KUMARAYYA J. - The Income-tax Appellate Tribunal, Hyderabad Bench, has referred for decision the following questions of law arising out of their order in I. T. As. Nos. 550 and 551 of 1960-61.
'1. Whether the income from the market properties is assessable in the hands of the assessee under section 10 of the Income-tax Act and
2. Whether the income from the building called fort is agricultural income within the meaning of section 2(1) (c) of the Income-tax Act and accordingly exempt ?'
The assessee is the Rajah of Vizianagaram and a big landlord. As the sole owner of the income of an impartible estate he was being assessed to income-tax as an individual. Even after the Estates Abolition Act, the assessment was being completed in the same status. The main source of his income is from house properties, interest on securities, dividends, etc. He owns amongst others a market and a fort. For the assessment years 1957-58 and 1958-59, for which the accounting years are the years ending on June 30, 1956, and June 30, 1957, respectively, he returned the income as a Hindu undivided family consisting of himself, his wife and sons. But that status was not accepted by the Income-tax Officer and finally by the Tribunal and he was assessed to tax as an individual as ever. That is not, however, the point which must engage our attention, for it is not covered by any of the questions referred. The controversy in this reference is confined to the assessment as made in relation to two items of property. One is the market and the other is the fort. As regard the first item, the question is whether the income derived therefrom is to be assessed under section 9 as the department has done or under section 10 of the Indian Income-tax Act, as the income or profits of business, as the assessee claims. The reason for the controversy is that if section 10 is the appropriate provision, the assessee would be entitled to much larger allowances by way of deductions in computing the income. In relation to the second item, i.e., the fort, the question is whether the income from this item of property for the assessment years in question should have been completely exempted from tax under section 2(1) (c) if the Act as it was being done consistently for the earlier years.
To appreciate the contentions, it is necessary to state the facts in some what greater detail. The market known as the Prince of Wales market owned by the assessee was constructed as far back as in 1876 to common rate the visit of the then Prince of Wales to India. It was divided into four divisions, grain market, timber market, cattle market and fish market. The buildings in the area were permanent structures. They were leased out on long term rents to regular traders and shopkeepers. Apart from the buildings, the market includes vacant sites which are let out only on market dates at specified rates. No licence fee was charged in the beginning. But it was introduced when the District Municipalities Act came into force. To begin with, a small fee of Rs. 25 was levied for each of the four sections of the market but on account of the statutory changes from time to time the size of this fee inevitably tended to develop until at last, with the advent of the Amending District Municipalities Act of 1930, it assumed huge dimensions. In 1935-36 the licence fee was Rs. 7,277 on the gross income realised by the estate as rents on buildings and godowns, etc., in the market. This fee was being collected with the avowed object of securing to the taxpayer the amenities of water supply, drainage, lighting, scavenging, sanitation, etc., and for meeting the incidental costs of supervision and registration as per the provisions of the Act. Of course, as per the statutory provision, the municipality was collecting property tax, besides, on the buildings in which the shops, etc., were located. The assessee took exception to this duplicate taxation and sought civil remedy against the levy of licence fee but he failed to purse the matter to successful termination. The matter dropped there. With the passage of time the licence fee increased further in volume in the same way as the property tax had increased from time to time. It may also be noted at this stage that the assessee, Raja, besides taking out licence which he had to do for the market, which was to run at specified hours and on specified dates in conformity with the restrictions imposed by the muncipality, had maintained separate staff such as superintendent, peons, watchers, and sanitary staff, etc., in connection with this market. For the assessment years 1957-58 and 1958-59, on the returns filed by the Raja, the Income-tax Officer taxed the income derived from the shops, stalls, etc., from the market property under section 9 as the income from the property, of which the assessee was the owner. Of course, the Income-tax Officer assessed the tax not on the actual letting value but on something in excess thereof which he (the Income-tax Officer) considered as bona fide letting value. On appeal, however, the actual letting value shown by the assessee was accepted as the bona fide annual letting value. But the Appellate Assistant Commissioner refused to tax the income under section 10 as profits or gains from the business. He was firmly of the opinion that it was taxable only as income from property under section 9. This view was confirmed by the Appellate Tribunal.
