[1]

AFR

Court No. - 35

Case :- INCOME TAX APPEAL No. - 52 of 2014

Appellant :- M/S Meeraj Estate And Developers

Respondent :- Commmissioner Of Income Tax

Counsel for Appellant :- Rahul Agarwal

Counsel for Respondent :- C.S.C. It,Gaurav Mahajan

with

Case :- INCOME TAX APPEAL No. - 55 of 2014

Appellant :- M/S Meeraj Estate And Developers

Respondent :- Commmissioner Of Income Tax

Counsel for Appellant :- Rahul Agarwal

Counsel for Respondent :- C.S.C. It,Gaurav Mahajan

Hon'ble Bharati Sapru,J.

Hon'ble Rohit Ranjan Agarwal,J.

(Per Hon'ble Rohit Ranjan Agarwal,J.)

1.These two appeals filed under Section 260A of the

Income Tax Act, 1961 arise out of judgment and order dated

14.08.2013 passed by Income Tax Appellate Tribunal, Agra

Bench (hereinafter called as 'ITAT') in Income Tax Appeal No.

182 and 292/ Agra/ 2012 for assessment years 2006-07 and

2008-09.

2.As the issues in question are same in both the appeals,

as such they are being heard and decided together by a

common order.

3.These appeals were admitted on 25.10.2017 on the

following question of law:-

“(a) Whether in view of the facts of the case

particularly the source of funding for acquiring the

property, the inter-relationship between the

agreements entered into by the appellant and the

[2]

Constitution Bench of the Hon'ble Supreme Court in

Sultan Brothers Pvt. Ltd. Vs. C.I.T. (1964) 51 ITR 353

(S.C.) and the Division Bench judgment of this Hon'ble

Court passed in CIT v. Goel Builders 331 ITR 344

(All.), the Tribunal below was justified in holding that

the receipts of the appellant were income from house

property/ other sources and not business income?

(b) Whether, in view of the decisions In Radhasaomi

Satsang v. CIT 193 ITR 321 (SC) and in ACIT Vs.

D.M. Brothers (2010) 44 DTR 13 (All.), the decision of

the Tribunal below in discarding the treatment of the

receipts of the appellant as business income for

Assessment Year 2005-06 and in all subsequent

assessment year's till A.Y. 2013-2014 (except

assessment year's under appeals) is legally justified?”

4.The assessee is a partnership firm, which was

constituted w.e.f. 01.07.2004, while the deed forming

partnership is dated 01.11.2004. According to the deed, the

object of the assessee firm is to venture into real estate

business and allied activities such as leasing/ sub leasing,

maintaining properties on maintenance contract etc. It was

subsequent to formation of partnership firm, that assessee

acquired leasehold rights over a commercial property

measuring 6925 square feet at third floor of Block No. G10/ 8,

Padam Deep Tower, Sanjay Place, Agra. The said rights were

acquired by the assessee from one M/s Pee Cee Soap and

Chemicals Pvt. Ltd. through a deed of assigning of lease

executed on 17.11.2004. The money for acquiring the

leasehold right by the assessee was arranged by taking loan

of Rs.1,31,04,107/- from Indian Overseas Bank and also loans

of Rs.16,94,107/- from M/s Meeraj Industries and Rs.5,03,385

from M/s Accurate Ferro Casting. Thereafter, the assessee

entered into an agreement with Gas Authority of India Ltd.

(hereinafter called as 'GAIL') on 30.11.2004 to lease the said

property to GAIL for a period of 10 years. Second agreement

[3]

was executed by the assessee with GAIL on 14.12.2004 for

furnishing of the leased area of 6925 square feet to ensure the

furniture and fitting etc. and also to undertake major repairs.

Thereafter, on 16.12.2004 third agreement was executed

between the assessee and GAIL for maintaining the leased out

area.

5.The assessee filed a return for assessment year 2005-06

at a loss of Rs.20,13.100/-. The said return was processed

under Section 143(3) of the Income Tax Act (hereinafter called

as 'Act') and reply filed by the assessee was accepted by

assessing authority, which passed an order under Section

143(3) of the Act on 28.12.2007.

6.Return for the assessment year 2006-07 was filed by

assessee on 12.06.2006 showing a loss of Rs.10,95,190/-.

The case was picked under scrutiny, and notice under Section

143(2) of the Act was issued on 18.06.2007. As no compliance

was made by the assessee, again notice under Section 143(2)

along with notice under Section 142(1) with questionnaires

dated 08.07.2008 was sent to the assessee. The assessee

appeared and replied to the various queries. The AO after

considering the three agreements as well as examining the

statement of one of partners of the firm found that assessee

was not involved in any kind of recurring activity to treat the

receipt as business receipt and the income of the assessee

was calculated at Rs.10,94,460/- as against loss of

Rs.10,95,190/- and the setoff of brought forward loss of

assessment year 2005-06 amounting to Rs.20,13,103/- was

rejected on 14.11.2008. An appeal was filed before

[4]

Commissioner of Income Tax (Appeals) challenging the said

order but the said appeal was rejected by order dated

23.01.2012 by CIT (A), aggrieved by the said order a Second

Appeal was preferred before the ITAT which was also rejected

by order dated 14.08.2013, which is impugned before this

Court. Pursuant to the order of this Court, assessee filed

copies of the partnership deed, as well as the three

agreements executed between the assessee -appellant and

GAIL.

