ORISSA CO-OPERATIVE V. COMMISSIONER OF IT

TA/20/2000

AI Insights

The case revolves around the classification of rental income earned by the Orissa Co-operative Housing Corporation Ltd. The Corporation appealed against the decision of the Income Tax Appellate Tribunal, which upheld the CIT (Appeals)'s finding that the rental income was to be considered as income from house property. The main legal contention was whether the rental income should be classified under 'business income' or 'house property income'. The Supreme Court's decision in Chennai Properties and Investments Ltd. vs. CIT, which emphasized the nature of the activities and the objectives of the entity, played a crucial role in the court's decision to classify the income as business income.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 690507 (HC-CUTTACK)
• Appeal Type: Others
• Pronouncement Date: 24-07-2019
• Assessment Year: misc
• Other Referred Cases: Chennai Properties and Investments Ltd. vs. Commissioner of Income-Tax, Karanpura Development Co. Ltd. v. CIT, Narasingh Kar v. CIT, Karnani Properties v. CIT, M.P. Bajaj v. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: T K SATAPATHY
• Assessee Lawyers: S RAY
• Keywords: Business income; CIT(Appeals); House property income; Income tax appellate tribunal; Rental income
• Section: 80P

Judgement Text

" 08. 24.07.2019 Heard Mr. S. Ray, learned counsel for the appellant and Mr. T.K. Satapathy, learned Senior Standing Counsel for the Income Tax Department. 2. By way of this appeal, the appellant has challenged the order dated 30.11.1999 at Annexure-6 passed by learned Income Tax Appellate Tribunal, Cuttack Bench, Cuttack whereby the appeal preferred by the appellant was dismissed and the order passed by the C.I.T. (Appeal) was upheld. 3. It appears that this Court on 02.05.2007 admitted the appeal on the following questions of law: “(1) Whether income earned by way of rent by the appellant from his adventure or concern which is in the nature of trade is income from “business” ? (2) Whether the learned Income Tax Appellate Tribunal, in considering the facts and circumstances of the case in totality, is legally right to come to the conclusion that there is no infirmity in the order of CIT(A) and that the rental income was clearly derived in substance from exercise of property rights without involving any operation of trading nature? 4. Mr. Ray, learned counsel for the appellant contends that the assessee-Orissa Co-operative Housing Corporation Ltd. is registered for different purposes and the object of it are described in Clause-3 of its Bye-laws. Sub-Clause-15 of Clause-3 reads as thus: “3. OBJECTS: The objects of the Corporation are: xxx xxx xxx xxx 15 (a) To procure and held to procure land and building materials for its members. (b) To purchase land through direct negotiation from Government or semi Government agencies or private parties for construction of house complex/colony or T.A. No.20 of 2000 -2- for allotment to its members and to let out under Rental Housing Scheme and for outright sale to the members in order to meet the acute demand of houses for residential purpose.” Placing reliance on the aforesaid Clause, Mr. Ray, learned counsel for the appellant contends that the Tribunal has committed an error in confirming the finding arrived at by the CIT (A) wherein the contentions of the appellant were not accepted and the income was considered to be the house property income. He takes us to the observation made by the C.I.T. (Appeals) in paragraphs-3.7 & 5.1 of the order dated 26.08.1994 at Annexure-5 which reads as under: “3.7 The next important question for consideration is whether the character of rental income from house property could be changed to one from trade or business merely because the hiring is inclusive of certain additional services like lighting, water supply, sanitation etc as referred to in the lease agreement with tenants noted earlier. In this regard, appellant’s reliance on the ratio of decision in Karnani Properties (82 ITR 547) was somewhat misplaced since in that case involving splitting up composite rent into property income and service charges, the question decided was that rendering of various services in an organized manner to tenants could constitute business income and not income from other sources. The services provided in the instant case were relatively insignificant (Rs.20 per month from tenant for water supply and maintenance of sanitation) and only incidental to the use of occupation of the flats both by outsiders and its own employees. Engagement of some permanent staff for maintenance, repairs and providing stipulated facilities by separately charging some nominal fees would not render the monthly rentals from bare letting out of the flats as involving complex activities of the nature of organized business. The case of Narasingh Kar, 113 ITR 712 (OR) referred to by the A.R. was clearly distinguishable on facts since the activities of a contractor in that case involved capital outlay -3- attention and labour for constructing shop rooms on land belonging to a school and letting out those on collection of rents that was somewhat shared between the contractor and the School. The remaining case laws of A.P. High Court concerning certain Govt. Corporations may have some apparent relevance to the facts of the appellant’s case, but the subject matter of let out properties in these cases were complex one involving purely commercial assets of industrial sheds or accommodations in an industrial estate developed with provisions of elaborate infrastructure facilities and the tenancy licenses were granted solely for promotion of industrial activities to persons directly or indirectly serving such purpose for which the industrial estate was established. The true nature of constructing and leasing out residential flats, not required for housing own employees, to outsiders in the instant case neither involved any commercial exploitation of land and building as such nor amounted to promoting or facilitating any existing or proposed business activities of the