IT : Guideline value for consideration under section 50C i.e. stamp duty value applies to sale of land to sister concerns also
• In view of section 50C, where consideration received from sister concern under agreement on transfer of a capital asset being land or buildings is more than the guideline value under section 50C i.e. stamp duty value, the AO cannot substitute the said consideration with market value based on an arm's length third party transaction for computing capital gains. This is so where legality of transaction is not questioned and the consideration under the said agreement is also admitted
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[2013] 35 taxmann.com 1 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax -III
v.
Velankani Information Systems (P.) Ltd.
N. KUMAR AND B. MANOHAR, JJ.
IT APPEAL NOS. 374 & 375 OF 2011 AND 273 TO 276 OF 2012
APRIL 2, 2013
E.I. Sanmathi and K.V. Aravind for the Appellant. Smt. Vani H. and Chythanya K.K. for the Respondent.
JUDGMENT
1. All these appeals are taken up for consideration together as the common question of law is involved and therefore, they are disposed of by this common order. However, for proper appreciation of the question of law involved, the facts in ITA No.374/2011 are set out.
2. The assessee M/s. Golf Link Software Park Pvt. Ltd., is a Real Estate Developer. It is in the business of providing comprehensive facilities to I.T. Industry. Such facilities include provision for specially furnished buildings, special electrical connections and special arrangement for antennae and dish, good net connectivity for transmission of data and special furniture. Provision for such facilities also includes letting out specialized buildings and office premises that are built to cater to the special requirements of the I.T. industry.
3. The assessee Company filed its return of income for assessment year 2005-06 on 31.10.2005 declaring a total income of Rs. NIL and paid taxes under Section 115JB of the Income-Tax Act, 1961 (for short, hereinafter referred to as 'the Act'). The same was processed under Section 143(1) of the Act on 28.08.2006. The case was selected for scrutiny by issue of notice under Section 143(2) dated 25.07.2006, which was duly served on the assessee Company. The assessee in response to the notice issued appeared on 13.12.2007 and 14.12.2007 and filed written submissions. The assessee claimed that they are in the business of providing comprehensive facilities to IT Industry. Such facilities include provision for specially furnished buildings, special electrical connections, and special arrangement for antennae and dish, good net connectivity for transmission of data and special furniture. All these facilities include letting out specialized buildings and office premises that are built to cater to the special requirements of the I.T. Industry.
4. The submissions of the assessee were not accepted by the Assessing Authority. According to the assessing authority, the lease agreements clearly reveal that the main activity of the company is renting out property. Majority of the investments has gone into construction of buildings. The assessee is neither manufacturing, exchanging nor selling any goods or services. Mere letting out the properties with facilities like furniture, air conditioners, dish antennae, etc. does not change the nature of the receipt. The business activities are usually concerned with transfer and exchange of goods and services. The primary motive behind such activity is profit making. Business may be defined as an activity which is continuously carried on for economic gain with the associated risk of producing and selling of goods and services. The factual position regarding the lease rentals as seen from copies of the agreements shows lease rentals were charged for let out of the buildings and a separate agreement was entered into in respect of the services and amenities provided. The Act provides the heads of income under the provisions of Section 14, which are mutually exclusive and determine the heads under which the income is to be assessed. The objects in the memorandum of the company cannot determine the heads of income under which the income is to be taxed. The lease rental income from any property of which an assessee is a beneficial owner shall be liable to be taxed as 'income from House property' irrespective of the nature of the asset being held as fixed asset or investment or closing stock. In case of a property let out along with furniture, fixtures, plant and machinery etc., then the question as to whether it is let out inseparably shall determine the heads of income. The inseparable letting-out does not depend on rent fixed on each asset but, where one lease shall be acceptable without the other. In case one is acceptable without the other, then the income from letting-out of building shall amount to 'Income from house property' and the income from letting out of the amenities shall constitute 'income from other sources'. In case one is inseparable from the other, then the income so derived shall constitute income from other sources. In the case of letting out being on a day to day basis, then it shall be construed to be a licence to use the same and held to be 'income from business'. In the case of letting out, being on a month to month basis or on an annual basis, the same shall not constitute 'income from business'. In the case of rental income from the building clearly falling under the head 'income from House Property', the building shall not be entitled for depreciation. In the light of the aforesaid particulars, the Assessing Authority held that the assessee has let out the buildings and also provides several amenities. The provision of amenities is governed by a separate agreement or separate rates in a common agreement at which such services are charged. Accordingly, the consideration in respect of these two transactions are distinct and need to be considered as such. Apparently, the letting out of space is independent of the other. The lessee may or may not opt for these benefits. Therefore, the income arising from the letting out of buildings or lands appurtenant thereto clearly constitutes 'income from House Property'. The income for providing services will constitute 'income from other sources'. Therefore, the Assessing Authority proceeded to assess the income from the buildings under the head of 'income from house property' and the income from furniture, fittings and other accessories and services rendered, under the heading 'income from other sources'.
