Facts

The assessee was a partnership firm. It was constituted under the deed of Partnership and main object was that it shall take premises on rent and sub-let them or any of business mutually agreed by the parties from time to time. The Maharashtra Housing and Developing Authority (“MHADA”) had constructed buildings known as Shyam Sunder Cooperative Society, Ram Darshan Cooperative Society and Sindhu Cooperative Society at Jariwala Compound Market, Opposite Navjivan Post Office, Lamington Road, Mumbai-400088. However, there was a reservation for Municipal retail market on the plot on  which MHADA  had  put  up the construction. Therefore, MHADA handed over the ground floor [stilt portion] of the above said buildings and admeasuringaround 17,925 sq. ft. (“market portion”) to Market Department of Municipal Corporation Greater Bombay (“MCGB”). This land was acquired by the MCGB from the MHADA by recovering the necessary cost.

In 1993, the Market Department of the MCGB auctioned the market portion on        a monthly license [stallage charges] basis to run municipal market. Assessee firm participated in the auction to acquire the right to  conduct the  market  on  the market portion. Assessee 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 Assessee 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 Assessee firm was a  bare structure,  on stilt, that is, pillar/column, sans  even  four  walls. In  terms of  the  auction, it was the Firm who had to make the entire premises fit to be used amarket, including construction of walls, construction of entire common amenities like toilet blocks, etc. Accordingly, after taking possession of the premises, the Firm 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]. Assessee constructed 95 shops  and 30 stalls of different carpet areas on the premises under the market name “Saibaba Shopping Centre”. The firm 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 fromMCGB and

 

 

other Government and semi-Government bodies for carrying on trading activities on the said premises. Assessee firm was responsible for day-to-day maintenance, cleanliness and upkeep of the market premises. It also had to incur/pay water charges, electricity charges,taxes and repair charges.

Essentially, Assessee collected the following types of receipt from the sub- licensees:

1. Compensation from sub-licensees [same rate of stallage charges and on the same terms and condition as given to the appellantthe MCGB].
2. Leave & License
3. Service Charges for providing various services, including security charges, utilities,

Assessee 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 Income  Tax Act, 1961 (hereinafter referred to as the ‘Act’). The income was also assessed accordingly. However, the case of the Assessee for the Financial Year 1999-2000 was reopened by the Assessing officer 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 reasons given by Assessing officer for so computing the income under the head “Income from House Property” were:

1. By virtue of Section 27(iiib) of the Act, Assessee firm was “deemed owner”  of the premises as it had acquired leasehold right in the land for  more than 12 years;
2. In agreements for sub-licensing the words “lease compensation” were used instead of “license fees” and deposits were referred as “sub-lease deposits”. Further, in some correspondence, like loan application, etc., the words, “lease” were used;

• Property tax has been levied on the Assessee

Accordingly, assessing officer held that the income received by the Firm from the market stalls was assessable as “Income from House Property” under the Act.

Being aggrieved by the reassessment order, Assessee filed an appeal before the Commissioner of Income Tax (Appeals) [‘CIT(A)’]. The CIT (A) allowed the appeal and reversed the action of the Assessing officer. Aggrieved by the order, Department as well as Assessee filed appeals before the Income Tax Appellate Tribunal (‘ITAT’). The ITAT reversed the order of the CIT (A) and confirmed the

 

 

action of the Assessing Officer. Being aggrieved by the order of the ITAT, Assessee preferred further appeal before the High Court. The High Court, by the impugned order dated 19.09.2014, dismissed the appeal filed by the Assessee.

Issue: Following issues were raised before the Supreme Court;

1. Whether the High court erred in holding that the Assessee firm was owner of the shopping centre within the meaning of Section 22 read with Section 27 of the Income Tax Act, 1961?
2. Whether the High Court was right in holding that the income earned  by the Assessee firm from the shopping centre was required to be taxed under the head “income from House Property” instead of the head “Profits and Gains from the Business orProfession”.

 

Views

The Supreme Court observed that there was no dispute that having regard to the terms and conditions on which the leasehold rights were taken by the Assessee firm in auction, constructed the market area thereupon and gave the same to various persons on sub-licensing basis, the Firm would be treated as deemed owner of these premises in terms of Section 27(iiib) of the Act. The Court took   note of the findings of High Court referring to the provisions of Section 27(iiib)      as well as Section 269UA(f) of the Act. The Court referred to High Court’s conclusion that reading of various clauses harmoniously as per the which the rights were given to the assessee firm in the said property, pointed out towards    the firm’s acquiring rights in or in respect of the building or part thereof, which rights were clearly traceable to Section 269UA(f) of the Act. This conclusion was not disputed by assessee. However the assessee’s contention was even if the it    was deemed owner of the premises in question, since the letting out the place     and earning rents therefrom was the main business activity of the firm, then the income generated from sub-licensing the market area and earned by it should be treated as income from business and not income from the house property. The submission was that the dominant test has to be applied and once it is found that dominant intention behind the activity was that of a business, the rental income would be business income. Reliance was placedon the decisions of

(i)             Chennai Properties & Investments Ltd. v. CIT [2015] 373 ITR 673 (SC)

• Rayala Corporation (P.) v. Asstt. CIT [2016] 386 ITR 500 (SC)

The observed that there may be instances where a particular income may appear   to fall in more than one head. 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. 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”, was  the question. The Court was of the view 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 as also held by the Constitution Bench ofthis Court in Sultan Bros.