assessee as an Apex Cooperative Housing Society. The facilities provided to the tenants along with own employees were incidental ones normally expected from any land lord having a housing complex for multiple tenants. The nature of tenancy licences entered into with different organizations taking such flats for residential or other use of employees, instead of directly with the occupants at a viven point of time, is immaterial to determine the character of monthly rent receipts as one from commercial exploitation of the rented out property. xxx xxx xxx 5.1 Disputed additions/variations in computation of income from business:- Subject to appropriate deduction or exemption, as the case may be, under the provisions of Sec.80P, these fresh assessments computed business income for the first time with reference to substantial losses disclosed as per P & L accounts incorporating both the business transactions and those relating to house property. As pointed out and seriously objected to on behalf of the appellant, the A.O. appears to have made indiscriminate additions without purposeful -4- examination of relevant accounts and without proper application of mind with the sole intention of converting the business loss to a positive figure in order to get over the specific observation of my predecessor (setting aside the original order) that business loss should have been set off against income from house property. On over all examination of the nature and merits of specific additions, as would be considered hereinafter, I find substantial force in such allegations of the appellant. Of course, the assessee had presented its annual statement of a/cs in a form peculiar to that prepared and approved under the Cooperative Society Act and that too by treating the transaction relating to house property as part of the business. In that context, disallowance of expenses or claims attributable to house property in computation of business income may be somewhat problematic and may involve some reasonable apportionment. But, that would not lead to whimsical and arbitrary disallowances in a preconceived manner without examining accounts maintained by a public body and subjected to statutory audit and without calling for details at least in respect of proposed additions. Therefore, computations of business income/loss in different years prima facie require fresh application of mind while giving effect to the present orders. ” The Tribunal while considering the matter upheld the view taken by the CIT (A) vide the impugned order relevant portion of which is reproduced hereunder: “5…………..He also observed that when the letting out of properties to outsiders in the instant case has no direct or indirect nexus with the existing main business of the assessee, the rental income was clearly derived in substance from exercise of property rights without involving of any operation of a trading nature. It is not the factum of his business or commercial activity which brings income but it is his investment in property which brings income. Considering the facts and circumstances of the case in totality I do not find any infirmity in the order of the CIT (A). Reliance by the assessee in the case of CIT v. M.P. Bajaj (supra) is also of no help to the assessee because in that case, formation of the company was for -5- doing in that case, but in the assessee’s case it is not so. Nothing substantial was urged to hold that the conclusion of the CIT (A) was not justified. In this view of the matter, the order of the CIT (A) on the point is up-held. In the result, the appeals by the assessee are dismissed.” Mr. Ray, learned counsel for the appellant relies on the decision of the Supreme Court of India in the case of Chennai Properties and Investments Ltd. vs. Commissioner of Income-Tax, reported in [2015] 373 ITR 673 (SC) wherein in paragraphs-8 & 9, it has been held as under: “8. Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P) Ltd., we would be well advised to discuss the law laid down authoritatively and succinctly by this court in Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC). That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mining leases was shown as business income. Department took the position that it is to be treated as income from the house property. It would be thus, clear that in similar circumstances, identical issue arose before the Court. This Court first discussed the scheme of the Income Tax Act and particularly six heads under which income can be categorised / classified. It was pointed out that before income, profits or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under another head. Thereafter, the court pointed out that the deciding factor is not the ownership of land or -6- leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel, House of Lords in England and US Courts were taken note of. The position in law, ultimately, is summed up in the following words (page 377 of 44 ITR): - \"As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.\" 9. After applying the aforesaid principle to the facts, which were there before the court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd.'s case squarely applies to the facts of the present case.” 5. Mr. Satapathy, learned Senior Standing Counsel for the Income Tax Department, however, defends the impugned order and submits that the same needs no interference. 6. Taking into consideration that one of the main objects of the appellant is to deal with the property for its members, in our considered opinion, the income of rent has arisen from the business activities. Therefore, the impugned order deserves to be set aside and question of law no.1 deserves to be answered in favour of the assessee. Accordingly, -7- the impugned order is set aside and question of law no.1 is answered in favour of the assessee. The T.A. stands disposed of being allowed. Misc. Cases/I.As. connected to the appeal, if any, are disposed of accordingly. Issue urgent certified copy of this order as per the Rules. SKG .…….......……………… ( K.S. Jhaveri ) Chief Justice …………………..……… (K.R. Mohapatra) Judge "