5. During the course of scrutiny proceedings, it was noticed that the assessee company had sold 82,152 sq. ft. of land in the Tech Park at Challaghatta on 24th January 2005 to its sister concern M/s. MD Properties Pvt. Ltd., at Rs. 389.52/- per sq. ft. Further, the assessee company has sold 14,516 sq. ft. of land to M/s. Mac Charles Pvt. Ltd., at Rs. 1193/- per sq. ft. on 18.06.2004. Both the lands are situated inside the same Tech Park Compound. On 12.12.2007, the assessee was called upon to file explanation as to why sale value of the land sold to M/s.MD Properties Pvt. Ltd., should not be taken at Rs. 1193/- per sq. ft. being the market value of the land during that period. The assessee filed their explanation on 28.12.2007. The assessee's case was that they had borrowed money against property/construction. The assessee was not able to raise further money as the financial institution had exceeded their exposure. The assessee was owning 2 acres 25.61 guntas of land. A portion of the property was idle. This prompted the assessee to dispose off the property in question in somewhat distress sale. Since there was a group concern M/s. MD Properties Ltd., which could profitably put the property to use, it was decided to sell the property to the said concern. The sale was made at a price that was greater than the guidelines value of the property. Thus, the price at which the sale was effected is at a reasonable price. The property was never sold outside to a third party, but it was a sale to itself, to a sister concern which never parted with the property and therefore, the sale is at arms length within the parameters of law. Hence, Capital gain cannot be calculated on the basis of the sale price to M/s. Mac Charles Pvt. Ltd. The said explanation was not accepted by the Assessing Authority which adopted the market value of the property at Rs.1193/- per sq. ft. and arrived at Short Term Capital Gain at Rs.6,34,26,274/- and levied Capital Tax on the said amount.
6. Aggrieved by this order, the assessee preferred an appeal to the Commissioner of Income-Tax (Appeals). The Appellate Authority after examining the entire material on record and after taking note of the various judgments relied on by both the parties was of the view that it is an admitted fact that different premises have been rented to different companies along with the facilities to plug and use inside the STP on a monthly basis. Relying on the judgment of the Tribunal in case of Global Tech Park (P.) Ltd. v. ACIT reported in [2008] 119 TTJ (Bang.) 421 he held that the income be assessed under the head 'Business'. The entire investment was fraught with a risk as adventure in the nature of trade and the entire activity of developing the premises as a STP is an organized activity to earn profit out of investment made by the assessee as a commercial venture and therefore, the income received has to be treated as receipt of a trader and not as a house property owner. Therefore, the Appellate Authority directed the Assessing Authority to treat the income under the head 'Business' and allow the claim of expenditures made thereon by the assessee. Insofar as the Capital gains on the sale of land to one of its sister concerns namely M/s. MD Properties Pvt. Ltd., is concerned, relying on Section 50C of the Act providing for adoption of the guideline value as the consideration for transfer of a capital asset, Section 80IA(8) requiring adoption of market value of goods in place of the actual sale price in the cases of certain specified sales, and the transfer pricing rules, it held the Assessing Authority does not have the power to substitute the value for the actual sale price in the absence of any evidence of understatement of the value. Therefore, the said finding recorded by the Assessing Authority was also set aside and the appeal was allowed.
