THE issues before the Bench are - Whether assessee is liable to pay income tax on the annual letting value of unsold flats owned by it as stock in trade under the head “income from house property”, even when the same is not actually let out; Whether the levy of income tax in the case of one holding house property is premised not on whether the assessee carries on business, as landlord, but on the ownership; Whether annual letting value method is a permissible method for determination of tax regardless of whether actual income is received or not; Whether existence of an artificial method itself would not mean that levy is impermissible and Whether mere passive occupation of one’s own property, amounts to "own occupation" in the course of business, and for the purpose of business, qualifying for exemption from income tax. And the verdict favours Revenue.
Facts of the case
A) The assessee company engages itself in the business of development of mini-townships, construction of house property, commercial and shop complexes etc. In the assessment completed for the year under consideration, the AO assessed the ALV of flats which the assessee had constructed, but were lying unsold under the head "Income from house property". The assessee however, contended that the said flats were its stock-in-trade and therefore the ALV of the flats could not be brought to tax under the head "Income from house property". The AO however did not accept the stand of the assessee, and therefore, added the notional value of unsold flats to the total income of the assessee. On appeal by the assessee, the CIT(A) however set aside the addition made by the AO. The revenue’s appeal to the Tribunal was unsuccessful.
Aggrieved, the Revenue filed appeal before the High Court.
It is argued on behalf of the revenue that in the present case, regardless of whether income was earned from the vacant flat, the assessee had to, in its capacity as owner, pay tax on the ALV. Counsel emphasized the fact that tax incidence did not depend on whether the assessee actually rented out with the intention of carrying on business, but on the mere factum of ownership.
In the counter argument, counsel for the assessee argued that there is no universal rule as urged by the revenue. It was submitted that unlike in the case cited by the Revenue, i.e. Azimganj Estates, the assessee in the present case did not actually let out the vacant flats; it was not even in the business of renting out its flats, unlike in the case of East India Housing and Land Development Trust v CIT, or in Sultan Brothers v CIT. Counsel submitted that letting out vacant or other properties was not part of the business or objectives of the assessee, and its case stands on a better footing than the other judgments, because in fact the assessee did not derive an income as a result of letting out. Counsel underlined that income tax is a levy on the income received, and not only notional calculations. In other words, the levy of income tax is for receipts, and not for notional amounts. It is also argued, in the alternative, that the flats cannot be taxed on the basis of their ALV, notionally because the owner was an occupant, and such occupation was in the course of, and for the purpose of business, as a builder.
B) The assessee had claimed benefit u/s 32 AB (1)(b) contending that it had utilized amounts during the previous year for purchase of new machinery or plant. The CIT(A) had allowed its claim, and in some instances, the Tribunal did so.
The revenue urged that the assessee was not entitled to claim the benefit, since it did not carry on eligible business at the relevant time.
The assessee, on the other hand, counters by contending that the eligibility for the benefit was never in issue, or questioned by the tax authorities, and what was in fact considered as well as decided was the correct method of computation.
