M/S.keyaram Hotels P.ltd v. The Assistant Commissioner Of Income Tax, Circle Ii(I) Chennai – 600 034

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 29.01.2008 CORAM THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIANANDTHE HONOURABLE MR.JUSTICE P.R.SHIVAKUMAR T.C.NO.1425 OF 2007 M/s.Keyaram Hotels P.Ltd.,2, Harrington RoadChetpet, Chennai – 600 031. ... Appellant Vs. The Assistant Commissioner of Income Tax, Circle II(I)Chennai – 600 034. ... Respondent For Appellant: Mr.S.Sridhar Tax Case Appeal filed under Section 260-A of the Income-tax Actagainst the order of the Income Tax Appellate Tribunal, "B" Bench,Chennai in I.T.A.No.246/MDS/2005 for the assessment year 2001-2002 dated22.12.2006.(ITA Tr No.326/ITA No.254/04-05 dated 10.12.2004 on the fileof the Commissioner of Income-Tax (Appeals)-XI, Chennai 600 034 againstPAN/GIR AABCK8077D dated 15.3.2004 on the file of the AssistantCommissioner of Income-Tax, Company Circle II (4) (i/c) Chennai-34). JUDGMENT (Judgment of the Court was made by K.RAVIRAJA PANDIAN,J.) The appeal is filed by formulating the following questions of law: "1. Whether the Appellate Tribunal is correct inlaw in holding that the income derived by the Appellantfrom leasing of the 'commercial property' is notbusiness income and has to be assessed as income fromproperty? 2. Whether on the facts and in the circumstances ofthe case, the Tribunal, having found that thetransaction is a business activity was justified inconcluding that the income has to be assessed as "incomefrom property"?3. Whether the Tribunal is correct in law insustaining the stand of the Respondent on the assessment https://hcservices.ecourts.gov.in/hcservices/ of lease income under head 'property' even though it wasnot a case letting 'simpliciter' and on the contraryletting with amenities and services, warrantingcomputation under the head 'business' granting deductionof expenses incurred? 4. Whether the Tribunal is correct in law insustaining the stand of the Respondent on the assessmentof lease income under head 'property' even though thefacts and circumstances warrant assessment under head'other sources' alternatively upon taking intoconsideration the expenses incurred in relation thereto? 5. Whether the Tribunal is correct in law insustaining the fair market value as on 1-4-1981 atRS.3,43,485/- per ground in the computation of long termcapital gains determined by the Lower Authorities asagainst RS.4 Lakhs on the facts and in the circumstancesof the case? 2. For the assessment year 2001-2002, the appellant company hasfiled its return of income on 30.10.2001 showing an income ofRs.9,92,06,410/-. In the scrutiny assessment, the Assistant Commissionerof Income-tax, Company Circle II(4), Chennai had computed income fromhouse property at Rs.38,46,982/-, long term capital gains atRs.12,03,90,674/- and income from other sources at Rs.38,22,070/-. Thetotal income computed in the said order of assessment wasRs.12,80,59,730/-. According to the assessee company, the lease incomederived from M/s.Shoppers Stop Limited by leasing out the property ofthe assessee should be assessed under the head of "Business Income".The assessing officer computed the said lease income under the head ofincome from house property after verifying the lease deeds entered intoby the assessees with the lessees. As regards the computation of longterm capital gains, the assessing officer had re-worked the taxablecapital gains at Rs.12,03,90,674/- as against the admitted amount ofRs.9,88,63,664/- by adopting the fair market value of the land as on1.4.1981. 3. Aggrieved by that order, the assessee carried the matter onappeal to the Commissioner of Income-tax (Appeals), Chennai, who inrespect of the the first issue confirmed the order of the assessingofficer but in respect of the second issue granted partial relief. Thesecond appeal filed before the Tribunal also has not yielded any resultin favour of the appellant/assessee. Hence, the present appeal. 3. Aggrieved by that order, the assessee carried the matter onappeal to the Commissioner of Income-tax (Appeals), Chennai, who inrespect of the the first issue confirmed the order of the assessingofficer but in respect of the second issue granted partial relief. Thesecond appeal filed before the Tribunal also has not yielded any resultin favour of the appellant/assessee. Hence, the present appeal. 4. We heard the argument of the learned counsel for the appellant,who assailed the order of the Tribunal contending inter alia that asper the memorandum of association, the main object of the assessee wasto carry on business of hotel, restaurant, roadhouse, motel, cafe,tavem, beer house, refreshment, etc., as such the property has beenexploited commercially and the income earned from the exploitation of commercial property has to be regarded as business income. In respect ofthe valuation of the capital gain, the learned counsel appearing for theassessee has reiterated what was stated before the authorities to theeffect that the fair market value to be adopted as on 1.4.1981 should beRs.4 lakhs per ground. 5. From the materials on record, it is clear that the assesseecompany is the owner of the property at No.2, Harrington Road, Chetpet,Chennai. The assessee had let out the premises in an extent of 25393sq.ft., upon entering into an agreement and received the income. 6. Before the authorities under the Act as well as the Tribunal,the assessee has not placed any materials to support its case that theproperty from which income has been derived was used as businessproperty and the exploitation of the property was the nature of thebusiness of the assessee company. 7. The assessing officer has recorded a factual finding to theeffect that the rental income from M/S.Shopper's shop Limited wassupported by supplementary agreement of lease executed on 25.7.2000which was operative from 15.7.2000. The lease agreement executed on25.7.2000 clearly specified that the rent payable for the premises letout to Shoppers Stop was Rs.3,58,020/- and Rs.2,79,059 per month forground and first floors respectively. The conditions for chargeabilityof property income as provided under the provisions of Section 22 of theIncome-tax Act were all available in this case i.e., the assessee wasthe owner of the property and has not been used by him for the purposeof his business. Thus the income was chargeable as income from propertyand not as business income. 