Rc/5/1997 Of Commissioner Of Income Tax v. Koyo Seiko Ltd. Japan

THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY and THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.No. 5 of 1997 % 10.06.2014 Between: Commissioner of Income TaxAndhra Pradesh-I, Hyderabad Versus$ Smt.S.Premalatha.. ...APPELLANT ...RESPONDENT < Gist:> Head Note: ! COUNSEL FOR THE APPELLANT :- Sri S.R.Ashok ^COUNSEL FOR RESPONDENT :-Sri Y.Ratnakar ? Cases Referred: 1.162 ITR 4682.222 ITR 737 3.233 ITR 468 4.(1971) 82 ITR 570 (SC) 5.(1986) 160 ITR 253 (AP) 6.(1972) 83 ITR 700 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.No. 5 of 1997 ORDER:(per the Hon’ble Sri Justice L.Narasimha Reddy) This reference is at the instance of the Revenue. Therespondent is an assessee and she undertakes the activity ofconstruction of buildings, giving them on lease and other alliedactivities. Certain extent of land owned by the Young Men’sChristian Association at Secunderabad was taken on lease bythe respondent. In terms of the agreement between the parties,construction was made and buildings were given on lease. Theexpenditure incurred for construction as well as the incomederived from the buildings constituted the subject matter of assessment for various years under the Income Tax Act (forshort ‘the Act’). While for some years, the income derived fromthe buildings so constructed was treated as the one frombusiness, for others the Assessing Authority treated it as theone from house property. Similarly, the claim of the respondentthat the expenditure incurred for construction of the buildingmust be treated as the revenue expenditure, was not acceptedand it was treated as capital expenditure. The orders passed by the Assessing Authority wereappealed against, and ultimately, the matter landed before theIncome Tax Appellate Tribunal, Hyderabad Bench “B” (for short‘the Tribunal’) as I.T.A.Nos.602 and 606 of 1993. The Tribunalagreed with the contention of the respondent herein and allowedthe appeals. The Department filed applications under Section 256 ofthe Income Tax Act, 1961 (for short ‘the Act’) before theTribunal with a request to refer certain questions covering thesubject matter; to this Court. After hearing both the parties, theTribunal passed an order, dated 17.07.1995, referring thefollowing questions to this Court. R.A.Nos.545 to 549/Hyd/1994: 1.Whether, on the facts and circumstances of the case, theI.T.A.T. is correct in law in holding that the entireexpenditure incurred by the assessee on the constructionof the building on the leasehold land is a revenueexpenditure?I.T.A.T. is correct in law in holding that the entireexpenditure incurred by the assessee on the constructionof the building on the leasehold land is a revenueexpenditure? 2.Whether, on the facts and in the circumstances of the case, the I.T.A.T. is correct in law in holding that theprovisions of Section 32 (1A) of the Act will not apply tothe present case? R.A.Nos.550 to 554/Hyd/1994: 1.Whether, on the facts and in the circumstances of thecase, the I.T.A.T. is correct in law in holding that the rentsreceived by the assessee from the building constructedon the leasehold land is assessable under the head‘business’ and not under the head ‘property’?case, the I.T.A.T. is correct in law in holding that the rentsreceived by the assessee from the building constructedon the leasehold land is assessable under the head‘business’ and not under the head ‘property’? 2.Whether, on the facts and in the circumstances of thecase, the I.T.A.T. is correct in law in holding that theassessee has never been the owner of the superstructure(building), which was constructed by the assessee on theleasehold land?case, the I.T.A.T. is correct in law in holding that theassessee has never been the owner of the superstructure(building), which was constructed by the assessee on theleasehold land? For the sake of convenience, we refer to the questionsas “Question Nos. 1, 2,3 and 4”. 