27 August 1971
Supreme Court
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KARNANI PROPERTIES LTD. Vs COMMISSIONER OF INCOME TAX, WEST BENGAL

Case number: Appeal (civil) 1874 of 1968


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PETITIONER: KARNANI PROPERTIES LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, WEST BENGAL

DATE OF JUDGMENT27/08/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N.

CITATION:  1972 AIR 2315            1972 SCR  (1) 457  1971 SCC  (3) 568  CITATOR INFO :  F          1973 SC 515  (11)  E          1973 SC 997  (16)  RF         1982 SC1153  (12)  RF         1986 SC  98  (18)

ACT: Income Tax Act, 1922, ss. 9, 10, 12, 66-Company owning flats and  shops  and  letting them  out  on  rent-Also  supplying electricity, water and other services to tenants-Income from latter  source whether falls under .s. 10, or s. 12 of  Act- High Court in reference cannot go behind the facts found  by the Tribunal as mentioned in statement of case.

HEADNOTE: The  assessee  company owned houses and  flats  in  Calcutta which  it had let out on rent.  The company  purchased  from the  Calcutta Electric Supply Corporation high voltage  A.C. current in bulk, converted it into low voltage A.C.  current in  the  company’s own power house with  the  premises.  and supplied  the  power to the tenants., It also  maintained  a separate water pump-house and a boiler for the supply of hot and cold water to the tenants.  It further provided for  the benefit  of  tenants electric lifts working day  and  night. For   all  these  purposes  a  large  permanent  staff   was maintained.   The monthly payments by the tenants  consisted apart  from rent, of charges in respect of  these  services. In  proceedings  before  the  Income-tax  Officer  for   the assessment  years 1956-57 and 1957-58 the  assessse  company claimed that the entire receipts from the tenants should  be treated  as income from business in as Much as  the  company had been formed for carrying on the business of letting  out flats and shops.  The Income-tax Officer split the  receipts into two Parts; one part of the receipts he treated as  rent received  by the assessce and the remaining part he  treated as  income  from other Sources taxable tinder s. 12  of  the income-tax  Act, 1922.  The Appellate Tribunal accepted  the contention  of  the assessee that the income  taxed  by  the Income-tax  Officer as income from other sources  should  be treated as income from business.  Thereafter at the instance of  the Department the Tribunal referred to the  High  Court the question whether "on the facts and circumstances of  the case"  the  Tribunal  was  justified  in  holding  that  the

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services  supplied  to the tenants  constituted  a  business activity  of  the assessee taxable under s.  10.   The  High Court  opined after a reappraisal of the evidence that  some of  the  facts found by the Tribunal were not  correct.   It came  to  the  conclusion that the income  in  question  was taxable  neither under s. 12 nor under s. 10 but under s.  9 though this was not the contention of the Department at  any stage.  By certificate appeals were filed in this Court. HELD  :  (1) The jurisdiction of the High Court  in  dealing with a reference under s. 66 is a very limited one.  It must take the facts as stated in the statement of the case unless the  question  whether  the findings  of  the  Tribunal  are vitiated  for one or the other of the reasons recognised  by the  law  is  before it.  The High Court  thought  that  the Income-tax Officer, the Appellate Assistant Commissioner  as well as the Tribunal erred in holding that the income of the assessee  company came from two different sources  but  that question  was  foreign to the proceedings  before  the  High Court.    Neither  the  High  Court  nor  this   Court   has jurisdiction to go behind or to question the facts found  by the Tribunal. [461 A-C] Kshetra  Mohan Sannyasi Charan Sudhukhan v. Commissioner  of Excess  Profits Tax, West Bengal. 24.  I. T. R. 488.  relied on. 458 (ii)On the facts found by the Tribunal in the present  case it was clear that the assessee had two different sources  of income and not one source .as found by the High Court. [C-D] [This  however,  should not be understood to  mean  that  in assessing the profits and gains from the several  activities of  a  business,  the profits and  gains  arising  from  the several  activities  of  that  business  can  be  separately computed or separately brought to tax.] [463 B-C] The  services rendered by the assessee to its  tenants  were the result of its activities carried on continuously, in  an organised  manner and with a view to earn  profits.   Hence, those activities had to be considered as business activities taxable under s. 10 of the Act. [461 D] Salisbury  House  Estate  Ltd. v. Fry,  15  Tax  Cases  266, applied. Commissioner of Income-tax, Bombay City v. National  Storage Private  Ltd., 66 I.T.R. 596 and Sultan Brothers Pvt.   Ltd. v.  Commissioner-of  Income-tax, Bombay City-II,  51  I.T.R. 353, referred to. (iii)Generally  speaking the rule of res judicata  does  not apply  to taxation proceedings.  This Court in  the  present case  had not gone into the correctness of the  findings  of fact reached by the Tribunal.  Therefore whether those facts and circumstances were correctly found or not may still be a matter for consideration in any future assessment. [464 F-G]

