Assam Biscuit Manufacturing Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

SooperKanoon Citationsooperkanoon.com/893763
SubjectDirect Taxation
CourtGuwahati High Court
Decided OnMay-04-1990
Case NumberIncome-tax Reference No. 8 of 1982
JudgeA. Raghuvir, C.J. and ;M. Sharma, J.
Reported in[1990]185ITR535(Gauhati)
ActsIncome Tax Act, 1961 - Sections 32(1), 144B and 256(1)
AppellantAssam Biscuit Manufacturing Co. Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateA.K. Saraf, Adv.
Respondent AdvocateD.N. Choudhury and ;K.H. Choudhury, Advs.
Excerpt:
- a. raghuvir, c.j.1. assam biscuit . at gauhati is the assessee in the above reference. the assessee-company was incorporated in 1970. as the name indicates, the company was to manufacture biscuits and other bakery products. from the inception, the company proved to be a non-starter. on june 4, 1973, in a report to the shareholders, the board of directors informed that there was an overall deficit of rs. 2,52,872 in the audited accounts ; the depreciation amount was rs. 1,22,938 and the carried forward loss was rs. 9,28,005. the company suffered heavy losses in the two years of business. the position of the factory was not satisfactory. the company did not manufacture biscuits from march 1, 1973. the factory unit and office premises of the company were leased out to a tenant. this is the short and brief history of the assessee-company.2. in the proceedings relevant to the assessment years 1974-75, 1975-76 and 1976-77, before the revenue authorities, the company represented that the business of the company was not discontinued. the income-taxofficer negatived the contention. the finding of the income-tax officer wasaffirmed by the appellate authority and by the income-tax appellate tribunal in second appeal. thereupon, as respects the assessment year 1974-75,two questions are referred to this court under sub-section (1) of section256 of the income-tax act. the questions read as under : '(a) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that rent of rs. 30,000 received by the assessee during the assessment year 1974-75 was taxable as income from property and not as income from business ?(b) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the business of the assessee was discontinued during the year and as such it was not entitled to the benefit of carry forward of earlier years' losses ?'3. we may take the second question first. that question relates to discontinuance of business. the facts show that after the board of directors' report the plant, machinery, electrical installations, laboratory equipment, delivery vans, all were sold to koley biscuit company at calcutta for rs. 9,90,000. the chemicals in stock were sold to s.k. choudhury and co. for rs. 10,308. the sale proceeds were utilised to liquidate the liabilities of the company. the shareholders were informed that the paid-up capital was 'eaten away' by annual losses. the accumulated loss by the date december 31, 1972, was rs. 9,34,813.4. on the above evidence, the income-tax officer, a-ward, gauhati, after following section 144b procedure, held that the company discontinued its business. there is no iota of evidence to sustain the contention raised by the assessee-company in these proceedings. the assessee, however, pointed out from the record that goods worth rs. 762 was purchased after june 4, 1973 and. therefore, the company has not ceased to manufacture biscuits. this purchase of goods worth rs. 762 is the proverbial swallow which when seen in the surfeit of evidence does not lead to the inference of a summer. no other aspect is argued on this aspect. therefore, we answer the second question against the assessee and in favour of the revenue.5. as respects the first question, it is seen that the company owned pucca godown-cum-office premises with asbestos roof. the plinth area of the premises is 14,912.35 square feet. this premises is at dag nos. 791, 794, 795 of k.p. patta no. 98 of betola mouza. that building with furniture, fixture, fans, telephone connections were let out on july 24, 1974, to messrs. assam co-operative apex marketing society ltd.6. the agreement recited that the rent was rs. 0.42 per square foot for the building and for furniture rs. 6,266.97 per month. the assessee on that basis received in the calendar years 1974-75--rs. 30,000, 1975-76--rs. 66,810 and 1976-77--rs. 1,04,477. the contention advanced by the assessee was that the amount of rs. 30,000 for the assessment years 1974-75 is to be computed as business income. we have held that the business was discontinued and, therefore, this contention cannot be sustained. in the succeeding assessment years, a question was raised whether rental income received by the assessee should be considered as income from other sources. that aspect will be adverted to later.7. in regard to the assessment year 1975-76, the following five questions are referred:' (i) whether, on the facts and in the circumstances of the case and on a true construction of the agreement of lease dated july 24, 1974, the tribunal was justified in law in holding that rent of rs. 66,810 received by the assessee during assessment year 1975-76 was taxable as income from property and not as income from business ?