1. This reference under Section 66(1), Income-tax Act, is made by the Income-tax Appellate Tribunal at the instance of the assessees, the Ballygunge Bank Ltd. The question referred for the opinion of the Court is:
Whether in the circumstances of the case the rent derived from the buildings erected by the assessee was properly assessed under Section 9, Income-tax Act.?
2. The assessees are a public limited company, one of its objects being to acquire land by purchase, lease or otherwise, to deal in such land or to build houses thereon and to deal in or let out such houses.
3. By deed of lease dated 28-2-1936 the lessors let to the assessees, as lessees, a vacant piece of land (including a tank) of an area exceeding 6 bighas for the term of 40 years at a progressive monthly ground rent therein specified. The lease provided, inter alia, that:
Clause (5) The assessees would be entitled to parcel the land into a number of plots and to erect buildings, etc., thereon and to let out the same on hire and for the purpose of the same to lay out and construct lanes, streets, drains and sewers aa might be necessary.
(6) The assessees were entitled to construct, and would be held responsible for constructing, 25 separate and self-contained houses on the land at their own cost.
(7) The assessees would use only the best available materials while constructing the buildings.
(8) The assessees would construct at their own cost pucca structures; the position and detailed construction of each house and the number of rooms, storeys, and dimensions thereof were left entirely at the assessees' discretion,
(10) The existing tank and ditches to be filled in and levelled by the assessees.
(11) Within 5 years after possession given of about 1 bigba 3 cottahs of land, the assessees would erect pucca structures and houses thereon after constructing pucca lanes, drains and sewers.
(12) In case the assessees failed to comply with the conditions in Clauses 10 and 11 the lessors would be entitled be take back possession Of the entire land together with the buildings and houses erected thereon and the assessees would have no right to make objection thereto or to claim compensation in respect thereof.
(14) After the expiration of the full period of 40 years the lessors 'will' take possession of the entire land together with all the structures and the assessees 'will' have no right, title or interest thereto and all the above 'will' pass to the lessors free from all encumbrances and defects.
(18) The assessees to pay a proportionate part of the municipal tax in respect of the land and the entire municipal tax, from time to time levied, upon the structures to be erected.
(22) In ease of acquisition of the land by the Government, or by any public authority (mentioned in the lease) any compensation received to be payable to the lessors whereas compensation in respect of the pucca structures would be apportioned according to the provisions contained in the lease of a graduated division dependent upon the unexpired period of the lease when acquisition occurred; the lessor's share increasing as the period of the remaining term becomes less.
(24) The lessors or their representatives to be entitled to visit the land or supervise any constructions thereon on one day each week.
(27) The assessees to be entitled to sub-lease the whole or any part of the land.
4. The assessees obtained possession of the land, filled in the tank, carried out the several works specified in the lease and erected houses on the land which they let to tenants, the assessees receiving the rents from the tenants.
5. In the assessees' income-tax assessment for the year 1941-42 there is included the sum of Rs. 5115 for 'Property' which was assessed under Section 9, Income-tax Act. By Section 6, income shall be chargeable to tax under the head of 'Property'; by Section 9 tax is payable by au assessee under the head of 'Income from property' in respect of the bona fide value of property consisting of any buildings or lands appurtenant thereto of which he is the owner.
6. It is not disputed that the amount of the assessment is correct. It is contended, however, by the assessees that they are not the owners of the houses but under the lease the lessors became the owners at the time they were constructed; further, the assessment should have been made under Section 10, as profits and gains of the business carried on by the assessees, it being their business to let out houses at rents.
7. The legal position, regarding the ownership of buildings constructed by a lessee upon land belonging to a lessor, is different in India to that in England. According to the maxim 'Quicquid plantatur solo solo cedit,' in England buildings and other things erected upon or affixed to the soil by a lessee, in the absence of a contracb to the contrary, cannot be removed at the termination of a lease and become the property of the lessor. In India the position is governed by Section 108(h), Transfer of Property Act, which enacts that:
In the absence of a contract to the contrary...the lessee may even alter the determination of the lease remove, at any time whilst he is in possession of the property leased out not afterwards all things which he has attached to the earth; provided he leaves the property in the state in which he received it.
Therefore, in India, when a lessee erects a house upon his lessor's land during the period of a demise, such house does not become appurtenant to the land but belongs to the lessee who can remove it, or demolish it and take away the materials, at the termination of the demise, unless there is a term to the contrary contained in the lease.
8. The lease granted to the assesses company contains a term which prevents removal of the houses erected during its currency. At the end of the tenure, the houses undoubtedly will belong to the lessors but the present question is who is the owner during the currency of the lease. Clause 18 of the lease requires the assessees to pay a proportionate amount of the municipal tax upon the land, but it further provides that the whole municipal tax upon the houses is to be paid by the assessees; which provision one would expect to find where the structures belong to a lessee. Upon acquisition of the land by the Government or by a public authority, Clause 22 provides, in respect of the land, that the lessors shall have all compensation but, in respect of the buildings on the land, that is to be divided between the lessors and the assessees. If the buildings were the lessors' property they would be entitled to the whole compensation. This division reflects recognition of the assessees expenditure and the ultimate right of the lessors to the property. The buildings erected by a lessee upon his lessors' land, belong to the lessee who has the right, given by Section 108(h), Transfer of Property Act, to remove them at the end of his tenancy. In the present case, Clause 14 prevents the assessees from exercising that right and the structures will have to be left upon the land at the end of the term when, according to the clause, they will pass to the lessors. The lessors' right of ownership to the structures arises out of Clause 14, which does not become operative until the expiration of the 40 years term of the lease. At that time, and not earlier, the clause provides that the structures will pass to the lessors. The lease nowhere provides that the lessors become the owners of the structures upon their erection.
