In Sultan Brothers Private Limited v. Commissioner

THE HON’BLE SRI JUSTICE DILIP B.BHOSALEANDTHE HON’BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.NO.316 OF 2003 JUDGMENT:(per the Hon’ble Sri Justice Dilip B.Bhosale) This Income Tax Appeal by the Revenue under Section 260-A of the Income Tax Act, 1961 (for short “the Act”) is directedagainst the order of the Income Tax Appellate Tribunal,Visakhapatnam Bench in I.T.A.No.78/H/96 for the assessment year1992-1993. 02. The respondent-assessee is a partnership Firm engaged inexport of Tobacco. The respondent- assessee filed return ofincome on 27-08-1992 admitting the net income of Rs.4,78,520/-.During the previous year relating to the assessment year 1992-93,the assessee had let out his godowns. He offered the rental incomefor taxation under the head “income from business”. It is the caseof the assessee, as argued by his learned counsel, that thegodowns, which he had let out, were being used by him for thebusiness of export of tobacco, and whenever they were not in use,he had given them on lease to third parties and received renttherefrom. He, therefore, claimed before the authorities below, onthe basis of Clause.3 of the partnership deed, that the godowns ofthe firm were let out, as provided for in the said deed and that beinga part of their business, the rent received from the lessee should betreated as “income from business”. It has come on record thatsuch income of the assessee for the earlier years i.e. 1990-91,1991-92 was assessed as “income from property” on the groundthat no business as such was carried on by the assessee duringthose years. The assessee had carried that order in appeal before the Commissioner of Income Tax (Appeals), who decided thematter in favour of the assessee treating the entire income as“income from business”. That order of the appellate authority waschallenged by the Revenue before the Income Tax AppellateTribunal (ITAT). Based on the order of the Appellate Tribunal,passed for the year 1991-92, the assessment for the year 1992-93,impugned in this appeal, was completed, treating the rental incomeas “income from property”. 2.1 The CIT(Appeals), in the appeal filed by the assessee,however, held that the income from letting out of the godownsshould be treated as “income from business” and directed theAssessing Officer to grant renewal of registration as a firm. Feelingaggrieved and dissatisfied by the order of the CIT(Appeals), theRevenue filed appeal before the Appellate Tribunal. The Tribunalconfirmed the order of the CIT(Appeals) holding that so longcharacter of the godown is retained as a godown, it should betreated as a commercial asset and its rental income must betreated as an exploitation of commercial asset in the nature oftrade. In short, the order of the CIT(Appeals) was confirmed by theAppellate Tribunal, which is the subject matter of the instant appeal. 03. In this backdrop, though at the stage of admitting the appealon 04-02-2004 no substantial question of law was formulated, in ouropinion, the following questions fall for our consideration: 1.Whether on the facts and in the circumstances of thecase, the Tribunal was justified in law in holding theincome from letting out of the godowns as “income frombusiness”?case, the Tribunal was justified in law in holding theincome from letting out of the godowns as “income frombusiness”? 2.Whether on the facts and in the circumstances of thecase, the Tribunal was justified in not recording anyfinding as to entitlement of the assessee for continuationof Registration as a firm?case, the Tribunal was justified in not recording anyfinding as to entitlement of the assessee for continuationof Registration as a firm? 04. We have heard learned counsel for the parties and with theirassistance gone through the judgments relied upon by the parties insupport of their contentions. It would be relevant at this stage tomake brief reference to the judgments relied upon by learnedcounsel in support of their contentions. 4.1 In Sultan Brothers Private Limited V. Commissioner 2.Whether on the facts and in the circumstances of thecase, the Tribunal was justified in not recording anyfinding as to entitlement of the assessee for continuationof Registration as a firm?case, the Tribunal was justified in not recording anyfinding as to entitlement of the assessee for continuationof Registration as a firm? 04. We have heard learned counsel for the parties and with theirassistance gone through the judgments relied upon by the parties insupport of their contentions. It would be relevant at this stage tomake brief reference to the judgments relied upon by learnedcounsel in support of their contentions. 