S. G. Mercantile Corpn. (P) Ltd. v. the C.I.T., Calcutta

Judgment

CIVIL APPELLATE JURISDICTION: Civil A!)peals Nos. 1748· 1750 of 1968. An?eals by soecial leave from the judgment and orrler dated July 20. 1967 of the Calcutta High Court in Income-tax Reference No. 144 of 1963. M. C. Chagla and D. N. Mukherjee, for the appe~lant (in all the a?peals). S. C. Monchrmd'l, R. N. Sachthey and B. D. Sharma, for the respondent (in all the appeals). The Judgment of the Court was delivered by Kh~n~ J.-Th.is it~don1ent would disoose of civil apoeals No. 1748 to 1750 o( 1968 filed by special leave against J.S -L7J(jS .P Cl/7: SUPilEME COURT REPORTS . }1972] 2 S.C.R. the judgment of the Calcutta High Court whereby the question referred to that Court under section 66 ( 1 ) of the Indian Incometax Act, 1922, hereinafter referred to as the Act, was answered . in favour of the revenue and against the appellant company. The appellant, a private limited company, was incorporated on January 25, 19~5.

The objects for which the Company was established were given in the clauses of paragraph 3 of the Mem(). randum of Association. A number of business activities were mentionedin thpse clauses. Clauses 6 and 7 of that paragraph were as under :--:--- "6. To purchase take on lease or otherwise .acquire and to hold, cultivate, improve, lease, sell, exchange, mortgage, or, otherwise, dispose of land, houses, mines, minerals, mining and other real and personal property and to deal with the same commercially. 7. To develop the resources of the same property by building, reclaiming, clearing, draining, and otherwise improving framing and planting on any terms or system that may be considered advisable." With effect from February 5, 1955, the appellant company took on lease a market place known as TaJ·oUa Bazar in the city of Calcutta from Shrimati Sujata Tagore and her sons on a monthly rent of Rs. 3,000 for a term of 50 years, with option to the lessee to renew the lea<~e for the further period of 40 years.

The deed of lease in this connection was executed on September 5, 1956. Clauses 4, 5 and 13 of the lease deed were as u::der: "4.

The Lessee shall have the option to e;.ect, rebuilt, remodel and reconstruct and repair the existing structures upon the demised premises from time to time during the tenn of these presents at its own costs in a substantial and workmanlike manner whh good material of the several kinds in accordance with the plans elevations sanctions and specifications according to the choice of the Lessee (and whenever necesc;arv to get such plans sanctioned by the Corporation of Calcutta) under the supervic;ion of a first class Engineer to he elected by the Lessee on notice to the Lessors and shall spend upon such works such sum or sumo;; as the Lesc;ee may in its absolute discretion think fit and proper but the entire total sum or sums so to be expended by the Lessee as aforesaid sh::tll not be less than R:upees Five Lacs and the same shaH be spent within the period of five years from date of these presents. The Lessors shall be at liberty to appoint at their own costs a valuer 0 S. G. MERCANTILE CORP. v. C.I.T. (Khanna, J.) and surveyor to verify such expenditure if required for their satisfaction after the completion of the said work.

5. If the Lessee constructs any new structures and/ or buildings as mentioned in the preceding clauses the said structures and/or buildings or erections together with all alterations renovation remodelling reconstruction thereto shall belong absolutely to the Lessors on the expiration or sooner determination of the term hereby granted and/ or the renewed period thereof as hereinafter mentioned. 13. That the Lessee shall not assign this lease without first obtaining the permission in writing of the Lessors but such consent shall not be unreasonably withheld. The lessee shall prior to any such assignment of this demise give notice thereof to the Lessors in writing containing the name of the assignee and f'qrnish other necessary particulars concerning sucb assignlllent.

Notwithstanding anything hereinbefore contained the Lessee shall subject to the conditions and convenants herein contained he entitled to sublet or underlet the demised premises or any part or portion thereof and/or grant sub~lease ·or sub-leases in respect of the demised premises or any portion or portions thereof for a term not exceeding or beyond the tenn hereby granted including the renewed and/or optional period in case of renewal subject to the terms and conditions of these presents." The appellant company's activity during the period covered by assessment years 1956-57, 1957-58 and 1958-59 was that of developing the demised premises and letting out portions of the same as shops, stalls and ground spaces to shopkeepers, stallholders and daily casual market vendors.

