Income Tax Appellate Tribunal - Ahmedabad
Kadodara Paper Industries P. Ltd. vs Assistant Commissioner Of Income Tax. on 26 November, 1993
Equivalent citations: (1994)49TTJ(AHD)208
ORDER
B.L. CHHIBBER, A.M. :
These three appeals by the assessee are directed against the consolidated order of the CIT(A), Surat relating to the asst. yrs. 1981-82 to 1984-85.
2. The first two common grounds read as under :
1. The learned CIT(A) erred in holding that the income earned by the appellant by hiring out its business assets was "income from business."
2. On the facts and circumstances of the case, the learned CIT (A) ought to have held that the activity carried on by the appellant-company at the relevant time was "business income".
During the course of assessment proceedings relating to the asst. yr. 1981-82, the Assessing Officer noted that the assessee-company had stopped its business activities and let out on lease its entire assets to Patel Paper Products on yearly licence fee basis. All the expenses like local taxes, cess, electric charges, telephone bills, etc. were borne by the licensee. The lease agreement initially was for a period of 5 years ending in November, 1984. The same was renewed subsequently and as on the dates of the three assessments under appeal the assets continued to be leased out on rent. The assessee claimed that the income from hiring out the plant and machinery along with the business premises was business income. The learned Assessing Officer (AO) on verification of the bank records and the statements and auditors remarks concluded that hiring out was not a temporary affair and hence the income on such hiring had to be assessed under s. 57(ii) of the Act.
3. On appeal the learned CIT(A) concurred with the views of the Assessing Officer and confirmed his action in assessing the income under the head "income from other sources".
4. Shri R.N. Vepari, the learned counsel for the assessee submitted before us that by leasing out the business premises along with plant and machinery the assessee had simply exploited the commercial assets and hence the rental income ought to have been assessed under the head "business income". In support of his contention he relied upon the following authorities :
1. CEPT vs. Shree Laxmi Silk Mills Ltd. (1951) 20 ITR 451 (SC)
2. Sultan Brothers Pvt. Ltd. vs. CIT (1964) 51 ITR 353 (SC)
3. Seth Banarsidas Gupta vs. CIT (1977) 106 ITR 559 (All)
4. G.R. Narasimier & Co. vs. CIT (1969) 73 ITR 257 (Mad)
5. Dalchand & Sons vs. CIT (1971) 79 ITR 247 (P & H)
6. Mangalgiri Sri Umamaheswara Gin & Rice Factory vs. CIT (1926) 2 ITC 251 (Mad)
7. Sadhucharan Roy Chowdhury, In re (1935) 3 ITR 114 (Cal)
8. CIT vs. National Mills Co. Ltd. (1958) 34 ITR 155 (Bom)
9. Laxmi Industries (Pvt) Ltd. vs. CIT (1966) 62 ITR 528 (AP)
10. Sri Ram Mahadeo Prasad vs. CIT (1961) 42 ITR 211 (All)
11. C.P. Pictures Ltd. vs. CIT (1962) 46 ITR 1181 (Bom)
12. Tripurasundari Cotton Press Co. Ltd. vs. CIT (1966) 62 ITR (AP)
13. Bolla Tirappanna & sons vs. CIT (1969) 71 ITR 247 (P&H)
14. CIT vs. Vikram Cotton Mills Ltd. (1977) 106 ITR 829 (All)
15. Ray Talkies vs. CIT (1974) 96 ITR 499 (Pat)
16. CIT vs. Vania Silk Mills Pvt. Ltd. (1978) 12 ITR 701 (Guj)
17. CIT vs. Prem Chand Jute Mills Ltd. (1978) 114 ITR 769 (Cal)
18. CIT vs. Kathihar Jute Mill Pvt. Ltd. (1979) 116 ITR 781 (Cal)
19. Everest Hotels Ltd. vs. CIT (1978) 114 ITR 779 (Cal)
20. Addl. CIT vs. Rajendra Flour & Allied Industries Pvt. Ltd. (1981) 128 ITR 402 (Del)
21. CIT vs. Northern India Theatres Pvt. Ltd. (1981) 128 ITR 497 (Del)
5. Shri R. I. Patel, the learned Departmental Representative submitted that the assessee had stopped its business activities; that the lease contract was initially for 5 years; the same was renewed and till date the business premises stand leased out. This according to the learned Department Representative shows that the assessee has no intention to restart its business and accordingly the authorities below were justified in treating the rental income as "Income from other sources".
