Commissioner of Taxes, Ctg Zone, Ctg
M/s Free School Street Properties, Ltd,
Kemaluddin Hossain CJ
Fazle Munim J
Ruhul Islam J
Badrul Haider Chowdhury J
Shahabuddin Ahmed J
Commissioner of Taxes, Chittagong Zone, Chittagong……………………Appellant
M/s Free School Street Properties, Ltd…………………….. Respondents
December 2, 1981
Cases Referred To-
Karanpura Development Co. V. Commissioner of Income Tax W.B. 1962 I. T.R. 362 ; Karnani Properties Ltd. V. Com. of Income Tax W.B. 1971 I.T.R. 547 : S.G. Mercantile Corporation Ltd. Vs. Com. of Income Tax 1972 I.T.R. 700.
A. M. Mahmudur Rahman, Advocate instructed by Md. Sajjadul Huq, Advocate on Record,—For the Appellant.
Rafiqul Haq, Senior Advocate, instructed by Syed Sakhawat Ali, Advocate on Record.—For the Respondents,
Civil Appeal No. 71 of 1981
(On appeal from the judgment and order 10.6.80 passed by the High Court Division in Application No. 155 of 1972.)
Badrul Haider Chowdhury J.—This is an appeal by special leave by the Revenue against the judgment and order of the High Court Division in Application No. 155 of 1972 under section 27 of the Wealth Tax Act.
2. The question is whether the house property of the assessee should be valued under rule 8(9) or rule 8(3) of the Wealth Tax Rules. The assessee respondent owned the Free School Street properties being a Housing estate. The Company is engaged in the business of acquiring houses and letting them out on monthly rental for the purpose of earning profit upon which the company declared dividend and distributed it to its share holders. The High Court Division took the view that it is a kind of trade as contemplated in the definition of a business in section 2(4) of the Income Tax Act. The Wealth Tax Officer and the Appellate Commissioner took the view that the property of the assessee company should be assessed under rule 8(3) and not as business. The Income Tax Appellate Tribunal on further appeal took the view as under:
”In our opinion the Company has been carrying on business of acquiring and letting out house properties for the purpose of earning rent. If this is not business then what it is? The activities are undoubtedly business activities in its natural sense. We must, therefore, hold that the house properties in the instant case should be valued under rule 8(9) of the Wealth Tax Rules and not under Rule 8(3).”
3. The Commissioner of Taxes raised a question of law before the High Court Division under section 27 of the Wealth Tax Act which is as under:
“Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the rental income of the assessee was income derived from business activities and whether the Tribunal was justified in holding that the house properties in the instant case should be valued under Rule 8(9) and not under Rule 8(3) of the Wealth Tax Rules.”
The learned Judges of the High Court Division answered “when the assessee carries on business through such property, valuation, thereof could only be taken under Wealth Tax rule 8(9),”
Rule 8 provides for the valuation of assets other than cash. Rule 8(3) deals with Land and buildings.
“Land and buildings.—The value of lands and buildings shall be estimated with the due regard to the nature and size of the property, the amenities available and the price prevailing for similar-assets in the same locality or in the neighborhood of the said locality:
Provided that where the capital value of such property has been determined by the appropriate local or Provincial authority for purpose of property taxation under the laws and regulations in force in the said locality, the Wealth Tax Officer shall adopt such capital value (as determined in the latest assessments) as the value of such property for purpose of assessment to Wealth Tax:
Provided further that where the capital value of such property has not been so determined, the Wealth Tax Officer shall not accept with the prior approval of the Inspecting Assistant Commissioner of Wealth Tax, adopt a value higher than a sum equal to ten times the gross annual rental value of such property.
[For the purpose of this sub-rule, “gross annual rental value” means the sum for which the property might reasonably by expected to let out from year to year.]
Sub-rule 9 provides for determination of the value of the net wealth representing the various assets of the business in the following manner:
(i) The net wealth representing the various assets shall be taken as the sum of the paid-up capital reserves and the balance to the credit of the profit and loss account,
(ii) The liabilities shown in the balance sheet shall be carefully scrutinised so as to exclude every item which is not a liability proper.
(iii) If according to the accounting system followed by the assessee, the original value of the block (i.e. fixed assets) is kept unaltered and depredation is ‘provided for by constituting a fund out of which investments are made, the value of such depreciation fund shall be excluded from the computation.
(iv) If development allowance has been deducted from the value of the block, the amount of it shall be added back.
(v) Where the closing stock is under valued, the amount representing the trader valuation shall be added back.
