ORDER
B.L. Chhibber, Accountant Member
1. The common ground raised by Revenue in the three appeals relating to assessment years 1986-87, 1987-88 and 1989-90 reads as under :
On the facts and in the circumstances of the case and in law, the learned CIT(A), Surat has grossly erred in holding that income of the assessee-trust is assessable under Section 56 of the Income-tax Act under the head “Income from other sources”, and not under Section 28 of the Income-tax Act under the head “Income from business or profession”, even though, the activity carried on by the assessee-trust clearly indicate that the activity was clearly in the nature of business or adventure in the nature of trade.
2. The assessee-trust came into existence on 13-12-1982, created by Settlor Shri Gulabdas Chhabildas Mithawala for the benefit of known beneficiaries. The trust took on lease a partly constructed property at Ward No. 15, Navagam, Revenue Survey No. 1 /2 Paiki Survey Nos. 485 and 486 TPS No. 4, final plot Nos. 144B and 144C. This property was co-owned by Shri Amratlal Hargovandas Relia in his individual capacity and the respective HUFs of his three sons Arvindkumar A. Relia, Ashokkumar A. Relia and Anilkumar A. Relia. Accordingly, lease deed was executed on 18-1-1983 giving monthly lease rent of Rs. 4,000 to the aforementioned co-owners. The trust completed remaining construction and rertted the whole premises to Post and Telephone Department from which it started earning rental income. Accordingly, the trust showed this income as “income from property” and since the shares of the beneficiaries were known and definite, the income was apportioned between the beneficiaries and assessed as such.
3. Later on, the Commissioner of Income-tax, Surat invoked the provisions of Section 263 for the assessment years 1986-87 and 1987-88 and set aside the assessments as no meaningful inquiry on all surrounding facts and circumstances of the case such as exact nature and character of lease agreement between the owners of the property and the assessee-trust, the source and nature of funds utilised by the assessee-trust for further construction of the property incurred before its letting out to the Telephone Department, etc., were made. This order of the CIT, Surat stands confirmed by the order of the ITAT Ahmedabad Bench “C” dated 18-2-1993 in ITA Nos. 4524 and 4525/Ahd/1990.
4. During the course of de novo assessment proceedings pursuant to the orders of the CIT, Surat under Section 263, the Assessing Officer made detailed enquiries and held that since the assessee was not the owner of the property, the income could not be assessed under Section 22 of the Income-tax Act. He further observed that the owner had carried out day-to-day supervision of the construction of the building to ensure maximum economy. Thirdly, the trust was created for specific purpose of leasing the property with the intent to sublet it in order to earn profit. Fourthly, that the entire arrangement appears to be a contrived one to divert income from the hands of the co-owners to their dependents through the medium of the trust. He accordingly held that the income derived by the assessee-trust from the Telephone Department was business income. In support of his contention he relied upon the judgment of the Supreme Court in the case of S.G. Mercantile Corpn. (P.) Ltd. v. CIT[1972] 83 ITR 700.
5. For assessment year 1989-90, the ITO treated the income from Telephone Department as income from the business for the same reasons as advanced by him for assessment years 1986-87 and 1987-88.
6. On appeal, the CIT(A) after considering the detailed submissions made before him and after going through the various case laws cited by the Assessing Officer and the learned Counsel for the assessee, held as under :
(A) Since the assessee is merely a lessee and not the owner of the land and building, the income derived from letting out of leasehold building cannot be taxed under the head “Income from house property”, i.e., under Section 22 of the Act.
(B) It cannot be said that the assessee-trust was carrying on any business activity and hence the income cannot be assessed under the head “Income from business”. According to the CIT(A) the ratio laid down by the Supreme Court in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra) is not applicable to the facts of the case. The observations in this regard are as under :
On going through the decision of the Supreme Court as cited above, it is seen that the most important determining factor whether the income is to be treated as income from business or not, is whether the taking of the property on lease by the appellant and sub-letting the same is a part of business and trading activity of the appellant-trust or not. The Assessing Officer in the assessment order has not tried to analyse the facts whether the appellant is indulging in any business activity or not. From the computation of income it is seen that the appellant-trust is not having any other sources of income except rental income from the house property taken on lease. It is also seen that apart from leasing out of property under consideration, the appellant has not ventured in any other such activities of leasing out of property or development or the land. It is also seen that the property has been let out to only one tenant, i.e., The Indian Telephone Department. All these facts go to prove that the appellant cannot be considered to be indulging in regular activities of taking properties on lease and subletting portion thereof, setting up a market thereon and letting out shops and stalls in the market as contemplated in the Supreme Court’s decision referred to above. It has also not been proved by the Assessing Officer that taking out of property on lease and sub-letting portion thereof is a part of business and trading activities of the appellant. Therefore, keeping in view of the facts and circumstances of the case, I am of the opinion that the income earned by the appellant by way of letting out of the leasehold property cannot be considered as income from business.