4.1 In Sultan Brothers Private Limited V. Commissioner of Income-Tax, Bombay City II([[1]]) the five Judge bench of theSupreme Court considered the question, how the income receivedas rent and hire is to be assessed, that is, under which section ofIncome Tax Act, 1922, (for short “1922 Act”) is it assessable?According to the assessee in that case, the entire income ought tohave been assessed under Section 10 as the income of a businessor, in the alternative, under Section 12 as the income fromresiduary source, that is, a source not specified in the precedingSections 7 to 11, with the allowances respectively specified in Sub-sections (3) and (4) of that Section. The appellant was a limitedCompany, which was owner of a certain building constructed onPlot No.7 on the Church Gate Reclamation in Bombay which it hadfitted up with furniture and fixtures for being run as a hotel. By alease dated August 30, 1949, the assessee had let out the buildingfully equipped and furnished to one Voyantzis for a term of sixyears from 09-12-1946 for running a hotel and for certain otherancillary purposes. The lease provided for a monthly rent ofRs.5,950/- for the building and hire of Rs.5,000/- for the furnitureand fixtures. In this backdrop, the aforementioned question fell forconsideration of the Supreme Court. One of the objects of theassessee-Company in Sultan Brothers’ Case (supra)was toacquire land and building and to turn the same into account byconstruction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling the same. TheSupreme Court observed that the activity contemplated in theaforesaid object of the Company, assuming it to be a businessactivity, would not by itself turn the lease in the present case into abusiness deal. It also referred its judgment in East India Housingand Land Development Trust Ltd. V. Commissioner of Income- tax, West Bengal([[2]])and observed that “the income derived bythe company from shops and stalls is income received fromproperty and falls under the specific head described in Section 9. The character of that income is not altered because it is receivedby a company formed with the object of developing and setting upmarkets.” Then the Supreme Court considered the question andobserved that it is true, the rent for the building and the hire forfurniture were separately reserved in the lease but that does notmake the two lettings separable. Then after referring to theClauses in the lease, further observed that the building and fixtureswere to be used for one purpose, namely, for the purpose ofrunning a hotel with them all together. The lessee was not toremove any article or things from the premises except for thepurposes of and in the course of hotel business which latter wouldbe for effecting repair to them or for replacing them where it wasduty of the lessee to do so under the lease. In the light of theseClauses, the Supreme Court held that the lease clearly establishedthe parties’ intention that the furniture and fixtures and the buildingshould be enjoyed altogether and not one separately from other. 4.2 In the result the Supreme Court held that the rent fromthe building will be computed separately from the income from thefurniture and fixtures and in the case of rent from the building theappellant would be entitled to the allowances mentioned in Sub- 4.2 In the result the Supreme Court held that the rent fromthe building will be computed separately from the income from thefurniture and fixtures and in the case of rent from the building theappellant would be entitled to the allowances mentioned in Sub- section (4) of Section 12 and in the case of income from thefurniture and fixtures, to those mentioned in Sub-section (3) andthat no part of the income can be assessed under Section 9 orunder Section 10 of the 1922 Act. The Sections 22, 28 and 56 ofthe Income Tax Act, 1961 are corresponding to Sections 9, 10 and12 of 1922 Act. 4.3 In Universal Plast Ltd. V. Commissioner of Income- Tax([[3]]), the Supreme Court was dealing with the case whereTribunal found that the leasing of the factory was not a sequel tothe assessee’s decision to go out of the business in respect of thesubject factory and that it was just a make-shift transientalternative means of commercial exploitation of the commercialassets. Against this finding, the Calcutta High Court after referringto various Clauses in lease agreement, held that the assesseedecided to go out of the business as far as this particular factorywas concerned, the lease agreement was in fact a veiledagreement for lease-cum-sale and it could not be in thecontemplation of the assessee, at the time of it entering into thelicense agreement, to retain the assets, any more as a commercialasset. In this backdrop, the High Court had framed the question“Whether, on the facts and in the circumstances of the case, theTribunal was correct in law in holding that the income received bythe assessee by leasing out the factory was business income?” This question was answered by the High Court in the negative-infavour of the Revenue and against the assessee. The SupremeCourt while dealing with the case affirmed the decision of CalcuttaHigh Court and held that the income of the assessee was notassessable as business income. This Court in Commissioner of Income-Tax. v. Y.Narayana Murthy([[4]])considered the question “whether, on thefacts and in the circumstances of the case and in law, the AppellateTribunal was justified in holding that letting out the godowns wouldamount to carrying on of business within the meaning of thePartnership Act disregarding the decision of the High Court inR.C.No.118 of 1980, dated November 29, 1984 in the case of CIT V. Phabiomal and Sons([[5]]).” In this case the assessee hadderived income from letting out the godowns to the FoodCorporation of India (F.C.I.) for the assessment years 1979-80 and 1980-81. The Commissioner had taken a view that income derivedfrom the letting out of