8. On appeal, the Commissioner after hearing the argument andperusal of the material on record, has recorded a finding that theincome was generated out of exploitation of the property by letting outthe same to M/s.Shoppers Stop. There was no commercial activity orbusiness activity carried out by the appellant to earn such income. Someadditional facilities extended to the tenant might be useful to thetenant to exploit the property commercially. This finding of fact hasbeen confirmed by the Tribunal. The Tribunal followed the decision ofthis Court in CIT VS. CHENNAI PROPERTIES AND INVESTMENT LIMITEDreported in 266 ITR 685. 9. The well established and recognised principle of law is that noprecise test can be laid down to ascertain whether income (referred toby what ever nomenclature, lease amount, rent or licence fee) receivedby an assessee from leasing or letting out the assets would fall underthe head of "Profits and gains of business or profession". It is a mixedquestion of law and fact and has to be determined from the point of viewof a businessman in that business on the facts and in the circumstancesof each case including true interpretation of the agreement under which the assets are let out. (See UNIVERSAL PLAST LIMITED VS. CIT 237 ITR 454(SC). 9. The well established and recognised principle of law is that noprecise test can be laid down to ascertain whether income (referred toby what ever nomenclature, lease amount, rent or licence fee) receivedby an assessee from leasing or letting out the assets would fall underthe head of "Profits and gains of business or profession". It is a mixedquestion of law and fact and has to be determined from the point of viewof a businessman in that business on the facts and in the circumstancesof each case including true interpretation of the agreement under which the assets are let out. (See UNIVERSAL PLAST LIMITED VS. CIT 237 ITR 454(SC). 10. In this case, the assessee earned income out of exploitation ofthe property by letting it out to M/s.Shoppers Stop. There is neithercommercial activity nor business activity carried out by the assesseeto earn such income. The object clause contained in the memorandum ofAssociation of the assessee company would not alter the nature ofactivity of the assessee company. The income earned cannot be under thehead of "business income". The agreement did not even suggest that theletting out of the property by the assessee is in the nature of businessactivity. 11. A constitution Bench of the Supreme Court in the case ofSULTAN BROTHERS PRIVATE LIMITED VS. C.I.T. (1964) 51 ITR 353 whileapproving the decision rendered by three Judges Bench in the case ofEAST INDIA HOUSING AND LAND DEVELOOPMENT TRUST LIMITED VS. C.I.T. (1961)42 ITR 49 (SC) has held that though the object of the assessee companyno doubt was to acquire land and building and turn the same intoaccount by construction, reconstruction and leasing and selling thesame assuming to be a business activity would not by itself turn thelease into business deal. After taking note of the aforesaid judgmentof the Supreme Court, the Division Bench of this Court reported inChennai Properties case 266 ITR 685 in which one of us (K.RavirajaPandian,J.) was a party, has also held to the same effect. 12. On the facts of the case, it is clear that the assessee companywas only exploiting the property as owner by leasing out the same andrealised income by way of rent. Such rental income is liable to beassessed as income from house property. 13. In respect of the capital gain, the assessee has entered intoan agreement with the builder M/s.Heeral Constructions Private Limitedand as per the developer's agreement dated 6.1.2000, 39 percent of landarea has been transferred for construction of 78295 sq.ft., of built uparea. Out of 78295 sq.ft., of built up area, the assessee has sold 52902sq.ft., along with undivided shares to M/s.SSI Technologies Limited andthe balance 25393 sq.ft. has been retained by the assessee. Theassessing officer after taking note of the sale consideration, purchasecost, cost of investments, development cost and selling expenses, hasdetermined the long term capital gain. Before the first appellateauthority, the assessee filed documents in document No.1966/1982. Thefirst appellate authority took the pain of visiting the properties inorder to consider the aspect of location and its potentiality. TheCommissioner (Appeals) after considering that the property taken up forcomparison by the assessing officer had certain disadvantages, foundthat the property under consideration was almost at the cross road ofChetpet over bridge and was in the prime commercial locality. Thecommercial potentiality of the property has also been taken note of by the Commissioner (Appeals) and having given due regard to all thefactors, the fair market value of the property of the appellant wasfixed at Rs.3,40,000/- per ground. Thus, the value of the property hasbeen determined on the basis of the evidence adduced i.e., the documentsproduced by the assessee pertaining to the year 1982 and this amount hasbeen fixed after taking stock of the factual situation of the localityby a personal visit. Hence, we are of the considered view that the fairmarket price fixed by the Commissioner, which has been affirmed by theappellate authority requires no re-consideration in this appeal, whichis factual in nature. 14. For the above said reasons, we find no question of law, muchless a substantial question of law so as to entertain this appeal. Theappeal is dismissed. Sd/Asst.Registrar /true copy/ Sub Asst.Registrar usk Copy to: 1. The Assistant Registrar,The Income-tax Appellate Tribunal,Rajaji Bhavan, III Floor,Besant Nagar, Chennai. 2. The Commissioner of Income-tax (Appeals) XI, Chennai 3. The Asst.Commissioner of Income-tax Company Circle II(4) i/c Chennai. 4.The Assistant Commissioner of Income Tax,Circle II (1), Chennai-600 034. JRG (CO)km/11.2. T.C.(A) NO.1425of 2007