6. We have considered the rival submissions and perused the facts on record. From the facts it is evident that the lease deed was initially entered into for a period of 5 years; on its expiry it was renewed and till date the premises are with the lessee. In a case like this the assessing authorities are to be guided by the intention of the party leasing the business premises as held by the Honble Supreme Court in the case of New Savan Sugar & Gur Refining Co. Ltd. vs. CIT (1969) 74 ITR 7 (SC). In the present case the intention of the assessee was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. The decisions relied upon by the learned counsel are distinguishable. The material facts of Laxmi Silk Mills Ltd. (supra) are that only a part of the machinery was let out on lease and the rest of the machinery was worked by the assessee. The letting out of the machinery was for a short period, i.e., for five months, There was also no letting out of the premises of the factory by the assessee. The ratio of the decision in Laxmi Silk Mills Ltd. (supra) is therefore, not applicable to the present case. In Sultan Brothers Ltd. (supra) the assessee, a private limited company, constructed the building on a certain plot of land, fitted it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent of Rs.5950 for the building and a hire of Rs. 5,000 for the furniture and fixtures. On these facts the Honble Supreme Court held that though the object of the assessee was to acquire land and building and to turn them into account by letting and selling them, the activity contemplated did not by itself turn the lease into a business deal. As the assessee never carried on business of a hotel in the premises let out, or otherwise at all, and there was nothing to show that it intended to carry on a hotel business itself in the same building, the letting of the building did not amount to the carrying on of a business and the income under the lease could not, therefore, be assessed under s. 10 of the IT Act, 1922, as income from business. Obviously this case relied upon by the learned counsel favours the Revenue. The facts of the other cases of the different High Courts relied upon by the learned counsel are also distinguishable. Under the circumstances we hold that the authorities below were justified in assessing the income from letting out of business premises and plant and machinery under the head "income from other sources". These two grounds accordingly fail and are dismissed.
7. Ground No. 3 reads as under :
"Without prejudice to the above, even if it is held that the income arising to the appellant-company from hiring its business assets amounted to income from other sources, the learned CIT(A) ought to have granted set off of unabsorbed depreciation in view of the judgment of the Gujarat High Court in the case of CIT vs. Deepak Textile Industries Ltd. (1987) 168 ITR 773 (Guj).
In support of the above point the assessee relied upon the Supreme Court decision in the case of CIT vs. Mother India Refrigeration Industries P. Ltd. (1985) 155 ITR 711 (SC), Kishanlal & Sons (Udyog) P. Ltd. (1985) 154 ITR 735 (SC) before the Assessing Officer. The Assessing Officer after considering the cases relied upon by the assessee concluded that in the case of CIT vs. Mother India Refrigeration Industries P. Ltd. (supra), it was decided that between the current depreciation and brought forward unabsorbed depreciation set off had to be given to the unabsorbed depreciation. As regards the facts of the assessee in the case of Kishanlal & Sons (Udyog) P. Ltd. (supra), the Assessing Officer distinguished the facts of the case and held that since no business activities were carried out by the assessee, brought forward depreciation could not be set off against income from other sources. Relying on the decision of Madras High Court in the case of East Asiatic Co. India P. Ltd. (1986) 161 ITR 135 (Mad) he concluded that in the absence of existence of business income, unabsorbed depreciation could not be adjusted.