(ii) if the answer to question no. (i) is in the negative, whether the tribunal did not commit an error of law in not holding the said rental income of the assessee as income from 'other sources' ?(iii) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the assessee was not entitled to current depreciation allowance under section 32(1) of the income-tax act, 1961?(iv) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the assessee was not entitled to the benefit of carry forward of earlier years' losses due to alleged discontinuance of its business ?(v) whether, on the facts and in the circumstances of the case and in view of the finding of the tribunal that rent received by the assessee was income from property, the tribunal was justified in law in holding that payment of interest on borrowings amounting to rs. 52,861 was not deductible while computing income from property of the assessee ?'8. the following five questions are also referred with reference to the assessment year 1976-77 of the same assessee :'(1) whether, on the facts and in the circumstances of the case and on a construction of the agreement of lease dated july 24, 1974, the tribunal was justified in law in holding that rent of rs. 1,04,477 received by the assessee during assessment year 1976-77 was taxable as income from property and not as income from business ?(2) if the answer to question no. (1) is in the negative, whether the tribunal did not commit an error in not holding the said rental income of the assessee as 'income from other sources' ?(3) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the assessee was not entitled to current depreciation allowance under section 32(1) of the income-tax act, 1961?(4) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the assessee was not entitled to the benefit of carry forward of earlier years' losses due to alleged discontinuance of its business ?(5) whether, on the facts and in the circumstances of the case and in view of the finding of the tribunal that rent received by the assessee was 'income from property', the tribunal was justified in law in holding that payment of interest on borrowings amounting to rs. 37,468 was not deductible while computing income from property of the assessee ?'9. the five questions are alike in the assessment years 1975-76 and 1976-77. the company received rs. 66,810 in the assessment year 1975-76, and this cannot be treated as income from business. this is the answer to the first question. the second question raises the issue whether the rent received by the assessee can be treated as income from other sources.10. learned counsel for the assessee argued that the clause in the agreement of lease, annexure-b, contains recitals wherein the tenant agreed to pay rent not only for the building but also for letting out the furniture, fixtures, and telephone facility. the contention is that the building and furniture are let out and the rent agreed to was not only for the building but was a quid pro quo for the furniture also which was entrusted to the tenant.11. the issue then arises whether furniture was 'inseparable' from the. building (section 56(2)(iii)) under annexure-b. this question in this pointed manner does not appear to have been raised before the appellate tribunal. but the agreement of lease, annexure-b, was before the tribunal and now forms the printed record. the building premises, it is seen, was let out with the furniture and on the terms the conclusion is irresistible that the building, and furniture were inseparable under the agreement, annexure-b.12. there is a lucid discussion on this question in the calcutta case reported in chitpore galabari co. p. ltd. v. cit : [1971]82itr753(cal) wherein the severability beginning from the indian income-tax act, 1922, under section 12 was considered alongside the amendments to that act the opinion expressed therein holds the field even under the 1961 act, we adopt the reasoning and conclusion reached in that case and following the same, we hold that the rent agreed included the rent for furniture also. we further hold that rs. 66,810 for the assessment year 1976-77 is to be classified as income from other sources.13. we keep open the question whether the telephone connection per se is furniture or not as no specific argument was advanced in this case and, therefore, we are not to be understood to have held that telephone is a part of furniture.14. so far as the first question is concerned, with reference to the assessment year 1975-76, we answer, that the business was discontinued, in favour of the revenue. the rents received by the assessee should be treated as income from other sources. the answer is in favour of the assessee and against the revenue. as respects questions nos. 3, 4 and 5, in view of the evidence on record, no argument is advanced. therefore, all the questions except as to rentals are answered against the assessee and in favour of the revenue.15. as respects the assessment year 1976-77, to repeat, the first question is answered in favour of the revenue and against the assessee. the second question is answered in favour of the assessee and against the revenue. questions nos. 3, 4 and 5 are analogous, and, therefore, are answered against the assessee. no costs.m. sharma, j.16. i agree.
Judgment:

