Excerpt: Whether the income falls under the head of business income or income from property has to be decided from case to case depending on the question whether transaction involved business activity or merely deriving rental income. One of the determining factors may be whether the transaction is normal part of business of the assessee. If business of the assessee has nothing to do with the renting of property and renting is an isolated transaction to earn property income, mere fact that such income will result in reduction of business loss is not enough to hold that it will fall under the head of business income.
Sheetal Khurana Foods (P.) Ltd V. Income Tax Appellate Tribunal
Income Tax Appeal No. 679 of 2008 Assessment Year: 2003-04. 03-01-2011
Adarsh Kumar Goel, J.
1. This order shall dispose of ITA Nos. 679 and 680 of 2008 as both the appeals have been filed by the same assessee raising common questions. Income tax Appeal No. 679 of 2008 has been preferred by the assessee under section 260A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) against order dated 11-1-2008 passed by the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar in ITA No. 468 (Asr.)/2006, for the assessment year 2003-04, claiming following substantial questions of law:-
(a) Whether impugned order dated 11-1-2008 is sustainable in eyes of law?
(b) Whether the department can be permitted to take a different and contrary view in respect of nature of income of the appellant-company in the given facts and circumstances of this case?
(c) When any property is taken on lease for running a hotel and restaurant, and some portion of it is further let out for avoiding losses and expenditure, whether it can be said that this activity was not a business activity and income derived from sub-letting is not a business income?
(d) Whether the Income-tax Appellate Tribunal was justified in reversing the well-reasoned order of Commissioner of Income-tax (Appeals)?
(e) Any other substantial question of substantial law with the leave of the Hon”ble Court?
2. The assessee received income from letting out of a building but sought to treat the same as business income. However, the Assessing Officer treated the same as rental income relying upon judgment of Hon”ble Supreme Court in Shambhu Investment (P.) Ltd. v. CIT :  263 ITR 143 : 129 Taxman 70. The CIT(A) reversed the said view and upheld the plea of the assessee as follows:-
I have considered these submissions. The actions of the appellant certainly partake of those of a businessman trying to minimise the expenditure reduce the losses due to non-completion of the hotel/restaurant project. This is a finding of fact and is borne out by the above discussion. It is also a material fact that in the case of jurisdictional High Court in Anand Rubber and Plastics (P.) Ltd. : (178 ITR 301), the lease period was even longer at even 19 years and yet the Hon”ble Punjab and Haryana High Court held the letting out income as business income.
The other distinguishing features, discussed earlier, also detract from applying the Supreme Court ruling in the case of Shambhu Inv. (P.) Ltd. in : (2003) 184 CTR 91 (SC).
The appellant has also pointed out that the cases relied upon by the Assessing Officer do not have similar facts and are distinguishable.
I have already discussed earlier in this appellate order that the facts have to be viewed in totality. It is the motive, intention, and actual activity of the appellant in dealing with the property that is relevant. There is also no choice but to acknowledge the fact that the Assessing Officer has made a major error in not noticing the fact that as per page 3 of the Assessing Officer”s assessment order, the objectives of the company clearly include running a Hotel/Restaurant and serving food, drinks etc.
The appellant”s action in applying for a Pub licence, as evidenced from a copy of its application to the Excise and Taxation Department, in the year 2001, cannot also be brushed aside as it throws a clear light on its motives in running a Hotel/Restaurant and serving drinks.
It is also a matter of fact that the appellant”s in further leasing out only the upper floor (i.e., not the whole property) for a short limited period, and further agreeing to the restrictive lease conditions of removing its entire building (superstructure) on the expiry of the lease period, are the actions of a businessman in exploiting its property (asset), cutting its losses (expenses) and the tax treatment for the relevant year (assessment year 2003-04) in its books of account, support its stand and not of the Assessing Officer. The appellant company”s application to the Excise and Taxation Department for a bar licence is a very relevant fact that has been not discussed by the Assessing Officer in the assessment order but directly supports the stand of the appellant.
The jurisdictional Punjab and Haryana High Court rulings also support its stand, as discussed earlier. The appellant”s reliance on the case of CIT v. Bosotto Bros. Ltd. :  8 ITR 41, of the Madras High Court also supports its stand, as also in the case of CIT v. Shree S. Shakti Mills (P.) Ltd. :  239 ITR 120, 131 of the Calcutta High Court wherein rental income from the superstructure on lease-hold was held to be business income.
Viewed in totality, all the facts support the stand of the appellant. No house owner would leave a plot of land and then construct a building and agree to remove it the conclusion of the relatively short lease period of 9 years. These activities partake instead of a business exploitation of an asset. It is also not necessary for the appellant to have a number of activities or sources of income, as per the Assessing Officer, to prove that it is commercially exploiting one of the assets. There need be only one single asset for it to be exploited commercially and for the income to be assessed as income from business.
