REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 6455-6460 OF 2017 (ARISING OUT OF SLP(C) NO(S). 17277-17282 OF 2015) RAJ DADARKAR & ASSOCIATES APPELLANT(S) VERSUS ACIT CC-46 RESPONDENT(S) JUDGMENT A.K. SIKRI, J. substantial questions of law which have been raised by appellant in these appeals, which were also questions before High Court on which High Court has rendered impugned judgment, are following: (1) Whether in facts and circumstances of case, and in law, Tribunal erred in holding that Signature Not Verified appellant was owner of shopping centre within Digitally signed by NIDHI AHUJA Date: 2017.05.11 meaning of Section 22 read with Section 27 of Income Tax Act, 1961? 18:05:56 IST Reason: Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 1 of 21 (2) Whether in facts and circumstances of case, and in law, Tribunal was right in holding that income earned by appellant from shopping centre was required to be taxed under head income from House Property instead of head Profits and Gains from Business or Profession as claimed by Appellant? (3) Whether on facts and circumstances of case, and in law, order of Tribunal, confirming action of Respondent, is perverse inasmuch as same is based on surmises, conjectures and suspicions by taking into account incorrect, irrelevant and extraneous consideration while ignoring relevant materials and considerations? 2) Few facts giving background in which aforesaid questions have arisen for consideration, may first be taken note of. These are recapitulated hereinafter: Maharashtra Housing and Developing Authority ( MHADA ) had constructed buildings known as Shyam Sunder Cooperative Society, Ram Darshan Cooperative Society and Sindhu Cooperative Society at Jariwala Compound Market, Opposite Navjivan Post Office, Lamington Road, Mumbai 400088. However, there was reservation for Municipal retail market on plot on which MHADA had put up construction. Therefore, MHADA handed over ground floor [stilt portion] of above said buildings and admeasuring around 17,925 sq. ft. Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 2 of 21 (hereinafter referred to as market portion ) to Market Department of Municipal Corporation Greater Bombay ( MCGB ). This land was acquired by MCGB from MCGB by recovering necessary cost. 3) In 1993, Market Department of MCGB auctioned market portion on monthly license [stallage charges] basis to run municipal market. appellant firm participated in auction to acquire right to conduct market on market portion. appellant was successful bidder and was handed over possession of market portion on 28.05.1993. terms and conditions subject to which appellant was given said market portion to run and maintain municipal market contained in terms and conditions of auction dated 11.03.1993. premises allotted to appellant was bare structure, on stilt, that is, pillar/column, sans even four walls. In terms of auction, it was appellant who had to make entire premises fit to be used market, including construction of walls, construction of entire common amenities like toilet blocks, etc. Accordingly, after taking possession of premises, appellant spent substantial amount on additions/alternations of entire premises, including demolishing existing platform Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 3 of 21 and, thereafter, reconstructing same according to new plan sanctioned by MCGB. [Rs. 1,83,61,488/- spent from Financial Year 1993-1994 to 2001-2002] appellant constructed 95 shops and 30 stalls of different carpet areas on premises under market name Saibaba Shopping Centre . appellant also obtained, in terms of conditions of auction, necessary registration certificate for running business under Shop and Establishment Act and other licenses/permissions from MCGB and other Government and semi-Government bodies for carrying on trading activities on said premises. appellant firm was responsible for day-to-day maintenance, cleanliness and upkeep of market premises. appellant also had to incur/pay water charges, electricity charges, taxes and repair charges. Essentially, appellant collected following types of receipt from sub-licensees: (a) Compensation from sub-licensees [same rate of stallage charges and on same terms and condition as given to appellant MCGB]. (b) Leave & License fees. (c) Service Charges for providing various services, including Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 4 of 21 security charges, utilities, etc. 4) appellant filed returns of income and right from year 1999 till 2004, it had been offering income from aforesaid shops and stalls sub-licensed by it under head Profits and Gains of Business or Profession of Income Tax Act, 1961 (hereinafter referred to as Act ). income was also assessed accordingly. However, case of appellant for Financial Year 1999-2000 was reopened by respondent by issuing notice under Section 148 