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos. 1874  and 1875 of 1968. Appeals from the judgment and order dated June 16, 1967  ,of the  Calcutta High Court in Income-tax Reference No.  20  of 1963. M.C.  Chagla,  A. N. Sinha, P. K. Chatterjee  and  Rathin Das. for the appellant (in both the appeals). S.C.  Manchanda, J. Ramamurthi, R. N. Sachthey and B.  D. Sharma, for the respondent (in both the appeals). The Judgment of the Court was delivered by Hegde,  J  These  appeals  by  certificate  arise  from  the

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decision  of  the  High  Court of  Calcutta  in  Income  Tax Reference No. 20 of 1963 on its file.  That was a  Reference under  s.  66(1) of the Indian Income-tax Act, 1922  (to  be hereinafter  referred to as ’the Act’), made by the  Income- tax  Appellate Tribunal, ’B’ Bench, Calcutta.  The  question referred to the High Court for its opinion reads thus :               "Whether on the facts and in the circumstances               of  the  case, the Tribunal was  justified  in               holding  that  the services  rendered  to  the               tenants,  by supplying electrical energy,  hot               and  cold water and maintenance of  lifts  and               other   amenities,  constituted   a   business               activity of the               459               assessee  and  as  such  the  income   arising               therefrom  was assessable under section 10  of               the Income-tax Act, 1922." The  High  Court came to the conclusion that the  income  in question  is income from property and as such is  assessable under S.  9  of the Act; that being so, the same  cannot  be assessed under s.   10.  In  the  result  it  answered   the question in the negative and in favour of the Department. The  assessment years with which we are concerned  in  these appeals   are   1956-57  and  1957-58,   the   corresponding accounting periods being the calendar years 1955 and 1956. The facts as set out in the Statement of the case  submitted by the, Tribunal are as follows : The assessee company owned house properties, popularly known as  Karnani  Mansion  in Park Street,  Calcutta.   The  said Karnani  Mansion consists of numerous residential flats  and over  a  dozen  shop premises.  All those were  let  out  to different tenants on a monthly rental basis.  The tenants in respect of each of the flats and shops let out had to make a monthly payment which included charges for electric current, for use of lifts, for the supply of hot and cold water,  for the arrangement for scavenging, for providing watch and ward facilities as well as other amenities.  The Tribunal further found that the assessee company purchases from the  Calcutta Electric  Supply  Corporation high voltage A.C.  current  in bulk, converts the same into low voltage A.C. current in the company’s  own power house within the premises and  supplies the  power  to its tenants.  It also  maintains  a  separate water pump-house and a boiler for the supply of hot and cold water to the tenants.  The company further provided for  the benefit  of tenants, Electric lifts working day  and  night. The  further finding of the Tribunal was that for all  these purposes  the assessee company maintains a large  number  of permanent staff.  No question under S. 66(1) or S. 66(2) was sought challenging the correctness of the findings  referred to  earlier.   The  question submitted  to  the  High  Court proceeded on the basis that the facts found by the  Tribunal are correct. The  total collection from the tenants made by the  assessee in  accordance with the terms of the agreement  between  the tenants  and  the  assessee was Rs.  5,53,541/-  during  the accounting   year  1956  and  Rs.  5,59,145/-   during   the accounting  year 1957.  The assessee company claimed  before the  Income-tax Officer that the entire receipts  should  be treated as income from business inasmuch as the company  had been  formed  for carrying on the business  of  letting  out flats and shops.  The Income-tax Officer while rejecting the assessees contention, split the receipts 460 into  two parts; one part of the receipt be treated  as  the rent  received  by the assessee and the  remaining  part  he