7.Sri Rahul Agarwal, learned counsel appearing for the

assessee submitted that the assessee firm is in the business

of real estate and allied activities such as leasing and sub-

letting, maintaining properties on contracts. He further

submitted that the three agreements executed between the

appellant and GAIL indicates that they were supplemental/

incidental to each other and were part of one composite

transaction and should not be read in isolation as done by the

taxing authorities. He further submitted that GAIL being a

Government organisation does not enter into tenancy

agreement with private parties without protracted negotiations

and usually does not conclude a transaction within a space of

a week or 10 days, as in the present case the property was

obtained by assessee on 17.11.2004 and was let out on

30.11.2004, which indicates the fact that the property was

acquired in view of the ongoing discussions with GAIL to fulfill

their office requirements. It was also contended that the entire

receipts received under the three contracts with GAIL was

claimed under the head 'business income' and depreciation

thereon was claimed and the assessee for assessment

[5]

year 2005-06 filed a return of loss of Rs.20,13,100/- which was

accepted by the Additional Commissioner of Income Tax on

28.12.2007, as such there was no occasion for the assessing

authority to treat the entire receipts of the appellant-assessee

from the three agreements executed with GAIL as income from

house property and from other sources and not as business

income for assessment year 2006-07.

8.Sri Rahul Agarwal, learned counsel for the assessee also

contended that even a solitary instance/ transaction could

constitute business so long as it was established that intention

of the assessee was to earn profit while undertaking the

transaction and not with an object of making an investment for

keeping the money safe or earning from that investment. He

relied upon a Division Bench judgment of this Court in Case of

CIT vs. Goel Builders 331 ITR 334 (All.), and which had

considered the distinction between income from house

property and income from business or profession.

9.It was also contended that assessee-appellant had

acquired the asset out of borrowed funds, which normally

would indicate an intention to carry on business and not profit

from an investment. Counsel for the assessee relied upon the

decision of the Constitution Bench of the Supreme Court in

case of Sultan Brothers Pvt. Ltd. Vs. CIT [1964] 51 ITR 353

(SC), and also judgments of the Apex Court in Universal

Plast Ltd. vs. Commissioner of Income Tax [1999] 237 ITR

454 (SC), Karnani Properties Ltd. vs. Commissioner of

Income Tax [1971] 82 ITR 547 (SC), Karanpura

Development Co. Ltd. vs. Commissioner of Income Tax

[6]

[1962] 44 ITR 362 (SC).

10.Counsel for the assessee also relied upon the decision of

the Supreme Court in Chennai Properties and Investment

Ltd. Vs. CIT [2015] 373 ITR 673 (SC). Relevant Para 11 is

extracted hereasunder:-

“11. We are conscious of the aforesaid dicta laid down

in the Constitution Bench judgment. It is for this

reason, we have, at the beginning of this judgment,

stated the circumstances of the present case from

which we arrive at irresistible conclusion that in this

case, letting of the properties is in fact is the business

of the assessee. The assessee, therefore, rightly

disclosed the income under the head “Income from

business”. It cannot be treated as “Income from the

house property”. We, accordingly, allow this appeal

and set aside the judgment of the High Court and

restore that of the Income Tax Appellate Tribunal. No

orders as to costs.”

11.Reliance has also been placed on a judgment of the

Division Bench of this Court in case of Hotel Arti Delux (Pvt.)

Ltd. vs. Assistant Commissioner of Income Tax [2014] 227

Taxman 119 (All.) wherein this Court held as under:-

“15. From the recital of the lease deed it is evident that

only the building was leased out along with a lift,

tubewell and electrical fittings. These cannot be

treated as plant and machinery but would be treated

as amenities, which are necessary for the use of any

building. We find that the appellant had not placed any

material on record to show that the building had

peculiar amenities with which the building could be

treated as a "plant" and not a building simplicitor. No

material has been brought on record to indicate that

the building had peculiar amenities, which could be

commercially exploited such as facilities of sterilization

of surgical instruments and bandages or an operation

theatre. The Tribunal has given a categorical finding of

fact that the building which was leased out by the

appellant was nothing else but a building simplicitor

and was not a building, which was equipped with

specialized plant and machinery. This being a finding

[7]

of fact, we are not inclined to interfere in such findings,

especially when nothing has been brought on record to

indicate that the said finding was perverse.

16. We also find that the appellant is not running the

business of a hospital and has only let out the building.

We are of the opinion that the income derived by the

appellant was from the ownership of the building and

not from the personal exertion, which is necessary to

treat the income as a business income.”

12.Further, in case of Commissioner of Income Tax vs.

Shambhu Investment (Pvt.) Ltd. [2001] 116 Taxman 795

(Calcutta) it was held as under:-

“7. Let us approach the problem from another angle by

applying the lest suggested by the five judges' Bench in the

case of Sultan Brothers Pvt. Ltd. (supra). The three

questions framed by the apex court are applied in the

instant case as follows:

(A) Was it the intention in making the lease-and

it matters not whether there is one lease or two,

i.e., separate leases in respect of the furniture

and the building-that the two should be enjoyed

together ?