(P) Ltd. v. CIT [1964] 51 ITR 353 (SC)

Basis this, the Court observed that, reading of the object clause brought out two discernible facts, which are as follows:

1. The firm has to take the premises on rent and to sub-let those premises. Thus, the business activity is of taking the premises on rent and sub- letting

To this the Court observed that by legal fiction  contained  in  Section 27(iiib) of the Act, the Assessee is treated as“deemed owner”.

1. The aforesaid clause also mentions that partnership firm may take any other business as may be mutually agreed upon by the

The Court observed that apart from relying upon the aforesaid clause in the partnership deed to show its objective, Assessee firm had not produced or referred to any material. This aspect was dealt with the ITAT who relied on the decision of Shambu Investment Pvt. Ltd. (2003) 263 ITR 143 (SC). Observation    of Tribunal was that the assessee had not established that it 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. ITAT  being   the last forum insofar as factual determination is concerned, these findings had attained finality.

Supreme Court was of the view that decisions of Chennai Properties & Investments Ltd. and Rayala Corporation (P) Ltd v. Asstt. CIT [2016] 386 ITR  500 (SC). would not be applicable to the present case. In Chennai Properties      & Investments Ltd v. CIT [2015] 373 ITR 673 (SC). the entire income of the Assessee was through letting  out of the  two properties it  owned and there  was  no other income of the assessee except the income from letting out of the said properties, which was the business of the assessee. The Court held that situation was just reverse. The judgment in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC)] were rather applicable. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It      so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls.

 

 

In those facts, the question which arose for consideration was: whether the rental income that is received was to be treated as income from the house property or    the income from the business? The Court while holding that the income shall be treated as income from the house property, rested its decision in the context of    the main objective of the company and took note of the fact that letting out of     the property was not the object of the company at all. The Court was therefore,  of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object     of developing and setting upproperties.

In Rayala Corporation (P) Ltd. fact situation was identical to the case of Chennai Properties & Investments Ltd. and for this reason, even Rayala Corporation (P) Ltd. was inapplicable to the facts of the Assessee Firm

 

Held

Dismissing the appeal of the assessee, the Supreme Court held that the object clause, as contained in the partnership deed, would not be the conclusive factor    to determine under which head the income would be taxable. Matter has to be examined on the facts of each case. Even otherwise, the object clause which is contained in the partnership firm was to take the premises on rent and to sub-let. (AY. 2000-01) (CA Nos. 6455-6460 of 2017 (Arising out of SLP (C) (Nos). 17277- 17282 of 2015 dt. 9-5-2017).

Editorial: In case of Chennai Properties & Investments [2015] 373 ITR 673 (SC), the SC held that in case of bare letting of property by construing the object clause    of the company (and not the circumstance of bare letting) as relevant factor to determine the head of taxation. In this case, the main object of the memorandum made specific reference, by name, to two different properties from which rental income was earned. There was also no dispute that the entire income of the taxpayer was from letting of properties. Due to this the SC held the rental income from property was assessable under the head PGBP. In this case the SC tried to distinguish the cases of Sultan Brothers (supra) and East India Housing (supra) without clearly bringing out the distinguishing features.

The ruling of Chennai Properties and Investments (supra) was followed in the case of Rayala Corporation Pvt. Ltd. [2016] 386 ITR 500 (SC). In this case the business of the assessee was to deal into real estate and also to earn rental income   by letting out the properties (though, it appears that this was not the main object).    It was noted by the SC that taxpayer was stopped its other business activity and letting out of the properties was the sole business of the taxpayer. The taxpayer earned only rental income during theyear. SC observed that the facts being

 

 

similar as in the case of Chennai Properties (supra), it was held that the rental   was to be taxed under the head PGBP.

Thus, SC decisions in the case of Chennai Properties and Rayala Corporation (supra) appear to support business taxation if the taxpayer in involved only in business of bare letting supported by object clause and actual conduct of the taxpayer.

Hence the ruling in the case of Raj Dadarkar (supra) has created some uncertainty on this issue and has made it difficult to reconcile with the earlier rulings of Chennai Properties and Rayala Corporation as the SC did not deal with the findings of the Tribunal nor did it deal with the nature of business activity and its requirement to constitute a ‘business’. Instead, the SC appears to have concluded that the rental income is taxable under IFHP on the basis that the taxpayer failed   to establish that the entire or substantial income of the taxpayer was from letting out of properties which was the principal activity of the taxpayer.

“Speak your mind. Even if you are a minority of one, the truth is still the truth.”

– Mahatma Gandhi