of Act and in response to same appellant filed its return on 12.12.2003. Thereafter, notice under Section 143(2) of Act dated 10.01.2005 was issued and served by respondent. Reassessment order was framed, computed income from shops, and stalls under head Income from House Property of Act. reasons given by respondent for so computing income under head Income from House Property were: (i) By virtue of Section 27(iiib) of Act, appellant was deemed owner of premises as it had acquired leasehold right in land for more than 12 years; (ii) In agreements for sub-licensing words lease compensation were used instead of license fees and Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 5 of 21 deposits were referred as sub-lease deposits . Further, in some correspondence, like loan application, etc., words, lease were used; (iii) Property tax has been levied on appellant. Accordingly, respondent held that income received by appellant from market stalls was assessable as Income from House Property under Act. 5) Being aggrieved by above mentioned reassessment order dated 29.03.2005, appellant filed appeal before Commissioner of Income Tax (Appeals) [ CIT (Appeals) ] on 13.04.2005. CIT (Appeals) allowed appeal of appellant and reversed action of respondent on 30.12.2005. Aggrieved by order dated 30.12.2005 of CIT (Appeals), respondent as well as appellant filed appeals before Income Tax Appellate Tribunal ( ITAT ). ITAT reversed order of CIT (Appeals) and confirmed action of Assessing Officer vide its decision dated 10.09.2009. Being aggrieved by order of ITAT, appellant preferred appeal before High Court. High Court, by impugned order dated 19.09.2014, dismissed appeal filed by appellant. Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 6 of 21 6) It is this judgment of High Court against which present appeals, via Special Leave to Appeal, have been filed. 7) learned counsel for appellant submitted that High Court, or for that matter ITAT, committed grave error in approaching entire matter from erroneous angle. Referring to discussion contained in impugned judgment, learned counsel pointed out that High Court confined its discussion only on one aspect viz. as to whether appellant was deemed owner of properties in question within meaning of Section 27(iiib) of Act and after holding it to be so, it treated income as income from house property . learned counsel argued that entire focus of High Court was on aforesaid aspect and, in process, it was totally ignored that main business of appellant was to take premises on rent and to sub-let those premises. Thus, sub-letting premises was business of appellant firm and income earned, as result, was business income. 8) In order to support aforesaid contention, Mr. Agarwal, learned counsel for appellant, referred to deed of partnership firm Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 7 of 21 of appellant which was constituted on 02.04.1993 under provisions of Indian Partnership Act. He referred to object clause of firm as per partnership deed, which reads as under: Partnership shall take premises on rent and to sub-let or any other business as may be mutually agreed by parties from time to time. According to him, it was in furtherance of aforesaid object that, as business activity, appellant participated in auction held by Market Department of MCGB. Thus, sole intention of appellant was to establish retail hub wherein various small retailers could come together and carry on their business in organised and systematic manner. Thus, sub-licensing premises was only part of this predominant object of appellant. This was sole and only activity of appellant. appellant, being partnership firm, maintained full and complete records of these business activities. Right from year 1999 till 2004, appellant had been offering income from shops and stalls sub-licensed by it under head Profits and Gains of Business or Profession of Act. 9) Mr. Maninder Singh, learned Additional Solicitor General, on Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 8 of 21 other hand, refuted aforesaid arguments by referring to order of Assessing Authority and submitted that appellant had argued before Assessing Officer that it was not lessee of market area but was only licensee and, therefore, deeming provisions of Section 27(iiib) of Act would not apply. This argument was rightly rejected by Assessing Officer. He also referred to order of ITAT which had specifically repelled argument that this income was business income. Therefore, no question of law arises for determination. 