godowns was assessable as “income fromthe property” and not from business and further held that theassessee was not entitled to the registration for assessment year1979-80 and continuation of registration for the assessment year1980-81. Accordingly, directions were issued to take the status ofthe assessee as an association of persons for the relevantassessment years 1979-80 and 1980-81. Consequently, theAssessing Officer passed the order for the assessment year 1979-80 which was upheld by the Appellate Assistant Commissioner. The assessing authority assessed the rental income as incomefrom house property for the assessment years 1981-82 and it wasupheld by the Commissioner of Income-Tax (Appeals). TheTribunal upheld the order of the Commissioner for the assessmentyears 1981-82 that the income derived from letting out the godownswas assessable as income from property. It, however, took theview that the letting out of the godowns to the F.C.I. would amountto exploiting the commercial asset and to carrying on of a businesswithin the meaning of the Partnership Act. The Tribunal, therefore,held that the assessee was entitled to registration for assessment years 1979-80 and continuation of registration for the assessmentyear 1980-81. On a reference, this Court held that the expression“business” contemplates continuous activity from year to year. Itwas not the case of the assessee that it was in the business ofconstruction of godowns and letting them out from year to yeareither to the F.C.I. or to any other interested person or persons, asthe case may be. Therefore, the assessee was not continuing theactivity of construction of godowns and letting them out from yearto year. There was no evidence to suggest that the assessee hadundertaken any such systematic business activity of constructionof godowns and letting them out as business property. Thus, it washeld that the Assessing Officer rightly assessed the income derivedby the assessee as that of the income from the property and notfrom business. Consequently, it was held that the assessee wasnot entitled to registration or continuation of the same in terms ofSection 185 (1)(a) of the Act. 4.5 I n Commissioner of Income-Tax v. Veerabhadra Industries([[6]]), this Court had taken the similar view, as was takenin Y.Narayana Murthy (supra) holding the single act of constructinggodowns and letting it out cannot be treated as a business. Theexpression “business” contemplates continuous activity from yearto year. There was no evidence that the assessee was continuingthe activity of constructing godowns and letting them out from yearto year. There was no material that it had constructed a godown inthe relevant year. Therefore, the income from a simple letting outof the godown would not be treated as a business income for thepurpose of Income-Tax Act. When once it was not businessincome, the question of availing of benefit under Section 185(1)(a)would not arise. 4.6 In East India Housing and Land Development TrustLtd. (supra), the Supreme Court dealt with a case of a Companywhich was incorporated with the objects of buying and developinglanded properties and promoting and developing markets. It hadpurchased 10 bighas of land in the town of Calcutta and had set upa market therein. The question was whether the income realizedfrom the tenants of the shops and stalls was liable to be taxed as“business income” under Section 10 of 1922 Act or as “income fromproperty” under Section 9. In this case, it was contended thatincome from letting out of the godowns is business income and,therefore, the assessee was entitled for registration under Section185 (1) (a) of 1922 Act. While dealing with the contention, theSupreme Court observed thus: “…. It is difficult to accept the contention of learned counselfor the assessee because a single act of constructing agodown and letting it out cannot be treated as a business.The expression “business” contemplates continuousactivity from year to year. There is no evidence that theassessee is continuing the activity of constructing godownsand letting them out from year to year. There is no materialthat he has constructed a godown in this year. Therefore,the income from a simple letting out of the godown cannotbe treated as business income for the purpose of theIncome-tax Act. When once it is not business income thequestion of availing of benefit under section 185 (1) (a) ofthe Act does not arise. The income has to be assessed asincome from property in accordance with sections 22 to 27of the Income-tax Act. We are fortified in our view by ajudgment of this court in Phabiomal and Sons’ case [1986]158 ITR 773, wherein it was held that letting out a buildingand realising rents therefrom did not amount to carrying onof business. It is true that the Punjab and Haryana HighCourt in Nauharcahnd Chananram’s case [1971] 82 ITR189, took the view that letting out of a factory amounts tocarrying on business.With respect we disagree with theview expressed by the Punjab and Haryana High Court.The judgment in Lakshmi Company’s case [1982] 133 ITR 904 (Mad), is distinguishable from the facts of the case. It isa case where the assessee went on putting up additionalconstructions and letting it out to various tenants which wasin the nature of business activity, because, as pointed out inthe earlier paragraph, it is a case where there is continuousactivity and therefore that judgment is distinguishable onfacts.” (emphasis supplied) 05. Learned counsel for the assessee, in support of his case,placed reliance on the following judgments: Commissioner ofIncome Tax v. National Storage Pvt. Ltd. Bombay[[7]],Commissioner of Income Tax-III v. Velankani InformationSystems (P.) Ltd.