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Tinsukia Development Corporation Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 180 of 1974
Judge
Reported in[1979]120ITR466(Cal)
ActsIncome Tax Act, 1961 - Sections 6, 14, 22, 28 and 56; ;Indian Income Tax Act, 1922 - Section 9
AppellantTinsukia Development Corporation Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateDipankar Gupta and ;Sohanlal Saraf, Advs.
Respondent AdvocateSuhas Sen and ;Ajit Sengupta, Advs.
Cases ReferredFry v. Salisbury House Estates Ltd.
Excerpt:
- .....orders of earlier years, did not accept the assessee's contention and assessed the same under the head ' property '. the aac, on appeal, upheld the decision of the ito.5. being aggrieved, the assessee preferred further appeals to the income-tax appellate tribunal. it was contended before the tribunal that in the earlier assessments the assessee had not claimed that the rent realised from the said bustees were the assessee's business income, at the initial stages and, therefore, the tribunal did not allow the assessee to agitate this point in the appeal. in the relevant assessment year, it was open to the assessee to agitate this question,6. it was further contended that the bustees were not 'property' and, in any event, the assessee was not the owner thereof but only of the structures.....
Judgment:

Dipak Kumar Sen, J.

1. This reference under Section 256(1) of the I. T. Act, 1961, arises out of the income-tax assessment of Tinsukia Development Corporation Ltd., the assessee, in the assessment years 1966-67, 1967-68 and 1968-69.

2. The facts found and/or admitted are shortly that the assessee was formed with the objects, inter alia, of acquiring land, developing the same, making constructions thereon and dealing with them. The assessee obtained from the Government of Assam a large area of land for development and construction of bustees under a lease for the period from 1st April, 1934, to 31st March, 1964. After 1964, this lease has been extended by the Government from time to time by notifications. In the assessment years in question, the assessee continued to be a lessee under the said lease.

3. The assessee set up bustees on the land, the constructions put up by the assessee therein being structures with no foundations but with light plinth or floors and walls made of planks of unseasoned indigenous wood or corrugated sheets fixed on frames of bamboos or local wood.

4. The assessee claimed that the income from such constructions on the said land was income from its business or, in the alternative, income from other sources but not income from property. The ITO, following the assessment orders of earlier years, did not accept the assessee's contention and assessed the same under the head ' Property '. The AAC, on appeal, upheld the decision of the ITO.

5. Being aggrieved, the assessee preferred further appeals to the Income-tax Appellate Tribunal. It was contended before the Tribunal that in the earlier assessments the assessee had not claimed that the rent realised from the said bustees were the assessee's business income, at the initial stages and, therefore, the Tribunal did not allow the assessee to agitate this point in the appeal. In the relevant assessment year, it was open to the assessee to agitate this question,

6. It was further contended that the bustees were not 'property' and, in any event, the assessee was not the owner thereof but only of the structures thereon and, therefore, the assessment of the income from the bustees under the head ' Property ' was not justified. Particulars of the sub-leases of the bustee construction were placed before the Tribunal to show that the same were meant for shops, hotels, restaurants, godowns, etc. It was lastly contended that the bustee constructions were not buildings but were temporary structures for the purpose of being used as aforesaid.

7. Contentions to the contrary were made on behalf of the revenue and it was submitted that in the facts and circumstances of the instant case the controversy was covered by a decision of the Supreme Court in the case of S. G. Mercantile Corporation P. Ltd. v. CIT : [1972]83ITR700(SC) and the income from bustee properties was rightly assessed under the head ' Property '.

8. On the basis of the findings in earlier years the Tribunal held that the structures in the bustees were not of a temporary character and constituted buildings. Following the decisions of this court in the cases of Ballygunge Bank Ltd. v. CIT : [1946]14ITR409(Cal) , Sri Ganesh Properties Ltd. v, CIT : [1962]44ITR606(Cal) and those of the Supreme Court in East India Housing & Land Development Trust Ltd. v. CIT : [1961]42ITR49(SC) and 5. G. Mercantile Corporation P. Ltd. v. CIT : [1972]83ITR700(SC) , the Tribunal held that if the assessee was treated as the owner of the buildings on the leasehold, then the income therefrom was assessable under the head ' Property ' even if the assessee was a company incorporated with the object of buying and developing landed properties and promoting and developing markets.