7. Aggrieved by the said order, revenue preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal held that it is an undisputed fact that the assessee had developed a Technology park wherein a number of IT Companies have been housed. The Assessee has not merely let out its building for rent, but also carried out a complex commercial activity of setting up a Software Technology Park where various amenities and fit-outs have been provided. Relying on the finding recorded by the Tribunal in an earlier case and also the Judgment of the Apex Court, it held that the rental receipts of the assessee are to be assessed as 'business income'. Insofar as the Capital gain is concerned, it held that it is an undisputed fact that the assessee had parted with a piece of land to its sister concern for its sale consideration of Rs.389.52ps. per sq. ft., which according to the assessee was more than the guideline rate prescribed by the State Government. The assessee had sold the said piece of land to its sister concern only. When the assessee had an occasion to sell another piece of land to a third party - M/s. Mac Charles Pvt. Ltd., the sale value was adopted at Rs. 1,193/- per sq. ft., which significantly exhibits the fair-play on the part of the assessee. On the other hand, the Revenue had not brought any credible documentary evidence to even remotely suggest that the assessee had, in fact, attempted to suppress the sale consideration on this transaction. Under these circumstances, the Assessing Authority was not justified in bringing to tax STCG of Rs.6.34 crores without any documentary evidence on this score. Therefore, the order of the Appellate Authority was upheld. Aggrieved by this order, the Revenue is in appeal.
8. This appeal came to be admitted on 07.02.2012 to consider the following substantial questions of law:
| 1. | Whether the Appellate Authorities were correct in holding that the rental income earned by the assessee company from letting out building should be brought to tax under the head 'Income from Business' and not under the head 'Income from House Property' as held by the Assessing Officer? | |
| 2. | Whether the Appellate Authorities were correct in holding that the decision of this Hon'ble Court in the case of Bhopalam Commercial Complex and Industrial Ltd., reported in 262 ITR 517 and Decision of Apex Court in the case of Poddar Cement, 226 ITR 625 are not applicable to the facts and circumstances of the present case, when the decisions were directly on the issue in favour of the revenue and consequently recorded a perverse finding? | |
| 3. | Whether the Appellate Authorities were correct in holding that the value of land sold for Rs.389.52 per sq. ft. in favour of the sister concern cannot be treated as inadequate, when the land in the same premises was sold by the assessee in favour of the third party at Rs.1,193/- per sq. ft. for the purpose of computing short term gains and recorded a perverse finding? | |
| 4. | Whether the Appellate Authorities were correct in deleting the re-computation of short term capital gains made by the Assessing Officer by adopting the value of land sold by the assessee to its sister concern at Rs. 1,193/- per sq. ft. (the value of land sold by the assessee in favour of M/s. Mac Charles Pvt. Ltd.,)? |
9. From the aforesaid facts set-out above, it is clear that the assessee is in the business of providing comprehensive facilities to IT Industries and such facilities include provision of specially furnished buildings, special electrical connections and special arrangement for antennae and dish, good net connectivity for transmission of data and special furniture. All these facilities include letting out specialized buildings and office premises that are built to cater to the special requirements of the I.T. industry. A separate agreement is entered into in respect of the buildings let out. Yet another agreement was entered into in respect of the service and amenities provided. The lease is a monthly lease. It is in this background, the question for consideration is whether the rental income arising from letting out the buildings and lands appurtenant thereto falls under 'income from house property' or it falls under 'Profits and gains from Business or Profession'.
Chapter IV of the Act deals with Computation of total income. Section 14 deals with Heads of Income which reads as under:
Heads of income.
14. 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.
B—[***]
C—Income from house property.
D—Profits and gains of business or profession.
E—Capital gains.
F—Income from other sources.
10. Section 22 of the Act deals with income from House property which reads as under:
Income from house property.
22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".
11. Section 28 of the Act deals with Profits and Gains of business and profession which reads as under:
Profits and gains of business or profession.
28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",—
| (i) | the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; |
12. Section 56 of the Act deals with Income from other sources which reads as under:
Income from other sources.
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :—
| (i) & (ii)** | ** | ** |
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or profession";
13. Section 80IA of the Act was inserted by the Finance Act 2/1991 with effect from 01.04.1991. and later on amended by the Finance Act, 1992 w.e.f. 1.4.1993. There were several amendments. However, the present Section 80IA was substituted by Finance Act, 1999 w.e.f. 1.4.2000. Deduction in respect of profits and gains from industrial undertakings reads as under:
[Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.
80-IA. [(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.]