2.Whether, on the facts and in the circumstances of thecase, the I.T.A.T. is correct in law in holding that theassessee has never been the owner of the superstructure(building), which was constructed by the assessee on theleasehold land?case, the I.T.A.T. is correct in law in holding that theassessee has never been the owner of the superstructure(building), which was constructed by the assessee on theleasehold land? For the sake of convenience, we refer to the questionsas “Question Nos. 1, 2,3 and 4”. Sri S.R. Ashok, learned Senior Standing Counsel for theIncome Tax Department, submits that the respondent herselfincurred the expenditure for construction of the building andacquired the rights, akin to ownership vis-à-vis the premisesand the expenditure incurred therefor deserves to be treated as‘capital expenditure’. He contends that the view taken by theTribunal in its order of adjudication referable to Question No.1is correct and the reference to it is not necessary. As regardsQuestion No.2, learned Senior Standing Counsel submits thatthere is an inherent contradiction, inasmuch as the very basisfor claiming the benefit under Section 32 (1A) of the Act is onthe premise that what is incurred as ‘capital expenditure’ andthe same does not go with Question No.1. According to the learned Senior Counsel, the respondent is not entitled for thebenefit under Section 32 (1A) of the Act. Coming to Question No.3, learned Senior StandingCounsel submits that though the respondent may have takenthe land on lease, she constructed the building with her ownfunds and leased the constructed premises, to the exclusion ofthe lessor and in that view of the matter, she deserves to betreated as the owner of the property at least, in the limitedcontext of the relevant provisions of the Act. He submits thatthe income derived from the premises may be in the form ofrents cannot be treated as the one from business. Learned Senior Standing Counsel further submits that theownership of the premises stood vested with the respondent atleast for the period up to which the lease is subsisting. Heseeks to derive support to his contention from the judgment ofthe Karnataka High Court in D.R.PUTTANNA SONS PVT. LTD. Vs.[1]COMMISSIONER OF INCOME TAXand the judgment of thisCourt in COMMISSIONER OF INCOME TAX Vs. NANDANAMCONSTRUCTIONS[[2]]. Sri Y.Ratnakar, learned counsel for the respondent, onthe other hand, submits that the subject matter of QuestionNo.1 is squarely covered by the judgment of the Hon’bleSupreme Court in CIT Vs. MADRAS AUTO SERVICE PVT. LTD[[3]]and the expenditure incurred for construction of the buildingdeserves to be treated as the revenue expenditure and not capital expenditure. He fairly submits that if the contention ofthe respondent on Question No.1 is accepted, Question No.2virtually becomes redundant and superfluous. RegardingQuestion No.3, learned counsel submits that it is fairly settledin law that “once a lessee always a lessee” and unless a leasein respect of an immovable property between two persons istransformed into the one of ownership, in accordance with theprocedure prescribed by law, the question of a lessee beingtreated as owner, does not arise. Learned counsel furthersubmits that an attempt to treat a person as a lesseee and aowner in respect of the same item of property would lead toseveral complications and that even the authorities of theDepartment have treated the income from the buildingconstructed by the respondent as the one from business for theassessment year 1986-87. He further contends that when therespondent did not enjoy any right of ownership, the question ofrequiring her to prove that fact, does not arise. While Question Nos.1 and 2 touch one facet, QuestionNos.3 and 4 touch another. The first set is about the‘expenditure’ and the second set is about the ‘income’. While Question Nos.1 and 2 touch one facet, QuestionNos.3 and 4 touch another. The first set is about the‘expenditure’ and the second set is about the ‘income’. In the first set, it becomes necessary to examine themanner in which the expenditure incurred by the respondent forconstruction of the building must be treated. While according tothe Revenue, it must be treated as capital expenditure, therespondent wanted it to be treated as revenue expenditure. It hardly needs any mention that the capital expenditureis the one which results in an enduring benefit. In other words,the expenditure so incurred must lead to the coming intoexistence, of a property, which would last for quite a long time.It is axiomatic that the expenditure incurred in relation to anenduring property must be, by the one, who has rights ofownership vis-à-vis the property. It hardly needs any mentionthat the construction of a building needs investment of funds. What makes the difference is that if the expenditure is incurredby the owner, it needs to be treated as capital expenditure,whereas if the expenditure incurred by a person, who is notvested with the rights of ownership, it tends to become revenueexpenditure. In the