Income from house property

Income derived by builder by letting out the unsold flats is assessable as income from house property and not business income — as held by KolHC in Azimganj Estate Pvt Ltd v CIT — In favour of: The assessee.

Azimganj Estate Pvt Ltd v CIT

High Court of Calcutta

ITA No. 242 of 2003

Bhaskar Bhattacharya and Sambuddha Chakrabarti, JJ

Decided on: 13 September 2011

Counsel appeared:

J P Khaitan, S Das, Sanjukta Bose , C S Das, for the Appellant

Md. Nizamuddin, Aniket Mitra, for the Respondent

Judgment

The Court: This Appeal under section 260A of the Income-tax Act, 1961 (“Act”) is at the

instance of an assessee and is directed against an order dated 24th June, 2003 passed by the

Income-tax Appellate Tribunal, ‘A’ Bench, Kolkata in ITA No. 1291(Kol) of 2002 relating to

assessment year 1998-99 by which the Tribunal allowed the appeal preferred by the Revenue

and set aside the order of the Commissioner of Income-tax(Appeals).

Being dissatisfied, the assessee has come up with the present appeal.

The facts giving rise to filing of this appeal may be summed up thus:

The assessee company is a property developer and builder. In course of its business activities,

it constructed a building at 7, Camac Street, Kolkata – 17 in which there were some unsold

flats which were appearing as stock-in-trade under the current assets in Schedule VI of the

balance sheet furnished by the assessee and which were meant for sale. The costs of these

unsold flats as appearing in the balance sheet was Rs.26,09,456/- and the assessee had shown

the rental income of Rs.49,00,612/- under the head ‘operating income’ in the profit and loss

account. This income was received from letting out of unsold flats which were shown as

stock-in trade in the balance sheet and meant for sale. The assessee had shown the rental

income under the head “income from house property” and, thus, claimed statutory reduction

of Rs.9,80,122/- being the 1/5th on account of repair from annual letting out value of

Rs.49,00,612/-.

The Assessing Officer pointed out that in the wealth tax proceedings the assessee had taken

the plea that the unsold flats as shown in stock-in-trade were not assets for the purpose of

Wealth Tax Act and, hence, not taxable under the said Act. The Assessing Officer took note

of the fact that the Tribunal accepted the aforesaid contention in the appeal under the Wealth

Tax Act and was, therefore, of the view that since the assessee had been treating the unsold

flats as stock-in-trade of its business, the income from such business assets in the nature of

stock-in-trade should be treated as business income and not income from house property, as

claimed by the assessee. The Assessing Officer, therefore, rejected the claim of the assessee

by treating the rental income from the unsold stock-in-trade flats under the head ‘income

from house property’ and rejected the claim of the statutory deduction on account of repair to

the extent of 1/5th of the gross rental income.

Being dissatisfied, the assessee preferred an appeal before the Commissioner of Incometax(

Appeals) who, however, accepted the contention of the assessee and held that the

appropriate head for the income derived by way of letting out the unsold flats should be

income from house property and not business income.

Being dissatisfied, the Revenue preferred an appeal before the Tribunal below and by the

order impugned in this appeal, the said Tribunal has set aside the order passed by the

Commissioner of Income-tax(Appeals) and restored the one passed by the Assessing Officer.

The assessee has, thus, come up with this appeal under section 260A of the Act.

A Division Bench of this Court at the time of admission of this appeal formulated the

following substantial questions of law for determination in this appeal.

i) Whether on a true and proper interpretation of the provisions of sections 14 and 22 of the

Income Tax Act, 1961 the Tribunal was justified in law in holding that the rental income

derived by the appellant from letting out unsold flats held as stock-in-trade was assessable as

“business income” and not under the head “income from house property” and that the

appellant was not entitled to the statutory deduction for repairs and collection under section

24(1)( i) of the Act.

ii) Whether on a true and proper interpretation of sections 14 and 22 of the Income Tax Act,

1961 the rental income derived by the appellant from letting out the flats owned by it had to

be classified and computed under the specific head “income from house property”

Mr. Khaitan, learned Senior Advocate appearing on behalf of the appellant has, by placing

strong reliance upon the decision of the Supreme Court in the case of East India Housing and

Land Development Trust Ltd. vs. Commissioner of Income-Tax, West Bengal (1961) 42 ITR

49 has submitted before us that the distinct heads specified in the Act indicating the sources

are mutually exclusive and the income derived from different sources falling under specific

heads has to be computed for the purpose of taxation in the manner provided by the

appropriate section. According to Mr. Khaitan, if the income from a source falls within the

specific head set out in the Act, the fact that it may indirectly be covered by another head will

not make the income taxable under the latter head. By relying upon the aforesaid principle,

Mr. Khaitan contends that his client has a business of developing house property and the

unsold flats in question being owned by his client, income derived from such unsold flats by

way of letting out so long a buyer is not procured amounts to income from house property by

letting out and cannot be a business income. According to Mr. Khaitan, the nature of the

stock-in-trade declared by his client being house property simplicitor, the Assessing Officer

has no other alternative but to assess the income by way of letting out of such property under

the head ‘income from house property’.