(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park (or develops a special economic zone referred to in clause (iii) of sub-section (4)] or generates power or commences transmission or distribution of power [or undertakes substantial renovation and modernization of the existing transmission or distribution line.:
[Provided that where the assessee develops or operates and maintains or develops, operates and maintains any infrastructure facility referred to in clause (a) or clause (b) or clause (c) of the Explanation to clause (i) of sub-section (4), the provisions of this sub-section shall have effect as if for the words "fifteen years", the words "twenty years" had been substituted.]
[(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), the deduction in computing the total income of an undertaking providing telecommunication services, specified in clause (ii) of sub-section (4), shall be hundred per cent of the profits and gains of the eligible business for the first five assessment years commencing at any time during the periods as specified in sub-section (2) and, thereafter, thirty per cent of such profits and gains for further five assessment years.]
(3) This section applies to [an [undertaking] referred to in [clause (ii) or] clause (iv) of sub-section (4)] which fulfils all the following conditions, namely:-
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of an [undertaking] which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such [undertaking] as is referred to in section 33B in the circumstances and within the period specified in that section;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
[Provided that nothing contained in this sub-section shall apply in the case of transfer, either in whole or in part, of machinery or plant previously used by a State Electricity Board referred to in clause (7) of section 2 of the Electricity Act, 2003 (36 of 2003), whether or not such transfer is in pursuance of the splitting up or reconstruction or reorganization of the Board under Part XIII of that Act]
Explanation 1.-For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely.-
| (a) | such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; | |
| (b) | such machinery or plant is imported into India from any country outside India; and | |
| (c) | no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provision of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the assessee. |
Explanation-2.-Where in the case of an [undertaking], any machinery or plant or any part there of previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified there in shall be deemed to have been complied with.
(4) This section applies to -
(i) any enterprise carrying on the business [of (i) developing or (ii) operating and maintaining or (in) developing, operating and maintaining] any infrastructure facility which fulfils all the following conditions, namely:-
| (a) | it is owned by a company registered in India or by a consortium of such companies [or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act:] | |
| (b) | it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing or (a) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility;] | |
| (c) | it has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995: |
Provided that where an infrastructure facility is transferred on or after the 1st day of April, 1999 by an enterprise which developed such infrastructure facility (hereinafter referred to in this section as the transferor enterprise) to another enterprise (hereafter in this section referred to as the transferee enterprise) for the purpose of operating and maintaining the infrastructure facility on its behalf in accordance with the agreement with the Central Government, State Government, local authority or statutory body, the provisions of this section shall apply to the transferee enterprise as if it were the enterprise to which this clause applies and the deduction from profits and gains would be available to such transferee enterprise for unexpired period during which the transferor enterprise would have been entitled to the deduction, if the transfer had not taken place. '
Explanation-For the purpose of this clause 'infrastructure facility' means-
| (a) to (d), (ii)** | ** | ** |
(iii) any undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone notified by the Central Government in accordance with the scheme framed and notified by that Government for the period beginning on the 1st Day of April, 1997 and ending on the 31st day of March, 2006."
14. In exercise of the powers conferred by clause (iii) of sub-section (4) of section 80 IA, the Central Government has framed Industrial Park Scheme, 2002. In Clause - 2 Definition, defines the "common facilities" includes the facilities of air conditioning, roads (including approach roads), water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power used by two or more industrial units in an industrial park and "undertaking" means any undertaking which is engaged in the business of developing, developing and operating or maintaining and operating an industrial park notified by the Central Government in accordance with the scheme.
15. Objectives of the said scheme is to set up an Industrial Model Town for development of industrial infrastructure for carrying out integrated manufacturing activities including research and development by providing plots or sheds and common facilities within its precinct or an industrial park for development of infrastructural facilities or built-up space with common facilities in any area allotted or earmarked for the purposes of industrial use specified in explanation to para 6 subclause (c) or a Growth Centre, under the Growth Centre Scheme of the Government of India. The various incentives on tax exemptions were extended under the Scheme to the developers.
16. In exercise of powers conferred by section 295 read with clause (iii) of sub-section (4) of section 80-IA of the Income-tax Act, 1961, the Central Board of Direct Taxes amended the Income-tax (First Amendment) Rules, 2008 substituting eligibility of Industrial Parks for benefits under section 80-IA(4)(iii).
