Case: S.G. Mercantile Corporation P. Ltd Vs. Commissioner of Income Tax, Calcutta

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 lessee and not the owner of the property in question. The assessee in the cited case of Karanpura Development Co. Ltd. too was lessee of the coal fields. So far as such assesses 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.14. The appellant company, as stated earlier, was incorporated on January 25, 1955. The object for which the company was formed, inter alia, was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of, land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the appellant company took on lease the property in question and undertook to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site. The appellant was also given the right to sublet the different portions. The appellants activity during the period of three years in question consisted of developing the demised property and letting out portions of the same as shops, stalls and ground spaces. All these facts point to the conclusion that the taking of the property on lease and subletting portions of the same was part of the business and trading activity of the appellant. The conclusion of the Tribunal that the activities of the appellant in taking lease and subletting the demised premises were undertaken with the object of doing business was warranted on the facts of the case. Likewise, the conclusion of the Tribunal that the appellant company in letting out the leasehold property was not acting as owner but as trader borne out by the material on record.15. Reference on behalf of the respondent has been made by Mr. Manchanda of the decisions of the House of Lords in Fry v. Salisbury House Estate Ltd. 1930 AC 432. In that case the assessee company which had been formed to acquire, manage and deal with a block of buildings, let out the rooms as unfurnished offices to tenants. The company provided a staff to operate the lifts and to act as porters and watch and protect the building. The company also provided certain services - such as heating and cleaning - for the tenants if required, at an additional charge. For four years the company was assessed under Schedule A to income-tax on the gross value of the building as appearing in the valuation list. The company admitted its liability to be assessed in respect of profits from the services supplied to the tenants under Sch. D, but the Crown claimed in making the assessment under Schedule D to include the rents of the offices as part of the receipts of trade, making allowance for tax assessment under Schedule A. It may be mentioned that the scheme of the English Income-tax Act is to provide for the taxation of specific properties under schedules appropriate to them and under a general Schedule D to provide for taxation of income not dealt with specifically. Schedule A provides for the taxation of income derived from property in land, B for income derived from occupation of land, C for income derived from Government securities and E for income from employment in the public service. The House of Lords held in the above cited case that the rents were profits arising from the ownership of land in respect of which the assessment under Schedule A was exhaustive and that they, therefore, could not be included in the assessment under Schedule D as trade receipts of the company. The assessee company, n the cited cases, was the owner of the Salisbury House, and the decision of the House of Lords rested on the view that Schedule a was exhaustive in respect of profits arising from ownership of land. The above decision is not of much help to the respondent because the assessee in the present case is not the owner but only a lessee of the property in question, and section 9, which is analogous to Schedule A of the English Act, applies to income from property consisting of buildings, or lands appurtenant thereto of which the assessee is the owner.16. The respondent can also have not much support from the decision of (1961) 42 ITR 49 (SC) (supra) because what was decided therein was that in the case of income from landed property by the owner company, the income would fall under the specific head described in section 9 and not under section 10 even though the company had been incorporated with the object of buying and developing landed property and promoting a market thereon. Section 9, as mentioned earlier, does not apply to the present case because the appellant is not the owner of the property in question. As such, there arises no question in this case of the exclusion of section 10 on the ground that section 9 is the specific head. In the instant case the revenue relies not upon the specific head given in section 9 but upon the residuary head given in section 12 of the Act. It is plain that the considerations which would weigh for applying section 9 on the ground of being a specific head would not hold good for invoking section 12 which can come into picture only if all the preceding heads of income, including business income as given in Section 10, are ruled out. Where, as in the present case, the income can appropriately fall under section 10 as being business income, no resort can be made to section 12 of the Act.