Income Tax Appellate Tribunal - Mumbai
Vora Warehousing (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 9 November, 1998
Equivalent citations: [1999]70ITD518(MUM)
ORDER
1. Question at issue in this appeal is whether rents realised for a godown said to have been let out during the course of its business transactions and therefore whether it represents business income or income from house property.
2. The assessee has filed appeal for the assessment year 1992-93 which is the first year of its assessment. The assessee filed 27 pages of the Paper Book before the Tribunal. Amongst the pages 22 to 27 represent the relevant Articles of Association of the assessee company. The main object of the company as mentioned in its Memorandum of Association is found at page 22 according to which its main object, inter alia, is to establish, build, construct, purchase or otherwise acquire take on lease or sub-lease, run, conduct and operate warehouses, cold storage, dry storage and to provide facilities for storage of commodities, articles, things, preparation of all kinds and description, storage, godowns etc. It is clear that constructing inter alia of warehouses and doing business with those warehouses is one of the main objects of the assessee-company. In my understanding business can be conducted in many ways. Even leasing out the business assets and getting the lease rent on the same is the recognised method of doing business. In the CIT v. First Leasing Co. of India Ltd. [1998] 231 ITR 308 of the Supreme Court itself recognised that letting out the business assets is one of the ways of conducting business. Admittedly even according to the Assessing Officer assessee started operation as Warehouse Keeper since August, 1991 and in its accounts it had shown rental income from warehousing as Rs. 1,42,250. No other income is reflected except this in the Profit & Loss Account. Assessing Officer felt that since ownership of the property vests in the company, income therefrom is to be assessed under the head 'Income from property' and not under the head 'Business income'. He relied upon the decision of the Supreme Court in the case of East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 and also on a portion of the commentary at pages 429 and 430 of Kanga & Palkhiwala Income-tax Act Volume I (8th Edition) wherein the learned Author stated the following :
"Since a specific head of charge is provided for income from the ownership of property, rents or other income from the ownership of the property cannot be brought to tax under the Act. Assessment under this Act is obligatory. It makes no difference that property constitute stock-in-trade of business or that it is the assessee's business to let out property or rooms. The rents cannot be taxed under section 28 as business income. Ownership itself is the criterion of assessment under this section and in no case does the Act regard income from ownership of buildings as profits of business."
The Assessing Officer also took note of the ratio of East India Housing & Land Development's case (supra) wherein it is said to have been stated that even a company incorporated with the object of promoting and developing markets was assessable under this section (section 22) and not under section 28 in respect of the rental income of markets, shops and stalls owned by it. Therefore he declined to entertain the claim of depreciation as claimed and treated the receipts as Property Income out of which he allowed 1/6 towards repairs and brought to tax the rest of receipts as Income from Property. In this way he computed the income of the assessee as Rs. 98,510 vide order dated 29-12-94.
3. Aggrieved with the above, assessee went in appeal before the CIT(A)-XXIII, Mumbai. Taking this point as the main point of the assessee learned CIT(A) in addition to what was found by the Assessing Officer and that the view taken by the Assessing Officer was also confirmed by the later Supreme Court decision in CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596. Thus, the assessee was not successful before the learned CIT(A). Hence the second appeal.
4. I have heard Shri R. R. Vora, learned counsel for the assessee and Shri S. K. Rastogi, learned DR from the Department. I have gone through the whole file including the Paper Book containing 27 pages. The learned counsel for the assessee summarised his submissions as follows :
One of the main objects of the assessee-company as can be seen from Memorandum and Articles of Association is carrying on business of warehousing. The company had started its operation in the year 1991. It had constructed 7 godowns, all at one place. This is the first year of its business and it closed its books of account for the first time on 31-3-92. From the next year i.e. from assessment years 1993-94 to 1996-97 though the assessments were all made under section 143(1)(a), the rent receipts received by the assessee from the lessees of the Warehouses were all accepted as Business Income. There are roads constructed around the warehouses in the compound in order to facilitate for the Lorries coming and going in order to load and unload into the warehouses, and take out the goods from the warehouses. Special flooring is also put up in warehouses in order to enable to store steel and other hardware materials etc. Special security is arranged to safeguard the properties stored inside the warehouses. Therefore he argued that the Warehouses Complex represents assessee's building with which he is carrying on business. He had sen cited a decision of the Gujarat High Court in the case of CIT v. New India Industries Ltd. [1993] 201 ITR 208. Pages 3 to 6 of the Paper Book represent the sample bills given to the parties after receiving rents towards user of the warehouses. At page No. 3, the receipt was given on 30-11-1991, under which the sum of Rs. 6,776 was collected towards warehousing charges from one M/s. Jailaxmi Warehouse Corporation. On 31-12-1991 a sum of Rs. 6,384 was received from the same party towards warehousing charges. Again on 4-11-1991, the paper discloses that 26 sheets were put in Warehouses belonging to M/s. Jailaxmi Warehousing Corporation. Similarly, on 4-11-91 80 sheets were stored in the Warehouse of Jailaxmi Corporation. At pages 9 to 14 of the Paper Book, the agreement entered into with Jailaxmi Warehousing Corporation was provided. At pages 15 to 21 the agreement entered into with M/s. Hindusthan Alloys were provided. After going through the materials, I am thoroughly convinced that the assessee-company is carrying out business of warehousing in the Warehouses constructed by the company. The warehouse is a commercial asset and not simply a house property. The main amenities which are essential to be used as residential house property are absent in such Warehousing Complex. On the other hand the arrangements made inside as well as outside of the Warehouses disclosed that they are fit to be used only as Commercial Buildings. At page 246 New India Industries Ltd.'s case (supra) the following criterion is laid down by the Hon'ble Gujarat High Court before deciding whether income from letting out an asset is business income or income from property. They held the following :
(1) No general principle will be laid down which is applicable to all cases and each case has to be decided on its own facts and circumstances.
