Harikrishna Family Trust - Applicant(S v. Commissioner Of Income-Tax - Respondent(S

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 20 of 1997 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTAHONOURABLE MR.JUSTICE Z.K.SAIYED ============================================================================Whether Reporters of Local Papers may be allowed to Whether Reporters of Local Papers may be allowed to 1see the judgment ?see the judgment ? 2To be referred to the Reporter or not ? Whether their Lordships wish to see the fair copy of 3the judgment ?the judgment ? Whether this case involves a substantial question of 4law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?India, 1950 or any order made thereunder ? 5Whether it is to be circulated to the civil judge ? ===================================================== HARIKRISHNA FAMILY TRUST - Applicant(s) Versus COMMISSIONER OF INCOME-TAX - Respondent(s) ===================================================== Appearance :MR MANISH J SHAH for Applicant(s) : 1,MR BB NAIK for Respondent(s) : 1, ===================================================== CORAM :HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE Z.K.SAIYED Date : 25/02/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) ITR/20/1997 1.The Income Tax Appellate Tribunal, Ahmedabad Bench-C, has referred the following three questions at the instance of the Assessee – applicant under sec. 256(2) of the Income Tax Act, 1961 (the Act). 1. Whether, on the facts and circumstances of the case, the Tribunal was justified of the case, the Tribunal was justified in holding that the rental income earned by the assessee trust was “Income from Business” and not “Income from House Property” or “Income from other sources”?from House Property” or “Income from other sources”? 2. Whether, on the facts and circumstances of the case, the rental income from the hire of the building is taxable as “income from other sources” or “Income from House Property” or “Income from Business”?from House Property” or “Income from Business”? 3. Whether, the Tribunal was right in law in holding that the assessee was doing business on the facts of the case?in holding that the assessee was doing business on the facts of the case? 2.The relevant assessment years are 1986-87, 1987-88 and 1989-90. The assessee, a Trust, came into existence vide Trust Deed dated 13.12.1982. On 18.1.1983, a lease-deed was executed between the owners of one partly constructed property at Ward No. 15, Navagam, Revenue Survey No. ½ paiki Survey Nos. 485 and 486, TPS No. 4, Final Plot No. 144-B and 144- C, and trustees of the Trust. Accordingly, the trust took on lease the said property at a monthly lease rent of Rs. 4000/-. It is an accepted position that the beneficiaries are dependent relatives of the co-owners of the property, one Shri Amrutlal Hargovandas Relia in his individual capacity and the respective Hindu Undivided Families of three sons of Amrutlal H. Relia, namely; Arvindkumar A. Relia, Ashokkumar A. Relia and Anilkumar A. Relia. existence vide Trust Deed dated 13.12.1982. On 18.1.1983, a lease-deed was executed between the owners of one partly constructed property at Ward No. 15, Navagam, Revenue Survey No. ½ paiki Survey Nos. 485 and 486, TPS No. 4, Final Plot No. 144-B and 144- C, and trustees of the Trust. Accordingly, the trust took on lease the said property at a monthly lease rent of Rs. 4000/-. It is an accepted position that the beneficiaries are dependent relatives of the co-owners of the property, one Shri Amrutlal Hargovandas Relia in his individual capacity and the respective Hindu Undivided Families of three sons of Amrutlal H. Relia, namely; Arvindkumar A. Relia, Ashokkumar A. Relia and Anilkumar A. Relia. 3.The Trust, after completing construction work of the balance portion of the building, rented out the whole premises to Posts & Telephones Department. The rental income was shown as income from property and originally assessed as such. Subsequently, by virtue of action under sec. 263 of the Act, the Commissioner of Income Tax set aside the assessment for the assessment years 1986-87 and 1987-88 directing the Assessing Officer to enquire into the exact nature of character of the lease agreement, the source and nature of funds utilised by the assessee trust for further construction of the property before letting out the property to the Telephone Department, etc. The order of CIT was confirmed by the Tribunal vide order dated 18.2.1993. In relation to assessment year 1989-90, the assessment has been framed on the basis of fresh assessments framed by the Assessing Officer after the order of CIT under sec. 263 of the Act. 4.During de-novo assessment pursuant to order under sec. 263 of the Act, the Assessing Officer, after making detailed inquiry, held that the assessee Trust was not the owner of the property and hence the income could not be assessed as “Income from House Property” under sec. 22 of the Act. It was further held that the owner had carried out day to day supervision of the construction work of rest of the portion to ensure maximum economy; the Trust was created for specific purpose of leasing out the property with the intention to sub-let in order to earn profit; the entire arrangement appeared to be contrived one to divert the income from the hands of the co-owners to the dependents through the medium of the Trust; and hence, income derived by the assessee Trust in the form of rental income was taxable under the head “Income from Profits and Gains of Business or Profession”. In support of the proposition, reliance was placed on the Apex Court's decision in the case of S.G. Mercantile Corporation P. Ltd. vs.