Income Tax Appellate Tribunal - Hyderabad
Bangaru Manikyam vs Income-Tax Officer on 27 February, 1987
Equivalent citations: [1987]21ITD320(HYD)
ORDER
G. Santhanam, Accountant Member
1. These are appeals by the assesses against the order of the Commissioner of Income-tax under Section 263. As common points are involved in both the appeals, a single order is passed for the sake of convenience.
2. The assessee along with seven others purchased a rice mill at a cost of Rs. 3,00,000 in 1972. The rice mill is known as Sri Sesharatna Rice Mill, Palakol. These persons belong to two family groups. Ever since its purchase, the individual holders leased the mill to individuals or firms by executing lease deeds separately or jointly. The assessee is one of the co-owners having 13 per cent share in the rice mill.
3. For the assessment years 1981-82 and 1982-83, Sri Sesharatna Rice Mill was leased to a firm in which the assessee himself is a partner. There are two lease agreements, one in respect of the building and another in respect of the machinery- During these years, the co-owners had invested In the purchase of new plant and machinery as part of expansion programme of the rice mill.
On the purchase of new plant and machinery, the assessee claimed the following amounts :
1981-82 1982-83
Rs. Rs.
(a) Investment allowance under 11,551 1,158
Section 32A 5,400
(b) Allowance under Section 80HHA
as per separate statement 2,340 4,160
(c) Allownce under Section 80J as per
statement 5,440 5,695
19,331 16,512
The assessment was completed under Section 143(1) allowing the above deductions. The Commissioner of Income-tax noticed that share income was assessed under other sources and that leasing of the rice mill lock, stock and barrel did not constitute business activity, and as the assessee was not carrying on any business, he is not entitled to investment allowance under Section 32A. He is also not entitled to deduction under Section 80J as the lease income is only by way of rent for the assets leased out and does not partake of the nature of profits and gains derived from an industrial undertaking. Deduction under Section 80HHA also was found to have been wrongly allowed in view of the fact that the assessee was only leasing out the mill along with other co-owners and was never engaged in the running of small-scale industrial undertaking. In this view of the matter, he directed the Income-tax Officer to redo the assessment afresh in accordance with law.
4. Sri K.R. Krishnamurthy, the learned representative of the assessee, submitted that the assessee did not inherit the mill as a property. On the other hand, he along with other members of two families to one of which he belongs, purchased Sri Sesharatna Rice Mill with the obvious intention of leasing it out and, therefore, leasing constituted a business activity in the hands of the assessee. This is not a case of leasing out the mill for a temporary period after working it. The cases relied on by the Commissioner of Income-tax to hold that leasing is not a business activity are all cases wherein the asset was used as a commercial asset for some time in the business and then leased out after closure of business. On the other hand, the assessee right from the beginning took up leasing as the business activity and that explains the manner in which the assessee and the other co-owners continued to lease the mill from time to time, entering into lease agreements either individually or jointly. In these two assessment years, the mill is under lease to a partnership firm in which the assessee along with some of the other co-owners is a partner, This scheme was a better exploitation of the commercial asset and the assessee as a partner along with some of the co-owners is spending his time and devotion to the improvement of the lessee-partnership business. Therefore, this is not a case of leasing out to some one sitting idle content with receiving rent. On the other hand, this is a case of leasing to a firm in which the assessee himself is a partner continuing to exercise control and supervision over the assets leased. Therefore,-'the case of the assessee is distinguishable from the other cases relied on by the learned Commissioner of Income-tax. As the co-owners had purchased the asset with the obvious intention of leasing it out from year to year, the element of business is ever present. Business activity has not been defined and the term 'business' is an inclusive term and, therefore, leasing can be looked upon as a business activity if carried outright from the beginning without let or hindrance. He also relied on the decision of the Hyderabad Bench of the Tribunal in ITA No. 354/Hyd. 1984, dated 29-8-1984 and also ITA No. 356/ Hyd. 1984, dated 5-2-1986 in similar cases where the Tribunal held in favour of the assessee.