(C) Since the income derived by the assessee-trust cannot be assessed either under Section 22 or 28 of the Income-tax Act, the income would naturally fall under the head “Income from other sources”. The CIT(A) accordingly directed the Assessing Officer that the income of the assessee be assessed under Section 56 of the Act.
7. Shri M.P. Lohia, the learned DR relied upon the order of the Assessing Officer. He submitted that since the assessee was not the owner of the property the income from Telephone Department could not be assessed under the head “Income from property”. He further submitted that the assessee trust has no title and no ownership to the property and on the contrary, the lease deed specifies no period of operation of lease and as per its conditions (clause) the lessee assessee can be evicted immediately on the notice from the co-owners. The learned DR submitted that the assessee took partly built property on lease and thereafter completed the construction by making investments therein and thereafter let out the property to the Telephone Department to earn the income. This activity on the part of the assessee constituted a business activity and as such the ratio laid down by the Supreme Court in the case of S. G. Mercantile Corpn. (P.) Ltd. (supra) was applicable. He, therefore, concluded that the learned CIT(A) was not justified in holding that the income received by the assessee from the Telephone Department should be assessed under the head “Income from other sources”.
8. Shri R.N. Vepari, the learned Counsel for the assessee submitted that notwithstanding the fact that the assessee had taken the property on lease, it ought to have been assessed under the head “Income from house property” in view of the following decisions :
(a) CIT v. Kanaiyalal Nimani [1979] 120 ITR 892 (Cal.)
(b) CIT v. Smt. T.P. Sidhwa[1982] 133 ITR 840 (Bom.)
(c) Saiffuddin v. CIT[1985] 156 ITR 127 (Raj.)
(d) D.R. Puttanna Sons (P.) Ltd. v. CIT[1986] 162 ITR 468 (Kar.)
He further submitted that since no other services were being rendered by the assessee other than what a landlord would render to a tenant, the income could not be considered as business income. For the same reasons the learned Counsel supported the cross-objections where the common grounds read as under :
(1) The learned CIT(A) erred in holding that income earned by the assessee-trust was assessable under the head “Income from other sources” and not “income from house property”, even though the income purely related to rent earned out of ownership of property.
(2) The assessee submits that the learned CIT(A) failed to appreciate the peculiar facts and the relevant provisions of the Act and therefore, was not justified in holding that income was “income from other sources”.
9. We have considered the rival submissions and perused the facts on record. In our view, the learned CIT(A) is justified in holding that the income received by the assessee-trust from the Telephone Department is not assessable under the head “Income from property”. We have perused the lease deed under which the assessee obtained the premises from the owners. In this lease deed the assessee is described as “tenant” while the other party from whom the assessee-trust has taken the premises, has been described as “landlord”. The parties are not described as “purchasers and sellers”. It is mentioned in this deed that on the date of the execution of the document the property was partly constructed. The assessee was given right to complete the construction. The assessee was also given right to let it out. The assessee-trust’s liability was to pay monthly rent of Rs. 4,000 to the other party. In one of the clauses it has been clearly mentioned that the tenant who would be inducted by the assessee would be regarded as sub-tenant of the other party. In view of this document, it cannot be said that the assessee was the owner of the property and hence the rental income from subletting cannot be treated as income from house property.