Learned Counsel for the assessee, Mr. Subrahmanya Reddy, contends that the income from the market property in the above circumstances represents the profits and gains from the business of the assessee and hence is taxable under section 10. In support of his contention he relies on Commissioner of Income-tax v. Mangalagiri Sri Umamaheswara Gin and Rice Factory Ltd., Commissioner of Income-tax v. Bosotto Bros. Ltd. and Commissioner of Excess Profits Tax v. Sri Lakshmi Silk Mills Ltd. Before we refer to these rulings we may notice the fact that the Income-tax Act by its section 6 has categorised income, profits and gains of an assessee which may be chargeable to income-tax under six specific heads. These heads are distinct and mutually exclusive. They are individually dealt with by sections 7 to 12. This classification under distinct heads of income, profits and gains is attributable to the source of income from which the respective income is derived. So then, the income derived from a distinct source falling under the specific head has to be computed for the purposes of taxation in the manner provided by the appropriate section. Therefore, if it is income from property, it is to be dealt with under section 9. If, on the other hand, it is profits and gains from business and profession, it is within the appointed province of section 10. This position is placed beyond all controversy by the Supreme Court in United Commercial Bank Ltd. v. Commissioner of Income-tax. It is, therefore, obvious that the nature or source of income has to be first determined in order to see which of the sections is applicable. Indisputably the assessee is the owner of the various buildings, godowns, shops and the open space in the area known as the Prince of Wales market area. He does not himself carry on business in the market area nor does he carry on business through the various persons to whom the buildings have been let out. In fact, he never carried on business himself so that there may be any scope for even speculation that what has been leased out may be an undertaking. What he has done indeed is that he leased out the buildings, shops and godowns and also the open space whenever necessary for the stalls, etc. It is obviously a case of exploitation or enjoyment of the property or right therein as the owner of the property. The mere fact that these buildings or shops were built with the specific object of forming, developing or setting up a market does not change the character of the income if that be the income derived by the assessee by way of exploitation as owner of the property by leasing the same and not doing a business himself. The contention seems to be that, since the assessee owns a licence for the market, has maintained staff and has done all that is necessary for carrying on the business in the market by the persons to whom the shops, stalls, etc., are leased out, it should be deemed that he has let out a commercial asset, namely, a fully equipped market place for carrying on the market business, and thus what he himself could do has been made to be done by him through his tenants. Whether a particular letting is a business or not has to be decided on the particular circumstance of each case. Each case has to be looked at from a business point of view to find out whether the letting was the doing of a business or exploitation of his property as the owner. As the market was set up not with the idea of doing business by the assessee himself nor has the assessee ever carried on such business by himself or through his servants in the market before the shops, stalls, etc., had been let out, his activity of leasing the property which he owns cannot be treated as a business activity so that the income from the lease may be deemed to be the profits and gains from his business. It cannot possibly be said that the business carried on by his tenants is his business nor can the very act of leasing ones house or shop be deemed to constitute business activity. The income derived by the assessee from the shops and stalls is indeed from property and falls within the ambit of section 9. The character of the income is not altered because it goes into the hands of a person whose ancestors had set up the market with the idea that the business may be carried on there. The authorities relied on by the learned counsel do not advance his contention to any extent. In fact these cases have been considered by the Supreme Court in Sultan Brothers Private Ltd. v. Commissioner of Income-tax. Commissioner of Income-tax v. Mangalagiri Sri Umamaheswara Gin and Rice Factory Ltd. was a case where the assessee-firm was the owner of a fully equipped rice mill which they constructed for their own trade and instead of working themselves they had decided to lease it out to another person. Bosotto Brothers case was concerned with the income of a fully equipped hotel which had previously been run by the assessee himself. Obviously enough, both the cases bear no analogy with the facts of the present case. The first case could not be brought fully within the ambit of section 9 of the Income-tax Act. Indeed it was a case covered by the present section 12(4) which section was not enacted in that form by that time. The second case was obviously one where the owner himself had run the hotel business and leased it with equipment, etc., for running the hotel. What has thus been let out was the undertaking or a part of it. Letting of hotel was part of the companys business as per their objects in the articles and memorandum of association. The case of Commissioner of Excess Profits Tax v. Sri Lakshmi Silk Mills Ltd. decided by the Supreme Court and relied on by the learned counsel also does not advance his point. There, the assessee company was manufacturing silk cloth. As a part of its business it had installed a plant for dyeing silk yarn. On account of he outbreak of war, there aroes difficulty in obtaining silk yarn. The company therefore could not make use of this plant for some time. It remained idle for a portion of the year. It was then, as a part of the normal activities of their business, let out to a person on a monthly rent. In these circumstances, it was held that the dyeing plant had not ceased to be an asset of the assessee and the sum representing the rent for five months received by the assessee was income from business. Their Lordships, while holding that view, observed thus :
'We respectfully concur in the opinion of the learned Chief Justice that if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business, but we cannot accept the view that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put but of use or let out to another person for use in his business or trade. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else.'