17. The Apex Court had an occasion to consider the question whether rental income from shops and stalls to constitute income from house property or business income under the old Act. In the case of East India Housing & Land Development Trust Ltd. v. Commissioner of Income Tax reported in [1961] 42 ITR 49 (SC), at para 2, it has been held as under:
"2. The appellant contends that because it is a company formed with the object of promoting and developing markets, its income derived from the shops and stalls is liable to be taxed under s. 10 of the IT Act as "profits or gains of business" and that the income is not liable to be taxed as "income from property" under s. 9 of the Act. The appellant is undoubtedly, under the provisions of the Calcutta Municipal Act, 1951 required to obtain a licence from the Corporation of Calcutta and to maintain sanitary and other services in conformity with the provisions of that Act and for that Act and for that purpose has to maintain a staff and to incur expenditure. But on that account, the income derived from letting out property belonging to the appellant does not become "profits or gains" from business within the meaning of ss. 6 and 10 of the IT Act. By s. 6 of the IT Act the following six different heads of income are made chargeable : (1) salaries, (2) interest on securities, (3) income from property, (4) profits and gains of business, profession or vocation, (5) income from other sources and (6) capital gains. This classification under distinct heads of income profits and gains is made having regard to the sources from which income is derived. Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in s. 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose to taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in s. 6 the fact that it may indirectly be covered by another head will not make the income taxable under the latter head.
The income derived by the company from shops and stalls is income received from property and falls under the specific head described in s. 9. The character of that income is not altered because it is received by a company formed within object of developing and setting up markets. In United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) this court explained after an exhaustive review of the authorities that under the scheme of the IT Act, 1922, the heads of income, profits and gains enumerated in the different clauses of s. 6 are mutually exclusive, each specific head covering items of income arising from a particular source."
18. On the same issue., the Apex Court in the case of Karanpura Development. Co. Ltd. v. Commissioner of Income Tax reported in [1962] 44 ITR 362 (SC) without referring to the said judgment held as under:
"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.
Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property'' (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter. The Californian Copper Syndicate case (supra) illustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in other words, in the holding of the business."
19. This Court had an occasion to consider both the judgments and attempted to reconcile the same in the case of Addl. Commissioner of Income taxv. Hindustan Machine Tools Ltd. reported in [1980] 121 ITR 798 (Kar.) held as under:
"5. The question as to whether a particular income falls under one head or the other has to be decided having regard to facts and circumstances of a case. In Nalinikant Ambalal Mody v. CIT [1966] 61 ITR 428, the Supreme Court observed.
Whether an income falls under one head or another has to be decided according to the common notions of practical men for the Act does not provide any guidance in the matter."
20. Section 22 of the Income-tax Act reads thus:
"The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head 'Income from house property'."
The section itself indicates that merely because a person is the owner of the property it does not follow that the income therefrom should be assessed under the head "Income from house property". It excepts portions of such property as may be occupied for the purposes of any business or profession carried on by him., the profits of which are chargeable to income-tax. The guidance to be sought is to find out the user of the property and the character in which that property is used. The distinction was brought forth in the decision of the Supreme Court in Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362.
Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter".
This view as again reiterated in the case of S G Mercantile Corporation (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC). In that case, earlier decision of the Supreme Court in the case of East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 was referred to but was distinguished. In Karanpura Development Co. Ltd.'s case (supra), the Supreme Court did not specifically refer to East India Housing & Land Development Trust Ltd.'s case (supra) but referred to the decision in the case of Commercial Properties Ltd. In re. 1928 ILR 55 Cal. 1057 which had been followed in East India Housings case and observed:
"There, the object of the registered company was to acquire land, build houses and let premises to tenants in Calcutta and elsewhere. The sold assets were three properties which were let out and all the registered company did was the management and collection of rents. Rankin, CJ, held that the receipts were income from property within section 9 of the Income-tax Act, that letting out such property and collecting rents was not doing business, and that profits and gains from business were very different from income from property."