The appellant claimed that its income from the leasehold property for the above mentioned three assessment years should be a~sessed under section 10 of the Act as letting out of that property was its business authorised by the Memorandum of Association. The appellant had shown losses in its return for all the three years and the above claim was made on its behalf obviously for the purpose of carrying forward such losses. The Income-tax O"fficer rejected the appellant's claim and made assessments under section 12 of the Act. · The Appellate Assistant Commissioner in appeal by a consolidated order held that the appellant had been rightly assessed under section 12 of the Act.

On further appeal to the Income-tax Appellate Tribunal, the Tribunal referred to clauses 6 and 7 of paragraph 3 of the Memorandum of Association and [1972] z·s.c.P.. came t.o the conclusion that the activities of the appellant com~ pany in taking the lease and subletting the demised premis~ were undertaken with the object of doing business. The Tribunal observed that normally where the assessee was not the owner of the buildin_g ~t eavned rent by subletting the same, such income could only be charged under section 12 as income from other sources. The difficulty, however, arose in cases where letting out of lease hold property was the business of the assessee. In such cases, according to the Tribunal, the decision could only turn upon the object for which the company was formed and upon the activities of the company during the relevant accounting· years.

It was held that if the activity of the appellant company amounted to carrying on the business of taking on lease and letting out the leasehold property, the company was not acting as owner but as trader. The income accruing from such a source, in the opinion of the Tribunal, must be held to be income from business assessable under section 10 of the Act. The Tri- · bunal accordingly held that the income of the appellant company from subletting of the stalls in question was income from business taxable under section 10 of the Act. At the instance of the res,!)ondent, the Tribunal referred the followi..<tg question to the High Court : "Whether, under the facts and in the circumstances of the case, the income from subletting the stalls of Taltolla Bazar was assessab1e under section 10 or sec tion 12 of the Income-tax Act, 1922?" The learned judges of the High Court held that the income from subletting of the stalls in question was not assessable under section 10 of the Act.

In arriving at this conclusion, the learned judges 0bserved : "The assessee had taken lease of a market or Bazar. After having reconstructed or renovated the buildings, it is letting out shops and stalls to shopkeepers and st~llholders. This is a normal activity of a owner or a lessee of such a _market or Bazar. It could not be said that by letting out the shops and stalls to shopkeepers • and stallholders, the assessee was carrving on any activity in the nature of trade and was utilising or exploit~ ing real estate in the best possible way or in other words was dealing with it commercially. The ratio of the Supreme Court decision in East India Houfif!~t Estate case(!) is fullv af}olicabl~ to the case before us and it must be held that the Tribunal was in error in its conclusion that lhe income of the assessee -fi6m 0) [19tllJ 4:'.1T .R ~C>. ll s. G. MERCANTILE CORP. V. C.I.T. (Khanna, J.) subletting the stalls of !altolla Bazar was assessable under section 10 of the ~ndtan Income-ta~ Act, 1922.

In the premises the .questton referred .to thts Court is answered in the followmg manner, that ts to say, that the income from subletting the stalls of Taltolla Bazar was not assessable under section 1 0." We have heard Mr. Chagla on behalf of the appellant and Mr. Manchanda on behalf ?f the respondent and are of the view that the judgment of the Htgh Court cannot b<! sustained. Section 6 of the Act enumerates the various heads of income, profits and gains chargeable to i~c?me-ta~:. Those heads are (i) Salaries; (ii) Interest on secunttes; (m) Income from property; (iv) C Profits and gains of business, professions or vocation; ( v) Income from other sources; and (vi) Capital gains. Section 9 of the Act deals with income from property.

According to that section, the tax shall be payable by an assessee under the head "Income from Property" in respect of the hona D fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, subject to certain allowances which are mentioned in that section but wirh which E we are not concerned. It is noteworthy that the liability to tax under section 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he woul~ be liable 10 pay t~:t under the above provic;ion even if the object of the assessee m purchasinn the landed property was to promote .md develop market thcr~n.