In view of the above detailed discussion, the Assessing Officer”s action in assessing the income as income from house property cannot be upheld. Hence, ground of appeal No. 2 is allowed and Assessing Officer is directed to treat the income as business income.
3. The Tribunal set aside the above finding and restored the view taken by the Assessing Officer. The finding recorded by the Tribunal is as under:-
10. We have heard the parties and have perused the material on record. The question here is as to whether the income earned by the assessee has been rightly directed by the learned CIT(A) to be assessed as business income of the assessee and not its income from the house property. The undisputed facts are that the assessee is a Private Limited Company, incorporated in 1999, with Dr. Bipindeep Singh Khurana, as one of its directors. The main objects of the company are as follows:-
1. To manufacture, process, import export, buy, sell and otherwise deal in milk, butter cream, ghee, cheese, condensed milk, malted milk, milk powder, skimmed milk, powder milk, ice cream, milk foods, baby foods, confectionary items, sea foods, agriculture products of all kinds including Soya milk protein foods spray dried milk, protein foods and other preparations of Soya, cereals and lentils including flour and dal, Soya snack foods, nutrias, Soya sweets, Soya weaning food flavoured with fruits and vegetables and Soya beverages and other products and preparations of every kind, nature and descriptions.
2. To sell, import, export, improve, prepare manufacture and market and generally to carry on the manufacturing and trading in jams, jelleys, pickles, cider, spices, chutney, marmalades, vinegars, ketchups, juices, squashes, syrups, powders (edible) drinks, beverages, gelatives, essences, ice cream, milk preparation, meat, sausages, porkpies, prawn, potted meats, table delicacies and other eatables.
3. To carry on the business as manufactures, sellers, purchases, importers, exporters, stockiest, distributors, traders, dealers, wholesalers, and retailers in all kinds of food snacks fruit, juices, breads, biscuits, syrups, cordial, jam, jellies.
4. To carry on the business of hotels, restaurant and canteens and to serve food, fast food, drinks, soft drinks of all types and to operate recreation centre of all types.
11. On 1-4-2000, the assessee-company entered into a lease deed-cum -agreement with Dr. Bipindeep Singh Khurana, Director, for taking on lease land measuring about 438 sq. yards, located at Pakhowal Road, Ludhiana. The property were taken on lease for initial period of five years. The terms and conditions of the lease agreement included that the assessee was permitted to raise construction on the plot, with the condition that the assessee would remove the said structure at its own costs and would not be entitled to any compensation on this account. On 21-9-2001, the assessee-company entered into a lease deed with CFCFIL, giving the building constructed on the aforesaid plot to CFCFIL, for an initial period of three years, as per the following terms and conditions:-
(i) The lease agreement is for initial period of three years commencing from 21-12-2001 and shall be extended for another term of three years on 20 percent enhancement in the existing rent. As per agreement, the lease shall stand terminated on expiry of nine years and the assessee-company will be given back the vacant premises and terrace thereon.
(ii) Premises will be for commercial use only and if any charges/duties/taxes/penalties etc., imposed by any authority will be born by the tenant in this case i.e., Association India Financial Services Pvt. Ltd. (presently known as City Financial Consumer Finance India Ltd.). The Corporation Tax at the rate of 12 percent approximate will be borne by the tenant company.
12. On query by the Assessing Officer as why the rent received by the assessee from the aforesaid premises should not be treated as income from house property of the assessee, in accordance with “Shambhu Investments” (supra), the assessee contended that its case was entirely different from ”Shambhu Investments” (supra), on facts. The assessee also contended that the assessee had given only the building on lease; that no security of advance covering the entire cost of construction had been received; that no relationship of landlord and tenant existed between the assessee and CFCFIL, since the assessee was holding the property not as owner, but only on lease rent basis; that no house property statutory deduction on the rent could be claimed by the assessee, the assessee was not being owner of the property; that the lease to CFCFIL, was only a temporary arrangement; and the numerous case laws, as cited by the assessee, supported its case. The Assessing Officer, however, for the reason recorded in the assessment order, as discussed hereinabove, disagreeing with the assessee, brought to tax the income as the income from the house property. The learned CIT(A) reversed the order of Assessing Officer mainly for the reason that the assessee had applied for the Pub licence, in keeping with its main objects of running hotel and restaurant and that since the said licence was not granted, the assessee let out the upper floor of the premises on lease for a limited period only, in order to reduce its expenditure and losses; that the assessee had agreed to the restrictive lease condition of removing its entire building on the expiry of the lease period, which was indicative of intention of a businessman to exploit its property/asset. In doing so the learned CIT(A) placed reliance on “Anand Rubber & Plastic (P.) Ltd.” (supra) and “Golden Engg. Works” (supra).