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]7. We have heard Mr. Chagla on behalf of the appellant and Mr. Manchanda on behalf of the respondent and are of the view that the judgment of the High Court cannot be sustained Section 6 of the Act enumerates the various heads of income, profits and gains chargeable to income-tax. Those heads are (i) Salaries: (ii) Interest on securities; (iii) Income from property (iv) Profits and gains of business, professions or vocation; (v) Income from other sources; and (vi) Capital gains.There is no finding in the present case that the appellant company is the owner of the property in question or any part thereof. As such, no reference was made to section 9 of the Act in the assessment proceedings. The learned counsel for both the parties agree, and in our opinion rightly, that the question of making the assessment against the appellant, in the circumstances, under section 9 of the Act does not arise. The stand of Mr. Chagla, on behalf of the appellant, is that the assessment against the appellant in respect of the income from the property in question should be made under section 10, while according to Mr. Manchanda, learned counsel for the respondent, the assessment should be under section 12 of the Act.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 lessee and not the owner of the property in question. The assessee in the cited case of Karanpura Development Co. Ltd. too was lessee of the coal fields. So far as such assesses 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.14. The appellant company, as stated earlier, was incorporated on January 25, 1955. The object for which the company was formed, inter alia, was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of, land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation the appellant company took on lease the property in question and undertook to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site. The appellant was also given the right to sublet the different portions. The appellants activity during the period of three years in question consisted of developing the demised property and letting out portions of the same as shops, stalls and ground spaces. All these facts point to the conclusion that the taking of the property on lease and subletting portions of the same was part of the business and trading activity of the appellant. The conclusion of the Tribunal that the activities of the appellant in taking lease and subletting the demised premises were undertaken with the object of doing business was warranted on the facts of the case. Likewise, the conclusion of the Tribunal that the appellant company in letting out the leasehold property was not acting as owner but as trader borne out by the material on record.15. Reference on behalf of the respondent has been made by Mr. Manchanda of the decisions of the House of Lords inFry v. Salisbury House Estate Ltd. 1930 AC 432.In that case the assessee company which had been formed to acquire, manage and deal with a block of buildings, let out the rooms as unfurnished offices to tenants. The company provided a staff to operate the lifts and to act as porters and watch and protect the building. The company also provided certain services - such as heating and cleaning - for the tenants if required, at an additional charge. For four years the company was assessed under Schedule A to income-tax on the gross value of the building as appearing in the valuation list. The company admitted its liability to be assessed in respect of profits from the services supplied to the tenants under Sch. D, but the Crown claimed in making the assessment under Schedule D to include the rents of the offices as part of the receipts of trade, making allowance for tax assessment under Schedule A. It may be mentioned that the scheme of the English Income-tax Act is to provide for the taxation of specific properties under schedules appropriate to them and under a general Schedule D to provide for taxation of income not dealt with specifically. Schedule A provides for the taxation of income derived from property in land, B for income derived from occupation of land, C for income derived from Government securities and E for income from employment in the public service. The House of Lords held in the above cited case that the rents were profits arising from the ownership of land in respect of which the assessment under Schedule A was exhaustive and that they, therefore, could not be included in the assessment under Schedule D as trade receipts of the company. The assessee company, n the cited cases, was the owner of the Salisbury House, and the decision of the House of Lords rested on the view that Schedule a was exhaustive in respect of profits arising from ownership of land. The above decision is not of much help to the respondent because the assessee in the present case is not the owner but only a lessee of the property in question, and section 9, which is analogous to Schedule A of the English Act, applies to income from property consisting of buildings, or lands appurtenant thereto of which the assessee is the owner.16. The respondent can also have not much support from the decision of (1961) 42 ITR 49 (SC) (supra) because what was decided therein was that in the case of income from landed property by the owner company, the income would fall under the specific head described in section 9 and not under section 10 even though the company had been incorporated with the object of buying and developing landed property and promoting a market thereon. Section 9, as mentioned earlier, does not apply to the present case because the appellant is not the owner of the property in question. As such, there arises no question in this case of the exclusion of section 10 on the ground that section 9 is the specific head. In the instant case the revenue relies not upon the specific head given in section 9 but upon the residuary head given in section 12 of the Act. It is plain that the considerations which would weigh for applying section 9 on the ground of being a specific head would not hold good for invoking section 12 which can come into picture only if all the preceding heads of income, including business income as given in Section 10, are ruled out. Where, as in the present case, the income can appropriately fall under section 10 as being business income, no resort can be made to section 12 of the Act.