cornish J. I think it clear, for the reasons fully set out in my Lords judgment that the rentals from the house properties in question cannot
be treated as income u/s 9. They can, therefore, be taxed only if they can be regarded as profits and gains of a business so as to come within the
scope of Section 4 (2). In my opinion they can be so treated.
The remarks of Lord Atkin in The Salisbury House Estate Company Ltd. v. Fry which have been quoted by Cornish, J., have to be read with
what that learned Lord had said alter it page 321 :
I find it difficult to say that companies which acquire and let houses for the purposes of their trade do not let the premises as part of their operation
of trade.
I take that case as deciding no more than that rentals from house property can only be included in Schedule A to which, in this country Section 9
corresponds, if that schedule is applicable and not that such rentals can in no circumstances be treated as profits and gains of a business. In the
present instance it is found that Section 9, which corresponds to Sch. A, is not applicable, while except in the case of one house the properties
acquired have not been acquired merely for the purpose of the money-lending business, but have actually been received as a payment in kind in
discharge of debts due to the money-lending firm. I agree with my Lord that the rentals received from these properties after the properties had
been received and before they had been sold, were as much interest on the repaid loans as if the loans had been repaid in cash. The rental of the
remaining house has also, in my opinion, clearly to be regarded as a profit of the business, seeing the purpose for which it had been acquired. I
agreed that the questions referred to us should be answered in the affirmative and that the petitioner should pay the costs of the Commissioner of
Income Tax.
Reference answered in the affirmative.