Per Shri T. V. Rajagopala Rao, Judicial Member - The assessee is common in all these appeals. There are also common points involved and, hence, all these appeals can be taken up together and disposed of by a common order for the sake of convenience.
2. The most important ground in all these appeals is whether the rent received by the assessee from Vazir Sultan Tobacco Co. Ltd., Hyderabad (VSTCO) on leasing out its godowns at Keesara falls under property income within the meaning of section 22 of the Income-tax Act, 1961 (the Act) or business income within the meaning of section 28 of the Act. The revenue wants to treat it as property income whereas the assessee wants to treat it as income from business. This matter is very extensively argued. The few facts relating to this issue may be stated as under.
3. The assessee is a partnership firm governed by the terms and conditions of a partnership deed dated 19-7-1975. There are seven major partners and four minors admitted to the benefits of partnership.
Profit sharing ratio of the partners is mentioned in clause 7 of the partnership deed. The nature of the business sought to be carried on by this firm is mentioned in clause 3 of the partnership deed as tobacco business, both local and foreign, or any other business which may prove to be lucrative and which may be carried on with the mutual consent of the parties. The firm name is given as Sundaram Tobaccos and it is stated to have its head office at Guntur with a branch at Ganapavaram.
Clause 1 of the partnership deed gives the option to open branches at other places also if necessary. A copy of the partnership deed was provided at pages 2 to 7 of the paper book filed before us. The assessee now before us is the said firm Sundaram Tobaccos. It has purchased 2.5 acres of land in R. S. No. 79 (O. S. No. 2) in Keesara Village, Nandigama Taluq, Krishna District and constructed godowns, grading halls, inspection halls and office-cum-guest house. For the sake of compendious expression, we call all the above constructions as Godown. The construction of the godown was completed on 19-12-1975.
Another godown and office building, etc., were constructed in the same premises and as soon as their construction was completed in 1976, they were leased out to VSTCO. It is also evident from records that during the accounting period relevant to the assessment year 1980-81, the assessee had constructed a creche in respect of which depreciation under section 32(1) (iv) of the Act was claimed during the assessee is calendar year. With effect from 1-1-1976, the assessee leased out the godown to VSTCO, in order to enable the latter to warehouse its stocks of tobacco purchased from and around Keesara. The lease amount fixed was Rs. 5,400 per month. The lessee advanced an amount of Rs. 3,05,200 to the assessee-firm for construction of the above godown and it was stipulated in the lease deed that this advance should be adjusted against the monthly rent becoming due and payable until the entire amount of the said advance was fully recovered and adjusted. The lease period was 9 years. A copy of the lease deed was furnished at pages 34 to 39 of the paper book filed on behalf of the assessee before us. The assessee obtained central excise licence for this godown. For the period from 19-12-1975 to 31-12-1975 tobacco stocks belonging to VSTCO were housed in this godown. No other work was carried out by the assessee during this period, viz., from 19-12-1975 to 31-12-1975. The ITO, by his letter dated 4-3-1981, directed the assessee to show cause as to why the lease amount should not be considered under the head Income from house property. The assessee submitted a reply to the effect that using the godown for lessees business should be considered as using the same for purposes of business of the assessee, and in support of this contention the decision in CIT v. National Newsprint & Paper Mills Ltd. [1978] 114 ITR 388 (MP) and CIT v. Prem Chand Jute Mills Ltd. [1978] 144 ITR 769 (Cal.) were cited.
4. During the course of its business the assessee purchases tobacco, redries it, grades it and does stripping and packing for itself and at times for other also. The assessee itself had taken up processing of tobacco for VSTCO, under a separate rate contract entered into with it in the very premises which were let out to the said company. It is the case of the assessee that it had leased out its Keesara godown only with a view to getting more business from VSTCO.5. The intendment of taking on lease by VSTCO can be known from the letter obtained from the director of the said company which is as follows : Regarding your enquiry about the construction and leasing of the godowns and grading halls at Keesara in 1975/76, I have to inform you that we do not have any correspondence in our records. It is, however, a fact that the godowns and grading halls were constructed at our instance and leased to us with the understanding that you will process our tobacco at those premises. This had taken place after discussions between your representatives and the representatives of our company including the undersigned. You have been regularly processing of our company including said premises since then and were being paid processing charges at the rates agreed to between us from time to time.