9. In my opinion the lessors have no right of ownership in the structures until the lease determines by effluxion of time; upon erection the assessees were the owners and their owner, ship continues throughout the period of the tease until its expiration when, and not before, the ownership will pass to the lessors.
10. The same position and effects would arise if Clause 12 became operative, which will not now occur, enabling the lessors to relate the land upon breach by the assessees of Clauses 10 and 11.
11. Emphasis was sought to be placed upon Clause 24, by which the lessors or their representatives are entitled to visit the demise and supervise the building construction, and Clause 7, requiring the best materials to be used. I do not consider these clauses have the effect of making the lessors the owners of the houses. An owner of land, who leases it for the purpose of the lessee erecting houses upon it in accordance with the terms contained in the lease, is entitled to require the best materials to be used and to reserve to himself the right to see this is being done and to satisfy himself the structures are being properly built.
12. Since the assessees are the owners of the houses during the currency of the lease it is next to be considered how they should be assessed with respect to that property. The argument is that, since it is the assesses company's business to erect and let out houses at rentals, the assessment should be made under Section 10, upon the rents as profits and gains of their business and they should not be assessed under Section 9. Sub-section 1 of the latter section provides that:
tax shall be payable by an assessee under the head 'Income from Property' in respect of the bona fide annual value of property consisting of any buildings or land appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purpose of any business, profession or vocation carried on by him, the profits of which are assessable to tax, subject to the following allowances namely:
(i) where the property is in the occupation of the owner, or where it is let to a tenant and the owner has undertaken to Bear the cost of repairs, a sum equal to one-sixth of such value;
(ii) where the property k in the occupation of a tenant who has undertaken to hear the costs of repairs, the difference between such value and the rent paid by the tenant up to but not exceeding one-sixth of such value;
(iii) the amount of any annual premium paid to insure the property against risk of damage or destruction; and,
(iv) the amount of interest paid upon a mortgage on the property and the amount paid in respect of an annual charge, (not being a capital charge), ground rent, and interest upon borrowed capital used to acquire, construct, repair, renew or reconstruct the property;
(v) land revenue;
(vi) vacancies computed as therein specified.
13. The amount of the assessment is not the actual rent received from a tenant but it is bona fide annual value (less the applicable deductions) which Sub-section (2) of Section 9 defines as the sum for which the property might reasonably be expected to let from year to year. It is clear, from Sub-section (1), that assessment pursuant to the section is applicable to property let to tenants. No distinction is made between ownership by an individual and ownership by company. In In re Commercial Properties Ltd. : AIR1928Cal456 , a company's sole object was to acquire land, build houses and let them to tenants; it owned house property which it let to tenants, it was assessed under Section 9 and contended the assessment should have been made under Section 10. In the year of account it was alleged the company had sustained a loss upon its business of letting houses; it was pointed out in the judgment, at p. 1062, that in letting the houses, seeing to the payment of rent and (doubtless) doing the repairs, the company carried on business in the sense in which every landlord or owner of that type of property must necessarily carry on business. The argument was rejected that where the owner is a company, the objects of which include the object of owning and managing house property, the income - derived from tenants is an income derived from business, with respect to the alleged loss incurred through unsuccessful trading with the property during the accounting year and the contention that the assessment should have been made under Section 10 in which event no income-tax would be recoverable, it was observed, by Rankin C.J., who delivered the judgment of the Court, at p. 1062, that
This is certainly a very important question from the point of view of the treasury, because if this argument be right then it will depend to some extent upon the success of the management whether or not the public treasury should derive any income tax in respect of house property of this character.... In my judgment, the words of Sections 6 and 9 and Section 10 must be read so as to give some effect to the contrast that is there made between income, profits and gains from 'Property' and from 'Business' and I entirely refuse any assent to the proposition that because it happens that the owner of a property is a company which has been incorporated for the purpose of owning such property,' therefore, the income derived from 'property' must be regarded as income derived from 'business'. In my judgment, income derived from 'property' is a more specific category applicable to the present case.
In re Kaladan Suratee Bazaar Co., Ltd. ('20) 7 A.I.R. 1920 L.B. 10 (13), it was pointed but that a person or a company drawing income from house property was clearly not contemplated, in the Indian Income-tax Act, as carrying on a business but was treated as a person who derived income from the property; also that a man who had invested his capital in house property and who kept a rent office and a staff of rent collectors for the purpose of letting his houses and collecting the rents, was not carrying on a business, he was merely taking the ordinary steps necessary for enjoying the income from his property. Reference was made to the above matters in the Kaladan case ('20) 7 A.I.R. 1920 L.B. 10 (13), at pp. 1063 and 1064 of the judgment in the Commercial Properties case : AIR1928Cal456 , which states that it is not favourable to the assessees. In the latter case it was held, at p. 1066, that the facts and circumstances in that case, came more directly and specifically under the word 'Property' in Section 6 and the mere fact that the house owner was a company did not change the incidence of the tax and the Income, tax Act did not regard the income derived from ownership of buildings as profits of management.
14. The Commercial Properties case : AIR1928Cal456 is a, decision by a Bench of three Judges of this Court and is binding upon us. It decides, as I understand it, that income derived from the ownership! of buildings is chargeable to tax 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.
15. In my opinion the facts and circumstances of the present reference fall within the Commercial Properties case : AIR1928Cal456 and are completely covered by it. I would answer the question referred in the affirmative.