Gujarat High Court
Gujarat Ginning And Manufacturing Co. ... vs Commissioner Of Income-Tax on 17 March, 1993
Equivalent citations: [1994]205ITR314(GUJ)
JUDGMENT G.T. Nanavati, J.
1. The Income-tax Appellate Tribunal has referred the following questions under section 256(1) of the Income-tax Act, 1961, to this court at the instance of the assessee :
"(1) Whether, the Tribunal was right in law in holding that the assessee was not entitled to vacancy allowance in respect of property that was neither struck with sterility nor was at any time in the past let out and was always vacant ?
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to get the vacancy allowance or exclusion for occupancy for business purposes for the properties wherein machines were lying ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the deduction of municipal taxes in respect of properties which were not let ?"
2. For the assessment years 1968-69, 1969-70, 1971-72 and 1972-73 :
"1. Whether, on the facts and in the circumstances of the case, the income was rightly taxable under the head 'Business income' and not 'Income from house property' ?"
3. For the assessment year 1971-72 :
"1. Whether the Tribunal was right in rejecting the claim of deduction of Rs. 26,512 which was the excess income taxed in the earlier years because of the decision in this year fixing the standard rent at Rs. 335 against the contractual rent of Rs. 601 ?"
4. For the assessment year 1970-71 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the additional ground to the effect that the income was taxable under the head 'Business' and not 'Income from property' could not be entertained ?"
5. As the questions which have been referred to us arise out of the judgments and orders passed by the Tribunal in five separate appeals pertaining to five separate assessment years, the Tribunal ought to have made five separate references. As that has not been done by the Tribunal, we direct the office to register five separate references by treating Income-tax Reference No. 277 of 1980 as reference arising out of Income-tax Appeal No. 1192 of 1976-77. Other income-tax references are to be numbered as References Nos. 277A, 277B, 277C and 277D of 1980 treating them as arising out of the judgments and orders in Income-tax Appeals Nos. 1193 and 1195 of 1976-77, 361 of 1975-76 and 1193 of 1974-75, respectively. The five assessment years are 1968-69, 1969-70, 1970-71, 1971-72 and 1972-73.
6. The assessee is a private limited company. Formerly, it was doing the business of ginning and spinning and for that purpose, it had constructed a textile mill and also acquired substantial immovable properties over which godown and office buildings were constructed. The business of ginning and spinning was closed years ago. The assessee started selling its business assets on and from March 20, 1946. The claim raised by the assessee that it had already closed its business and that its assets had ceased to be commercial assets was accepted by the Department in different proceedings. As there was no possibility of restarting its original business, the assessee passed a resolution on January 16, 1964, deciding to modify the memorandum of association by including some more activities as the activities of the company. One such activity included in the memorandum of association was purchasing or acquiring lands and properties or to sell them. The assessee does not appear to have acquired any new land or building or constructed new buildings but the buildings which were constructed or acquired for the original activity of spinning continued to be owned by the assessee. Some machinery which was till then not sold occupied some parts of the buildings. Some of those buildings were let out by the assessee. The properties which were let out by the company underwent some change from year to year because of old tenants leaving the premises and new tenants being inducted. Some buildings were in such a dilapidated condition that they could not be used. During the assessment proceedings, except for the assessment year 1970-71, the assessee had raised a contention that income received by way of rent should be taxed as business income and not as income from property under section 9 of the 1922 Act. It was also contended that income in respect of the property which was not actually let out should either be excluded from computation or the assessee should be granted vacancy allowance. This vacancy allowance should be granted not only in respect of the property which has remained vacant nor let out but also in respect of the property wherein machinery was lying. A contention was also raised that the assessee was entitled to a deduction of municipal taxes in respect of the property not let out the annual letting value of such property should have been determined accordingly.
7. In respect of the assessment proceedings for the assessment year 1971-72, a contention was raised that the assessee was entitled to a deduction or set off of Rs. 26,512, which was excess income in the earlier years on the basis of rent received then but which rent came to be fixed at a lower rate during that assessment year. Some other contentions were also raised but we are not concerned with them in this reference.