The charges agreed upon between the assessee on the one hand and VSTCO on the other for each type of processing are furnished at pages 40 and 41 of the paper book. It is the case of the assessee that having kept in view the availability of plenty of labour and the godown at Keesara, it had contracted with VSTCO to undertake the various process listed out at the prices quoted against each type of process at pages 40 and 41 of the paper book. It is the case of the assessee that even at the time of letting out of the godown at Keesara to VSTCO. It was given to understand that it would be appointed as the agent of VSTCO, to purchase tobacco in and around Keesara, to stock it in the godown, employ labour and to undertake that various process and to supply processed tobacco to VSTCO, from Keesara. That means that it is always the intention of the assessee to expand its field of operation and to expand its business and with that end in view only the godown was let out to VSTCO. It is the further case that the assessee had obtained central excise licence for the Keesara godown even prior to leasing it out to VSTCO. It is also the claim of the assessee that the labour licence also stands in the name of the assessee. The assessee derives income from grading and stripping operations conducted by it in this godown for the tobacco purchased by VSTCO. Therefore, ultimately, the arguments of the assessee was that although the godown was leased out to VSTCO, in fact it was not deprived of the exploitation of the assets for business purposes which is borne out by the evidence. Therefore, there is a direct nexus between the letting assessee is maintaining its staff for its branch at Keesara to whom salary as well as bonus is paid. Grading coolies also are employed by it. Therefore, the godown was not let out to a party unconnected with the business activity of the assessee. The ITO held the connections of the assesse as having no force. He held that the assessee did not lease out the godown to VSTCO from 19-12-1975 to 31-12-1975. The business of the assessee is held to be different from that of VSTCO. The two cases cited on behalf of the assessee before the ITO were held to be distinguishable. Ultimately, he held that the income from leasing the godown should be assessed under the head Income from house property. As a corollary depreciation allowance claimed was denied.
6. In appeal, the Commissioner (Appeals) held that the decision in National Newsprint & Paper Mills Ltd.s case (supra) and Prem Chand Jute Mills Ltd.s case (supra) were not in fact applicable to the facts of the present case. In the first case, it was held that the dominant purpose of the letting out of the godown was to enable the assessee to carry on its business more efficiently and smoothly and the activity of letting had a definite nexus with the business that the assessee was carrying on. From the facts of that case, the rent received by the assessee from letting out godown to the Government departments was found to be incidental to the assessees business and as such it was found to be taxable as income from business. In the second case, decided by the Calcutta High Court also, before considering whether the income derived from leasing of an asset is income from business or income from property, four tests are to be kept in mind : (1) in order to be a business income, there must be evidence of exploitation of a commercial asset; (2) the exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times and the assessee may temporarily cause it to be exploited by another person against payment of consideration and for this purpose may execrate a lease for a fixed period even with an option to renew; (3) in order that the income derived from the lease should be taxable, it must be shown that the lessors intention was that during the period of lease, the asset leased out must remain and be treated as a commercial asset and be exploited as such; and (4) this intention of the lessor has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances. Keeping the above principles in mind, the learned Commissioner (Appeals) held that the facts gathered from the records of the present case as well as then lease agreement clearly go to establish that the assessees intention was to exploit the godown as the owner of the property and not as a commercial asset. He applied the ratio of the Allahabad High Courts decision in Seth Banarsi Das Gupta v. CIT [1977] 106 ITR 559 where it is held that every asset which is used as a business asset or which is capable of so being used cannot be regarded as a commercial asset. In order that an asset may be regarded as a commercial asset, it must be an asset of a running business. If the business stopped, then the assets employed in such business cease to be commercial assets. The learned Commissioner (Appeals) also applied the dicta of the Supreme Court laid down in Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 where it is held : ".... We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on ...." (p. 358) The learned Commissioner (Appeals) held that simply because the godown is a commercial asset and trade is commonly carried on in it per se, such a godown cannot be taken to be a commercial asset according to the abovesaid Supreme Court decision. The godown was not at any time used by the assessee for its business. Applying the ratio of the Allahabad High Court as well as the Supreme Court, the Commissioner (Appeals) held that in the instant case the income derived by the assessee from letting out the godown is not business income and is to be assessed as income from property. Therefore, the panchayat taxes payable over the godown as well as the depreciation claimed over the godown were disallowed and the ITOs order bringing the income under the head Income from house property is held to be quite valid and the appeal before him was dismissed for all the assessment years under consideration. Hence, the second appeal.