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treated  as income from other sources taxable under  s.  12. The total amount of the latter category as allocated by  the Income-tax  Officer  was Rs. 1,32,456/- in  the-  assessment year  1956-57 and Rs. 1,32,568/in the assessment year  1957- 58.   It may be noted that even according to the  Income-tax Officer the entire receipt was not assessable under s. 9. In  the appeal before the Appellate  Assistant  Commissioner the  only  controversy was whether the receipt held  by  the Income-tax  Officer as income from other source should  have been  held to be income from business.  Neither the  Revenue nor  the  assesses contended that the  same  was  assessable under s. 9 nor was there any dispute as regards that part of the  receipt  which  was  brought to tax  under  s.  9.  The Appellate Assistant Commissioner rejected the contention  of the  assessee  and affirmed the decision of  the  Income-tax Officer. Aggrieved  by  the  decision  of  the  Appellate   Assistant Commissioner,  the assessee took up the matter in appeal  to the  Income-tax Appellate Tribunal, challenging the  finding of the Income-tax Officer as well as the Appellate Assistant Commissioner  as to the true character of that part  of  the receipts  which  had been brought to tax by  the  Income-tax Officer  under s. 12.  The assessee contended that the  said amount  should  have  been  assessed under  s.  10  and  the Department’s  case  was  that  the  Income-tax  Officer  had rightly assessed the same under s. 12.  Neither the assessee nor  the Department contended before the Tribunal  that  the same  was assessable under S. 9. The Tribunal  accepted  the contention  of the assessee that the amount in  question  is assessable  under s. 10.  Thereafter at the instance of  the Department the question set out earlier was referred to  the High Court of Calcutta for its opinion. The High Court of Calcutta did not accept the contention  of the  Department  that the amount in question  is  assessable under  s. 12 of the Act.  On the other hand, it came to  the conclusion that the same was assessable under S. 9 of the Act.  As seen earlier the Department had all along proceeded on the basis that that amount was not assessable under S.  9 of  the  Act.  If the Department had sought to  assess  that amount under s. 9, it was open to the assessee to claim  the allowances  to  which  it  was  entitled  under  S.  9.  The Department having all along proceeded on the basis that  the income  of  the  assessee  was  income  from  two  different sources,  should not have been allowed to change  its  case. The  High Court opined that some of the facts found  by  the Tribunal  are not correct.  That finding was arrived  at  on reappraisal of the evidence on record.  As seen earlier  the ques- 461 tion  whether the findings of fact reached by  the  Tribunal were vitiated for any reason was not before the High  Court. The  jurisdiction  of  the  High Court  in  dealing  with  a Reference  under s. 66 is a very limited one.  It must  take the  fact as stated in the Statement of the case  unless-the question  whether the findings of the Tribunal are  vitiated for  one  or the other of the reasons recognised by  law  is before  it.   It  may be that the  Income-tax  Officer,  the Appellate  Assistant  Commissioner as well as  the  Tribunal erred in holding that the income with which we are concerned in  these appeals came from two different sources  but  then that question was foreign to the proceedings before the High Court.   The High Court had to accept the facts as found  by the Tribunal and should have answered the question  referred to it on the basis of those facts. From  the  facts found by the Tribunal it follows  that  the