5. Shri N. Santhanam, the learned departmental representative, vehemently argued that the assessee was not carrying on any business and his income was assessed under other sources. Under other sources, only specific deductions are permitted under Section 57. The assessee is entitled to deduction in accordance with the provisions of Sub-clause (ii) of Clause (a) and Clause (c) of Section 30, Section 31 and Sub-sections (1), (1A) and (2) of Section 32 and subject to the provisions of Sections 34 and 35. Investment allowance falls under Section 32A which is not a permissible deduction under Section 57 and, therefore, even on this ground the assessee is not entitled to the grant of investment allowance. In addition, he submitted that the assessee never worked the mill by himself. He is only a co-sharer and it was the lessee, vis., the partnership firm which was running the mill and, therefore, the assessee is not carrying on any business activity as such. Investment allowance is admissible only when the asset is owned by the assessee and wholly used for the purposes of the business carried on by him. The assessee as co-owner did not carry on any business. He was only collecting lease rent and enjoying his share there from and, therefore, there was absolutely no case for grant of investment allowance. Regarding relief under Section 80J, he submit tea. that pronts ana gains must be aerivea from the industrial undertaking and the relief is calculated as a percentage on the capital employed in the industrial undertaking or on the profits of the business. The assessee as a co-owner did not derive any profit or gain as such from an industrial undertaking and, therefore, the Commissioner rightly withdrew the relief granted. Regarding the claim under Section 80HHA, he submitted that here again, the assessee will be entitled to deduction only if the income included profits and gains derived from a small-scale industrial undertaking and the conditions specified in Sub-section (2) of Section 80HHA are, fulfilled. Even if it is held that Sri Sesharatna Rice Mill is a small-scale industrial undertaking, still the assessee would not be entitled to the relief because he received only the lease rent and not any share in the profits and gains of the industrial undertaking. Finally, he took us through the order of the learned Commissioner of Income-tax in support of his contentions and relied on the same.
6. In his reply, Shri Krishnamurthy submitted that the assessee might have returned the income under other sources inadvertently but that should not shut him out of the relief. The true character of the income is only business income and the assessee by mistake had offered it under other sources and assessment was completed under Section 143(1). However, before placing the income under other sources, first an enquiry should be made under Section 56 whether that income would not fall under any of the heads specified in Section 14, items A to E, and then only it should be classified under other sources and not before. He further submitted that the assessee had share income from the lessee-firm as a partner. As the ITO had allowed the investment allowance under Section 32A and other deductions, he is deemed to have taken the lease income as business income, though such income was returned under other sources. This was in consonance with the mandatory terms of Section 56. Even otherwise, he is not precluded from taking the plea that if the true character of the lease income is business income, then the assessee is entitled for the grant of such allowances and deductions. As a matter of fact, the assessee agitated the true nature of the income as business income before the Commissioner of Income-tax in proceedings under Section 263. Shri Santhanam objected that this is a new plea raised for the first time before the Tribunal and submitted that such a plea was not raised in the grounds of appeal. He railed on the decision of the Tribunal, Hyderabad Bench 'B', in ITA Nos. 1000/Hyd. 1985 and 291 to 294/Hyd. 1985 in order dated 30-8-1986, in support of his plea that the activity of the assesses did not constitute business.
7. Having regard to rival submissions and the materials on record, we modify the order of the learned Commissioner of Income-tax. From the facts narrated before us and as per records, it appears that the assessee along with some others had purchased Sri Sesharatna Rice Mill with the obvious intention of leasing out the same from time to time. This is proved by the conduct of the assessee right from the beginning. This is not a case of the assessee having exploited the commercial asset himself for some time and started leasing out the same after closure of business. Thus, the cases relied on by the learned Commissioner are distinguishable. The very business of the assessee is that of leasing. The assets are owned by the assessee, though partly owned, as a co-sharer. The assets are used in the business of leasing as the plant and machinery were installed in the leased premises. The lease agreement also covers all the machinery and plant installed in the premises. The mill is engaged in manufacturing activity as it converts paddy into rice. This is not a case of idle leasing. The assessee himself, as a partner of the lessee, is exercising control and supervision over the leased property. Therefore, all the conditions stipulated in Section 32A of the Act are fulfilled in the case of the assessee. In its order in the case of ITO v. Sri Kancherla Srinath [IT Appeal No. 354 (Hyd.) of 1984 dated 29-8-1984], the Tribunal applied the ratio of the decision in the case of First Leasing Company of India Ltd. v. ITO [1983] 3 ITD 808 (Mad.) (SB), wherein it was held that investment allowance is permissible even in respect of leased machinery. The case of K. Rami Reddi & Sons relied on by the revenue is also distinguishable. In that case, the godowns were constructed and leased out to the Food Corporation of India and the Tribunal had no difficulty in coming to the conclusion that after the construction was over, the only activity of the partners was to sit back and to realise the rentals (para 9). In that view of the matter, the Tribunal held that no business activity was carried on when the godowns were leased out and, therefore, the group of persons engaged in such activity could not be treated as a firm. In the case before us, some of the co-owners are partners in the lessee-firm running the rice mill. Therefore, the ratio laid down in the case of K. Rami Reddi & Sons will not apply to the facts of the case before us.