10) We have considered aforesaid submissions of counsel for parties in light of legal provisions contained in Act. We may remark at outset that it is not in dispute that having regard to terms and conditions on which leasehold rights were taken by appellant in auction, constructed market area thereupon and gave same to various persons on sub-licensing basis, appellant would be treated as deemed owner of these premises in terms of Section 27(iiib) of Act. We may point out that High Court took note of provisions of Section 27(iiib) as well as Section 269UA(f) of Act which reads as under: Section 27(iiib) - person who acquires any rights Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 9 of 21 (excluding any rights by way of lease from month to month or for period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be owner of that building or part thereof; Section 269UA(f) - "transfer", (i) in relation to any immovable property referred to in sub-clause (i) of clause (d), means transfer of such property by way of sale or exchange or lease for term of not less than twelve years, and includes allowing possession of such property to be taken or retained in part performance of contract of nature referred to in section 53A of Transfer of Property Act, 1882 (4 of 1882). Explanation. For purposes of this sub-clause, lease which provides for extension of term thereof by further term or terms shall be deemed to be lease for term of not less than twelve years, if aggregate of term for which such lease is to be granted and further term or terms for which it can be so extended is not less than twelve years ; (ii) in relation to any immovable property of nature referred to in sub-clause (ii) of clause (d), means doing of anything (whether by way of admitting as member of or by way of transfer of shares in co-operative society or company or other associa- tion of persons or by way of any agreement or ar- rangement or in any other manner whatsoever) which has effect of transferring, or enabling enjoyment of, such property. 11) Thereafter, High Court pointed out circumstances under which Market Department of MHAD had auctioned market Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 10 of 21 area wherein appellant was successful tenderor; BMC permitted sub-letting of shops and stalls in stilt portion; appellant was permitted to carry out additions and alterations which he did; manner in which appellant after making necessary constructions sub-licensed to various types of traders etc. On that basis, High Court concluded that reading of various clauses harmoniously as per which rights were given to appellant in said property, pointed out towards appellant acquiring rights in or in respect of building or part thereof, which rights were clearly traceable to Section 269UA(f) of Act. 12) As pointed out above, aforesaid conclusion is not even disputed by learned counsel for appellant. submission was, as noted above, even if appellant is deemed owner of premises in question, since letting out place and earning rents therefrom is main business activity of appellant, then income generated from sub-licensing market area and earned by appellant should be treated as income from business and not income from house property. His submission was that dominant test has to be applied and once it is found that dominant intention behind activity was Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 11 of 21 that of business, rental income would be business income. In support, Mr. Agarwal referred to following two judgments: (i) Chennai Properties and Investments Limited, Chennai v. Commissioner of Income Tax Central III, Tamil Nadu & Anr., (2015) 14 SCC 793. (ii) Rayala Corporation Private Limited v. Assistant Commissioner of Income Tax, (2016) 15 SCC 201. 13) Before dealing with respective contentions, we may state, in summary form, scheme of Act about computation of total income. Section 4 of Act is charging Section as per which total income of assessee, subject to statutory exemptions, is chargeable to tax. Section 14 of Act enumerates five heads of income for purpose of charge of income tax and computation of total income. These are: Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. particular income, therefore, has to be classified in one of aforesaid heads. It is on that basis rules for computing income and permissible deductions which are contained in different provisions of Act for each of aforesaid heads, are to be applied. For example, provisions for computing income from Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 12 of 21 house property are contained in Sections 22 to 27 of Act and profits and gains of business or profession are to be computed as per provisions contained in Sections 28 to 44DB of Act. It is also to be borne in mind that income tax is only One Tax which is levied on sum total of income classified and chargeable under various heads. It is not collection of distinct taxes levied separately on each head of income. 