After referring to several other cases, their Lordships concluded thus :
'We are, therefore, of the opinion that it was a part of the normal activities of the assessees business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it out to others for making profit for that business when for the time being it could not itself run it. The High Court, therefore, was in error in holding that the dyeing plants had ceased to be a commercial asset of the assessee and the income earned by it and received from the lessee, Messrs. Parakh & Co., was not chargeable to excess profits tax.'
It is manifest that the case in hand has no parallel in the case decided in that it was a case where the asset was acquired and actually used for the purpose of business by the assessee and only in times of difficulty had to be let out, and temporary letting out of the machinery was in fact according to the specified objects of the company included in the normal activities of the assessees business to earn money by making use of the machinery. The company, having regard to its avowed object, was carrying on trade or business when it let out the commercial asset which in their hand was being used as such and was in a fit condition to be exploited as such in several other ways.
Learned counsel for the department in support of his contention referred us to two decisions of the Supreme Court which shed a floodlight on the question. East India Housing and Land Development Trust Ltd. v. Commissioner of Income-tax is a case where the assessee was a company formed with the object of promoting and developing the markets. The question there was whether the income realised from the tenants of the shops and stalls was liable to be taxed as business income. It was held that the said income is the income derived from the property and it falls under the specific head of section 9 and that the character of income is not altered merely because it is received by a company formed with the object of developing market, nor because of the fact that the company was required to obtain a licence from the municipality for sanitary and other services and had to incur expenditure for maintaining such staff. Nor was the character of the income altered merely because some stalls were occupied by the same occupants and the remaining stalls were occupied by the shifting class of occupants. The other case is Sultan Brothers Private Ltd. v. Commissioner of Income-tax. There the assessee, a private company, constructed a building on a certain plot of land, fitted it with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided a monthly rent of Rs. 5,950 for the building and a hire of Rs. 5,000 for the furniture and fixtures. It was held that as the assessee company never carried on any business of a hotel in the premised let out and there was nothing to show that it intended to carry on a hotel business itself in the same building, the letting of the building did not amount to the carrying on of a business and the income under the lease could not, therefore, be assessed under section 10 of the Income-tax Act as income from the business. In the above state of the law, it is obvious that merely because a market was set up and the assessee had to take out a licence under the District Municipalities Act for allotting out the various portions of the market to intending traders, or had provided sanitary arrangements, etc., it cannot be said that the assessee had utilized the property for any business carried on by himself. His letting out is only a normal feature of exploitation of this property as owner. In no sense is it a business deal or exploitation of a commercial asset as such. The term 'business' is defined in section 2(4) of the Income-tax Act and, unless the activity in question comes within the meaning of trade, commerce or manufacture and some activity in the nature thereof, it is not possible to regard that activity as business activity. We, therefore, answer the first question in the negative.
