Madras High Court
M/S.Madras Silk & Rayon Mills vs The Income Tax Officer / The ... on 11 February, 2002
Author: V.S.Sirpurkar
Bench: V.S.Sirpurkar, K.Raviraja Pandian
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 11.02.2002 CORAM : THE HONOURABLE MR.JUSTICE V.S.SIRPURKAR AND THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIAN Tax Case Nos.171 to 173 of 2001 and T.C.M.P.Nos.3 and 4 of 2001 M/s.Madras Silk & Rayon Mills Pvt.Ltd., No.3, Brightons Road Kannikapuram, Chennai-600 012. .. Applicant in all TCs Vs - The Income Tax Officer / The Asst.Commissioner of Income tax Company Ward I(5) Chennai. .. Respondent in all Tcs Appeals under Section 260 A of the Income Tax Act, 1961 against the common order of the Income Tax Appellate Tribunal Madras Bench 'C' in I.T.A.Nos.2650/Mds/92, 789 and 790/Mds/97. ! For Applicant : Mr.V.S.Jayakumar ^ For Respondent : Mrs.Chitra Venkataraman Senior Standing Counsel for Income Tax : J U D G M E N T
(Judgment of the Court was delivered by V.S.SIRPURKAR, J.) This judgment shall dispose of three appeals, they being T.C.Nos.171 , 172 and 173 of 2001 pertaining to the three assessment years 1989-9 0, 1990-91 and 1991-92 respectively.
2. These appeals are filed by the assessee questioning the order of the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal'), whereby the Tribunal has confirmed the earlier order passed by the appellate authority as also the assessment officer. Two questions have been framed by the appellant. They are:-
"1. Whether on facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the rental income derived by the assessee should be treated as 'income from property' and not 'income from business'?
2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in ignoring the order passed in the Wealth-tax Appeal, relating to the assessment year 1989-90, wherein it was held that the factory in question was a commercial asset?"
3. Question No.1:- Learned counsel took us through the orders and it is his contention that in the light of the facts and circumstances obtained, the income which the assessee company has derived by letting out its land and buildings should be treated as a business income, which finding has been rejected by all the authorities below. Few admitted facts would be necessary to appreciate the contention.
4. The assessee-company was formed in the year 1950 and its main object was to erect and work silk mills for large scale production of all kinds of silk, artificial silk, mixed, mercerised and similar fabrics. In the Memorandum of Association, there are certain other clauses also, which authorised the company to carry on any other business which may enhance the value or render profits by any of the company's properties or rights. This is particularly to be found at Clause No.27 of the Memorandum of Association. The Company, after initial teething troubles went further into losses with the result that most of machinery had to be sold in December 1971, the profits thereof have been shown under Section 41(2) of the Income Tax Act. It is an admitted position that right from 1964 till 1971, there was absolutely no manufacturing activity. It is also an admitted position that even today, there is no manufacturing activity on the part of the assessee. The assessee company leased out part of its premises to various occupants to run therein business or industry, as the case may be. In short, upto 31.12.1987, the assessee had leased out an area of 8,866 Sq. ft.to in all 11 persons on rent. By 31.3.1990, this area increased to 12,588 Sq.ft., while it further increased to 13,633 Sq.ft. by 31.3.1 991. A glance at the assessment order suggests that there are as many as 15 tenants on the whole on the property and the company is earning rental income. It is also the claim of the company that besides leasing out its property, it also provides the service of a qualified engineer, who is none else but the director of the company to the tenants and for that purpose he has been provided with a residential accommodation in the premises.
5. Considering that the company had stopped its industrial or manufacturing activity and further considering that the assessee company was earning income only from the leases it had granted in favour of as many as 15 persons, the assessment authority held the income to be from other sources and not as business income. An appeal came to be filed against this order of the assessment authority, wherein the only question raised was regarding the nature of income. Since the assessee failed before the Commissioner of Appeals, a further appeal came to be filed before the appellate Tribunal, wherein again the only question raised was, " The learned Commissioner of Income Tax (Appeals) erred in law, facts and circumstances of the case in deciding that the Appellant's Lease Rent Income received from the lessees should be treated as 'Income from Property' and not as "Income from Business" as claimed by the appellant."