14) There may be instances where particular income may appear to fall in more than one head. These kind of cases of overlapping have frequently arisen under two heads with which we are concerned in instant case as well, namely, income from house property on one hand and profits and gains from business on other hand. On facts of particular case, income has to be either treated as income from house property or as business income. Tests which are to be applied for determining real nature of income are laid down in judicial decisions, on interpretation of provisions of these two heads. Wherever there is income from leasing out of premises and collecting rent, normally such income is to be treated as income from house property, in case provisions of Section 22 of Act are satisfied with primary ingredient that Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 13 of 21 assessee is owner of said building or lands appurtenant thereto. Section 22 of Act makes annual value of such property as income chargeable to tax under this head. How annual value is to be determined is provided in Section 23 of Act. Owner of house property is defined in Section 27 of Act which includes certain situations where person not actually owner shall be treated as deemed owner of building or part thereof. In present case, appellant is held to be deemed owner of property in question by virtue of Section 27(iiib) of Act. On other hand, under certain circumstances, where income may have been derived from letting out of premises, it can still be treated as business income if letting out of premises itself is business of assessee. 15) What is test which has to be applied to determine whether income would be chargeable under head income from house property or it would be chargeable under head Profits and gains from business or profession , is question. It may be mentioned, in first instance, that merely because there is entry in object clause of business showing particular object, would not be determinative factor to arrive at conclusion that income is to be treated as income from Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 14 of 21 business. Such question would depend upon circumstances of each case. It is so held by Constitution Bench of this Court in Sultan Bros. (P) Ltd. v. CIT, (1964) 5 SCR 807 and we reproduce relevant portion thereof: 7. We think each case has to be looked at from businessman's point of view to find out whether letting was doing of business or exploitation of his property by owner. We do not further think that thing can by its very nature be commercial asset. commercial asset is only asset used in business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that particular activity is business because it is concerned with asset with which trade is commonly carried on. We find nothing in cases referred, to support proposition that certain assets are commercial assets in their very nature. 16) In view thereof, object clause, as contained in partnership deed, would not be conclusive factor. Matter has to be examined on facts of each case as held in Sultan Bros. (P) Ltd. case. Even otherwise, object clause which is contained in partnership firm is to take premises on rent and to sub-let. In present case, reading of object clause would bring out two discernible facts, which are as follows: Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 15 of 21 (a) appellant which is partnership firm is to take premises on rent and to sub-let those premises. Thus, business activity is of taking premises on rent and sub-letting them. In instant case, by legal fiction contained in Section 27(iiib) of Act, appellant is treated as deemed owner . (b) aforesaid clause also mentions that partnership firm may take any other business as may be mutually agreed upon by partners. 17) In instant case, therefore, it is to be seen as to whether activity in question was in nature of business by which it could be said that income received by appellant was to be treated as income from business. Before us, apart from relying upon aforesaid clause in partnership deed to show its objective, learned counsel for appellant has not produced or referred to any material. On other hand, we find that ITAT had specifically adverted to this issue and recorded findings on this aspect in following manner: Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 16 of 21 26. On this issue facts available on record are that assessee let out shops/stalls to various occupants on monthly rent. assessee collected charges for minor repairs, maintenance, water and electricity. As per terms of allotment by BMC, assessee was bound to incur all these expenses. assessee, in turn, collected extra money from allottees. assessee collected 20% of monthly rent as service charges. Such service charges were also used for providing services like watch and ward, electricity, water etc. This in our opinion was inseparable from basic charges of rent. assessee has made bifurcation of receipt from the, occupiers of shops/stalls as rent and service charges. As rightly held by Assessing Officer, decision of Hon ble Supreme Court in case of Shambu Investment Pvt. Ltd., 263 ITR 143 will apply. assessee has not established that he was engaged in any systematic or organized activity of providing service to occupiers of shops/stalls so as to constitute receipts from them as business income. In our opinion, assessee received income by letting out shops/stalls; and therefore, same has to be held as income from house property. 