Having heard the parties, the High Court held that,
A) ++ in East India Housing and Land Development Trust, the assessee, incorporated with the object of buying and developing landed properties and promoting and developing markets, purchased land in Calcutta and set up a market. The question was whether the income realized from the tenants of those shops taxable as "business income" under section 10 of the Income-tax Act or “income from property” under Section 9. The Supreme Court held that the income derived by the company from shops and stalls was income received from property and fell under the specific head described in Section 9. The character of that income was not altered either because it was received by a company with the specific object of setting up markets, or because the company was required to obtain a licence from the Municipality to maintain sanitary and other services, and resultantly had to maintain staff and to incur expenditure. The income did not become "profits or gains" from business within the meaning of Section 10. The character of the income altered merely because some stalls were occupied by the same occupants and the remaining stalls were occupied by a shifting class of occupants. The primary source of income from the stalls was the occupation of the stalls and it was a matter of little moment that the occupation which was the source of income was temporary;
++ in Sultan's case the Supreme Court held that: ["........whether a particular letting is business has to be decided in the circumstances of each case. Each case has to be looked at from a businessman's point of view to find out whether the letters was the doing of a business or the exploitation of his property by its owner."];
++ in S. G. Mercantile Corpn. (P) Ltd vs C.I.T. it was held that: [“It is noteworthy that the liability to tax under section 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under the above provision even if the object of the assessee in purchasing the landed property was to promote and develop market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting no markets thereon. The income derived by such a company from the tenants of the shops and stalls, constructed on the land for the purposes of setting up market, would not be taxed as "business income" under section 10 of the Act…”];
++ again, in the case of Commissioner of Income Tax v Vikram Cotton Mills Ltd., it was observed that whether a particular income is income from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and the conduct of the parties concerned;
++ in Karanpura Development Co. Ltd. vs. CIT the Supreme Court indicated the possibility that the ownership of property and leasing it out may be done either as part of business or as land owner;
++ this court is conscious about indivisibility of the levy of income tax, which are neither general or specific for the purpose of any source of income, as held in United Commercial Bank Ltd. v. CIT where the Supreme Court observed that:[“No one of those sections can be treated to be general or specific for the purpose of any one particular source of income; they are all specific and deal with the various heads in which an item of income, profits and gains of an assessee falls. These sections are mutually exclusive and where an item of income falls specifically under one head it has to be charged under that head and no other."];
++ likewise, in CIT v. Chugandas and Co. it was held that business income was broken up under different heads under the Income-tax Act only for the purpose of computation of the total income and by that break up the income did not cease to be the income of the business;
++ in the present case, the assessee is engaged in building activities. It argues that flats are held as part of its inventory of stock in trade, and are not let out. The further argument is that unlike in the other instances, where such builders let out flats, here there is no letting out and that deemed income – which is the basis for assessment under the ALV method, should not be attributed. This Court is of the opinion that the argument, though attractive, cannot be accepted. As repeatedly held, in East India, Sultan, and Karanpura, the levy of income tax in the case of one holding house property is premised not on whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership. Undoubtedly, the decision in Vikram Cotton indicates that in every case, the Court has to discern the intention of the assessee; in this case the intention of the assesse was to hold the properties till they were sold. The capacity of being an owner was not diminished one whit, because the assessee carried on business of developing, building and selling flats in housing estates. The argument that income tax is levied not on the actual receipt (which never arose in this case) but on a notional basis, i.e. ALV and that it is therefore not sanctioned by law, in the opinion of the Court is meritless. ALV is a method to arrive at a figure on the basis of which the impost is to be effectuated. The existence of an artificial method itself would not mean that levy is impermissible. Parliament has resorted to several other presumptive methods, for the purpose of calculation of income and collection of tax. Furthermore, application of ALV to determine the tax is regardless of whether actual income is received; it is premised on what constitutes a reasonable letting value, if the property were to be leased out in the marketplace. If the assessee’s contention were to be accepted, the levy of income tax on unoccupied houses and flats would be impermissible – which is clearly not the case;
++ as far as the alternative argument that the assessee itself is occupier, because it holds the property till it is sold, is concerned, the Court does not find any merit in this submission. While there can be no quarrel with the proposition that “occupation” can be synonymous with physical possession, in law, when Parliament intended a property occupied by one who is carrying on business, to be exempted from the levy of income tax was that such property should be used for the purpose of business. The intention of the lawmakers, in other words, was that occupation of one’s own property, in the course of business, and for the purpose of business, i.e. an active use of the property, (instead of mere passive possession) qualifies as “own” occupation for business purpose. This contention is, therefore, rejected. Thus, this question is answered in favour of the revenue, and against the assessee;
B) ++ this court is of the opinion that the question is no longer res integra, and is covered by the decision of the Supreme Court in Apollo Tyres Ltd v CIT. It was held, in that decision that if a business qualifies for the benefit granted under Section 32AB, if an assessee carries on business covered by that provision, and has utilized any amount during the previous year for the purchase of new plant or machinery then it is entitled to a set off of a sum equal to 20 per cent of the profit of such eligible business as computed in the accounts of the assessee which account has been audited in accordance with sub-section (5) of Section 32AB;
++ in the present case, the approach of the tax authorities, as well as the Tribunal, was to compute the benefit of set off, in the manner described, and approved in Apollo Tyres. The Court also notices that the eligibility or entitlement of the assessee to claim the benefit, was never questioned in the proceedings before the lower authorities. Accordingly, the question is answered in favour of the assessee, and against the revenue.
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