2017 (9) TMI 1240 - HC - Wealth-tax

Wealth tax assessment - Whether the Scindia House Property of the Respondent-Assessee is its business asset/stock-in-trade and cannot form part of its wealth for the purposes of the WTA? - whether the amendment to sub-section 3 of Section 40 by the Finance Act, 1988 (FA 1988) by way of insertion of a proviso to the same is clarificatory and hence retrospective in nature? - Held that - The Assessee has accepted that from AY 1990-91 the income earned by it from the Scindia House property is not its business income. Applying the rule of consistency as explained by the Supreme Court in Radhasoami Satsang v. Commissioner of Income Tax (1991 (11) TMI 2 - SUPREME Court), as further explained by this Court in Mool Chand Khairati Ram v. DIT (2015 (7) TMI 922 - DELHI HIGH COURT) it must be held that even for AYs 1984-85 onwards till AY 1990-91 the Scindia House property cannot be considered to be the Assessee s stock-in-trade. In other words even for the said AYs, the Scindia House property formed part of the Assessee s net wealth for the purposes of the WTA. For the above reasons, the Court holds that the ITAT erred in holding by its orders dated 27th December 2004 and 12th January 2005 that the Scindia House property was the Assessee s stock-in-trade and was therefore to be excluded from its net wealth for the purposes of the WTA. Is the amendment to Section 40 (3) retrospective? - Held that - The additional question for AYs 1984-85 to 1988-89 is answered in favour of the Revenue and against the Assessee by holding that the amendment to Section 40 (3) of the FA 1983 by the FA 1988 is not retrospective and will not apply to a period prior to 1st April 1989.

Summary

Issues Involved:
1. Whether the rental income received by the Assessee from the Scindia House property is to be taxed under the head 'income from house property' or 'business income'.
2. Whether the Scindia House property is the Assessee's 'business asset/stock-in-trade' and therefore, cannot form part of its 'wealth' for the purposes of the Wealth Tax Act (WTA).
3. Whether the amendment to Section 40 (3) of the Finance Act, 1983 (FA 1983) by the Finance Act, 1988 (FA 1988) is retrospective in nature.

Detailed Analysis:

1. Taxability of Rental Income:
The Assessee categorized the rental income from the Scindia House property as 'business income' for AY 1980-81, a stance initially upheld by the ITAT but later reversed for AY 1992-93 onwards, where the ITAT consistently held it to be taxable as 'income from house property'. This position was accepted by the Assessee for AYs 1990-91 to 1999-2000, as reflected in the Court's order dated 4th September 2015. The Court noted that the Assessee's concession that the rental income should be treated as 'income from house property' for these years altered the scenario significantly, thus impacting the treatment of the property as stock-in-trade.

2. Nature of Scindia House Property:
The Court examined whether the Scindia House property could be considered the Assessee's stock-in-trade. The ITAT had previously held that if the rental income was taxable as 'business income', the property should be treated as stock-in-trade. However, given the Assessee's concession that the rental income should be treated as 'income from house property' for AYs 1990-91 onwards, the property could not be considered a business asset. The Court emphasized that the main objects of the Assessee, as per its MoA, did not include earning rental income as a business activity. Thus, the property could not be treated as stock-in-trade for the purposes of the WTA.

3. Retrospective Application of the Amendment:
The Assessee argued that the amendment to Section 40 (3) of the FA 1983 by the FA 1988, which exempted stock-in-trade from wealth tax, should be applied retrospectively. The Court disagreed, stating that the amendment was substantive and intended to take effect from 1st April 1989. The Court found no basis for attributing retrospectivity to the amendment, aligning with the reasoning of the Madras High Court in CWT v. Varadharaja Theatres (P) Ltd.

Conclusion:
1. The rental income received by the Assessee from the Scindia House property is to be taxed under the head 'income from house property' and not 'business income'.
2. The Scindia House property is not the Assessee's 'business asset/stock-in-trade' and therefore forms part of its 'net wealth' for the purposes of the WTA.
3. The amendment to Section 40 (3) of the FA 1983 by the FA 1988 is not retrospective and will not apply to periods prior to 1st April 1989.

The Court thus set aside the ITAT's orders dated 27th December 2004, 12th January 2005, and 5th April 2005, and restored the corresponding orders of the WTO and CWT (A). The appeals were allowed, with no orders as to costs.