6. The Tribunal, to begin with, after considering the facts and the factual situation, came to the conclusion that the income could not be treated as a business income. Initially, the Tribunal wrote a finding that the assessee company had sold all the machinery and had also not installed any machinery to restart its business. The Tribunal also found that the leases were granted somewhere in the year 1971 and the extent of the leased out area was extended from time to time. It also came to the conclusion that there was nothing on record to suggest that the company could again take up industrial or manufacturing activity or that it had made any efforts to do so. From this, the Tribunal came to the conclusion that the income could be viewed only as 'income from other sources' and not as 'business income'.
7. Learned counsel for the applicant pointed out that the Tribunal had relied upon the Supreme Court judgment reported in Universal Plast Ltd. (vs) C.I.T. (237 ITR 454), in which the Supreme Court had formulated four principles and had held that, where it could not be seen that the assets were let out with the idea of restarting the business or reviving the business, then the income from the assets being let out could not be said to be the business income. The following extract from the Supreme Court judgment has been quoted by the Tribunal.
"The general principles relating to income from leasing out the assets of the business by an assessee are:-
(1) no precise test can be laid down to ascertain whether income ( referred to by whatever nomenclature, lease, amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head "Profits and gains of business or profession";
(2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out;
(3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same;
(4) if only a few of the business assets are let out temporarily, while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets."
8. According to the learned counsel, this case was distinguishable on facts. The counsel very persuasively argued that since the Memorandum of Association permitted the assessee company to exploit the assets of the company so as to enhance its value and since there was no such question involved in the aforementioned decision of the Supreme Court and there being no such clause in the Memorandum of Association, the Supreme Court judgment was distinguishable on facts. We do not agree. In the Supreme Court decision, after considering the law laid down in CEPT v. Shri Lakshmi Silk Mills Ltd. {20 ITR 451(SC)}, Narain Swadeshi Weaving Mills v. CEPT {26 ITR 765 (SC)}, CIT v. Calcutta National Bank Ltd. {37 ITR 171 (SC)}, Sultan Brothers Private Limited v. CIT {51 ITR 353 (SC)}, New Savan Sugar and Gur Refining Co.Ltd v. CIT {74 ITR 7 (SC)} and lastly C.I.T v. Vikram Cotton Mills {169 ITR 597 (SC)}, the Supreme Court came to the conclusion and laid down the law in the terms quoted in Tribunal's order, reproduced by us in Para
7.
9. It is obvious that the Supreme Court had taken into consideration the Calcutta National Bank's case where one of the objects in the Memorandum of Association pertained to realisation of rental income of the assessee and therefore, it was held that since the realisation of rental income was in the course of business being in prosecution of one of its objects in the Memorandum it was included in the business profits and was assessable to excess profits tax. Before coming to the conclusion and laying down the law as has been quoted above, the Apex Court had undoubtedly taken into consideration the factor of Memorandum of Association providing for such rental income. It cannot be, therefore, said that in laying down the law and crystallising it to the four points as stated by us, the Supreme court had taken into consideration the question of there being such a permissive clause in the Memorandum of Association. The argument, therefore, must fail that the Supreme Court judgment is not applicable to the present case on account of the fact that in the present matter the Memorandum of Association permits the company to exploit its property in a better manner as per Clauses 27 and 33 of the Memorandum of Association.
10. Now going back to the argument, firstly the Supreme Court has termed this to be a mixed question of law and fact and secondly the Supreme Court has specifically cautioned that if it is found from the facts that the business assets were let out only temporarily and the assessee was carrying out his other business activities, then it could be said to be a case of exploiting the business assets otherwise than employing them for his own use for making profits of that business. On facts, it is found that right from 1971 when the leases started, till today the leases are continuing. This is, therefore, not the case of temporary leasing as has been considered by the Apex Court. That apart, the Apex Court has also held that if the assessee has never started its original business or had no intention to resume the same, then such leased assets would cease to be the business assets. Thereby, the Apex Court has clearly held that in that case the income would not be the business income.
