Income Tax Appellate Tribunal - Madras
Assistant Commissioner Of Wealth-Tax vs Hajee Moosa Ltd. on 29 May, 1992
Equivalent citations: [1992]42ITD292(MAD)
ORDER
A. Venku Reddy, Judicial Member
1. Revenue is the appellant in all these five appeals directed against the orders dated 28-2-1990 of the CWT (A), Madurai, relating to the assessment years 1984-85 to 1988-89 but pertaining to one and the same assessee.
2. The sole common issue that arises for consideration in all these appeals is whether the assessee is entitled to claim exemption from wealth-tax on the value of the whole buildings owned by it at D. Nos. 17, 18and 19. East Chitrai St., Madurai, on the ground that the assessee used the said buildings for purposes of its business as contemplated under Clause (vi) of Sub-section (3) of Section 40 of the Finance Act, 1983. Hence, these appeals relating to one and the same assessee have been heard together for disposal by a common order.
3. The facts that led to the filing of these appeals are as follows : The assessee, a great name in textile business, is a private limited company in which the public are not substantially interested. It is the owner of the buildings bearing D. Nos. 17, 18 and 19, East Chitrai St., Madurai. The following six partnership concerns have entered into agreements known as "franchise agreements" with the assessee for the purpose of carrying on business in textiles and garments in the aforementioned buildings of the assessee :
(a) M/s Hajee Moosa Fabrics
(b) M/s Hajee Moosa Silks
(c) M/s Fibres and fabrics
(d) M/s May Fair
(e) M/s Decors
(f) M/s Shabnam.
Accordingly, they were carrying on business in textiles in the said buildings by virtue of the franchise agreements entered into by them with the assessee. Each of them was paying a commission at the rate of 1 per cent of the net purchase value of the textile goods purchased by them to the assessee on or before the 10th day of each succeeding month till the expiry of the franchise agreements. The said commission was paid by the franchisees to the assessee-franchisor for using the trade emblem of the assessee "Hajee Moosa" and for the other services rendered by the assessee-franchisor to the franchisees in pursuance of the franchise agreements. Thus, according to the assessee, it was exploiting its business asset, viz., the building for earning income through franchise business.
4. While so, the assessee filed its returns of wealth for the assessment years 1984-85 to 1988-89. Before the WTO, the assessee claimed exemption of the buildings at D. Nos. 17, 18 and 19, East Chitrai St., Madurai, from wealth-tax contending that the assessee had been using the said buildings for its own business and as such they are not liable for wealth-tax in view of Clause (vi) of Sub-section (3) of Section 40 of the Finance Act. 1983. The WTO rejected the said contention of the assessee for exemption and made a reference to the Valuation Officer under Section 16A of the Wealth-tax Act for the determination of the value of the building in question. After receiving the valuation report of the Valuation Officer and after considering the objections of the assessee, the WTO completed the assessments. He found that a portion of the buildings. i.e., about l/10th of the buildings, is being used by the assessee as its office. Accordingly, he allowed exemption in respect of 1/ 10th of the value of the buildings and assessed to tax the value of the remaining 9/10th of the buildings. The WTO determined the value of the 9/10th of the buildings as follows:
Assessment year Valuation date Value 1984-85 31-3-1984 13,88,700 1985-86 31-3-1985 13,88,700 1986-87 31-3-1986 14,28,020 1987-88 31-3-1987 14,28,020 1988-89 31-3-1988 17,98,200
The WTO rejected the claim of exemption made by the assessee stating that the six concerns which are carrying on business in that building under franchise agreements with the assessee are separate and distinct assessable entities, that the business carried on by the said six concerns, through franchise agreements with the assessee cannot be considered as the business of the assessee itself, and as such the buildings (except the 1/ 10th portion) cannot be said to have been used by the assessee for its own business for claiming exemption under Section 40(3)(vi) of the Finance Act. 1983.
5. Aggrieved by the assessments made by the WTO. the assessee preferred appeals before the CWT (A), Madurai. The CWT (A) allowed the five appeals of the assessee on the issue of exemption of the buildings in question from wealth-tax under Section 40(3)( of the Finance Act, 1983 by his separate orders all dated 28-2-1990. He gave detailed reasons in his order dated 28-2-1990 relating to the assessment year 1984-85 for allowing the appeal and adopted the same reasons for allowing the remaining appeals relating to the assessment years 1985-86 to 1988-89. The CWT (A) while allowing the appeals after duly considering the terms and conditions of the franchise agreements (sic) into between the assessee and the franchisees observed as follow :
For all these services, as already stated, the appellant was getting commission of 1 per cent on the purchases made by the franchisees. Therefore, the income earned by the appellant from the franchising business is mainly by way of providing expertise and the building. Therefore, it cannot be said that the buildings in question have not been used by the appellant for the purpose of its business. I would therefore hold that the building provided by the appellant for carrying out the franchising business was used for the business of the appellant itself and therefore it is exempt from wealth-tax under Clause (vi) of Sub-section (3) of Section 40 of the Finance Act. 1983. It would therefore delete the addition.