Now coming to the second question, viz., whether the income from the building called 'fort' is agricultural income within the meaning of section 2(1) (c) of the Income-tax Act and accordingly exempt, it is common ground that complete exemption was being allowed in relation to the income from this source under section 2(1) (c) on all former occasions. Reasonableness or legality of such a step has been doubted for the first time only during the assessment years in question. The Income-tax Officer did not doubt at all the applicability of section 2(1) (c) but was simply of the view that, in the changed circumstances, partial exemptions reasonable. So, he allowed exemption to the extent of half and that expressly on the ground that as a result of the abolition of the abolition of the zamindar and the diminution of the vast agricultural lands since then, only 50% of the income may be treated as agricultural income and exempt under section 2(1) (c). Obviously enough, it is the nature of the income from the building that was a matter for consideration. Unless the building satisfies the description of section 2(1) (c) both as regards situation and purpose, it is clear that the income was not agricultural and the assessee was not entitled to any exemption. If it did fall within the purview of that section, the exemption ought to be complete and not partial. But the Income-tax Officer, while bringing the case within section 2(1) (c), allowed exemption only to the extent of 50%. That is not warranted by the provisions of section 2(1) (c). The Appellate Tribunal, however, seems to be of the view that the income from the building in question did not come within the purview of section 2(1) (c) as the building was situated in the middle of Vizianagaram Municipality far away from the center of agricultural operations. This finding does not appear to have been based on any evidence. Merely because the building is in the heart of the town, it cannot be presumed that there were no agricultural lands adjoining the same. As a matter of fact, the contention of the learned counsel for the assessee is that there are agricultural lands adjoining the fort, and that this was made clear in the statement field by the assessee. It passes our comprehension how the Income-tax Officer or the department could have granted complete exemption on previous occasions and partial on the present occasion, if there were no agricultural land at all in the immediate vicinity of the fort. The order of the Appellate Tribunal does not show that it had come to the conclusion as to the situation of lands on any evidence brought on record. No doubt stated in the order that the fort is situated far away from the main center of agricultural operations. But having regard to the fact that the assessee has lands at several places, the mere fact that some of the lands or large portion of the lands owned by the assessee are at a distance is of no consequence if there are certain other lands in the immediate vicinity and the assessee requires the building for the purpose stated in the provision. This has to be decided on the evidence bearing on section 2(1) (c) and not on a mere conjecture or assumption that most of the agricultural lands are far away from the town. It is clear, therefore, the question referred to us cannot be rightly decided except on a clear finding of fact on legal evidence. In this behalf we may referred to the following observation of the Supreme Court in Guru Estate v. Commissioner of Income-tax.
'Under the scheme of the Income-tax Act the function of the determining facts rests with the Tribunal and, on the facts found, the High Court has to advise the Tribunal as to the law applicable...... finding of fact recorded by the Tribunal may not be regarded as final if it not supported by any evidence, or is founded upon a view of facts which cannot reasonably be entertained, or upon misconception.'
As we are not satisfied that the statement in the case is sufficient to enable us to determine the question under section 2(1) (c) in that it does not contain a finding of fact based on evidence, we refer the case back to the Appellate Tribunal for a further and fuller statement in that behalf. Thus we answer question No. 1 in the negative and refer back the case in relation to question No. 2 for the said statement. The Tribunal shall make a further statement based on evidence as to the situation of the lands visa-a-vis the building and whether the assessee required the same during the relevant assessment years for purpose referred to in the proviso to section 2(1) (c). Parties will be given an opportunity to adduce evidence if they so choose.
[The Tribunal submitted a further statement, the material portion of which was as follows :]
5. The first point on which High Court has required clarification is as to the situation of the property and of the agricultural land of the assessee. To enable easy understanding, a plan has been furnish by the assessee before the Appellate Assistant Commissioner showing the building and the lands in question. This plan has been marked as annexure 'C' to this further statement. The total extent of agricultural lands owned by the applicant in the relevant accounting years was 359 acres. A good portion of these land (of the extent of 44 acres) known as the 'Big Tank Farm Lands' are situated on he main road leading to Visakhapatnam. Though the 'fort' building is, as stated earlier, in side the Vizianagaram Municipality, it is also situated on the road collecting Vizianagaram railway station and Visakhapatnam at a distance about a furlong from the 'Big Tank farm lands'. The rest of the lands are situated on the other side cart road leading to Dharmapuri from the main road, but they also abut and from one compact block with the 'Big Tank Farm lands'. They are also not very far from the 'fort' the building.
6. The second point on which High Court has called for a statement whether the building was used, during the relevant accounting years, for the purpose set out in the proviso to section 2(1) (c). So far as this is concerned, the facts are that two of the rooms of the building are being used for storing of the produce from the lands. Some rooms are occupied for office purpose. This office establishment is common for collection of rent from the market properties owned by the assessee as well as for attending to the agricultural estate. The other rooms in the building are intended for residential purposes.