ORDER
SATISH CHANDRA, A. M. :
The assesseds appeal and the cross-appeal by the Revenue are directed against the learned CIT(A)s order dt. 30th Oct., 1989 for the asst. yr. 1986-87. For the sake of convenience, both the appeals are disposed of by this common order.
2. We first take up the assesseds appeal in ITA No. 7387/Del/1989. The assessed has taken three grounds in all. Ground No. 3 relating to the denial of the claim of investment allowance has not been pressed. The same is, thereforee, dismissed, as not pressed. The remaining two grounds are reproduced below :
'1. The CIT(A) has erred in confirming the view of the Dy. CIT (Asst.), who treated the business income of rent from surplus area of the factory building received by the appellant company as income from house property.
2. The Dy. CIT (Asst.) wrongly disallowed 1/3rd depreciation out of the depreciation on factory building on the ground that a part thereof was let out. The CIT(A) has wrongly held that rental income from the surplus portion of the factory building is to be assessed under the head 'Income from house property'. Consequently, the direction of the CIT(A) to the Dy. CIT (Asst.) to allow depreciation on such portion of the premises as is in occupation of the appellant for the purposes of its business, is erroneous.'
3. In Ground No. 1, the assessed has challenged the assessment of the rent from the surplus area from the factory building as income from house property, as against its claim that it should be assessed as income from business. The learned Assessing Officer has dealt with this issue at page 2 of the assessment order dt. 23rd March, 1989, as under :
'As per past history, rental income enjoyed by the assessed will be treated as income from House Property. There is no force in the arguments of the assessed that it should be treated as income from business and his arguments are rejected.'
4. Aggrieved by the above decision of the learned Assessing Officer, the assessed went in appeal before the CIT(A). It was argued before the learned CIT(A) that the surplus portion after actual user of the same for business, if let out, the income derived from the let out surplus portion was liable to be assessed as income from business. Alternatively, it was pleaded that unabsorbed depreciation was also adjustable against the income from house property, because, as per the provisions of s. 32(2) of the IT Act, the unabsorbed depreciation takes the character of current years depreciation which is adjustable against the income from the sources other than business. The learned CIT(A) noticed that the issue as to whether in the facts and circumstances of the assesseds case, the rental receipts from the property which are assessable under the head 'Income from property' or 'Income from business' has been restored to the file of the Assessing Officer in the asst. yr. 1985-86 as the learned Assessing Officer did not examine the assesseds claim on merits. Since in the assessment year under consideration also, the assesses claim was rejected summarily by the learned Assessing Officer, the learned CIT(A) proceeded to decide the issue himself. In para 5 of the order, the learned CIT(A) set out the fact relating to the property in question and in para 6, he held that the income in question has rightly been assessed as Income from house property. His observations are as under :
'Whether a particular letting is business or not, has to be decided in the circumstances of each case. In Sultan Bros. Pvt. Ltd. vs . CIT : [1964]51ITR353(SC) , the Hon'ble Supreme Court had held that each case has to be looked at from a businessman point of view, to find out, whether the letting was the doing of a business or the exploitation of his property by an owner. The Bombay High Court in its decision in CIT vs . National Storage Pvt. Ltd. : [1963]48ITR577(Bom) , affirmed by the Hon'ble Supreme Court in (1967) 66 ITR 696, has laid down certain objective principles for deciding the issue in question. One such principle is that it is the nature of the operation and not the capacity of the owner that must determine, whether the income is from house property or business. Where income is derived from house property by the exercise of property rights properly, the income falls under the head Income from house property.
Adverting to the facts of the present case, it is seen that when the property in question was acquired by the assessed, it was already let out to certain tenants. Thereafter, some more portion was let out by the assessed, not because any operations were involved, but simply as an owner of the property. I am, thereforee, of the opinion that part of the property has been let out for earning income there from and as such the true character of the income derived is income from property assessable under s. 22 of the IT Act. The fact of the cases relied upon by the appellant are totally different and hence these decisions are of no help to it. To conclude, I hold that the income in question has rightly been assessed as income from house property.'
5. As regards the alternate plea, the learned CIT(A) held that the unabsorbed depreciation, if any, for the preceding assessment years, is to be set off first against then business income, if any, after giving effect to his appellate order and in case there is still a balance of unabsorbed depreciation left, it is to be set off against the income from house property.
6. The assessed is aggrieved by the decision of the learned CIT(A) in regard to the assessment of the income in question as income from house property and ground No. 1 before us relates thereto.