9. From the order of the Tribunal, the following question has been referred :

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the income from bustee properties should be assessed under Section 22 and not under Section 28 or 56 of the Income-tax Act, 1961 '

10. Mr. Dipankar Gupta, learned counsel for the assessee, has contended before us that the assessee in the instant case cannot be considered to be the owner of the property inasmuch as the assessee was only a lessee in respect of the land. The same point was agitated in the Income-tax Ref. No. 113 of 1970 in respect of the very same assessee for the assessment year 1960-61 (since reported as Tinsukia Development Corpn, Ltd. v. CIT : [1979]120ITR476(Cal) ), where it was held by this court that where the term of a lease, being a building lease, provided that the ownership of the structure to be built remained vested in the lessee while the ownership of the site remained in the lessor, the lessee would still be assessed in respect of the income from such structure under Section 9 of the Indian I. T. Act, 1922, as an income from the property. Therefore, such contention of Mr. Gupta cannot be sustained.

11. Mr. Gupta next contended that the structures were not buildings within the meaning of Section 9 as they were in the nature of temporary structures. The same point was also decided in the earlier reference, that is, Income-tax Reference No. 113 of 1970 (since reported as Tinsukia Development Corpn. Ltd. v. CIT : [1979]120ITR476(Cal) ), and it was held that the structures were not seasonal structures but could be let out at least for 5 to 6 years. This contention of the assessee is, therefore, also rejected.

12. Mr. Gupta, lastly, contended that, in any event, irrespective of the question of ownership of the property or the nature of the structure, the income arising from the bustees must be treated as the business income of the assessee. He submitted that property could be owned and also leased out by an owner either as a part of his business or incidental to his ownership. It was necessary to determine the intention or the object of the owner in each case. If it was the object or the intention of the owner to own property and let it out as part of his business then the income arising out of such property would be income from business and must be assessed as such.

13. For this contention, Mr. Gupta drew inspiration from a decision of the Supreme Court in the case of Karanpura Development Co. Ltd. v. CIT : [1962]44ITR362(SC) . The facts in that case were that the assessee was incorporated with, inter alia, the following objects : (a) to purchase and acquire from the owners or proprietors or other persons interested, underground coal mining and relative rights of and in the Karanpura Coal Fields, (b) to sell, dispose of and otherwise deal in all such underground coal mining and relative rights, and (c) to sell, improve, manage, develop, exchange, lease, mortgage dispose of, turn to account or otherwise deal with such properties. After its incorporation, the assessee obtained, by way of assignment, rights under a prospecting licence and acquired from time to time diverse coal mining leases over areas aggregating 20,000 bighas. The assessee developed the coal-fields by providing means of communication and sub-leased them to collieries and other companies. The assessee did not itself work the coalfields nor did it acquire or sell coal raised by the sub-lessees.

14. On these facts, the Tribunal as also the High Court held that in acquiring the head leases and in granting the sub-leases, the assessee was carrying on a business within its objects. These conclusions were challenged by the revenue and the matter came up before the Supreme Court. The Supreme Court analysed Section 6 of the Indian I, T. Act, 1922, and observed as follows (p. 367) :

' Section 6 then enumerates six heads of income chargeable to income-tax. Two of these heads are (a) income from property and (b) profits and gains of business, etc. The several heads into which income is divided under the Income-tax Act do not make different kinds of taxes. The tax is always one ; but it may arise from different sources to which the different rules of computation have to be applied. The manner of this computation is indicated in the sections that follow. Before income, profits or gains can be brought to computation, they have to be assigned to one or more heads. These heads are in a sense exclusive of one another, and income which falls within one head cannot be assigned to, or taxed under, another head.'

15. The Supreme Court further observed (p. 377) :

' 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 a 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 landowner but as trader. The cases which have been cited in this case both for and against the asses-see-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 California^ 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 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.'

16. Mr. Gupta next cited CIT v. Ukhara Estate Zamindaries (Pvt.) Ltd, : [1971]82ITR103(Cal) , where the aforesaid observations of the Supreme Court in the case of Karanpura Development Co. Ltd. : [1962]44ITR362(SC) was followed and applied.

17. In fairness Mr. Gupta has also drawn our attention to the later decision of the Supreme Court in 5. G. Mercantile Corporation P. Ltd. v. CIT : [1972]83ITR700(SC) . The facts in this case were that the assessee was a private limited company and was established with the following objects I (a) To purchase, take on lease or otherwise acquire and to hold, improve, lease, sell, exchange or otherwise dispose of lands; houses and other real and personal properties and to deal with the same commercially ; and (b) to develop the resources of the properties by building, reclaiming and otherwise improving on any terms or system,