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services  rendered by the assessee to its tenants  were  the result  of  its activities carried on  continuously,  in  an organized manner, with a set purpose and with a view to earn profits.   Hence those activities have to he  considered  as business  activities.  In this connection Mr. M. C.  Chagla, the  learned Counsel for the assesses invited our  attention to  the  decision of the House of Lords in  Salisbury  House Estate,  Ltd.  v.  Fry.(1) The facts of  that  case  are  as follows The  Appellant  Company was the rated occupier  of  a  large block of buildings let to tenants by rooms and by suites  of rooms  as  unfurnished offices.  The Company  had  no  other business  except the letting out and management of  the  one property.   In  addition to the rents for  the  offices  the Company derived profits from its tenants in connection  with the  provision of lighting. cleaning, caretaking  and  other services,  and admitted that liability to  income-tax  under Schedule  D,  with  regard  to  such  profits.   The   Crown contended  that  the  Company  was in  respect  of  all  its activities  carrying  on  a trade and  that  accordingly  in computing  its profits for the purposes of assessment  under Schedule  D, it was necessary to take into account  all  its receipts, including receipts from rents, an allowance  being made  for  the amount of the assessments  under  Schedule  A (Schedule  dealt  with rents  of  properties).   Assessments under  Schedule D (which includes ’business’ were made  upon the Company upon this basis.  The facts found were that  the Appellate  Company was a Company, the main objects of  which were  the acquisition, development, management, leasing  and letting  of land and property.  Its properties were for  the most  part  shops  and blocks of offices  and  of  flats  in London,  let unfurnished to tenants.  The larger blocks,  of offices, etc. contained lifts, the liftman being provided by (1) 15, Tax cases 266. L1340 Sup.CI/71 462 the  Company.  The Company also provided cleaning,  heating, lighting  and  caretaking  services  in  respect  of   which additional  changes  were made.  The  Company  admitted  its liability to income-tax under Sch.  D, in respect of profits arising from such additional charges levied for the services rendered.  The Crown contended that the Company was carrying on a trade namely the letting of accommodation and provision of  various  services and that in addition  to  the  profits assessed under Schedule A in respect of the property in  the premises  the Company made a further profit by the  user  of the  premises  as  a commercial  enterprise  and  hence  the Company  was  assessable to income-tax under  Sch.   D.  The House of Lords held that the Company’s liability in  respect of the rents was covered by the Sch.  A assessments, and the rents  could  not  be brought into the  computation  of  any liability under Sch.  D. In the course of the judgment, Lord Macmillan (at p. 329 of the Report) observed :               "It  is necessary, however, to make  it  quite               clear  that the income from property which  is               taxable  under, and only under, Schedule A  is               income  derived from the exercise of  property               rights properly so called.               Property  is regarded as yielding income  from               the  exercise by the proprietor of  the  right               either  of himself enjoying the possession  or               of parting with the possession by letting  his               property  to tenants.  The owner  of  property               may make profit out of it in other ways and by               doing  so  he  may render  himself  liable  to

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             taxation   under  Schedule  D.  The  case   of               Governors  of the Rotunda Hospital, Dublin  v.               Coman,  (1921)  1  A.C.  1,  is  an  excellent               example.    There  as  Lord  Chancellor   Lord               Birkenhead  pointed  out  at  page  8(1)   the               arrangements   between  the  owners   of   the               premises  and the persons who paid  for  their               use for the purpose of entertainments were not               such as to constitute the relation of landlord               and   tenants,  and  the  owners   remained-in               possession and occupation of their property.               The  receipts  derived from hiring  out  their               premises along with various movable  fittings,               and affording services in the way of  heating,               lighting  and attendance, were receipts of  an               enterprise  quite distinct from  the  ordinary               receipts which a landlord derives from letting               his property.               Consequently the, owners of the premises  were               rightly held to be engaged in the carrying  on               of a trade or business in their premises,  the               trade or business", in Lord Shaw’s language at               p. 37(2) "of providing, or               (1) 7, Tax Cases at p. 576.               (2) Ibid. at p. 593.               463               providing for, public entertainments,,.  There               is nothing to prevent a landlord who has  been               assessed  under Schedule A in respect  of  his               income as a property owner being also assessed               under  Schedule  D  ’in respect  of  a  trade,               business or other enterprise carried on by him               on his premises." We are referring to these observations only to show that the activities  of the assessee with which we are  concerned  in these  appeals  are business activities.  We should  not  be understood as having laid down that in assessing the profits and gains of a business, the profits and gains arising  from the  several activities of that business can  be  separately computed or separately brought to tax.  If the facts are  as found by the Tribunal we must assume for the purpose of this case that the facts were correctly found by the Tribunal  as there was no challenge to the correctness of those  findings in the question referred to the High Court-then it is  quite clear  that the assessee had two sources of income  and  not one source as found by the High Court. Mr. Manchanda, learned Counsel for the Department  contended with  some emphasis that there was no justification for  the Income-tax Officer, the Appellate Assistant Commissioner  as well  as the Tribunal for coming to the conclusion that  the services   rendered   by  the  assessee  was   an   activity independent  of  letting out the premises  to  the  tenants. According to him the primary activity of the assessee was to let  out the premises and the services rendered were  merely incidental.   In support of his contention he relied on  the ratio  of  the  decision of this Court  in  Commissioner  of Income-tax, Bombay City v. National Storage Private  Ltd.(1) He alternatively contended that the income said to have been realised  as  a  result of rendering  the  services  by  the assessee  should  have been brought to tax under  s.  12(4). For that contention he relied on the decision of this  Court in  Sultan Brothers Private Ltd. v. Commissioner of  Income- tax,  Bombay City-II(2).  The High Court  after  reassessing the  evidence on record has also taken the view  that  there was only one source of income and that source was of letting