8. The only point for consideration is whether the assessee is entitled to investment allowance when the assessee himself had admitted the income under other sources. Shri Krishnamurthy contends that even though the assessee had inadvertently shown the income under other sources in the return filed by him, the true character of the income is only business income and this aspect of the matter was agitated before the Commissioner of Income-tax in the proceedings under Section 263. Therefore, this is not in any way a new plea and even if it is a new plea, there is no bar for him to raise this plea before the Tribunal. In this connection he relied on the decision of the Supreme Court in CIT v. S. Nelliappan [1967] 66 ITR 722. Shri Santhanam contends that such a plea should not be entertained and as the income was assessed under other sources under Section 143(1), the character of the income cannot be agitated before the Tribunal indirectly.
9. Having regard to rival submissions, we are inclined to uphold the contention of Shri Krishnamurthy. Before the Commissioner of Income-tax, the assessee raised the plea that in the facts and circumstances of his case, his activity constituted business. So, this is not a new plea now raised before the Tribunal. Even if it is a new plea, the Tribunal has got ample powers to entertain such a new plea in the ratio of the decision of the Supreme Court in the case cited supra, in which, as per head notes, it was held that in hearing the appeal, the Tribunal may give leave to the assessee to urge grounds not set forth in the memorandum of appeal and in deciding the appeal, the Tribunal is not restricted to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal. The Tribunal is not precluded from adjusting the tax liabilities of the assessee in the light of its findings merely because the findings are inconsistent with the case pleaded by the assessee. Therefore, we reject the contention of Shri Santhanam in this behalf.
10. As we have held that the lease income received by the assessee constituted business income and in the light of our discussions as detailed above, we hold that the assessee is entitled to the grant of investment allowance under Section 32A of the Act and thus reject the arguments of Shri Santhanam that the assessee is eligible for the deductions specified in Section 57.
11. Section 80J operated from the gross total income of the assessee for the assessment year 1980-81 and Section 80-1 for the assessment year 1981-82. The gross total income must include any profits and gains derived from an industrial undertaking. Rice mill is certainly an industrial undertaking. For purposes of Section 80J or Section 80-1, it is the undertaking and not the person owning it who is relevant and the assessee should receive profit from the industrial undertaking. Section 80J or Section 80-1 has to be read with Section 80A. Accordingly, in computing the total income of the firm or association of persons or body of individuals, if any deduction was allowed under Section 80J or Section 80-1, etc., no deduction under the same section shall be made in computing the total income of a partner of the firm or, as the case may be, of a member of the association of persons or body of individuals, in relation to the share of such partner in the income of the firm or the share of such member in the income of the association of persons or body of individuals. In case the lessee-firm was not allowed deduction under Section 80J for the reason that it did not own the industrial undertaking, the provisions of Section 80A would not be applicable and the assessee would be entitled to claim deduction under Section 80J as co-owner-cum-partner. That part of the share income derived from the lessee-firm which is referable to the new industrial undertaking will certainly partake of the nature of profits and gains derived from the industrial undertaking. Therefore, in our -view, the assessee is entitled to get deduction under Section 80J as co-owner-cum-partner provided other conditions envisaged in Section. 80J are satisfied. The Commissioner's order on Section 80HHA is confirmed as the same was not seriously contested before us.
12. In the result, the appeals are partly allowed.