Advocate Akhilesh Kumar Sah
Controversy has remained in many cases whether particular income in a given case is income from business or from house property. Recently, in Raj Dadarkar & Associates Vs. ACIT [Civil Appeal Nos. 6455- 6460 Of 2017, decided on 9.05.2017], the substantial questions of law before Honorable Supreme Court were whether in the facts and circumstances of the case, and in law, the ITAT erred in holding that the appellant was owner of the shopping center within the meaning of Section 22 read with Section 27 of the Income Tax Act, 1961(hereinafter referred to as the ‘Act’), the ITAT was right in holding that the income earned by the appellant from the shopping center was required to be taxed under the head “income from House Property” instead of the head “Profits and Gains from the Business or Profession” as claimed by the Appellant, the order of the ITAT confirming the action of the Respondent, was perverse in as much as the same was based on surmises, conjectures and suspicions by taking into account incorrect, irrelevant and extraneous consideration while ignoring relevant materials and considerations.
Facts & Decision in brief of the above- mentioned appeals:
In 1993, the Market Department of the Municipal Corporation Greater Bombay (MCGB) auctioned the market portion on a monthly license [stall age charges] basis to run municipal market. The appellant firm participated in the auction to acquire the right to conduct the market on the market portion. The appellant was the successful bidder and was handed over possession of the market portion on 28.05.1993.
The terms and conditions subject to which the appellant was given the said market portion to run and maintain municipal market contained in the terms and conditions of the auction dated 11.03.1993. The premises allotted to the appellant was a bare structure, on stilt, that is, 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 appellant 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 F.Y. 1993- 1994 to 2001- 2002]. The appellant constructed 95 shops and 30 stalls of different carpet areas on the premises under the market name “Saibaba Shopping Center”.
The appellant filed the 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 Act. The income was also assessed accordingly. However, the case of the appellant for the F.Y. 1999- 2000 was reopened by the respondent by issuing notice under Section 148 of the Act and in response to the same the appellant filed its return on 12.12.2003. Thereafter, notice under Section 143(2) of the Act dated 10.01.2005 was issued and served by the respondent. Reassessment order was framed, computed the income from the shops, and the stalls under head “Income from House Property” of the Act.
The appellant against the reassessment order, filed an appeal before the CIT (A). The CIT (A) allowed the appeal of the appellant and reversed the action of the respondent. Against the order of the CIT (A), the respondent as well as appellant filed appeals before the ITAT. It reversed the order of the CIT (A) and confirmed the action of the AO. Being aggrieved by the order of the ITAT, the appellant preferred an appeal before the Bombay High Court. The High Court, by its order, dismissed the appeal filed by the appellant. Thereafter, the appellant filed appeals before Supreme Court.
The learned Counsel of the appellant submitted that the sole intention of the appellant was to establish a retail hub wherein various small retailers could come together and carry on their business in an organized and systematic manner. Thus, sub- licensing the premises was only a part of this predominant object of the appellant. This was the sole and the only activity of the appellant. The appellant, being a partnership firm, maintained full and complete records of these business activities. Right from the year 1999 till 2004, the appellant had been offering the income from the shops and stalls sub-licensed by it under the head “Profits and Gains of Business or Profession” of the Act.
The learned Additional Solicitor General referred to the order of the AO and submitted that the appellant had argued before the AO that it was not the lessee of the market area but was only a licensee and, therefore, deeming provisions of Section 27(iiib) of the Act would not apply. This argument was rightly rejected by the AO. He also referred to the order of the ITAT which had specifically repelled the argument that this income was business income.
The learned Judges of the Honorable Supreme Court observed that it is not in dispute that having regard to the terms and conditions on which the leasehold rights were taken by the appellant in auction, constructed the market area thereupon and gave the same to various persons on sub-licensing basis. 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 we are concerned in the instant case as well, namely, 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. The learned Judges held appellant to be the “deemed owner” of the property in question by virtue of Section 27(iiib) of the Act.
What is 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. It may be mentioned, in the first instance, that merely because there is 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.
Matter has to be examined on the facts of each case as held in Sultan Bros. (P) Ltd. vs. CIT [(1964) 5 SCR 807]. Even otherwise, the object clause which is contained in the partnership firm is to take the premises on rent and to sub-let. 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 appellant was to be treated as income from the business. The learned Judges further observed that apart from relying captioned clause in the partnership deed to show its objective, the learned counsel for the appellant has not produced or referred to any material. On the other hand, we find that ITAT had specifically adverted to this issue and recorded the findings on this aspect in the following manner:
“26. …On this issue facts available on record are that the assessee let out shops/stalls to various occupants on a monthly rent. The assessee collected charges for minor repairs, maintenance, water and electricity. As per the terms of allotment by the BMC, the assessee was bound to incur all these expenses. The assessee, in turn, collected extra money from the allottees. The assessee collected 20% of monthly rent as service charges. Such service charges were also used for providing services like watch and ward, electricity, water etc. This in our opinion was inseparable from basic charges of rent. The assessee has made bifurcation of the receipt from the, occupiers of the shops/ stalls as rent and service charges. As rightly held by the Assessing Officer, decision of Honorable Supreme Court in the case of Shambu Investment Pvt. Ltd., 263 ITR 143 will apply. The assessee has not established that he was engaged in any systematic or organized activity of providing service to the occupiers of the shops/ stalls so as to constitute the receipts from them as business income. In our opinion, the assessee received income by letting out shops/ stalls; and therefore, the same has to be held as income from house property.”
The ITAT being the last forum insofar as factual determination is concerned, these findings have attained finality. In any case the learned counsel for the appellant 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 appellant 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 of the appellant. No such effort was made.
The reliance placed by the appellant on the judgments of Supreme Court, earlier, in Chennai Properties & Investments Ltd. Vs. CIT [(2015) 14 SCC 793]and Rayala Corporation (P) Ltd. Vs. ACIT [(2016) 15 SCC 201] was found to be inapplicable in the case.
Finally, the appeals were dismissed by Honorable Supreme Court.