7. According to Shri A. Satyanarayana, the learned counsel for the assessee, cases of income from leasing out a property can be broadly categorised under four heads : (a) Cases where the whole activity carried on by the assessee was letting out the property it owns or possesses. Under this head fall the following decisions -East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC), O. RM. SP. SV. Firm v. CIT [1960] 39 ITR 327 (Mad.), Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 (SC), Indian City Properties Ltd v. CIT [1965] 55 ITR 262 (Cal.), Manohar Singh v. CIT [1965] 58 ITR 592 (Punj.), CIT v. Pandyan Bank Ltd. [1969] 71 ITR 707 (Mad.) and CIT v. Admiralty Flats Motel [1982] 133 ITR 895 (Mad.).
(b) Cases where the property was utilised for business ordinarliy carried on by the assessee and if such business was for some reason or other stopped temporarily or for a considerable length of time, and the property let out during that interregnum, the income is assessable under section 28. Under this head fall the following decisions -(sic 8 ITR 47 (Mad.), CIT v. Central Studios (P.) Ltd. [1973] 88 ITR 298 (Mad.) Rampur Industries Ltd. v. CIT [1971] 82 ITR 23 (All.) and Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561 (Bom.) (c) Cases where the lease contemplates a composite letting out, i.e., the building along with plant, machinery and furniture may be let out, and in such cases also, the income derived therefrom should be treated as income from other sources. Under this head we should consider the decision of the Supreme Court in Sultan Bros. (P.) Ltd.s case (supra).
(d) If income is derived from letting out of property and this letting out is incidental to or in the course of the ordinary business carried on by the assessee or in order to facilitate the other income earning activity the assessee, then such income is also to be assessed as income from business. Under this category, the following decisions were cited - Jamshedpur Engg. & Machine Mfg. Co. Ltd. v. CIT [1957] 32 ITR 41 (Pat.), Rohtas Industries Ltd. v. CIT [1961] 41 ITR 524 (Pat.), CIT v. Delhi Cloth & General Mills Co. Ltd. [1966] 59 ITR 152 (Punj.), CIT v. Kanak Investments (P.), Ltd. [1974] 95 ITR 419 (Cal.), Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC), CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596 (SC), CIT v. Ajmera Industries (P.) Ltd. [1967] 103 ITR 245 (Cal.), National Newsprint & Paper Mills Ltd.s case (supra), Everest Hotels Ltd. v. CIT [1978] 144 ITR 779 (Cal.), Addl. CIT v. National Newsprint & Paper Mills Ltd. [1978] 114 ITR 398 (MP) and Addl. CIT v. Hindustan machine Tools Ltd. [1980] 121 ITR 789 (Kar.). It was contended that the case it had constructed the Keesara godown, the assessee was able to get turnover of Rs. 50 lakhs by virtue of the contract it had entered into for processing tobacco, etc., which it had obtained from VSTCO. The assessee was having 18 branches.
Therefore, it was the contention of the assessee that it had constructed the godown as part of its business activity, or to facilitate its business and, thus, the lease amount obtained should be considered as part of the business income.
8. On the other hand, Shri N. Santhanam, the learned departmental representative, opposing the claim of the assessee tooth and nail, made the following submissions before us. Firstly, he contended that the letter dated 1-9-1983 which the assessee had produced clarifying the contemporaneous idea or state of thinking of VSTCO at the time of taking the Keesara godown on lease from the assessee from 1-1-1976 should not be admitted ITO or by the Commissioner (Appeals). He also contended that all the results which flow from the lease should not be lost sight of. The true legal relationship which results from the transaction should not be ignored. He cited the decision of the Supreme Court in CIT v. B. M. Kharwar [1969] 72 ITR 603. He submitted that for the provisions of section 22 of the Act to apply, the assessee itself should be occupying the godown. Occupying the godown through somebody else is not contemplated under that section. Here, in this case, the lessee is deemed to be in occupation of the property but not the lessor. He drew our attention to sections 104, 105 and 108 of the Transfer of Property Act, 1882. He referred us to pages 36 and 37 of the paper book and also to clause 5(f) of the lease deed wherein it is stated that on the expiration of determination of the lease, vacant possession of the premises should be handed over by the lessee to the lessor subject to changes caused by reasonable were and tear. The learned departmental representative also brought to our notice the distinction between licence and lease. He states that rent is defined under section 105. He propounded that even if income is derived in the course of business and if such income falls under a specific head, it is assessable under that head. He elaborated by saying that a firm which carries on business is not prevented from deriving lease income in appropriate cases. In support of this proposition, he strongly relied upon the Madras High Courts decision in Admiralty Flats Motels case (supra). He also contended that there is no complex activity in the facts of the assessees case and there is no composite letting also.