18. The assessee took on lease a market place known as Taltalla Bazar in Calcutta on a monthly rent for 50 years with option to renew the lease for a further period of 40 years. In the relevant assessment years, the assessee-company developed the premises and let out portions of the same as shops, stalls and ground spaces to the shopkeepers, stall-holders and daily casual market vendors. The assessee claimed that its income from the said lease-hold property for the said years should be assessed under the head ' business ' as letting out of the property was its authorised business. The contentions of the assessee were rejected by the ITO and the AAC. The Tribunal, however, held that such income of the assessee should be assessed as business income. On a reference, the High Court held that such income was not assessable under Section 10 of the Act. The matter ultimately came up before the Supreme Court. The Supreme Court noted that there was no finding that the appellant company was the owner of the property in question or any part thereof and that it was not disputed by either side that there could be no assessment under Section 9 of the Indian I.T. Act, 1922. The Supreme Court also considered its earlier decision in Karanpura Development Co. Ltd.'s case : [1962]44ITR362(SC) and quoted the observations therein noted earlier. Further observations of the Supreme Court were as follows (p. 708) :

' The above observations have a direct bearing. It is not necessary for the purpose of this case to say anything, beyond what has already been said while dealing with Section 9 of the Act, about the view expressed in the above passage regarding the rental income of an owner being treated as business income in case it is received as part of trading activity, because we are concerned in the instant case with an assessee who is a lessee and not the owner of the property in question. The assessee, in the cited case of Karanpura Development Co. Ltd. : [1962]44ITR362(SC) too was lessee of the coal fields. So far as such assessees are concerned, who as part of their essential trading activity take lease of property and sublet parts thereof with a view to make profits, the dictum laid down above, in our opinion, would hold good and the profits would have to be treated as business income.'

19. On the facts, the Supreme Court found that the activity of the assessee in taking the property on lease and sub-letting portions thereof were part of its business and trading activity and upheld the conclusions of the Tribunal that in letting out the leasehold property the assessee was not acting as an owner but as a trader. Its income was assessable under Section 10 of the Act.

20. Mr. Gupta submitted that the Supreme Court in S. G. Mercantile Corporation P. Ltd.'s case : [1972]83ITR700(SC) had not overruled or disapproved in Karanpura Development Co. Ltd.'s case : [1962]44ITR362(SC) andthat the principle laid down in both the cases were good law and hadto be applied in the facts and circumstances of each case. If an assesseedealt with his property qua owner then the income should be assessed asincome from property, whereas if the dealing was qua trader or businessman then it must be assessed as business income.

21. Mr. Suhas Sen, learned counsel for the revenue, has contended on the other hand that the settled law has all along been that the ultimate test is that of ownership. If the assessee was the owner of a property and earned income therefrom the same must be assessed under Section 9 of the Indian I.T. Act, 1922, or Section 22 of the I.T. Act, 1961. In support of his contentions, Mr. Sen cited the following :

(a) In the matter of Commercial Properties Ltd., : AIR1928Cal456 . The assessee in this case was a registered company incorporated with the objects of acquiring land, building houses and letting out premises to tenants. Its assets consisted of three properties and its sole business was the management thereof and collection of rents therefrom. The question arose whether the income of the properties should be assessed under Section 9 or Section 10. It was held by a Special Bench of this court that the income must be assessed under Section 9. It was observed that the words of Sections 6, 9 and 10 of the Indian I.T. Act, 1922, must be so read as to give some effect to the contrast made between income arising from different sources. Merely because the owner was a company incorporated for the purpose of owning property it would not be sufficient to hold that the income derived from the properties owned must be regarded as income derived from business. Income derived from property fell in a more specific category which must be applied if the facts so warranted.

(b) Ballygunge Bank Ltd. v. CIT : [1946]14ITR409(Cal) . Here the assessee was a limited company and its objects were to acquire land, build houses and let them out. The assessee obtained a lease, erected a house on the demised land and let out the same to tenants. The question arose whether the rent received should be assessed under Section 9 of the Indian I.T. Act, 1922. Following Commercial Properties Ltd.'s case, : AIR1928Cal456 , this court held that the rents were assessable under Section 9 of the Indian I.T. Act.

(c) East India Housing and Land Development Trust Ltd. v. CIT : [1961]42ITR49(SC) . The facts in this case were that the assessee, a company, was formed with the object of promoting and developing markets. It purchased land in Calcutta, set up a market therein, constructed shops and stalls and let them out. Rents were received from the tenants and/or occupants of the shops and the stalls. The question arose whether such rent should be assessed under Section 9 of the Indian I.T. Act; 1922.