A. Raghuvir, C.J.

1. Assam Biscuit . at Gauhati is the assessee in the above reference. The assessee-company was incorporated in 1970. As the name indicates, the company was to manufacture biscuits and other bakery products. From the inception, the company proved to be a non-starter. On June 4, 1973, in a report to the shareholders, the board of directors informed that there was an overall deficit of Rs. 2,52,872 in the audited accounts ; the depreciation amount was Rs. 1,22,938 and the carried forward loss was Rs. 9,28,005. The company suffered heavy losses in the two years of business. The position of the factory was not satisfactory. The company did not manufacture biscuits from March 1, 1973. The factory unit and office premises of the company were leased out to a tenant. This is the short and brief history of the assessee-company.

2. In the proceedings relevant to the assessment years 1974-75, 1975-76 and 1976-77, before the Revenue authorities, the company represented that the business of the company was not discontinued. The Income-taxOfficer negatived the contention. The finding of the Income-tax Officer wasaffirmed by the appellate authority and by the Income-tax Appellate Tribunal in second appeal. Thereupon, as respects the assessment year 1974-75,two questions are referred to this court under Sub-section (1) of Section256 of the Income-tax Act. The questions read as under :

'(A) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that rent of Rs. 30,000 received by the assessee during the assessment year 1974-75 was taxable as income from property and not as income from business ?

(B) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the business of the assessee was discontinued during the year and as such it was not entitled to the benefit of carry forward of earlier years' losses ?'

3. We may take the second question first. That question relates to discontinuance of business. The facts show that after the board of directors' report the plant, machinery, electrical installations, laboratory equipment, delivery vans, all were sold to Koley Biscuit Company at Calcutta for Rs. 9,90,000. The chemicals in stock were sold to S.K. Choudhury and Co. for Rs. 10,308. The sale proceeds were utilised to liquidate the liabilities of the company. The shareholders were informed that the paid-up capital was 'eaten away' by annual losses. The accumulated loss by the date December 31, 1972, was Rs. 9,34,813.

4. On the above evidence, the Income-tax Officer, A-Ward, Gauhati, after following Section 144B procedure, held that the company discontinued its business. There is no iota of evidence to sustain the contention raised by the assessee-company in these proceedings. The assessee, however, pointed out from the record that goods worth Rs. 762 was purchased after June 4, 1973 and. therefore, the company has not ceased to manufacture biscuits. This purchase of goods worth Rs. 762 is the proverbial swallow which when seen in the surfeit of evidence does not lead to the inference of a summer. No other aspect is argued on this aspect. Therefore, we answer the second question against the assessee and in favour of the Revenue.

5. As respects the first question, it is seen that the company owned pucca godown-cum-office premises with asbestos roof. The plinth area of the premises is 14,912.35 square feet. This premises is at Dag Nos. 791, 794, 795 of K.P. Patta No. 98 of Betola Mouza. That building with furniture, fixture, fans, telephone connections were let out on July 24, 1974, to Messrs. Assam Co-operative Apex Marketing Society Ltd.

6. The agreement recited that the rent was Rs. 0.42 per square foot for the building and for furniture Rs. 6,266.97 per month. The assessee on that basis received in the calendar years 1974-75--Rs. 30,000, 1975-76--Rs. 66,810 and 1976-77--Rs. 1,04,477. The contention advanced by the assessee was that the amount of Rs. 30,000 for the assessment years 1974-75 is to be computed as business income. We have held that the business was discontinued and, therefore, this contention cannot be sustained. In the succeeding assessment years, a question was raised whether rental income received by the assessee should be considered as income from other sources. That aspect will be adverted to later.

7. In regard to the assessment year 1975-76, the following five questions are referred:

' (i) Whether, on the facts and in the circumstances of the case and on a true construction of the agreement of lease dated July 24, 1974, the Tribunal was justified in law in holding that rent of Rs. 66,810 received by the assessee during assessment year 1975-76 was taxable as income from property and not as income from business ?

