Azimganj Estates (P.) Ltd. vs Commissioner of Income Tax

The subject matter of challenge in this appeal is a judgment and order dated July 24, 2007, by which the learned Tribunal held on concession that the rental income was to be treated as a business income. It is this order, which is under challenge at the instance of the assessee himself. Mr. Sen, learned advocate appearing for the assessee-appellant, submitted that a concession on a point of law cannot bind the assessee. He drew our attention to a judgment of this court in the assessee''s own case, Azimganj Estate (P) Ltd. Vs. Commissioner of Income Tax, , wherein the Division Bench held as follows:

"...the subject matter of exploitation being unsold flats still owned by the assessee, the Commissioner (Appeals) rightly concluded that the income therefrom should be treated as income from house property by way of letting it out."

Mr. Sen, therefore, submitted that the order of the learned Tribunal to that extent is bad and should be set aside.

Mr. Sharaf, learned advocate, appearing for the Revenue, did not dispute the fact that in the assessee''s own case in the aforesaid judgment, it was held by this court that the income on account of rent from the unsold flats should be treated as an income from house property. He, as a matter of fact, very fairly also drew our attention to the judgment of the Apex Court in the case of S.G. Mercantile Corporation P. Ltd. Vs. Commissioner of Income Tax, Calcutta, , wherein the following view was taken (headnote):

"In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under section 9 even if the object of die assessee in purchasing the landed property was to promote and develop a market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting up markets thereon."

The aforesaid judgment was not taken into consideration in the earlier judgment in the assessee''s own case, Azimganj Estate (P.) Ltd. (supra).

Mr. Sharaf, however, submitted that two points have to be taken into account by this court - (a) that the assessee himself in his wealth-tax return has treated the self-same house property, from which the rental income has been derived, as stock-in-trade and on that basis contended that he is not liable to pay wealth-tax. He contended that the assessee has to elect whether he wants the income to be treated as business income or income from house property. In case it is to be treated as an income from house property then the buildings are to be covered by the Wealth-tax Act. The assessee cannot claim the best of the both; and (b) he drew our attention to a judgment of the Apex Court in the case of Karanpura Development Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, , wherein the income was treated to be business income. Their Lordships held as follows:

"Ownership of property and leasing it out may be done as a part of business, or it may be done as land 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 enough the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view of 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 its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter. The Californian Copper Syndicate''s case [1904] 5 TC 159 illustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in other words, in the holding of the business. The Calcutta cases and the case of Fry v. Salisbury House Estates Ltd. [1930] AC 432 : 15 TC 266 (HL) illustrate the contrary proposition. There, the property, though dealt with by a company intending to do business, was dealt with as landowner. The intention in those cases was not to derive profit by business done with those properties but to derive income by renting them out. 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, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation."

He contended that the facts of this case are similar to those before their Lordships of the Apex Court and, therefore, the rental income of the assessee should be treated to under the head of "Business income". Mr. Sen, learned advocate appearing for the assessee, submitted that the judgment in the case of Karanpura Development Co. Ltd. (supra) relied upon by Mr. Sharaf does not apply to the facts and circumstances of this case.

We have considered the rival submissions advanced by the learned advocates. As regards the first contention of Mr. Sharaf that the assessee cannot be permitted to blow hot and cold by taking one stand before the income-tax authority and another before the wealth-tax authority, it can straightaway be pointed out that this question can be raised in the wealth-tax proceedings and may be decided in accordance with law. But, in so far as the income-tax is concerned, that can only be levied in accordance with the provision of the Act.

In so far as the second point of Mr. Saraf is concerned, it can be pointed out that the case of Karanpura Development Co. Ltd. (supra) was considered in the case of S.G. Mercantile Corpn. Ltd. (supra) Their Lordships quoted from the judgment in the case of Karanpura Development Co. Ltd. (supra), as follows:

"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 dividing 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 assigned.

Ownership of property and leasing it out may be done as a part of business, or it may be done as land 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 an integral part of its business, cannot be said to treat them as land owner but as trader."

Mr. Sharaf has missed the point that both in the case of S.G. Mercantile Corpn. Ltd. (supra) and in the case of Karanpura Development Co. Ltd. (supra) it was held that the income was to be treated as business income. The income in this case cannot be treated otherwise than arising out of house property because in this case the assessee is enjoying the property by giving the use of it to another on rent rather than enjoying it by itself.

Therefore, the facts and circumstances of the present case are distinguishable from the facts and circumstances, which were before their Lordships in the case of Karanpura Development (P.) Ltd. (supra). Another significant fact drawn to our attention is that in the memorandum of the assessee-company the first object includes the following activities:

"...and to build, take on lease and/or rent, purchase or acquire in any manner whatsoever any departments, houses, flats, rooms, floors, huts or other accommodation and to let or dispose of the same on instalment basis, hire purchase basis, outright sale or otherwise whether by private treaty or by auction or in any other mode of disposition all or any integral part thereof."

Mr. Sharaf contended that the main object of the company appears to be dealing in property and, therefore, the object is business and, therefore, that should be treated as business income. This submission of Mr. Sharaf cannot be accepted because the object is both to earn money by selling the property as also by letting them out. It cannot be said that the company is not authorised by the memorandum to earn profit by letting out. Therefore, this submission of Mr. Sharaf is not of any significance.

The point raised in this appeal is covered by a judgment of this court in the case of the assessee itself. In that view of the matter, the question raised in this appeal is answered in favour of the assessee and the appeal is allowed.