M/s. Dasapalla Properties V. DCIT

ITTA/139/2004

AI Insights

The case involves a partnership firm appealing against the order of the Income Tax Appellate Tribunal, which reversed the decision of the Commissioner of Income Tax (Appeals) that had favored the appellant. The primary issues were the classification of rental income and the taxability of accrued but unrealized interest income. The Tribunal had classified the rental income as 'income from house property' rather than 'business income', and also treated the accrued interest on loans as taxable income. The appellant argued that their activities constituted a business, and thus the income should be classified as business income. However, the court found that the nature of the income, being derived from property leasing, aligns it more with house property income.

• Counselvise Citation: [2004] 140 COUNSELVISE.COM (IT) 746340 (HC-VISAKHAPATNAM)
• Appeal Type: Others
• Pronouncement Date: 16-12-2004
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax, Bombay City I v. Messers. Shoorji Vallabhdas and Co., Sultan Brothers Private Ltd. v. Commissioner of Income-Tax, Bombay City II, Commissioner of Income-Tax, Lucknow v. Vikram Cotton Mills Ltd., Commissioner of Income Tax v. New India Industries Ltd., Commissioner of Income Tax v. Smt. S. Premalatha
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: VIVEK SHEKAR
• Assessee Lawyers: A V KAUNDINYA
• Keywords: Assessment Year 1995-96; Business income; Income from house property; Interest on Loans; Taxable income
• Section: 143(2); 143(1)(a); 14(c); 14(d)

