East India Housing And Land Development... vs Commissioner Of Income-Tax, West... on 2 November, 1960

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 2 November 1960

Coram: J.C. Shah, M. Hidayatullah

In this case, the Court noted that the matter was an appeal taken on special leave from the judgment of the Income‑tax Appellate Tribunal, Calcutta Bench. The appellant was a private company that had been incorporated under the Companies Act. Its memorandum of association gave it several objects, two of which were to develop landed properties and to promote and develop markets. In the year 1946 the company purchased ten bighas of land in the town of Calcutta and proceeded to establish a market on that land. On the market site the company erected shops and constructed stalls on raised platforms. For the assessment year 1953‑54 the company received rent of Rs 53,145 from the tenants of the shops and rent of Rs 29,721 from the occupants of the stalls. The Income‑tax Officer assessed the receipts from the shops and stalls as income from property and levied tax thereon under section 9 of the Income‑tax Act. The assessment was affirmed on appeal by the Appellate Assistant Commissioner and thereafter confirmed by the Tribunal. Dissatisfied with the Tribunal’s order, the company obtained special leave to appeal that order before this Court.

The company contended that because it was formed with the specific object of promoting and developing markets, the receipts from the shops and stalls should be taxed as “profits or gains of business” under section 1o of the Income‑tax Act and not as “income from property” under section 9. The company acknowledged that, pursuant to the Calcutta Municipal Act, 1951, it was required to obtain a licence from the Corporation of Calcutta and to maintain sanitary and other services in accordance with that Act. To fulfil those statutory obligations the company had to employ staff and incur related expenditures. Nevertheless, the company argued that the mere existence of such obligations did not transform the rent into “profits or gains” of a business within the meaning of sections 6 and 1o of the Act. Section 6 classifies taxable receipts into six distinct heads: (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 is based on the source from which the income arises. Although tax is levied on the total taxable income of the taxpayer, each head is computed separately, and an amount that falls within a particular head cannot be taxed again under another head even if it might be indirectly covered by that other head.

The Court explained that the levy of tax must be effected in the manner prescribed by the specific provision of the applicable section of the Income‑tax Act. It held that if income from a particular source is placed by section 6 within a defined head, the fact that the same income might be indirectly covered by another head does not make it taxable under that other head. The Court then observed that the receipts earned by the company from its shops and stalls are plainly income from property and accordingly fall within the head described in section 9. It further stated that the character of that income is not altered merely because the company was incorporated for the purpose of developing and establishing markets. In United Commercial Bank Ltd. v. Commissioner of Income‑tax, the Court, after an exhaustive review of authorities, reiterated that under the scheme of the Income‑tax Act, 1922, the heads of income, profits and gains enumerated in the various clauses of section 6 are mutually exclusive, each head covering items of income arising from a distinct source. The Court cited Fry v. Salisbury House Estate Co. Ltd., where a company formed to acquire, manage and deal with a block of buildings let out unfurnished offices to tenants and was held chargeable to tax under Schedule A of the Income‑tax Act, 1918, and not under Schedule D. In that case the company supplied staff to operate lifts, acted as porters, and provided services such as heating and cleaning to tenants for an additional charge; nevertheless the taxing authority’s attempt to treat the rental receipts as trade income under Schedule D was rejected by the House of Lords, which held that the rents constituted profits arising from ownership of land assessable under Schedule A and could not be included as trade receipts. The Court also referred to Commercial Properties Ltd. v. Commissioner of Income‑tax, where income derived from rents by a company whose sole object was to acquire land, construct houses and let them to tenants, and whose exclusive business was the management and collection of those rents, was held assessable under section 9 and not under section 10 of the Act. That decision observed that the mere fact that the owner of the property was a company incorporated for the purpose of owning property does not alter the incidence of the income; the income clearly falls under the head “property” rather than under the head “business”. Finally, the Court affirmed that the appellant’s receipts from shops and from stalls are undisputed income from property, and that the nature of that income is not changed simply because some stalls continue to be occupied by the same tenants or because the occupation of the stalls is temporary. The Court concluded that the income‑tax authorities were correct in holding the appellant’s income assessable under section 9 of the Income‑tax Act.

The Court observed that the assessment authority had correctly concluded that the income which the appellant had received was subject to tax under section 9 of the Income‑tax Act. In reaching this conclusion, the Court affirmed that the character of the income was that of property income and that it was therefore assessable under the provisions relating to income from property rather than under any other provision. Because the Court found no error in the assessment authority’s determination, the appeal raised by the appellant could not succeed. Accordingly, the Court held that the appeal failed and ordered that it be dismissed. In addition, the Court directed that the appellant be required to pay the costs of the proceedings. The dismissal of the appeal was expressly confirmed, leaving the assessment as it stood and obliging the appellant to bear the costs incurred by the revenue authority in defending the assessment.