7. Shri S. Sampath, the learned counsel for the assessed, submitted that the assessed is a limited company. It purchased a factory building for Rs. 23,89,056 in auction on 3rd March, 1980 from the receiver appointed by the Delhi High Court. When the property was purchased, a part of it was let out to three tenants. Till the asst. yr. 1984-85, the assessed declared the rental income under the head 'Income from house property' which has been assessed as such. However, in the asst. yr. 1985-86, the assessed filed a revised return including the above income therein as income from business. The learned Assessing Officer rejected the assesseds claim, but the learned CIT(A) restored the matter to the file of the Assessing Officer to examine the assesseds claim on merits and to decide the same afresh. The learned counsel pointed out that the matter is still sub judice before the learned Assessing Officer. The learned counsel further submitted that the facts relating to the property, as noted by the learned Assessing Officer in para 5 of his order are admitted. He, however, challenged the conclusion of the learned CIT(A) that the income is assessable as income from property. The main thrust of the learned counsels argument is that the surplus area of the property measuring 14082 sq. ft. has been let out to the assesseds own sister concerns with whom it has regular business relations. According to him, the assessed-company has exploited its commercial asset by letting out the surplus area of the factory building and, thereforee, the rental income is assessable as income from business. In support, he placed reliance on the following decisions :
(a) CIT vs . Ajmera Industries (P) Ltd. : [1976]103ITR245(Cal) .
(b) Addl. CIT vs . Hindustan Machine Tools Ltd. : [1980]121ITR798(KAR) .
(c) Addl. CIT vs . Rajendra Flour & Industries (P) Ltd. : [1981]128ITR402(Delhi) .
(d) CIT vs . Vikram Cotton Mills Ltd. : [1988]169ITR597(SC) .
The learned Departmental Representative, on the other hand, submitted that the assessed-company has let out 1/3rd of the factory building with the intention of deriving rental income as owner of the property and, thereforee, the learned CIT(A) was justified in holding that the income from the property was assessable under s. 22 of the IT Act, as income from house property. He placed reliance on the decision of the Supreme Court in the case of East India Housing & Land Development Trust Ltd. vs . CIT : [1961]42ITR49(SC) .
8. We have carefully considered the rival submissions and perused the authorities cited by both the sides. The admitted facts are that the property in question is a factory building purchased on 3rd March, 1980 and, at that time, a part of it was let out to three tenants. Immediately after the purchase of the property, some more part of it was let out to another three tenants. In the vacant portion, the assessed-company started its own business activities. Since the assesseds own business was at initial stage, it let out the surplus area of the property and received rental income. The assesseds case is that the letting out of the surplus area was exploitation of the commercial asset and hence the income there from is assessable as income from business. To begin with, the question which arises for consideration is, whether the assessed-company has held the property as commercial asset. It is now well-settled that every asset, which is once used as a business asset or which is capable of being so used, cannot be regarded as a commercial asset. In order that asset may be regarded as a commercial asset, it must be the asset of a running business. In the case of the assessed before us, the property in question was purchased in 1980 and the same was already let out to certain tenants. Thereafter some more portion was let out by the assessed. It is, thereforee, obvious that the assessed did not ever carry on any business in the property let out by it. In such a situation, it cannot be held that the property was held by the assessed as a commercial asset. If that be so, the question of commercial exploitation of the property in question does not arise at all. Their Lordships of the Supreme Court have held in the case of Karanpura Development Co. Ltd. vs . CIT : [1962]44ITR362(SC) , that 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' (s. 9 of the IT Act, 1922 corresponding to s. 22 of the IT Act, 1961), even though the company may do extensive business otherwise. From the admitted facts, it is crystal clear that the assessed-company has dealt with this property-qua-the-owner in letting it out on rent. thereforee, the learned CIT(A) was perfectly justified in holding that the assessed let out its property for earning income there from and as such the income was assessable under the head 'Income from house property'.
9. In the case of CIT vs. Ajmera Industries (P) Ltd. (supra), the assessed derived rental income from non-factory buildings including godown. These were commercial assets of the company which the company was utilising mainly for its own business purposes and portions thereof were let out after actual user of the portions for its own business. In view of these facts, the Calcutta High Court held that income derived from letting out the surplus of the non-factory buildings including godowns was the business income of the assessed. In the case before us, there is nothing on record that the assessed-company had ever utilised the let out portions for its own business purposes and, thereforee, the ratio of this decision relied upon by the learned counsel for the assessed does not apply to the facts of the assesseds case.
10. In the case of Addl. CIT vs. Hindustan Machine Tools (supra), the assessed-company 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 was engaged and these had been leased out to several persons on rental basis. The Hon'ble Karnataka High Court held that the income derived from letting out sheds was not the income derived from the exercise of property rights only but income from carrying on the assesseds own business. In the case of the assessed before us, it has derived income from letting out a part of the property in exercise of its property rights only and no material has been brought on record to enable us to hold that by letting out the property, the assessed-company served its own business interest. In this view of the matter, in our opinion, the ratio of this decision will also not render any assistance to the assessed.