The assessment of such income under Section 9 of the Act was confirmed bythe AAC and the Tribunal. The matter finally went up to the SupremeCourt from the order of the Tribunal by way of special leave. TheSupreme Court quoted with approval the decision of the Calcutta HighCourt in Commercial Properties Ltd.'s case, : AIR1928Cal456 andobserved as follows (p. 51) :

' By Section 6 of the Income-tax Act the following six different heads of income are made chargeable: (1) salaries, (2) interest on securities, (3) income from property, (4) profits and gains of business, profession or vocation, (5) income from other sources, and (6) capital gains. This classification under distinct heads of income, profits and gains is made having regard to the sources from which income is derived. Income-tax is undoubtedly 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 levied on distinct heads of income. But the distinct heads specified in Section 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation 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 that 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. '

The Supreme Court held that the income received by the appellant was indisputably income from the property and, therefore, was rightly assessed under Section 9 of the Act.

(d) CIT v. Chugandas & Co. : [1965]55ITR17(SC) . The facts in this case were that the assessee, a firm dealing in securities, discontinued its business in June, 1947, and claimed benefit under Section 25(3) of the Indian I.T. Act, 1922, by way of exemption from payment of tax on income earned in the relevant previous years. To come under Section 25(3), the assessee had to establish that it was carrying on a business, tax was being charged in respect of such business and that the business was discontinued. It was contended by the revenue that, as the interest earned by the assessee from securities were liable to be assessed under Section 8 as income from other sources, and not under Section 10 as business income, the assessee was not entitled to the benefit of the said section. The Supreme Court held that the assessee was entitled to such benefit in respect of interest on securities and observed as follows (p. 21) : ' It must, therefore, be held that even if an item of income is earned in the course of carrying on a business, it will not necessarily fall within the head ' Profits and gains of business ' within the meaning of Section 10 read with Section 6(iv). If securities constitute stock-in-trade of the business of an assessee, interest received from those securities will for the purpose of determining the taxable income be shown under the head ' Interest on securities ' under Section 8 read with Section 6(ii) of the Act. Similarly, dividends from shares will be shown under Section 12(1A) and not under Section 10, If an assessee carries on business of purchasing and selling buildings, the profits and gains earned by transactions in buildings will be shown under Section 10, but income received from the buildings so long as they are owned by the assessee will be shown under Section 9 read with Section 6(iii). Income earned by an assessee carrying on business will in each case be broken up, and taxable income under the head ' Profits and gains of business ' will be that amount alone which is earned in the business, and does not fall under any other specific head. '

22. Mr. Sen contended that the decision of the Supreme Court in the case of Karanpura Development Co. Ltd. : [1962]44ITR362(SC) must be read and understood in the context of the circumstances of tbat case. There the assessee was not the owner of any property, and, therefore, there was no question of application of Section 9. The only question was whether such income should be assessed under Section 12 or Section 10. It was found that Section 10 was the more appropriate section and was applied.

23. It appears to us tbat the law on the question is well settled. Whatever be the nature of the activity or the nature of the income, the income of an assessee has to be classified and computed under the specific heads under Section 6 of the Indian I.T. Act, 1922, or under Section 14 of the I.T. Act of 1961. Even if such income arises in the course of the assessee's business, if the same falls clearly in the category under some other head or satisfies the tests of any specific head, then such income has to be classified and computed under that head.

24. This is laid down by the Supreme Court in S. G. Mercantile Corporation P. Ltd. : [1972]83ITR700(SC) and Chugandas & Co. : [1965]55ITR17(SC) . In view of the said decisions it does not appear to us that in Karanpura Development Co. Ltd. : [1962]44ITR362(SC) , the Supreme Court deviated from the law as laid down. All that the Supreme Court laid down in Karanpura Development Co, Ltd. is that an owner can own property and earn income therefrom by way of business. Significantly, the Supreme Court in that case stopped short of holding that such income must necessarily be assessed or computed under Section 10.

25. Distinction between income which is earned in the course of business and income which is earned as an incident to the ownership of property is important. Apart from computation and assessment of such income, other consequences may follow from such distinction. One of such consequences has been noted in Chugandas & Co. : [1965]55ITR17(SC) , where though the income of the assessee was assessed under Section 8 of the Act of 1922, yet the same was held to be the assessee's income from business so as to enable the assessee to claim benefit under Section 25 of the Act. It is also significant that in S. G. Mercantile Corporation P. Ltd. : [1972]83ITR700(SC) , the Supreme Court did not elaborate on the observations in Karanpura Development Co. Ltd. : [1962]44ITR362(SC) and such observations do not stand in our way in holding that the income of the assessee in the instant case from the subleases should be assessed and computed under Section 22 of the I.T. Act, 1961.

26. For the reasons given above, we are unable to accept the contentions of Mr. Gupta. We answer the question referred in the affirmative and in favour of the revenue. We, however, make it clear that our answer will not prejudice any other claim of the assessee or will not stand in the way of any other benefit, if any, available to the assessee under the Act, on the basis that such income is the assessee's business income.

27. There will be no order as to costs.

C. K. Banerji, J.

I agree.


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