1964 (3) TMI 5 - HC - Income Tax

Income from the building called fort is agricultural income within the meaning of s. 2(1)(c) of the IT Act and accordingly exempt

Issues Involved:
1. Whether the income from the market properties is assessable in the hands of the assessee under section 10 of the Income-tax Act?
2. Whether the income from the building called 'fort' is agricultural income within the meaning of section 2(1)(c) of the Income-tax Act and accordingly exempt?

Analysis:

Issue 1: Income from Market Properties
The primary question was whether the income derived from the market properties should be assessed under section 9 (income from property) or section 10 (profits and gains from business) of the Income-tax Act. The assessee argued that the income should be assessed under section 10, claiming it as business income, which would allow for larger deductions.

The court noted that the market, known as the Prince of Wales market, included permanent structures leased out to traders and shopkeepers. The Income-tax Officer had taxed the income under section 9, treating it as income from property. This view was upheld by the Appellate Assistant Commissioner and the Tribunal.

The court emphasized that the Income-tax Act categorizes income under distinct and mutually exclusive heads, and the nature or source of income must be determined to apply the correct section. The court found that the assessee, as the owner of the buildings, was not carrying on any business in the market area, nor through the tenants. The activity of leasing the property did not constitute a business activity. The court referred to several precedents, including United Commercial Bank Ltd. v. Commissioner of Income-tax and Sultan Brothers Private Ltd. v. Commissioner of Income-tax, to support this view.

The court concluded that the income derived from the market properties was indeed from property and fell within the ambit of section 9. The contention that the market setup and related activities could be considered a business was rejected. Therefore, the court answered the first question in the negative, affirming that the income from the market properties is assessable under section 9, not section 10.

Issue 2: Income from the Fort
The second question concerned whether the income from the building called 'fort' was agricultural income within the meaning of section 2(1)(c) of the Income-tax Act and thus exempt from tax. Historically, this income had been exempted as agricultural income. However, for the assessment years 1957-58 and 1958-59, the Income-tax Officer allowed only partial exemption, reasoning that the abolition of zamindaris and the reduction in agricultural land justified this change.

The court noted that for income to be exempt under section 2(1)(c), the building must satisfy both the situational and purpose requirements. The Tribunal had concluded that the fort did not meet these criteria, as it was situated in the middle of Vizianagaram Municipality, far from agricultural operations, and was used for residential purposes. This conclusion was not based on evidence but on assumptions.

The court called for a further statement from the Tribunal, which revealed that the fort was situated close to the assessee's agricultural lands, and parts of the building were used for storing produce and office purposes related to agricultural activities. The court found that these facts brought the case within the ambit of section 2(1)(c), making the income from the fort agricultural and exempt from tax.

The court addressed the objection that the supplementary statement included new material not on record at the time of the initial reference. It held that even without the additional material, the existing evidence, including the Income-tax Officer's order and historical exemptions, supported the conclusion that the income was agricultural.

Thus, the court answered the second question in the affirmative, confirming the income from the fort as agricultural income and exempt from tax.

Conclusion:
1. The income from the market properties is assessable under section 9 of the Income-tax Act, not section 10.
2. The income from the building called 'fort' is agricultural income within the meaning of section 2(1)(c) of the Income-tax Act and is accordingly exempt from tax.

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