According to Mr. Khaitan, the said decision of the Supreme Court in East India Housing and

Land Development Trust Ltd. has been subsequently approved by a Constitution Bench in the

case of Sultan Brothers Private Ltd. vs. Commissioner of Income-Tax, Bombay City II

reported in (1964) 51 ITR 353.

Mr. Khaitan, therefore, prays for setting aside the order passed by the Tribunal and

restoration of the order passed by the Commissioner of Income-tax (Appeals).

Mr. Nizamuddin, learned advocate appearing on behalf of the Revenue has, on the other

hand, opposed the aforesaid contention of Mr. Khaitan and has relied upon the decision of the

Supreme Court in the case of Karanpura Development Co.Ltd. vs. Commissioner of Income-

Tax, West Bengal reported in (1962) 44 ITR 362 in support of his contention that the

property, though dealt with by the assessee intending to do business was, in fact, dealt with as

owner. According to Mr. Nizamuddin, where an assessee has acquired property which he

sells with a view to acquiring other property to be dealt with in the same manner, the assessee

is, in fact, not treating them as properties to be enjoyed in the shape of rent which they yield

but as a kind of circulating capital leading to profits of business, which profit might be either

enjoyed or put back into business to acquire more properties for further profitable

exploitation. Mr. Nizamuddin further relied upon the decision of the Gujarat High Court in

the case of Commissioner of Income-Tax vs. New India Industries Ltd. reported in (1993) 201

ITR 208 which was also relied upon by the Tribunal below. Mr. Nizamuddin, therefore, prays

for dismissal of the appeal by affirming the order passed by the Tribunal below.

After hearing the learned counsel for the parties and after going through the materials on

record, we find that with regard to similar rental income in respect of unsold flats, the

Assessing Officer in the past treated those income as income from house property and those

decisions relating to earlier assessment years have attained finality. The moment in the

proceedings under the Wealth Tax Act, the assessee contended that those unsold flats were

stock-in-trade of its business and such contention was accepted by the Tribunal in the appeal

preferred under the Wealth Tax Act, the Assessing Officer decided to treat the said income as

income from business on the ground that the assessee itself having claimed those unsold flats

as part of stock-in-trade of its business, there is no reason why the income from letting out

those stock-in-trade should not be treated to be income from business.

In our opinion, we would have accepted the reasoning assigned by the Tribunal if the subject

matter of stock-in-trade was not unsold flats simplicitor, but were plants, machinery, godown,

etc. and in those circumstances it could be reasonably argued that income by exploiting those

stock-in-trade would come under the purview of income from business. Even in the decision

of the Gujarat High Court relied upon by Mr. Nizamuddin and the Tribunal below, in

paragraph (iii) at page 247 of the Report, it was pointed out that what was to be seen was

whether the asset was being exploited commercially by the letting out or whether it was being

let out for the purpose of enjoying the rent. According to the said decision, the distinction

between the two is a narrow one and has to depend upon certain facts peculiar to each case. It

was further pointed out that pure and simple, the commercial assets like machinery, plants,

tools, industrial sheds or godowns having high business potentials stand on a different footing

from assets like land and building. In our view, in the case before us, the subject matter of

exploitation being unsold flats still owned by the assessee, the Commissioner of Income

Tax(Appeals) rightly concluded that the same should be treated as income from house

property by way of letting it out.

In the case of Commissioner of Income-tax West Bengal III vs. Ajmera Industries Private Ltd.

(1976) 103 ITR 245, relied upon by the Tribunal below, a Division Bench of this Court was

considering a case where the assessee was carrying on business and in course of its trading

activities, the assessee was using and exploiting non-factory building including its godowns.

In such a fact, the Division Bench was of the view that non-factory building including the

godowns clearly constituted commercial assets of the assessee and the finding of the Tribunal

in that case was that non-factory buildings including godowns were commercial assets of the

company which amounted to exploiting major portion of the same by letting out to some

others as business income of the assessee.

In the case before us, the unsold flats being house property, pure and simple and having fallen

under the head, income from house property, as provided in section 22 of the Act, in our

opinion, Commissioner of Income-tax(Appeals) rightly held that the rental income of such

property should be assessed under section 22 of the Act.

We cannot lose sight of the fact that under the Act, the income of an assessee is one and

various sections of the Act direct the modes in which the income is to be levied. No one of

those sections can be treated as general or specific for the purpose of any one particular

source of income; they are all specific and deal with various heads in which an item of

income, profits and means of an assessee falls. These sections are mutually exclusive and

where an item of income falls specifically under one head, it has to be charged under that

head and no other.

On consideration of the entire materials on record, we, therefore, hold that the Tribunal below

committed substantial error of law in reversing the order of Commissioner of Incometax(

Appeals) and we consequently restore the order passed by the Commissioner of Incometax(

Appeals).

The appeal is, thus, allowed by answering the first question the first question in the negative

and against the Revenue and the second question in the affirmative and in favour of the

assessee.

In the facts and circumstances, there will be, however, no order as to costs.

Photostat certified copy of this order be made available to the parties upon compliance of

usual formalities.