instant case, the expenditure incurred by therespondent falls into the second category. The question issquarely covered by the judgment of the Hon’ble SupremeCourt in CIT Vs. MADRAS AUTO SERVICE PVT. LTD (3 supra) andfollowing the same, we answer this question against theRevenue and in favour of the respondent. Question No.2 is nothing but an offshoot of QuestionNo.1. In a way, both of them do not coexist. Unless theexpenditure incurred by the respondent for construction of thebuilding is treated as capital expenditure, the question of herclaiming the benefit under Section 32 (1A) of the Act in relationthereto, does not arise. The Act does not maintain anydistinction as to the purport of capital expenditure with reference to different provisions. Either it has to be treated ascapital expenditure for all purposes covered by the Act or not atall. Viewed from that angle, Question No.2 deserves to beanswered in favour of the Revenue and against the respondent. Question Nos.3 and 4 touch a different aspect altogether,namely, ‘income’. The respondent has admittedly derivedincome from the premises constructed by her on the land takenon lease. The whole controversy was as to whether the incomemust be treated as the one from house property or the one frombusiness. The record discloses that the Income Tax Officertreated the income in the form of rents from the buildingsconstructed by her; as the one from business, for theassessment year 1986-87. It is only in the subsequent year,that an attempt was made to treat it as the one, from houseproperty. Under both the heads, the income is taxable, exceptthat the rates and other incidents differ. I n NANDANAM CONSTRUCTIONS’scase (2 supra), aDivision Bench of this Court took the view that if an individual isto be treated as owner, it is not necessary that there must exista sale deed in his favour. Their Lordships observed that if aperson is in a position to enjoy the rights of ownership, themere fact that the registration of sale deed did not take place,does not make any difference. Support was derived from thejudgment of the Hon’ble Supreme Court in R.B.JODHA MAL KUTHIALA Vs. CIT[[4]] and the judgment of this Court in CIT Vs.NIZAM’S MISCALLENEOUS TRUST (TRUSTEES OF HEH THE)[[5]]. Their Lordships have also referred to the amendment caused toSection 27 of the Act, importing into it, the purport of Section53-A of the Transfer of Property Act. That, however, was not acase in which a lessee was sought to be treated as owner ofthe property. The controversy was as to whether a person whopaid the entire consideration and is in exclusive possession ofthe property can be treated as the owner of an item ofimmovable property, before the sale deed was executed. KUTHIALA Vs. CIT[[4]] and the judgment of this Court in CIT Vs.NIZAM’S MISCALLENEOUS TRUST (TRUSTEES OF HEH THE)[[5]]. Their Lordships have also referred to the amendment caused toSection 27 of the Act, importing into it, the purport of Section53-A of the Transfer of Property Act. That, however, was not acase in which a lessee was sought to be treated as owner ofthe property. The controversy was as to whether a person whopaid the entire consideration and is in exclusive possession ofthe property can be treated as the owner of an item ofimmovable property, before the sale deed was executed. The judgment of Karnataka High Court in D.R.PUTTANNASONS’scase (1 supra) is on facts, which are to those of thiscase. The question in that case, as in the present one, was asto whether a lessee of a land for a particular period can betreated as the owner of the building constructed thereon, duringthe subsistence of the lease. The answer is in affirmative. Their Lordships have also sought to lay support on thejudgment of the Hon’ble Supreme Court inS.G.MERCANTILE CORPORATION P. LTD. Vs. CIT[[6]].The discussion by the Karnataka High Court proceeded on thefollowing premise: “It is not in dispute that the assessee remained theowner of the building for the period of 30 years andupon expiry of that period, the land leased to theassessee with the building constructed thereon wouldrevert to the lessor. The income by way of rentrecovered from the tenant inducted by the assesseecannot, therefore, be considered as business incomeso long as the assessee remained the ownerthereof.” The portion of the judgment of the Supreme Court inS.G.MERCANTILE CORPORATION P. LTD’s case (6 supra) thatwas relied upon by the Karnataka High Court reads: “The liability to tax under Section 9 of