In the instant case there is no separate

agreement for furniture and fixtures or for

providing security and other amenities. The only

intention, in our view, was to let out the portion

of the premises to the respective occupants.

Hence, the intention in making such agreement

is to allow the occupants to enjoy the table

space together with the furniture and fixtures.

Hence, this question should be answered in the

affirmative.

(B) Was it the intention to make the letting of

the two practically one letting?

From a plain reading of the agreement it

appears that the intention of the parties to the

said agreement is clear and unambiguous by

which the first party has allowed the second

party to enjoy the said table space upon

payment of the comprehensive monthly rent.

Hence, this question should be answered in the

affirmative.

[8]

(C) Would one have been let alone, and a lease

of it accepted, without the other ?

As we have discussed hereinbefore that it is

composite table space let out to various

occupants, the amenities granted to those

occupants including the user of the furniture

and fixtures are attached to such letting out and

the last question, in view of the same, must be

answered in the negative.

Applying the said test we hold that by the said

agreement the parties have intended that such

letting out would be an inseparable one.

8. Hence, we hold that the prime object of the

assessee under the said agreement was to let out the

portion of the said property to various occupants by

giving them additional right of using the furniture and

fixtures and other common facilities for which rent was

being paid month by month in addition to the security

free advance covering the entire cost of the said

immovable property.

In view of the facts and law discussed above we hold

that the income derived from the said property is an

income from property and should be assessed as

such.”

13.In case of Raj Dadarkar and Associates Vs. Assistant

Commissioner of Income Tax, [2017] 81 Taxmann.com 193

(SC), the Supreme Court held that object clause contained in

partnership deed would not be conclusive factor in determining

whether the assessee carried on business activity, and liable

to be assessed under the head 'income from business.

14.Per contra, Sri Gaurav Mahajan, learned counsel

appearing for the Department submitted that assessee had let

out vacant floor to GAIL and the receipts from the same cannot

be treated as business income, as business is a continuous

and systematic activity carried on by a person with a view to

earn profit. As per the first agreement the assessee was not

required to provide any day-to-day service or incur any day to

[9]

day expenses to receive the leased rent receipt, which

establishes the fact that receipts are to be taxed income from

'house property' and not as income from business or

profession. Second agreement was executed between the

assessee and GAIL to furnish the third floor of the building as

per requirement of GAIL, meaning thereby that vacant floor

which was leased out was furnished and finished and

converted into office by the assessee. This agreement was

consequence of the first agreement and was executed 14 days

later. The third agreement executed between assessee and

GAIL was in regard to maintenance and upkeeping of building/

floor, furniture and fittings and other equipments installed and

set up in said premises, and further, only one person was

deputed to look after premises and the income from the said

agreement should be treated as income under head 'income

from other sources'.

15.He further submitted that in income tax, each year is

independent year and in each year correct income is to be

assessed under the correct head, and any mistake if

committed cannot be allowed to continue. Sri Mahajan

vehemently argued that mere statement of each of the deed

would not be determinative factor to arrive at a conclusion that

income is to be treated from business and in present case as

there was no business activity being carried out by the

assessee and having failed to produce any evidence, the

assessing authority as well as the Tribunal rightly rejected the

claim treating the income as income from house property and

other sources and not from business or profession.

[10]

16.We have heard learned counsel for the parties and

perused the material on record.

17.The question which arises for consideration is whether

the property acquired by the assessee and subsequently

entered into an agreement with GAIL and the receipts at the

hand of assessee pursuant to the agreements is assessable

under the head 'income from business or income from house

property or income from other sources'.

18.The contention of the assessee hinges around two

facts, firstly that AO has already taken a view while making

assessment for the assessment year 2005-06 that income is

assessable under the head 'income from business' and

therefore maintaining consistency the Assessing Officer

should have not taken a different view for the subsequent

assessment year, and the second ground of attack being that

the assessee firm is in the business of real estate and allied

activities and the three agreements executed were

supplemental and incidental to each other and are part of one

composite transaction and should not be read in isolation, further

the property acquired by the assessee was for letting, as such

the same being income from business and cannot be assessed

under the heading 'income from house property or income from

other sources'.

19.The first question raised by the appellant-assessee

regarding the maintenance of consistency by the assessing

authority, the Tribunal had recorded categorical finding in view

of the judgment of the Apex Court in case of Bhart Sanchar

Nigam Nigam Ltd. and another vs. Union of India and

[11]

others [2006] 3 SCC 1, wherein the Court held that res-

judicata does not apply to tax matters for different assessment

years, the relevant Paragraphs 20, 21, 22 are extracted

hereasunder:-

“20. The decisions cited have uniformly held that res

judicata does not apply in matters pertaining to tax for

different assessment years because res judicata

applies to debar courts from entertaining issues on the

same cause of action whereas the cause of action for

each assessment year is distinct. The courts will

generally adopt an earlier pronouncement of the law or

a conclusion of fact unless there is a new ground

urged or a material change in the factual position. The

reason whey the courts have held parties to the

opinion expressed in a decision in one assessment

year to the same opinion in a subsequent year is not

because of any principle of res judicata but because of

the theory of precedent or the precedential value of the

earlier pronouncement. Where facts and law in a

subsequent assessment year are the same, no

authority whether quasi-judicial or judicial can

generally be permitted to take a different view. This

mandate is subject only to the usual gateways of

distinguishing the earlier decision or where the earlier

decision is per incuriam. However, these are fetters

only on a coordinate Bench which, failing the

possibility of availing of either of these gateways, may

yet differ with the view expressed and refer the matter

to a Bench of superior strength or in some cases to a

Bench of superior jurisdiction.