It is, therefore, seen that the activities, in the case of Commercial Properties Ltd. and East India Housing were very restricted and consisted of only in owning property and collecting of rent. There was no exploitation of the property for commercial or business purposes in these cases. The Supreme Court considered the question in the case of CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596. In that case the assessee after purchasing a plot of land constructed 13 units thereon, 12 units meant for the members of the Indian Motion Picture Distributors' Association, who had floated the company, and one unit for Foreign Film Distributors in Bombay, who were not members of the Association. Each unit was divided into four vaults, having a ground floor for rewinding of films and an upper floor for storage of films. The assessee entered into agreements with the film distributors who are permitted to use these vaults. There were other facilities also provided to the vault-holders. The persons who had taken the vaults were described as licensees and they were paying certain charges. The question arose as to whether the vaults were used for the purposes of business and income arising was assessable under section 10 of the Act. The Supreme Court observed:
"The question which really arises in the present case is whether the assessee is carrying on any business, i.e., is it carrying on any adventure or concern in the nature of trade, commerce or manufacture? If it is carrying on any adventure or concern in the nature of trade, then section 9 specifically excludes the income derived from property from computation under section 9, if the property is occupied for the purpose of adventure or concern."
The High Court had held that the income had to be computed under section 10 of the Act. The Supreme Court observed:
"The assessee not only constructed vaults of special design and special doors and electric fittings, but it also rendered other services to the vault-holders.... These vaults could only be used for the specific purpose of storing of films and other activities connected with the examination, repairs, cleaning, waxing and rewinding of the films."
It was argued before the Supreme Court that section 10 could not be applied as the assessee could not be said to be in occupation of the premises for the purposes of any concern of its own, but it was observed:
"The assessee was thus in occupation of all the premises for the purpose of its own concern, the concern being the hiring out of specially built vaults and providing special services to the licensees. As observed by Viscount Finley in Governors of the Rotunda Hospital, Dublin v. Coman [1920] 7 TC 517, the subject which is hired out is a complex one and the return received by the assessee is not the income derived from the exercise of property rights only but is derived from carrying on an adventure or concern in the nature of trade."
The provisions of sections 9 and 10 of the Indian Income-tax Act, 1922, correspond to sections 22 and 28 of the 1961 Act, the latter being in almost identical terms with the earlier enactment."
From the above judgments of the Apex Court in the case of East India Housing & Land Development Section 12(4) of the old Act did not come for consideration. However, a constitution Bench of the Apex Court m the case of Sultan Brothers (P.) Ltd. v. Commissioner of Income Tax reported in [1964] 51 ITR 353 (SC) evolved a concept of inseparability. The concept of inseparability has been explained as under:
"12. (1). The tax shall be payable by an assessee under the head 'Income from other sources' in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads)...
(3) Where an assessee lets on hire machinery, plant or furniture belonging to him, he shall be entitled to allowances in accordance with the provisions of claimants. (iv), (v), (vi) and (vii) of sub-s. (2) of s. 10.
(4) Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, he shall be entitled to allowances in accordance with the provisions of claimants. (iv), (v), (vi) and (vii) of sub-s. (2) of s. 10 in respect of such buildings."
To clear the ground it may be stated here that once s. 10 is found inapplicable to the case, there is no dispute that the income from the hire of the furniture and fixtures was rightly assessed under s. 12 after prodding for the allowances mentioned in sub-s. (3) of that section. The only dispute that then remains is whether the building is to be assessed under s. 9 which of course will have to be on the basis of its annual value or whether the rent from the building has to be assessed under s. 12 after the allowances mentioned in sub-s. (4) have been deducted."
21. Subsequently under the new Act Section 56(2) and (3) is inserted. In addition to that, Section 80- IA and in particular sub-sections (1) to (4) and clause (iii) are inserted. In addition to that, we have to keep in mind the Industrial Policy and the object behind giving incentives and the objects sought to be achieved by extending such benefits have to be kept in mind. Here we may also take note of the judgment of the Apex Court in the case ofCommissioner of Income Tax v. National Storage (P.) Ltd. reported in [1967] 66 ITR 596 (SC), the facts of the said case are as under:
"The assessee was promoted because the Government of India promulgated the Cinematograph Film Rules, 1948 hereinafter referred to as Rules, according to which the distributors were required to store films only in godowns constructed strictly in conformity with the specification laid down in the Film Rules and in a place to be approved by the Chief Inspector of Explosives, Government of India. A place at Mahim was approved and the assessee, after purchasing a plot of land, there constructed 13 units therein, 12 units meant for the members of the Indian Motion Picture Distributors Association, who had floated the company, and one unit foreign film distributors in Bombay, who are not members of the Association. Each unit was divided into four vaults having a ground floor for rewinding of films and an upper floor for storage of films. These units were constructed in conformity with the requirements of and the specification laid down in the Film Rules. The walls and ceilings were of a particular width and automatic fire proof door was installed in one wall which would close immediately on the out break of fire in the vault. Other walls had no opening or window and one ventilation was provided in the ceilings. The units were built at a distance of fifty feet from one another the assessee entered into agreements with the film distributors. There were two types of agreements, one was classified as "A" licence and the other "B' license the agreements were more or less in identical term with minor variation here and there. One agreement has been annexed to the statement of the case as Annexure-A and some of the relevant clauses are under.