the Income TaxAct, 1922, is of the owner of the buildings or landappurtenant thereto. In case, the assessee is theowner of the buildings or lands appurtenant thereto,he would be liable to pay tax under Section 9 even ifthe object of the assessee in purchasing the landedproperty was to promote and develop a marketthereon. It would also make no difference if theassessee was a company which had beenincorporated with the object of buying and developinglanded properties and promoting and setting upmarkets thereon.” We find a bit difficult to fit the proposition enunciated bythe Karnataka High Court into the observations made by theSupreme Court in S.G.MERCANTILE CORPORATION P. LTD’scase (6 supra). The Transfer of Property Act maintains a cleardistinction between the ownership, on the one hand, and thelease, on the other. The rights of the lessor and the lessee vis-à-vis the leased property are clearly delineated under Chapter-V of that Act. We hardly find any circumstances or possibilitywhere a lease can metamorphosise or transform intoownership, unless the parties to the transaction take the steps,those are required under law. The very statement that anindividual remained as owner of the property for a period of 30 years during the lease was in force, does not accord with thebasic tenets of those two concepts. Just as a lessee cannot betreated as owner, a person who acquires the rights ofownership would cease to be a lessee. Both the concepts oflaw do not coexist. A lessee, in a given case may be conferred with the rightto sublease the property or to do certain activities, dependingon the terms of agreement between the parties. Howsoeverpervasive the control of a lessee, over the property may be, itwould not have the effect of wiping away the ownership of thelessor over it. Conversely, the lessee under such a leasecannot become owner. The fact that the lease is for a fairlylonger period, does not bring about any change in the characterof rights. We, therefore, express our inability to fall in line withthe judgment of the Karnataka High Court. A lessee, in a given case may be conferred with the rightto sublease the property or to do certain activities, dependingon the terms of agreement between the parties. Howsoeverpervasive the control of a lessee, over the property may be, itwould not have the effect of wiping away the ownership of thelessor over it. Conversely, the lessee under such a leasecannot become owner. The fact that the lease is for a fairlylonger period, does not bring about any change in the characterof rights. We, therefore, express our inability to fall in line withthe judgment of the Karnataka High Court. Even from the statement of the case by the Tribunal,while making the reference, it is evident that the respondentwas treated as lessee, may be for a period of 30 years and forcertain years, the income derived from the building by therespondent was treated as the one from business. Theconstruction of the building on the land taken on lease wasobviously for the purpose of business and not with an intentionto own it. If the intention of the respondent was to own theproperty, the transaction would have been different altogether. Though the lease is one of the forms of transfer of property, itdoes not lead to conferment of rights of ownership. That would be possible only when a sale as defined under Section 54 of theTransfer of Property Act takes place. Therefore, we answerQuestion No.3 against the Revenue and in favour of therespondent. From a reading of Question No.4, we find that there isserious defect in framing of it. A close perusal of Question No.4i.e. Question No.2 in R.A Nos.550 to 554 of 1994 reveals thatthere is some non-application of mind in the process. In casethe Tribunal has taken the view that the assessee i.e. therespondent has never raised the superstructure on theleasehold land, it is just un-understandable as to how theincome derived by her can be treated as the one from thehouse property. It is the specific case of the respondent thatthe income is from business. At any rate, the view expressedby the Tribunal is not germane for Question No.3. We thereforetreat Question No.4 as superfluous and unnecessary. The reference is answered accordingly. REDDY,J _____________________ L.NARASIMHA ________________________ CHALLA KODANDARAM,J Dt:10.06.2014 Note: L.R. copy to be marked.kdl [1] 162 ITR 468[2] 222 ITR 737 [3]233 ITR 468 [4]((1971) 82 ITR 570 (SC)) [5](1986 160 ITR 253 (AP) [6]((1972) 83 ITR 700)