21. In our opinion, the preliminary objection raised by

the State of U.P. therefore, rests on a faulty premise.

The contention of the appellant-petitioners in these

matters is not that the decision in State of U.P. v.

Union of India, (2003) 3 SCC 239 for that assessment

year should be set aside, but that it should be

overruled as an authority or precedent. Therefore, the

decisions in Devilal Modi v. STO, (1965) 1 SCR 686

and in Hurra v. Hurra (2002) 4 SCC 388 are not

germane.

22. A decision can be set aside in the same lis on a

prayer for review or an application for recall or under

Article 32 in the peculiar circumstances mentioned in

Hurra v. Hurra. As we have said, overruling of a

decision takes place in a subsequent lis where the

prcedential value of the decision is called in question.

[12]

No one can dispute that in our judicial system it is

open to a court of superior jurisdiction or strength

before which a decision of a Bench of lower strength is

cited as an authority, to overrule it. This overruling

would not operate to upset the binding nature of the

decision on the parties to an earlier lis in that lis, for

whom the principle of res judicata would continue to

operate. But in tax cases relating to a subsequent year

involving the same issue as an earlier year, the court

can differ from the view expressed if the case is

distinguishable or per incuriam. The decision in State

of U.P. v. Union of India related to the year 1988.

Admittedly, the present dispute relates to a

subsequent period. Here a coordinate Bench has

referred the matter to a large Bench. This Bench being

of superior strength, we can, if we so find, declare that

that the earlier decision does not represent the law.

None of the decisions cited by the State of U.P. are

authorities for the proposition that we cannot, in the

circumstances of this case, do so. This preliminary

objection of the State of U.P. is therefore rejected.”

20.The said decision was followed by the Apex Court again

in case of C.K. Gangadharan and another vs.

Commissioner of Income Tax, Cochin [2008] SCC 739 ,

while the counsel for the appellant placed reliance upon the

decision of the Apex Court in case of Radhasaomi Satsang

vs. Commissioner of Income Tax [1992] 1 SCC 659 .

Relevant Paras 13 and 16 are extracted hereasunder:-

“13. One of the contentions which the learned senior

counsel for the assessee-appellant raised at the

hearing was that in the absence of any change in the

circumstances, the Revenue should have felt bound

by the previous decisions and no attempt should have

been made to reopen the question. He relied upon

some authorities in support of his stand. A full Bench

of the Madras High Court considered this question in

T.M.M Sankaralinga Nadar & Bros. & Ors, v. CIT, 4

ITC 226 (Mad) (FB). After dealing with the contention

the Full Bench expressed the following opinion:

"The principle to be deducted from these two

cases is that where the question relating to

assessment does not vary with the income

every year but depends on the nature of the

property or any other question on which the

[13]

rights of the parties to be taxed are based, e.g.,

whether a certain property is trust property or

not, it has nothing to do with the fluctuations in

the income; such questions if decided by a

Court on a reference made to it would be res

judicata in that the same question cannot be

subsequentiy agitated."

16. We are aware of the fact that strictly speaking res

judicata does not apply to income-tax proceedings.

Again, each assessment year being a unit, what is

decided in one year may not apply in the following

year but where a fundamental aspect permeating

through the different assessment years has been

found as a fact one way or the other and parties have

allowed that position to be sustained by not

challenging the order, it would not be at all appropriate

to allow the position to be changed in a subsequent

year.”

21.From the reading of the judgment of the Apex Court, it is

clear that the judgment relied by the assessee in case of

Radhasaomi Satsang (supra) was dealt by the Apex Court in

the case of BSNL (supra) and Supreme Court held that

principal of res-judicata does not apply in matter pertaining to

tax for different assessment years, because res-judicata

applies to debar courts from entertaining issues on the same

cause of action, whereas cause of action for each assessment

year is distinct. In the case in hand, the AO for assessment

year 2005-06 had accepted claim of the assessee without

examining relevant records, as well as without recording any

finding on the issue in question. Thus, for subsequent year, the

claim of assessee cannot be accepted without examining

records and material, and AO after examining the records

came to conclusion and took a view that receipts at the hand

of assessee was to be assessed under income from house

property and income from other sources and not business

income. In Commissioner of Income Tax vs. British Paints

[14]

India Ltd., Supreme Court while interpreting Section 145 of

the Act held that even if the assessee had adopted a regular

system of accounting, it was the duty of the Assessing Officer

to consider whether correct profits and gains would be

deduced from the account so maintained. Relevant portion are

extracted hereasunder:-

“Section 145 of the Income Tax Act, 1961 confers

sufficient power upon the officer-nay it imposes a duty

upon him-to make such computation in such manner

as he determines for deducing the correct profits and

gains. This means that where accounts are prepared

without disclosing the real cost of the stock-in-trade,

albeit on sound expert advice in the interest of efficient

administration of the company, it is the duty of the

Income Tax Officer to determine the taxable income by

making such computation as he thinks fit.

