My client is a company whose memorandum says it exists to develop and let property. Does that alone make its rent business income?
No. The heads of income are mutually exclusive and are fixed by the source from which the income is derived, so rent from shops and stalls is income from property whatever the company's objects say. The Supreme Court held that the character of the income is not altered because it is received by a company formed with the object of developing and setting up markets, and that if income falls within a specific head the fact that it may indirectly be covered by another head does not make it taxable under the latter.
Decided by the Supreme Court (J.C. Shah J and M. Hidayatullah J) on 1960-11-02, reported as [1961] 42 ITR 49 (SC); AIRONLINE 1960 SC 3. It bears on section 22, section 28, section 14 of the Income Tax Act 1961, in House Property and How Tax Law Is Read matters.
This is the foundation stone on the Revenue's side of the section 22 versus section 28 argument and it has never been overruled. Anyone relying on Chennai Properties, Rayala Corporation or Raj Dadarkar has to get past it, and the Supreme Court in Chennai Properties (9 April 2015) did so by distinguishing it, not by discarding it: there the company's main object was to acquire and let out properties, here the main object was to develop landed properties into markets and the letting was the fruit of ownership. So the memorandum of association is not the test and never was — what matters is whether the letting is itself the business being carried on or is the way the owner enjoys his property. The second holding, that an income falling under a specific head cannot be dragged to another head merely because it is indirectly covered there, is the reason the Revenue can insist on the house property computation (30 per cent, and only section 24 deductions) even where the taxpayer has run the receipt through a profit and loss account.
Binding on every court and authority in India.
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The appellant was a private company incorporated under the Indian Companies Act with objects that included buying and developing landed properties and promoting and developing markets. In 1946 it purchased ten bighas of land in Calcutta and set up a market on it, constructing shops and stalls on platforms. For assessment year 1953-54 it received Rs 53,145 from the tenants of shops and Rs 29,721 from the tenants or occupants of stalls. Under the Calcutta Municipal Act 1951 the company was required to obtain a licence from the Corporation of Calcutta and to maintain sanitary and other services, for which it maintained staff and incurred expenditure. The Income-tax Officer assessed the income from shops and stalls under section 9 of the Indian Income-tax Act 1922 as income from property; the Appellate Assistant Commissioner and the Tribunal confirmed that. The company obtained special leave to appeal against the Tribunal's order, contending that because it was formed with the object of promoting and developing markets, the income was taxable under section 10 as profits or gains of business.
The appeal was dismissed with costs. Income derived by the company from the shops and stalls was income received from property falling under the specific head in section 9, and its character was not altered because it was received by a company formed with the object of developing and setting up markets; the obligation to obtain a municipal licence and to maintain sanitary and other services, and the staff and expenditure that went with it, did not make the receipts profits or gains of business (paragraphs 2, 3 and 6).
The Court began from the structure of section 6, which makes six heads of income chargeable. Income-tax is a single tax on aggregate taxable receipts and not a collection of taxes separately levied on distinct heads, but the heads specified in section 6 indicate the sources from which income is derived and are mutually exclusive; income falling under a specific head must be computed in the manner provided by the appropriate section, and the fact that it may indirectly be covered by another head does not make it taxable under that other head (paragraph 2). The Court relied on its own earlier exhaustive review in United Commercial Bank Ltd. v. Commissioner of Income-tax for the mutual exclusivity of the heads (paragraph 3). It drew support from Fry v. Salisbury House Estate Co. Ltd., where a company formed to acquire, manage and deal with a block of buildings, letting rooms as unfurnished offices while providing lift staff, porters, heating and cleaning, was held chargeable under Schedule A and not Schedule D (paragraph 4), and from Commercial Properties Ltd. v. Commissioner of Income-tax, where income of a company whose sole object was to acquire land, build houses and let them to tenants was held assessable under section 9, the incidence of the income not being altered merely because the owner was a company incorporated with the object of owning property (paragraph 5). On the stalls, the Court held the character of the income was not altered by the fact that some stalls remained with the same occupants and the source was occupation of the stalls, and that it was a matter of little moment that the occupation was temporary (paragraph 6).