8. The Income-tax Officer considered the income of the assessee as income from property and not as a income from business. He disallowed the claim for deduction of municipal taxes and determined the annual letting value accordingly, following the decision in the case of Liquidator, Mahmudabad Properties Ltd. v. CIT [1972] 83 ITR 470 (Cal). The Income-tax Officer also disallowed the claim for vacancy allowance in respect of the properties which were not let out.
9. The assessee's appeal before the Appellate Assistant Commissioner failed and the further appeal to the Tribunal also met the same fate.
10. What is contended by learned counsel for the assessee is that after 1964, the income which the assessee had earned by letting out these properties should have been regarded as business income, and not as income from property. He submitted that, by passing a resolution, the company had modified its memorandum of association and included in it the activities of purchasing or otherwise acquiring lands and buildings for constructing them and letting out such properties. Therefore, after 1964, it became the business of the assessee to let out properties. The properties which were already let out and which came to be let out thereafter were, therefore, in the course of its business of letting and, therefore, the income received by it from such properties should be regarded as business income. In support of this contention, he drew our attention to a decision of this court in the case of CIT v. Motilal Hirabhai Spg. and Wvg. Co. Ltd. [1978] 113 ITR 173, wherein it is held that (headnote) :
"In taxing statutes the word 'business' is used in the sense of an occupation or profession which occupies the time, attention and labour of a person normally with the object of making profit. In order to infer from a course of transactions that the person intended thereby to carry on business, ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transaction must exist."
11. Relying upon these observations, learned counsel submitted that the assessee carried on the activity of letting out its properties and through the volume of business was not large, looking to the nature of business, it cannot be said that letting out of property was not in the course of transacting its business. But as pointed out in that judgment, no test is decisive of the intention to carry on business. In the light of all the circumstances, an inference that a person desires to carry on business has to be raised. Merely because the assessee included in its memorandum of association the activity of purchasing or acquiring lands and buildings or constructing them and letting them, it cannot be said that thereby it had embarked upon that activity or business. That has to be inferred from the subsequent conduct of the assessee.
12. The next decision relied upon by earned counsel for the assessee is the decision in the case of CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC). In that case, it was found as a matter of fact that the intention of the company was not to part with the assets but to lease them out for a temporary period as a part of exploitation. Considering that fact and other circumstances, the Supreme Court affirmed the decision of the [1977] 106 ITR 829 (All), which had taken the view that, from the said fact and other circumstances, it could not be said that no business was carried on or that the income derived by the company from letting out the machinery was only rental income. In that case, the High Court held that the income derived by the company by way of lease rent from the letting out of its assets was assessable to tax under the head "Profits and gains of business" and that decision was affirmed by the Supreme Court. But, as pointed out therein, whether a particular income is income from business or from investment must be decided according to the general common sense view of those who deal with such matters, the particular circumstances and the conduct of the parties concerned. As pointed out by the Supreme Court, it is predominantly a matter of intention. Intention is an inference to be drawn from the relevant facts. The whole transaction is to be viewed from the standpoint of an ordinary prudent businessman.
13. Therefore, what we have to find out in this case as indicated by the Supreme Court is as to whether the assets were treated by the assessee as commercial assets and whether the commercial assets were intended to be exploited by the assessee as commercial assets or were intended to be used by letting them out on rent. In short, the true nature of the activity carried on by the assessee is required to be found out. As pointed out above, the assessee had closed its business of spinning long time ago, i.e. even before March 20, 1946. It is amply clear that it had no intention to restart the business. It did not carry on any business thereafter nor had it any intention to carry on any business and till 1964, the only activity which it carried on was to let out its properties and earn rental income. Only in 1964, it amended its memorandum of association but its subsequent conduct shows that except carrying on the old activity, the assessee had not done anything more as would indicate that it had embarked upon a new activity of purchasing or acquiring lands or buildings or constructing new buildings to let them on rent. The properties which were let out were allowed to remain with the tenants and the properties which became vacant, either because the tenants vacated them or because some machines housed in those properties were sold, were let out by the assessee. Not a single building was purchased or acquired by it. Even upon open land which the assessee possessed, it did not construct any new building. No attempt was made by it to repair those buildings which were usable. Thus, no attempt was made by it to make any property in its possession fit enough for the purpose of business of letting. Therefore, it cannot be said that the assessee intended to exploit these assets as commercial assets for the purpose of business. From the conduct of the assessee, it becomes clear and, in our opinion, the Tribunal was right in coming to the conclusion that what the assessee intended was to earn income by letting out properties by treating them as properties. That income which the assessee received as a result of letting out the properties was as an owner of the properties and not in any other capacity. The Tribunal was right in treating the income received by the assessee as a result of letting of the properties as income from property and not accepting it as business income. The circumstances that the assessee was allowing tenants to use its telephone and had engaged a watchman to look after the properties cannot be of any avail to the assessee as, admittedly, the expenses incurred by the assessee for that purpose did not constitute one per cent of the total income received by it by way of rent.