8. Before the CIT(A), besides relying upon the decisions cited before the assessing authority the representative of the assessee relied upon the judgment of Gujarat High Court in the case of CIT vs. Deepak Textile Industries Ltd. (supra). The learned CIT(A) distinguished the facts of the Gujarat High Court from the facts of the assessees case stating that in the case before the Gujarat High Court though the manufacturing activity had come to an end, there was some other business activity during the assessment year in question in that case and therefore, it was held that the assessees business could not be said to be completely discontinued. In the case of the assessee the entire business activity had come to an end. Relying upon the decisions the Madras High Court in the case of East Asiatic Co. P. Ltd. (supra) from which she has extensively quoted, she confirmed the action of the Assessing Officer.
9. The learned counsel of the assessee submitted that the learned CIT(A) ought to have granted set off of unabsorbed depreciation in view of the judgment of the jurisdictional High Court in the case of Deepak Textile Industries Ltd. (supra). The learned counsel further submitted that the learned CIT(A) has not correctly appreciated the ratio laid down by the Honble Gujarat High Court and has erred in distinguishing the case of the assessee from that decided by the Honble High Court. In that case, there were appeals for two years viz. 1969-70 and 1970-71. assessment years. The business of manufacture of textile had come to an end. For asst. yr. 1969-70 some business income was claimed but for 1970-71 assessment year, there was no income from business and the Gujarat High Court held that even in the case of 1970-71 assessment year unabsorbed depreciation had to be allowed.
10. The learned Departmental Representative relied upon the orders of the authorities below.
11. We have considered the rival submissions. The view of the judgment of the jurisdictional High Court in the case of CIT vs. Deepak Textile Industries (supra) has clinched the issue in favour of the assessee. In that case, as submitted by the learned counsel of the assessee, there were appeals for two years viz. 1969-70 and 1970-71. The business of manufacture of textiles had come to an end. For asst. yr. 1969-70, some business income was claimed but for 1970-71 there was no income from business (last line on page 774). The Gujarat High Court held that even in case of 1970-71 assessment year when there was no income from business, unabsorbed depreciation had to be allowed. The Honble High Court held that s. 32(1) introduces the legal fiction therefore, the ownership of machinery and user of machinery for the purpose of business will have to be assumed for giving effect to the legal fiction as is evident from the following observations :
"On reading s. 32(2) of the Act, it is clear that the purpose of the legislature in introducing the legal fiction is to give the benefit of the unabsorbed depreciation in the following previous year or in the succeeding previous years and when that is the purpose of the legal fiction all the facts necessary for the purpose of earning depreciation under s. 32(1) of the Act must be secured and, therefore, for the following previous year the ownership of machinery, user of machinery and user of machinery for the purpose of business and existence of business also will be required to be assumed for giving effect to the legal fiction."
"Prima facie, it appears that to call upon the assessee to comply with all the three ingredients of s. 32(1) of the Act for the following previous year or the succeeding years would amount to putting at naught the legal fiction and the purpose for which it is made."
The ratio of the Gujarat High Court judgment therefore comes out loud and clear and whether there is any business income or not the unabsorbed depreciation has to be allowed against any other head. Respectfully following the judgment of the jurisdictional High Court we hold that the assessee is entitled to set off of unabsorbed depreciation against the rental income. This ground accordingly succeeds.
12. In grounds No. 4, 5 & 6 it has been contended that the learned CIT(A) has erred in not dealing with Ground No. 3 (relating to not granting deduction of expenses incurred by the appellant company); Ground No. 7 (relating to charge of interest under s. 139 of the Act); ground No. 8 (relating to charge of interest under s. 217 of the Act). We find that while disposing of the appeal the learned CIT(A) has not dealt with the above grounds. She is accordingly directed to adjudicate upon the same. For this purpose the matter is restored back to her file.
13. In the result all the appeals are allowed in part.