But the distinct heads specified in section 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose to taxation in the manner provided by the appropriate section.
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Handle my notice → Ask a CA on WhatsAppNo. The heads of income are mutually exclusive and are fixed by the source from which the income is derived, so rent from shops and stalls is income from property whatever the company's objects say. The Supreme Court held that the character of the income is not altered because it is received by a company formed with the object of developing and setting up markets, and that if income falls within a specific head the fact that it may indirectly be covered by another head does not make it taxable under the latter. This was decided by the Supreme Court (J.C. Shah J and M. Hidayatullah J) and bears on section 22, section 28, section 14 of the Income Tax Act 1961. It is reported as [1961] 42 ITR 49 (SC); AIRONLINE 1960 SC 3. This is the foundation stone on the Revenue's side of the section 22 versus section 28 argument and it has never been overruled. Anyone relying on Chennai Properties, Rayala Corporation or Raj Dadarkar has to get past it, and the Supreme Court in Chennai Properties (9 April 2015) did so by distinguishing it, not by discarding it: there the company's main object was to acquire and let out properties, here the main object was to develop landed properties into markets and the letting was the fruit of ownership. So the memorandum of association is not the test and never was — what matters is whether the letting is itself the business being carried on or is the way the owner enjoys his property. The second holding, that an income falling under a specific head cannot be dragged to another head merely because it is indirectly covered there, is the reason the Revenue can insist on the house property computation (30 per cent, and only section 24 deductions) even where the taxpayer has run the receipt through a profit and loss account. If it applies to you, the first step is this: Stop arguing from the objects clause. Identify the source of the receipt and ask whether the taxpayer is exploiting the property as owner or carrying on a business of which the letting is the substance.
The appellant was a private company incorporated under the Indian Companies Act with objects that included buying and developing landed properties and promoting and developing markets. In 1946 it purchased ten bighas of land in Calcutta and set up a market on it, constructing shops and stalls on platforms. For assessment year 1953-54 it received Rs 53,145 from the tenants of shops and Rs 29,721 from the tenants or occupants of stalls. Under the Calcutta Municipal Act 1951 the company was required to obtain a licence from the Corporation of Calcutta and to maintain sanitary and other services, for which it maintained staff and incurred expenditure. The Income-tax Officer assessed the income from shops and stalls under section 9 of the Indian Income-tax Act 1922 as income from property; the Appellate Assistant Commissioner and the Tribunal confirmed that. The company obtained special leave to appeal against the Tribunal's order, contending that because it was formed with the object of promoting and developing markets, the income was taxable under section 10 as profits or gains of business. The matter was decided on 1960-11-02 by the Supreme Court (J.C. Shah J and M. Hidayatullah J). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. Income derived by the company from the shops and stalls was income received from property falling under the specific head in section 9, and its character was not altered because it was received by a company formed with the object of developing and setting up markets; the obligation to obtain a municipal licence and to maintain sanitary and other services, and the staff and expenditure that went with it, did not make the receipts profits or gains of business (paragraphs 2, 3 and 6).
