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K. Rami Reddy and Sons Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1985)14ITD108(Hyd.)
AppellantK. Rami Reddy and Sons
Respondentincome-tax Officer
Excerpt:
.....long as the source of income is the ownership of property, the character of income is income from house property only. thus, the income received from the godowns is income from property and taxable under section 22. the assessee appealed to the commissioner (appeals).he upheld the action of the ito holding that the income from the godowns is assessable as income from house property and not as income from business. against the said order, the assessee has preferred these appeals. the ito had refused to grant registration but the commissioner (appeals) has allowed the registration. we are not concerned with the registration of the firm in these appeals.3. the learned counsel for the assessee urged that the very object of the firm was to construct godowns as per the specifications and.....
Judgment:
1. Since common points are involved these appeals are being disposed of together.

2. The assessee-firm was constituted by a partnership deed dated 21-1-1971. The assessee constructed four godowns which were leased out to the Food Corporation of India (FCI) as per an agreement entered into on 31-12-1976. The FCI had called for tenders for the construction of godowns. The assessee made a tender which was accepted. Accordingly, the godowns were constructed as per the specifications of the FCI and they were leased out to them. The partnership itself was formed to construct the godowns and to lease them to the FCI. During these years, the assessee received rent from the FCI. It was claimed before the ITO that the activity of letting out godowns constituted a business activity. The ITO did not accept the assessee's contention. He held that the income from the godowns falls under Section 22 of the Income-tax Act, 1961 ('the Act'), because the source of the income is ownership. The firm has invested money in the construction of godowns and the assessee-firm had exploited its property and earned income therefrom. Thus, the income is earned by letting out the property. So long as the source of income is the ownership of property, the character of income is income from house property only. Thus, the income received from the godowns is income from property and taxable under Section 22. The assessee appealed to the Commissioner (Appeals).

He upheld the action of the ITO holding that the income from the godowns is assessable as income from house property and not as income from business. Against the said order, the assessee has preferred these appeals. The ITO had refused to grant registration but the Commissioner (Appeals) has allowed the registration. We are not concerned with the registration of the firm in these appeals.

3. The learned counsel for the assessee urged that the very object of the firm was to construct godowns as per the specifications and plans of the FCI to suit their requirements and to lease them out to them.

This is clear as per Clause (3) of the partnership deed. The godowns as such have been constructed as per specifications required by the FCI.Further services have been rendered by providing electricity, water supply, inner approach road, fencing, etc., and by undertaking to repair and maintain them This is not a case like building a house and letting it out for rent. Since the very object and activity of the firm is to construct and let out the godowns to the FCI if is an adventure in the nature of trade and is a business activity. Hence, the income from the godowns is assessable as business income and not as income from house property. He placed reliance on two orders of the Tribunal and the decisions in CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596 (SC) and S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC). The learned departmental representative strongly urged that even if the object of the firm was to construct the godowns and lease them out to the FCI as per their specifications, still the income derived is from the godowns and so it is assessable as income from house property.

He submitted that the so-called services rendered by the assessee to the FCI. are nothing but basic amenities of providing electricity, water supply, inner approach road, fencing, etc., to a building and as such they cannot be considered as any special services. Thus, the income from the godowns cannot be assessed as income from business. He placed reliance on the decisions in Parekh Traders v. CIT [1984] 150 ITR 310 (Bom.) and S.G. Mercantile Corpn. (P.) Ltd.'s case (supra).

4. We have considered the rival submissions. The question for consideration is whether the income derived from leasing out godowns which were constructed as per the specifications and plans of the FCI is assessable as income from house property or as business income.