It would also make no differenc~ if the ~~>;essee was .a company which liad been inco;porated wtth ~be lect of buysng and developing landed propertrcs and promotrng and_ '\ettinj! uo m:trkets thereon. The income derived by such a COmpany from the tenants of the shops and staUs, con~tructed ~n the land for the purooses of setting uo market. would not .be ~ ;x.ed as "business income" under section 10 of th'! Act, to whtch kt~ore det1iled reference would be made hereafter, but under td ~on 9 of the Act. A concrete ir"'ance of thi<: tvne i<: aff~•d­ r, Y the ca~e of ,::,.1 '"'na /frtu•;,v nnd Ln"" Dev,.lnnment flr( Lt1 8"~n1/( I) lhe a., · v. Commisri'>ner nf f,cnm~-tax, the ob· l'lcllant comnanv in th:tt cnc:e h'~d bce11 incornorated ~·th ll and ~~:~ ·~ of buvi11~ dcvcJ,.,..,i.,g larrded prnner•ie~ and or~motm~ . . land · i~ l'l~ uo m:~rke•~. The comr.>anv. purch1<ed ten h•!tha~ .,f l qu~tio th~ ~own of C<>lcutt'l noel <;et uo a market thereon;

The 11 Which aro~e for detennination was whether the mcome \} (19 --;:;=-=---- 6lJ4l I.T.R.. 49 [1972]. 2 S.C.R. realised from the tenants of shops and stalls was liable to be taxw as business income under section 10 of the Act or income from property under seclion 9. This Court held that the ln.come derived by tne company from shops and stalls was income recei~ ved from property and fell under the specific head described in sec lion 9. it was observed in this connection : "Income-tax is urldoubtedly. levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately lev1ed on distinct head$ of income. But the distinct heads specified in secLion 6 indicating the sources are mu~ually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxaLion in the manner provided by the appropriate section.

If the income from a source falls within a specific head set out in section 6, the fact ~hat it may indirectly be covered by another head will not make the income taxable under the latter ;head. The income derived by the company from shops and stalls is income received from property and falls under the specific head described in section 9. The character of that income is not' altered because it is received bY a company formed with the object of developing and setting up markets." There is no finding in the present case that the appellant company is the owner of the property in question or any part thereof. As such, no reference was made to section 9 of the Act in the assessment proceedings. The learned counsel for both the parties agree, and in our opinion rightly, that the question of making the assessment against the appellant, in the circumstances under section 9 of the Act does ;not arise. The stand of Mr. Chagla, on behalf of the appellant, is that the assessment against the appellant in respect of the income from the property in question should be made under section 10, while according to Mr. Man~handa, learned counsel for· the respondent, the assessment should be under sedon 12 of the Act.

Section 10 of the Act deals with in com~ from business and the material uortion with which we are concerned is given in sub-section ( i) of that section. According to that sub-section, the tax shall be payable by an assessee under the head "Profits K S. G, :MERCANTILE COJlP, l': C.LT. (Khanna, ] . .) 8S7 and gains of ~u~ness, prof~sion. Qr v~tion". in ·re&~t of ~he profits and gains of any busmess, professton or vocat~on earned on by him. "Business':, according to section 2(4) ·of the Act, includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Section 12 of the Act deals with income from other sources. Sub-section ( 1) of that section reads as under. : "

( 1) .The tax shall be payable by an assessee under the head "Income from other sources" in ·respect of income, ·profit and gains of every kind which may be ipcluded ih his total income (if not included under any Of the preceding heads.), Section 12 deals with the residuary head of income and applies to all such taxable income, profits and gains as are not covered by preceding specific heads. The residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation oruy after the preceding heads are excluded. It is, therefore, manifest that section 12 of the Act can be invoked in the present case only if we exclude the applicability .of section 10 by holding that the income of the appellant company from the property in question is not income from business. The definition of the word "Business", as giv~n in section 2( 4) and reproduced above shows its wide amplitude and we agree with Mr. Chagla that it can embraee within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in· the I' market.

The important . question which arises in the latter case is whether the :.acq~isition of the property on lease and letting out of the shops· and stalls was in the course of investment or wheth~r it was essentially a part of the businesc; and tra<Jing operation of the assessee. The · paramount consideration which would ~eigh is whether the acquisition of the property was by way of mvestment and whe•her the property was let out because o.f the assess~ having a title in the· same ?r whether the acquisition and lettmg out of the property constttuted the business and trading activity of the assessee. The question as to whether the above activity is being carried on by an inrlividual or a com.,anv and in the latter case, the further Q·uestion as to whether th~ .. carrying on of the said activity wa5 the object of the. incorooratio.n of the company as giv~n in the Memorandum of Association would also have some relevance.