The Court began from the structure of section 6, which makes six heads of income chargeable. Income-tax is a single tax on aggregate taxable receipts and not a collection of taxes separately levied on distinct heads, but the heads specified in section 6 indicate the sources from which income is derived and are mutually exclusive; income falling under a specific head must be computed in the manner provided by the appropriate section, and the fact that it may indirectly be covered by another head does not make it taxable under that other head (paragraph 2). The Court relied on its own earlier exhaustive review in United Commercial Bank Ltd. v. Commissioner of Income-tax for the mutual exclusivity of the heads (paragraph 3). It drew support from Fry v. Salisbury House Estate Co. Ltd., where a company formed to acquire, manage and deal with a block of buildings, letting rooms as unfurnished offices while providing lift staff, porters, heating and cleaning, was held chargeable under Schedule A and not Schedule D (paragraph 4), and from Commercial Properties Ltd. v. Commissioner of Income-tax, where income of a company whose sole object was to acquire land, build houses and let them to tenants was held assessable under section 9, the incidence of the income not being altered merely because the owner was a company incorporated with the object of owning property (paragraph 5). On the stalls, the Court held the character of the income was not altered by the fact that some stalls remained with the same occupants and the source was occupation of the stalls, and that it was a matter of little moment that the occupation was temporary (paragraph 6). In the words reproduced by the source cited on this page: "But the distinct heads specified in section 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose to taxation in the manner provided by the appropriate section." The decision followed or applied United Commercial Bank Ltd. v. Commissioner of Income-tax (SC) — relied on for the mutual exclusivity of the heads of income; Fry v. Salisbury House Estate Co. Ltd. (House of Lords) — relied on; Commercial Properties Ltd. v. Commissioner of Income-tax — relied on.
It was decided by the Supreme Court on 1960-11-02 and is reported as [1961] 42 ITR 49 (SC); AIRONLINE 1960 SC 3. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 22, section 28, section 14, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed with costs. Income derived by the company from the shops and stalls was income received from property falling under the specific head in section 9, and its character was not altered because it was received by a company formed with the object of developing and setting up markets; the obligation to obtain a municipal licence and to maintain sanitary and other services, and the staff and expenditure that went with it, did not make the receipts profits or gains of business (paragraphs 2, 3 and 6). It arises in House Property and How Tax Law Is Read matters, on section 22, section 28, section 14 of the Income Tax Act 1961, and was decided by J.C. Shah J and M. Hidayatullah J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you are for the taxpayer, build the Chennai Properties distinction on facts, not on the memorandum: what the organised activity actually is, what services are supplied, what the commercial asset being exploited is. If you are for the Revenue or defending a house property assessment, cite this case for the mutual exclusivity of the heads and for the proposition that maintenance staff and statutory services incurred by the owner do not convert rent into business profits. Remember what follows from mutual exclusivity on the deduction side: once the receipt is house property income, only sections 23 and 24 apply and actual outgoings such as staff and maintenance are not deductible. Read this case together with Karanpura Development and Sultan Brothers before advising on any composite or serviced letting.
Still good law. Distinguished, not overruled, by the Supreme Court in Chennai Properties & Investments Ltd. v. CIT (judgment dated 9 April 2015): that Court expressly took up this decision, noted that the main objective of the company here was to develop landed properties into markets and that some shops and stalls so developed had been rented out, and held its own case to be different because there the letting out of properties was itself the company's main object. That passage was read on the plain indiankanoon page for the Chennai Properties judgment because the ?type=print version of that document returned HTTP 403 on two attempts, so the corroboration is from a rendered page rather than a raw transcription and no quotation from Chennai Properties is offered here. Beyond that single check, no search for later treatment of this 1960 judgment was carried out. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment is under the Indian Income-tax Act 1922 — sections 6, 9 and 10, which correspond to sections 14, 22 and 28 of the 1961 Act; the sections field records the modern equivalents and the reasoning is set out in the 1922 Act's own language. The retrieved text carries obvious optical errors: 'section 1o' appears for section 10 in two places in paragraph 2, 'for the purpose to taxation' appears in paragraph 2 where 'for the purposes of taxation' is meant, and 'to by and develop landed properties' in paragraph 1 is plainly 'to buy and develop'. The key quote reproduces the text exactly as printed, including 'for the purpose to taxation'. The appeal reached the Supreme Court by special leave directly against the order of the Income-tax Appellate Tribunal, Calcutta Bench, not through a High Court reference. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs. Income derived by the company from the shops and stalls was income received from property falling under the specific head in section 9, and its character was not altered because it was received by a company formed with the object of developing and setting up markets; the obligation to obtain a municipal licence and to maintain sanitary and other services, and the staff and expenditure that went with it, did not make the receipts profits or gains of business (paragraphs 2, 3 and 6).
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