13. We, however, do not find ourselves persuaded to agree with the order of the learned CIT(A). Undoubtedly, as held repeatedly by valid court, including “Shambhu Investments” (supra), it is the intention of the assessee in letting out the property, which is determinative of the nature of income. This obviously, depends on the facts of each case. In the present case, first of the assessee never contended before the Assessing Officer that it had applied for the Bar (Pub) licence. There is no discussion in this regard in the assessment order. The learned CIT(A) has also taken objection to such fact. However, in the assessment order, in the narration of the contentions of the assessee too, it does not come out that the assessee ever made out any such case before the Assessing Officer. Before us, on our asking the learned counsel for the assessee could not deny that no such argument was raised before the Assessing Officer. Further, the stand of the assessee that it was not the owner of the property, has also been proved to be incorrect. Before the Assessing Officer the assessee denied such ownership. However, it was found in the agreement with CFCFIL, the assessee had stated that it was absolute owner in possession of the property in question. Further, the assessee had also claimed depreciation and expenses on account of repairs of the building. As such, the assessee was undisputedly the owner of the premises leased out, so far as regards income-tax purposes and was to taxed in respect the annual value of such building, under section 22 of the Act.
14. The assessee having given an unfurnished accommodation on lease also does not help the case of the assessee. The assessee has tried to raise this as a point of distinction with “Shambhu Investments” (supra). As discussed hereinabove, what to see is the intention of the assessee in letting out the premises. Here, though running of a hotel/restaurant was one of its main objects, such main object was never shown to have been carried out during the year under consideration.
15. The assessee also sought of distinguish “Shambhu Investments” (supra), for the reason that it had not recovered the cost of construction from the occupant and that the letting out of the premises was only a temporary arrangement. In this regard, the Assessing Officer rightly observed that this makes no difference and that even Dr. Bipindeep Singh Khurana had not recovered the entire cost of construction from the assessee and he had been showing the income from the rental receipts from the assessee as income from the house property. Regarding the argument temporary arrangement, the initial duration of the agreement was of three years, which was extended for a further period of three years, with 20 percent enhancement. This was the arrangement of the assessee with Dr. Bipindeep Singh Khurana. On the other hand the lease by the assessee to CFCFIL, was for nine years, which goes directly against the lease entered into by Dr. Bipindeep Singh Khurana with the assessee. The assessee obviously could not lease out the premises for a period longer than that for which it was itself leased out the premises.
16. Apropos the assessee”s contention it was in line of hoteling, the Assessing Officer made a specific observation as under:-
… Secondly, the assessee contended during assessment proceedings that it is in the line of hoteling but the activity of the assessee at all during the relevant period. Profit and loss account of the assessee-company for the financial year 2001-02 (rent receipts of Rs. 6,06,000) and 2002-03 (rent receipts of Rs. 8,64,000) reveal that all the receipts of the company are on account of rent only. Admittedly the first year of the company was assessment year 2002-03 and this evident from the agreement also, as discussed above. So, how come the question of the company having main business of hoteling? Moreover, the main objects to be pursued by the company on its incorporation have already been reproduced above and established that the main objects of the company does not include hotel/restaurant business. So, the contention of the assessee that it has given on rent the building as temporary arrangement is not only misleading but also untrue as the conduct of the business of the company so far.
17. From the above, it is evident that the assessee did not carry on the business of running of hotel/restaurant during the year. Though, as rightly observed by the learned CIT(A), the Assessing Officer went wrong in observing that the main object of the assessee-company did not include hotel/restaurant business, the fact remain that even though this was the one of the main objects of the assessee-company, it did not carry on any such business.
4. We have heard learned counsel for the parties.
5. Learned counsel for the assessee submitted that the intention of the assessee in letting out the property was to minimise its business loss and thus transaction of letting out could be treated as part of business activity of the assessee as held by the CIT(A). Letting out was for a temporary period, pending obtaining of Pub licence by the assessee. It was, therefore, different from a transaction of letting out of property with a view to earn income from the property. In these circumstances, the view taken in Shambhu Investments (P.) Ltd.”s case (supra) should not have been followed by the Assessing Officer and the Tribunal.
6. Learned counsel for the revenue supported the view taken by the Assessing Officer and the Tribunal.
7. We are unable to find any merit in the appeal. Under the scheme of the Act, heads of income are mutually exclusive. When a particular item of income falls specifically under one head it could not be charged under any other head. If income from a source falls under a specific head, the fact that it may indirectly be covered by another head is not enough to attract the other head. United Commercial Bank Ltd. v. CIT :  32 ITR 688 (SC), East India Housing & Land Development Trust Ltd. v. CIT :  42 ITR 49 (SC) and CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. :  273 ITR 1 : 142 Taxman 713 (SC).