Any system of accounting which excludes, for the

valuation of the stock-in-trade, all costs other than the

cost of raw materials for the goods-in-process and

finished products, is likely to result in a distorted

picture of the true state of the business for the purpose

of computing the chargeable income. Such a system

may produce a comparatively lower valuation of the

opening stock and the closing stock, thus showing a

comparatively low difference between the two. In a

period of rising turnover and rising prices, the system

adopted by the assessee, as found by the Tribunal, is

apt to diminish the assessment of the taxable profit of

a year. The profit of one year is likely to be shifted to

another year which is an incorrect method of

computing profits and gains for the purpose of

assessment. Each year being a self-contained unit,

and the taxes of a particular year being payable with

reference to the income of that year, as computed in

terms of the Act, the method adopted by the assessee

has been found to be such that the income cannot

properly be deduced therefrom. It is, therefore, not

only the right but the duty of the Assessing Officer to

act in exercise of his statutory power, as he has done

in the instant case, for determining what, in his

opinion, is the correct taxable income.”

22.Thus, a conspicuous glance of judgments of the Apex

Court in case of Radhasaomi Satsang (supra), BSNL (supra)

[15]

as well as British Paints India Ltd. (supra) it has been

constant view that question of res-judicata does not apply in

tax proceedings, while each assessment year being a unit,

what is decided in one year may not apply in following years,

but where a fundamental aspect permeating through different

assessment years has been found as a fact one way or the

other, and parties have allowed that position to be sustained

by not challenging the order, it would not be at all appropriate

to allow the position to be changed in subsequent year, unless

there was a material change justifying the revenue to take

different view.

23.In the present case, the AO found sufficient materials and

changes in the year under consideration, as he after

examining the relevant clauses of agreements formed an

opinion that the property was taken on lease for giving it on

rent to GAIL. Further, Section 2(13) defines business, which

includes any trade, commerce or manufacture or adventure or

concerned in the nature of trade, commerce or manufacture. In

the present case no business activity was being carried out by

the assessee as business is a continuous and systematic

activity carried on with a view to earn profit.

24.Further, the records of the assessee revealed that only

one person was employed, which cannot go on to establish

the fact that any business activity was being carried out by the

appellant, and the premises was only let out to GAIL pursuant

to the agreement and was thus rightly assessed by the

Assessing Officer under the heading 'income from house

property and income from other sources'.

[16]

25.Now adverting to the second question, whether the

assessing authority was justified in treating the receipt of the

appellant-assessee as income from house property and

income from other sources other than income from business

on the basis of partnership deed which defines object of the

firm as to the business activity of real estate, letting and sub-

letting of the properties and further, upon the agreement so

entered by it with GAIL.

26.The constitution Bench of the Apex Court in case of

Sultan Brothers Pvt. Ltd. vs. CIT, [1964] 51 ITR 353 (SC)

had the occasion to consider whether the letting of a building

fitted with furniture and fixtures and income derived from

lease, would be income from business or income from

property as well as income from other sources. The Apex

Court held that merely by providing in the object clause that

any activity was in regard to acquiring the land and building, as

well as furnishing and maintaining it and also by leasing the

same, would not be assumed as carrying on business activity.

Relevant portion are extracted hereasunder:-

“A very large number of cases was referred to in support

of this contention but it does not seem to us that much

assistance can be derived from them. Whether a

particular letting is business has to be decided in the

circumstances of each case. We do not think that the

cases cited lay down a test for deciding when a letting

amounts to a business. We think each case has to be

looked at from a businessman's point of view to find out

whether the letting was the doing of a business or the

exploitation of his property by an owner. We do not

further think that a thing can by its very nature be a

commercial asset. A commercial asset is only an asset

used in a business and nothing else, and business may

be carried on with practically all things. Therefore it is

not possible to say that a particular activity is business

because it is concerned with an asset with which trade is

commonly carried on. We find nothing in the cases

[17]

referred, to support the proposition that certain assets

are commercial assets in their very nature.

The object of the appellant company no doubt was to

acquire land and buildings and to turn 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 India Housing and

Land Development Trust Ltd. v. Commissioner of

Income-tax 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."

Now the cases on which learned counsel for the

appellant specially relied were cases of the letting out of

plant and machinery, in some instances along with the

factory buildings in which they had been housed. In all of

them, except one, which we will presently mention, the

assessee had previously been operating the factory or

mill as a business and had only temporarily let it out as it

was not convenient for him at the time to carry on the

business of running the mill or factory. In these

circumstances, it was held that by letting out the plant,

machinery and building the assessee was still conducting

a business though not the business of running the mill or

factory.

Learned counsel for the appellant also relied on certain

clauses in the lease and a clause in the memorandum of

the appellant company to show that the lease amounted

to the carrying on of a business. We shall now turn to

these provisions. Clause 3(b) of the memorandum

gave power to the appellant to manage land,

buildings, and other property and to supply the tenants

and occupiers thereof refreshment, attendants,

messengers, light, waiting-room, reading room,

meeting, room, libraries, laundry convenience, electric

conveniences, lifts, stables and other advantages. The

contention was that this cause in the memorandum

gave the appellant a power to carry on a business of

the nature of running a hotel. We do not think, it did.