Under Section 22, the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business carried on by him, the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head 'Income from house property'. The godowns constructed by the assessee fall under the description of a 'building' referred to in the above section. The assessee is the owner : (1) The said godowns are not used for the business carried on by him the profits of which are chargeable to income-tax. The above provision makes it very clear that if the house property is not used for the business of the assessee, then the annual value of that building of which the assessee is the owner is assessable under the head 'Income from house property'. The income received by the assessee from the godown of which he is the owner is clearly assessable under the above provision as income from house property. The contention of the assessee is that the very object and activity of the assessee-firm is to construct godowns as per the specifications and plans of the FCI to suit their requirements and lease them out to them and it is a business activity and as such, the income from the godowns is assessable as business income only. We are unable to accept this submission. (2) It is, no doubt, true that the firm has been constituted with the object of constructing godowns as per the specifications of the FCI and to lease them out to them. That by itself will not make the activity a business activity, if the income is derived by the assessee on account of its being the owner of the building. There is no dispute that the assessee is the owner of the godowns, hence, the income derived therefrom is assessable as income under the head 'Income from house property'. Where an item of income falls specifically under one head, it has to be charged under that head and no other. Section 14 of the Act specifies various heads of income.

For the purpose of computing the income, the section dealing with that head will have to be looked at. Thus, where an item of income falls specifically under one head, it has to be charged under that head alone. This is well settled by the decision of the Supreme Court in the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688.

5. The question whether the income from shops or godowns constructed by a company or a firm, whose object was to construct and let out those properties is assessable as income from property or business has come up for consideration in a few cases. It will be useful to refer to those cases. In East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC), a private company was incorporated with the object, amongst others, (i) to buy and develop landed properties, and (ii) to promote and develop markets. In that case, the assessee purchased lands and set up a market therein by constructing shops and stalls. Income was received from the tenants of the shops and stalls.

The question that arose in that case was whether the income derived from shops and stalls was assessable as income from property or business. The Supreme Court held that the income derived by the assessee-company from shops and stalls is income from property and falls under the specific head described in Section 9 of the Indian Income-tax Act, 1922 ('the 1922 Act'). It was held therein that the character of that income is not altered because it is received by a company formed with the object of developing and setting up of markets.

In the case of S.G. Mercantile Corpn. (P.) Ltd. (supra), the Supreme Court held that the liability to tax under Section 9 is of the owner of the buildings or land appurtenant thereto. In case, the assessee is the owner of the buildings or the land appurtenant thereto, he would be liable to pay tax under Section 9 even if the object of the 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 income derived by such a company from the tenants of the shops and stalls constructed on the land for the purpose of setting up market would not be taxed as business income under Section 10 of the 1922 Act, but under Section 9. In this case, the assessee was a lessee and not the owner of the property. Hence, it was held that the income was assessable under Section 10. In Commercial Properties Ltd. v. CIT AIR 1928 Cal. 456, the Calcutta High Court held that the income derived from rent by the company whose sole object was to acquire lands, build houses and let them to tenants and whose sole business was the management and collection of rent from the said properties, was assessable under Section 9 and not under Section 10. It was observed in that case that merely because the owner of the property was a company incorporated with the object of owning the property, the incidence of income derived from the property owned could not be regarded as altered ; the income came directly and specifically under the head 'Income from house property' than income from business. In Ballygunge Bank Ltd. v.CIT [1946] 14 ITR 409 (Cal.), one of the objects of the assessee-company was to acquire land to build houses thereon and to deal in such houses or let out such houses. The question was whether the rent received from the buildings erected by the assessee was properly assessed as income from property. It was held by the Calcutta High Court that the assessees were the owners of the buildings until the period of the lease expired and they were, therefore, assessable under Section 9 in respect of the rents received from the buildings. In that case, the lease did not provide that the lessors become the owners of the superstructure upon their erection. It was held that the income derived from the ownership of the buildings is chargeable under Section 9 irrespective of whether an individual or a company is the owner and also irrespective of whether one of a company's objects or its sole object is to acquire and let out buildings at rents ; ownership itself is the criterion of assessment under that section. In Indian City Properties Ltd. v. CIT [1965] 55 ITR 262 (Cal.), the assessee-company was formed for carrying on the activities of sale and purchase of lands and buildings and constructing houses for the purpose of letting them out and in pursuance of the above objects the assessee constructed a large number of houses and let them out. The assessee claimed that the income from rent should be taxed under the head 'Profits and gains of business or profession'. On those facts, the Calcutta High Court held that the rental income out of the property should be assessed under Section 9 as income from property and not as income from business. In Parekh Traders' case (supra) the assessee-company constructed a godown which was used for its business for about three years and thereafter it was let out. On those facts, the Bombay High Court held that the income derived by the assessee by letting out the godown was to be assessed under the head 'Income from house property'.

