By TIOL News Service

NEW DELHI, MAY 12, 2017: THE issue is - Whether merely because there was an entry in the object clause of the business showing a particular object, would be the determinative factor to arrive at a conclusion that the income from house property is to be treated as income from business. NO is the verdict.

Facts of the case

The Maharashtra Housing and Developing Authority (MHADA) had constructed buildings known as Shyam Sunder Cooperative Society, Ram Darshan Cooperative Society and Sindhu Cooperative Society in Jariwala Compound Market, Opposite Navjivan Post Office, Lamington Road, Mumbai. There was a reservation for Municipal retail market on the plot on which MHADA had put up the construction. Ground floor [stilt portion] was handed over of the above said buildings and admeasuring around 17,925 sq. ft. (hereinafter referred to as the "market portion") to Market Department of Municipal Corporation of Greater Bombay ("MCGB"). This land was acquired by the MCGB from the MCGB by recovering the necessary cost.

The Market Department of the MCGB auctioned the market portion on a monthly license [stallage charges] basis to run municipal market. The Assessee firm participated in the auction to acquire the right to conduct the market on the market portion. The assessee was the successful bidder and was handed over possession of the market portion. The terms and conditions subject to which the Assessee was given the said market portion to run and maintain municipal market contained in the terms and conditions of the auction. The premises allotted was a bare structure, on stilt, that was, pillar/column, sans even four walls. In terms of the auction, it was the appellant who had to make the entire premises fit to be used a market, including construction of walls, construction of entire common amenities like toilet blocks, etc. Accordingly, after taking possession of the premises, the assessee spent substantial amount on additions/alternations of the entire premises, including demolishing the existing platform and, thereafter, reconstructing the same according to the new plan sanctioned by the MCGB. [Rs. 1,83,61,488/- spent from Financial Year 1993-1994 to 2001-2002] The Assessee constructed 95 shops and 30 stalls of different carpet areas on the premises under the market name "Saibaba Shopping Centre". The appellant also obtained, in terms of the conditions of the auction, necessary registration certificate for running a business under the Shop and Establishment Act and other licenses/permissions from MCGB and other Government and semi-Government bodies for carrying on trading activities on the said premises. The Assessee firm was responsible for day-to-day maintenance, cleanliness and upkeep of the market premises. Assessee collected various types of receipts such as maintenance charges for the premises, service charge and the fee payable by the sub-licensee.

The Assessee filed returns of income and right from the year 1999 till 2004, it had been offering the income from the aforesaid shops and stalls sub-licensed by it under the head "Profits and Gains of Business or Profession" of the Income Tax Act, 1961. The income was also assessed accordingly. The case of the Assessee for the Financial Year 1999-2000 was reopened by the Revenue by issuing notice u/s 148 of the Act and in response to the same the assessee filed its return. Notice u/s 143(2) of the Act was also issued. Reassessment order was framed, computed the income from the shops, and the stalls under head "Income from House Property" of the Act. Assessee's first appeal was allowed but the ITAT reversed the order of the CIT (A) and the HC dismissed the appeal.

On appeal, the Supreme Court held that,

Whether merely because there was an entry in the object clause of the business showing a particular object, would be the determinative factor to arrive at a conclusion that the income from house property is to be treated as income from business - NO: SC

++ section 4 of the Act is the charging Section as per which the total income of an assessee, subject to statutory exemptions, is chargeable to tax. Section 14 of the Act enumerates five heads of income for the purpose of charge of income tax and computation of total income. These are: Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. A particular income, therefore, has to be classified in one of the aforesaid heads. It is on that basis rules for computing income and permissible deductions which are contained in different provisions of the Act for each of the aforesaid heads, are to be applied. For example, provisions for computing the income from house property are contained in Sections 22 to 27 of the Act and profits and gains of business or profession are to be computed as per the provisions contained in Sections 28 to 44DB of the Act. It is also to be borne in mind that income tax is only One Tax which is levied on the sum total of the income classified and chargeable under the various heads. It is not a collection of distinct taxes levied separately on each head of the income;

++ there may be instances where a particular income may appear to fall in more than one head. These kind of cases of overlapping have frequently arisen under the two heads with which Court was concerned in the instant case as well, i.e. income from the house property on the one hand and profits and gains from business on the other hand. On the facts of a particular case, income has to be either treated as income from the house property or as the business income. Tests which are to be applied for determining the real nature of income are laid down in judicial decisions, on the interpretation of the provisions of these two heads. Wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, in case provisions of Section 22 of the Act are satisfied with primary ingredient that the assessee is the owner of the said building or lands appurtenant thereto. Section 22 of the Act makes 'annual value' of such a property as income chargeable to tax under this head. How annual value is to be determined is provided in Section 23 of the Act. 'Owner of the house property' is defined in Section 27 of the Act which includes certain situations where a person not actually the owner shall be treated as deemed owner of a building or part thereof. In the present case, the assessee was held to be "deemed owner" of the property in question by virtue of Section 27(iiib) of the Act. On the other hand, under certain circumstances, where the income may have been derived from letting out of the premises, it can still be treated as business income if letting out of the premises itself is the business of the assessee;

++ the test which has to be applied to determine whether the income would be chargeable under the head "income from the house property" or it would be chargeable under the head "Profits and gains from business or profession", is the question. That merely because there was an entry in the object clause of the business showing a particular object, would not be the determinative factor to arrive at a conclusion that the income is to be treated as income from business. Such a question would depend upon the circumstances of each case. It was held by the Constitution Bench of the Apex Court in Sultan Bros. (P) Ltd. v. CIT, 2002-TIOL-925-SC-IT-CB;

+ it is to be seen as to whether the activity in question was in the nature of business by which it could be said that income received by the assessee was to be treated as income from the business. Before us, apart from relying upon the aforesaid clause in the partnership deed to show its objective, the counsel for the assessee has not produced or referred to any material. Apex Court found that ITAT had specifically adverted to this issue and recorded the findings on this aspect;

++ the ITAT being the last forum insofar as factual determination is concerned, these findings have attained finality. In any case, the counsel for the assessee did not argue on this aspect and did not make any efforts to show as to how the aforesaid findings were perverse. It was for the assessee to produce sufficient material on record to show that its entire income or substantial income was from letting out of the property which was the principal business activity. No such effort was made;

++ reliance placed by the assessee on the judgments of this Court in Chennai Properties & Investments Ltd. and Rayala Corporation (P) Ltd. would be of no avail. In Rayala Corporation (P) Ltd., fact situation was identical to the case of Chennai Properties & Investments Ltd. and for this reason, Rayala Corporation (P) Ltd. followed Chennai Properties & Investments Ltd., which is held to be inapplicable in the instant case;

++ we are of the opinion that these appeals lack merit and are, accordingly, dismissed with cost.

(See 2017-TIOL-222-SC-IT)