14. It was submitted by learned counsel for the assessee that, with respect to the properties which were neither struck with sterility nor let out and with respect to the properties were machines were lying, the assessee should have been granted vacancy allowance. In support of his contention, he relied upon clause (ix) of sub-section (1) of section 24. It is provided by that clause that, where the property is let out and was vacant during a part of the year, that part of the annual value which is proportionate to the period during which the property is wholly unoccupied or, where the property is let out in part, that portion of the annual value appropriate to any vacant part which is proportionate to the period during which such part is wholly unoccupied, then, before computing the income from the house property, deduction on that count has to be granted. Now, this is not a case where property was let out and was vacant during a part of the year and, therefore, it is difficult to appreciate how this clause can apply to the facts of the case. What was contended was that the property was let out in the past and merely because it was not let out during the relevant accounting year, the benefit of this provision cannot be denied to the assessee. As pointed out by the Supreme Court in Liquidator of Mahamudabad Properties P. Ltd. v. CIT [1980] 124 ITR 31, section 24(1)(iv) cannot apply if the building was not let out during the previous year. The reason given by the Supreme Court is that, while reading section 24(1)(ix), which speaks of property which is let and which was vacant during a part of the year, we have to read it to mean property which was let during the previous year and was vacant during a part of the year. It cannot refer to property which was not let at all during the previous year. The Tribunal was, therefore, justified in not accepting the assessee's claim made under section 24(1)(ix).
15. It was seriously contended on behalf of the assessee that, in any case, the assessee was entitled under section 23 to deduction of municipal taxes in respect of the property which was not let out. Section 23 as it then stood was as under :
"23. (1) For the purpose of section 22, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year :
Provided that whether the property is in the occupation of a tenant and the taxes levied by any local authority in respect of the property are, under the law authorising such levy, payable wholly by the owner, or partly by the owner and partly by the tenant, a deduction shall be made equal to the part, if any, of the tenant's liability borne by the owner."
16. Sub-section (2) as it then stood was as under :
"(2) Where the property is in the occupation of the owner for the purpose of his own residence, the annual value shall first be determined as in sub-section (1) and further be reduced by one-half of the amount so determined or one thousand eight hundred rupees, whichever is less."
17. As we are not concerned with the proviso and the Explanation, we have not reproduced the same. What was contended was that the annual value of the property is to be determined on the basis of a fiction that the property is let to a tenant. Once such fiction is raised, the proviso automatically becomes applicable and, therefore, even in respect of the property which is not let out and which is in the occupation of the owner, deduction of municipal taxes has to be granted while determining the annual value for the purpose of section 23. In support of his contention, learned counsel relied the decision of this court in CIT v. Arvind Narottam Lalbhai Dalpatbhai Vada [1976] 105 ITR 378, wherein this court had held as under (headphone) :
"While calculating the annual letting value of the property in the occupation of the owner for the purpose of his residence, municipal taxes had to be deducted. It was clear that by the use of the words 'further to be reduced in sub-section (2) of section 23 of the Income-tax Act, 1961, the Legislature had clearly indicated that the deduction of municipal taxes contemplated by the proviso and the Explanation to sub-section (1) as they existed prior to April 1, 1969, had to be made, and thereafter the amount so determined had to be further reduced as contemplated by sub-section (2) so far as self-occupied properties were concerned."
