TMI Blog2003 (3) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 'Income from other sources'?" - Answer: In the affirmative. The income of the assessee would be "business income", except the income derived by way of rent from the residential hotel and revolving restaurant" – Further, held that, the income derived by way of rent from residential hotel and revolving restaurant would be income from the house property. - - - - - Dated:- 27-3-2003 - Judge(s) : R. K. ABICHANDANI., A. L. DAVE. JUDGMENT The judgment of the court was delivered by A.L. DAVE J.-These income-tax references are made by the Income-tax Appellate Tribunal in respect of the assessment of various assessment years of the respondent, pursuant to the directions issued by this court under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") for referring questions which are almost identical, though differently worded. Following the amendment in the Act, Tax Appeal No. 1 of 2002 was preferred by the Revenue in respect of the assessment year 1990-91 in which also similar question was formulated. The question that arises for determination by this court is worded in different references as under: In I.T.R. No. 83 of 1989 for the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, the question is reframed as under: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in concluding that the activity of the assessee was business activity and, therefore, its income was liable to be taxed under the head 'Business income'?" All the matters relate to the same respondent-assessee for different assessment years and raise the above common question and are, therefore, argued together by learned counsel for both the sides. In order that the contentions raised by learned counsel for the parties can be better appreciated, the background of the matter needs to be stated. The assessee is a co-operative society registered under the Gujarat Co-operative Societies Act, 1962. It was formed broadly with the objects of carrying on activities of providing godowns, shops, and other amenities for the trade of members and persons engaged or connected with textile trade and the society. The assessee was given on lease, land in the vicinity of the Ring Road of Surat by the Surat Municipal Corporation, whereon it constructed a huge building complex having 1,030 shops, 104 godowns and one auditorium. In addition, part of the complex was designe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt by the Tribunal. This court accepted those applications and directed the Tribunal to refer the above questions to this court in exercise of powers under section 256(2) of the Act. Following the order, the Tribunal has referred the questions as stated above and that is how the matters are before us. The Assessing Officer observed that the assessee has given the hotel, revolving restaurant, banks, auditorium, and even shops and godowns on rent which is not the object of the society nor is it the business of the society. He came to the conclusion that the provisions of section 28, clause (iii) of the Income-tax Act cannot be attracted as the assessee is a co-operative society and not an association envisaged under the said provision. The Assessing Officer, on the facts, observed that the activities of the society suggest that the society is not doing any business and, therefore, it is not earning any business income. The object of the society is of carrying on activities of selling, hiring, letting, developing land and construction of buildings in accordance with the society's principles with a view to provide godowns and shops and other amenities for the trade of members and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sanitation, lifts, etc., form part of the properties let out to the members or banks or others in the sense that they go with property and, therefore, it cannot be considered that whatever the assessee earned by way of charges for the services is its business income. The business of the assessee is not to let out the building owned by it and earn therefrom and, therefore, it would amount to exploiting the property. The learned advocate, Mr. Naik, placed reliance on the following decisions in support of his contentions: (i) Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 (SC); (ii) S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700 (SC); and (iii) East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC). Learned counsel therefore submitted that the Tribunal has erred in law and in fact in concluding that the income of the assessee is "business income". Learned counsel appearing for the respondent-assessee submitted that the assessee is a co-operative society formed with the object of carrying on the activities of buying, selling, hiring, letting and developing land and construction of buildings in accordance with the co-operative princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cotton Press Co. Ltd. v. CIT [1999] 237 ITR 454 (SC); and (iv) CIT v. Shah Brothers [2000] 243 ITR 445 (Karn). A decision of this court dated November 21, 2002, rendered in the case of CIT v. Sarabhai Pvt. Ltd. [2003] 263 ITR 197 in Income-tax Reference No. 134 of 1988 was cited to point out that the Division Bench opined therein that the income which the assessee had received towards rent from the property leased by it should be treated as "income from house property" whereas the income received by the assessee towards different services rendered to the tenants should be treated as "profits and gains of business or profession". We have considered the rival contentions. We have been taken through the material on record in support of the contentions. The entire dispute spins around the question whether the income derived by the assessee by letting out the premises can be considered as "business income" or "income from other sources" or "income from house property". It would therefore be necessary to examine the question whether the income earned by the assessee is out of business activity. A Constitution Bench of the apex court, in the case of Sultan Brothers Pvt. Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociety. The basic principle of co-operation is that the members join as human persons and not as capitalists. Co-operation is a form of organization wherein persons associate together as human beings on the basis of equality for the promotion of economic interest of themselves. It is a method of doing business with ethical base. "Each for all, and all for each" is the motto of co-operation. It not only develops the latent business capacity of its members but it also produces leaders and encourages growth of social virtues, honesty and loyalty. The assessee is a co-operative society which is formed by its members with the above stated objects which are not meant for anybody's personal gain or profit but aimed at an all round development of textile trade which will have a favourable impact on the economy. Therefore, it would be appropriate to consider the view point of the assessee also while deciding the question whether the activity of the assessee can be considered as business activity and whether the income can be considered as business income. There is no dispute about the fact that the assessee provides various facilities for its members and occupiers of the property like mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch inductee would be required to become a nominal member of the assessee. Statements of some of the occupants recorded by the revenue authority reveal that the rent notes were executed in respect of shops and godowns for "technical reasons" and, therefore, the assessee cannot be considered as owner of the shops or godowns allotted to its members. In CIT v. Podar Cement Pvt. Ltd. [1997] 226 ITR 625, the apex court ruled in the context of section 22 of the Act, that having regard to the ground realities and further having regard to the object of the Act, namely, to tax the income, the owner is a person who is entitled to receive income from the property of his own right. The amount of token rent of Re. 1 charged from the allottee members is not charged with a view to exploit the property. In fact, after the shops or god owns were allotted to the members, the members alone had a right to derive income of such property which they could subject to the byelaws assign to others and derive income therefrom. In the instant case, it is the allottee member who would receive or would be entitled to receive income from the property in his own right and not the assessee and, therefore, the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for its members;..." The assessee is an association of persons (though in the form of a co-operative society) which provides specific services to its members and charges them therefor and, therefore, the income derived by the assessee by charging its members and/or occupiers for the services rendered would fall under the head "Profits and gains of business or profession". So far as the income derived by the assessee by way of rent from banks, canteens, post office and auditorium are concerned, it is contended by the Revenue that it is not the business of the assessee to run a bank or to run an auditorium or to run canteens or even to provide such services and, therefore, it has to be considered as income from house property or in any case, it cannot be considered as income out of business of the assessee. It is also contended that a revolving restaurant or a hotel is not required to be constructed or run to facilitate the trade or to fulfil the object of the assessee. It cannot be considered as business income either. The contention of the Revenue is countered by learned counsel for the assessee by submitting that banks, canteens, and post office are very much necessary to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raders and large volume of business. It is the assessee who would have the best information and would be the best person to judge as to what could be the quantum of requirement of banking services to cater to the need of its members and, therefore, in our opinion, letting out the premises to banks was with a view to facilitate and provide amenity to its traders and therefore, would fall within the term "business activity" of the assessee. As regards letting out a part of the premises to the post office also, these days when trade and commerce are expanding far from being restricted to local markets, traders would require the services of the postal department and the action of the assessee in arranging for a post office in the premises itself, in our view, is an act of providing amenity to its members for promotion of their trade. This service is in no manner different from services of banks from the businessman's point of view as it helps the traders in their business. The income that is derived by the assessee by way of rent is only incidental for providing the services and not aimed at making profit out of the property. The rent is only incidental and may be considered, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be only an incidental use of the premises and not a main source of income from the property. That incidental use cannot be regarded as an act of deriving income from the property, and, therefore, in our view, the income derived by the assessee by permitting use of the auditorium by collecting charges therefor cannot be considered as "income from house property" or "income from other sources" but would fall under the head "Business income". So far as the income of the assessee derived from the rental of the revolving restaurant and residential hotel, it is not possible for us to accept the contention of the assessee that the hotel and the revolving restaurant were contemplated and constructed for fulfilling the objects of the assessee to facilitate trade of the members. It would be too far fetched and remote to contemplate that it would attract more clientele and provide facility to the members to entertain such clients or customers especially when they are open to the general public. Construction of a hotel or revolving restaurant was not the object of the assessee nor can it be said that the members could not have run the business conveniently or could not have promoted bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t part of the question would be in the affirmative, in favour of the assessee and against the Revenue and answer to the second part of the question would be as under: The income of the assessee would be "business income", except the income derived by way of rent from the residential hotel and revolving restaurant. Question in I.T.R. No. 83 of 1989 for the assessment years 1975-76, 1976-77, 1978-79 and 1979-80, 1980-81, 1981-82, I.T.R. No. 35 of 1992 for the assessment years 1977-78, 1982-83 and 1983-84, I.T.R. No. 256 of 1995 for the assessment years 1986-87, I.T.R. No. 52 of 1997 for the assessment years 1987-88 and 1988-89, I.T.R. No. 10 of 1998 for the assessment year 1989-90, I.T.R. No. 32 of 2000 for the assessment years 1990-91 to 1994-95: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the activity of the assessee co-operative society was business activity?" Answer: In the affirmative, in favour of the assessee and against the Revenue. Question in I.T.R. No. 83 of 1989 for the assessment years 1975-76, 1976-77, 1978-79 and 1979-80, I.T.R. No. 35 of 1992 for the assessment years 1977-78, 198 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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