But in any case, by the lease none of the objects

mentioned in this clause was sought to be achieved.

We find nothing in the lessor's covenants to some of

which we were referred to bring the matter within

clause 3(b) of the memorandum. None of these

clauses support the contention that by granting the

[18]

lease, the appellant did anything like carrying on the

business of running a hotel. Thus clause (a) is a

covenant for quiet enjoyment. Clause (b) provides for

a renewal of the lease of the demised premises being

granted to the lessee for a further term of six years at

his request. Clause (c) deals with payment of

municipal bills and similar charges and ground rent.

Clause (d) provides that the lessor shall during the

continuance of the lease and on its renewal provide

various things which included furniture, pillows,

mattresses, gas-stoves, bottle coolers, refrigerators,

lift, electric fittings and the like and also paint the

outside of the building with oil once in five years and

keep the building insured. These are ordinary

covenants in a lease of a furnished building. These do

not at all show that the lessor was rendering any

service in the hotel business carried on by the lessee

or in fact doing any business at all. On the facts of this

case we are unable to agree that the letting of the

building amounted to the doing of a business. The

income under the lease cannot, therefore be assessed

under section 10 of the Act as the income of a

business.”

27.In case of Universal Plast Ltd. vs. Commissioner of

Income Tax [1999] 237 ITR 454 (SC), the Apex Court

considering the question of leasing out of asset of the

business would be income from business or not, the Court

held as under:-

“The question whether the amount earned by an

assessee by leasing out the assets of the business

would be income from business carried on by it, has

been the subject-matter of consideration by this Court

as well as by various High Courts and it would be

useful to refer to the judgments of this Court bearing

on the issue. In Commissioner of Excess Profits Tax v..

Shri Lakshmi Silk Mills Limited [1951] 20 ITR 451

(SC), the assessee-company was carrying on the

business of manufacturing silk cloth and dyeing silk

yarn. Due to lack of supply of silk yarn during the

relevant period while keeping idle other plant and

machinery, it let out dyeing plant for five months. The

question which came up for consideration before this

Court was whether the rent received from letting out

the dyeing plant would fall under the head "Income

[19]

from business" or "Income from other sources". If it

was "Income from business", it would have been

chargeable to excess profits tax; if not, the liability

would not arise. Mahajan,J., speaking for the Court,

observed that no general principle could be laid down

which was applicable to all cases and each case had

to be decided on its own circumstances. It was held

that it was part of the normal activities of the

assessee's business to earn money by making use of

its machinery by either employing it in its own

manufacturing concern or temporarily letting it to

others for making profit for that business when for the

time being it could not itself run it and for that reason

the dyeing plant had not ceased to be a commercial

asset of the assessee, so the sum representing the

rent for five months received from the lessee by the

assessee was income from business and was

chargeable to excess profits tax. In Narain Swadeshi

Weaving Mills CEPT [1954] 26 ITR 765, a Constitution

Bench of this Court considered a similar question

which also arose under the Excess Profits Tax Act,

1940. In that case, the assessee-firm was carrying on

manufacturing business. A Public Limited Company

was incorporated to take over the business from the

assessee-firm. The company purchased the building of

the assessee-firm and took over from it the plant and

machinery on lease at an annual rent. One of the

questions that fell for consideration there was whether

the lease money obtained by the assessee from the

company could be legally treated as business profit

liable to excess profit tax. Distinguishing Shri Lakshmi

Silk Mills' case [1951] 20 ITR 451 (SC), it was pointed

out that only a part of the business of the assessee

therein, namely dyeing silk yarn, was temporarily

stopped owing to difficulty in obtaining silk yarn on

account of war so that part of the assets did not cease

to be commercial asset of that business and

accordingly, the income from the assets would be the

profit of the business irrespective of the manner in

which that asset was exploited by the company.

Noticing the facts in the case before the Court that the

assessee had already sold land and building to the

Company; it was not having any manufacturing,

trading or commercial activity; and let out the plant and

machinery on an annual rent of Rupees forty thousand

and applying the common sense principle to the facts,

this Court found that the transaction of lease was quite

apart from the ordinary business activity of the

company, so it was impossible to hold that the letting

out of the plant and machinery etc. was at all a

[20]

business operation when its normal business activity

had come to a close.

In CIT v. Calcutta National Bank Limited [1959] 37 ITR

171 (SC), the case arose under the Excess Profits Tax

Act. The assessee was a banking company. It owned a

six-storeyed building of which only a part was under its

occupation and the rest was let out to tenants. The

question was whether the rent received from the

tenants of the building was the business income of the

company. The majority opinion was that realisation of

rental income of the assessee was in the course of its

business being in prosecution of one of its objects in

its memorandum and was liable to be included in its

business profits and was assessable to excess profits

tax. That conclusion was reached on the premise that

the term `business' as defined in that Act was wider

than the definition of that term under the Income Tax

Act. The minority, however, took a contrary view.

In Sultan Brothers Private Ltd. vs. CIT, [1964] 51 ITR

353 (SC), the assessee constructed a building, fitted it

up with furniture and fixtures and let it out on lease

fully equipped and furnished for the purpose of running

a hotel. The lease amount provided separately for

running of the building and hire charges for furniture

and fixtures. The question that fell for consideration

was whether the rent income was business income

taxable under the Income Tax Act, 1922? It was held

that as the assessee never carried on any business of

a hotel in the premises let out or otherwise at all and

there was nothing to show that it intended to carry on a

hotel business itself in the same building, the letting of

the building did not amount to the carrying on of a

business, so the income under the lease could not be

assessed as income from business.