18) ITAT being last forum insofar as factual determination is concerned, these findings have attained finality. In any case, as mentioned above, learned counsel for appellant did not argue on this aspect and did not make any efforts to show as to how aforesaid findings were perverse. It was for appellant to produce sufficient material on record to show that its entire income or substantial income was from letting out of property which was principal business activity of appellant. No Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 17 of 21 such effort was made. 19) Reliance placed by appellant on judgments of this Court in Chennai Properties & Investments Ltd. and Rayala Corporation (P) Ltd. would be of no avail. In Chennai Properties & Investments Ltd. where one of us (Sikri, J.) was part of Bench found that entire income of appellant was through letting out of two properties it owned and there was no other income of assessee except income from letting out of said properties, which was business of assessee. On those facts, this Court came to conclusion that judgment of this Court in Karanpura Development Co. Ltd. v. CIT, (1962) 44 ITR 362 was applicable and judgment of this Court in East India Housing and Land Development Trust Ltd. v. CIT, (1961) 42 ITR 49 was held to be distinguishable. In present case, we find that situation is just reverse. judgment in East India Housing and Land Development Trust Ltd. which would be applicable which is discussed in para 8 of Chennai Properties & Investments Ltd. case and reproduction thereof would bring home point we are canvassing: Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 18 of 21 8. With this background, we first refer to judgment of this Court in East India Housing and Land Development Trust Ltd. case [East India Housing and Land Development Trust Ltd. v. CIT, (1961) 42 ITR 49 (SC)] which has been relied upon by High Court. That was case where company was incorporated with object of buying and developing landed properties and promoting and developing markets. Thus, main objective of company was to develop landed properties into markets. It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from renting of said shops and stalls. In those facts, question which arose for consideration was: whether rental income that is received was to be treated as income from house property or income from business? This Court while holding that income shall be treated as income from house property, rested its decision in context of main objective of company and took note of fact that letting out of property was not object of company at all. Court was therefore, of opinion that character of that income which was from house property had not altered because it was received by company formed with object of developing and setting up properties. 20) In Rayala Corporation (P) Ltd., fact situation was identical to case of Chennai Properties & Investments Ltd. and for this reason, Rayala Corporation (P) Ltd. followed Chennai Properties & Investments Ltd., which is held to be inapplicable in instant case. Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 19 of 21 21) For aforesaid reasons, we are of opinion that these appeals lack merit and are, accordingly, dismissed with cost. J. (A.K. SIKRI) J. (ASHOK BHUSHAN) NEW DELHI; MAY 09, 2017. Civil Appeal Nos.6455-6460 of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 20 of 21 ITEM NO.1C COURT NO.7 SECTION IIIA (For judgment) SUPREME COURT OF INDIA RECORD OF PROCEEDINGS C.A. Nos.6455-6460 of 2017 (Arising out of SLP (C) Nos. 17277-17282 of 2015) (Arising out of impugned final judgment and order dated 19/09/2014 in ITA No. 588/2012, ITA No. 713/2012, ITA No. 720/2012, ITA No. 721/2012, ITA No. 722/2012 and ITA No. 723/2012 passed by High Court of Bombay) RAJ DADARKAR & ASSOCIATES Appellant(s) VERSUS ACIT - CC-46 ... Respondent(s) Date : 09/05/2017 This matter was called on for pronouncement of judgment today. For Petitioner(s) Mr. Bhargava V. Desai, Adv. For Respondent(s) Mrs. Anil Katiyar, Adv. Hon'ble Mr. Justice A. K. Sikri pronounced judgment of Bench comprising His Lordship and Hon'ble Mr. Justice Ashok Bhushan. appeals are dismissed in terms of signed reportable judgment. (Nidhi Ahuja) (Mala Kumari Sharma) Court Master Court Master [Signed reportable judgment is placed on file.] Civil Appeal Nos. of 2017 (@ SLP (c) Nos. 17277-17282 of 2015) Page 21 of 21 Raj Dadarkar & Associates v. ACIT CC-46