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out  the premises to the tenants.  Mr. Manchanda  contended, and  the  High Court has accepted that contention  that  the authorities  under the Act have not properly  construed  the lease deeds nor have they properly appreciated the  evidence on  record.  It may well be so.  We say nothing about it  as it is not within our province to reappropriates the evidence on record.  The question as to the correctness of the  facts found  by the Tribunal was not before the High Court nor  is it before us.  When the question referred to the High  Court speaks  of  "on the facts and in the  circumstances  of  the case", it means (1) 66 I.T.R. 596. (2) 51.  I.T.R. 353. 464 on  the, facts and circumstances found. by the Tribunal  and not  about the facts and circumstances that may be found  by the High Court.  We have earlier referred to the facts found and  the circumstances relied on by the Tribunal, the  final fact  finding  authority.  It is for the  Tribunal  to  find facts  and  it is for the High Court and this Court  to  lay down  the  law applicable to the facts found.   Neither  the High Court nor this Court has jurisdiction, to go behind  or to  question the statements of facts made by  the  Tribunal. The statement of the case is binding on the parties and they are  not entitled to go behind the facts found by  the  Tri- bunal  in the Statement-see, Kshetra Mohan Sannvasi-  Charan Sadhukhan v.   Commissioner of Exccess Profits  Tax,  West Bengal(1). Mr.  Manchanda  was apprehensive that our decision  in  this case may have far reaching effect inasmuch as that the  same may be considered as having laid down the rule that whenever a  premises  is let out with fixtures and furnitures  for  a consolidated  rent  or  when the  landlord  in  addition  to providing  fixtures  and furnitures  also  renders  services incidental to the letting out of the premises and charges  a consolidated  rent,  it  may be  considered  that  the  rent realised  would have to be split up and assessed  separately partly  under  S. 9 and partly under some  other  provision. There is no basis for this apprehension.  Herein we are  not considering  any abstract proposition of law.  We  are  only laying down the law applicable to the facts found. It was next urged by Mr. Manchanda that our decision in this case  may  preclude the Department  from  reconsidering  the correctness  of  the  findings  reached  by  the  Income-tax Officer,  Appellate Assistant Commissioner and the  Tribunal in  the  assessee’s  case in  the  subsequent  years.   This apprehension  may  again  be not  well  founded.   Generally speaking the rule of res judicata does not apply to taxation proceedings.  _We have not gone into the correctness of  the findings of fact reached by the Tribunal.  Therefore whether those  facts and circumstances were correctly found  or  not may  still  be  a matter for  consideration  in  any  future assessment.   We  do not wish to say anything more  on  this aspect as we do not want to pronounce on questions which are not before us. In the result these appeals succeed, the answer given by the High  Court  is discharged and in its place  we  answer  the question  in the affirmative and in favour of the  assessee. The  assessee is entitled to its costs of these  appeals-one hearing fee. G. C.                                  Appeal allowed. (1)  24 I.T.R. 488. 465

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