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HIGH COURT OF CALCUTTA
S.P. MITRA, K.C.SEN, JJ.
Indian City Properties Ltd. - Appellant
Versus
Commissioner Of Income Tax – Respondent
Appeal No : IT Ref. No. 65 of 1959
Decided On : Sep 19, 1963
INCOME TAX - Assessment of rent income - Whether to be made under s. 9 or s. 10 of the IT Act, 1922 - Depreciation allowance on buildings - Managing agency commission - Deduction of interest on borrowed capital - Interpretation of relevant provisions.
Fact of the Case:
Indian City Properties Limited, Calcutta, is the assessee. The assessee's business activities included the sale and purchase of lands and buildings, constructing houses for letting out, and dealing in stocks and shares. The Tribunal held that the income derived from rents should be assessed under s. 9 and not under s. 10 of the Act and that no depreciation allowance was admissible under s. 10(2)(vi) in respect of such buildings. The Tribunal also held that the managing agency commission should be apportioned between the income from property and the income from business, and that the interest paid on borrowed capital for the construction of newly constructed houses was not deductible under s. 9(1)(iv).
Finding of the Court:
1. The assessment of rent income arising out of the properties should be made under s. 9 and not under s. 10 of the Act. 2. When the assessment of the income derived from property is made under s. 9 the question of allowing any depreciation of the buildings does not arise under s. 10(2). 3. As it is not denied that the managing agents rendered services in respect of the property the remuneration paid therefore is justifiably allocated under the head "property" within the meaning of s. 9 and there being no provision for deducting the said allowance under this section it is not allowable as a deductible allowance. 4. The Tribunal rightly decided that in the asst. yrs. 1953-54 and 1954-55 the interest payable to Greaves Cotton and Company Limited should be disallowed as a deduction under s. 9(1)(iv) of the Act. 5. In the asst. yr. 1955-56 a part of the interest paid to M/s Karam Chand Thapar and Brothers Limited for the borrowals of a sum of Rs. 13,00,000 was justifiably disallowed by the Tribunal as inadmissible under s. 10(2)(iii) of the IT Act.
Issues: 1. Whether the assessment of rent income should be made under s. 9 or s. 10 of the IT Act, 1922. 2. Whether depreciation allowance is admissible under s. 10(2)(vi) in respect of buildings from which rent income is derived. 3. Whether the managing agency commission should be apportioned between the income from property and the income from business. 4. Whether the interest paid on borrowed capital for the construction of newly constructed houses is deductible under s. 9(1)(iv).
Ratio Decidendi: 1. The income from property is a specific head of charge and the tax is payable under s. 9 in respect of the bona fide annual value of such property. 2. Depreciation allowance under s. 10(2)(vi) is admissible only in respect of buildings used for the purpose of business. 3. The managing agency commission should be apportioned between the income from property and the income from business, as the managing agents rendered services in respect of both property and business. 4. The interest paid on borrowed capital for the construction of newly constructed houses is not deductible under s. 9(1)(iv), as the newly constructed houses are exempt from tax under s. 4(3)(xii).
Final Decision: The questions referred to the Court are answered in the affirmative.
1. K. C. SEN, J. 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 landlords, 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 course 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 co
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