The Constitution Bench formulated the principle thus

(headnote) :

"Whether a particular letting is business, has to be

decided in the circumstances of each case. Each case

has to be looked at from the businessman's point of

view to find out whether the letting was the doing of a

business or the exploitation of his property by an

owner....".

In New Sevan Sugar and Gur Refining Co. Ltd. v. CIT

[1969] 74 ITR 7 (SC), the appellant-company was

carrying on business of crushing sugarcane and gur

refining. The building, machinery and plant of the

factory mill were leased out initially for a period of five

years with three options to renew for similar periods on

[21]

the part of the lessee. The assessee had, however, the

option to terminate the lease after first two years which

option was not exercised. The question was whether

the income which arose to the assessee for the

Assessment Year 1955-56 from the lease was

assessable as income from business or income from

other sources? It was held, on interpretation of the

terms of the lease deed, that the intention of the

appellant-assessee was to part with the machinery of

the factory and the premises with the obvious purpose

of earning rental income and not to treat the factory

and the machinery as commercial asset during the

subsistence of the lease; the intention of the appellant

was found to go out of business altogether, therefore

the income was not assessable as business income.

CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597

(SC) is again a case arising under the Income Tax Act,

1922. One of the creditors filed a petition in the High

Court for winding up. The Industrial Financial

Corporation took possession of fixed assets under an

English mortgage of those assets. The assessee

company had gone into losses and had stopped its

manufacturing activity. Under the scheme evolved by

the High Court under the Companies Act, the business

assets were let out for ten years with an option for

renewal for another ten years. The management of the

company was transferred to a Board of Trustees

approved by the High Court. The question which fell

for determination was whether the rental income was

assessable in the relevant assessment years as

business income? The findings of the Tribunal were

that on account of financial crisis, the company found it

advantageous to let out the machinery on hire for a

temporary period and the company was able to

liquidate its liability at the end of the lease period and

regained possession of its assets; the company did not

sell or otherwise dispose of its assets; there was

nothing on record to show that the company was

formed to let out plant and machinery on hire. The

Tribunal came to the conclusion that the maintenance

of the assets meant that the Company had an intention

to re-start the business and that the intention of the

Company in letting out its assets was to exploit the

commercial assets for the purpose of its business and

therefore the rental income was assessable as

business income. On reference, that conclusion was

upheld by the High Court. On appeal to this Court,

while affirming the decision of the High Court, it was

noted that all relevant facts were correctly considered

from the standpoint of an ordinary prudent

[22]

businessman by the Tribunal and it was also pointed

out that the stoppage of the business by the company

was a temporary suspension of business for a

temporary period with the object of tiding over the

crisis condition and there was never any act indicating

that the company intended to carry on the business in

future.

In the light of the above discussion, the propositions

may be summarised as follows:

(1) no precise test can be laid down to ascertain

whether income (referred to by whatever

nomenclature, lease amount, rents licence fee)

received by an assessee from leasing or letting out of

assets would fall under the head `Profits and Gains of

business or profession';

(2) it is a mixed question of law and fact and has to be

determined from the point of view of a businessman in

that business on the facts and in the circumstances of

each case including true interpretation of the

agreement under which the assets are let out;

(3) where all the assets of the business are let out, the

period for which the assets are let out is a relevant

factor to find out whether the intention of the assessee

is to go out of business altogether or to come back and

restart the same.

(4) if only or a few of the business assets are let out

temporarily while the assessee is carrying out his other

business activities then it is a case of exploiting the

business assets otherwise than employing them for his

own use for making profit for that business; but if the

business never started or has started but ceased with

no intention to be resumed, the assets also will cease

to be business assets and the transaction will only be

exploitation of property by an owner thereof, but not

exploitation of business assets.

Now adverting to the facts of UPL case, the High Court

referred to the findings of the Tribunal that the leasing

out of the factory was not a sequel to the assesee's

decision to go out of the business in respect of the

subject factory and that it was just a make-shift

transient alternative means of commercial exploitation

of the commercial assets, so income from such letting

could not be treated as the fruits of ownership

simplicitor of the asset. The High Court also referred to

various clauses in the Agreement, particularly Clauses

1, 2, 4, 7, 19, 20, 21 and 22 and concluded that

"licensee exercising its vested right of option to

purchase the licenced premises, the assessee stands

[23]

completely out in the cold". The High Court recorded

the following findings (page 11):

"Therefore, it can very well be presumed that at the

time the licence agreement was entered into, the

intention of the ultimate outright sell out was already

there. The assessee was already committed to the

licensee for such a sell-out at licensee's pleasure and

there is no means of the assessee falling back from

that commitment. Therefore, it can very reasonably be

inferred that the assessee in the case decided to go

out of business as far as this particular factory was

concerned..

The lease agreement is in fact a veiled agreement for

lease-cum-sale....We are of the opinion that the

licensing is not meant to be a temporary stop gap

exploitation of commercial assets. It could not be in the

contemplation of the assessee at the time it entered

into the licence agreement, to retain the assets any

more as a commercial asset."