11. We must clarify here that it was not the task of the assessing authorities under the Act to classify the income earned by the assessee to be a particular type of income described under the Act. The only restricted jurisdiction was to find as to whether the income was business income or not. Once the answer to that question is in the negative, the question would really end. Then, it would not be for the authorities concerned to further probe and give a finding as to under what head that income could be described. We find a clear cut finding by the authorities below and we concur with those findings that the income was not business income. We are particularly referring to this aspect because the learned counsel also argued before us that this income was held to be an income under Section 22 of the Income Tax Act. Learned counsel very painstakingly took us to Section 22 and tried to contend that, that section was not available or was not applicable particularly because the properties were in occupation of the assessee in pursuance of his business. We, therefore, are inclined to deal with this aspect and clarify that the authorities concerned had to only find as to whether the concerned income was a business income or not. If it was not a business income, it could be the income from other sources - it was not the task of the income tax authorities to find as to under which other head would that income fall. At least in this case it was not a relevant question. Be that as it may. Once it is held not to be the business income, then the controversy in this appeal would come to an end.
12. There is another reason why we are not interfering in this matter. As per the second point in the Apex Court judgment, the question as to whether it amounts to business income or not is a mixed question of law and fact. Under Section 260 A, our jurisdiction is now restricted to consider only the substantial question of law in order to entertain an appeal. On that count also, the assessee must fail. However, the matters do not stop here.
13. Question No.2:- By way of second question, Mr.Jayakumar raised a very interesting question and pointed out that under the Wealth Tax proceedings of this assessee, a finding has been written by the Income Tax Appellate Tribunal that the assets which were leased out were commercial assets and therefore the income from those commercial assets would always be treated as 'income from business'. Learned counsel also pointed out very fairly that though in the earlier order these assets were not considered to be commercial assets, the Tribunal has now considered those assets to be commercial assets. From this, the learned counsel sought to argue that the question whether these assets were commercial assets or not was concluded against the revenue or was at least liable to be considered in that light by the Tribunal, while it dealt with the Income Tax Appeal.
14. Learned counsel pointed out that after finding that the Tribunal had not dealt with the question of applicability and binding nature of the finding in the Wealth Tax matters and more particularly in that order dated 20.06.1996, to which we have already referred, a miscellaneous petition was moved before the Tribunal for rectification. We do find that such a petition under Section 254(2) was actually filed raising two questions therein. The first being about the observations of the Tribunal in the earlier order that all the machinery was sold, which according to the assessee was a mis-statement on facts and the second being in respect of the aforementioned order passed dated 2 0.06.1996 wherein the assets were held by the Wealth Tax authorities and the Tribunal to be commercial assets. When confronted with this, the Tribunal, it seems has corrected this order by deleting the reference "all the machinery" and by replacing it with the words "most of its plant and machinery".
15. We do find that the Tribunal has not referred to the second question raised by way of a miscellaneous petition under Section 254(2). Learned Standing counsel for the department pointed out to us that in the appeal memorandum, this question was never raised and therefore, the Tribunal was well justified in not considering that question. In the first place, learned counsel goes on to argue, a question not raised in the appeal could not be raised by way of a miscellaneous petition and that too for rectification. The rectification could only be of the obvious errors of factual nature and in this case, the question of the order or its applicability not having been raised initially in the appeal memorandum, the Tribunal had committed no error in not considering the same and therefore, the assessee could not call upon the Tribunal to consider that question in the miscellaneous petition by way of a rectification. The argument is undoubtedly correct and we concur with the same.
16. However, even considering the question on merits, we are of the clear opinion that an order passed in the Wealth Tax proceedings would have no effect on the income tax proceedings. The concepts of wealth tax and income tax would have to be definitely read separately. Even assuming that this property was a commercial property, we would be bound by the Supreme Court judgment, where the Supreme Court held that even a commercial property which is exp loited otherwise than in the course of business by letting out, the income from such letting out could not be said to be a business income. Therefore, even if it is held that such a question could be argued, the question has to be answered against the assessee. In short, we find no reason to interfere with the orders. The appeals are, therefore dismissed. Consequently, connected T.C.M.P.Nos.3 and 4 of 2001 are also dismissed.
11.02.2002 Index : Yes Website : Yes kst.
To:
1.The Assistant Registrar Income Tax Appellate Tribunal, Bench 'C', Madras.
2.The Secretary Central Board of Revenue,New Delhi.
3.The Appellate Assistant Commissioner of Income Tax, Tiruchirapalli.
4.The Income Tax Officer, Circle I (3), Dindigul.
5.The Income Tax Officer / The Asst.
Commissioner of Income Tax