4. This is known as bulk valuation. The controversy is whether rule 8(3) or 8(9) will be attracted. Rule 8(3) operates in the field where a single unit or land or building is to be valued. But the bulk valuation under rule 8(9) is attracted” when there are various assets of the business of the assessee. In this case the assessee company builds houses and lands though on rental basis and declares dividends thereon, Assets has been defined in section 2(e):
(e) “assets” includes property of every description movable or immovable but does not include—
(i) agricultural land and growing crops, grass or standing trees on such land;
(ii) any building owned 01 occupied by a cultivator or receiver of rent or revenue out of agricultural land: Provided that the building is on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of rent or revenue by reason of his connection with the land require as a dwelling house or a store-house or an out-house;
(iii) one residential house owned and occupied by the assessee for purposes of his own residence where such assessee has exercised the option under sub-paragraph (iv) of paragraph (1) of the schedule;
(v) a right to any annuity in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump-sum grant;”
5. Now, it is clear that the buildings of the Company do come within the definition of the assets, and the single unit of residential-house owned and occupied by assessee is excluded. Net wealth is defined as under (m):
(m) “net wealth” means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets, required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owned by the assessee on the valuation date other than—
(i) debts which under section 6 are not to be taken into account and
(ii) debts which are secured on, or which have been incurred in relation to, any asset in respect of which wealth-tax is not payable under this Act.”
Clause (s) provides any term not specifically defined shall have the meaning assigned to it under the Income-Tax Act, 1922.’Business’ has been defined under section 2(4) of the Income Tax Act. Income from property can be faxed under section 6(iii) of the Income Tax Act. But it does not include income from business carried out through such property.
6. In the case of Karanpura Development Co. Ltd. versus Commissioner of Income Tax, West Bengal, 1962 I.T.R, P. 362 it was observed in deciding whether a Company dealt with his properties as owner, one must see not to the form which it gives to the transaction but to the substance on the matter. It was held where a Company acquires properties which it sells or leases but with a view to carrying other properties to be dealt with in the same manner. The Company is not trading them as properties to be enjoyed in the shape of rent which held but as a kind of circulating capital leading to expansion of business, when profits may either be enjoyed or put back into the business to acquire more properties for further profitable exploitation. The Indian Supreme Court considered further that letting out of premises and collection of rents assessment on property basis may be correct but not so where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find. But in the case of the Company with its professed objects and the manner of its activities and the nature of its dealings with its profit, it is possible to say on which side the operation fell and the income is to be assigned.
7. In the case of Karnani Properties Ltd. Vs Commissioner of Income Tax. West Bengal 1971 I. T. R 547 the Supreme Court of India considered that where the assessee Company owned the Karnani Mansion consisting of numerous residential flits and over a dozen of shops which were let out to tenants with business activities it was held that services rendered by the assessee to its tenants were the result of its activities carried on continuously in an organized manner with set purposes and with a vie to earn profits. Those activities were business activities and the income arising therefrom was assessable under section 10. In that case it was noticed that the Company had no other business excepting the letting out and the management of the property.
8. In the case of S.G. Mercantile Corporation Ltd. Vs Commissioner of Income Tax 1972 I.T R 700 the question was whether the appellant’s income from sub letting the stalls was assessable as business income under section !0 or as income from other sources under section 12 of the Income Tax Act It was held that the definition of ‘business in section 2(4) was of wide amplitude and it could embrace within its dealing in real property as also the activity of taking a properly on lease, setting up a market there n and letting out shops and stalls in the market and on the facts of the case the taking away property on lease and sub-letting portions thereof was part of the business and trading activities of the appellant and the income of the appellant fell under section 10 of the Act.
9. The principles propounded are reasonable. Applying these principles there is no hesitation in saying that assessee Company is carrying on a business within the meaning of section 2(4) of the Income Tax Act. Since it is a business the Wealth Tax officer is obliged to determine the value of the net wealth representing the various assets of the business and the method of computing has been provided for by the rules. As has been noticed the controversy in whether rule 8 3) or rule 8(9) will be attracted. The Income Tax Appellate Tribunal observed:
“The activities are undoubtedly business activities in its natural sense. We must therefore, hold that the house properties in the instant case should be valued under Rule 8(9) and not under rule 8(3) of the Wealth Tax Rules.”
The High Court Division has also taken the same view. Considering the principles mentioned above, there is no hesitation in saying that the nature of the activities of the assessee was business or trading. Therefore, rule 8 (9) is applicable.
In the result, therefore, this appeal is dismissed without any order as to cost.
Source: 1982, (AD)