Reference iii thic; context ·may be .made to the observations· of Lord Stem4a}e, M.·R. in~ case of· Commissioners. of -Inland Reven.ue Ltd.(l) : Korean Syndical~ "If . you once get the individual and the company spending exactly on the same -basisJ then there would · be no difference between them at all. But the fact that the limited company comes into existence in a 'different way is a matter to be considered. An individual comes into existence for many purposesJ or perhaps sometimes for noneJ whereas a limited company comes i~to 'existence for the particular purpose of carrying out a t an action by get mg. possessiJn of concessions and turning them to accountJ then that is a matter to be con.>idered when you come to decide whether doing that is carrying on a business or not." ''The· abOve observations were quoted with approval 'by this Court in the case of Karanpura Development Co. Ltd. v. Commissioner of Income-tax, West Bengale).

The' assessee company in the last mentioned case was formed with the objects, inter alia, of acquiring and disposing of underground coal mining rights in certain cJa. field>. The Mem::>randum of Association of the company enumerated other objects, such as coal raising, but the assessee restricted i~s activities to acquiring coal mining leases over large areasJ developing· them as coal fields and then subleasing them to collieries and. other companies. · The [eases were acquired for a term of 999 years and the coal fields were sublet for the balance of the term of the respective leases minus two days. The company never wxked the coal fields with a view to raising coal, nor did it acquire or sell coal raised by the sublessees. As a'!ainst a, salami of Rs. 40 per bigha which. the '· a~sessee had paid, it realised from the sub-lessees Rs. 400 per bigha as sal-ami.

In ~ddition, the assessee c)larged certain royal;. ties at r~tes higher than those it had aqreed. to pay u.nder the brad , leases. The question . which arose for determination was whether the amount received bv the assec;see as salami for granting sub-lease consti~ut~d trad~ng receipts and the profits therefrom was assessable. It was held that the tran<:actions of,a.cQuir- ,ing ]eases anri e:rantinq sub-leao;es were in the nature of trading with;n the obj~cts of the company and not enjoyment of the property as landowner. It_was observed in this connection: "As has been already . oointed out in connection , with the other two cases wnere there is a let•im! out of ' premises and collection of rents the assessment on property, oasis mav be correct but n,ot so, where the letting . (1) rt92iJ 12 Tax Cas. 181. (2) [1962] 44 I.T.R. 362. il S. G. MER.CANnLE COR.P. v. c.r.T. (Khanntl. J.) J.l. or subletti.DJt is part of a trading operation.

The divid· ing line is difficult to find; but in the case of a company wtth its professed objects and the manner of its acti· vities and the nature of its dealin~s with its property_ it is possible to say on which side the operations fall and to what head the income is to be assi~ned. Ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. Whether it is the one or the other must necessarily depen.d· upon the object with which the act is done. It rs not that no company can own property and enjoy it as property, wh·~ther by itself or by giving 1he use of i'l: to another on rent. Where this happens, tthe appropriate head to apply is "income from property" ( sec'tion 9), even though the company may be doin~ extensive busine>s othe· wise.

But a company formed with the specific object oi acquiring properties not with the view to basing them as prope~ty but to selling them or turning them to account even by way of leasing them ou~ as an integral part of its bushes~, cannot be said to treat them as landowner but as trader." The above observations have a direct bearing. It is not necessary for the purpose of this case to say anything, br~yond what has already been said while dealing with s-ection 9 of the Act, about the view exptessed in the above passage regarding the rental income of an owner bein!Z treated as business income in case it is reooived as :pa"rt of trading activity, because we are concerned in the in<;~tant' case with an assessee who is lessee and not the owner of the property in question. The assessee in the cited case of Karanpura Development Co. Ltd. too was 1essee of the coal fields.

So far as such ac;seo;seeo; aN concerned, who as part of their essential trading activity take le1Se . of p;o"e Jy and sublet parts thereof with a view to make profits, the dictum l<dd down above, in our ooinion, !would hold good and ~e profits would have to be trearted as business income. 'lite appellant ccmpa1'1)', as stated earlier was incorp•ratcd on January 25, 1955. ·Th·~ obier.t: for which the comoany was formed, inter alia, was to tak~ on lease or otherw;se acquire and to hold, improve, lease or otherwise dispOse of, la11d, houses and. other real ancl oersonal oropertv and to deal ·vith the same com· mercially. Within less than two weeks of its incorporation the ·appellant comoanv took on lease the orooertv in question·. and undertook to soend R "· 5 Iakhs for the ouroo-se of remodelling and reoairin!!' the structure on ~he site. The appel]ant was also given the right to sublet the different portions.