11. We have also gone through the other case laws and find that they are also distinguishable on facts. In the case of Addl. CIT vs. Rajendra Flour & Industries Ltd. (supra), the assessed started to construct and run flour mill. After installation of the factory, the company let out the flour mill for five years as a temporary measure to tide over the period of difficulties. The mill was restored to the assessed on expiry of the term of lease and the assessed started running the mill thereafter. The Hon'ble Delhi High Court held that the letting out was for exploitation of commercial assets and the rental income was assessable as business income. The facts of the case before us are entirely different.
12. In the case of CIT vs. Vikram Cotton Mills Ltd. (supra), the assessed-company was engaged in the business of manufacturing textiles. The mill was closed on account of losses. The mill was let out on lease under a scheme evolved by the High Court to pay off creditors. The Tribunal recorded a finding that there was no intention to permanently discontinue the business and the company had intention to restart the business and held that the rental income was business income against which the companys earlier losses could be set off. The High Court affirmed the decision of the Tribunal. The Hon'ble Supreme Court approved the decision of the High Court holding that there was a temporary suspension of the business for a temporary period with the object of tiding over the crisis condition. There was never any act indicating that the company did not intend to carry on the business in the future. Obviously, none of these features are noticed in the case before us.
13. Accordingly, we uphold the decision of the learned CIT(A) and reject this ground of the assessed.
14. Ground No. 2 relates to 1/3rd disallowance out of the depreciation on factory building. The learned Assessing Officer made the impugned disallowance following the past history of the case. The learned CIT(A) observed that the issue is covered by the earlier appellate orders. He, thereforee, directed the learned Assessing Officer to determine the WDV of the building in the light of the appellate orders and allowed depreciation on such portion of the premises as is in occupation of the assessed for the purposes of its business. It is against the above direction of the learned CIT(A) which is a consequence to his finding that the rental income from the surplus portion of the factory building is assessable under the head 'Income from house property', that the assessed is in appeal before us.
15. Shri S. Sampath, the learned counsel for the assessed, submitted that even if the rental income from the let out portion of the building is held to be assessable under the head 'Income from house property', the assessed would be entitled to depreciation in respect of the let out portion also in view of the decision in the case of CIT vs . Sarveshwar Nath Nigam . Shri Suman Gupta, the learned Departmental Representative, on the other hand, submitted that the assessed is not entitled to depreciation on the let out portion of the factory building, because that portion has not been used by the assessed for the purposes of its business.
16. We have considered the rival submissions and perused the decision relied upon by Shri Sampath. We have already held that the rental income from the surplus let out portion of the building has rightly been held by the learned CIT(A) to be assessable under the head 'Income from house property', and rejected the claim of the assessed that the aforesaid income is assessable under the head 'Income from business'. It is not in dispute that the assessed has not used the let out portion for the purposes of its business. As a Lesser, the assessed is not entitled to claim depreciation ordinarily on the asset leased out by him unless the assessed is engaged in the business of leasing similar assets. Admittedly, the assessed is not engaged in the business of leasing out similar assets, nor has ever used the asset in question for the purposes of its business. We, thereforee, do not find any infirmity in the order/direction of the learned CIT(A), which we uphold. We may state that in the case of CIT vs. Sarveshwar Nath Nigam (supra), the facts are that the assessed carried on the business of manufacture of Kohlus. He let out, as part of his business, some of the Kohlus for sugarcane crushing season alone, and claimed depreciation for the entire 12 months of the year. The Court held that the assessed was entitled to depreciation for the full year. In our considered view, the facts of the case are not applicable to the case of the assessed before us. The decision (supra) was rendered in the context of the applicability of the proviso (2) to r. 8 of the IT Rules and can have no application to the case of the assessed. We, thereforee, reject this ground of the assessed as well.
17. Ground No. 3 relating to the denial of investment allowance has not been pressed. It is, thereforee, dismissed as not pressed, as indicated in para 2 above.
18. Now, coming to the Revenues appeal in ITA No. 132/Del/1990, the Revenue is aggrieved by the direction of the learned CIT(A) given to the learned Assessing Officer to allow depreciation on factory building. The learned CIT(A) has dealt with this issue in paras 8 and 9 of his appellate order, which are reproduced below :
'The ground at Sl. No. 2 is that the Dy. CIT (Asst.) has wrongly disallowed 1/3rd depreciation on factory building.
The disallowance has been made following the past history of the case. The issue is covered by the earlier appellate orders. The Assessing Officer is directed to determine the WDV of the building in the light of these orders and allow depreciation on such portion of the premises as is in occupation of the appellant for the purpose of its business.'
19. We observe that the assessed claimed depreciation on factory building at Rs. 72,274 out of which the learned Assessing Officer disallowed 1/3rd amounting to Rs. 24,091 for the reasons given by him in detail in earlier assessment order. The learned CIT(A) followed his earlier appellate orders and gave the direction to the learned Assessing Officer as mentioned in para 9 of his order, extracted above. We do not find any infirmity in the said direction of the learned CIT(A). We, thereforee, do not find any substance in the ground taken by the Revenue. We, accordingly, reject the same.
20. In the result, both the appeals are dismissed.