INDIAN CITY PROPERTIES LTD Vs. COMMISSIONER OF INCOME TAX
LAWS(CAL)-1963-9-9
HIGH COURT OF CALCUTTA
Decided on September 19,1963

INDIAN CITY PROPERTIES LTD. Appellant
VERSUS
COMMISSIONER OF INCOME TAX Respondents





Cited Judgements :-

COMMISSIONER OF INCOME TAX VS. RUSSELL PROPERTIES P LTD [LAWS(CAL)-1981-11-15] [REFERRED TO]
ROYAL CALCUTTA TURF CLUB VS. COMMISSIONER OF INCOME TAX [LAWS(CAL)-1982-6-27] [REFERRED TO]


JUDGEMENT

K. C. SEN, J. - (1.)INDIAN City Properties Limited, Calcutta, is the assessee. At it instance the following questions of law have been referred to this Court under s. 66(1) of the IT Act, 1922, hereinafter referred to as the "Act"
"(1) Whether, on the facts and in the circumstances of the case, the assessment of rent income of the company should be made under s. 9 and not under s. 10 of the IT Act (2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in not allowing the depreciation on the buildings in question ? (3) If the answer to question No. (1) is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proportionate remuneration payable to the managing agent in respect of their rendering services in relation to the aforesaid property was not allowable under s. 9 of the IT Act ? (4) Whether, in the asst. yrs. 1953-54 and 1954-55, the interest payable to Greaves Cotton and Co. Ltd. has been justifiably disallowed as a deduction under s. 9(1) (iv) of the INDIAN IT Act ? (5) Whether, on the facts and in the circumstances of the case, in the asst. yr. 1955-56 a part of the interest paid to Karamchand Thapar and Bros. Ltd. for the borrowal of the sum of Rs. 13,00,000 was justifiably disallowed as inadmissible under s. 10(2) (iii) of the IT Act ?"

(2.)IN this statement of the case the purpose of the business of the assessee-company has been set out with reference to the memorandum of association, which are stated as follows :
"(i) To acquire, purchase, lease, exchange or otherwise, land, buildings and hereditaments of any tenure or description. (ii) To develop and turn to account any land acquired by or in which the company is interested, and in particular by laying out and preparing the same for building purposes, constructing, altering, pulling down, decorating, improving, furnishing and maintaining offices, flats, houses, factories, warehouses, shops, wharves, building works and conveniences of all kinds, and by consolidating or connecting or sub-dividing properties, and by planting, paving, draining, farming, cultivating, letting on building lease or building agreement, and by advancing money to and entering into contracts and agreements of all kinds with landords, builders, tenants and others. (iii) To purchase for investment or resale, and to traffic in land and house any other property of anu tenure and any interest therein, and to create, sell and to deal in freehold and leasehold ground rents, and to make advances upon the security of land, etc."

The assessment years are 1951-52, 1952-53, 1953-54, 1954-55 and 1955-56. From the above clauses of the memorandum of association, it appears that the company's activities were the sale and the purchase of lands and buildings as also constructing houses for the purpose of letting them out. In pursuance of the above clauses the assessee constructed a large number of house and was dealing in lands at various places. The Tribunal has referred to the company's balance-sheet which disclosed the following heasd : (a) Fixed capital (lands and bulidings at various places); (b) Building Erection Suspence (the expences for construction of buildings not yet completed) and (c) Stocks and share (the value of stocks and shares on hand). From the balance- sheet the Tribunal found that the assessee was constructing houses for the purpose of letting them out in order to earn income from rents. It also dealt in lands and made profits out of such dealings. Stocks and securities were held for earning dividend and interest. During the cource of business the company was also carrying on activities in the sale and purchase of lands and constructed or acquired buildings and let them out. This being the position, it was contended that the income form properties was to be taxed under the head "business" and necessary deduction as contemplated under s. 10 should be allowed. Further it was contended that the company was dealing in lands and the income from the sale of land should be brought to tax under the head "business". The sheet-anchor of the company's case was that although it was receiving rent income upon the letting out of its properties, the receiving of such rent should be held to be the income from some business assessable under s. 10 of the Indian IT Act inasmuch as such buidings were the stock-in- trade of the business. The main contention in this regard was that depreciation allowance under s. 10(2)(vi) in respect of such buildings should be allowed.