10. Coming to the question whether the property is assessable under the head “Income from business” or “Income from other sources”, we are of the opinion that the income is liable to be taxed under the head “Income from business”. We have perused the trust deed dated 13-12-1982 and find that it empowers the trustees who are also the owners of the property to invest the Trust Fund in any firm, company or bank, in the mortgage of immovable properties, in the purchase and lease of properties, in shares or debentures, or in any business, whether proprietary or a partnership. The assessee-trust took on lease partly built property and within two weeks after the execution of the trust deed, i.e., on 1-1-1983 Rs. 3 lakhs were spent on the finishing work of the building between January and April 1983. The assessee’s activity during this period consisted of purchase of partly built building, complete its construction and letting out the same to the Telephone Department. It is further evident from the facts of the case that the property was taken on lease with the object of developing it into commercial property and then letting it out for earning income and this activity constitutes commercial exploitation of an asset and thus a business activity. It is now well settled that in taxation matters it is not necessary to construe documents from their purely legal and/or technical aspect. It is open to the Court not merely to look at the documents themselves but also to consider the surrounding circumstances so as to know what was the real nature of the transactions from the point of view of two businessmen who were carrying out the transactions. For this proposition, reliance is placed on the judgment of the Supreme Court in the case of CIT v. Durga Prasad More [1971] 82ITR 540. Reference is also invited to the recent judgment of the Supreme Court in the case of Sumati Dayal v. CIT where it has been held that considering the surrounding circumstances and applying the test of human probabilities is a must. The sequence of events and the surrounding circumstances indicate that the trust was created for the specific purpose of taking on lease a partly built building from the co-owners who are also family members with the intent to sublet it to a commercial institution, viz., Telephone Department in order to earn profit. Accordingly, we agree with the learned Assessing Officer that the case stands squarely covered by the judgment of the Supreme Court in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra). In this case the appellant-company was incorporated in January 1955. One of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. Within less than two weeks of its incorporation, the company took on lease a market place for an initial term of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site. It was also given the right to sublet the different portions. The appellant’s activity during the period covered by the assessment years 1956-57 to 1958-59 consisted of developing the property and letting out portions thereof as shops, stalls and ground spaces to shopkeepers, stallholders and daily casual market vendors. The question was whether the appellant’s income from subletting the stalls was assessable as business income under Section 10 of the Income-tax Act, 1922 or as income from other sources under Section 12. The Hon’ble Supreme Court held that since the appellant-company was not the owner of the property or any part thereof, no question of making the assessment under Section 9 arose. The Supreme Court further held that the definition of “business” in Section 2(4) was of wide amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market. The Hon’ble Apex Court further held that the taking of the property on lease and subletting portions thereof was part of the business and trading activity of the appellant and the income of the appellant fell under Section 10 of the Act and further that where, as in this case, the income could appropriately fall under Section 10 as being business income, no resort could be made to Section 12. The Supreme Court further held that the liability to tax under Section 9 of the Income-tax Act, 1922, is of the owner of the buildings. The Supreme Court further held that the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded.
In the case before us, as stated above, the trust was incorporated with the specific purpose, inter alia, to acquire partly built property, developing it into a commercial structure and then letting it out to a commercial institution, viz., Telephone Department. Further, as stated above, as in the case of S.G. Mercantile Corpn. (P.) Ltd. “(supra), two weeks after the execution of the trust deed, i.e., 1-1-1983 Rs. 3 lakhs were spent on the finishing work of the building between January and April 1983 mostly out of borrowed funds. The distinction drawn by the learned CIT(A) between the facts of the case of the assessee and those of the case before the Supreme Court, is untenable and accordingly we set aside his finding that the income should be assessed under the head “Income from other sources”.
11. Coming to the cases relied upon by the learned Counsel for the assessee, it is noted that the facts of those cases are distinguishable from the facts of the case of the assessee before us.
In Kanaiyalal Nimani’s case (supra), it was the land which was leased out on which the assessee had constructed stalls and these stalls were permanently affixed to the ground and on the basis of the provisions of the lease deed the assessee was held to be the owner of the stalls during the period of the lease. We have, in para 9 above referred to the lease deed of the assessee and analysed the same and noted that the assessee is described as “tenant” while the other party from whom the assessee has taken the premises, has been described as “landlord”. As such the terms and conditions in the lease deed are vastly different from those of the lease deed in the case of Kanaiyalal Nimani (supra).
In Smt. T.P. Sidhwa ‘s case (supra), the assessee entered into a contract to purchase one-fourth share in a house property in 1959. In 1963, a regular conveyance deed in favour of the assessee was executed and she became full owner of the one-fourth share. Thus, it was a case of ownership and not one of lease and hence the facts are clearly distinguishable.
In Saiffuddin’s case (supra), the Hon’ble Rajasthan High Court was deciding the case of an assessee who purchased a plot of land on which a hotel was constructed and the expenses of the construction were borne by the assessee and his two brothers. Again it was a case of ownership and not that of lease and hence the facts are distinguishable.
In D.R. Puttanna Sons (P.) Ltd. scase (supra), the title, and ownership of the structure built by the assessee remained vested in the lessee (assessee) and on these facts the Hon’ble Karnataka High Court held that the income was assessable under the head “Income from property”. The High Court also held that the ratio laid down by the Supreme Court in the case of S. G. Mercantile Corpn. (P.) Ltd. (supra) was distinguishable on the facts of the case. In the case before us as stated above, as per the lease deed the relation between the assessee and the owners of the property was that of ‘tenant’ and a ‘landlord’ and further we have held that the ratio laid down by the Supreme Court in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra) is squarely applicable to the facts of the case before us. Accordingly the assessee cannot draw assistance from the aforesaid judgment of the Karnataka High Court.
12. In the light of the above discussion, we hold that the income derived by the assessee from letting out the building to Telephone Department is assessable under the head “Income from business” and we accordingly reverse the finding of the CIT(A) that it is assessable under the head “Income from other sources”. We further hold that the said income is not taxable under the head “Income from house property” as pleaded by the learned Counsel for the assessee.
13. In the result, the Revenue’s appeals are allowed and the cross-objections filed by the assessee are dismissed.