The appellant's 9.9.0 SUPREME OOVRT RBPOJt,T~ ·[1972]2 S.C.R. activit}' during . the period of· three years in question consisted of devetopmg, lhe aemised property and letting out ponions of the same as shops, stalls and ground spaces. All the.;e facts point to the conclusion that the takinj!; of the property on lease and subletting portions of the same · was part of the business and tradinj!; activity of the appellant. The conclu.sion of the Tribunal that the activi1ies of the appellant in takinj!; lease and subletting the demised premises were undertaken with the object of doing . business was warranted on 1he facts of 'the case. Likewise, the conclusion of the Tribunal that the aooellant company in letting out the leasehold property was not acting as owner but as tl ader was borne out by the material on record. Reference on behalf of the respondent has been made by Mr. · Manchanda to the decision of the H.use of Lords in Frv v. Salisbury House Estate Ltd. (1 )

In that case the assessee· company which had been formed to acquire, manage and deal with a block of buildl11gs, let out the rooms as unrurnished offices to tenants. The company provide1 a staff to operate the lifts and to act as porters and watch and protect the bui ding. The c-mpany al5o provided certain se~vices--such as heating and cleaning-for the tenants if required, at an additional charge. For four years the company was assessed under Schedule A to income-lax on the gross value of the building as appearing in the valuation lic;t. The company admitted its liability to be assessed in respect of profits from the service supplied to the tenants under Schedule D, but he Cro~n claimed in makin~ the assessment under Schedule D Ito include the rents of the offices as part of · the receipts of trade, making allowance for tax assess•.xl under SChedule A. It may be men ioned that the -scheme of the English Income-tax Act is tto p~ovide for the taxation of specific properties under schedules appropriate to them and under a general Schedule D. to provide for taxa· ion of income not dealt with specifically.

Schedule A provides for the 'taxation of. income derived from proi>ertv. in land; B (or incom.'!s derived from occupation of land, C for irl'come d·~rived from. Government · . securities and E for income from employment in the public ser- . vice. The. Ho\lc;e of Lords held in othe above citefl ca"'~ that ·he rents were P!Ofits arising from the ownership o~ land in respect of which the assessment under Schedule A was exhaustive and that thev,' therefore/Could not be included in the assessment under Schedule D as trade 're'ceipts of the company, The assec:see com· -pany, in the cited case, was the owner of the Salisbury Houc:.e. and -the decision of the House of Lords re.c;ted on the view that Sche- -dule A was exhaustive in respect of profits a~isina from owne~hil> / of land. The above decision is not of much helo to the respandent because the assessee in the present case is not the owner (1) ·{1930} A.C. 432. S. G. MERCANTILE CORP. v. C.I.T. (Khanna. /,)

99l but only a lessee of the prOperty in· question; and section 9, which is anruogou.§ to Schedule A of the English Act, applies to income fwm property consistin~ of buildings orlands appurtenant ~hereto of wtuch the assessee is the owner. The respondent can also have not much support from the decision of East India Housing and Land Development Trust ·V'. Commissio11er of Income-tax(!) because what was decided therein was Lhat in the case of income from landed property by the owner company, the income would tall under the spectfic head: described in section 9 and not under section 1 0 even though the company had been· incorporated with the. object of buying and dev~Jloping landed p1 operty and promoting a market thereon. Section 9, as mentioned earlier, does not apply to the present case because the appellant is not owner of the .property in question. As such there arises no question in this case of the exclu.: sion of seotion 10 on the eround that section 9 is the specifichead.

In the instant case the revenue relies not' upon the specifichead given in section 9 but upon the residuary head given in sectio.n 12 of t~e Act. It is p1ain that the considerations which would weigh for applying section 9 on the ground .of being a specific head would not hold good for invoking section 12 which can come into picture only if all the preceding heaqs of income, · including b11siness incom.e as given in section 10, are ruled out. Where, as in the present case, the income can appropriately fall under section 10 as being business income, no resort can be made to section 12 of the Act. As a result of the above, we acceot the aooeal and set ac;ide the judgmem of the High Court. The answer to the ques'ion referred by the Tribunal is that the income in ouestion wa~ asc;essabl•.! under section 10 and not under section 12 of the Act. The appellant shall be entitled to 'the costs of this Court as weU as: th0l1e of the Hiah Court. One hearin2 fee. K.B.N. Appeal allowed. (l)

[1961]42 I.T.R..~J