6. The principles that emerge from the above decisions are that the rental income from a building, godown, shop or stall of which the assessee is the owner is assessable as 'Income from property' and not as 'Business income'. The character of that income will not change even if the income is received by a firm or a company formed with the object of developing and setting up shops, stalls or godowns, which are to be let out. If the income received from the property falls under the specific head, it is assessable under that particular head. The rental income derived by the owner of a building is assessable as income from property. If the assessee was not the owner but only a lessee of the property, then the rental income is not assessable as income from house property.

7. The ratio laid down in the above cases squarely applies to the instant case. In the instant case, the assessee is the owner of the godowns which are let out and so the rental income is assessable as income from house property. The fact that the firm was constituted with the object of constructing godowns as per the specifications of the FCI for being let out to them will not alter the character of the income as the assessee is the owner of the godowns and the rental income is assessable only as income from house property. We have gone through the lease agreement executed by the assessee with the FCI. The so-called services mentioned in Clause (3) of that agreement are only for providing electricity, water supply, inner approach roads, fencing, etc., which are the basic amenities required to be provided for a godown. Hence, they cannot be called as any special services agreed to be provided. Without those facilities, the building cannot be made use of.

8. The decision of the Supreme Court in CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596 relied on by the learned counsel for the assessee is distinguishable and has no application to the instant case.

In that case, the assessee constructed vaults of special design and special doors and electric fittings for storage of films. The vaults were let out and a key to each vault was retained by the vault-holder.

The assessee installed fire alarm and paid an annual amount to the municipality towards fire services. Two railway booking offices were opened in the premises for the despatch and receipt of film parcels, which was a very valuable service. It maintained regular staff consisting of a secretary, a peon, a watchman and a sweeper. It also paid for the entire staff of the Indian Motion Picture Distributors' Association. The vault could only be used for the specific purpose of storing of films. It is on those facts, the Supreme Court held that the assessee was carrying on an adventure in the nature of trade and the subject which was hired out was a complex one. The return received was not income derived from the exercise of property rights only, but was income received from carrying on an adventure in the nature of trade.

Thus, the income arising from licensing the vaults to vault-holders had, therefore, to be computed under Section 10 and not under Section 9. Thus, the above decision is clearly distinguishable as the vaults were of special design and with special doors and electrical fittings and the assessee therein had rendered special services. It is on those facts, the Supreme Court held that it is an adventure in the nature of trade, 9. The learned counsel for the assessee had relied on two orders of the Tribunal, one in the case of Rajeswari Warehousing Complex v. ITO [IT Appeal Nos. 120 to 125 (Hyd.) of 1982] the assessment years 1978-79 to 1980-81 of the Hyderabad Bench 'A' and the other in the case of ITO v.Lodha Bros. [IT Appeal No. 1370 (Jp.) of 1981] the assessment year 1978-79. Those two orders are clearly distinguishable as they relate to the grant of registration to the firm under Section 185 of the Act. It is in that context it was held that for the purposes of considering whether the firm was carrying on any business so as to be entitled to registration, the question whether the income of the assessee is assessable either as property or business income for the purposes of income-tax is not relevant. It is well established that merely because the income received by the assessee is liable to be assessed as property income within the meaning of income-tax law, it does not mean that the assessee has no business in the general sense for the purpose of partnership law and other laws. Thus, it was held that the assessee was entitled to registration. The Jaipur Bench was also considering the question of granting registration to the assessee-firm. It is only in that context it was observed that constructing the godowns and leasing them out is a business activity. In those two decisions, the question whether the income from leasing out the godown of which the assessee is the owner is assessable as income from house property did not come up for consideration.

10. Thus, we hold that the rental income derived by the assessee by leasing out the godowns of which the assessee is the owner is assessable as income from property and not as business income. Thus, we uphold the order of the Commissioner (Appeals).


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