In that background, the Apex Court has held as under:
"In our view, the High Court was right in holding that the assessee was carrying on an adventure or concern in the nature of trade. The assessee not only constructed vaults of special design and special doors and electric fittings, but it also rendered another services to the vault -holders. It installed fire alarm and was incurring expenditure for the maintenance of fire alarm by paying charges to the Municipality. Two Railway booking offices were opened in the premises for the despatch and receipt of film, parcels. This, it appears to us, is a valuable service. It also maintained a regular staff consisting of a secretary, a peon, a watchman and a sweeper, and apart from that it paid for the entire staff of the Indian Motion Picture Distributors' Association an amount of Rs.800 per month for services rendered to the licensees. These vaults could only be used for the specific purpose of storing of films and other activities connected with the examination, repairs, cleaning, waxing and rewinding of the films.
But the learned counsel for the Commissioner says that section 9 applies because the assessee cannot be said to be in occupation of the premises for the purpose of any concern of its own. He says that the licensees were in possession of the vaults as lessees and not merely as licensees. But, in our opinion, the agreements are licences and not leases. The assessee kept the key of the entrance which permitted access to the vaults in its own exclusive possession. The assessee was thus in occupation of all the premises for the purpose of its own concern, the concern being the hiring out of specially built vaults and providing special services to the licensees. As observed by Viscount Finlay in Coman's case (supra), "the subject which is hired out is a complex one" and the return received by the assessee is not the income derived from the exercise of property rights only but is derived from carrying on an adventure or concern in the nature of trade."
22. Sub-section (4) of Section 12 of the IT Act reads as under:
"[(4) Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, he shall be entitled to allowances in accordance with the provisions of clause (iv), [(v), (vi) and (vii)] of sub-section (2) of section 10 in respect of such buildings.]
23. The corresponding provision under the new Act reads as under:
Section 56(2)(iii):
"where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from such letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or profession."
24. This doctrine of inseparability finds a place in these two provisions. The inseparability referred to in the said provision is arising from the intention of the parties.
25. We have to find out in that context what was the intention of the parties in entering into the lease transaction. It is not the number of agreements, which are entered into between the parties which is decisive in determining the nature of transaction. What is the object of entering into more than one said transactions is to be looked into. However, if for enjoyment of lease, the subject matter of all the agreements is necessary, then notwithstanding the fact that there are more than one agreement or one lease deed, the transaction is one. As all the agreements are entered into contemporaneously and the object is to enjoy the entire property viz: building, furniture and the accessories as a whole which is necessary for carrying on the business, then the income derived there from cannot be separated based on the separate agreement entered into between the parties. What has to be seen is, what was the primary object of the assessee while exploiting the property. If it is found applying such principle that the intention is for letting out the property or any portion thereof, the same may be considered as rental income or income from properties. In case, if it is found that the main intention is to exploit immovable property by way of complex commercial activities, in that event it must be held as business income.