28.Thus, after having a close glance of the law laid down by

the Apex Court in relation to the receipts at hands of assessee

from letting out of any property pursuant to an agreement,

whether amount to income from business or income from

house property and income from other sources, in case of

Sultan Brothers (supra), Universal Plast Ltd. (supra),

Shambhu Investment Pvt. Ltd. (supra) and Hotel Arti Delux

(Pvt.) Ltd. (supra) the Court was of the view that mere

incorporation of the company or firm with an object of carrying

on business of real estate, letting and sub-letting of property

would not automatically mean that assessee was having

business income from the property let out through

agreement, but only upon qualifying certain test as laid down

that any conclusion can be reached.

29.Business as defined in Section 2(13) of the Act

postulates expenses of certain elements in the activity of an

[24]

assessee which would invest it with character of business. In

each case the question whether or not the assessee carried

on business must necessarily be approached in the light of

intention of the assessee, having regard to the legal

requirements which are associated with the concept of

business. Word 'business' is used in the sense of an

occupation, or profession which occupies time, attention and

labour of a person, normally with the object of making profit. To

record an activity as a business there must be course of

dealing, which is continued or contemplated to be continued

with profit motive and not for sport or pleasure. In the present

case, the assessee had deposed and also from perusal of his

records it is reflected that only one staff was engaged in the

upkeeping and maintenance of the premises let out to GAIL,

meaning thereby that no regular or continuous activity was

carried out for deeming it to be a business activity for being

assessed under the heading income from business.

30. In case of State of Gujarat v. Raipur Manufacturing

Company Ltd. [1967] 19 HTC 1 (SC) the Apex Court

observed that in taxing statutes, the word “business” is used in

sense of an occupation, or profession which occupies the time,

attention and labour of a person, normally with the object of

making profit. Whether or not a person carries on business in

a particular commodity must depend upon the volume,

frequency, continuity and regularity of transaction, or purchase

and sale in class of goods and transaction must necessarily be

entered into with a profit motive. The said decision was

rendered in the context of sales tax law, and was relied upon

and referred in the context of Income Tax law in judgment of

[25]

Apex Court in case of Sole Trustee, Loka Shikshana Trust

vs. Commissioner of Income Tax [1975] 101 ITR 234.

31.As in case of hiring out of a property along with other

articles, rights asserts etc. question which arises is whether

the income derived is from house property, business or other

sources. This was exclusively dealt by Bombay High Court in

case of CIT vs. National Storage Pvt. Ltd. [1963] 48 ITR 577

(Bom.). This case was confirmed in 1967, 66 ITR 596 (SC).

32.For the purpose of income to be revenue in nature it must

arise from the various sources as envisaged under the Act.

One of such sources is business income, but to be a business

income, volume, frequency, continuity, regularity and the

intention of the assessee to carry on has to be seen, and

where business itself has not come into existence, it cannot be

considered to be a business income and therefore, cannot be

a revenue receipt, as in the present case the agreement

executed between the assessee and the GAIL was for leasing

out the premises, secondly for furnishing of the area leased

out and thirdly for maintaining the leased out area.

33.Only one staff was kept for the said purpose by the

assessee, meaning thereby that no business activity as

mandated was carried out by the assessee so as to bring the

said exercise within the ambit of business income, and the

taxing authorities rightly assessing the assessee under the

head 'income from house property and income from other

sources'.

34.The guidelines laid down by the Apex Court in case of

[26]

Universal Plast Ltd. (supra) considering the Constitution

Bench judgment in the case of Sultan Brothers Pvt. Ltd.

(supra), the leasing out of the assets by assessee simplicitor

would not constitute business income. Further, the partner of

the assessee firm had admitted that the property was

purchased to let out on rent to GAIL. The assessing authority

had also come to the conclusion that no systematic set up was

established for doing business activity and assessee having

failed to point out the volume, frequency, continuity and

regularity of the transactions.

35.In a similar set of fact, the Bombay High Court in case of

Mangla Homes Pvt. Ltd. vs. Income Tax Officer, 325 ITR

281 (Bom.) following the decision of the Apex Court in case of

East India Housing and Land Development Trust Ltd. v.

CIT [1961] 42 ITR 49 (SC) held that income derived by the

company from shops and stalls is income received from

property and falls under the specific head described in Section

9 being income from property.

36.Thus, the finding recorded by the Assessing Officer after

examining all the three agreements found that the assessee

did not indulge in any kind of recurring, systematic and in

organized manner, business activity and having only one

employee rightly assessed the receipts under the heading

'income from house property and income from other sources'.

37.Having considered the case in depth and the findings

recorded by the authorities below, we are of the considered

opinion that as the appellant-assessee did not carry out any

systematic, recurring and in organised manner, any business

[27]

activity nor there was any volume, frequency, continuity and

regularity of transactions, and only one person was employed

by him for the management and look after of the leased

property, the taxing authorities had rightly held the receipts to

be income from house property and income from other

sources and not business income.

38.In our considered view the appeal lacks merit and is

hereby dismissed.

39.The question of law as framed are hereby answered in

favour of the Revenue and against the assessee.

Order Date :- 18.9.2019

V.S.Singh