18. For the purpose of proper interpretation of section 23(2), this court also referred to section 23(1) and observed as under (at page 386) :
"Therefore, the question that we have to ask ourselves is as to what is meant by the words 'determined as in sub-section (1)'. It is obvious that what the main part of sub-section (1) provides for is the determination of the annual value of all properties, whether tenant-occupied or self occupied, and by the main body of sub-section (1) of section 23, the annual value of any property is to be deemed to be the sum for which the property might reasonably be expected to let from year to year. This notional or hypothetical annual letting value is the annual value and it any taxes of any local authority are paid, then as laid down in the provision read with the Explanation as it stood prior to April 1, 1969, the whole or half of the municipal taxes were to be deducted depending upon whether the property was constructed before April 1, 1950, or after April 1, 1950. But the proviso and the Explanation only applied in the case of property in the occupation of a tenant and under the proviso to sub-section (1), the requirements for the application of that proviso were : (1) that the property should be in the occupation of a tenant; (2) the taxes levied by the local authority in respect of the property should be under the law authorising such levy payable wholly by the owner or partly by the owner and partly by the tenant; and (3) the deduction was to be made equal to the part, if any, of the tenants liability borne by the owner and by the legal fiction created by the Explanation, the whole or half of the municipal taxes were deemed to be the tenant's liability. It is obvious that, on the face of it, if a mere prima facie view were to be taken, the condition about deduction of the municipal taxes laid down in the proviso to sub-section (1). Namely, that the property should be in the occupation of a tenant, would not apply to property in the occupation of the owner for the purpose of his own residence... The words 'further be reduced' indicate that some deduction from the annual letting value has already been carried out before further reduction contemplated by sub-section (2) of section 23 can be considered and that further reduction can only be of the municipal taxes as contemplated by the proviso to sub-section (1) read with the Explanation to that proviso. There is no other meaning that can possibly be attached to the words 'further be reduced'."
19. In Arvind Narottam's case [1976] 105 ITR 378, this court was concerned with a claim made under section 23(2), i.e., in respect of the property in occupation of the owner for his residence. In that context and in view of the language used in sub-section (2), this court held as stated above. Moreover, with due respect, it has to be stated that the learned judges constituting that Bench stressed what was to be deemed further than what was intended by section 23(1). What it provided was that the annual letting valued had to be determined on a notional or hypothetical basis, i.e., on the basis of what a willing tenant would have paid by way of rent. It did not create a fiction of tenancy and, therefore, the proviso cannot have any application because the proviso contemplates a tenant in fact. Even so, we would have been required to follow that decision or to refer the matter to a larger Bench but for the fact that we have now a decision of the Supreme Court on the point. The Supreme Court in the case of Liquidator of Mahamudabad Properties [1980] 124 ITR 31, has, in terms, held that the proviso to section 23(1) can be availed of only if the property was in the occupation of a tenant and no deduction of municipal taxes can be granted to the assessee if the building was vacant during the previous year. We cannot distinguish that decision or refuse to follow the same as desired by learned counsel for the assessee, on the ground that the main part of section 23(1) has not been considered by the Supreme Court and the Supreme Court was only concerned with the proviso to section 23(1). On page 38 of the report, the Supreme Court has specifically referred to the claim for deduction made under section 23(1) and after referring to section 23, it has held as under :
"The proviso to section 23(1) can be availed of only if the property is in the occupation of a tenant. It would seem so on the language of the proviso. The assessee does not rest his claim on any other provision of law. In the circumstances, the High Court is right in denying the claim in respect of municipal taxes."