(2) Whether an income falls under one head or another has to be decided according to the common notions of a practical and reasonable men, for the Act does not provide any guidance in the matter.
(3) In each case, what is to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend on certain facts peculiar to each case. Pure and simple commercial assets like machinery, plant, tools, industrial sheds or godowns having high business potentials stand on a different footing from assets like land or building.
(4) If an assessee derived income from a commercial asset which is capable of being used as a commercial asset, then it is income from his business, whether he used the commercial asset himself or lets it out to somebody else to be used.
(5) So long as the commercial asset is capable of being exploited as such, its income is business income irrespective of the manner in which the asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else.
There are some other tests laid down with which we are not immediately concerned and so they are not extracted.
5. I have come across two more Supreme Court decisions directly on the point and they are the following :
(i) Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC),
(ii) CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597/36 Taxman 1 (SC).
In the case of Karanpura Development Co. Ltd. (supra), the Hon'ble Supreme Court has held the following :
"Ownership of property and leasing it out may be done as part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" (section 9) even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter.
Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation."
In the second case, which is again of the Supreme Court decision in the case of Vikram Cotton Mills Ltd. (supra) in the facts of the case, the assessee-company, which ran the business of manufacture of Textiles began running into losses in 1949. By December 1953 against the capital of Rs. 11 lakhs it accumulated liabilities amounting to Rs. 26 lakhs and the company stopped its manufacturing activities. In May 1956, one of the Creditors filed a petition for winding up of the company. With the approval of the company and the Creditors, the High Court evolved a scheme under section 153 of the Indian Companies Act, 1913, whereunder the business assets were 1st on a rent of Rs. 2.50 lakhs per year for 10 years with an option for renewal for another 10 years and the management of the company was transferred to a board of trustees approved by the High Court. For the assessment years 1960-61 to 1963-64, the question arose whether the rental income is assessable as business income under section 10 of the Indian Income-tax Act, 1922, so that the assessee company could set off its earlier losses against the rental income. The Tribunal held that the intention of the company in letting out its assets was to exploit the commercial asset for the purpose of its business and therefore the rental income was business income. Hence the earlier losses could set off. High Court confirmed the view of the Tribunal. Further apart from the decision of the High Court, Supreme Court held that the High Court was right in its view that the income derived by the respondent (assessee-company) by way of lease rent letting out of its assets was assessable to tax under the head "Profits and gains of business". While rendering this decision the Hon'ble Supreme Court kept in mind the principle laid down to CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 and CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171. The Hon'ble Supreme Court further held the following :
"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 those matters in the particular circumstances and the conduct of the parties concerned.
So far as the question whether income received by the lease of commercial assets is business income or not is concerned, the approach is the same whether it arises in the context of excess profits tax or income-tax."
In this connection, the Hon'ble Supreme Court confirmed the Allahabad High Court decision in the case of CIT v. Vikram Cotton Mills Ltd. [1977] 106 ITR 829. Therefore, I have no hesitation in mind to hold :
(1) The warehouses constructed by the assessee-company are commercial assets.
(2) The intention while constructing the warehouses is only to exploit them and carry on business with those warehouses.
(3) In fact there is ample evidence on record that they began using the warehouses for letting out to various parties, charging rent for warehousing their products and thus the assessee-company intended to derive profit from business conducted by it.
Therefore, the rent receipt derived by the assessee-company, in the light of the above decisions, is clearly to be held as 'business income' and not as 'income from house property'.
6. In view of the above, the orders of the authorities below are set aside and the appeal is allowed.