Thus, in his opinion, this factor distinguished the present case from those in National Newsprint & Paper Mills Ltd.s case (supra), CIT v.National Newsprint & Paper Mills Ltd. [1978] 144 ITR 398 (MP) and East India Housing & Land Development Trust Ltd.s case (supra). He also seeks to distinguish the decision of the Karnataka High Court in Hindustan Machine Tools Ltd.s case (supra) by saying that the lease terms in that case are different from those in the case before us. No option is left to the lessee in the facts of the cited case except to produce accessories for Hindustan Machine Tools Ltd. However, the lease term as in the case before us to do not compel the assessee only to undertake processing activities for VSTCO. He distinguished the Calcutta High Courts decision in Ajmera Industries (P.) Ltd.s case (supra) from the case on hand by stating that there was no lease deed at all in the case before the Calcutta High Court. He also further stated that East India Housing & Land Development Trust Ltd.s case (supra) was not referred to at all by the Calcutta High Court in that case. He further argued that without letting the godown at Keesara also, the assessee was having business connection with VSTCO. It is not as if the assessee established its business connection for the firs time with VSTCO only after constructing the godown at Keesara or leasing it out to them from 1-1-1976. The learned departmental representative also wanted to rely upon the decision of this Tribunal in I. T. Appeals No. 1115 (Hyd.) of 1978-79.
9. In reply, Shri A. Satyanarayana, the learned counsel, countered the learned departmental representatives argument and stated that the owner need not actually occupy the premises and in support thereof he cited the decision of the Punjab High Court in Delhi Cloth & General Mills Co. Ltd.s case (supra). Ultimately, he submitted that the facts of this case are quite identical with the facts considered by the Calcutta High Court in Tinsukia Development Corpn. Ltd. v. CIT [1979] 120 ITR 466.
10. Thus, we considered the respective arguments advanced by both the parties, and having duly considered the facts on record as well as the arguments advanced before us, we are inclined to accept the arguments advanced on behalf of the assessee. Our reasons are as follows.
11. The assessee was already having 17 branches situated in and around Guntur. The business which it carried on was in tobacco - purchasing tobacco, redrying, grading, stripping and packing it and also selling it in India as well as abroad. From the facts on record, it appears to us that the assessee built the godown at Keesara with intention to use it as a commercial asset in the business carried on by it. Admittedly, the assessee obtained a central excise licence for the said premises, either to stack tobacco or to carry on processing operations of tobacco. The IAC, in his assessment order dated 25-3-1981 for the assessment year 1978-79, admitted that the assessee obtained central excise licence for this godown, that the godown was opened on 19-12-1975 and that from then on, up to 31-12-1975, the assessee allowed VSTCO to use it as its warehouse for the purchases it made in and around Keesara. So also, the assessee obtained the labour licence for this godown. If it had used the godown for its own business, the income derived therefrom would not be assessable under the head Income from house property because section 22 of the Act specifically excludes such portion to the property as the assessee may occupy for the purposes of any business carried on by it the profits of which are chargeable to income-tax. The assessee had an offer from VSTCO for taking this godown on lease. Subsequently, the lease deed was executed.
The lease deed no doubt did not contain any clause that the assessee alone would be entitled to do business in the demised premises.