8. In East India Housing & Land Development Trust Ltd.”s case (supra) the assessee was in the business of buying and developing landed property including development of markets. It derived income by letting out shops and stalls in the interregnum pending sale of the said property. Claim of the assessee that the said income was business income was rejected and the same was held to be income from property. Relying upon judgment of House of Lords in Fry v. Salisbury House Estate Ltd.  AC 432 and judgment of Calcutta High Court in Commercial Properties Ltd. v. CIT  ILR 55 (Cal.) 1057, it was held that income from letting out was income from property unless business of the assessee itself was to let out the property. Mere fact that letting out was incidental to its business will not deviate from the character of income being income from property. It will be appropriate to make a reference to the following observations in the said judgment:
The appellant contends that because it is a company formed with the object of promoting and developing markets, its income derived from the shops and stalls is liable to be taxed under section 10 of the Income-tax Act as “profits or gains of business” and that the income is not liable to be taxed as “income from property” under section 9 of the Act. The appellant is undoubtedly, under the provisions of the Calcutta Municipal Act, 1951, required to obtain a licence from the Corporation of Calcutta and to maintain sanitary and other services in conformity with the provisions of that Act and for that purpose has to maintain a staff and to incur expenditure. But, on that account, the income derived from letting out property belonging to the appellant does not become “profits or gains” from business within the meaning of sections 6 and 10 of the Income-tax Act. By section 6 of the Income-tax Act the following six different heads of income are made chargeable : (1) salaries, (2) interest on securities, (3) income from property, (4) profits and gains of business, profession or vocation, (5) income from other sources and (6) capital gains. This classification under distinct heads of income, profits and gains is made having regard to the sources from which income is derived. Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in section 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purposes of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in section 6, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head.
The income derived by the company from shops and stalls is income received from property and falls under the specific head described in section 9. The character of that income is not altered because it is received by a company formed with the object of developing and setting up markets. In United Commercial Bank Ltd. v. CIT :  32 ITR 688 (SC) this Court explained after an exhaustive review of the authorities that under the scheme of the Income-tax Act, 1922 the heads of income, profits and gains enumerated in the different clauses of section 6 are mutually exclusive, each specific head covering items of income arising from a particular source.
9. In Shambhu Investments (P.) Ltd.”s case (supra), Calcutta High Court held as under:-
Taking a sum total of the aforesaid decisions it clearly appears that merely because income is attached to any immovable property cannot be the sole factor for assessment of such income as income from property, what has to be seen is what was the primary object of the assessee while exploiting the property. If it is found applying such test that the main intention is for letting out the property or any portion thereof the same must be considered as rental income or income from property. In case, it is found that the main intention is to exploit the immovable property by way of complex commercial activities in that event it must be held as business income.
Against the above judgment, the appeal was dismissed by Hon”ble Supreme Court without a speaking order being Shambhu Investment (P.) Ltd.”s case (supra).
10. In CIT v. Anand Rubber & Plastics (P.) Ltd. :  178 ITR 301 : 44 Taxman 482 (Punj. & Har.) relied upon by the assessee the rental income of the assessee was held by the Tribunal to be business income on the ground that earlier the premises were being used for running factory but due to heavy losses part thereof was let out temporarily as a commercial asset. This Court, “on the peculiar facts”, held that no question of law arose.
11. In the present case, the view taken by the Assessing Officer which has been upheld by the Tribunal is based on the following reasons:-
(i) The main object of the company is to manufacture and market the food articles and not renting of property. It took property on lease and in turn let out the same for nine years which was not its business activity;
(ii) Letting out was not temporary arrangement but for 9 years. Initial duration was three years which was extended for further three years with 20 percent enhancement. Intention clearly was to earn rent and not to derive business income.
12. Whether the income falls under the head of business income or income from property has to be decided from case to case depending on the question whether transaction involved business activity or merely deriving rental income. One of the determining factors may be whether the transaction is normal part of business of the assessee. If business of the assessee has nothing to do with the renting of property and renting is an isolated transaction to earn property income, mere fact that such income will result in reduction of business loss is not enough to hold that it will fall under the head of business income. If this was to be the sole test, every rental income of a businessman has to be held to be business income which is not the statutory scheme as held by the Hon”ble Supreme Court particularly in East India Housing & Land Development Trust Ltd.”s case (supra).
13. In the facts and circumstances, the Tribunal was right in holding that the income derived by the assessee was from property and not business income. Question (c) has to be answered against the assessee. Questions (a), (b) and (d) are consequential. Accordingly, the appeals are dismissed.