-Commissioner of IncomeTax, Calcutta, reported in(1972)83 ITR, 700. 5.The assessee carried the matter before the Commissioner (Appeals), who agreed with the findings of the Assessing Officer that the income could not be treated as “Income from House Property”. However, the Commissioner (Appeals) came to the conclusion that the rental income received by the Trust could not be taxed as business income, but was taxable under the head “Income from Other Sources”. The revenue carried the matter in appeals before the Tribunal challenging the findings of Commissioner (Appeals), while the assessee filed cross objections against the finding of the Commissioner (Appeals) that the income was not taxable under the head “Income from House Property”. 6.The Tribunal has, while dismissing the cross-objections filed by the assessee reversed the finding of Commissioner (Appeals) to the extent that Commissioner (Appeals) had held that the rental income was not income from business. The Tribunal has come to the conclusion that income is liable to be taxed as income from business by placing reliance on the Apex Court's decision in the case of S.G.Mercantile Corporation P. Ltd. (supra) after holding that the facts of the case before the Apex Court and the facts of the present case were similar. assessee filed cross objections against the finding of the Commissioner (Appeals) that the income was not taxable under the head “Income from House Property”. 6.The Tribunal has, while dismissing the cross-objections filed by the assessee reversed the finding of Commissioner (Appeals) to the extent that Commissioner (Appeals) had held that the rental income was not income from business. The Tribunal has come to the conclusion that income is liable to be taxed as income from business by placing reliance on the Apex Court's decision in the case of S.G.Mercantile Corporation P. Ltd. (supra) after holding that the facts of the case before the Apex Court and the facts of the present case were similar. 7.Mr JP Shah learned advocate appearing on behalf of the assessee Trust has assailed the impugned order of Tribunal dated 8.9.1995 by contending that the Tribunal has failed to appreciate that instead of the owners of the property themselves hiring out the property, the letting out was done through the medium of the Trust which was created for the benefit of persons who are dependent relatives of the co-owners of the property. That in fact, except for letting out the premises to one tenant, namely Telephone department, no other activity was carried out by the assessee Trust. That the facts on record revealed that the assessee trust had at no point of time purchased any other property, either constructed, or partly constructed, or without construction to ITR/20/1997 develop and let out the property. In fact, the submission was, that at no point of time was there any organized activity so as to hold that a business was being carried on by the assessee trust. Mr. Shah urged that, even if the income from property could not be taxed under the head “Income from House Property” there was no ground for treating the rental income as “Income from Business”, and at the most, the income could be taxed under the head “Income from Other Sources”. 8.Mr. BB Naik learned Standing Counsel appearing for respondent – Revenue, apart from supporting the impugned order of Tribunal, placed reliance on the decision of the Apex Court in the case of S.G.Mercantile Corporation P. Ltd. (supra)as well as the decision of this High Court in the case of Commissioner of Income Tax vs. Amora Chemicals Pvt.Ltd., reported in (2002)258 ITR 519.Mr Naik fairly accepted the fact that the Trust had not carried out any other activity after letting out the property to the Telephone department. He, therefore, urged that the impugned order of Tribunal did not merit any intervention. 9.The basic facts which are not disputed, are that the assessee trust is merely a lessee of the property and has sub-let the property after completing the partly constructed building which the assessee Trust had taken on lease. In the circumstances, in absence of the assessee-Trust being the owner of the property, there can be no question of taxing the rental income from the said property in the hands of the assessee- Trust under the head “Income from House Property”. To the aforesaid extent, the findings recorded by the Assessing Officer, Commissioner (Appeals) and the Tribunal, deserve to be accepted. 