However, notwithstanding the legal safeguard having not been explicitly spelt out, the assessee expected in view of its having entered into the separate contract for processing tobacco with VSTCO and advance for construction given by VSTCO being recoupable from lease rent, that it would only be exclusively permitted to do processing in this very godown at Keesara. In facts, the lease agreement is for 9 years beginning from 1-1-1976 and during these years, the assessee is continuing to have the business contract with VSTCO under which it is continuing its processing operations VSTCO in Keesara godown according to the rates it had contracted with VSTCO and which were quoted at pages 40 and 41 of the paper book. Thus, the expectation of the assessee was proved to be correct by subsequent events also. Therefore, factually, the godown was used only for assessees business. the income derived therefrom will be assessable under the head Profits and gains of business or profession having regard to the ratio of the Karnataka High Court in Hindustan Machine Tools Ltd.s case (supra) In view of the facts independently ascertained by us, there is in fact no fresh material which in contained in the letter of 1-11-1983 for the purposes of decision of this case.
12. In the case of Hindustan Machine Tools Ltd.s case (supra), the HMT Ltd. had constructed 50 sheds forming an industrial estate with the object of having ancillary units which would manufacture components required for the purposes of the machines in the manufacture of which it is engaged, and these sheds were leased out to several persons on rental basis. The object of HMT Ltd. was to set up a large number of small-scale feeder industries in the industrial estate owned and maintained by small-scale entrepreneurs mainly of worker-proprietor type, and to sub-contract to them the simpler components which do not require heavy equipment or high degree of skill and technique. The entrepreneurs for the units were selected by HMT Ltd. itself having regard to the candidates experience in the particular line, his technical competence and his genuine enthusiasm to build up competitive small-scale industrial units. Several facilities were afforded by HMT Ltd. to the ancillary units including free technical advice, training of workers, etc. There also, the ITO assessed the lease amount derived over the sheds as income from property. The AAC, on the other hand, reversed it and held the income to be the business income. The Tribunal affirmed the decision of the AAC. The revenue went in reference to the High Court. The High Court held : "Instead of the assessee himself engaging in the manufacture of the components through its own labourers, the ancillary units were required to manufacture them for its purposes. The benefit which the assessee derived was almost direct, viz., continuous supply of components to keep up its own production and manufacturing of components under its own guidance and scrutiny.
Therefore, the Tribunal was right in holding that the income derived by the assessee from the sheds constructed and leased out to the several persons on a rental basis was to be assessed under the head Income from business." 13. In National Newsprint & Paper Mills Ltd.s case (supra), there is a huge industrial complex called Nepanagar. The assessee not only built residential quarters for its employees, but also made available to the Government accommodation for locating a branch of State Bank of India, post office, police station, central excise office and railway staff quarters as it required these facilities for carrying on its business efficiently and smoothly. The Tribunal found that when accommodation was let out to the Government for locating a branch of the State Bank of India, post office, police station, central excise officer, etc., the motivation was facility of the assessees business. The Madhya Pradesh High Court, following the decision of the Supreme Court in National Storage (P.) Ltd.s case (supra) held that the State Bank of India, post office, police station, central excise office and railway staff quarters were constructed to serve as incidental to the assessees business and, therefore, the rent derived from the above was taxable under section 28.
14. In CIT v. Associated Building Co. Ltd. [1982] 137 ITR 339 (Bom.), the assessee owned a building known as Bombay House in Bruce Street, Bombay. Subsequently, an air-conditioning unit and an auditorium were constructed. Staff of 25 persons were employed for the maintenance of the air-conditioning plant. Various parts of the building of the building let out to different tenants were air-conditioned and the assessee began charging separately for supply of cool air. Ultimately, the Bombay High Court held that the Tribunal was justified in holding that the carrying on of these activated by the assessee amounted to the carrying on of business and income derived from the same was to be assessed as business income.
15. The principle enunciated in Karanpura Development Co. Ltd.s case (supra) at page 377, which was approved and reiterated in S. G.Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC), is as follows : "Ownerships of property and leasing it out may be done as a 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 ....." (p. 707) 16. Having considered the facts and circumstances of this particular case, we are inclined to hold that the leasing out of the Keesara godown must have been done as part of business activity of the assessee-firm and, therefore, in our opinion, the lease amount derived by the assessee-firm from VSTCO under the terms of the lease deed dated 19-7-1975 should be taxed as business income and not as income from property. Thus, the assessee succeeds on the main ground in all these appeals.
17. to 38 [These paras are not reproduced here as they involve minor issues.]