Anaikar Traders and Estates (P.) Ltd. (No. 1) vs Commissioner of Income Tax

Ratnam, J.—The assessee is a company incorporated on May 5, 1967. The main object of the company as could be gathered from clause 3(A)(i) of the memorandum of association. Is to purchase, take on lease or mortgage or otherwise acquire and possess lands, buildings or real estate, freehold or otherwise, lands with their superstructures and appurtenances, whether movable or immovable. In order to attain the aforesaid main object of the company, clause 3(B)(i) of the memorandum of association stated that an incidental or ancillary object was to undertake to sell or lease or mortgage the whole or part of any property, land, buildings, structures, movable or immovable, of the company in furtherance of its objects. For the accounting periods ending on July 31, 1968 and July 31, 1969, relevant to the assessment years 1969-70 and 1970-71, the assessee returned an income of Rs. 3,16,201 and Rs. 2,51,870 respectively under the head "Business". However, the Income Tax Officer treated the income derived by the assessee-company as income derived from letting out of the properties purchased and owned by it and. In that view, brought to tax the income returned asincome from property"", subject to the deductions u/s 24 of the Income Tax Act, 1961 (hereinafter referred to as the Act""). On appeal by the assessee-company to the Appellate Assistant Commissioner, he took the view that as the records of the assessee-company showed that the assessee was not doing any business in real estate and the income derived by the assessee-company was rental income from the properties acquired and possessed by the assessee-company, the income returned was properly assessed under the head "Income from property" and dismissed the appeals. On further appeal at the instance of the assessee-company, the Tribunal, on a consideration of the memorandum and articles of association of the assessee-company, found that the assessee-company had purchased properties and possessed them as owner and the income derived from such properties was rightly assessed u/s 22 of the Act and upholding the orders of the authorities below, dismissed the appeals.

In this reference u/s 256(2) of the Act, at the instance of the assessee-company, the following common question of law in respect of the two assessment years 1969-70 and 1970-71 has been referred to this court for its opinion :

Whether, on the facts and in the circumstances of the case, the assessment made on the assessee for the assessment years 1969-70 and 1970-71 under the head "House property" is valid in law ?

Learned counsel for the assessee-company contended that the properties held by the company really formed part of the commercial assets of the company in order to enable the company to carry on its business in accordance with the objects as set out in the memorandum of association and that the substituted user of such commercial assets by the assessee-company does not alter the character of the asset and therfore, the income derived by the assessee-company ought to be properly assessed under the head "Business income". In this connection, learned counsel for the assessee-company also placed strong reliance upon the decisions reported in Commissioner of Excess Profit Tax, Bombay City Vs. Sri Lakshmi Silk Mills Ltd., , S.G. Mercantile Corporation P. Ltd. Vs. Commissioner of Income Tax, Calcutta, , Addl. Commissioner of Income Tax, Karnataka Vs. Hindustan Machine Tools Ltd., and Commissioner of Income Tax Vs. Admiralty Flats Motel, . On the other hand, learned counsel for the Revenue submitted, referring to sections 14, 22, 28 and 56 of the Act and the main object of the assessee-company, that the properties held by the assessee-company did not form part of the assets of any business in such properties carried on by the assessee-company. But that those properties were held by the assessee-company as owner and, therefor, the income derived by the assessee-company from the properties during the relevant accounting years was rightly brought to tax under the head "Income from property" failing u/s 22, subject to the deductions provided u/s 24 of the Act. Learned counsel invited our attention in support of this contention to the decision reported in United Commercial Bank

Ltd. Vs. Commissioner of Income Tax, West Bengal, , East India Housing and Land Development Trust Ltd. Vs. Commissioner of Income Tax, West Bengal, and Parekh Traders Vs. Commissioner of Income Tax, Poona, and further submitted that the decision in S.G. Mercantile Corporation P. Ltd. Vs. Commissioner of Income Tax, Calcutta, was inapplicable, as the object of the assessee-company in that case was the carrying on of business and trading activities in property.

We may first point out that under the provisions of the Act, there are several heads into which income is divided and though the tax is one, the income may arise from diverse sources with reference to which different rules of computation apply and the manner of computation has also been enumerated in the relevant provisions of the Act. However, it must be remembered that the heads of income enumerated in the Act are in a sense mutually exclusive and income which appropriately falls under one head, cannot be assigned or subjected to tax under another head. The aforesaid principles are too well-settled. However, the question remains whether in this case the income of the assessee-company could be assessed under the head "Profits and gains of business" or "Income from property." In the case of a company with certain professed and avowed objects, from the nature of its dealings with property and the manner in which its activities had been carried on, it would be possible to say under which head the income should be properly assessed. We have at the outset referred to clause 3(A)(i) of the memorandum of association which sets out the main object with which the company had been incorporated. We find therefrom that the main object of the assessee-company was to acquire and possess lands, buildings or real estate, lands with their super-structures and appurtenances, etc. The principle object of the assessee-company, as could be scanned from the memorandum of association, is the acquisition and possession of property and the modes of such acquisition have been indicated as by way of purchase or taking on lease or mortgage or otherwise. Only with a view to attain, the main object of the company, viz., to acquire and possess properties, the incidental objects by way of undertaking to sell or lease or mortgage the property of the company in furtherance of its objects have been set out in clause 3(B)(i) of the memorandum of association. In other words, a conjoint reading of clauses 3(A)

(i) and 3(B)(i) of the memorandum of association clearly establishes that the object of the assessee-company is to acquire and possess properties through the different types of transactions enumerated therein. It would be appropriate in this connection to refer to the weighty observation of the Supreme Court in Karanpura Development Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, (headnote) :

Ownership of property and leasing it out may be done as a part of business, or it may be done as and owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent, where this happens, the appropriate head to apply is "income from property" (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as in integral part of its business. Cannot be said to treat them as landowner but as trader...

Earlier, on a consideration of the memorandum of association relating to the main object of the company, It has been found that its object is to acquire and posses property. What is significant is that in the memorandum of association, there is no indication that the assessee-company intended to sell those properties or even turn them to account by way of leasing them as part of its business activities. We may mention in passing that in the course of the order of the Appellate Assistant Commissioner, a clear finding had been recorded to the effect that on a perusal of the records of the assessee-company, the assessee-company had carried on any business in real estate. We, therefore, hold that the assessee-company cannot be regarded as having acquired the properties as commercial assets for purposes of any business carried on by it and, therefore, the receipt of income from the properties held by the assessee-company cannot be referred to a substituted user of the commercial asset by the assessee-company, as claimed by it, so as to constitute the income from the properties as "Profits and gains of the business" carried on by the assessee-company. Inasmuch as we have come to the conclusion that the properties were not held by the asseesse-company as part of its business assets, it follows that the income from those properties were rightly assessed under the head "Income from property", subject to the deductions provided u/s 24 of the Act. In the view we have taken, it is unnecessary to refer to the several decisions relied on by counsel on both sides, we, therefore, answer the common question referred to us in the affirmative and against the assessee-company The Revenue will be entitled to the costs of these references. Counsel fee Rs. 500. One set.