(ii) If the answer to question No. (i) is in the negative, whether the Tribunal did not commit an error of law in not holding the said rental income of the assessee as income from 'other sources' ?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to current depreciation allowance under Section 32(1) of the Income-tax Act, 1961?

(iv) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to the benefit of carry forward of earlier years' losses due to alleged discontinuance of its business ?

(v) Whether, on the facts and in the circumstances of the case and in view of the finding of the Tribunal that rent received by the assessee was income from property, the Tribunal was justified in law in holding that payment of interest on borrowings amounting to Rs. 52,861 was not deductible while computing income from property of the assessee ?'

8. The following five questions are also referred with reference to the assessment year 1976-77 of the same assessee :

'(1) Whether, on the facts and in the circumstances of the case and on a construction of the agreement of lease dated July 24, 1974, the Tribunal was justified in law in holding that rent of Rs. 1,04,477 received by the assessee during assessment year 1976-77 was taxable as income from property and not as income from business ?

(2) If the answer to question No. (1) is in the negative, whether the Tribunal did not commit an error in not holding the said rental income of the assessee as 'income from other sources' ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to current depreciation allowance under Section 32(1) of the Income-tax Act, 1961?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to the benefit of carry forward of earlier years' losses due to alleged discontinuance of its business ?

(5) Whether, on the facts and in the circumstances of the case and in view of the finding of the Tribunal that rent received by the assessee was 'income from property', the Tribunal was justified in law in holding that payment of interest on borrowings amounting to Rs. 37,468 was not deductible while computing income from property of the assessee ?'

9. The five questions are alike in the assessment years 1975-76 and 1976-77. The company received Rs. 66,810 in the assessment year 1975-76, and this cannot be treated as income from business. This is the answer to the first question. The second question raises the issue whether the rent received by the assessee can be treated as income from other sources.

10. Learned counsel for the assessee argued that the clause in the agreement of lease, annexure-B, contains recitals wherein the tenant agreed to pay rent not only for the building but also for letting out the furniture, fixtures, and telephone facility. The contention is that the building and furniture are let out and the rent agreed to was not only for the building but was a quid pro quo for the furniture also which was entrusted to the tenant.

11. The issue then arises whether furniture was 'inseparable' from the. building (Section 56(2)(iii)) under annexure-B. This question in this pointed manner does not appear to have been raised before the Appellate Tribunal. But the agreement of lease, annexure-B, was before the Tribunal and now forms the printed record. The building premises, it is seen, was let out with the furniture and on the terms the conclusion is irresistible that the building, and furniture were inseparable under the agreement, annexure-B.

12. There is a lucid discussion on this question in the Calcutta case reported in Chitpore Galabari Co. P. Ltd. v. CIT : [1971]82ITR753(Cal) wherein the severability beginning from the Indian Income-tax Act, 1922, under Section 12 was considered alongside the amendments to that Act The opinion expressed therein holds the field even under the 1961 Act, We adopt the reasoning and conclusion reached in that case and following the same, we hold that the rent agreed included the rent for furniture also. We further hold that Rs. 66,810 for the assessment year 1976-77 is to be classified as income from other sources.

13. We keep open the question whether the telephone connection per se is furniture or not as no specific argument was advanced in this case and, therefore, we are not to be understood to have held that telephone is a part of furniture.

14. So far as the first question is concerned, with reference to the assessment year 1975-76, we answer, that the business was discontinued, in favour of the Revenue. The rents received by the assessee should be treated as income from other sources. The answer is in favour of the assessee and against the Revenue. As respects questions Nos. 3, 4 and 5, in view of the evidence on record, no argument is advanced. Therefore, all the questions except as to rentals are answered against the assessee and in favour of the Revenue.

15. As respects the assessment year 1976-77, to repeat, the first question is answered in favour of the Revenue and against the assessee. The second question is answered in favour of the assessee and against the Revenue. Questions Nos. 3, 4 and 5 are analogous, and, therefore, are answered against the assessee. No costs.

M. Sharma, J.

16. I agree.