9.The basic facts which are not disputed, are that the assessee trust is merely a lessee of the property and has sub-let the property after completing the partly constructed building which the assessee Trust had taken on lease. In the circumstances, in absence of the assessee-Trust being the owner of the property, there can be no question of taxing the rental income from the said property in the hands of the assessee- Trust under the head “Income from House Property”. To the aforesaid extent, the findings recorded by the Assessing Officer, Commissioner (Appeals) and the Tribunal, deserve to be accepted. 10.The question that survives for consideration thereafter is, whether the rental income is liable to be taxed as “Income from Other Sources” as held by the Commissioner (Appeals), or as income from business as held by the Tribunal. The Tribunal has placed undue emphasis on the fact that; (i) the lease agreement was executed on 18.1.1983 with effect from 1.1.1993, i.e. two weeks after the execution of the Trust Deed, namely, 13.12.1982; and (ii) the assessee – Trust spent Rs. 3 lacs on finishing partly constructed building between January – April, 1983 to sub-let the property with effect from April, 1983. These factors, though material and relevant, are required to be weighed and appreciated in context of the following facts which emerge from the record: 1).The lease-deed in question specifies no period of lease but stipulates the condition that the lessee – assessee is liable to vacate the leased property immediately on the notice of the co-owners.period of lease but stipulates the condition that the lessee – assessee is liable to vacate the leased property immediately on the notice of the co-owners. 2).Assessee Trust does not have any other source of income except rental income from the property taken on lease.source of income except rental income from the property taken on lease. ITR/20/1997 3).Apart from letting out the property in question, the assessee had not done any other such activity of letting out the property or development of property.other such activity of letting out the property or development of property. 4).After letting out the property to a single tenant, the assessee is not carrying on any other activities like providing ancillary services except to the extent of services a landlord is required to provide to a tenant.tenant, the assessee is not carrying on any other activities like providing ancillary services except to the extent of services a landlord is required to provide to a tenant. 5).The Telephone Department is to be treated, as per the terms of the agreement to be a sub-tenant of the co-owners of the property.as per the terms of the agreement to be a sub-tenant of the co-owners of the property. 11.Hence, in light of the aforesaid findings of facts, as recorded by the Commissioner (Appeals), when the findings of the Tribunal are appreciated, it becomes apparent that the Tribunal has committed an error in law in applying the legal principles to the facts found. The finding of facts recorded by the Commissioner (Appeals) have not been held to be factually incorrect by the Tribunal and no reasons are advanced as to why and how the said findings are dislodged except to the extent of the aforesaid two findings recorded by the Tribunal. 12.In the circumstances, when the settled principles of law in relation to the controversy are applied to the facts of the case, it becomes apparent that the assessee trust at no point of time indulged in any systematic activity so as to treat the assessee as having indulged in business or a venture 12.In the circumstances, when the settled principles of law in relation to the controversy are applied to the facts of the case, it becomes apparent that the assessee trust at no point of time indulged in any systematic activity so as to treat the assessee as having indulged in business or a venture in the nature of business. The decision relied upon on by the revenue, namely S.G. Mercantile P. Ltd. (supra) cannot be made applicable to the facts of the case considering that in the said case the lease was for a period of 50 years, the property in question was a market which was let out to various persons who occupied the shops therein, and land in the form of stalls as well as open parcels of lands to vendors by the assessee therein. In other words, there were more than one tenant indicating a systematic and organised activity of sub-letting the property. 13.In the circumstances, the Tribunal was not justified in holding that the assessee was doing business. In the facts of the case, the income is liable to be taxed as “Income from other Sources” and not as “Income from House Property” or “Income from Business”. 14.The three questions referred for the opinion of this Court are answered accordingly, i.e., partly in favour of the assessee and partly in favour of the revenue. The Reference stands disposed of accordingly with no order as to costs.