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

2. The appellant, a private limited company, was incorporated on January 25, 1955. The objects for which the Company was established were given in the clauses of Paragraph 3 of the Memorandum of Association. A number of business activities were mentioned in those clauses. Clauses 6 and 7 of that paragraph were as underTo purchase take on lease or otherwise acquire and to hold, cultivate, improve, lease, sell, exchange, mortgage, or otherwise, dispose of land, houses, mines, minerals, mining and other real and personal property and to deal with the same commercially.7. To develop the resources of the same property by building, reclaiming clearing, draining, and otherwise improving framing and planting on any terms or system that may be considered advisable.With effect from February 5, 1955, the appellant company took on lease a market place known as Taltalla Bazar in the city of Calcutta from Shrimati Sujata Tagore and her sons on a monthly rent of Rupees 3,000 for a term of 50 years, with option to the lessee to renew the lease for the further period of 40 years. The deed of lease in this connection was executed on September 5, 1956. Clauses 4, 5 and 13 of the lease deed were asThe lessee shall have the option to erect, rebuild, remodel and reconstruct and repair the existing structures upon the demised premises from time to time during the term of these presents at its own costs in a substantial and workmanlike manner with good material of the several kinds in accordance with the plans elevations sanctions and specifications according to the choice of the Lessee (and whenever necessary to get such plans sanctioned by the Corporation of Calcutta) under the supervision of a first class Engineer to be elected by the Lessee on notice to the Lessors and shall spend upon such works such sum or sums as the Lessee may in its absolute discretion think fit and proper but the entire total sum or sums so to be expended by the lessee as aforesaid shall not be less than Rupees Five Lacs and the same shall be spent within the period of five years from date of these presents. The lessors shall be at liberty to appoint at their own costs a valuer and Surveyor to verify such expenditure if required for their satisfaction after the completion of the said work.5. If the Lessee constructs any new structures and/or buildings as mentioned in the preceding clauses the said structures and/or buildings or erections together with all alterations renovation remodelling reconstruction thereto shall belong absolutely to the Lessors on the expiration or sooner determination of the term hereby granted and/or the renewed period thereof as hereinafter mentioned.13. That the Lessee shall not assign this lease without first obtaining the permission in writing of the Lessors but such consent shall not be unreasonably withheld. The lessee shall prior to any such assignment of this demise give notice thereof to the Lessors in writing containing the name of the assignee and furnish other necessary particulars concerning such assignment. Notwithstanding anything hereinbefore contained the Lessee shall subject to the conditions and convents herein contained be entitled to sublet or underlet the demised premises or any part or portion thereof and/or grant sub-lease or sub-lease in respect of the demised premises or any portion or portions thereof for a term not exceeding or beyond the term hereby granted including the renewed and/or optional period in case of renewal subject to the terms and conditions of these presents.The appellant Companys activity during the period covered by assessment years 1956-57, 1957-58 and 1958-59 was that of developing the demised premises and letting out portions of the same as shops, stalls and ground spaces to shopkeepers, stall-holders and daily casual market vendors. The appellant claimed that its income from the leasehold property for the above mentioned three assessment years should be assessed under Section 10 of the Act as letting out of that property was its business authorised by the Memorandum of Association. The appellant had shown losses in its return for all the three years and the above claim was made on its behalf obviously for the purpose of carrying forward such losses. The income-tax Officer rejected the appellants claim and made assessments under Section 12 of the Act. The Appellate Assistant Commissioner in appeal by a consolidated order held that the appellant had been rightly assessed under Section 12 of the Act. On further appeal to the Income-tax Appellate Tribunal, the Tribunal referred to clauses 6 and 7 of paragraph 3 of the Memorandum of Association and came to the conclusion that the activities of the appellant company in talking the lease and subletting the demised premises were undertaken with the object of doing business. The Tribunal observed that normally where building but earned rent by subletting the same, such income could only be charged under section 12 as income from other sources. The difficulty, however, arose in cases where letting out of leasehold property was the business of the assessee. In such cases, according to the Tribunal, the decision could not turn upon the object for which the company was formed and upon the activities of the company during the relevant accounting years. It was held that if the activity of the appellant company amounted to carrying on the business of taking on lease and letting out the leasehold property, the company was not acting as owner but as trader. The income accruing from such a source, in the opinion of the Tribunal, must be held to be income from business assessable under section 10 of the Act. The Tribunal accordingly held that the income o the appellant company from subletting of the stalls in question was income from business taxable under section 10 of the Act.5. At the instance of the respondents, the Tribunal referred the following question to the High Courtunder the facts and in the circumstances of the case, the income from subletting the stalls of Taltolla Bazar was assessable under S. 10 or S. 12 of the Income-tax Act,The learned judges of the High Court held that the income from subletting of the stalls in question was not assessable under section 10 of the Act. In arriving at this conclusion, the learned judgesassessee had taken lease of a market or Bazar. After having reconstructed or renovated the buildings, it is letting out shops and stalls to shopkeepers and stall holders. This is a normal activity of an owner or a lessee of such a market or Bazar. It could not be said that by letting out the shops and stalls to shopkeepers and stallholders, the assessee was carrying on any activity in the nature of trade and was utilising or exploiting real estate in the best possible way or in other words was dealing with it commercially. The ratio of the Supreme Court decision in East India Housing case, (1961) 42 ITR 49 (SC) in fully applicable to the case before us and it must be held that the Tribunal was in error in its conclusion that the income of the assessee from subletting the stalls of Taltolla Bazar was assessable under section 10 of the Indian income-tax Act, 1922. In the premises the question referred to this Court in answered in the following manner, that is to say, that the income from subletting the stalls of Taltolla Bazar was not assessable under Section

Court's reasoning:
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.