Aggrieved by the orders of the CWT (A), the Revenue preferred these five appeals before the Tribunal.
6. The learned Departmental Representative vehemently contended that by no stretch of imagination it can be said that the assessee used the buildings in question for its own business, since six of the partnership concerns, which are all distinct assessable entities have been carrying on textile business on their own in the said buildings, that the business carried on by the franchisees in the buildings in question cannot be treated as the business of the assessee itself and that the CWT (A) erred in allowing exemption for wealth-tax for the buildings in question. Further, it is contended that the so called franchise agreements etc. were brought into existence for the purpose of tax avoidance. The second contention has no legs to stand since it was never the contention case of the department that the franchise agreements are either nominal or not intended to be acted upon. If law permits an assessee to follow a particular procedure for reducing its tax burden, and the assessee adopts it, none can find fault with it. As we have already observed, the only issue that arises for decision now in these appeals is whether the exemption of the buildings at D. Nos. 17, 18 & 19, East Chitrai St., Madurai, allowed by the CWT (A) on the ground that the assessee used the said buildings for its business is sustainable under law or not.
7. Section 40(1) of the Finance Act, 1983 states that wealth-tax shall be charged under the Wealth-tax Act with effect from 1-4-1984 in respect of the net wealth of every company, not being a company in which the public are substantially interested. Admittedly, the assessee is a company in which the public are not substantially interested. Sub-section (2) of Section 40 states that the net wealth of a company shall be the amount by which the aggregate value of all the assets referred to in Sub-section (3) wherever located belonging to the company on the valuation date. Sub-section (3) of Section 40 enumerates the assets referred to in Sub-section (2) for the purpose of calculating the net wealth of a company. Clause (vi) of Sub-section (3) of Section 40 runs as follows :
40(3) The assets referred to in Sub-section (2) shall be the following, namely :
(vi) building or land appurtenant thereto, other than building or part thereof used by the assessee as factory, go down, warehouse, hotel or office for the purposes of its business or as residential accommodation for its employees or as a hospital, creche, school, canteen, library, recreational centre, shelter, rest room or lunch room mainly for the welfare of its employees and the land appurtenant to such building or part:
Thus, a building which is used by the assessee for the purposes of its business as mentioned in Sub-clause (vi) is excluded from the purview of wealth-tax. The main contention of the Revenue is that the assessee itself has not been using the building in question for its business. What is business? It is not defined, in the Wealth-tax Act. Section 2(13) of the Income-tax Act defines "business". "Business" includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It covers every facet of an occupation carried on by a person with a view to earning profit. Activities of rendering services to others also fall in the four categories of the expression "business". "Business" in commercial parlance is an activity capable of producing a profit. Ordinarily, the expression "business" connotes a continuous activity in carrying on a particular trade or avocation. "Business" implies some real, substantial, systematic or organised course of activity or conduct with a set purpose. After the advent of Industrial Revolution and wide spread increase in commercial activities, several concepts of business have come to stay. The traditional connotation of 'business', as a layman understands it, is mere purchasing and selling of merchandise. Due to tremendous growth of industrial activity, several sophisticated business concepts have come into existence. Some of them are business of managing agency, consultancy, commission agency, etc. Likewise, franchise business, though a Western concept transplanted on Indian soil a few decades ago, is one such type of recognised line of business. The dictionary meaning of the word "franchise", as given in the Chambers 20th Century Dictionary, is as follows :
A commercial concession by which a retailer is granted by a company the exclusive right of retailing its goods in a specified area.
Leading business houses permit third parties called "Franchisees" to use the former's trade name, goodwill, etc. and also utilise the former's expertise in carrying on business. For using the goodwill, trade name, etc. of the franchisor and for taking the expert services of the franchisor, the franchisee pays some royalty or commission to the franchisor. Thus, the franchisor earns income from franchise business. The franchisor controls the business carried on by the franchisee since the reputation of the franchisor's trade name is at stake.
8. The assessee-franchisor is the owner of the buildings in question. It entered into franchise agreements with as many as six concerns mentioned supra to enable the said concerns to use the franchisor's trade emblem or logo and utilise the expertise of the franchisor for carrying on textile trade. It is not disputed that identical franchise agreements were entered into between the franchisor and the frachisees. It is enough if we consider the terms and conditions of one such franchise agreement. Some of the relevant terms and conditions contained in the franchise agreement executed between the assessee and the franchisees are as follows :
(1) The company (assessee) shall permit the Franchisee to use the logo or emblem of Hajee Moosa' a specimen of which is affixed at the end of this agreement, in the textile business carried on by the franchisee.