26. Sub-section (1) of Section 56 makes it clear that income of every kind which is not be excluded from the total income under this Act shall be chargeable to income tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Sub-section (2) of Section 56 specifically states that the incomes shall be chargeable to income-tax under the head 'Income from other sources'. Clause (ii) of Section 56(2) provides that income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head 'profits and gains of business or profession'. Clause (iii) also provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head 'profits and gains of business or profession'. Therefore the intention of the legislature is explicit. The provision is clear, i.e., if the letting of building, plant, machinery and furniture is inseparable, the income from such letting should ordinarily fall within the head 'profits and gains of business or profession'. But for any reason, if it does not fall under that head, it shall fall under the head income from " other sources ", but certainly not under the heading income from House property. If the intention is to exploit commercial property by putting up construction and letting it out for the purpose of getting rental income, then notwithstanding the fact that the furniture and fittings are provided to the lessee, the income from the building fall under the head 'income from house property'. But if the assessee is in the business of taking land, putting up commercial buildings thereon and letting out such buildings with all furniture as his profession or business, then notwithstanding the fact that he has constructed a building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the heading of income from house property. Therefore, firstly what is the intention behind the lease and secondly what are the facilities given along with the buildings and documents executed in respect of each of them is to be seen. Thirdly it is to be found out whether it is inseparable or not. If they are inseparable and the intention is to carry on the business of letting out the commercial property and carrying at complex commercial activity and getting rental income therefrom, then such a rental income falls under the heading of profits and gains of business or profession. In fact, any other interpretation would defeat the very object of introduction of Section 80-IA as well as the scheme which is framed by the Government for development of industrial parks in the country. In that view of the matter, the finding recorded by the Appellate Authority as well as the Tribunal is in accordance with law and does not suffer from any legal infirmity which calls for interference. Accordingly, the substantial questions 1 and 2 are answered in favour of the assessee and against the revenue.
27. Insofar as the tax on capital gain is concerned, reliance is placed on the Apex Court judgment in the case of Commissioner of Income Tax v.George Henderson and Co. Ltd. reported in [1967] 66 ITR 622 (SC) while dealing with the case of sale of shares at the rate of less than market value of share held as under:
It is manifest that the consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely, money or money's worth and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer. It follows that the expression full consideration in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him. The consideration for the transfer is the thing received by the transferor in exchange for the asset transferred and it is not right to say that the asset transferred and parted with is itself the consideration for the transfer. The main part of section 12B(2) provides that the amount of a capital gain shall be computed after making certain deductions from the full value of the consideration for which the sale, exchange or transfer of the capital asset is made. In case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words full value of the consideration because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate ofRs.136 per share the full value of the consideration must be taken at the rate of Rs. 136 per share. The view that we have expressed as to the interpretation of the main part of section 12B(2) is borne out by the fact that in the first proviso to section 12B(2) the expression full value of consideration is used in contradistinction with fair market value of the capital asset and there is an express power granted to the income-tax officer to take the "fair market value of the capital asset transferred" as the full value of the consideration in specified circumstances. It is evident that the legislature itself has made a distinction between the two expressions "full value of the consideration" and "fair market value of the capital asset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are:- (1)that the transferor was directly or indirectly connected with the transferee, and (2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part of section 12B(2) applies and the Income-tax officer must taken into account the full value of the consideration for the transfer".
28. However in the new Act, the aforesaid two conditions are deleted. Section 50C categorically states that where the consideration received on transfer of a capital asset is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. Therefore, the Taxing Authorities are not entitled to, in determining whether the receipt is liable to be taxed or not to ignore legal character of transfer, which is a source of receipt and to proceed on what they record as substance of the matter. The Taxing Authorities are entitled and are now bound to determine true legal character resulting from transaction.
29. In the instant case, the sale of land to the sister concern is not in dispute. The legality of the said transaction is not questioned. The consideration received under the said agreement is also admitted. Further, admittedly, the said consideration is more than guidance value prescribed by the Government for sale of such property. As it is clear from the material on record that the assesse has borrowed money from financial institution, it has crossed its limit, it needed further funds. The land which is sold to the sister concern was lying idle. It is in those circumstances, the said sale transaction came into effect. The earlier sale made in favour of the sister concern is not vitiated in any manner whatsoever. Therefore, the Assessing Authority was not justified in taking the market value. The property sold to a third party cannot be the basis for determining the capital gain tax in respect of a sale in favour of the sister concern. Both the lower Appellate Authority and the Tribunal were justified in setting aside the order. Accordingly, the substantial question of law is answered in favour of the assessee and against the revenue.
In the light of the above discussion, we do not see any merit in any of the appeals filed by the revenue. Accordingly, the appeals are dismissed. No cost.
Regards
Prarthana Jalan
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