Judgement Text

"THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.139 of 2004 JUDGMENT: (per the Hon’ble Sri Justice L.Narasimha Reddy) This is an appeal preferred by the assessee feeling aggrieved by the order dated 20.02.2004 passed by the Visakhapatnam Bench of the Income Tax Appellate Tribunal (for short ‘the Tribunal’), in I.T.A.No.569/V/98. The appellant is a partnership firm, involved in the business of acquiring properties, raising constructions and deriving income in the form of rents. The returns for the assessment year 1995-96 were filed on 05.09.1995. Income of Rs.2,29,173/- was shown. The Assessing Officer initially gave an intimation of prima facie adjustment under Section 143(1)(a) of the Income Tax Act, 1961 (for short ‘the Act’). That was followed by a notice dated 24.09.1996 under sub- Section (2) of Section 143 of the Act. The Assessing Officer proposed to treat the income, as the one from ‘house property’, whereas the appellant wanted that to be treated as ‘business income’. Another area of controversy was the interest payable on loans advanced by the appellant. That was not shown in the return on the plea that the same was not collected. The Assessing Officer treated the same as income and passed an order of assessment. Aggrieved by that, the appellant approached the Commissioner of Income Tax (Appeals), Visakhapatnam. The Commissioner allowed the appeal. Aggrieved by that, the Department filed I.T.A.No.569/V/98 before the Tribunal. The order passed by the Commissioner was reversed by the Tribunal. Sri A.V. Krishna Kaundinya, learned counsel for the appellant, submits that though the income is derived in the form of rents for the building, the same deserves to be treated as the one from business, since it happens to be the principal, if not, exclusive activity of the appellant. He contends that in the context of determining the nature and character of income, the activity undertaken by the assessee becomes relevant and the Tribunal ignored this vital aspect. Reliance is placed upon the judgments of the Hon’ble Supreme Court in Commissioner of Income-Tax, Bombay City I v. Messers. Shoorji Vallabhdas and Co.,; Sultan Brothers Private Ltd. v. Commissioner of Income-Tax, Bombay City II and Commissioner of Income-Tax, Lucknow v. Vikram Cotton Mills Ltd., and that of the Gujarat High Court in Commissioner of Income Tax v. New India Industries Ltd. As regards interest, he submits that the liability to pay tax thereon would arise only if it is received. Sri Vivek Chandra Shekar, learned Counsel, representing Sri S.R. Ashok, learned Senior Counsel for the respondent, on the other hand, submits that the income in question is undisputedly, in the form of rents from building and on that mere account, it deserves to be treated as income from ‘house property’ under Section 14-C of the Act, irrespective of the fact as to who happens to be the owner thereof. He submits that the income referable to Section 14-C of the Act is item or objective centric than person centric and the nature of ownership hardly makes any difference. He has placed reliance upon the recent judgment of this Court in Commissioner of Income Tax v. Smt. S. Premalatha and submits that the Tribunal has taken correct view of the matter. The dispute is in relation to two items. The first is the income derived in the form of rents from buildings and the second is the income in the form of interest on the loans advanced by the appellant. As regards first, the plea of the appellant is that though it is in the form of rent, it deserves to be treated as the one from business referable to Section 14- D and not 14-C of the Act. The basis pleaded by the appellant is that the acquisition of land, construction of building and leasing of the constructed premises is its exclusive activity and thereby, it is the income, than mere rent. It got a bit of encouragement in this behalf, since that plea was accepted in earlier assessment years. The Assessing Officer, who processed the returns for the assessment year 1995-96, however, did not accept that contention. Though the appeal preferred by the appellant herein was allowed by the Commissioner, the order passed therein was reversed by the Tribunal. The basic objective under the Act is to levy tax on income. We notice a broad classification regarding incidence of levy or obligation to pay. While in some cases, the obligation is on an individual to pay tax on his different forms of income, in other cases, the object or target of income tax is an item of property or an activity, irrespective of the persons who operate them. This is evident from Section 14 of the Act. It reads; “Section 14.Heads of income,_ Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:- A.—Salaries. *** C.—Income from house property. D.—Profits and gains of business or profession. E.—Capital gains. F.—Income from other sources. While the incomes referable to Clauses ‘A’ and ‘B’ fall into the first category, those referable to clauses ‘D’ and ‘E’ fall into the second category. Here itself, we add a caveat that this analysis of ours is only for the limited purpose of understanding the issue in this case, but not with a view to enunciate any principle as such. Even where a building yields rent, there does exist a scope to treat it as the one, other than rent. Expenditure for a building, would, however, stand on a different footing. A small facet of this very aspect fell for consideration in Premalatha’s case (5 supra). The question there was as to whether the expenditure incurred in relation to construction of a building must be treated as ‘revenue’ or ‘capital expenditure’. We took the view that in case the expenditure is incurred by the owner of the building or land, it becomes capital expenditure and on the other hand, if it is incurred by a person, who took the land on lease and constructed building for the purpose of earning income in the form of lease, it becomes the ‘revenue expenditure’. That contingency, however, does not exist in this case. Section 14-C of the Act does not leave any doubt whatever as to the classification of the income. It is just, the income from the house property, irrespective of the nature of the ownership. The appellant placed reliance upon the judgment of the Hon’ble Supreme Court in Sultan Brothers Private Ltd’s (2 supra) case. On a perusal of the same, we find that apart from not helping the appellant, it renders the very argument untenable. The same is evident from the following paragraph: “The object of the appellant company no doubt was to acquire land and buildings and to run the same into account by construction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling the same. The activity contemplated in the aforesaid object of the company, assuming it to be a business activity, would not by itself turn the lease in the present case into a business deal. That would follow from the decision of this Court in East Indian Housing and Land Development Trust Ltd. V. Commissioner of Income- tax (1961)42 ITR 49 (SC)), where it was observed that ‘the income derived by the company from shops and stalls is income received from property and falls under the specific head described in Section 9. The character of that income is not altered because it is received by a company formed with the object of developing and setting up markets’.” In categorical terms, their Lordships held that it hardly makes any difference as to whether the assessee has its principal activity, the acquisition of properties and giving them on lease or rent. The Judgment of Gujarat High Court in Commissioner of Income Tax’s case (4 supra) also is not of much help to the appellant. Centrain observations made therein cut at the root of the very argument of the appellant. For example, the differentiation between the ‘rental income’ and the ‘business income’ was summed up and Clauses (iii) and (viii) of the general principles evolved by the Court read as under: “Clause (iii): In each case, what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend on certain facts peculiar to each case. Pure and simple, commercial assets like machinery, plant, tools, industrial sheds or godowns having high business potential stand on a different footing from assets like land or building. Clause (viii): When the asset is in the nature of land or building capable of being used for any other purpose and when the assessee ceases to use it as a commercial asset either himself or even through others, the income derived by him by renting out the same would more appropriately fall under the head ‘Income from house property’ as, like any other owner of property, he gets income from that property as owner. In such cases, it is not the factum of his business or commercial activity which brings income to him but it is his investment in property or his ownership of property which brings income to him. In such cases, leasing of property itself is the activity. It is leased with a view to produce income, a transaction quite apart from the ordinary business activities of the assessee.” Therefore, the finding of the Tribunal on the first aspect, namely, the character of income does not warrant interference and we agree with the said finding. Coming to the second aspect i.e., the interest on loans advanced by the appellant, the basis pleaded by it is that though the loans were given, the interest was not realised in reality. On verification of the record, the Tribunal came to the conclusion that the appellant was not consistent in the method of accountancy. On certain occasions, it adopted mercantile system and on others, cash system. Though it is permissible for an assessee to adopt hybrid system, the practice must be consistent. An assessee cannot be permitted to switch over the system to suit his convenience with the sole objective of avoiding payment of tax. The ultimate plea is that the income, in the form of interest did not accrue to it. In Messers. Shoorji Vallabhdas’s case (1 supra) relied upon by the appellant, the Hon’ble Supreme Court explained the distinction between the accrual and mere right to claim. The relevant paragraph reads as under: “Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. It income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.” There is distinction between the ‘accrual’ on the one hand and ‘receipt’ on the other. The former becomes relevant for mercantile system and the latter for cash system. The appellant is not able to state as to which of the aspect it inclined to adopt. Either way, he is liable. The reason is that the interest was debited to the account of the borrower and thereby, it became an accrual to the appellant. We do not find any merits in the appeal. It is accordingly dismissed. There shall be no order as to costs. The miscellaneous petitions filed in this appeal shall also stand disposed of. ___________________________ L.NARASIMHA REDDY, J ____________________________ CHALLA KODANDA RAM, J Date: 16.12.2014 Note: L.R. copy to be marked. va/kdl "