(3) The Franchisee shall purchase, buy or acquire textile/Garments goods dealt in by it only from suppliers, distributors, manufacturers, wholesalers or other sources approved by the company and from no other source or person.
(4) The Franchisee shall carry on the textile business in the premises situated at 17, 18 and 19, East Chitrai Street, Madurai, which belong to the company on a leave and licence such space in the said premises as may be necessary for the franchisee to carry on its textile business. No separate rent or other compensation shall be payable by the franchisee to the company in respect of space so provided by the company to the franchisee.
(8) The Franchisee shall stock only the textile goods recommended by the company (assessee)....The Franchisee shall not deal in other textile goods not recommended by the company....
(9) The company (assessee) shall help, assist and guide the franchisee in buying or acquiring the stocks of textile goods recommended and approved by the company at competitive prices.
(10) The company (assessee) shall furnish its guarantee to suppliers or textile goods for credit to the Franchisee or to banks or other credit institutions in respect of loans or other advances made by them to the franchisee if such guarantee is insisted upon by the suppliers of textile goods or the banks or the credit institutions, as the case may be.
(12) The Franchisee shall sell the textile goods dealt in by it at the prices recommended by the company (assessee) from time to time.
(13) The Franchisee shall permit the authorised representative of the Company to inspect at all reasonable times the business premises and stocks of goods of the franchisee.
(14) The Franchisee shall pay the company a consolidated sum calculated at the rate of 1 per cent (one per cent) of the net purchase value of the textile goods purchased by the Franchisee during the period in which this agreement is in force, for the use of the logo or emblem of Hajee Moosa and for the other services to be rendered by the Company to the Franchisee in pursuance of this agreement....
9. The assessee, a well-known name in textile trade circles, acquired a reputation for the quality of the textile goods dealt by it. Likewise, its logo or trade emblem 'Hajee Moosa' acquired reputation as a guarantee for quality, durability and reliability of the goods dealt by the assessee. The franchising business of the assessee comprises of lending its logo or emblem 'Hajee Moosa' and providing its expertise in textile sales to the franchisees. Further, it gives guarantee to suppliers of textile goods for credit to the franchisees. It also stands guarantee to banks and other credit institutions in respect of the loans or advances given by the said banks and institutions to the franchisees. Further, it provides sufficient space and accommodation for the franchisees to carry on business in textiles. No separate rent is stipulated or collected from the franchisees for the accommodation given to them. In order to safeguard the reputation of its trade name, the assessee controls the business of the franchisees. Franchisees should only purchase textile goods from the suppliers or the manufacturers or distributors approved by the assessee. The assessee helped the franchisees in acquiring stocks of textile goods. The franchisees cannot sell the textile goods at prices higher than the prices recommended by the assessee from time to time. The franchisor reserved the right to inspect at all reasonable times the business premises and the goods stocked by the franchisees. Thus, it is not a mere case of the assessee letting out its buildings to third parties on rent for carrying on textile trade. No rent was reserved for the said buildings. The franchisees were merely permitted on leave and licence basis to carry on their textile trade in the said building. The franchisor reserved the right of inspection of the said premises at any reasonable time for inspecting the stocks held by the franchisee. Thus, the assessee-franchisor has been in possession of the buildings in question. The franchisees have been carrying on business in the said buildings on leave and licence basis. Occupation of the buildings by the franchisees as licences is undoubtedly occupation by the assessee itself for its own franchise business.
10. The building in question is a commercial asset, which, its owner - the assessee has been exploiting for its own business purposes. The income which the assessee earned from the franchisees under the franchise agreements is not a mere property income in the shape of rent for the building. The said income is derived by the assessee for permitting the franchisees to use the assessec's trade logo or emblem in textile trade and for providing assistance and help in acquiring stocks on credit etc. and also for providing the assessee's expertise in textile trade to the franchisees. The services rendered by the franchisor to the franchisees are complex in nature. It is seen from the order of the CWT (A) that the commission received by the assessee from the franchisees was assessed in the hands of the assessee as income from business and not as income from property, ie., by mere letting out the buildings. After giving our anxious consideration to the nature of the franchise business of the assessee and also taking into consideration the terms and conditions of the franchise agreement, and also taking into consideration the facts of this case, we have no hesitation in agreeing with the finding recorded by the CWT (A) that the buildings in question have been used by the assessee for purposes of its own business within the meaning of Clause (vi) of Sub-section (3) of Section 40 of the Finance Act, 1983. Hence, we confirm the order of the CWT (A) that the buildings at D. Nos. 17, 18 and 19, East Chitrai St., Madurai, owned by the assessee are exempt from wealth-tax under Clause (vi) of Sub-section (3) of Section 40 of the Finance Act, 1983.
11. In the result, all these appeals fail and are, therefore, dismissed