[[8]], Commissioner of Income Tax v.Information Technology Park Ltd.[[9]]and Commissioner of Income Tax III v. M/s.NDR Warehousing Pvt. Ltd.,[[10]]andsubmitted that the income arising from letting out of the godowns isan income from business and not from property. 5.1 In National Storage Pvt. Ltd. Bombay (supra), theSupreme Court was considering the case of the distributors, whowere required to store films only in godowns constructed strictly inconformity with the specifications laid down in the Film Rules and ina place to be approved by the Chief Inspector of Explosives,Government of India. The assessee, after purchasing a plot ofland, constructed 13 units thereon. Each unit was divided into fourvaults, having a ground floor for rewinding of films and an upperfloor for storage of films. 12 units were meant for the Members ofthe Indian Motion Picture Distributors’ Association, who had floatedthe Company. The Income Tax Officer took the view that theassessee should be assessed under Section 9 of the Income TaxAct, 1922, and not under Section 10 thereof. The Appellate Assistant Commissioner confirmed the said view. The Tribunalheld that the income was taxable under Section 10 of the said Act. When the matter came up before the High Court, it was held thatwhere the letting was only incidental and subservient to the mainbusiness of the assessee, the income derived from the letting willnot be the income from property falling under Section 9 and theexception to Section 9 may also come into operation in suchcases. The appeal was dismissed by the Supreme Court. In theinstant case before us, the letting out of the godowns is not themain business of the assessee and therefore, income cannot beheld to be from the business activity. Thus, this judgment is of noavail to the assessee. 5.2 Similarly, in Velankani Information Systems (P.) Ltd.,(supra) the assessee was a real estate developer and was in thebusiness of providing comprehensive facilities to IT industries. Thecase in Information Technology Park Ltd., (supra) to which oneof us is a party (DBB, J), was also a case relating to the letting outbuildings along with other amenities in software technology park. InM/s.NDR Warehousing Pvt. Ltd., (supra) the assessee wasengaged in the business of warehousing, handling and transportbusiness. Thus, the facts in these cases are different and, hence,these judgments also are of no avail to the assessee. 6. In the present case, the main business of the assessee wasthe export of tobacco and for that purpose they had constructedgodowns. As submitted by the learned counsel for the assessee,the assessee would let out the godowns when they would notrequire the same and earn rental income therefrom. Apart fromletting out the godowns, no other services/amenities, admittedlywere extended by the assessee to the lessees. Merely because 6. In the present case, the main business of the assessee wasthe export of tobacco and for that purpose they had constructedgodowns. As submitted by the learned counsel for the assessee,the assessee would let out the godowns when they would notrequire the same and earn rental income therefrom. Apart fromletting out the godowns, no other services/amenities, admittedlywere extended by the assessee to the lessees. Merely because one of the objectives, in the partnership deed, was to let out thegodowns would not mean that the assessee had undertaken theactivity of construction of godowns and letting them out asbusiness activity. Moreover, it is not the case of assessee thatletting out of the godowns was continuous activity from year toyear. Therefore, in our opinion, the income received by theassessee, by way of rent, was the income received from propertyand it would not fall under the head “income from business”. Thecharacter of the income would not stand altered because it wasreceived by the firm with one of the objects of the partnership deedto let out their godowns. The income derived from letting out theproperty, in the facts of the present case, would not amount toprofits or gains from the business. In other words, the incomeearned by letting out the godowns cannot be termed or treated asincome from business. From the facts of the present case, it isclear that the assessee could let out their godowns only becausethose were not in use at the relevant time. Therefore, the rentreceived by the assessee would have to be computed as incomefrom property. Thus, the first question framed by us is answeredagainst the assessee and in favour of the Revenue, and in viewthereof, the second question, as submitted by learned counsel forthe parties, does not survive consideration. 07. Accordingly, the Appeal is allowed. No order as to costs. 08. Miscellaneous Petitions, if any, pending in the appeal alsostand disposed of. ______________ Dilip B.Bhosale, J ___________________ 11[th] March, 2015.sur/TSNR L.R. 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