20. Therefore, in view of the decision of the Supreme Court in Liquidators of Mahamudabad Properties' case [1980] 124 ITR 31, the contention raised on behalf of the assessee cannot be accepted. Earlier also, the Full Bench of the Bombay High Court in New Piecegoods Bazar Co. Ltd. v. CIT [1947] 15 ITR 319, had taken the same view as can be seen from the following observation made in the separate but concurring judgment of Chagla J. (at page 330) "Now, Mr. M. V. Desai's grievance is this : he says that he has in fact not received all the income which he has shown under that head on income from property. He says that he had paid the municipal property tax and the urban immovable property tax and, therefore, he should be permitted to deduct the amount paid for the municipal property tax and the amount paid for the urban immovable property tax before arriving at the figure of the bona fide annual value of the property. Now, that contention is clearly based on a fallacy because income on property is not based on what the landlord actually receives. It is based on the none fide annual value of the property. If a landlord claims any deductions, he must come under one or other of the heads which are contained in the sub-section to section 9 of the Income-tax Act and which are considered to be allowances which can be made to a landlord in taxing his income to income-tax. In fixing the rent a landlord takes into consideration all his outgoing and fixes a reasonable rent, and one of the outgoing in this case happens to be the municipal property tax and the urban immovable property tax. It would be entirely erroneous to suggest that a landlord is allowed to deduct from the rent which he receives all the outgoing before the bona fide annual value of the property is arrived at. The bona fide annual value of the property is the rent which the landlord receives. The outgoing are matters for allowances, and if a particular outgoing is a permissible allowance under section 9, then the income-tax authorities could grant that allowance to the landlord."
21. It may be stated that the said decision of the Bombay High Court was overruled by the Supreme Court (see New Piece Goods Bazar Co. Ltd. v. CIT [1950] 18 ITR 516), but that was on a different point. In CIT v. I. Chatterji [1986] 161 ITR 535 also, the Bombay High Court has held that there is no provision in section 23 whereby, for the purposes of computing the annual letting value of self-occupied house property, local or municipal taxes paid by the owner can be deducted. The Bombay High Court differed from the view taken by this court in CIT v. Arvind Narottam Lalbhai Dalpatbhai Vada [1976] 105 ITR 378 and followed the Full Bench decision in New Piecegoods Bazar Co. Ltd. v. CIT [1947] 15 ITR 319. It appears that the decision of the Supreme Court in Liquidator of Mahamudabad Properties P. Ltd. v. CIT [1980] 124 ITR 31 was not cited before the Bombay High Court. Following the decision of the Bombay High Court in New Piecegoods Bazar Co.'s case [1947] 15 ITR 319, and the Supreme Court in Liquidator of Mahamudabad Properties P. Ltd. v. CIT [1980] 124 ITR 31, we hold that, under section 23(1), while determining the annual letting value of the property, municipal taxes paid by the owner of the property cannot be deducted if the property is in his occupation.
22. It was next contended that excess income was taxed in the earlier years i.e., in the years earlier to the assessment year 1971-72 as the annual letting value was determined on the basis of income actually received by the assessee in those years but the said income got subsequently reduced as a result of a decision of a competent court. Therefore, in the assessment year 1971-72, a set off should have been granted to the assessee. Learned counsel frankly conceded that there is no provision for granting such set off. But he submitted that, on the analogy of section 25A, such relief ought to have been granted to the assessee. Obviously, this contention cannot be accepted because, in the absence of a specific provision, no relief can be granted. For imposing a burden on the assessee in respect of a wrong relief granted in the earlier years, the Legislature has enacted section 25A. Therefore, if a relief is to be granted to the assessee in a converse case, then, we must find a suitable provision in the Act. Learned counsel for the assessee relied upon a decision of this court in CIT v. Bachubhai Nagindas Shah [1976] 104 ITR 551, wherein it is observed as under (headnote) :
"It is not doubt true that such deduction is not contemplated by the actual wording of section 16 of the Act. But what has been pointed out goes to the very root of the notion of income and before anything can be considered 'income', the principle which follows from the basis approach of 'income accrued' being considered on the same footing as income received, must be accepted."
23. Now, these observations are obiter dicta and this court, realising the difficulty in granting such benefit in the absence of provisions, expressed the hope that the authority concerned would consider the claim of the assessee. In the absence of any provision to that effect, it cannot be head that the assessee was entitled to the claim of set off and that the Tribunal went wrong in not granting the same.
24. The last contention raised by the assessee was in respect of the assessment year 1970-71 only. We would have been required to go into that question if we had come to the conclusion that the income which the assesses had earned was business income. As we have come to the conclusion that the income was rightly held to be income from property, question No. 5 is not required to be answered. We, therefore, decline to answer the same.
25. For the reasons stated above, we answer the other questions referred to us against the assessee and in favour of the Revenue. Reference is disposed of accordingly. No order as to costs.