The Tribuanal negatived the contention of the assessee holding that such buildings from which rent income was derived should not be considered as the stock-in-trade as under s. 10(2)(vi) of the Act allowance is admissible in respect of such buildings, machinery, plant or furniture being the property of the assessee, as were used for the purpose of the business. Apart from this consideration the Tribunal held that as there was no revaluation of the stocks, assuming that the buildings were stock-in-trade, the contention of the assessee as to the claim of depreciation allowance was not admissible. In support of this finding the Tribunal has held that the heads given in the balance-sheet "Fixed Capital Expenditure" and "Building Erection Suspence" wre also sufficient to negative the contention of the assessee with regard to rental income from buildings. Accordingly, the Tribunal upheld the finding of the AAC that the income derived from rents should be assessed under s. 9 and not under s. 10 of the Act.

(3.)FOR the assessment years from 1952-53 to 1955-56 the assessee paid commission to the managing agents. Under the articles of association the managing agents were entitled to a remuneration of a monthly allowance of Rs. 250 together with a commission of 10 per cent. per annum on the net profit of the company as defined in s. 87C(3) of the Indian companies Act, 1913. Therefore, the managing agency commission was calculated on the basis of the net profits disclosed by the company in its accounts. The ITO found that there was loss under the head "business" in the asst. yr. 1952-53 and so, the managing agency commission was paid out of the income from property and other sources. He held that s. 9 did not contemplate any deduction falling under this category and, therefore, on allowance under the head of managing agency commission could be allowed. Accordingly, he made a proportionate basis of the managing agency commission referable to the property income and the income from other sources. He disallowed the commission attributed to the income from properties. In all these years, the ITO allowed the proportionate commission on the income from other sources and disallowed the commission referable to the income from property. The assessee contended that the company paid the commission on the basis of the net profits arrived at and it was not justifiable that an allocation should be made in respect of this commission on the basis of income from properties and income from business or other sources. On this point the Tribunal came to the conclusion that the net income was arrived at by considering the income from properties and income from business. Regarding the income from properties, the Act permits the allowance of expenses under certain specific heads. With regard to the business the Act also allows the granting of expenses under certain specific heads. The net income is the combined result of both these two source of income. The computation of the net income by the ITO is the computation from two sources and, in computing the total income, the ITO is required to adjust the income according to law. In so doing he was required to consider that the allowances under the head of property will be limited to the provisions under s. 9. If the managing agents get anything for supervising the collection of rents or for maintaining the property, that portion of the remuneration received by them should be considered under s. 9 and not under s. 10. In the present case it is not the case of the assessee that the managing agents did not render services to the company in respect of the property and, therefore, the remuneration received by the managing agents included the proportionate remuneration payable to the managing agents in respect of their rendering services in relation to the property. In such circumstances, the ITO should, according to law, make an estimate of the remuneration received by the managing agent with respect to the services rendered for the property of the company.
For the asst. yrs. 1953-54 and 1954-55, the assessee paid interest to Greaves Cotton and Co. Ltd. and claimed deduction for the same. Money was borrowed from this firm for the purpose of constructing a house. The income from the newly constructed houses were exempted from the charge of tax under s. 4(3) (xii). It was claimed that, although the income from the newly constructed houses were exempted from taxation and the borrowed money was utilised in the construction of those houses, the interest paid should be allowed as a deduction against the total income from property and the ITO was not correct to hold that, since the interest referred to a loan utilised in the construction of the new houses, the said interest or any part of it could be allowed as a deduction againt the income from properties which were constructed out of the borrowals. The Tribunal held that the interest could be deducted from the income of the property under s. 9(1) (iv). This clause of s. 9 referred to property which was subject to a mortgage or other capital charge. The income from each property would, therefore, be computed according to the provisions of s. 9 and the total income under that head would be the aggregate sum of income of such properties. If a particular income from property was exempted from tax, the deduction should relate to that property and, under the law, the deduction related to one property could not be allowed as a deduction from the income of another property or from the total income under the head "property". In view of this finding the Tribunal held that the ITO has correctly disallowed the deduction claimed for the interest.



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